2021 (7) TMI 832 - AT - Income Tax

Addition u/s 68 - Addition/action of AO in respect of share capital and premium infused into the assessee company HELD THAT - An opportunity is being given to the assessee to produce the director of investor companies as well as itself to the satisfaction of the AO to prove identity, creditworthiness and genuineness of the share capital and premium infused into their account. And the AO after giving proper opportunity to the assessee, to pass assessment order considering the documents and material produced post/pre this order and after appreciation of entire evidence the AO to decide the issue in accordance with law. And the assessee is at liberty to produce all documents written submission before the AO to substantiate/clarify the observation of AO in the assessment order dated 30.12.2016 and needless to say that if AO is intending to use any third party statement against the assessee, then the assessee may be given a copy of the statement/material and opportunity to cross-examine the maker of the statement. With the aforesaid observation, the impugned order is set aside, and the matter is remanded back to AO for fresh consideration and to give opportunity to assessee to produce the director of sixteen investor companies in accordance to law. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the addition of ?25,54,50,000/- as share capital and premium under Section 68 of the Income Tax Act.
2. Adequacy of the opportunity provided to the assessee to produce directors of investor companies.
3. Legitimacy of reliance on third-party statements without cross-examination.
4. Sufficiency of the reasoning provided by the CIT(A) in the appellate order.

Detailed Analysis:

1. Validity of the Addition under Section 68:
The primary issue revolves around the addition of ?25,54,50,000/- as share capital and premium under Section 68 of the Income Tax Act. The AO questioned the identity, creditworthiness, and genuineness of the share transactions involving sixteen corporate entities. Despite the assessee providing various documents, including confirmations, financial statements, and bank statements, the AO found discrepancies such as spelling mistakes and similar fonts, which led him to suspect that the confirmations were fabricated. The AO also relied on a third-party statement from Shri Subash Agarwal, an alleged entry operator, to disbelieve the transactions. The AO concluded that the assessee failed to discharge its burden under Section 68 due to the non-production of the directors of the investor companies.

2. Adequacy of Opportunity to Produce Directors:
The assessee argued that due to health issues and other unforeseeable problems, it could not produce the directors of the investor companies before the AO. The assessee's director filed an affidavit explaining the inability to coordinate effectively and requested another opportunity to produce the directors. The Tribunal noted that the AO had acknowledged the submission of various documents by the assessee but emphasized the failure to produce the directors as the main reason for the adverse inference. The Tribunal, citing the Supreme Court decision in Tin Box Company vs. CIT, stressed the importance of providing a proper opportunity to the assessee and decided to allow the assessee another chance to produce the directors before the AO.

3. Reliance on Third-Party Statements:
The AO heavily relied on the statement of Shri Subash Agarwal, recorded in another proceeding, to disbelieve the share transactions. The assessee contended that this reliance was inappropriate as the statement was recorded behind its back without providing an opportunity for cross-examination. The Tribunal agreed with the assessee, emphasizing that if the AO intended to use any third-party statement against the assessee, it should be given a copy of the statement and an opportunity to cross-examine the maker of the statement.

4. Sufficiency of Reasoning by CIT(A):
The Tribunal criticized the CIT(A) for passing a cryptic order that merely reproduced the AO's findings without providing independent reasoning. The Tribunal highlighted the importance of recording reasons in a quasi-judicial order, noting that it is essential for the affected party to understand the decision and for the appellate forum to evaluate the reasoning. The Tribunal found that the CIT(A) failed to give reasons for agreeing with the AO's findings and dismissed the appeal without proper consideration.

Conclusion:
The Tribunal set aside the impugned order and remanded the matter back to the AO for fresh consideration. The AO was directed to provide the assessee with a proper opportunity to produce the directors of the investor companies and to decide the issue in accordance with the law after considering all the evidence. The Tribunal emphasized the need for the AO to allow the assessee to cross-examine any third-party statements used against it. The appeal was partly allowed for statistical purposes.