Incorporation of Investing Companies under Companies Act not sufficient to prove genuineness of Share Transactions: Calcutta HC sets aside ITAT’s Finding [Read Order]
The court held that the assessing officer was right in not accepting the explanation offered by the assessee as being not satisfactory upon proper appreciation of the materials placed before him by the assessee
Incorporation of Investing Companies Under Companies Act Not sufficient to Prove Genuineness of Share Transactions: Calcutta HC sets aside ITAT’s Finding
Incorporation of Investing Companies Under Companies Act Not sufficient to Prove Genuineness of Share Transactions: Calcutta HC sets aside ITAT’s Finding
In a recent case, the Calcutta High Court held that incorporation of Investing Companies Under Companies Act is not sufficient to prove genuineness of share transactions handset aside the Income Tax Appellate Tribunal (ITAT) ’s finding.
Minto Park Estates Private Limited, the respondent assessee filed their return of income on 25.09.2012 showing income of Rs. 770/- which was processed under Section 143(1) of the Act. The case was selected for scrutiny and notice under Section 143(2) and Section 142(1) were issued on 26.08.2013. In compliance with those notices, the assessee made certain submissions on 19.02.2014. Again, two notices were issued under Section 142(1) dated 06.05.2014 and 30.06.2014 to which the assessee through their authorised representative appeared before the assessing officer and explained them their stand.
The assessing officer while completing the assessment under Section 143(3) by order dated 27.03.2015 noted that the assessee was incorporated on 22.03.2012 and during the financial year 2011-2012 relevant to the assessment year 20122013 it raised share capital by Rs. 16,40,000/- against issue of 1,64,000 equity shares of face value of Rs. 10/- each. The assessing officer noted that 24000 shares were allotted with premium of Rs. 1,17,60,000/- at the rate of Rs. 419 per share to 9 subscribers. The total share capital including premium that was raised was Rs. 1,34,00,000/-.
The assessing officer examined the financial stability of the share subscriber companies and noted that all of them reported the source of investment from sale of shares. Further the assessing officer noted that all the seven investing companies reported NIL income from its operations. Therefore, the assessing officer held that this would clearly lead to the inference that the share subscriber companies which were incorporated have no visible business activity and creditworthiness to make the investment. In order to verify the genuineness of the transactions, summons were issued under Section 131 of the Act to Shashi Mehta, the director for personal appearance and to produce the investors/investor directors along with the documents which were requisitioned.
The assessing officer came to the conclusion that in the absence of personal appearance of the directors of the subscriber companies, the genuineness and creditworthiness remained unexplained. More so when the onus is on the assessee to prove the genuineness, creditworthiness and the identity of the investors.
The assessing officer found that the assessee is a private limited company and share application money was received through private placement, as the assessee failed to bring on record any evidence, the assessing officer held that the so called share applicant were mere paper entities and did not have the requisite capacity to advance the amounts shown to have paid for purchase of the shares.
It was held that where the assessee fails to prove satisfactorily, the source and nature of the amount of credit during the accounting year, the income tax officer is entitled to draw the inference that the receipts are often assessable nature. The assessee filed appeal before the National Faceless Appeal Centre (NFAC) contending that the observations/findings made in the assessment order were perverse, the addition of Rs. 1,10,00,000/- is not called for and the same is required to be deleted and that the assessing officer failed to appreciate the evidence filed before him and the addition was made merely on conjectures.
The tribunal further held that going by the documents placed by the assessee of all the share subscribing companies, it can be safely held that the assessee had discharged its initial burden and the burden shifted on the assessing officer to enquire further into the matter which he failed to do. Furthermore, it observed that the investing companies have sufficient own funds available with them to make the investment.
The coram comprising Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das) observed that merely because the share subscriber companies are incorporated under the Companies Act, 1956 that would not add any credibility or evidentiary value and does not prove the transaction to be genuine.
The court held that the assessing officer was right in not accepting the explanation offered by the assessee as being not satisfactory upon proper appreciation of the materials placed before him by the assessee and the other attending circumstances available on record.
The court allowed the appeal and set aside the order passed by the tribunal is set aside and the assessment order dated 27.03.2015 as affirmed by the appellate authority by order dated 20.10.2023 are stand restored.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
