The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that share application money cannot be treated as unexplained cash credit where the assessee establishes the identity and creditworthiness of the investor, genuineness of the transaction and the immediate source of the investment through documentary evidence.
The Bench of Anubhav Sharma (Judicial Member) and Sanjay Awasthi (Accountant Member) has observed that where an assessee receiving share application money, share capital, share premium or loans furnishes complete documentary evidence establishing the identity and creditworthiness of the investor or lender, genuineness of the transaction and the immediate source of the investment, an addition under Section 68 cannot be sustained merely on suspicion.
The appellant/assessee was a company engaged in the financing business and registered as a Non-Banking Financial Company (NBFC) with the Reserve Bank of India. For AY 2012-13, it had filed its return declaring total income of approximately ₹3.33 crore.
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The original assessment was completed under Section 143(3) on February 13, 2015, accepting the returned income. During the relevant financial year, the assessee had received an aggregate ₹105.50 crore as share application moneyfrom Supreme Build-Cap Private Limited.
Of this amount, ₹8.42 crore was refunded during the year, leaving an outstanding balance of ₹97.07 crore as on March 31, 2012. The assessee had furnished details of the receipts and refunds along with confirmation from the share applicant during the original assessment proceedings. The Assessing Officer did not make any adverse inference against the transaction at that stage.
Subsequently, the Assessing Officer received information from the Investigation Wing concerning transactions involving the assessee, Supreme Build-Cap Private Limited and certain group concerns.
Based on this information, the assessment was reopened under Sections 147/148. In the reassessment order dated December 31, 2019, the Assessing Officer determined the assessee’s total income at approximately ₹100.40 crore.
The AO treated the outstanding share application money of ₹97,07,50,000 as an unexplained cash credit under Section 68. The principal reasoning was that Supreme Build-Cap Private Limited had declared nil income, and therefore its creditworthiness, according to the AO, had not been established.
The assessee challenged the reassessment order before the CIT(A). During the appellate proceedings, it submitted additional documentary evidence, including material concerning the investor and the source of funds.
The CIT(A) partly allowed the appeal. While the reopening under Section 148 was upheld, the appellate authority deleted the ₹97.07 crore addition under Section 68.
The CIT(A) found that the assessee had explained the specific source of the funds invested by Supreme Build-Cap and had produced sufficient evidence to establish the identity, creditworthiness and genuineness of the transaction.
Importantly, the CIT(A) also examined the assessment records of Supreme Build-Cap for the same assessment year. Its reassessment order had been passed on the same date, December 31, 2019. According to the CIT(A), no adverse finding had been recorded against Supreme Build-Cap concerning the issues cited in the reopening reasons of the assessee’s case, including the alleged source of funds and transactions involving certain entities.
The appellate authority further noted that Supreme Build-Cap had subsequently reported substantial income in AY 2013-14, including long-term capital gains of approximately ₹163.07 crore.
The assessee’s explanation was that the investor had received funds pursuant to agreements for sale of immovable properties and that these funds subsequently formed the source of the share application money advanced to the assessee.
The CIT(A), therefore, concluded that the assessee had produced the necessary evidence to establish the nature and source of the credit and had satisfied the requirements of Section 68. It consequently directed deletion of the addition.
Before the ITAT, the assessee pointed out that detailed replies and supporting documents had already been uploaded on the income-tax portal on November 28, 2019 and December 21, 2019, but these materials had not been considered or discussed in the reassessment order.
The CIT(A) independently verified the electronic records maintained on the departmental system and found that the replies had indeed been filed during the reassessment proceedings.
The Tribunal noted that the additional evidence admitted by the CIT(A)—including fresh confirmation, assessment orders of Supreme Build-Cap and agreements for sale of properties—was in continuation of and provided further support to the case that had already been presented before the Assessing Officer.
The ITAT also highlighted that the Department had not challenged the admission of the additional evidence under Rule 46A in its appeal.
Further, the Departmental Representative did not make any submission before the Tribunal against the additional evidence admitted by the CIT(A) after obtaining a remand report from the Assessing Officer.
This became significant because the documents were not merely unsupported claims made by the assessee; they were part of the documentary record considered during the appellate process.
The Tribunal noted that the ₹105.50 crore share application money had been received through normal banking channels and was duly recorded in the assessee’s books.
Of the total amount, ₹8.42 crore was refunded during the year. The remaining ₹97.07 crore was subsequently refunded because shares were not allotted to Supreme Build-Cap.
The Tribunal also noted that the transaction was disclosed in the assessee’s audited financial statements and had been specifically examined during both the original assessment and reassessment proceedings.
The assessee did not stop at establishing the immediate source of the share application money. It also explained the source of funds available with the investor.
According to the material before the Tribunal, Supreme Build-Cap had received approximately ₹130.94 crore on October 28, 2011 from Adamas Builders Private Limited through HSBC Bank, pursuant to agreements for sale of immovable properties situated in Bangalore.
The assessee demonstrated that the share application money had been advanced out of these funds. Agreements for sale involving properties with an aggregate consideration of ₹221 crore, along with the consequential sale deed, were also placed before the Tribunal.
The Tribunal found that Supreme Build-Cap was an incorporated company, had a valid PAN, was regularly assessed to income tax and had audited financial statements.
Its corporate particulars, tax records and assessment orders had been furnished before the tax authorities.
The Tribunal also examined the investor’s financial capacity. Its audited financial statements reflected substantial immovable assets, including commercial land, buildings and plant and machinery. The financial statements also recorded borrowings and advances received against agreements for sale of valuable commercial properties.
The bank statements showed receipt of more than ₹130.94 crore immediately before the investment, while subsequent tax records showed long-term capital gains exceeding ₹163 crore arising from the sale of the relevant capital assets.
A central issue before the Tribunal was the Assessing Officer’s reliance on the investor’s low or nil income for questioning its creditworthiness.
The ITAT rejected this approach in the facts of the case. It noted that the transaction was supported by confirmations, bank statements, audited financial statements, agreements for sale and income-tax records.
The Tribunal observed that there was no material brought on record by the Assessing Officer to demonstrate that the money represented the assessee’s own unaccounted income or that the banking transactions were sham or fictitious.
The Tribunal considered the assessment orders passed in the case of Supreme Build-Cap to be particularly significant.
Its original assessment under Section 143(3) and subsequent reassessment under Sections 147/143(3) did not record any adverse finding concerning the alleged source of funds, the transactions with Adamas Builders or the genuineness of the investment made in the assessee.
The Tribunal further noted that the investor subsequently offered substantial long-term capital gains exceeding ₹163 crore to tax, providing corroboration for the assessee’s explanation regarding the source of funds.
The confirmations, bank statements and ledger accounts also established the complete cycle of the transaction—from receipt of the share application money to its eventual repayment through banking channels.
The Bench relied upon judicial precedents including PCIT v. BDR Builders and Developers (P) Ltd., ITO v. Arpitam Builders Pvt. Ltd. and CIT-9 v. Vrindavan Farms (P) Ltd.
The Tribunal particularly referred to the principle emerging from the Delhi High Court’s decision in Vrindavan Farms, where merely relying upon the low income disclosed in the investors’ income-tax returns was found insufficient to doubt creditworthiness when the assessee had supplied PAN details, confirmations, bank statements, balance sheets, profit and loss accounts and incorporation documents.
The principle is that once the assessee furnishes sufficient documentation to discharge its initial burden, the Assessing Officer is expected to undertake appropriate inquiry rather than reject the explanation merely on the basis of assumptions concerning the investor’s income.
After examining the documentary evidence and findings of the CIT(A), the ITAT found no reason to interfere with the appellate order deleting the ₹97.07 crore addition.
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