2022 (1) TMI 827 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on burden of proof under Section 68, stresses natural justice principles

The ACIT, Central Circle – 3 (2), Chennai Versus M/s. Suryadev Alloys & Power Pvt. Ltd. And (Vice-Versa) And The ACIT, Central Circle – 3 (2), Chennai Versus M/s. BMP Steels Pvt. Ltd.

The ACIT, Central Circle – 3 (2), Chennai Versus M/s. Suryadev Alloys & Power Pvt. Ltd. And (Vice-Versa) And The ACIT, Central Circle – 3 (2), Chennai ... Issues Involved:1. Deletion of addition towards unexplained cash credit under Section 68 of the Income Tax Act, 1961.2. Validity and jurisdiction of the search assessment.3. Application of Section 68 for share capital/premium received.Issue-wise Analysis:1. Deletion of addition towards unexplained cash credit under Section 68 of the Income Tax Act, 1961:The Revenue appealed against the deletion of Rs. 11,00,00,000/- added as unexplained cash credit under Section 68. The Assessing Officer (AO) based the addition on the investigation report from Kolkata, which suggested that the shareholders were paper companies lacking creditworthiness and genuineness. The AO also noted that the companies were non-functional at their registered addresses and failed to produce directors for verification. The AO concluded that the transactions were accommodation entries to route unaccounted money.The assessee argued that it provided sufficient evidence to prove the identity, genuineness, and creditworthiness of the subscribers, including PAN, financial statements, and bank statements. The CIT(A) accepted the assessee's evidence and deleted the addition, relying on judicial precedents like CIT vs. Lovely Exports Pvt. Ltd., which held that the identity of shareholders suffices to shift the burden of proof to the Revenue.The Tribunal upheld the CIT(A)'s decision, stating that the assessee had discharged its burden under Section 68 by providing comprehensive evidence. The Tribunal emphasized that the AO failed to provide the investigation report and statements to the assessee, violating principles of natural justice. The Tribunal also noted that the AO did not conduct further inquiries or issue summons under Section 131.2. Validity and jurisdiction of the search assessment:The assessee challenged the validity of the search assessment, arguing that it was passed out of time and without jurisdiction. The CIT(A) did not consider these grounds. The Tribunal did not specifically address this issue, focusing instead on the merits of the addition under Section 68.3. Application of Section 68 for share capital/premium received:The AO questioned the high premium charged for the shares, suggesting it was a means to camouflage unaccounted money. The Tribunal rejected this reasoning, stating that the AO was not examining the issue under Section 56(2)(viib), which deals with excess share premium. The Tribunal noted that the assessee justified the premium based on its financials and intrinsic value of shares.The Tribunal also addressed the applicability of the proviso to Section 68, inserted by the Finance Act, 2012, effective from April 1, 2013. The Tribunal held that the proviso is prospective and not applicable to the assessment years in question. Therefore, the assessee was not required to explain the source of the source for the share capital received before the proviso's effective date.The Tribunal cited various judicial precedents, including CIT vs. Stellar Investments Ltd. and CIT vs. Gagandeep Infrastructure Pvt. Ltd., which support the view that once the identity of shareholders is established, the burden shifts to the Revenue to prove otherwise. The Tribunal concluded that the AO's addition under Section 68 was not justified, as the assessee had provided sufficient evidence to establish the identity, genuineness, and creditworthiness of the shareholders.Conclusion:The Tribunal dismissed the Revenue's appeals and upheld the CIT(A)'s order, confirming that the assessee had discharged its burden under Section 68. The Tribunal emphasized the importance of adhering to principles of natural justice and conducting thorough inquiries before making additions under Section 68. The Tribunal also clarified the prospective applicability of the proviso to Section 68, reinforcing that the assessee was not required to explain the source of the source for the assessment years before the proviso's effective date.