Prior Year Share Receipts Not Taxable in Current Year: ITAT upholds Investor Credibility [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT )in a recent case allowed the assessee’s appeals for Assessment Years 2016-17 and 2017-18, deleting additions of ₹99 lakh and ₹45 lakh under Section 68 of theIncome-tax Act.

For AY 2016-17, the AO had added ₹99 lakh, while for AY 2017-18, ₹45 lakh was added, alleging that the assessee failed to establish the identity, creditworthiness, and genuineness of its corporate investors.

The assessee, Ekalavya Gift Gaileries Private Limited, challenged these additions, arguing that the amounts had been received in prior years, were properly documented, and that shares had been allotted in the relevant assessment years.

The AO initiated scrutiny proceedings under the faceless assessment scheme (CASS), issuing notices under Sections 143(2), 142(1), and 133(6) to verify whether the share capital and share premium were from disclosed sources.

In response, the assessee submitted comprehensive documentation, including certificates of incorporation, Memorandum and Articles of Association, audited balance sheets and profit & loss accounts of the investor companies, PAN, ITRs, bank statements, confirmations of account, and share application forms. Additionally, a valuation report for shares issued at a premium was furnished under Rule 11UA of the Income Tax Rules, 1962.

Despite these submissions, the AO rejected the documents and made the additions, partly because some investors were not personally produced before the AO. The CIT(A)/NFAC upheld the additions, observing that the absence of investors’ physical presence rendered the documents insufficient. Aggrieved by this order, the assessee filed an appeal before the Tribunal.

The assessee contended that the documents filed were adequate under Section 68, that prior-year receipts could not be taxed in the current year, and that technical issues in e-filing had sometimes delayed submissions. Further, the assessee argued that the share valuation report demonstrated that shares were issued at a fair premium, consistent with corporate practice.

The ITAT, after considering the submissions and material on record, allowed both appeals. For AY 2016-17, it was noted that share application money of ₹18 lakh had been received in preceding years, although shares were allotted in the relevant assessment year. Citing judicial precedents such as Naveen Aggarwal vs. DIT, CIT vs. Vardhman Overseas Ltd., and Sooraj Leathers vs. ITO, the Tribunal emphasised that prior-year receipts credited in earlier accounting periods cannot be added as income in the current year. Accordingly, the addition of ₹99 lakh for AY 2016-17 was deleted.

For AY 2017-18, the Tribunal observed that fresh shares were issued to Acquatic Exim Pvt. Ltd., and the assessee had submitted audited financial statements and confirmations establishing identity and creditworthiness.

The company had substantial revenue and profits, affirming its capacity to invest. The valuation of shares was made in accordance with Rule 11UA, ensuring that the share premium was appropriately calculated.

The Tribunal found that all three ingredients under Section 68, identity, creditworthiness, and genuineness of transactions, were fully satisfied. It also noted that no material contrary evidence was presented by the AO or CIT(A) to justify the additions.

The ITAT rejected the revenue’s argument that multiple investors with the same registered address indicated non-genuineness, clarifying that multiple companies may lawfully share an address while remaining separate legal entities.

Reliance was placed on various High Court and ITAT decisions, including PCIT v. Agson Global (P.) Ltd. and People Care Hospitals Pvt. Ltd., which supported the principle that mere doubts or technical objections cannot override documentary evidence establishing the legitimacy of corporate investors.

In conclusion, the two-member bench of Vikas Awasthy (Judicial Member) and S.Rifaur Rahman allowed both appeals, deleting additions of ₹99 lakh and ₹45 lakh for AYs 2016-17 and 2017-18, respectively.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates