ITAT Mumbai Deletes Section 68 Additions on Share Capital and Premium: Key Lessons from Mistry Construction Co. Pvt. Ltd. vs ACIT

Overview of the Dispute

The Income Tax Appellate Tribunal, Mumbai, recently adjudicated four cross-appeals arising from assessments under Section 143(3) read with Section 153A of the Income Tax Act, 1961, for Assessment Years 2007–08 and 2008–09 in the case of Mistry Construction Co. Pvt. Ltd. Vs ACIT (ITAT Mumbai), Appeal Numbers ITSSA 5418/MUM/2024 and ITSSA 5419/MUM/2024 (Assessee's appeals) and ITA 5911/MUM/2024 and ITA 5912/MUM/2024 (Revenue's appeals). The order was pronounced on 24/09/2026.

At the heart of the controversy was the Revenue's treatment of share capital and share premium received by the assessee — a closely held private company engaged in real estate development, civil contracting, earthmoving and mining — as unexplained cash credits under Section 68 of the Income Tax Act, 1961. The shares in question had been issued at a premium of ₹240 per share over and above a face value of ₹10 per share.

Following a survey under Section 133A initiated on 9 July 2008, which was converted on the same date into a search and seizure operation under Section 132, notices were issued under Section 153A. The assessee requested that its original returns filed under Section 139(1) — declaring total income of ₹4,86,98,989 for AY 2007–08 and ₹3,97,19,754 for AY 2008–09 — be treated as returns filed in response to those notices.

Assessment Year 2007–08: Categorisation of Share Receipts

The Assessing Officer (AO) noted that the assessee had received total share capital and share premium of ₹34,79,26,100 during AY 2007–08. Of this, ₹17,69,90,000 received from sister concern M/s. Millennium Clothing Pvt. Ltd. was accepted without dispute. The remaining ₹17,09,36,100 was treated as unexplained credits under Section 68 and classified under four categories:

  • Category A: ₹3,07,50,000 from entities allegedly linked to Shri Sanjay Banbarilal Chouhan — M/s. Avani Biotech Ltd., M/s. Dhwani Marketing Ltd., M/s. Emarald Systems Engineering Ltd. and M/s. Mansi Securities Pvt. Ltd.
  • Category B: ₹2,05,00,000 from entities allegedly associated with Shri Jagdish Prasad Purohit — M/s. Benco Finance & Investments Pvt. Ltd., M/s. Prarambh Multitrade Pvt. Ltd. and M/s. Suvidha Securities Pvt. Ltd.
  • Category C: ₹2,01,86,100 from seven foreign investors and entities based in the UAE.
  • Category D: ₹9,95,00,000 from 21 domestic corporate subscribers.

The Commissioner (Appeals) [CIT(A)], by order dated 23 August 2024, partly allowed the assessee's appeal by deleting the Category D addition of ₹9,95,00,000, finding that the assessee had discharged its onus under Section 68. However, the additions under Categories A, B and C aggregating to ₹7,14,36,100 were confirmed. Both the assessee and the Revenue challenged the respective outcomes before the Tribunal.

Assessment Year 2008–09: Full Deletion by CIT(A)

For AY 2008–09, the AO made an addition of ₹20,20,00,000 under Section 68 in respect of share application money and share premium, again at ₹240 per share over the ₹10 face value. The CIT(A) deleted the entire addition, comprising:

  • ₹16,25,00,000 received from corporate subscribers; and
  • ₹3,95,00,000 representing share application money received from nine parties and refunded through banking channels within the same financial year, i.e., FY 2007–08, with no shares allotted.

The Revenue challenged ₹19,90,00,000 of this deletion before the Tribunal. The difference of ₹30,00,000 related to M/s. Arena Securities Ltd., which the Revenue itself acknowledged represented a duplicate addition traceable to AY 2007–08.

Before examining the facts, the Tribunal addressed the applicable law. The first proviso to Section 68, inserted by the Finance Act, 2012 with effect from 01.04.2013, imposes an additional obligation on closely held companies to explain not merely the source of share subscriptions but also the source of the source. The Tribunal, relying on the judgment of the Bombay High Court in CIT v. Gagandeep Infrastructure (P.) Ltd. [2017] 80 taxmann.com 272 (Bom.), firmly held that this proviso operates prospectively and cannot be applied to assessment years prior to AY 2013–14.

Consequently, for AY 2007–08 and AY 2008–09, the assessee was required to establish the following under the pre-amendment law:

  1. Identity of the subscriber
  2. Creditworthiness of the subscriber
  3. Genuineness of the transaction

The Tribunal drew further support from the Supreme Court's ruling in CIT v. Lovely Exports (P.) Ltd. [2008] 216 CTR 195 (SC), which established that where shareholder names are duly furnished to the Revenue, the department retains the liberty to proceed against such shareholders independently, but share application money cannot on that ground alone be treated as the assessee-company's undisclosed income.

Key Legal Position: For assessment years prior to AY 2013–14, the first proviso to Section 68 does not apply. The assessee's burden extends to establishing identity, creditworthiness and genuineness — not to explaining the ultimate source of the subscriber's funds.

Physical Verification During Remand: The Decisive Turn