Income Tax Act, 1961 – Sections 68, 133(6), 147 and 143(3) – The Assessing Officer (AO) reopened the assessment under Section 147 and added Rs. 4.99 crores as unexplained cash credit under Section 68, alleging that the assessee introduced its own unaccounted money through share capital issued at a premium via book entries. The assessee contended that the shares were allotted in exchange for investments held by subscribers, and no cash was received, making Section 68 inapplicable. The CIT(A) deleted the addition, observing that the AO issued notices under Section 133(6), which were duly responded to, and no adverse material was found against the investors. The Revenue appealed, arguing that the CIT(A) failed to examine the genuineness of the investors and the justifiability of the high share premium - Whether Section 68 applies to share capital issued for consideration other than cash and whether the AO’s addition of Rs. 4.99 crores as unexplained cash credit was justified – HELD - The Tribunal upheld the CIT(A)’s order, ruling that Section 68 applies only when there is an actual "cash credit" in the books of accounts, which was absent in the present case. Since the share allotment was a swap of investments and no monetary transaction occurred, Section 68 was inapplicable. The Tribunal relied on the Supreme Court ruling in VR Global Energy Pvt. Ltd. and Madras High Court's decision, which held that share allotments in exchange for investments do not constitute unexplained cash credits. Further, the AO failed to present any evidence to show that the funds were recycled or that the investors lacked creditworthiness. The Tribunal also noted that all relevant documents, including financial statements, confirmations, and ROC records, were submitted and remained unchallenged. Since no fresh material warranted the reopening, the reassessment was deemed invalid - Appeal dismissed. The Tribunal confirmed that Section 68 did not apply in the absence of cash credits, and the addition of Rs. 4.99 crores was unjustified

 

2025-VIL-209-ITAT-DEL

 

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCHES: F: NEW DELHI

 

ITA No. 5718/Del/2017

Assessment Year: 2010-11

 

Date of Hearing: 21.01.2025

Date of Pronouncement: 31.01.2025

 

INCOME TAX OFFICER

 

Vs

 

M/s ROYAL FACTORY FARMING PVT LTD

 

Assessee by: Shri Paras Dawar, Advocate

Revenue by: Ms Harpreet Kaur Hansra, Sr. DR

 

BEFORE

SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER

SHRI ANUBHAV SHARMA, JUDICIAL MEMBER

 

ORDER

 

PER ANUBHAV SHARMA, JM:

 

This appeal is preferred by the Revenue against the order dated 19.06.2017 of the Commissioner of Income-tax (Appeals)-36, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No.229/2016-17 arising out of the appeal before it against the order dated 30.03.2015 passed u/s 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ITO, Ward 21(4), New Delhi (hereinafter referred to as the Ld. AO).

 

2. Heard and perused the records. The facts in brief are that during AY 2010-11, the assessee had issued share capital of Rs.4,93,00,000/- by allotment of 99,800 equity shares to 9 parties for consideration otherwise than for cash. The, share allotment by the assessee was in lieu of purchase of investment held by these 9 subscribers under an “Agreement for allotment of shares in consideration of shares of other companies’’. The ld. AR has submitted no cash / cheque consideration was received by the assessee on issue of shares as it is case of swapping / exchange of shares. Ld. AO passed impugned assessment order adding entire share capital of Rs. 4.99 crores under section 68 of the Act on the ground that assessee has introduced its own unaccounted money through book entries by using the above companies as a conduit.

 

3. The same has been deleted by the Ld. CIT(A) with following observations and conclusions;

 

i. ld. AO had issued notices u/s 133(6) of the Act to all the 9 parties which were duly replied by them and desired Information along with audited accounts were submitted by them. All these details submitted showed that there was no cash payment for acquisition of the aforesaid shares and they had sufficient Investment to give to the assessee company In consideration of shares allotted to them for consideration other than cash.

 

ii. No evidence was brought on record by the ld. AO that funds of the appellant company was recycled/rotated by the appellant and introduced in the garb of share capital/share premium. Ld. AO was unable to justify the allegation that the assessee had introduced its own unaccounted money through book entries by using the above companies as a conduit.

 

iii. The ld. AO is silent in his order about the enquiry conducted by him by issuance of notices u/s 133(6) of the Act or getting information from ROC which favored the assessee.

 

iv. Ld. AO has not found any defect in the documents submitted to prove the identity, genuineness and creditworthiness of the subscribers.

 

v. That the issue of shares by swapping of shares in absence of receipt of cash cannot result in addition u/s 68 of the Act. Ld. CIT(A) relied on judgement of Hon'ble ITAT Delhi in the case of ITO vs Vital Communication Ltd. (ITA No. 2448/Del/2007)

 

4. Revenue is in appeal raising following grounds;

 

“i. That on facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the addition of Rs.4.99 crore u/s 68 of the IT Act as unexplained credit.

 

ii. That on facts and circumstances of the case and in law, the Id. CIT(A) has erred in allowing the equity shares of Rs.10 each at a premium of Rs.490/- per share inspite of the fact that assessee company was incorporated on 27.06.2008 and no business activity has commenced in the company.

 

iii. That on facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the addition made by AO without examining and giving her own finding about the identity and creditworthiness of the purported investors of the share premium of 4.99 crore.

 

iv. The appellant craves to be allowed to add any fresh ground(s) of appeal and /or delete or amend any of the ground(s) of appeal.”

 

5. Ld. AR has primarily contended that Section 68 of the Act is not attracted in case of share issued for consideration other than cash. It was contended that Section 68 of the Act, as the heading suggests, is a provision for taxing unexplained Cash Credits'. In the absence of any ‘cash credit’, rigours of section 68 of the Act will not be triggered. In the current case, it is undisputed that no cash was received on issue of shares, accordingly, section 68 of the Act has no application. It was further contended that the provisions of section 68 of the Act can be invoked only if any "sum" is credited in the account books of the assessee. It was submitted by ld. AR that "Sum" u/s 68 of the Act, denotes the money brought into the account books by way of cash / cheque / draft. Since there is no inflow of cash, section 68 of the Act has no application. In this context ld. AR relied numerous decisions of ITO vs. V.R. Global Energy (P) Ltd. 113 taxmann.com 31 (Supreme Court); V.R. Global Energy (P) Ltd. vs. ITO 96 taxmann.com 647 (Madras HC); Jatia Investment vs. CIT Ltd. 206 ITR 718 (Calcutta HC); ITO vs Vital Communication Ltd. (ITA No. 2448/Del/2007) [Delhi ITAT];ITO vs Zexus Air Services (P.) Ltd. [2021] 127 taxmann.com 119 [Delhi ITAT];ITO vs Elatlve Building Solutions Pvt. Ltd. (ITA No. 2498/Del/2017) [Delhi ITAT];ACIT vs. Paras Healthcare P. Ltd. (ITA 2207/Dei/2012 (Delhi Trib) [Delhi ITAT];Frohar Trading Pvt. Ltd. vs ITO (ITA No. 543/Mum/2018) [Mumbai ITAT];ITO vs. Bhagwat Markcom (P) Ltd. 109 taxmann.com 330 [Kolkata ITAT];ITO vs. Saffron Comtrade Pvt. Ltd.ITA 2029 /Kol/2016 (Kolkata ITAT]; ITO vs. Kaner Investments Ltd. ITA 2095/Kol/2017 [Kolkata ITAT];ITO. vs. Aryvarat Construction Pvt. Ltd. ITA 2203/Kol/2017 [Kolkata ITAT];ITO vs. Sarviok Vanijya Pvt. Ltd. ITA 501/Kol/2017 [Kolkata ITAT]; ITO vs. Vishwadham Traders P. Ltd. ITA 803/ Kol/2017 [Kolkata ITAT];Access Global Limited vs. ITO ITA 13/Kol/2018 [Kolkata ITAT];ITO vs. Anand Enterprises Ltd. ITA 1614/Kol/2016 [Kolkata ITAT];ABA Earthline Communications Ltd. vs. ITO ITA 1141 /Kol/2017 [Kolkata ITAT]; ITO vs. Sunglow Dealcom Pvt. Ltd. ITA 2178/Kol/ 2016 [Kolkata ITAT]; DCIT vs. P.N. Memorial Neuro Centre & Research Ltd. ITA 1383/Kol/2015 [Kolkata ITAT]; ITO vs. DSR Impex Pvt. Ltd. ITA 2087/Kol/2017 [Kolkata ITAT].

 

6. On merits it was submitted by the ld. AR that the share capital received as explained and satisfies the test prescribed under section 68 of the Act. It was submitted that the identity, credit worthiness and genuineness of share issue has been properly explained by the assessee and the Ld. CIT(A) passed his order after properly appreciating the same. It was submitted that Ld. AO had issued notice under section 133(6) of the Act to all the subscribers, which was duly served and replied. Ld. AO had also made certain enquiry from ROC, New Delhi, in which no adverse finding was received against the assessee.

 

7. Ld. DR has submitted that the ld.CIT(A) has failed to examine the expenses in correct perspective. It was submitted that details of investment purchased in lieu of share allotment as provided by the assessee at page 446 of the paper book would show that the investments of similar companies were held by the investing companies and they have been valued differently. It was submitted that all the documentation required for the transfer of shares was concluded in one day. The ld. DR, thus, submitted that the transactions were mere paper transactions and sham transactions of investor companies which had no substantial basis for investment on a high premium in the assessee company.

 

8. Now appreciating the matter on record with regard to the applicability of Section 68 of the Act, there appears to be no error in the findings of the ld CIT(A) as admittedly no credit entry of cash has been made in the relevant Assessment Year. Ld. AO seems to have not at all cared to examine the nature of transaction of the assessee and concluded that assessee has “received money’ (para 3.5 of the assessment order). Admittedly during the relevant year no cash was actually infused in the fund flow of company. There was mere dressing of capital and investments by swapping of shares for the investments of other companies received as consideration in lieu of the shares issues at premium. Which though may be effecting the value of liquid assets held by assessee at the end of year and increase in capital, but same cannot be equated with ‘cash credits’ and ‘sum’ permitted to be taxed as deemed income u/s 68 of the Act. As for the purpose of section 68 of the Act, it is imperative for the Revenue that there was cash involved in the transaction. Then Hon’ble Madras High Court in the case of VR Global Energy Pvt. Ltd. ITO, 407 ITR 145 (Madras) has held that where the assessee allotted shares to a company in settlement of preexisting liability of assessee to the said company by way of adjustment and since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credit u/s 68 of the Act. It was held that since the cash credits towards share capital were only by way of book adjustment and not actual receipts, therefore, the same could not be treated as receipt towards share subscription money. Since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credits u/s 68 of the IT Act. The Revenue challenged this decision of the Hon’ble Madras High Court before the Hon’ble Supreme Court and the Hon’ble Supreme Court dismissed the SLP filed by the Revenue reported in 268 taxmann.com 392. The same has also been relied by Co-ordinate Bench at Delhi in ITO Vs Zexus Air Services Pvt. Ltd. (ITAT Delhi) [2021]127 taxmann.com. A coordinate Bench at Delhi in the case of DCIT vs. M/s Glass Tech India Ltd., (ITA 624/DEL/2017 order dated 25/3/2022) on which one of us (Judicial Member) was a party, while dealing with the provisions of section 68, has held that it is not just an entry of cash credit in the books of account that would create liability of explanation from the assessee, but, there should be an actual flow of funds. Once the flow of funds is established, then, the question of explanation from the assessee actually arises. Similar was the view in Acres Buildwell Pvt. Ltd. V ITO Ward 1(3) New Delhi ITA no. 2191/DEL/2022 order dated 22/5/2024. In DCIT versus NCR Business Park (P) Ltd. 2022 141 taxmann.com 563( Delhi-Trib) the revenue’s appeal was dismissed by following the this proposition of law. Thus there is no error in the finding of Ld CIT(A) holding non-applicability of provision of section 68 of the Act.

 

8.1 Even if the allegation is of sham companies being operated by the assessee to channelize its unaccounted money into books of the assessee, then, for the year under consideration as observed above, no funds were actually received. The premium shown to be charged is not received as a ‘sum’ credited in the books of account so as to be ultimately used during the year. If the case of the AO is accepted, then also, at the time of liquidation of the investments received as consideration of the share capital and share premium could be examined when actually received, which was not the case of the Department so far.

 

9. At the same time we find that the assessee has brought on record substantial evidences, which have not been rebutted by any evidence or findings of ld. AO, to show that the transaction of share subscription was not at genuine one. Rather what is established before us is that in order to establish identity, creditworthiness and genuineness of the transactions, the assessee had submitted the following documents before the tax authorities below:

 

i. Copy of ITR of subscribers, copies made available at pages 57 to pages 138 of Paper book

 

ii. Copy of PAN Card of Subscribers, copies made available at pages 57 to pages 138 of Paper book

 

iii. Notice under section 133(6) of the Act was duly served to the subscribers and copies made available at pages 139 to pages 149 of Paper book.

 

iv. Reply to notice under section 133(6) of the Act was duly filed by the subscribers and the copies made available at pages 150 to pages 287 of paper book.

 

v. Master Data as available on Ministry of Corporate Affairs website of all the subscribers Pages 447 to Pages 455 of Paper book

 

vi. Copy of Audited Financial Statements of subscriber made available at pages 150 to pages 287 of Paper book

 

vii. Copy of Allotment Letter in the favor of subscribers of shares swapped by the Subscriber in exchange of assessee’s share capital evidencing source of receipt copies made available at pages 150 to pages 287 of Paper book

 

viii. Copy of Form 2, 'Return of Allotment’ evidencing receipt of shares swapped by Subscriber in exchange of assessee’s share capital evidencing source of receipt, copies made available at pages 291 to pages 422 of Paper book.

 

ix. Copy of Agreement for allotment of shares in consideration of shares of other companies, copies made available at pages 456 to pages 474 of Paper book

 

x. Reply to notice under section 133(6) of the Act was duly filed by the subscribers, copies made available at pages 150 to pages 287 of Paper book

 

xi. Copy of Confirmation of Accounts by subscriber copies made available at pages 150 to pages 287 of Paper book

 

xi. Copy of Board Resolution passed by assessee for share allotment, copies made available at Page 429 of Paper book

 

xii. Copy of Form 3 filed by assessee for share allotment, copies made available at, pages 430 to pages 432 of Paper book

 

xiii. Challan evidencing Stamp Duty paid for increasing authorized capital, copies made available at pages 433 to pages 434 of Paper book

 

xiv. Copy of EGM Notice and Resolution for increasing authorized capital, copies made available at pages 435 to pages 439 of Paper book

 

xv. Details of shares of other companies received in consideration for allotment of shares of appellant, copies made available at Page 446 of Paper book.

 

10. In fact as with regard to the capacity of the investor companies the ld. AR has cited before us a chart, where by financials of the investor companies are shown and we reproduce the same below:-

 

 

11. The aforesaid evidences have been duly appreciated by the ld. CIT(A) to conclude that transaction is genuine while the ld. AO inspite of having the aforesaid evidences has not discussed any of the evidences to show the inferences drawn to discredit genuineness of transaction is based on factual analysis and not merely on surmises and conjunctures. The case which ld. DR has tried to build before us does not find any place in the order of ld. AO.

 

11.1 At the same time, we are of the considered view that as CIT(A) has co terminus powers as that of assessing officer, then the plausible view of the CIT(A) with regard to the sufficiency of evidences of the assessee to establish the identity and creditworthiness of investors or genuineness of the transaction cannot be interfered unless the Department establishes that the CIT(A) has relied evidences which were not genuine or palpably deficient so as to say that the onus on the assessee stood un-discharged thereby justifying invoking the provisions of deeming income. That is not the case here so as to unsettle the findings of ld. CIT(A). Thus, we find no substance in the grounds. The appeal of revenue has no merit and same is dismissed.

 

Order pronounced in the open court on 31.01.2025.

 

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