2014 (9) TMI 83 - AT - Income Tax

Share application/ share capital subscribed Additions u/s 68 as undisclosed income Admissibility of statements made - accommodation entry providers - Held that - Sufficient material has been brought on record by the department to prove that appellant introduced its own unaccounted money in the garb of share application - The initial source of funds in the case of allottee companies remains unexplained - Statements of Mr. Ram Dinesh Sharma, Mukesh Choksi and Jayesh Patel clearly indicate the nature of accommodation entry business carried out by the four allottee companies - an iota of doubt that the transactions are bogus. The addition is made u/s. 68 of the Act on the ground of unexplained cash credit - as per the provisions of section 68, the initial onus lies upon the assessee to prove the nature and source of amount credited in his books of account - this initial onus was discharged by the assessee by furnishing documents like MOA, AOA, share application & board resolution, Certificate of Incorporation, Certificate of Commencement, acknowledgements of ITRs, audited accounts etc. of concerned companies - the onus shifted upon the Department and it was for the Department to bring on record relevant material to show that why inspite of the documents, the addition is still to be made in the hands of the assessee - the Department has endeavoured to discharge its burden on the basis of statements recorded by it. The assessee requested for cross-objection of the maker of the statement - the AO also made an attempt to allow the assessee opportunity to cross-examine the makers of the statement by issuing summons to them - the cross-examination could not take place because of failure on the part of the makers of the statements to appear on the appointed date but, thereafter the AO did not take any step to allow effective opportunity to the assessee to cross-examine the makers of the statements - the assessee was not allowed any real opportunity to cross-examine the persons who made the statement at the back of the assessee - the statement of those persons cannot be read against the assessee relying upon Heirs and Legal Representatives of Late Laxmanbhai S. Patel Vs. Commissioner of Income Tax 2008 (7) TMI 544 - GUJRAT HIGH COURT - the statements of the persons are not admissible evidence against the assessee - In absence of these statements, no other material has been brought on record by the Revenue to show that why still the amount should be treated as income of the assessee when the assessee furnished all the documents which were available with it to discharge the onus which was upon it u/s. 68 of the Act - the addition was made solely based on the inadmissible and unreliable material and the addition made cannot be sustained - the addition of ₹ 2,00,00,000/- made in the case of M/s Charted Motors Pvt. Ltd. as well as addition of ₹ 70,00,000/- made in the case of M/s. Chartered Speed Private Limited is set aside Decided in favour of assessee.

Issues Involved:

1. Confirmation of addition of Rs. 2 crores in the case of M/s Chartered Motors Pvt. Ltd. as undisclosed income under Section 68 of the Income Tax Act.
2. Confirmation of addition of Rs. 70 lakhs in the case of M/s Chartered Speed Pvt. Ltd. as undisclosed income under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Rs. 2 Crores in the Case of M/s Chartered Motors Pvt. Ltd.

The sole issue in this appeal was whether the addition of Rs. 2 crores, received as share application money from various companies, should be treated as undisclosed income under Section 68 of the Income Tax Act. The Assessing Officer (AO) observed that the share application money received from several companies was not genuine. The AO cited various reasons, including the issuance of shares at a high premium, the lack of business activity in the investing companies, and the fact that shares were sold back at face value shortly after being purchased at a premium. The AO also relied on statements from directors of the investing companies, who admitted to providing accommodation entries.

The assessee argued that the transactions were genuine, supported by documentary evidence such as Memorandum of Association (MOA), Articles of Association (AOA), share application forms, board resolutions, certificates of incorporation, income tax returns, and audited accounts of the investing companies. The assessee also contended that the AO did not allow cross-examination of the directors whose statements were relied upon.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, citing the inability of the assessee to satisfactorily explain the source of funds and the nature of the transactions. The CIT(A) referred to the decision of the Delhi High Court in CIT vs. Nova Promoters Finlease Pvt. Ltd., which emphasized the importance of examining the genuineness of transactions in depth.

Upon appeal, the Tribunal found that the initial onus to prove the nature and source of the credit was discharged by the assessee through substantial documentary evidence. The Tribunal also noted that the AO did not provide an effective opportunity for cross-examination of the directors, rendering their statements inadmissible. Citing various judicial precedents, the Tribunal concluded that the addition of Rs. 2 crores was unsustainable and deleted the addition.

2. Confirmation of Addition of Rs. 70 Lakhs in the Case of M/s Chartered Speed Pvt. Ltd.

Similar to the first issue, this appeal involved the addition of Rs. 70 lakhs received as share application money, which the AO treated as undisclosed income under Section 68. The AO observed that the shares were issued at a high premium and later bought back at face value by the promoter director, indicating a premeditated scheme to introduce unaccounted money. The AO relied on statements from directors of the investing companies and other individuals, who admitted to providing accommodation entries.

The assessee provided documentary evidence similar to that in the first issue, including MOA, AOA, share application forms, board resolutions, certificates of incorporation, income tax returns, and audited accounts of the investing companies. The assessee also argued that the AO did not allow cross-examination of the directors.

The CIT(A) upheld the AO's decision, emphasizing the unexplained source of funds and the nature of the transactions. The CIT(A) referred to the same judicial precedents as in the first issue.

Upon appeal, the Tribunal found that the initial onus to prove the nature and source of the credit was discharged by the assessee through substantial documentary evidence. The Tribunal also noted that the AO did not provide an effective opportunity for cross-examination of the directors, rendering their statements inadmissible. Citing the same judicial precedents as in the first issue, the Tribunal concluded that the addition of Rs. 70 lakhs was unsustainable and deleted the addition.

Conclusion:

In both cases, the Tribunal emphasized the importance of providing an opportunity for cross-examination of witnesses and found that the initial onus to prove the nature and source of the credits was discharged by the assessee. The Tribunal deleted the additions of Rs. 2 crores and Rs. 70 lakhs, respectively, as the additions were based on inadmissible and unreliable evidence.

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