2025 (1) TMI 756 - AT - Income Tax

Reopening of assessment u/s 147 - Addition u/s 68 - share capital raised during the year unexplained - information recovered during search and post search operation that the assessee has been beneficiary of bogus share capital from three subscribers - HELD THAT - In the case of Data ware Private Limited 2011 (9) TMI 175 - CALCUTTA HIGH COURT as held that where the assessee has given PAN No. and other information along with names of creditors, AO should enquire the creditworthiness, genuineness of the transactions and whether such transaction has been accepted by the AO of the Creditor but instead of adopting such course, the AO himself could not enter into the return of the creditor and brand the same as unworthy of credence. Similarly, in Naina Distributors Pvt. Ltd. 2023 (6) TMI 1362 - CALCUTTA HIGH COURT 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. Also see Orissa Corporation Pvt. Ltd. 1986 (3) TMI 3 - SUPREME COURT and Orchid Industries Ltd. 2017 (7) TMI 613 - BOMBAY HIGH COURT Validity of re-assessment proceedings - We find that the ld. AO in the reasons recorded referred to the material found during the course of search and based on the search enquiries that the assessee is a beneficiary of bogus share capital. We note that that the ld. AO has not made any enquiry independently and just made the conclusion as to reopening the assessment based on the search enquiries. Therefore, this is the case of borrowed satisfaction by the AO. The case of the find support from the decision of Meenakshi Overseas (P.) Ltd. 2017 (5) TMI 1428 - DELHI HIGH COURT Accordingly, the re-assessment proceedings as well as assessment order is hereby quashed. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

• Whether the deletion of the addition of Rs. 1,48,00,000/- by the Commissioner of Income-tax (Appeals) (CIT(A)) was justified under Section 68 of the Income Tax Act, concerning the share capital raised by the assessee.
• Whether the reopening of the assessment proceedings under Section 147 of the Income Tax Act was valid, given the claim that there was no tangible material before the Assessing Officer (AO) and that the reopening was based on post-search inquiries.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deletion of Addition under Section 68

• Relevant legal framework and precedents: Section 68 of the Income Tax Act pertains to unexplained cash credits, where the burden is on the assessee to prove the identity, creditworthiness of the creditors, and the genuineness of the transactions. Relevant precedents include judgments from various High Courts and the Supreme Court, which emphasize the need for the AO to conduct a thorough inquiry into the creditworthiness and genuineness of transactions.
• Court's interpretation and reasoning: The CIT(A) concluded that the assessee had provided sufficient evidence to discharge its burden under Section 68. The evidence included bank statements, income tax returns, and other documents proving the identity and creditworthiness of the share applicants. The AO failed to provide cogent evidence to refute these claims.
• Key evidence and findings: The assessee provided documents such as share application forms, bank statements, and financial statements of the subscriber companies, which were scrutinized by the CIT(A). The AO's failure to conduct further inquiries or present contrary evidence was noted.
• Application of law to facts: The CIT(A) applied the principles laid down in precedents, stating that once the assessee provides prima facie evidence, the burden shifts to the AO to disprove the claims. The AO did not meet this burden.
• Treatment of competing arguments: The CIT(A) addressed the AO's concerns about the non-appearance of directors and the meager income disclosed by the subscriber companies, concluding that these were insufficient grounds for addition under Section 68.
• Conclusions: The CIT(A) deleted the addition of Rs. 1,48,00,000/-, finding that the assessee had adequately demonstrated the identity, creditworthiness, and genuineness of the transactions.

Issue 2: Validity of Reopening under Section 147

• Relevant legal framework and precedents: Section 147 of the Income Tax Act allows for the reopening of assessments if the AO has reason to believe that income has escaped assessment. The requirement of tangible material and the concept of "borrowed satisfaction" are significant considerations, as highlighted in precedents like PCIT Vs. Meenakshi Overseas (P.) Ltd.
• Court's interpretation and reasoning: The Tribunal found that the AO's decision to reopen the assessment was based on borrowed satisfaction from search inquiries, without independent verification or tangible material.
• Key evidence and findings: The AO relied on information from search operations without conducting further independent inquiries to substantiate the claim of bogus share capital.
• Application of law to facts: The Tribunal applied the principle that reopening based on borrowed satisfaction is not permissible, as the AO must have independent tangible material to justify reopening.
• Treatment of competing arguments: The Tribunal considered the AO's reliance on search inquiry information insufficient, emphasizing the need for independent assessment and verification.
• Conclusions: The Tribunal quashed the reassessment proceedings and the assessment order, deeming the reopening invalid due to lack of independent tangible material.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Owing to the above discussion, I cannot agree with the contention of the AO that the identity, creditworthiness and genuineness of the transaction were not proved. The addition of Rs. 1,48,00,000/-, therefore, cannot be sustained and stands deleted."
• Core principles established: The burden of proof under Section 68 initially lies with the assessee, but once prima facie evidence is provided, it shifts to the AO. Reopening of assessments under Section 147 requires independent tangible material, not borrowed satisfaction.
• Final determinations on each issue: The Tribunal upheld the CIT(A)'s deletion of the addition under Section 68, finding the assessee had met its burden of proof. The Tribunal also quashed the reassessment proceedings, ruling the reopening invalid due to lack of independent tangible material.