Share capital and prior notice requirements under section 68 and CBDT Instruction No. 20/2015 led to deletion and invalidation.

Share capital received from investor companies was held not to warrant addition under section 68 where their audited balance sheets, income-tax returns, tax paid particulars and net worth showed financial capacity, and the Assessing Officer had not carried out independent verification under section 133(6). In a limited scrutiny assessment, the assessment was also held invalid because no prior show-cause notice was issued before making the adverse addition, contrary to CBDT Instruction No. 20/2015. Non-compliance with that binding instruction was treated as a breach of natural justice, and the procedural invalidity was upheld.

---

---

Issues: (i) whether the addition made on account of share capital received from investor companies under section 68 could be sustained on the facts found by the appellate authority, and (ii) whether the assessment was liable to be quashed for breach of the mandatory requirement of prior show-cause notice under CBDT Instruction No. 20/2015.

Issue (i): Whether the addition made on account of share capital received from investor companies under section 68 could be sustained on the facts found by the appellate authority.

Analysis: The appellate authority had examined the net worth of the investor companies, their audited balance sheets, income-tax returns and tax paid particulars, and recorded that they possessed sufficient financial capacity to invest. It also found that no notice sent by the Investigation Wing had been returned unserved and that the Assessing Officer had not made independent verification through notices under section 133(6) before treating the receipts as unexplained cash credits. On these findings, the appellate authority held that the share capital transactions were genuine and that the addition under section 68 was unwarranted.

Conclusion: The deletion of the addition under section 68 was sustained and the issue was decided in favour of the assessee.

Issue (ii): Whether the assessment was liable to be quashed for breach of the mandatory requirement of prior show-cause notice under CBDT Instruction No. 20/2015.

Analysis: The appellate authority found that no prior show-cause notice had been issued before making the impugned addition in a limited scrutiny assessment and held that the instruction required the Assessing Officer to give the assessee an opportunity to respond before making adverse additions. The Tribunal noted that the revenue had not challenged this foundational finding and agreed that non-compliance with the binding instruction constituted a violation of natural justice and rendered the assessment invalid.

Conclusion: The quashing of the assessment on this ground was upheld and the issue was decided in favour of the assessee.

Final Conclusion: The appeal failed because the challenged addition did not survive on merits and the assessment itself stood invalid on the unassailed procedural ground.

Ratio Decidendi: A binding CBDT instruction requiring prior show-cause notice before proposed additions must be complied with, and failure to do so in a limited scrutiny assessment can invalidate the assessment; where that foundational finding is not challenged, the appeal becomes unsustainable.

---