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2022 (1) TMI 827 - AT - Income TaxAddition u/s 68 - unexplained share capital - addition of share money regarded as undisclosed income - discharge of onus by assessee or not - HELD THAT - Assessee has discharged burden cast upon it under section 68 of the Income-tax Act, 1961 in respect of share capital received from share capital subscribers - AO has not disputed the fact that the assessee has furnished various evidences to prove identity of the subscribers. The assessee has filed name and address of subscribers, their PAN numbers, details of amount received and allotment made to them, return of allotment filed with Registrar of companies, company master data as available on website of Ministry of Corporate Affairs, Certification of Incorporation along with Memorandum and Articles of Association, ITR acknowledgement, audited financial statements, copies of relevant bank statements and confirmation letters from share applicants along with source of funds for investment in assessee s company. The evidences filed by the assessee clearly satisfy the condition prescribed u/s.68 of the Act. The assessee not only proved identity, but also established credit worthiness of the parties which is evident from the fact that all subscriber companies financial statement shows source of income to explain investments made in Assessee Company which is further supported from the fact that all transfer of funds was through proper bank accounts. It is a well established legal principle of law by the decisions of various courts including the Hon ble Supreme Court in the case of CIT vs. Stellar Investments Pvt. Ltd 1991 (4) TMI 100 - DELHI HIGH COURT where it was clearly held that once alleged bogus shareholders details are provided to the AO then the AO is free to proceed to reopen the assessments of alleged bogus shareholders but sum received by the assessee cannot be treated as unexplained credit u/s.68 of the Act. In this case, although the assessee has filed various details, but the AO disregarded all evidences filed by the assessee and has made additions solely on the basis of investigation report without confronting those reports and statements recorded from those individuals to the assessee for rebuttal. Sole basis for the AO to draw an adverse inference against assessee is investigation report of Income Tax Department Kolkata and statements of certain persons recorded at the time of investigation - AO did not refer investigation report and its contents in his assessment order and further did not share copy of said report to the assessee. Further, even in statement of certain parties, no direct or indirect reference to the assessee. Nowhere the parties stated that the assessee is one of the beneficiaries of alleged transactions. In fact, the director of Assessee Company denied meeting any of the persons from whom statements were taken by the department. If you go through statement relied upon by the AO, except a general statement of modus operandi of entry providers, there is no direct or indirect reference to Assessee Company in any of statements. From the above, it is clear that the AO totally ignored genuine documents produced before him and passed the Assessment Order on a sweeping statement without any material evidence or fact on record. The AO has merely stated modus operandi of how, the transaction took place without considering the facts of the present case. AO instead passed a general statement on the lines of suspicion and surmises without any vital material evidence against the Assessee. From the above, it is very clear that the observations of the AO in his assessment order on the basis of report of investigation wing, Kolkata is a general observation of modus operandi of certain parties who are involved in alleged activity of entry providing, but it cannot be a conclusive evidence to draw an adverse inference against the assessee of having benefited from so called alleged hawala activity. No doubt, an alleged scam may have taken place, but, it has to be seen whether the assessee is part of an alleged activity and he had any direct or indirect role in alleged scam. Unless, evidences in the possession of the AO directly or indirectly linked to the assessee, it is difficult to implicate the assessee in the alleged scam AO has made additions solely on the basis investigation report of Income tax Department, Kolkata without providing copy of said report to the assessee for its rebuttal - not allowing the assessee to cross-examine the witnesses by the adjudicating 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. In this case, the Director of assessee Company Shri Pankaj Agarwal, in his statement recorded during the course of assessment proceedings, has categorically denied that he does not know any persons, whose statements were relied upon by the AO and further stated before the AO that he wants to cross examine those persons whose statements is basis for the addition. However, the AO neither made available copy of statements nor allowed director of the assessee Company to avail cross examination of those witnesses. In our considered view, this a clear case of violation of principles of natural justice in view of the decisions of Andaman Timber Industries Ltd 2015 (10) TMI 442 - SUPREME COURT and thus, on this count alone the additions made by the AO cannot be sustained. Even though there were circumstances leading to suspicion, yet having taken an action u/s.132 and enquiries made in the assessment proceedings, the assessing authority had not brought any positive material or evidence to indicate that the share application money as such represented assessee s own undisclosed money brought back in the garb of share capital. Merely because of his subjective satisfaction that the source of availability of money with the shareholder or their creditworthiness were not established, the AO could not treat the genuinely raised share capital as deemed income u/s.68 - Decided in favour of assessee.
Issues Involved:
1. Deletion of addition towards unexplained cash credit under Section 68 of the Income Tax Act, 1961. 2. Validity and jurisdiction of the search assessment. 3. Application of Section 68 for share capital/premium received. Issue-wise Analysis: 1. Deletion of addition towards unexplained cash credit under Section 68 of the Income Tax Act, 1961: The Revenue appealed against the deletion of ?11,00,00,000/- added as unexplained cash credit under Section 68. The Assessing Officer (AO) based the addition on the investigation report from Kolkata, which suggested that the shareholders were paper companies lacking creditworthiness and genuineness. The AO also noted that the companies were non-functional at their registered addresses and failed to produce directors for verification. The AO concluded that the transactions were accommodation entries to route unaccounted money. The assessee argued that it provided sufficient evidence to prove the identity, genuineness, and creditworthiness of the subscribers, including PAN, financial statements, and bank statements. The CIT(A) accepted the assessee's evidence and deleted the addition, relying on judicial precedents like CIT vs. Lovely Exports Pvt. Ltd., which held that the identity of shareholders suffices to shift the burden of proof to the Revenue. The Tribunal upheld the CIT(A)'s decision, stating that the assessee had discharged its burden under Section 68 by providing comprehensive evidence. The Tribunal emphasized that the AO failed to provide the investigation report and statements to the assessee, violating principles of natural justice. The Tribunal also noted that the AO did not conduct further inquiries or issue summons under Section 131. 2. Validity and jurisdiction of the search assessment: The assessee challenged the validity of the search assessment, arguing that it was passed out of time and without jurisdiction. The CIT(A) did not consider these grounds. The Tribunal did not specifically address this issue, focusing instead on the merits of the addition under Section 68. 3. Application of Section 68 for share capital/premium received: The AO questioned the high premium charged for the shares, suggesting it was a means to camouflage unaccounted money. The Tribunal rejected this reasoning, stating that the AO was not examining the issue under Section 56(2)(viib), which deals with excess share premium. The Tribunal noted that the assessee justified the premium based on its financials and intrinsic value of shares. The Tribunal also addressed the applicability of the proviso to Section 68, inserted by the Finance Act, 2012, effective from April 1, 2013. The Tribunal held that the proviso is prospective and not applicable to the assessment years in question. Therefore, the assessee was not required to explain the source of the source for the share capital received before the proviso's effective date. The Tribunal cited various judicial precedents, including CIT vs. Stellar Investments Ltd. and CIT vs. Gagandeep Infrastructure Pvt. Ltd., which support the view that once the identity of shareholders is established, the burden shifts to the Revenue to prove otherwise. The Tribunal concluded that the AO's addition under Section 68 was not justified, as the assessee had provided sufficient evidence to establish the identity, genuineness, and creditworthiness of the shareholders. Conclusion: The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s order, confirming that the assessee had discharged its burden under Section 68. The Tribunal emphasized the importance of adhering to principles of natural justice and conducting thorough inquiries before making additions under Section 68. The Tribunal also clarified the prospective applicability of the proviso to Section 68, reinforcing that the assessee was not required to explain the source of the source for the assessment years before the proviso's effective date.
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