2019 (9) TMI 44 - AT - Income Tax

Addition u/s 68 - share application money received by the assessee company from alleged bogus share holders - Addition based on statement made u/s 131 - HELD THAT - AO, except issue of 133(6) notices nothing has been done to find out, the nature of transactions between the parties. Therefore, we are of the considered view that when, assessee has filed complete details to prove identity, genuineness of transactions and creditworthiness of the parties, then there is no reason for the AO to came to the conclusion that share capital and share premium is unexplained only for the reason that during the survey proceedings, the director of the company had admitted that those five companies are shell companies ignoring the fact that such admission has been retracted by filing affidavit along with letter explaining reasons fro such admission during survey proceedings. It is a settled position of law that once, any third party information/statements is relied upon to make additions, it is the obligation of the AO to provide copies of such statements/information and also to provide an opportunity of cross examination of the person, who gave the statement, when such opportunity has been availed by the person against whom, such statements are used. The Hon ble Supreme Court in the case of Andaman Timber Industries Ltd Vs CCE, Kolkata II 2015 (10) TMI 442 - SUPREME COURT had also upheld a similar legal position and held that not allowing the assessee to cross-examine the witnesses by the adjudicating the authority, though the statements and those witnesses were made the basis of the impugned order is a serious flaw, which makes the order nullity in, as much as, it amount to violation of principle of natural justice, because of which, the assessee was adversely affected. Therefore, on this count also the additions made by the AO cannot be sustained. Additions invoking the provisions of section 56(2)(viib) - We find that the said provision has been inserted by Finance Act, 2012 w.e.f 10.04.2013, where it provides that where a closely held company issues its shares at a price which is more than its fair market value, then amount received in excess of fair market value will be charged to tax in the hands of the company as income from other sources. On perusal of amendments brought out by Finance Act 2012, w.e.f. 01.04.2013 to the provisions of section 56(2)(viib) and section 68 it is very clear that where the assessee has issued shares at premium and also received share capital and if such company do not offer any explanation about the nature and source, then sum so received may be regarded as income of the assessee from undisclosed sources. In this case, from the facts on record, it is clear that the assessee has proved identity and genuineness of the transactions by filing necessary evidences. The assessee has filed valuation report from registered valuer as per which the share price of the company is over and above premium charged by the assessee.Therefore, we are of the considered view that provisions of section 56(2)(viib) has no application. - Decided against revenue

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Addition of share capital and premium under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment on the grounds that it was done mechanically based on information received from the DIT(I&CI) without the AO applying his mind. The assessee argued that there were no fresh tangible materials to justify the reopening. The CIT(A) upheld the reopening, stating that the AO had credible information which led to the belief that income had escaped assessment. The CIT(A) noted that the AO followed due procedure by providing the reasons for reopening to the assessee and disposing of the objections raised by the assessee. The CIT(A) relied on several judicial precedents, including the Supreme Court's decision in Raymond Woollen Mills Ltd. vs. ITO, which held that at the stage of issuing notice, the AO only needs to have a prima facie belief that income has escaped assessment. The CIT(A) dismissed the assessee's ground of appeal regarding the reopening of the assessment.

2. Addition of Share Capital and Premium under Section 68:
The AO made additions of ?9,80,00,000/- under Section 68, questioning the genuineness of the share capital and premium received by the assessee. The AO relied on statements recorded during a survey under Section 133A, where it was suggested that the share capital was an accommodation entry. The AO noted that the assessee failed to prove the genuineness of the transactions and the creditworthiness of the subscribers.

The CIT(A) deleted the addition, stating that the assessee had provided substantial evidence to prove the identity, genuineness, and creditworthiness of the investors. The CIT(A) criticized the AO for not conducting further investigations and for relying on third-party statements without allowing cross-examination, which violated principles of natural justice. The CIT(A) referred to several judicial precedents, including the Supreme Court's decision in Lovely Exports Pvt. Ltd. vs. CIT, which held that if the assessee provides details of the shareholders, the onus shifts to the AO to prove otherwise. The CIT(A) also noted that the provisions of Section 56(2)(viib) and the first proviso to Section 68, which require the investor to explain the nature and source of the credit, were applicable from AY 2013-14 and not retrospectively.

The ITAT upheld the CIT(A)'s decision, agreeing that the assessee had discharged its initial burden by providing necessary documents and that the AO failed to carry out further investigations. The ITAT emphasized that the AO's reliance on third-party statements without providing an opportunity for cross-examination was unjust. The ITAT also noted that the amendments to Sections 56(2)(viib) and 68 were prospective and not applicable to the assessment year in question.

Conclusion:
The ITAT dismissed the revenue's appeals and upheld the CIT(A)'s order, deleting the additions made under Section 68. The cross-objections filed by the assessee challenging the reopening of the assessment were dismissed as infructuous. The ITAT emphasized the importance of following due process and the principles of natural justice in making additions under Section 68.