2019 (1) TMI 1543 - AT - Income Tax

Addition u/s 68 - unexplained share application money and premium received - HELD THAT - AO has made the addition based on the report of the Investigation Wing Kolkata whereas the assessee has produced all the relevant documentary evidence to establish the identity, creditworthiness and genuineness of the transactions. Hence in the absence of any discrepancy or otherwise any material or record to show that the assessee s own unaccounted/undisclosed income has routed through the share applicants, the addition made by the AO is not justified. Accordingly, we do not find any error or illegality in the impugned order of the CIT (Appeals) in deleting the addition. Disallowance u/s 14A - sufficiency of own interest free fund - HELD THAT - There is no dispute that the assessee s own interest free fund was many times more than the investment made for both the assessment years 2010-11 and 2011-12. Further, there was no dividend income earned by the assessee during these assessment years, therefore, in the absence of any exempt income earned by the assessee during the years under consideration, the disallowance made by the AO being 1% of the average investment is not sustainable when there is no specific and identified expenditure or finding by the AO regarding any expenditure incurred by the assessee for earning the exempt income. Assessment u/s 153A - no incriminating material found or seized during the course of search and seizure action - HELD THAT - As relying on M/S. KOTA DALL MILL case 2019 (1) TMI 344 - ITAT JAIPUR the addition made by the AO without any material much less the incriminating material is not sustainable in law. Further, the report of the Investigation Wing Kolkata is also not a material or document either found or detected during the search and seizure action in case of the assessee but it pertains to the investigation carried out by the Investigation Wing Kolkata in a separate matter. Therefore, the said report will not partake the character of incriminating material found or seized during the course of search and seizure action in the case of the assessee. Hence the additions made by the AO while framing the assessment under section 153A of the Act are deleted for want of incriminating material. Cross examination of the witnesses denied - denial of natural justice - HELD THAT - When the assessee has specifically asked for cross examination of the witnesses whose statements were relied upon by the AO, then the denial of the opportunity to cross examine would certainly in violation of principles of natural justice and consequently renders the assessment order based on such statement as not sustainable in law. Hence in view of the facts and circumstances of the case where the assessee has repeatedly requested and demanded the cross examination of the witnesses whose statements were relied upon by the AO in the assessment order and further the report of the DDIT Investigation Kolkata is also based on the statement of such person then the denial of cross examination by the AO as well as ld. CIT (A) despite the fact that the assessee was ready to bear the cost of the cross examination of the witnesses is a gross violation of principles of natural justice. Thus the additions made by the AO on the basis of such statement without any tangible material is not sustainable in law and liable to be deleted. See M/S. KOTA DALL MILL case 2019 (1) TMI 344 - ITAT JAIPUR - Assessee appeal allowed.

Issues Involved:
1. Deletion of additions on account of unexplained share capital and premium.
2. Deletion of additions on account of unexplained unsecured loans.
3. Deletion of disallowance under Section 14A of the Income Tax Act.
4. Validity of the assessment order under Section 153A without incriminating material.
5. Violation of principles of natural justice by not providing the opportunity for cross-examination.

Issue-wise Detailed Analysis:

1. Deletion of Additions on Account of Unexplained Share Capital and Premium:
The revenue challenged the deletion of additions made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, which were based on the report from the Investigation Wing, Kolkata. The AO treated the share capital and premium received from M/s. Sangam Distributors Pvt. Ltd. and M/s. Teac Consultants Pvt. Ltd. as unexplained cash credits. The CIT (A) deleted the additions, noting that the AO relied solely on the information from the Investigation Wing without any supporting material. The assessee provided comprehensive documentary evidence, including bank statements, income tax returns, and confirmations from the investor companies, which were not contradicted by the AO. The Tribunal upheld the CIT (A)'s decision, emphasizing that the AO did not have any incriminating material to support the additions.

2. Deletion of Additions on Account of Unexplained Unsecured Loans:
Similar to the share capital issue, the AO made additions for unsecured loans allegedly obtained from M/s. Sangam Distributors Pvt. Ltd. and M/s. Teac Consultants Pvt. Ltd. The CIT (A) deleted these additions, stating that the AO did not have the statements of the alleged entry providers and relied solely on the Investigation Wing's report. The assessee produced evidence such as bank statements, confirmations, and financial statements of the loan creditors, which were not disproved by the AO. The Tribunal supported the CIT (A)'s decision, noting the lack of any material evidence against the assessee.

3. Deletion of Disallowance under Section 14A:
The AO made a disallowance under Section 14A of the Income Tax Act, which was deleted by the CIT (A). The CIT (A) observed that the AO did not record any satisfaction regarding the correctness of the assessee's claim and mechanically applied Rule 8D. Additionally, the assessee had sufficient interest-free funds, and no exempt income was earned during the assessment years. The Tribunal upheld the CIT (A)'s decision, emphasizing the absence of specific expenditure incurred for earning exempt income.

4. Validity of the Assessment Order under Section 153A without Incriminating Material:
The assessee argued that the assessments under Section 153A were invalid as no incriminating material was found during the search. The CIT (A) did not accept this contention, citing pending SLPs before the Supreme Court. However, the Tribunal, referencing its earlier decision in a related case (Kota Dall Mill), held that in the absence of incriminating material, the additions made under Section 153A were not sustainable. The Tribunal emphasized that the AO relied on the Investigation Wing's report, which was not based on any material found during the search.

5. Violation of Principles of Natural Justice by Not Providing the Opportunity for Cross-Examination:
The assessee contended that the AO violated principles of natural justice by not providing an opportunity for cross-examination of the witnesses whose statements were relied upon. The Tribunal agreed, referencing the Supreme Court's decision in Andaman Timber Industries vs. CCE, which held that not allowing cross-examination when statements are the basis of an order is a serious flaw. The Tribunal concluded that the denial of cross-examination rendered the assessment orders unsustainable and deleted the additions made by the AO.

Conclusion:
The Tribunal upheld the CIT (A)'s deletion of additions on account of unexplained share capital, premium, and unsecured loans, and disallowance under Section 14A. It also ruled in favor of the assessee on the validity of the assessment orders under Section 153A and the violation of principles of natural justice. The appeals by the revenue were dismissed, and the cross-objections by the assessee were allowed.

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