Legitimacy of Income Not Established when Investment made from Share Premium Without Noticeable Business Activity: Calcutta HC [Read Order]

The Calcutta High Court observed that the legitimacy of income not established when investment made from share premium without noticeable business activity.

The assessee filed the return of income disclosing a total income of Rs. NIL. The return was processed under Section 143(1) of the Income Tax Act. Subsequently, the case was selected for scrutiny and notices under Section 143(2) and 142(1) were issued and served on the assessee. In response to the said notice, the authorised representative of the assessee appeared and filed details as called for.

The assessing officer recorded that there was no complaints from the directors of the assessee company in response to the summons issued under Section 131 of the Income Tax Act and therefore the identity, genuineness and creditworthiness of the share applicant companies were not established because the primary issue regarding the due diligence done, the steps taken for protection of the funds and most importantly the reason for investment in a company with no track record and that to with such huge premium was not clarified. Further since the assessee did not furnish the details of the shareholders, and hence the identity of the shareholders was questionable.

The Senior Advocate appearing for the appellant assessee contended that the assessee did not have adequate opportunity before the assessing officer as the summons issued by the assessing officer was served after the assessment order was received and there has been no examination of the facts of the case despite details having been filed by the assessee by appearing in person in response to the notices issued under Section 143(2) and 142(1) of the Income Tax Act.

It was submitted that in such circumstances, the tribunal could not have examined the issues which were not in before the assessing officer. Further the tribunal failed to give any opportunity to the assessee to file the documents and therefore the order passed is in the gross violation of the principles of natural justice. The creditworthiness of the shareholders cannot be doubted on the facts that the investment in immovable property was made by it using the share premium received by it.

A Division Bench of Chief Justice TS Sivagnanam and Justice Hiranmay Bhattacharyya observed that “The effects of these documents were considered by the tribunal and it was not satisfied with the genuineness of the transaction more importantly noting that the assessee itself has claimed that there is no noticeable business activity during the year. Thus, the tribunal ultimately concluded that the assessee has failed to establish the basic ingredients required to be established under Section 68 of the Act.”

“The sale transaction between the five individuals and the alleged land owners appears to have not taken place and out of the land owners who have stated to have signed the agreements for sale dated 22.07.2011, two of them are stated to have executed to a deed of conveyance in favour of the assessee dated 28.04.2014. In the Memorandum of Understanding dated 28.02.2012 which precedes the deed of conveyance, it is stated that the assessee will allot pari passu shares of Rs. 10/- each at par to the parties of the first part who are the five individuals which shall be in turn deemed to be the consideration to acquire the said interest in the land parcels” the Court noted.

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