Third-Party Share Capital Additions Under Section 68 Are Invalid Without Proof of Round-Tripping By Assessee

By | June 1, 2026
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Third-Party Share Capital Additions Under Section 68 Are Invalid Without Proof of Round-Tripping By Assessee

Issue

Whether an addition under Section 68 on account of share capital received from a third-party investor can be sustained in the hands of the recipient-assessee company in the absence of any evidence showing that the invested funds originated from or were passed on by the assessee itself.

Facts

  • The assessee-company received a monetary investment from a third-party investor toward its share capital during the Assessment Year 2012-13.

  • The Assessing Officer (AO) treated this investment as unexplained cash credit and made an addition under Section 68 of the Income-tax Act, 1961.

  • On appeal, the Commissioner (Appeals) recorded categorical findings establishing that the assessee was engaged in genuine business activities and was not a shell entity.

  • The Commissioner (Appeals) further accepted the factual position that the assessee had legitimately invited the investment into its share capital.

  • The Revenue did not produce any evidence to establish that the money invested by the third party had actually been provided or routed back by the assessee company itself.

Decision

  • Held, yes: An addition under Section 68 for third-party share capital can only be made in the hands of the recipient-assessee if there is concrete evidence demonstrating that the money had passed out from the assessee itself to the investor.

  • Held, yes: Since the Revenue failed to demonstrate any such round-tripping or routing of funds by the assessee, the investor’s capital contribution cannot be treated as the assessee’s unexplained cash credit.

  • Held, yes: Consequently, the addition made under Section 68 was legally unsustainable and was ordered to be deleted, ruling in favor of the assessee.

Key Takeaways

  • Onus on Revenue for Round-Tripping: Once an assessee-company establishes its genuine business character and proves it actively invited capital, the Revenue cannot make a Section 68 addition on third-party investments without proving the funds originated from the assessee.

  • Immunity for Non-Shell Entities: Genuine, operating commercial entities are shielded from arbitrary share premium or share capital additions if the appellate authorities explicitly find they are not functioning as shell companies.

HIGH COURT OF ALLAHABAD
Principal Commissioner of Income-tax
v.
Livros Publishing (P.) Ltd.*
Saumitra Dayal Singh and Swarupama Chaturvedi, JJ.
IT APPEAL No. 44 of 2026
MAY  14, 2026
Ankur Agarwal, Counsel for the Appellant. Suyash Agarwal, Counsel for the Respondent.
ORDER
1. Heard Shri Ankur Agarwal, learned counsel for the appellants and Shri Rakesh Ranjan Agarwal, learned Senior Advocate assisted by Shri Sumit Mishra, learned counsel for assessee.
2. Present appeal filed by the revenue arises from the order dated 08.10.2025 passed by the Income Tax Appellate Tribunal, Delhi Bench, Delhi in ITA No. 1971/Del/2020, Assessment Year: 2012-13, ITO v. Livros Publishing (P.) Ltd. [IT Appeal No. 1971 (Del) of 2020, dated 08.10.2025] By that order, learned Tribunal has dismissed the revenue’s appeal and thereby confirmed the order passed by the Commissioner Income Tax (Appeal), Meerut dated 28.08.2020 allowing the assessee’s appeal against the assessment order dated 27.03.2015.
3. The present appeal has been pressed on the following question of laws:
“3. Whether the Ld. ITAT has erred in law and on facts in ignoring the genuineness of transactions of a newly incorporated assessee company (with no discrenible net worth) receiving share application money at an exorbitant premium of Rs. 490 per share on face value of 10, thereby failing to apply the test of human probabilities as laid down by the Hon’ble Supreme Court in the case of Sumati Dayal v. CIT ?
4. Whether the Ld. ITAT erred in law by failing to apply the principle of preponderance of probabilities, as enunciated in Sumati Dayal v. CIT, wherein the Supreme Court held that apparent transactions must be tested against surrounding circumstances and human conduct, thereby overlooking that the assessee’s claim of receipt of share premium lacked commercial rationale and was wholly improbable?”
4. At the outset, learned counsel for the assessee has raised preliminary objection that the tax effect Rs. 1,29,75,868/- is below the monitory limit of Rs. 2 crore. Relying on the Circular No. 09/2024 issued by the CBDT. Thus, it has been objected that the present appeal is not maintainable.
5. Even otherwise, it has been submitted that there is no adverse fact found against the appellant as may have allowed for the addition to be made under section 68 of the IT Act, 1961.
6. To the extent, the assessee is a duly incorporated company and further to the extent, the shares issued by it were duly listed, if any doubt existed with the revenue as to the source of money available to the investor, here another corporation M/s Apurva Leasing Finance and Investment Company, that may have led to addition at the hands of the third party i.e. the investor. However, the present assessee has no means to verify the source of investment made in its share capital.
7. To the extent, issuance of shares is genuine, other issues may fade into insignificance.
8. Having heard learned counsel for the parties and having perused the record, we find that the Commissioner of Income Tax (Appeals) has recorded categorical findings confirming the genuine activity of the assessee. To the extent, the present assessee is not a shell entity and further to the extent, it had invited investment in its share capital, the fact that said investment made by M/s Apurva Leasing Finance and Investment Company may have been added at the hands of the assessee only if evidence may existed of that money having been passed on by the assessee itself.
9. To the extent, that is not the case of the revenue, and further to the extent, the revenue alleges that certain third party namely Shri S.K. Jain and Virendra Kumar Jain were operating the investor company M/s Apurva Leasing Finance and Investment Company, the addition may have been made at other hands under other provision of law.
10. So far as the present assessee is concerned, it is the recipient of the amount invested. The amount in issue is share capital received from third party. Which third party is to be assessed with respect to the amount invested, may remain outside the control of the assessee and may have no bearing on it’s assessment.
11. In view of the above, the reasoning of the Tribunal, confirming the order of the CIT (Appeal) cannot be faulted.
12. In absence of any element of perversity or other serious doubt, the appeal lacks merits and is dismissed.
13. No order as to costs.