2018 (7) TMI 2375 - AT - Income Tax

Section 68: Share application money and share capital not unexplained cash credits; additions deleted on proof of genuine investors

M/s. Cauvery Iron & Steel (India) Ltd. Versus Asst. Commissioner of Income Tax, Circle-1 (2), Hyderabad

ITAT, Hyderabad allowed the appeal of the assessee, deleting additions treating share application money/share capital as unexplained cash credits. The ... Addition of share application money/share capital - Unexplained cash credit - presumptions and assumptions - proof of identity, genuineness and creditworthiness of investors - modus operandi - investments made by various companies in the assessee-company - non-existing company - Held that:- The enquiry report from DIT, Chennai proves that the companies are existing, even though AO and CIT(A) shows that companies are paper entities and not genuine. Therefore, reliance on the so called statements of AO and CIT(A) about the modus operandi and introduction of assessee’s money in the form of share capital cannot be accepted on the face of it. Companies from Delhi - M/s. Glozon Alloys & Casting Pvt. Ltd., Mahak Textiles Pvt. Ltd., and Afflatus Software Pvt. Ltd., - No investigation was conducted at New Delhi and there is no evidence against assessee worth mentioning as far as the investment by the Delhi companies are concerned. Since assessee has furnished the evidence available with it in support of the contentions, which have not been controverted, we have no hesitation in holding that these companies cannot be categorised as non-genuine. The investments to that extent from the above companies cannot be brought to tax as ‘unexplained cash credits’ in the hands of assessee. Balance of investment from Kolkata companies - No evidence to support the allegation that these companies are bogus. The evidences placed on record by assessee do indicate that they are filing returns and has shown the investments in assessee-company in their balance sheets. If a company do not have any activity of income, but invested moneys in the assessee-company, the source of the same has to be examined in that company. No evidence of the so-called modus operandi has been placed on record. Additions cannot be made on presumptions and assumptions. There should be some evidence to support the contentions raised. Since the Revenue has not placed anything on record worth considering to hold that these companies are bogus, just because AO mentions the so called modus operandi which in turn was followed by the CIT(A) in the order, the same cannot be accepted, unless the flow of funds have been confronted to assessee or at least brought to the notice of ITAT being a final fact finding authority. In the absence of any evidence to the contrary, the contentions of assessee cannot be rejected. In our opinion, the Revenue has failed to establish that it is assessee’s money which has been routed through various companies. Since AO or the CIT(A) failed to link the investments by the shareholders to assessee’s Managing Director or to the company, the statement made by the CIT(A) that this is the assessee-company’s money cannot be accepted. Assessee-company has commenced its operations in the previous year and has no worthwhile revenue in either of the years to consider that the company has earned unaccounted money. Judicial principles established by the Hon'ble Supreme Court in the case of CIT Vs. P.K. Noorjahan [1997 (1) TMI 6 - SUPREME COURT] will apply to the facts of the case. Since Revenue failed to place any evidence to support its contentions and as assessee discharged its onus, for the reasons stated above, we find that none of the amounts can be brought to tax as assessee’s unaccounted income in the form of ‘unexplained cash credits’. Following the principles laid down by the Hon'ble Supreme Court in the case of CIT Vs. Lovely Exports (P) Ltd.,[2008 (1) TMI 575 - SC ORDER], the department could have enquired the amounts and the sources thereon in the hands of the respective shareholders. In view of this, we have no hesitation to delete the entire addition made by the AO. Grounds raised by assessee are allowed. In the result, the appeal of assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received as share application money/share capital can be treated as unexplained cash credit in assessee's hands under the statutory provision requiring proof of identity, genuineness and creditworthiness of investors when the Assessing Officer finds investors to be non-existent or paper companies. 2. Whether the Assessing Officer may go into the 'source of source' (i.e., investigate the origin of funds of the investor-companies or intermediaries) and tax such amounts in the assessee's hands when investors have made confirmations and documentary submissions. 3. Legitimacy and evidentiary weight of departmental/investigation reports (including short enquiry reports from distant Investigation Units and bank enquiries) relied upon by the AO/CIT(A) without producing supporting enquiry material before the assessee or confronting the assessee with detailed flow-of-funds evidence. 4. Whether investment made by a related/sister concern (itself an existing and assessed entity) in the assessee-company can be treated as unexplained cash credit in the assessee's hands when the sister concern has confirmed the investment and is outside the scope of the present assessment. 5. Standard of proof and burden allocation between assessee and Revenue in cases of alleged accommodation entries by third-party investors; scope of Revenue's power to pursue investigation in investors' assessments rather than to make additions in the recipient's assessment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Treatability of share capital/share application money as unexplained cash credit under statutory provision Legal framework: The statutory provision invoked requires that where an assessee shows an amount as a credit (e.g., share capital), the identity, genuineness and creditworthiness of the investor must be established; burden initially lies on the assessee to prove these elements but if established the Revenue's remedy is to examine the investor's position in his assessment (i.e., not to automatically tax recipient where investor is genuine). Precedent treatment: The Court applied the principles laid down in higher court authority that where an assessee proves the identity/genuineness/creditworthiness of investors, additions in recipient's hands are not warranted and Revenue must proceed against the investors; that line of authority was relied upon by the assessee and followed by the Tribunal for relevant investors. A departmental decision relied upon by Revenue was distinguished on facts where adequate enquiry and supporting material were absent. Interpretation and reasoning: The Tribunal examined the evidence furnished by assessee (PANs, ITRs, audited accounts, confirmations) and contrasted it with the Revenue's material. The Tribunal found the Revenue's investigative material incomplete: short, unexplained enquiry reports dated within days of referral, lack of corroborative documents (no detailed bank enquiry report or flow-of-funds report placed on record), absence of confrontation of investigation findings with assessee, and some direct confirmations received by AO from investors. On this factual matrix the Tribunal held that assessee discharged its onus for a substantial part of investments and that mere ipse dixit statements in assessment/CIT(A) without supporting evidence cannot sustain additions. Ratio vs. Obiter: Ratio - where the assessee produces documentary evidence of investors' existence and the Revenue fails to place cogent contrary evidence (proper enquiry reports, bank flow details or direct linkages to assessee/promoters), additions under the provision cannot be sustained in the recipient's hands. Obiter - general observations on modus operandi of entry providers where unsupported by contemporaneous evidence. Conclusion: Additions could not be sustained for investments where assessee produced confirmations/ITRs/audited accounts or where AO's own record showed responses from investors; entire addition was deleted because Revenue failed to establish that amounts were the assessee's unaccounted monies. Issue 2 - Permissibility and limits of enquiring into 'source of source' by treating recipient as taxable Legal framework: Taxing an amount in recipient's hands under the relevant provision requires that the credit is unexplained in the recipient's context; where investor-entities are shown to exist and have confirmed investment, enquiry into the investor's source is a matter for the investor's assessment and not a licence to treat recipient's receipt as unexplained by probing the investor's funds in the recipient's assessment. Precedent treatment: The Tribunal relied on authoritative precedent that Revenue should pursue investigation and reassessment in the hands of the investors if necessary, but cannot simply tax the recipient on the basis of suspicion about the investor's sources when the recipient has discharged its onus. Interpretation and reasoning: The AO attempted to treat recipient as having unexplained income by asserting layering of funds and routing through multiple accounts; Tribunal required that such allegations be supported by bank enquiry reports and detailed flow-of-funds analysis on record and confronted to assessee. In absence of those materials, the AO impermissibly ventured into 'source of source' inquiry and made additions which could not stand. Ratio vs. Obiter: Ratio - Revenue cannot convert suspicion about investors' sources into an addition in the recipient's hands without producing detailed supporting evidence; such source-of-source enquiries should be pursued in investors' assessments. Obiter - remarks on typical economic conditions (e.g., high premium during boom years) not determinative. Conclusion: AO's approach to tax amounts by investigating 'source of source' without producing requisite evidence was unsustainable; additions based on such an approach were deleted. Issue 3 - Reliance on departmental/investigation reports and bank enquiries without confrontation or supporting material Legal framework: Evidence relied upon by Revenue must be placed on record and be such that assessee is afforded an opportunity to meet it; investigation reports must contain supporting particulars if they are to displace documentary proof produced by assessee. Precedent treatment: The Tribunal applied standards of evidence and procedural fairness, holding that short, unsupported reports (e.g., an enquiry reply prepared within days and without annexures) lack probative value if not substantiated and not confronted with assessee. Interpretation and reasoning: The Tribunal scrutinised the paper book and found that investigation reports were perfunctory, lacked annexed evidence of field enquiries, contained internal inconsistencies (companies responding to AO yet reported as non-existent), and that no bank enquiry reports showing layering/back-to-back transactions were placed on record despite assertions of such layering. Consequently, the Tribunal refused to accept those reports as sufficient to displace the documentary evidence supplied by assessee. Ratio vs. Obiter: Ratio - unsupported/summary investigation reports and unproduced bank enquiry analyses cannot be the basis for additions; the Revenue must bring forward detailed material and confront it with assessee. Obiter - comments on the need for coordination between Investigation Units and timely, detailed reporting. Conclusion: Revenue's investigative reports and alleged bank enquiries were insufficiently supported and were not relied upon to sustain additions; where such material was absent, the Tribunal accepted assessee's evidence. Issue 4 - Treatment of investment by a sister concern which itself is existing and assessed Legal framework: When a related company (sister concern) which is an existing, separately assessed entity confirms investment, the recipient-company cannot be taxed by treating that confirmed investment as unexplained cash credit; any enquiry into the sister concern's sources must be in that sister concern's assessment. Precedent treatment: The Tribunal applied established principle that investments by an existing company which has confirmed the transaction cannot be imputed to the recipient absent linkage evidence tying funds to the recipient/promoters. Interpretation and reasoning: The Tribunal observed that the sister concern was an assessed entity in the same jurisdiction, had confirmed the investment and that there was no evidence linking the funds to assessee's promoters or to accommodation operators. Therefore the AO's addition on account of the sister concern's investment was impermissible. Ratio vs. Obiter: Ratio - confirmed investment by an existing sister concern cannot be brought to tax in recipient's hands in absence of evidence establishing that funds belonged to recipient/promoters; revenue to proceed against the investor if necessary. Obiter - none. Conclusion: The addition relating to the sister concern's investment (Rs.13 Crore) could not be sustained and was deleted. Issue 5 - Burden of proof, standards and remedial limits for Revenue Legal framework: Assessee bears initial onus to prove identity/genuineness/creditworthiness; once discharged, Revenue must produce positive evidence to rebut; presumptions or uncorroborated administrative assertions are insufficient. Precedent treatment: The Tribunal adhered to established jurisprudence requiring the Revenue to proceed against investors where doubts exist, rather than making recipient-level additions without cogent proof. Interpretation and reasoning: On the facts - many investors had furnished confirmations or had responded to AO; several companies were shown by assessee's documents to have filed returns and to hold shares; Revenue failed to produce investigation documents, bank flow statements and did not conduct enquiries at New Delhi despite investor addresses there. The Tribunal held that additions cannot rest on assumptions and must be based on admissible, confrontable evidence. Ratio vs. Obiter: Ratio - Revenue's failure to place detailed contrary evidence when assessee has produced documentation means additions are unsustainable. Obiter - procedural critique of the haste and incompleteness of departmental investigations. Conclusion: The Tribunal deleted the entire addition; grounds raised by assessee were allowed as assessee discharged onus in respect of several investors and Revenue failed to establish that funds were assessee's unaccounted income.