2025 (1) TMI 521 - AT - Income Tax

Addition u/s 68 - share capital raised during the year - money raised by the assessee was not explained as the assessee failed to establish the identity, creditworthiness of the subscribers and genuineness of the transactions - CIT(A) deleted addition - HELD THAT - CIT (A) noted that these transactions were routed through banking channel and all the evidences were placed before the ld. AO qua these subscribers. CIT (A) has noted that the assessee has filed all the evidences and the AO has not pointed out any defect or deficiency in these documents on record in the assessment proceedings as well as during remand proceedings. In the case of Dataware Private Limited 2011 (9) TMI 175 - CALCUTTA HIGH COURT has held that where the assessee has given PAN No. and other information along with name of creditors, the ld. AO should enquire from the AO of the creditors about the creditworthiness, genuineness of the transactions and whether such transaction has been accepted by the AO in the case of the Creditors but instead of adopting such course, the AO himself could not brand the creditors as unworthy of credence - so long as it is not established that that return submitted by the creditor/subscriber has been rejected by its AO, the AO of the assessee is bound to accept the same as genuine when the identity of creditor and genuineness of the transactions through account payee cheque has been established. Similarly, in the case of PCIT Vs. Naina Distributors Pvt. Ltd. 2023 (6) TMI 1362 - CALCUTTA HIGH COURT has decided the issue in favour of the assessee by holding that mere non-production of director cannot be the ground for making any addition in the hands of assessee u/s 68 of the Act. Reopening based on borrowed satisfaction - We find that the ld. AO in the reason recorded referred to the search material found during the course of search and also post search enquiries that the assessee was a beneficiary of bogus share capital. We note that that the ld. AO has not made any enquiry and just reached a conclusion that income has escaped assessment and thus reopened the assessment based on the post search enquiries. Therefore, this is the case of borrowed satisfaction by the ld. Assessing Officer. See Meenakshi Overseas (P.) Ltd. 2017 (5) TMI 1428 - DELHI HIGH COURT wherein it has been held that no reopening could be made on borrowed satisfaction. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The judgment primarily revolves around two core legal issues:

Whether the addition of Rs. 1,50,00,000/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, on account of share capital raised by the assessee, was justified.
Whether the reopening of the assessment under Section 147 of the Act was valid, considering the assessee's claim that there was no tangible material to justify such reopening.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of Addition under Section 68

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act pertains to unexplained cash credits. The legal burden is initially on the assessee to prove the identity, creditworthiness of the investors, and the genuineness of the transactions. Precedents such as CIT vs. Dataware Private Ltd. and PCIT Vs. Naina Distributors Pvt. Ltd. were considered.
Court's Interpretation and Reasoning: The court observed that the assessee had provided substantial evidence, including bank statements, income tax returns, and other documents, to establish the identity and creditworthiness of the share applicants and the genuineness of the transactions. The AO failed to provide contrary evidence or conduct further inquiries.
Key Evidence and Findings: The assessee submitted various documents, including share application forms, bank statements, and financial statements of the share applicants. The CIT (A) noted that the share transactions were conducted through banking channels and that the share applicants were active and compliant with regulatory filings.
Application of Law to Facts: The CIT (A) concluded that the assessee had discharged its burden under Section 68 by providing sufficient evidence. The AO's failure to conduct further inquiries or substantiate allegations with evidence led to the deletion of the addition.
Treatment of Competing Arguments: The Revenue's argument that the share applicants were not found at the given address and the directors did not appear was insufficient to challenge the documentary evidence provided by the assessee.
Conclusions: The addition of Rs. 1,50,00,000/- under Section 68 was not sustainable, and the CIT (A) rightly deleted it.

Issue 2: Validity of Reopening under Section 147

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act allows for reassessment if the AO has reason to believe that income has escaped assessment. The court considered the precedent set by PCIT Vs. Meenakshi Overseas (P.) Ltd., which held that reopening based on borrowed satisfaction is invalid.
Court's Interpretation and Reasoning: The court found that the AO's decision to reopen the assessment was based on information from post-search inquiries without independent verification or tangible material, constituting borrowed satisfaction.
Key Evidence and Findings: The AO relied on search materials and post-search inquiries without conducting independent investigations or providing new tangible evidence.
Application of Law to Facts: The lack of independent inquiry by the AO rendered the reopening of the assessment invalid, as it was not based on the AO's own satisfaction.
Treatment of Competing Arguments: The assessee's argument that the reopening was based on borrowed satisfaction was upheld, as the AO failed to provide evidence of independent satisfaction.
Conclusions: The reopening of the assessment under Section 147 was invalid, and the cross-objection by the assessee was allowed.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The AO has also not been able to bring forth any fund flow statement or any evidence to substantiate his allegation that it was the unaccounted money of the appellant which was brought back in the form of share capital."
Core Principles Established: The judgment reinforces the principle that the initial burden of proof under Section 68 lies with the assessee, but once discharged, the burden shifts to the AO. Reopening of assessments must be based on the AO's independent satisfaction and not merely on borrowed information.
Final Determinations on Each Issue: The addition of Rs. 1,50,00,000/- under Section 68 was deleted, and the reopening of the assessment under Section 147 was deemed invalid.

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