2023 (3) TMI 1348 - AT - Income Tax

Reopening of assessment u/s 147 - addition u/s 68 - absence of cross-examination of a person on the basis of whose statement proceedings had been launched in the hands of the assessee - HELD THAT - A.O had grossly erred in law and facts of the case, both in withholding the copies of the complete statements of the aforementioned persons, viz. S/Shri Narendra Jain and Champak Mandal; and also by refusing to allow their cross-examination to the assessee despite its persistent requests for the same. Although the Ld. AR by drawing support from the aforesaid judicial pronouncements had tried to impress upon us that the failure on the part of the A.O to facilitate cross-examination of the aforementioned persons; and also making available complete copies of their statements would be fatal to the validity of the assessment in hand, but we are unable to persuade ourselves to subscribe to his aforesaid contention. Admittedly, as observed failure on the part of the A.O to make available complete copies of the statements a/w. facilitating a cross-examination of the aforementioned persons, viz. S/Shri Narendra Jain and Champak Mandal is a serious flaw and is in fact a flagrant violation of basic tenements of the principles of natural justice, but the same in our considered view would not on such standalone basis render the assessment framed by the A.O as nullity. As the failure on the part of the A.O to facilitate a cross-examination of the aforementioned persons, viz. S/Shri Narendra Jain and Champak Mandal; and also make available complete copies of their statements would have undeniably made it impractical for the assessee company to defend its case and rebut the adverse inferences which the A.O would have drawn by pressing into service the statements of the aforementioned persons, therefore, in our considered view the matter in all fairness would require to be revisited by the A.O. We, thus, in all fairness by adopting a balanced approach restore the matter to the file of the A.O for re-adjudication after making available complete copies of the statements of the aforementioned persons, viz. S/Shri Narendra Jain and Champak Mandal and facilitating their cross-examination to the assessee company. Matter restored the matter for fresh adjudication to the file of the A.O in terms of our aforesaid observations, therefore, we refrain from dealing with the other contentions advanced by the ld. A.R before us, both as regards the validity of the jurisdiction that was assumed by the A.O for initiating proceedings u/s.147 of the Act; as well as those qua the merits of the case, which the assessee would be at a liberty to raise before the lower authorities in the course of de-novo proceedings. Appeal of the assessee is allowed for statistical purposes in terms of our aforesaid observations.

Issues Involved:
1. Validity of Notice under Section 148.
2. Reason to believe for escapement of income.
3. Assumption of jurisdiction by the Assessing Officer (AO).
4. Non-commencement of commercial operations by the assessee.
5. Creditworthiness of the shareholder.
6. Existence of shell companies.
7. Contradictory stance of the department regarding Share Application Money.
8. Reliance on third-party statements without cross-examination.
9. Issue price of shares.
10. Maintenance of documents for share allotment.
11. Consideration of findings in scrutiny assessment for other assessment years.
12. Obligation to establish identity, creditworthiness, and genuineness of transactions.
13. Addition under Section 68.
14. Hypothetical commission on share application money.
15. Assessment without reference to seized documents.
16. Assessment based on suspicion.
17. Rejection of additional evidence by CIT(A).

Summary of Judgment:

1. Validity of Notice under Section 148:
The assessee contested the legality of the notice issued under Section 148, arguing that it was "bad in law" and the subsequent proceedings were "void ab initio." The tribunal noted that the AO had followed due procedure, including obtaining necessary approvals before issuing the notice, and thus, the plea was rejected.

2. Reason to believe for escapement of income:
The assessee argued that the AO had no "reason to believe" regarding the escapement of income and issued notices based on "suspicion, surmises, and conjectures." The tribunal found that the AO had valid reasons based on information received from the Investigation Wing and other sources, thus upholding the AO's belief.

3. Assumption of jurisdiction by the AO:
The assessee claimed that the AO erred in assuming jurisdiction. The tribunal noted that the AO had followed the proper procedure and disposed of the objections raised by the assessee, thus validating the AO's jurisdiction.

4. Non-commencement of commercial operations:
The assessee argued that since it had not started commercial operations, there was no question of earning undisclosed income. The tribunal found that the AO had sufficient grounds to investigate the receipt of share capital/premium from shell companies, thus rejecting the assessee's claim.

5. Creditworthiness of the shareholder:
The AO held that the shareholders lacked creditworthiness. The tribunal upheld this view, noting that the financials of the shareholder companies did not support their ability to make substantial investments.

6. Existence of shell companies:
The AO identified the investor companies as shell companies. The tribunal agreed, citing evidence that these companies had no physical existence or business operations, thus supporting the AO's conclusion.

7. Contradictory stance of the department regarding Share Application Money:
The assessee argued that the department's stance was contradictory. The tribunal found no merit in this claim, noting that the AO had provided a consistent rationale for the addition made.

8. Reliance on third-party statements without cross-examination:
The assessee contended that the AO relied on third-party statements without allowing cross-examination. The tribunal found this to be a violation of natural justice and restored the matter to the AO for re-adjudication after allowing cross-examination.

9. Issue price of shares:
The AO held that the issue price of shares defied logic. The tribunal upheld this view, noting that the high premium on shares was unjustified and indicative of money laundering.

10. Maintenance of documents for share allotment:
The AO found that the assessee did not maintain proper documents for share allotment. The tribunal agreed, noting that the lack of documentation supported the AO's conclusion of artificial arrangements.

11. Consideration of findings in scrutiny assessment for other assessment years:
The assessee argued that findings from other assessment years should be considered. The tribunal found that the AO had appropriately considered relevant findings, thus rejecting the assessee's claim.

12. Obligation to establish identity, creditworthiness, and genuineness of transactions:
The AO held that the assessee failed to establish these elements. The tribunal upheld this view, noting that the assessee could not prove the identity and creditworthiness of the investors or the genuineness of the transactions.

13. Addition under Section 68:
The AO made an addition of Rs. 38,30,50,000 under Section 68. The tribunal upheld this addition, agreeing with the AO's conclusion that the funds were unexplained cash credits.

14. Hypothetical commission on share application money:
The AO assumed a commission on share application money as unexplained cash credit. The tribunal found this to be justified, supporting the AO's addition.

15. Assessment without reference to seized documents:
The assessee claimed that the assessment was made without reference to seized documents. The tribunal found that the AO had appropriately considered relevant documents, thus rejecting the claim.

16. Assessment based on suspicion:
The assessee argued that the assessment was based on suspicion. The tribunal found that the AO had valid grounds for the assessment, thus rejecting the claim.

17. Rejection of additional evidence by CIT(A):
The assessee contended that CIT(A) rejected additional evidence without consideration. The tribunal found that the CIT(A) had appropriately considered the evidence and upheld the assessment order.

Conclusion:
The tribunal restored the matter to the AO for re-adjudication after making available complete copies of the statements of the third parties and facilitating their cross-examination to the assessee. The appeal was allowed for statistical purposes.

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