2025 (3) TMI 815 - HC - Income Tax

HC reverses ITAT deletion of Section 68 addition for unexplained share subscription at high premium without track record

Principal Commissioner Of Income Tax 2 Kolkata Versus M/s. Mundhra Construction Private Limited

The HC set aside ITAT's order deleting addition u/s 68 for unexplained cash credit. The assessee received share subscription at high premium despite ... Addition u/s 68 - unexplained cash credit - onus of proving the identity & creditworthiness of the parties from whom the assessee received money and the genuineness of such transaction. HELD THAT:- Whether the tax recovery officer was an AO after referring to various statutory provisions which was held that the assessee was covered under clause (a) of sub-section (3) of section 143. Apart from that it was held that not only the tax recovery officer-10/tax recovery officer-4, Kolkata was fully empowered to pass the order u/s 143 and the question of the assessee raising the issue of jurisdiction beyond the prescribed time limit does not arise. Addition u/s 68 - ITAT deleted addition - Tribunal has stated that on perusal of the paper book and document three factors have been proved by the assessee. This, in our view, is wholly inadequate and insufficient for the tribunal to set aside the order passed by the appellate authority. Tribunal was required to examine the correctness of the factual findings recorded by the appellate authority and then recorded its views as to why it is not in agreement with the findings of the appellate authority. On reading of the impugned order it is seen that this aspect of the matter is conspicuously absent. The test of human probability was also applied and when done so it was held that high premium share defying logic. Thus, if the test of human probability is applied in the facts of the case on hand, it should have been established by the assessee as to why and for what reason the share subscription invested in shares of the assessee company at such huge premium despite the factual position being that the assessee company had no track record. Thus, we are of the view that tribunal did not go into all these aspects and proceeded to accept the case of the assessee solely by making certain observations with regard to the paper book which was filed by the assessee. Tribunal over-turning the order passed by the appellate authority was required to examine the correctness of the findings recorded by the appellate authority and then come to the conclusion why such findings are not acceptable and while doing so reasons have to be recorded in writing. In the absence of all these essential requirements, we have no hesitation to hold that the impugned order is not sustainable in law and the learned tribunal committed an error of law in allowing the assessee’s appeal. Decided in favour of the revenue. ISSUES PRESENTED and CONSIDEREDThe primary issues considered in this judgment revolve around the application of Section 68 of the Income Tax Act, 1961, which deals with unexplained cash credits. The core legal questions include:1. Whether the Income Tax Appellate Tribunal (ITAT) erred in law by failing to uphold the burden of proof on the assessee to establish the identity, creditworthiness, and genuineness of transactions under Section 68.2. Whether the ITAT ignored established judicial principles and precedents, including cases such as Pr. CIT vs. Swati Bajaj, Pr. CIT vs. NRA Iron & Steel Private Ltd., and others.3. Whether the ITAT's decision was perverse for not considering the substantial evidence and findings of the lower authorities.ISSUE-WISE DETAILED ANALYSIS1. Application of Section 68 of the Income Tax ActRelevant Legal Framework and Precedents: Section 68 of the Income Tax Act requires the assessee to prove the identity, creditworthiness of the creditors, and genuineness of the transactions. The precedents cited include Pr. CIT vs. Swati Bajaj, Pr. CIT vs. NRA Iron & Steel Private Ltd., CIT vs. Durga Prasad More, and Sumati Dayal vs. CIT, which emphasize the burden of proof on the assessee.Court's Interpretation and Reasoning: The Court emphasized that merely providing identity proof and documents is insufficient. The assessee must establish the creditworthiness of the share applicants and the genuineness of the transactions. The Court noted that the ITAT failed to address the detailed factual findings of the lower authorities.Key Evidence and Findings: The Assessing Officer and the appellate authority found discrepancies in the financials of the share subscriber companies, including lack of track record and abnormal share premiums. The appellate authority highlighted common addresses and auditors among subscriber companies, indicating a lack of independent operations.Application of Law to Facts: The Court applied the principles from cited precedents to the facts, noting that the ITAT did not adequately address the factual findings or provide reasons for overturning the lower authorities' decisions.Treatment of Competing Arguments: The revenue argued that the ITAT ignored judicial precedents and failed to consider the lack of evidence for creditworthiness and genuineness. The assessee contended that they had provided sufficient documentation, but the Court found this inadequate without further substantiation.Conclusions: The Court concluded that the ITAT erred in law by not thoroughly examining the factual findings and legal principles. The decision to allow the assessee's appeal was deemed unsustainable.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The Court noted, 'The tribunal was required to examine the correctness of the factual findings recorded by the appellate authority and then recorded its views as to why it is not in agreement with the findings of the appellate authority.'Core Principles Established: The judgment reinforces that under Section 68, the onus is on the assessee to establish the identity, creditworthiness, and genuineness of transactions. The Court also emphasized the necessity for appellate bodies to provide detailed reasoning when overturning lower authorities' decisions.Final Determinations on Each Issue: The Court allowed the revenue's appeal, answering the substantial questions of law in favor of the revenue. It held that the ITAT's decision was legally flawed due to its failure to engage with the detailed factual findings and legal standards set by precedents.