ITAT has laid down principles for applicability of section 68 of Income Tax Act in cases like Share Premium received etc

Facts of the Case:

• Raw Pressery Private Limited (hereinafter referred as “Assessee”) is a start-up engaged in manufacturing of fresh health beverages/juices. It had filed its return of Income for AY 2018-19 (FY 2017-18) declaring a loss of ₹ 41.86 crores.
• During the relevant assessment year (AY), the Assessee issued its share on premium and received an amount of ₹ 52.25 crores as share premium. Further, the Assessee also had an amount of ₹63.32 crores as a closing balance in its share premium account, which became the opening balance for the year under consideration.
• It was for the share premium received that provisions of section 68 were invoked in the assessment proceedings initiated for the aforementioned assessment year.
• In the assessment proceedings, the Assessee had furnished all the available evidences justifying the receipt of money from valid sources i.e., by the foreign PE investors and founder-promoter. Further, the Assessee also stated that it had engaged a celebrity for its product branding and promotion for which it entered into a service agreement with her in lieu of which shares had been allotted to her at a premium which was included in the fresh share premium.
• It was for this above transaction that a share premium of ₹52.25 crores was recorded in the share premium account for the year under consideration. Further, with the opening balance of ₹63.32 crores, the total balance in share premium account stood at ₹115.57 crores. This entire amount of ₹115.57 crores (₹52.25 crores + ₹63.32 crores) was added under the provisions of section 68 of the Income Tax Act,1961 (the Act) by assessing officer (AO) as unexplained credit while completing the assessment proceedings.
• Against this assessment order, the Assessee filed an appeal before the CIT(A) under the NFAC provisions. The appeal was taken up by the CIT(A), but, inspite of all clarification and information submitted by the Assessee, CIT(A) confirmed the addition made in the assessment order by the AO. It was during this entire procedure of assessment and appeal, that no independent verification was made by either of the officers and the order was passed against the Assessee.
• It was against the adverse order of CIT(A) that Assessee went to ITAT.

Findings of Hon’ble ITAT:

Observation And Conclusion:

• Initial ‘burden of proof’ was upon the Assessee to establish the (i) identity of the investors; (ii) their creditworthiness/investments; and (iii) genuineness of the transaction however, once the Assessee submits evidence in support of the credit and makes out a prima facie case, then the ‘onus of proof’ shifts to the AO and hence if the explanation put forth cannot be said to be completely unsatisfactory, then the onus cast upon the Assessee u/s 68 of the Act can be said to have been discharged.
• Section 68 of the Act was applicable to any sum which was found credited in the books of an assessee during the previous year for which no explanation had been furnished or explanation furnished was found to be false, hence the opening balance of share premium of ₹ 63.32 crores received in earlier years and not in the relevant FY 2017-18 had no application in relation to section 68.
• Further, the proviso to Section 68 of the Act was applicable to residents only, who are required to substantiate the ‘source of source’ of funds. This additional burden cast upon by the proviso was not applicable to non-resident investors.
• Coming to the share premium of ₹ 52.25 crores received during the year, ₹ 48.21 crores was received from existing foreign shareholders whose identity, creditworthiness and genuineness of the transactions had already accepted by the AO in earlier AYs 2016-17 & 2017-18.
• Although the Assessee had furnished the primary evidences in support of the share premium received from the foreign investors, the tax authorities chose to sit back with folded hands till the Assessee exhausted all the evidence in his possession and then merely reject the same without conducting any inquiry or verification whatsoever. Such in-action/omission on the part of lower authorities cannot be accepted.
• Even if tax authorities had a remote suspicion regarding the foreign investors, it ought to have made appropriate independent enquiry through proper channel, rather than simply rejecting the documents furnished by the Assessee. This in-action on the part of the tax authorities and thereafter making the impugned addition u/s 68 of the Act is not acceptable.
• As regard to the share premium received from the founder-promoter, none of the lower authorities in their order had pointed out any defect or infirmity therein. Further in regard to the shares issued in lieu of services rendered by the celebrity has no application of section 68 of the Act as she did not actually pay any amount to the company, hence it was unjustified to add this share premium.
• Accordingly, the Hon’ble ITAT held that opening balance of share premium shall not be subject to section 68 provisions. Further, for the premium received in the current year from issue of shares to foreign investors, ITAT remanded back the matter & directed the AO to conduct a de-novo assessment to check for the credit worthiness of foreign investors by means available to it and check the genuineness of arrangement with the celebrity done along with the compliance of other laws while issuing such shares.

ITAT, MumbaiRaw Pressery Private Limited vs. ACIT

SW Point of View:

With this decision, the Mumbai tribunal has laid down the principles for applicability of Section 68 in an elaborate manner and has held that where the taxpayer has provided all the relevant documents it has in its possession it has discharged its burden of proof and it is for the tax authorities to clear their doubts, if they still exist by doing its own independent investigation about the credit worthiness of the investment companies and the genuineness of the transactions. 

Lakshay Prakash Jonwal , Direct Tax Associate, SW India

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