Section 68 and Share Capital: No Addition if Identity, Creditworthiness, and Genuineness Proven – Delhi High Court

Section 68 and Share Capital: No Addition if Identity, Creditworthiness, and Genuineness Proven – Delhi High Court Reaffirms Law with Judicial Precedents

Introduction

Section 68 of the Income-tax Act, 1961, often becomes the focal point during scrutiny assessments, especially when companies receive share capital and share premium. The law requires the assessee to establish the identity of the investor, their creditworthiness, and the genuineness of the transaction. However, in many assessments, despite fulfilling these conditions, additions are made merely due to non-responsiveness of investor entities or based on suspicion.

In a significant judgment, the Delhi High Court in PCIT v. Central Plastics Pvt. Ltd. [2025] 176 taxmann.com 472 has re-established that Section 68 cannot be invoked where proper documentary evidence is on record to explain the receipt of share capital. The decision is consistent with long-standing jurisprudence on the interpretation of Section 68 and adds strength to taxpayer protection in genuine capital raising cases.

Case Brief: PCIT v. Central Plastics Pvt. Ltd. [2025] 176 taxmann.com 472 (Delhi)

Assessment Year: 2012–13
Court: Delhi High Court
Coram: Hon’ble Justices Vibhu Bakhru and Tejas Karia
Date of Decision: 07 July 2025

Facts:

• Central Plastics Pvt. Ltd. received Rs. 5.80 crore as share capital and premium from three corporate investors.

• Notices under Section 133(6) were issued to the investor companies, but no response was received.

• The Assessing Officer invoked Section 68 and treated the share capital as unexplained cash credit.

• The CIT(A) and ITAT deleted the addition, holding that the assessee had provided:

  • PAN, ITRs, financials of investor companies

  • MCA data showing companies were active

  • Confirmations and bank statements

  • Proof of genuine banking transactions

High Court Ruling:

• The Court upheld the ITAT order and held that no addition can be made under Section 68 when the source is explained with sufficient documents.

• Even if the Revenue alleges that the assessee is a conduit, the money cannot be taxed in its hands unless it is proven to be its own unaccounted income.

• For Assessment Year 2012–13, there was no requirement to prove "source of source", which was introduced only by the Finance Act, 2012 (applicable from AY 2013–14).

Section 68: Legal Language and Judicial Interpretation

Section 68 of the Income-tax Act, 1961 states:

"Where any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee..."

Legal Interpretation:

• The burden of proof initially lies on the assessee to explain:

  1. Identity of the creditor or investor

  2. Creditworthiness of the creditor

  3. Genuineness of the transaction

Once these three conditions are met with supporting documentary evidence, the burden shifts to the Revenue to disprove the same.

From AY 2013–14 onwards, the proviso to Section 68 requires that where the credit is in the nature of share capital/premium from a closely held company, the source of the source must also be explained, unless the investor is a Venture Capital Fund or listed company. This was not applicable in the case at hand, which pertained to AY 2012–13.

Why the High Court Rejected the Addition

• The funds were received via proper banking channels

• Investor companies were income-tax assessees, active on the MCA portal, and had adequate financial capacity

• Investor confirmations were submitted

• There was no evidence to show that the assessee had routed its own unaccounted funds or paid cash to obtain accommodation entries

The Court noted that even if the assessee were used as a conduit, the amount could not be taxed in its hands unless it was proven to be its income.

Other Judicial Decisions on Similar Facts

1. CIT v. Lovely Exports (P.) Ltd. (2008) 216 CTR 195 (SC)

The Supreme Court held that if the details of share applicants are furnished to the AO, including their PAN and other identification, then the AO is free to reopen the case of the applicant but cannot make addition in the hands of the assessee company.

2. PCIT v. NRA Iron & Steel Pvt. Ltd. (2019) 103 taxmann.com 48 (SC)

The Supreme Court held that if the assessee fails to prove identity, creditworthiness, and genuineness of the investor, addition under Section 68 is justified. However, this decision was distinguished in Central Plastics as the assessee had discharged its burden in full.

3. CIT v. Kamdhenu Steel and Alloys Ltd. (2012) 19 taxmann.com 26 (Delhi)

The Delhi High Court ruled that where the assessee produced investor details, ITRs, and confirmations, and the transactions were through banking channels, the addition under Section 68 was not sustainable.

4. CIT v. Gangeshwari Metal Pvt. Ltd. (2013) 30 taxmann.com 328 (Delhi)

The Court distinguished between cases where:

• AO brings no evidence but makes additions based on suspicions – not permissible

• AO brings material evidence of accommodation entries – addition may be upheld

In the absence of contrary material, the assessee is to be given the benefit.

5. CIT v. Vrindavan Farms Pvt. Ltd. (2015) 53 taxmann.com 437 (Delhi)

Addition under Section 68 was deleted where share applicants did not appear personally but all documentary proof was provided. Court ruled that adverse inference cannot be drawn solely due to non-appearance.

Practical Scenarios Where Section 68 May or May Not Apply

Scenario	Addition Under Section 68
Valid documents furnished, investor non-responsive	Not applicable
Funds routed through banking channel, PAN and ITR submitted	Not applicable
No confirmation or falsified documents	Applicable
High premium without justification and no valuation report	May be applicable
Source of investor funds untraceable in AYs after 2013–14	Applicable under "source of source" rule
Investor is a listed company or registered VCF	Exempt from "source of source" rule

Guiding Principles for Assessees and Professionals

1. Always collect:

   • PAN, ITRs, balance sheets of investors

   • Confirmation letters and bank statements

   • MCA records showing active status

2. Ensure:

   • Funds are routed through traceable banking channels

   • Valuation report supports share premium (DCF/Net Asset)

   • Directors' resolutions and ROC forms are properly filed

3. Maintain:

   • Investor correspondence and audit trail

   • Proper documentation of board approvals

4. Avoid:

   • Cash receipts

   • Transactions with paper companies or known entry providers

Conclusion

The Delhi High Court’s decision in PCIT v. Central Plastics Pvt. Ltd. strengthens the principle that genuine capital receipts cannot be taxed under Section 68 merely on suspicion or procedural lapses. When the assessee has produced adequate documentation and followed legitimate procedures, the burden lies on the Revenue to bring contrary material on record.

This ruling is particularly critical for private limited companies, startups, and unlisted entities which frequently raise capital from corporate investors or group entities.

The takeaway is clear – evidence, not assumptions, must drive assessment outcomes under Section 68.