Section 68 Addition Unsustainable Without Rebuttal of NBFC Genuineness or Tracing Money Trail: ITAT Deletes ₹25 Cr Bogus Share Application Money [Read Order]

The Delhi Bench of theIncome Tax Appellate Tribunal (ITAT) held that an addition under Section 68 cannot be sustained where the assessee has established the genuineness of a Non-banking financial company (NBFC) investor, and the Assessing Officer (AO) fails to rebut such evidence or trace any money trail linking the assessee to the invested funds.

The assessee, Bestech Hospitalities Pvt. Ltd., a private limited company engaged in the hospitality business, was subjected to search and seizure proceedings under Section 132, pursuant to which the assessment was completed under Section 153A.

READ MORE: Unexplained Cash CreditAddition u/s 68 unsustainable as Advances from Associate Concern Accepted inEarlier Years: ITAT

During the assessment year (AY) 2011-12, the AO observed that the assessee had received share application money, amounting to ₹55 crore, including ₹25 crore from Apoorva Leasing Finance & Investment Co. Ltd. (the NBFC) and ₹30 crore from Micro Management Ltd. The AO claimed that both investors were controlled by one S.K. Jain, an alleged accommodation entry provider, and that a total addition of ₹55 crore was made under Section 68 as unexplained cash credit.

On appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) deleted the ₹30 crore addition relating to Micro Management Ltd. but sustained the ₹25 crore addition relating to the NBFC, against which the assessee preferred the present appeal.

The assessee contended that it had fully discharged its onus under Section 68 by furnishing all requisite documents. It was argued that the investor was a listed NBFC with a net worth of over ₹120 crore, regularly assessed for tax, and had liquidated prior investments to fund the assessee, thus proving its genuineness.

Reliance was placed on CIT v. Daulat Ram Rawat Mull and CIT vs. Value Capital Services Ltd. to submit that the assessee was not required to prove the ‘source of the source,' and the burden to prove that the invested funds actually emanated from the assessee's own coffers shifted to the revenue. The addition was made only on presumptions and investigation reports, without focusing on the money trail and the nexus linking the assessee’s fund to the investment.

The Revenue, on the other hand, relied on the Investigation Wing's appraisal report alleging S.K. Jain's companies were accommodation entry providers who had weak financials, lacked real business activity, and showed abnormal share premiums, thus making the transaction suspicious.

READ MORE: No Income Tax Additionu/s 68 Based On Mistaken Identity and Third Party Confirmation: ITAT Sets Aside₹20 L Addition Against Finance Co.

The bench, comprising C.N. Prasad (Judicial Member) and M. Balaganesh (Accountant Member), noted that the AO heavily relied on the Investigation Wing report without conducting any independent inquiry to rebut the assessee's evidence.

The tribunal observed that the value of the share premium was already accepted by the revenue in respect of another investor and wasn’t found excessive. Therefore, once the premium is justified, it can’t be alleged that the investment is a bogus accommodation entry.

The Tribunal noted that NCLT had dismissed a winding-up petition against the NBFC, which NCLAT upheld, and that the Supreme Court had dismissed the SLP. Coordinate bench decisions in DCIT v. Garg Acrylics Ltd. and PCIT v. Modinagar Rolls Ltd., and had already accepted Apoorva Leasing as a genuine NBFC investor. The Tribunal held that investments flowing from regulated NBFCs carry a presumption of genuineness unless rebutted by substantive evidence.

The Bench observed that no incriminating documents or money trail was discovered linking the assessee's funds to the NBFC. The NBFC had duly responded to notices issued under sections 133(6) and 131, and its directors had appeared before the AO, thereby prima facie establishing the identity, creditworthiness, and genuineness of the transaction.

Accordingly, the Tribunal allowed the appeal and deleted the ₹25 crore addition.

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