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Issues Involved:
1. Addition of Rs. 3 crores towards undisclosed income under Section 68 of the IT Act. 2. Addition of Rs. 2,50,000 under Section 69C of the IT Act. Issue-wise Detailed Analysis: 1. Addition of Rs. 3 crores towards undisclosed income under Section 68 of the IT Act: The first issue pertains to the addition of Rs. 3 crores towards undisclosed income for the assessment year 1995-96. The shares contributed by four Sapphire Group companies in the assessee-company were not satisfactorily explained regarding the genuineness and creditworthiness of the shareholders. The addition was made under Section 68 of the IT Act, suggesting that the subscription amount received from these companies was the undisclosed income of the assessee-company. The assessee-company was incorporated on 30th June 1993, converting a registered firm into a public limited company. It had an authorized capital of Rs. 30 crores, with shares worth Rs. 11.4 crores offered for public issue and Rs. 3.8 crores through promoters quota. Four Sapphire Group companies invested Rs. 75 lakhs each in the assessee-company. A search under Section 132(2) of the Act was conducted on 21st Nov 1995, leading to the seizure of certain documents, including a Memorandum of Understanding (MOU) indicating that the Sapphire companies were floated by the Sethia group to subscribe to the assessee-company. The AO inferred that the MOU indicated the introduction of unaccounted funds into the assessee-company. Despite retraction by Rajendra Sethia, who claimed the MOU was a mere oral discussion, the AO proceeded with the addition based on the following observations: - The investments by the four Sapphire companies were not satisfactorily explained. - The substantial share capital of these companies was subscribed by about 15 companies, which were found non-existent. - The funds in these companies originated from Khemka & Co., whose source of deposits could not be verified due to non-compliance by Khemka & Co. The assessee argued that the addition was made without giving a reasonable opportunity to be heard and that the material gathered was not put to the assessee-company. The assessee cited several legal precedents to support the claim that the burden of proof lies on the Revenue to prove that the receipt is taxable income. The Tribunal concluded that there was no justification for the addition. It was admitted that the ultimate source of funds was from Khemka & Co., and there was no evidence linking these funds to the assessee-company. The Tribunal emphasized that the onus on the assessee was discharged by proving the source of funds from the four Sapphire companies, which were assessed by the same AO. The Tribunal held that the AO left the investigation halfway without linking the funds to the assessee-company. The Tribunal ruled that the addition under Section 68 was not justified as the assessee had discharged its onus, and there was no direct evidence to prove that the funds belonged to the assessee-company. 2. Addition of Rs. 2,50,000 under Section 69C of the IT Act: The second issue pertains to the addition of Rs. 2,50,000 under Section 69C of the IT Act. The search revealed that the assessee paid Rs. 2,50,000 to 'ULFA', which was not accounted for in the books. The AO added this amount under Section 69C. The assessee contended that the payment was not made, and the receipt was merely thrown in the office premises. Alternatively, the assessee argued that if the payment was made, it was protection money to run the business smoothly and should be allowed as a business expenditure under Section 37 of the Act. The assessee also argued that if the addition towards undisclosed income was confirmed, this expenditure should be considered incurred from the said undisclosed source, and the addition under Section 69C should be canceled. The Tribunal concluded that the document found during the search indicated that the expenditure was incurred. The statement by the assessee that the amount was not actually paid was considered a self-serving statement. The Tribunal confirmed the addition of Rs. 2,50,000 but ruled that the payment, being opposed to public policy, was not allowable as a business expenditure. Conclusion: The Tribunal partly allowed the appeal, ruling in favor of the assessee on the first issue by deleting the addition of Rs. 3 crores under Section 68 but confirming the addition of Rs. 2,50,000 under Section 69C.
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