2019 (4) TMI 1988 - AT - Income Tax

Tribunal rules in favor of assessee, deletes addition under Income Tax Act Section 68

The Tribunal upheld the CIT(A)'s decision to delete the addition under Section 68 of the Income Tax Act, ruling in favor of the assessee. The Tribunal ... Unexplained cash credit u/s. 68 - identity, genuineness and creditworthiness of shareholders - onus shifting under section 68 - reliance on third party statements and investigation reports - principles of natural justice - right to confrontation/cross examination - distinction between share capital and share premium for additionUnexplained cash credit u/s. 68 - identity, genuineness and creditworthiness of shareholders - onus shifting under section 68 - distinction between share capital and share premium for addition - Sustainability of the Assessing Officer's addition of share premium as unexplained cash credit under section 68 for AY 2012-13. - HELD THAT: - The Tribunal found that the assessee had furnished confirmations, ITR acknowledgements, audited financial statements of the investors, share application forms, bank evidence showing payment through banking channels, ROC compliances and related documents which established the identity, genuineness and creditworthiness of the shareholders. Once this primary onus under section 68 was discharged by the assessee, the burden shifted to the Revenue to prove otherwise. The Assessing Officer relied solely on investigation reports and statements said to be recorded from third parties (PKJ group) but did not bring any corroborative or specific incriminating material linking those findings to the assessee's transactions, nor did he undertake independent enquiries to displace the documentary evidence. The AO had accepted the face value subscription as genuine and attempted to tax only the premium; the Tribunal held that having accepted allotment of share capital, the AO could not selectively treat only the premium as unexplained cash credit without contrary evidence. Applying settled precedents, the Tribunal sustained the deletion of the addition under section 68. [Paras 22, 29, 30]Addition of share premium treated as unexplained cash credit under section 68 deleted; Revenue's appeal dismissed on this ground.Reliance on third party statements and investigation reports - principles of natural justice - right to confrontation/cross examination - Validity of AO's reliance on statements of third parties (PKJ) and investigation material without supplying the statements to the assessee or affording opportunity of cross examination. - HELD THAT: - The Tribunal recorded that the Assessing Officer neither furnished the statements relied upon to the assessee nor afforded an opportunity to cross examine the declarants. PKJ had filed an affidavit retracting earlier statements. The Tribunal held that statements of third parties recorded behind the assessee's back lose sanctity unless the assessee is given an opportunity to rebut them and/or they are corroborated by independent evidence. In the absence of provision of such material or cross examination, reliance on those statements alone was held to violate principles of natural justice and was insufficient to sustain additions. [Paras 12, 13, 19, 29]AO's exclusive reliance on third party/investigation statements without furnishing them or affording cross examination held impermissible; such material did not justify the addition.Final Conclusion: The Tribunal upheld the Ld. CIT(A)'s deletion of the addition made under section 68 for AY 2012 13: the assessee discharged the primary onus of identity, genuineness and creditworthiness of shareholders, the Assessing Officer failed to bring independent or corroborative evidence to displace that material and breached principles of natural justice by relying on third party statements without disclosure or cross examination; Revenue's appeal dismissed. Issues Involved:1. Deletion of addition made under Section 68 of the Income Tax Act towards unexplained cash credit in respect of share premium received by the assessee.2. Justification of the Assessing Officer's reliance on statements from third parties without providing cross-examination.3. Consideration of evidence provided by the assessee to establish the genuineness, identity, and creditworthiness of the shareholders.4. Applicability of judicial precedents and principles of natural justice in the assessment proceedings.Issue-wise Detailed Analysis:1. Deletion of Addition under Section 68:The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] which deleted the addition made under Section 68 of the Income Tax Act towards unexplained cash credit in respect of share premium received by the assessee. The Assessing Officer (AO) had treated the share premium received as unexplained cash credit based on statements from PKJ, who allegedly provided accommodation entries. However, the CIT(A) found that the assessee had provided sufficient evidence to prove the identity, creditworthiness, and genuineness of the transactions, and thus deleted the addition.2. Reliance on Third-Party Statements Without Cross-Examination:The AO relied heavily on the statements from PKJ without providing the assessee an opportunity for cross-examination. The assessee requested copies of the statements and cross-examination, which were not provided. The CIT(A) and the Tribunal held that such reliance without cross-examination violated principles of natural justice. The Tribunal noted that PKJ had retracted his statements and that reliance on such statements without allowing cross-examination was unjustified.3. Consideration of Evidence Provided by the Assessee:The assessee provided various documents to establish the genuineness, identity, and creditworthiness of the shareholders, including confirmations, ITR acknowledgments, audited financial statements, share application forms, and bank statements. The shareholders responded to notices issued under Section 133(6) and provided the requisite information. The CIT(A) and the Tribunal found that the assessee had discharged its initial burden of proof, and the AO did not bring any contrary evidence to disprove the assessee's claims.4. Applicability of Judicial Precedents and Principles of Natural Justice:The Tribunal referred to several judicial precedents, including the Supreme Court's decision in CIT v. Lovely Exports (P) Ltd., which held that if the share application money is received from alleged bogus shareholders, the department should proceed against those shareholders rather than adding the money as the assessee's income. The Tribunal also cited decisions from various High Courts emphasizing the need for the AO to provide cross-examination opportunities and to rely on concrete evidence rather than mere statements. The Tribunal concluded that the AO's actions violated principles of natural justice and that the addition under Section 68 could not be sustained.Conclusion:The Tribunal upheld the CIT(A)'s order deleting the addition made under Section 68, emphasizing that the assessee had provided sufficient evidence to prove the genuineness, identity, and creditworthiness of the shareholders. The reliance on third-party statements without providing cross-examination was deemed a violation of natural justice. The Tribunal directed the AO to delete the addition, and the appeal of the Revenue was dismissed.