2013 (12) TMI 1529 - HC - Income Tax

Addition u/s 68 - Held that - The companies from which the share application money had been received by the assessee-company were genuinely existing and the identity of the individual investors were also established and they had confirmed the fact of making investment, the finding that assessee had discharged initial burden and addition under Section 68 could not be sustained.

Issues Involved:
1. Addition of Rs. 79,80,000/- on account of unexplained share capital contribution.
2. Addition of Rs. 19,950/- on account of unexplained expenditure on commission for getting accommodation entries.
3. Utilization of statements made by third parties without providing an opportunity for cross-examination.
4. Evaluation of evidence and genuineness of the share capital contributors.

Detailed Analysis:

1. Addition of Rs. 79,80,000/- on account of unexplained share capital contribution:
The Assessing Officer (AO) made an addition of Rs. 79,80,000/- to the income of the assessee company, alleging that the share capital and share premium were received from five Delhi-based companies engaged in providing accommodation entries. The AO relied on statements from individuals related to these companies, including Shri Pradeep Kumar Jindal, who admitted to providing accommodation entries. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) deleted this addition. The CIT(A) found that the AO did not provide the assessee an opportunity to cross-examine the individuals whose statements were used against them, violating principles of natural justice. The ITAT upheld this finding, emphasizing that the share capital was received through account payee cheques and that the companies were assessed to tax, thus following the precedent set by the Supreme Court in CIT v. Lovely Exports (P.) Ltd. [2008] 216 CTR 195.

2. Addition of Rs. 19,950/- on account of unexplained expenditure on commission for getting accommodation entries:
The AO also added Rs. 19,950/- as commission paid for arranging share capital and share premium entries. The CIT(A) and ITAT deleted this addition as well, reasoning that the AO's conclusion was based on statements recorded behind the assessee's back without an opportunity for cross-examination. The ITAT noted that there was no evidence that the assessee paid any commission or refunded the amount received under the guise of share application money.

3. Utilization of statements made by third parties without providing an opportunity for cross-examination:
Both the CIT(A) and ITAT found that the AO's reliance on statements made by third parties, without allowing the assessee the opportunity to confront and cross-examine these individuals, was unjustified. This procedural lapse was a significant factor in deleting the additions made by the AO. The appellate authorities stressed that any such statements could not be used against the assessee without adhering to the principles of natural justice.

4. Evaluation of evidence and genuineness of the share capital contributors:
The appellate authorities examined the evidence and found that the share capital contributors were existing assessees with valid Permanent Account Numbers (PANs) and were regularly assessed to tax. The ITAT highlighted that the share capital was received through proper banking channels and that the AO failed to disprove the genuineness of the confirmations and affidavits provided by the directors of the investing companies. The ITAT reiterated the legal position that even if the shareholders were bogus, the amount could not be treated as undisclosed income of the assessee company, as established in the case of CIT v. Lovely Exports Pvt. Ltd. and other similar judgments.

Conclusion:
The High Court upheld the findings of the CIT(A) and ITAT, concluding that no substantial question of law was involved. The court emphasized that the issues raised were matters of evidence appreciation, which had been duly considered by the appellate authorities. The court affirmed that the department could proceed against the individual investors but could not assess the increased share capital as the income of the assessee company. Consequently, the appeal was dismissed.

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