While hearing the case between Zion Promoters & Developers (P) Ltd and Additional Commissioner of Income Tax, Delhi bench of Income Tax Appellate Tribunal ( ITAT ) recently ruled that when the company has sufficient share capital and premium through reserves, its capacity to invest can’t be suspected merely because it has shown meager income.
Assessee Company in the instant case engaged in the construction business filed its return of income for the relevant assessment year and declared its total income at Rs.18,96,750.
During the course of assessment proceedings the Assessing Officer (AO) noticed that the Assessee received share capital of Rs.3,10,00,000 and share premium of Rs.2,79,00,000 on account of issue of Rs.31,00,000 shares from 15 investors. Thereafter the AO issued notice under section 133(6) of the Income Tax Act 1961 by holding that the Assessee had not submitted complete details regarding the investor companies in order to verify the genuineness of them. Therefore, he was of the view that the Assessee has failed to prove the creditworthiness of the investors and doubted the identity and creditworthiness of the investor companies who have invested in shares of the assessee company and the genuineness of the transactions. Accordingly, the AO has invoked the provisions of section 68 of the Income Tax Act 1961 and made the addition of Rs.3,10,00,000 to the total income of the Assessee.
On appeal, the CIT(A) granted partly relief to the Assessee by deleting addition regarding some companies and restored the action of the AO in the case of the remaining companies on the ground that the return of income filed by the investor companies show very meager income and therefore the company does not have any capacity to invest and in certain cases the directors could not substantiate the source of investment.. Thereafter the Assessee carried the matter before the Tribunal on appeal.
Before the bench, the counsel for the Assessee advocate submitted that the assessee has produced all the relevant documents/details during the remand proceedings to establish the identity and creditworthiness of the investor companies and genuineness of the transactions. Therefore, the addition could not have been made under section 68 by the Assessing Officer and sustained by the CIT(A) and the same was reproduced before the bench also.
After considering the facts and circumstances of the case, the Tribunal bench including Judicial Member Kuldip Singh and Accountant member R.K.Panda observed that “merely because the company has declared meager income, the same, in the opinion of the Tribunal cannot be a ground to disbelieve the investment. the investment in the share of the assessee company by the above-mentioned companies whose directors appeared before the AO and whose statements were recorded and full details were filed substantiating the identity and creditworthiness of the investor companies and the genuineness of the transactions, cannot be doubted merely because companies have meager income or that the directors could not categorically answer the question of the AO. While concluding the issue the division bench further held that income in case of a concern cannot be the basis to disbelieve the creditworthiness if it has otherwise sufficient capital and free reserves”.
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