Assessee wins on Section 68 share capital additions, bogus purchases, and post-demonetization cash deposits

Pr. Commissioner of Income Tax (Central) - 3, New Delhi Versus M/s. Agson Global Pvt. ltd.

Pr. Commissioner of Income Tax (Central) - 3, New Delhi Versus M/s. Agson Global Pvt. ltd. - [2022] 441 ITR 550 (Del) The principal legal questions considered by the Court in these appeals under Section 260A of the Income Tax Act, 1961, relate to the validity of additions and deletions made to the declared income of the assessee for six assessment years (AYs 2012-13 to 2017-18). The core issues revolve around:

(i) Whether additions under Section 68 of the Act on account of share capital/share premium received by the assessee from various entities were justified, particularly in light of allegations that such investments were routed back from the assessee's own funds through accommodation entries.

(ii) The correctness of disallowances made on account of alleged bogus purchase transactions, specifically the addition of 25% of such purchases to the assessee's income.

(iii) The propriety of additions under Section 68 for cash deposits made by the assessee during the demonetization period (09.11.2016 to 30.12.2016) in AY 2017-18, alleged to represent unaccounted income.

These issues were considered against the backdrop of search and seizure operations, statements recorded under Section 132(4), and the preparation of a deviation report by the Assessing Officer (AO), which diverged from the assessment orders ultimately passed.

Issue 1: Additions under Section 68 on account of share capital/share premium

The legal framework requires that for additions under Section 68, the AO must demonstrate that the sum credited in the books is unexplained or the explanation is unsatisfactory, and the assessee must prove the identity, creditworthiness, and genuineness of the investor entities. Precedents clarify that the assessee is not required to prove the 'source of source' of funds. The Tribunal found that the monies credited as share capital/share premium were routed from the assessee itself to the investor entities and back to the assessee, with a clear banking trail and documentary evidence establishing genuineness.

The AO initially made large additions on this account, but the CIT(A) deleted these additions for AY 2012-13, and the revenue did not pursue the matter further for that year. For subsequent years, the Tribunal found no incriminating material unearthed during the search that would justify disturbing the concluded assessments under Section 143(3). The statement of the Managing Director, recorded under Section 132(4), was retracted within 48 hours and did not constitute incriminating material. Further, photocopies of blank share transfer forms and other documents found during search were held not to be primary or secondary evidence sufficient to justify additions.

The Tribunal emphasized that the AO failed to verify the documentary evidence and the trail of funds, which the assessee had produced. The revenue's reliance on statements of accommodation entry providers and assertions about the rate of share premium paid was rejected, as the ultimate source was the assessee's own funds. The Court concurred with the Tribunal's finding that no addition under Section 68 could be sustained without incriminating material or failure to prove identity, genuineness, and creditworthiness. The principle that tax avoidance by lawful means is permissible was reiterated, and the mere motive to reduce tax liability does not render transactions invalid.

Issue 2: Disallowance on account of alleged bogus purchases

The AO disallowed substantial amounts as bogus purchases, adding 25% of such purchases to the income. The CIT(A) reduced these disallowances significantly, applying provisions of Section 145(3) to estimate profits after rejecting the books of accounts partially. The Tribunal found that the AO's approach was inconsistent and lacked evidentiary support. It was noted that 50% of purchases were verified through notices under Section 133(6) and confirmed by third parties with no discrepancies found. The Tribunal also observed that if purchases were bogus, corresponding sales to the same parties should also be disregarded; however, the assessee showed profits on these transactions, undermining the revenue's case.

The Tribunal criticized the CIT(A) for rejecting books of accounts without examining them and for applying an inconsistent and incomprehensible methodology to quantify additions. The AO's deviation report contradicted the assessment orders, and the Tribunal highlighted the absence of any material to justify the disallowance. The alleged shortage of stock worth Rs. 450 crores was found to be based on an erroneous premise, as stock was physically found at the assessee's godown, a fact ignored by the AO.

The Court upheld the Tribunal's findings as factual and not perverse, emphasizing that the revenue failed to establish defects in the books of accounts or prove that purchases were bogus. The principle that assessments must be based on more than mere suspicion was reinforced.

Issue 3: Addition for cash deposits during demonetization period

The AO added Rs. 150.53 crores under Section 68 for cash deposits made during the demonetization period, alleging these represented unaccounted income. The CIT(A) scaled down the addition to Rs. 73.13 crores, while the Tribunal deleted the addition altogether.

The assessee's explanation that increased cash deposits corresponded with increased cash sales, especially during the Diwali season, was supported by detailed bank statements, audited accounts, and monthly sales data. The Tribunal analyzed cash sales and deposits over three financial years, noting that cash deposits aligned with cash sales and that the increase in sales during demonetization was consistent with prior years' trends.

The Tribunal also rejected the AO's reliance on alleged stock shortages and accepted the assessee's explanations regarding loan repayments and cash holdings. The Court agreed that the Tribunal's conclusion that no unaccounted income was introduced via cash deposits was supported by evidence and not open to interference.

Treatment of competing arguments and conclusions

The revenue's arguments focused on the lack of creditworthiness of investor entities, statements by accommodation entry providers denying investments, and the large unexplained cash deposits during demonetization. The Court found these arguments unpersuasive due to lack of corroborative evidence, failure to allow cross-examination, and the presence of documentary evidence establishing a banking trail. The revenue's reliance on the deviation report was selectively applied by the Tribunal, which was justified given the AO's contradictory positions.

The Tribunal's role as the final fact-finder was emphasized, with the Court declining to reappraise factual findings absent perversity or lack of evidence. The quasi-judicial independence of the AO was underscored, condemning the investigation wing's directive to the AO to frame assessments merely to protect revenue interest, which violates principles of fair adjudication.

Significant holdings and core principles established

'Considering the facts of the case in the light of material on record in voluminous paper books and confirmations of the parties and the summary of transfer of funds reproduced above, it is clear that assessee produced sufficient documentary evidences before the A.O. to prove that money routed from the assessee itself which came back to the assessee in the form of share capital/premium, therefore, assessee proved identity of the Investors, their creditworthiness and genuineness of the transaction in the matter and as such have been able to prove ingredients of Section 68 of the I.T. Act.'

'......there must be more than a mere suspicion to support an assessment u/s 143 (3) of the act. Against this, the assessee has supported his books of accounts with adequate evidences of his own business as well as also supported it with the balance sheet and profit and loss account of comparable 3rd parties.'

'......the learned assessing officer has incorrectly disallowed 25% of the purchases from the alleged bogus parties without finding any evidence and ignoring the sales paid by them to the assessee.'

'The stock lying at the said premises was not taken into consideration while arriving at the physical stock as on the date of search, thus resulting in the alleged difference of Rs. 450 crores......There was thus actually no difference in the stock physically lying with the Assessee vis-`a-vis the stock as per books of accounts as on the date of search.'

'The Tribunal is the final fact-finding authority. We have not been able to conclude that the findings returned by the Tribunal are perverse.'

'The A.O. performs a quasi-judicial function while framing an assessment. The revenue cannot dictate the manner, in which, the A.O. frames the assessment order.'

The Court held that no substantial question of law arose warranting interference, affirming the Tribunal's deletions of additions under Section 68 for share capital/share premium and cash deposits, and the disallowance of bogus purchases. The findings of fact regarding the genuineness of transactions, absence of incriminating material, and consistency of cash sales and deposits were upheld. The Court condemned the investigation wing's interference with the AO's quasi-judicial role and emphasized the necessity for independent, evidence-based assessments.