2010 (5) TMI 855 - AT - Income Tax

Tribunal affirms deletion of Rs. 1.18M share application money & validates assessment reopening.

Income Tax Officer Versus Nova Promoters & Finlease (P) Ltd.

The Tribunal upheld the deletion of an addition of Rs. 1,18,50,000 as share application money, finding that the assessee had provided sufficient evidence ... - Issues Involved:1. Deletion of addition on account of share application money.2. Validity of reopening the assessment.Detailed Analysis:1. Deletion of Addition on Account of Share Application Money:The Revenue was aggrieved by the CIT(A)'s deletion of an addition of Rs. 1,18,50,000 received as share application money from 16 parties, which the AO had added as unexplained cash credit under Section 68 of the IT Act. The AO's addition was based on information from the Investigation Wing indicating that the companies providing the share application money were not conducting actual business and were providing accommodation entries. The AO issued summons to these companies, some of which were unserved or uncomplied. Despite the assessee providing affidavits, confirmations, PAN details, and other documents proving the identity and genuineness of the transactions, the AO disregarded these and made the addition.The CIT(A) found that the assessee had filed sufficient documentary evidence to establish the identity and genuineness of the transactions, including confirmations, PAN details, bank statements, and affidavits from the directors of the investor companies. The CIT(A) noted that the AO did not take further action to enforce the attendance of the investor companies or rebut the affidavits. The CIT(A) relied on several judicial pronouncements, including the Supreme Court's decision in CIT vs. Lovely Exports (P) Ltd., which held that once the identity of the shareholders is established, the share application money cannot be regarded as undisclosed income of the assessee.The Tribunal upheld the CIT(A)'s decision, noting that the AO had not brought any material to prove that the share capital emanated from the assessee's coffers. The Tribunal emphasized that the identity of the shareholders was established, and the affidavits filed by the directors were not rebutted by the AO. The Tribunal also noted that the AO did not allow the assessee to cross-examine the witnesses whose statements were used against them, which was a fatal flaw in the assessment process.2. Validity of Reopening the Assessment:The assessee challenged the validity of the reopening of the assessment under Section 147/148, arguing that the AO did not apply his independent mind and merely relied on the Investigation Wing's information. The Tribunal, however, upheld the reopening, stating that the AO had specific information from the Investigation Wing about the transactions entered by the assessee. The Tribunal referred to the Supreme Court's decision in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd., which held that 'reason to believe' does not require the AO to have conclusively proven the escapement of income at the stage of issuing notice. The Tribunal found that the AO had a rational connection with the facts of the case, justifying the reopening of the assessment.Conclusion:The Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection. The deletion of the addition on account of share application money was upheld, and the reopening of the assessment was deemed valid. The Tribunal emphasized the importance of establishing the identity of shareholders and following due process, including allowing cross-examination of witnesses whose statements are used against the assessee.