2025 (1) TMI 171 - AT - Income Tax

Addition u/s 68 - unexplained cash credit being share capital/ share premium - person/investors has not appeared before the AO - assessee company/investors did not comply with summon u/s 131 by producing the director / principal officer/ individual of the share subscribing companies - HELD THAT - The assessee has furnished all the evidences proving identity and creditworthiness of the investors and genuineness of the transactions but AO has not commented on these evidences filed by the assessee. Besides the investors have also furnished complete details/evidences before the AO which proved the identity, creditworthiness of investors and genuineness of the transactions. Similar ratio has been laid down in the case of CIT Vs Orchid Industries (P) Ltd 2017 (7) TMI 613 - BOMBAY HIGH COURT by holding that provisions of section 68 of the Act cannot be invoked for the reasons that the person has not appeared before the AO where the assessee had produced on records documents to establish genuineness of the party such as PAN, financial and bank statements showing share application money. Crystal Networks Pvt. Ltd. 2010 (7) TMI 841 - KOLKATA HIGH COURT wherein it has held that where all the evidences were filed by the assessee proving the identity and creditworthiness of the loan transactions, the fact that summon issued were returned unserved or no body complied with them is of little significance to prove the genuineness of the transactions and identity and creditworthiness of the creditors. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

Whether the addition of Rs. 3,55,65,468/- as unexplained cash credit under Section 68 of the Income Tax Act was justified.
Whether the disallowance of Rs. 88,648/- under Section 14A read with Rule 8D was appropriate when no exempt income was earned or claimed by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 for Unexplained Cash Credit

Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The legal requirement is that the assessee must prove the identity, creditworthiness, and genuineness of the transactions. Key precedents include CIT Vs. Orissa Corporation Pvt. Ltd., CIT Vs. Orchid Industries Ltd., and Crystal Networks Pvt. Ltd. Vs. CIT.
Court's interpretation and reasoning: The tribunal found that the assessee had provided sufficient evidence to establish the identity, creditworthiness, and genuineness of the share capital and premium received. The tribunal noted that the AO did not conduct further verification of the evidence provided.
Key evidence and findings: The assessee submitted PAN cards, lists of directors, ITRs, bank statements, and other relevant documents. Despite the non-appearance of directors in response to summons under Section 131, the tribunal emphasized that the documentary evidence was sufficient to discharge the onus on the assessee.
Application of law to facts: The tribunal applied the principles from established precedents, emphasizing that the mere non-appearance of individuals in response to summons does not invalidate the documentary evidence provided.
Treatment of competing arguments: The revenue argued that the non-compliance with summons indicated a lack of creditworthiness. However, the tribunal held that the evidence provided was adequate and that the AO's lack of further investigation was a critical oversight.
Conclusions: The tribunal concluded that the addition under Section 68 was unsustainable and directed its deletion.

Issue 2: Disallowance under Section 14A

Relevant legal framework and precedents: Section 14A of the Income Tax Act pertains to expenses incurred in relation to exempt income. The legal principle is that disallowance under this section is not applicable if no exempt income is earned or claimed.
Court's interpretation and reasoning: The tribunal observed that the AO mechanically applied Section 14A without establishing that any exempt income was earned by the assessee.
Key evidence and findings: The assessee demonstrated that no exempt income was earned during the relevant assessment year.
Application of law to facts: The tribunal applied the legal principle that disallowance under Section 14A cannot be made in the absence of exempt income.
Treatment of competing arguments: The revenue did not provide substantial evidence to counter the assessee's claim of no exempt income.
Conclusions: The tribunal directed the deletion of the disallowance under Section 14A.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "The addition in the instant case had been made by the AO on non-compliance of notice u/s 131(1) of the Act by the shareholder, even when the relevant details had been filed by the appellant in the course of the assessment proceedings and also at the appellate stage."
Core principles established: The tribunal reinforced the principle that documentary evidence can suffice to establish the genuineness of transactions under Section 68, even if personal appearances are not made in response to summons. Furthermore, disallowance under Section 14A requires the presence of exempt income.
Final determinations on each issue: The tribunal upheld the deletion of the addition under Section 68 and the disallowance under Section 14A, dismissing the revenue's appeal.

The judgment underscores the importance of documentary evidence in tax assessments and clarifies the application of Sections 68 and 14A of the Income Tax Act. The tribunal's decision highlights the necessity for assessing officers to conduct thorough investigations and not rely solely on procedural non-compliance to justify additions or disallowances.

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