2011 (12) TMI 394 - HC - Income Tax

Additions under ss.68/69 unsustainable without causal link; Revenue must probe shareholder identity, genuineness and creditworthiness

The HC held that additions under ss. 68/69 could not be sustained where Revenue failed to establish a causal link between cash bank entries and the ... Addition u/s 68 - Cash Credit - Unexplained share application money - Burden of proof - identity of shareholders, genuineness of the transaction and creditworthiness of the shareholders - principle of natural justice - Held That:- Even in the instant case, it is projected by the Revenue that the Directorate of Income Tax (Investigation) had purportedly found such a racket of floating bogus companies with sole purpose of landing entries. But, it is unfortunate that all this exercise is going in vain as few more steps which should have been taken by the Revenue in order to find out causal connection between the cash deposited in the bank accounts of the applicant banks and the assessee were not taken. It is necessary to link the assessee with the source when that link is missing, it is difficult to fasten the assessee with such a liability. Once adequate evidence/material is given, as stated by us above, which would prima facie discharge the burden of the assessee in proving the identity of shareholders, genuineness of the transaction and creditworthiness of the shareholders, thereafter in case such evidence is to be discarded or it is proved that it has 'created' evidence, the Revenue is supposed to make thorough probe of the nature indicated above before it could nail the assessee and fasten the assessee with such a liability under Section 68 and 69 of the Act. In our discussion on the aspect of remand in ITA No.972/2009, we have indicated that if the addition is set aside only because of some procedural defect or irregularity, viz., violation of principle of natural justice, then matter can be remitted back to give opportunity to the assessee to cross-examine the witness if it was not done. In view of that, we need not go into the merits of the addition made by the AO. As pointed out above, the CIT(A) had deleted the addition on merits and the Tribunal has simply remitted the case back to the AO. Issues Involved:1. Additions under Section 68 of the Income Tax Act, 1961.2. Burden of proof on the assessee regarding share application money.3. Legal principles and precedents regarding Section 68.4. Role and responsibilities of the Assessing Officer (AO).5. Remand and procedural defects in assessment.6. Validity of notice under Section 148 for reassessment.Detailed Analysis:1. Additions under Section 68 of the Income Tax Act, 1961:The primary issue involves the additions made by the AO under Section 68 of the Income Tax Act, 1961, due to unexplained share application money. The Tribunal had deleted these additions, prompting the Revenue to file appeals.2. Burden of Proof on the Assessee:The judgment emphasizes that the initial burden is on the assessee to explain the nature and source of the share application money. The assessee must prove:- Identity of the shareholder.- Genuineness of the transaction.- Creditworthiness of the shareholders.3. Legal Principles and Precedents:The court revisited various judgments to elucidate the legal position under Section 68:- Divine Leasing and Finance Ltd.: Highlighted the duty of the Revenue to curb the conversion of unaccounted money while ensuring that innocent assessees are not harassed.- Lovely Exports P. Ltd.: The Supreme Court held that the Department could reopen individual assessments of alleged bogus shareholders.- Sophia Finance Ltd.: Stated that the AO has jurisdiction to inquire into the nature and source of sums credited in the books of accounts.- Value Capital Services P. Ltd.: Asserted that the Department must show that the investment emanated from the assessee's coffers.4. Role and Responsibilities of the Assessing Officer (AO):The AO must conduct thorough investigations if there are doubts about the genuineness of the transactions. The AO cannot rely solely on suspicions or returned summons but must gather concrete evidence to support any additions under Section 68.5. Remand and Procedural Defects:The judgment discusses the circumstances under which a case can be remanded back to the AO:- If procedural defects or irregularities, such as violations of natural justice, are present.- If the AO failed to collect required evidence.- The Tribunal's role is to ensure that the assessment is according to law and supported by sufficient material.6. Validity of Notice under Section 148 for Reassessment:The court scrutinized the validity of notices issued under Section 148 for reassessment:- The AO must apply their mind independently and not act mechanically on information received from the Directorate of Income Tax (Investigation).- The reasons for reopening must be based on relevant material and not merely on vague information.- The court cited cases like Sarthak Securities Co. (P.) Ltd. and SFIL Stock Broking Ltd., where similar notices were quashed due to lack of independent application of mind by the AO.Conclusion:The court dismissed the appeals of the Revenue, emphasizing that the initial burden of proof lies with the assessee, which can be discharged by providing adequate documentation. The AO must conduct further investigations to substantiate any suspicions. The judgment also underscores the importance of independent application of mind in issuing reassessment notices under Section 148.