Mere Incorporation Of Investing Companies Under Companies Act Not Enough To Prove Genuineness Of Share Transactions: Calcutta High Court

The Calcutta High Court held that mere incorporation of investing companies under the Companies Act is not enough to prove the genuineness of share transactions. The bench opined that, admittedly, the shares were by way of a private placement. Though the investing companies might have been incorporated under the provisions of the Company's Act, that by itself will not validate the transaction. Justices T.S. Sivagnanam and Chaitali Chatterjee (Das) stated that “though it can be said that the identity of the investors were partly established as they are shown to have been registered under the Company's Act and returns have been filed but what is important is on analysing the financials, the assessing officer found that all investment companies had NIL income”. In this case, the assessee filed their return of income, which was processed under Section 143(1) of the Income Tax Act. The case was selected for scrutiny and notice under Section 143(2) and Section 142(1) was issued. Accordingly, notices under Section 142(1) were issued to the assessee. The assessing officer noted that 24000 shares were allotted with premium of Rs. 1,17,60,000/- at the rate of Rs. 419 per share to 9 subscribers. The assessing officer examined the financial stability of the share subscriber companies and noted that all of them reported the source of investment from the sale of shares. Further, the assessing officer noted that all seven investing companies reported NIL income from its operations. The assessing officer opined that the assessee company has raised share capital and/or premium in order to route its undisclosed money to the desired end of the beneficiaries taking recourse of the corporate veil. The assessing officer held that the so-called share applicant were mere paper entities and did not have the requisite capacity to advance the amounts shown to have paid for purchase of the shares. Aggrieved by the order passed by the assessing officer, the assessee filed an appeal before the National Faceless Appeal Centre (NFAC), which was dismissed. The assessee had filed an appeal before the Tribunal challenging the order passed by the NFAC. The Tribunal held that the assessee had discharged its initial burden and accordingly allowed the appeal. The Department/Appellant has challenged the order passed by the Tribunal before the Calcutta High Court. The assessee contended that the non-appearance of the directors cannot be made a ground for addition in the hands of the assessee under Section 68 of the Income Tax Act. The bench noted that when the assessee had produced certain documents regarding the investing companies, the assessing officer, to investigate the matter further, issued a summons to the directors of the investing companies, but those directors did not respond to the summons. Therefore, the assessing officer was well justified in drawing an adverse inference against the assessee. The Court found that the assessee did not discharge the legal obligation to the satisfaction of the assessing officer. “The assessee thwarted the enquiry/investigation that was to be done by the assessing officer by issuing summons to the directors of the investing company which were not responded. In such circumstances, the assessing officer proceeded to analyse the financial stability of the investing company and has clearly recorded the findings that those investing companies though might have been incorporated under the Company Act have no visible business activity and creditworthiness to make their investment,” added the bench. In view of the above, the bench allowed the appeal and set aside the order passed by the Tribunal. Case Title: Principal Commissioner of Income Tax - 2, Kolkata v. Minto Park Estates Private Limited Case Number: ITAT/4/2025 (IA NO: GA/2/2025) Counsel for Appellant/Revenue: Aryak Dutta, Amit Sharma Counsel for Respondent/Assessee: Abhratosh Majumder, Alisha Das Click Here To Download Order/Judgement

Mere Incorporation Of Investing Companies Under Companies Act Not Enough To Prove Genuineness Of Share Transactions: Calcutta High Court

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