2012 (11) TMI 595 - HC - Income Tax

High Court stresses thorough evidence review in case remittance, criticizes Tribunal's narrow focus on shareholder identity.

The High Court remitted the case to the Tribunal for fresh disposal, emphasizing the need for a comprehensive examination of evidence and surrounding ... Addition u/s 68 - ingenuine share transactions - ITAT deleted the addition - reopening of assessment - Held that:- AO had examined the bank accounts and had deduced a pattern by which the bank accounts were used only as a conduit to receive the monies and pay them out on the same day. This pattern, coupled with the general admission made by Pradeep Kumar Jindal one of the directors of company admitted to providing accommodation entry to the assessee and the failure of the share applicants to produce the directors before the AO, all taken cumulatively, should have forced Tribunal necessitating a deeper probe into the matter. The Tribunal chose to rest its decision on the sole fact that the share applicants had established there identity by filing confirmation letters and copies of their income tax returns. This is hardly sufficient for the purpose of discharging the creditworthiness of the share applicants and the genuineness of the transactions. Invoking Section 68 involves three ingredients, namely, the proof regarding identity of the share applicants, their creditworthiness to purchase the shares and the genuineness of the transaction as a whole. The Tribunal failed to keep in mind these aspects of the matter and has chosen to dispose of the appeal on the limited question of the identity of the shareholders. The present case is one where there is enough material in the possession of the Assessing Officer which warrants explanation from the assessee regarding the nature and source of the share application monies - matter remitted back to ITAT for fresh decision - decided against the assessee Issues Involved:1. Whether ITAT erred in deleting the addition of Rs.1.65 crores made under Section 68 of the Income Tax Act, 1961.2. Whether the decision of the Supreme Court in the case of Lovely Export is applicable in the present case.Issue-wise Detailed Analysis:1. Whether ITAT erred in deleting the addition of Rs.1.65 crores made under Section 68 of the Income Tax Act, 1961:The Revenue appealed against the ITAT's decision to delete the addition of Rs.1.65 crores made under Section 68 of the Income Tax Act. The assessee, a company, had filed a return of income for the assessment year 2000-01, which was initially processed under Section 143(1). Subsequently, the Assessing Officer (AO) initiated proceedings under Section 147 based on information from the investigation wing indicating that the assessee had taken accommodation entries from three companies amounting to Rs.3,30,000/-. However, during reassessment, it was clarified that the correct amount was Rs.1,65,00,000/-.The AO examined the nature and source of these amounts under Section 68 and called upon the assessee to produce the directors of the three companies. The assessee failed to comply, leading the AO to conclude that the identity, creditworthiness, and genuineness of the transactions were not established. Consequently, the AO added Rs.1.65 crores as the assessee's income under Section 68.The CIT(Appeals) upheld the reassessment's validity but admitted additional evidence, including affidavits from the directors of the three companies. The CIT(Appeals) found that all transactions were routed through banking channels, and no cash transactions were involved. It was noted that the AO did not confront the assessee with the investigation wing's information or examine the material to quantify the escaped income. The CIT(Appeals) deleted the addition, referencing the Supreme Court's judgment in CIT vs. Lovely Exports Pvt. Ltd.The Tribunal upheld the CIT(Appeals)'s decision, noting that the share applicants confirmed their investments and provided necessary documents, establishing their identity. The Tribunal applied the Supreme Court's judgment in Lovely Export, stating that the department's remedy was to reopen the individual shareholders' assessments, not to treat the share application monies as the assessee's undisclosed income.However, the High Court found the Tribunal's decision insufficient. The case involved reassessment based on the investigation wing's report, indicating accommodation entries. The AO had gathered substantial evidence, including bank account patterns and a general admission from a director of one of the companies, suggesting the accounts were used to route monies. The Tribunal failed to consider these aspects, focusing solely on the identity of the shareholders. The High Court emphasized that Section 68 requires proving the identity, creditworthiness, and genuineness of the transactions. The Tribunal's simplistic view ignored the broader picture and surrounding circumstances.2. Whether the decision of the Supreme Court in the case of Lovely Export is applicable in the present case:The Tribunal relied on the Supreme Court's judgment in Lovely Export, which held that if share application money is received by an assessee company from alleged bogus shareholders, the department can only proceed against the shareholders and not the company. However, the High Court noted that the present case involved substantial material suggesting accommodation entries, requiring a deeper probe. The Tribunal failed to consider the broader implications and surrounding circumstances, including the investigation wing's report, bank account patterns, and conflicting statements from the directors.Conclusion:The High Court found that the Tribunal did not dispose of the appeal in all its aspects and remitted the appeal to the Tribunal for fresh disposal in accordance with law. The substantial questions of law were answered against the assessee, emphasizing the need for a comprehensive examination of the evidence and surrounding circumstances.