2012 (2) TMI 189 - AT - Income Tax

Tribunal overturns income addition, emphasizes need for thorough inquiry

The Tribunal allowed the appeal, vacating the addition of Rs.16,50,000/- as income from undisclosed sources. The Tribunal held that the AO did not conduct ... Share Capital from Undisclosed Sources - Notice under 133(6) returned unserved - No Directors produced nor the books of account - Investigating report: Entities engaged in providing entries no actual business carried on - Held That:- The addition could not sustain as the primary onus was discharged by the appellant by producing PAN number, bank account, copies of income tax returns of the share applicants, etc. - Assessing Officer was influenced by the information received by the Investigating Wing and on the general modus operandi, whether such modus operandi existed in the present case or not was not investigated by the Assessing Officer. AO is mistaken in question assessee for source of receipt of application money such enquiries should have been made to M/s Diamond Protein Ltd. Issues Involved:1. Legality of the CIT(A)'s order.2. Addition of Rs.16,50,000/- as income from undisclosed sources.3. Consideration of evidence and material ignored by the CIT(A).4. Addition based on material collected without providing the assessee an opportunity to rebut.5. Addition based on statements without giving the assessee an opportunity to cross-examine.Issue-wise Detailed Analysis:1. Legality of the CIT(A)'s Order:The assessee contended that the CIT(A)'s order was flawed both legally and factually. The appeal challenged the order confirming the addition of Rs.16,50,000/- as income from undisclosed sources, arguing that the CIT(A) ignored the material and evidence provided by the assessee and indulged in conjecture without any adverse material on record.2. Addition of Rs.16,50,000/- as Income from Undisclosed Sources:The AO added Rs.16,50,000/- under Section 68 of the Income-tax Act, 1961, as unexplained credits. The assessee had raised share capital of Rs.32,00,000/- during the year, receiving Rs.4,50,000/- each from Onyx Exim and Shimmer Marketing, Rs.3,00,000/- from Rapid Impex Pvt. Ltd., and Rs.4,50,000/- from Jainco Metals Pvt. Ltd. The AO received a report from the Investigating Wing, revealing that Shri S.H. Malik, a director in Onyx Exim and Shimmer Marketing, admitted these companies provided accommodation entries without actual business activities. The assessee failed to produce the directors of these companies or their books of accounts, leading the AO to conclude that the assessee did not establish the identity, creditworthiness, and genuineness of the transactions.3. Consideration of Evidence and Material Ignored by the CIT(A):The CIT(A) upheld the addition, noting that the assessee submitted confirmations, PAN, and bank details of the companies but did not produce the directors or controlling persons. The CIT(A) emphasized that the AO had rightly required the presence of the concerned parties to verify the genuineness of the transactions. The CIT(A) also pointed out that the assessee did not indicate what efforts were made to produce the parties or why they failed. The CIT(A) relied on the decision in CIT vs. Sophia Finance Ltd., which allows the AO to inquire into the nature and source of any sum credited in the books of the assessee.4. Addition Based on Material Collected Without Providing the Assessee an Opportunity to Rebut:The assessee argued that the addition was made based on material collected at the back of the assessee without providing a copy or an opportunity to rebut the same. The CIT(A) countered that the AO had provided a copy of Shri S.H. Malik's statement to the assessee and asked for proof of the identity, genuineness, and creditworthiness of the transactions. The CIT(A) concluded that the AO did not base his decision entirely on Malik's statement but also on the lack of evidence provided by the assessee.5. Addition Based on Statements Without Giving the Assessee an Opportunity to Cross-examine:The assessee contended that the addition was based on the statement of Shri S.H. Malik without giving an opportunity to cross-examine him. The CIT(A) found that the AO had apprised the assessee of the facts emerging from Malik's statement and provided a copy of it. The AO also gave the assessee an opportunity to prove the entries in its books of accounts, which the assessee failed to do.Judgment:The Tribunal found that the assessee had submitted confirmations, PAN, and bank details of the companies involved. The Tribunal noted that the AO did not make further inquiries beyond issuing notices under Section 133(6). The Tribunal emphasized that the statement of Shri S.H. Malik, recorded on 23rd June 2004, was irrelevant as the share capital was received later in December 2004 and January 2005. The Tribunal referred to the Supreme Court's decision in CIT Vs. Lovely Exports, which held that if share application money is received from alleged bogus shareholders whose names are provided, the Department should reopen their individual assessments but cannot treat it as undisclosed income of the assessee. The Tribunal allowed the appeal, vacating the addition of Rs.16,50,000/- and dismissing other grounds as academic or general in nature.Final Order:The appeal was allowed, and the addition of Rs.16,50,000/- was deleted.