2023 (10) TMI 1452 - AT - Income Tax

Addition u/s 68 - share capital and share premium unexplained - onus to prove - HELD THAT - AO could have taken an adverse view only if he could point out the discrepancies or insufficiency in the evidence and details received in his office from all the subscriber companies and also pointing out as to what further investigation was needed by him by way of recording of statement of the directors of the assessee and the subscriber companies. We draw our force from the decision of Paradise Inland Shipping Pvt. Ltd. 2017 (11) TMI 1554 - BOMBAY HIGH COURT wherein it was held that once the assessee has produced documentary evidence to establish the existence of the subscriber companies, the burden would shift on the revenue to establish its case. As in the present case all the share subscriber companies have responded to the notice issued u/s. 133(6) and AO has not bothered to discuss or point out any defect or deficiency in the documents furnished by the share subscribing companies. These evidences furnished by them have been neither controverted by the AO during the assessment proceedings nor anything substantive brought on record to justify the addition made by him. Ld. AO has simply added the amount of share capital and share premium on the ground that assessee has not produced the directors/shareholders. AO has ignored the reply given in response to notice issued u/s. 133(6) of the Act which are on record under duly acknowledged seal and stamp of his good office. From the perusal of the order of Ld. CIT(A), we note that Ld. CIT(A) has perused the evidence in the nature of documents and details and on their examination has sustained the addition made by the Ld. AO. Thus, going by the records placed by the assessee and by all the share subscribing companies in response to notices issued u/s 133(6), it can be safely held that the assessee has discharged its initial burden and the burden shifted on the ld. AO to enquire further into the matter which he failed to do so. CIT(A) has not taken into consideration the creditworthiness of all the subscriber companies by going through the records and the net worth of each of them. It is also noted that all the investing companies have substantial own funds available with them to make investment in the assessee. In this respect, all the investing companies have also explained their source of funds in their reply to notices issued u/s. 133(6) of the Act. Thus, we find that assessee has discharged its onus to prove the identity and creditworthiness of the share subscribing companies and the genuineness of the transactions. Assessee appeal allowed.

Summary

Issues Involved:

1. Legality of the addition of share capital and share premium as unexplained income under Section 68 of the Income Tax Act.
2. Validity of the assessment order and the order of the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Compliance with the principles of natural justice and the requirement for a reasoned order.
4. Burden of proof regarding the identity, genuineness, and creditworthiness of share subscribers.
5. The role of independent inquiry by the Assessing Officer (AO) in verifying the transactions.

Detailed Analysis:

1. Legality of the Addition under Section 68:

The primary issue was the addition of Rs. 15,51,00,000/- made by the Assessing Officer (AO) as unexplained income under Section 68 of the Income Tax Act, which was upheld by the CIT(A). The AO based this addition on the non-appearance of directors of the assessee and subscriber companies, despite the submission of documentary evidence. The Tribunal observed that the AO failed to consider the evidence submitted by the assessee, which included confirmations from subscriber companies, their income tax returns, and bank statements. The Tribunal emphasized that the mere non-appearance of directors cannot justify the addition under Section 68 if the assessee has provided sufficient documentary evidence to establish the identity, genuineness, and creditworthiness of the transactions.

2. Validity of the Assessment Order and CIT(A)'s Order:

The Tribunal found the orders of the AO and CIT(A) to be non-speaking, cryptic, and unreasoned. It noted that both authorities failed to engage with the facts and contentions presented by the assessee. The Tribunal highlighted that the CIT(A) did not examine the evidence and merely upheld the AO's decision without providing a reasoned analysis. This lack of reasoning and engagement with the evidence rendered the orders unsustainable in law.

3. Compliance with Principles of Natural Justice:

The Tribunal underscored the necessity for a quasi-judicial authority to provide reasons for its conclusions, as established in the case of Kranti Associates Pvt. Ltd. vs. Masood Ahmed Khan. The absence of a reasoned order from the AO and CIT(A) contravened the principles of natural justice, which require that decisions be based on an objective consideration of relevant factors.

4. Burden of Proof:

The Tribunal reiterated that the initial burden of proof lies with the assessee to establish the identity, genuineness, and creditworthiness of the share subscribers. Once the assessee discharges this burden by providing documentary evidence, the onus shifts to the Revenue to prove otherwise. In this case, the Tribunal found that the assessee had discharged its burden by submitting comprehensive evidence, including confirmations from subscriber companies, their financial statements, and bank details. The Revenue failed to counter this evidence or conduct further inquiries.

5. Role of Independent Inquiry by the AO:

The Tribunal criticized the AO for not conducting an independent inquiry to verify the genuineness of the transactions, as mandated by the Supreme Court in the case of PCIT vs. NRA Iron & Steel Pvt. Ltd. The AO's reliance on the non-appearance of directors, without pointing out any discrepancies in the submitted documents, was deemed insufficient to justify the addition. The Tribunal noted that the AO should have investigated any discrepancies or insufficiencies in the evidence provided by the assessee, which he failed to do.

Conclusion:

The Tribunal concluded that the assessee had adequately discharged its burden to prove the identity, genuineness, and creditworthiness of the share subscribers. The AO and CIT(A) failed to provide a reasoned order or conduct necessary inquiries. Consequently, the Tribunal set aside the orders of the AO and CIT(A) and deleted the addition made under Section 68 of the Act. The appeal of the assessee was allowed.