2016 (9) TMI 382 - AT - Income Tax

Addition u/s 68 on account of unexplained share capital - Held that - The assessee is a private limited company whose functioning capability strengths etc. would be known only to its close knit circle of friends and Directors and promoters who would be privy to this information. The Private Ltd. Company and such known concerns known to the said company would operate on internal information available to them and it is generally not easily available in the public domain. Thus necessarily the shareholders are limited to persons or concerns managed by the close knit circle of family and friends of the assessee. Accordingly the benefit of arm s length distance between a shareholder of a Public Ltd. Company with the company cannot be claimed by a shareholder in a Private Ltd. Company as the shareholders necessarily would be companies/entities managed and controlled by friends, relatives, business partners etc. of the Private Ltd. Company The fact that bogus transactions have been accepted by Director, Sh. Rajendra Agarwal in 2009-10 AY and a surrender has been made of ₹ 45 lakhs is sufficient evidence for the Revenue to conclude that such behavior for Director was a norm and not an aberration. Accordingly the company having been given an opportunity to prove that the transactions were genuine the onus in the peculiar facts and circumstances cannot be said to be discharged by placing insufficient evidences. The evidences now on record stated to be filed all along a position disputed by the Revenue and negated by the AO needs to be reconciled and the evidences relied upon need to be addressed. We note that the finding of fact that relevant documents were not filed before the AO has not been assailed by the assessee by way of any affidavit before the CIT(A) or before us that facts are incorrectly recorded. The impugned order in view of these obvious shortcomings is set aside and the matter is restored to the AO for fresh determination. The AO accordingly is directed to pass a speaking order in accordance with law on the jurisdictional aspect first and thereafter if need be on merits after giving the assessee a reasonable opportunity of being heard.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 of the Income Tax Act, 1961.
2. Validity of assessment proceedings under Section 153C of the Income Tax Act, 1961.

Detailed Analysis:

1. Deletion of Addition under Section 68 of the Income Tax Act, 1961:

The Revenue challenged the deletion of an addition of ?50,00,000 made by the Assessing Officer (AO) under Section 68 on account of unexplained share capital. The AO contended that the assessee failed to prove the genuineness of the transaction, as well as the identity and creditworthiness of the contributors. During the search and seizure operation, documents related to buy-back of shares were found, leading to a conclusion that unaccounted income was being introduced as share capital.

The CIT(A) deleted the addition, noting that the amounts were received through account payee cheques and there was no adverse material from the search to show that the assessee gave any cash or benefit against the investments. The CIT(A) relied on precedents like Lovely Exports Pvt. Ltd. and Divine Leasing & Finance Ltd., stating that the investor companies had sufficient funds and were regular in their business activities, thus proving their creditworthiness and the genuineness of the transactions.

2. Validity of Assessment Proceedings under Section 153C of the Income Tax Act, 1961:

The assessee filed a Cross Objection (C.O.) challenging the additions made in the assessment order under Section 153C, arguing that the additions were not based on any books of account or material found during the search. The assessee claimed that the original return was filed on 28.10.2005, and the assessment proceedings were deemed completed under Section 143(1) by the time of recording satisfaction under Section 153C.

The ITAT found that the claim of the original return being filed on 28.10.2005 was not verified by the AO. Therefore, the ITAT set aside the jurisdictional issue back to the AO for verification. If the jurisdictional issue is resolved against the assessee, the ITAT directed the AO to pass a speaking order on the merits after giving the assessee a reasonable opportunity of being heard.

Conclusion:

The ITAT restored the matter to the AO for fresh determination on both the jurisdictional aspect and the merits. The AO was directed to verify the claim regarding the original return and, if necessary, re-examine the evidences and pass a speaking order in accordance with law. The appeal of the Revenue and the C.O. of the assessee were allowed for statistical purposes.