2015 (5) TMI 473 - AT - Income Tax

Addition u/s 68 - genuineness of investments - cash credit - Held that - In the present case, the assessee is a loss making company and assessee has not been able to establish as to why an ordinary person of even having little prudence will invest in such a company. As regards, creditworthiness, Ld. CIT(A) has not made any finding as to what were the earnings of these companies and what were the net owned funds. Ld. CIT(A) stressed compliance only of one ingredient and that is identity of shareholders and the other two essential ingredients such as genuineness of transaction and creditworthiness of shareholders has been ignored. Moreover, there is certain set pattern of entries in the bank accounts of alleged shareholders whereby before issuance of cheques, the share applicants had got deposits almost equivalent amounts in their bank accounts. Moreover, the fact remained that A.O. had the information that the share applicants were engaged in the business of providing accommodation entries and therefore, the ratio of Nova Promoters and Finlease 342 ITR 169 is squarely applicable in this case. Therefore, in the absence of proper explanation of credits, the only option available with the A.O. was to make addition u/s 68 of the Act. The assessee cannot be allowed relief simply holding that assessee had discharged its onus by filing certain documents and the A.O. had failed to take further action. As decided in CIT v/s M/s Jansampark Advertising And Marketing (p) ltd. 2015 (3) TMI 410 - DELHI HIGH COURT where A.O. has failed to discharge his obligation to conduct proper inquiry to make additions the Ld. CIT(A) could not have closed the chapter by simply allowing the appeal and deleting the addition relying upon certain case laws and ignoring the facts that no documents for establishing creditworthiness of alleged shareholders were filed and income tax returns also related to earlier years. In view of above facts and circumstances, we set aside the issue to the office of Ld. CIT(A) who should pass a well reasoned and speaking order based upon the facts of the case after affording reasonable opportunity of being heard to the assessee. - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 of the Income Tax Act, 1961.
2. Establishment of identity, genuineness, and creditworthiness of shareholders.
3. Adequacy of the inquiry conducted by the Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)].
4. Applicability of case laws to the facts of the case.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 68 of the Income Tax Act, 1961:
The Revenue appealed against the order of the CIT(A) dated 20.01.2011, which deleted an addition of Rs. 31 lacs made by the A.O. under Section 68 of the Income Tax Act, 1961. The A.O. had added this amount as unexplained cash credits, citing that the assessee failed to establish the identity, genuineness, and creditworthiness of the shareholders. The CIT(A), however, deleted this addition, holding that the assessee had provided sufficient documentary evidence to substantiate the identity and genuineness of the transactions.

2. Establishment of Identity, Genuineness, and Creditworthiness of Shareholders:
The A.O. observed that the share capital of the assessee company had increased significantly and required the assessee to prove the identity, genuineness, and creditworthiness of the shareholders. The assessee provided documents such as share application forms, confirmations, PAN details, IT returns, bank statements, and other statutory documents. However, the A.O. noted discrepancies, such as simultaneous deposits in the shareholders' bank accounts before issuing cheques to the assessee and the submission of outdated IT returns. The CIT(A) found that the assessee had discharged the initial burden of proof by submitting the necessary documents and held that the identity and genuineness of the shareholders were established. The CIT(A) relied on various case laws, including the Supreme Court's decision in the case of Lovely Exports P. Ltd., which stated that if the share application money is received from alleged bogus shareholders whose names are given to the A.O., the department is free to proceed against them individually, but it cannot be regarded as the undisclosed income of the assessee company.

3. Adequacy of the Inquiry Conducted by the A.O. and CIT(A):
The A.O. made the addition based on information from the Director of Income Tax (Investigation) that some shareholders were providing accommodation entries. The CIT(A) allowed the relief without conducting further inquiry into the creditworthiness of the shareholders, which the A.O. had questioned. The Tribunal found that the CIT(A) did not adequately address the creditworthiness and genuineness of the transactions, as the assessee did not file relevant IT returns and financial documents for the assessment year under consideration. The Tribunal emphasized that the CIT(A) should have conducted a more thorough inquiry, especially given the A.O.'s findings and the information from the Investigation Wing.

4. Applicability of Case Laws to the Facts of the Case:
The CIT(A) relied on several case laws to support the deletion of the addition, including the jurisdictional High Court's decision in Dwarkadhish Investment Pvt. Ltd. and the Supreme Court's decision in Lovely Exports P. Ltd. The Tribunal, however, noted that the CIT(A) failed to consider the specific facts and circumstances of the case, particularly the pattern of deposits in the shareholders' bank accounts and the information from the Investigation Wing. The Tribunal referred to the Delhi High Court's decision in Nova Promoters and Finlease, which held that in cases involving accommodation entries, the genuineness of transactions cannot be established merely by providing certain documents.

Conclusion:
The Tribunal set aside the CIT(A)'s order and remanded the case back to the CIT(A) for a detailed and reasoned order after conducting a proper inquiry into the creditworthiness and genuineness of the shareholders. The Tribunal emphasized the need for the CIT(A) to address the defects pointed out by the A.O. and ensure that the assessee provides relevant documents for the assessment year under consideration. The appeal filed by the Revenue was allowed for statistical purposes.