2015 (5) TMI 1227 - AT - Income Tax

Addition u/s 68 - bogus share application money - HELD THAT - No such evidence appears to have been gathered by the department in course of search proceedings against the two parties. On perusal of bank statement of these two parties, it can be gathered that no cash has been deposited by these parties before issuing cheques to assessee towards share application money. Shares issued to alleged two companies were transferred to Director of the company on 31.07.2008 long before search conducted in case of Shri Mukesh Choksi on 25.11.2009 and so the statement of Shri Mukesh Choksi recorded after the transfer of shares cannot be relied upon in absence of any evidence collected in course of search in case of Shri Mukesh Choksi indicating transfer of cash. We find that all the transactions were duly supported by the Share application form, acknowledgement of return of income, audited financial statements bank statements, Memorandum of Association (hereinafter referred as MOA ) and Articles of Association (hereinafter referred as AOA ) of the share applicant. All the share application monies have been received through proper banking channel and there is no evidence that assessee has paid any money in cash to the share applicant in consideration of cheque received from share. No inquiry is made by the Assessing Officer once the assessee has discharged his primary onus to prove the identity, genuineness and creditworthiness of the share applicants. On perusal of the bank statements of share applicant, it can be seen that no cash has been deposited by them before issue of cheque to assessee towards share application money. None of the parties are related to assessee company. The assessee has proved all the three ingredients of proving a genuine cash credit by establishing identity (limited/listed companies), genuineness (transactions through normal banking channel) and creditworthiness (IT returns and balance sheet with huge share capital). If the Assessing Officer doubts the source of the source of the source, he was free to conduct inquiries in the case of persons from whom assessee has received funds. However, on that count, addition cannot be made u/s 68 in the hands of the assessee once the assessee discharges the onus on it as per the requirement of section 68. There was a clear lack of inquiry on the part of the assessing officer once the assessee had furnished all the material - Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment under Section 148 of the Income Tax Act, 1961.
2. Addition of Rs. 1,06,00,000/- under Section 68 of the Income Tax Act on account of share application and share premium money.

Detailed Analysis:

1. Reopening of Assessment under Section 148:

The assessee contested the reopening of the assessment by the Assessing Officer (AO) under Section 148 of the Income Tax Act, 1961. The AO had issued the notice based on information from the Investigation Wing, which indicated that the assessee had received bogus share application money from certain companies. The AO recorded reasons for reopening, stating that income chargeable to tax had escaped assessment.

The Tribunal found that the AO had not applied his independent mind and had acted solely on the information provided by the Investigation Wing. The Tribunal emphasized that the AO must have a reason to believe that income had escaped assessment and that this belief must be based on his satisfaction, not borrowed from another source. The Tribunal cited several judicial precedents, including the Supreme Court's decision in Calcutta Discount Co. Ltd. and the Delhi High Court's decision in Kamdhenu Steel & Alloys Ltd., to support its conclusion that the AO's action was mechanical and lacked independent application of mind.

The Tribunal also noted that the AO had not provided the assessee with an opportunity to cross-examine the individuals whose statements were used against him. This failure violated principles of natural justice, rendering the reopening invalid. Consequently, the Tribunal quashed the assessment framed under Section 143(3) read with Section 147.

2. Addition of Rs. 1,06,00,000/- under Section 68:

The AO had made an addition of Rs. 1,06,00,000/- to the assessee's income under Section 68 of the Income Tax Act, attributing it to bogus share application and share premium money received from various companies. The Tribunal divided this addition into two parts: Rs. 21,00,000/- from Mihir Agency Pvt. Ltd. and Buniyad Chemicals Pvt. Ltd., and Rs. 85,00,000/- from twelve other companies.

a. Addition of Rs. 21,00,000/-:

The AO based this addition on the statement of Mr. Mukesh Choksi, who admitted to providing accommodation entries through his group companies, including Mihir Agency Pvt. Ltd. and Buniyad Chemicals Pvt. Ltd. The Tribunal found that the AO had not conducted any independent inquiry to verify the genuineness of the transactions or provided the assessee with an opportunity to cross-examine Mr. Choksi. The Tribunal emphasized that mere reliance on Mr. Choksi's statement without corroborative evidence was insufficient to justify the addition.

The Tribunal also noted that the AO had not established any link between the assessee and the alleged accommodation entry providers. The Tribunal referred to the Supreme Court's decision in Kishinchand Chellaram, which held that evidence not shown to the assessee cannot be admitted. The Tribunal concluded that the addition of Rs. 21,00,000/- was not sustainable and directed its deletion.

b. Addition of Rs. 85,00,000/-:

The AO had made this addition based on the failure of some share applicants to respond to notices issued under Section 133(6) and the alleged similarity in the replies received from other share applicants. The Tribunal found that the assessee had provided sufficient documentary evidence to establish the identity, genuineness, and creditworthiness of the share applicants, including share application forms, bank statements, and financial statements.

The Tribunal observed that the AO had not made any further inquiry to disprove the evidence provided by the assessee. The Tribunal cited the Supreme Court's decision in Lovely Exports (P) Ltd., which held that if the share application money is received from alleged bogus shareholders whose names are provided to the AO, the department is free to reopen their individual assessments but cannot treat it as undisclosed income of the assessee company.

The Tribunal also referred to the Delhi High Court's decision in Kamdhenu Steel & Alloys Ltd., which emphasized that once the assessee provides prima facie evidence to discharge its burden, the onus shifts to the revenue to prove otherwise. The Tribunal concluded that the AO had failed to carry his suspicion to a logical conclusion through further investigation and directed the deletion of the addition of Rs. 85,00,000/-.

Conclusion:

The Tribunal allowed the assessee's appeal, quashing the reopening of the assessment under Section 148 and deleting the addition of Rs. 1,06,00,000/- made under Section 68. The Tribunal emphasized the importance of independent application of mind by the AO, adherence to principles of natural justice, and the need for corroborative evidence to justify additions based on statements from third parties.

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