2025 (5) TMI 698 - AT - Income Tax

Assessee gets fresh hearing opportunity after CIT(A)'s selective approach on section 68 share sale proceeds

Rudramukhi Vintrade Ltd. Versus ACIT/DCIT, Circle-11 (1), Kolkata

ITAT Kolkata remitted the matter back to CIT(A) for fresh consideration regarding addition under section 68 for share sale proceeds treated as ... Addition u/s 68 - money was received on account of sale of shares which was held to be accommodation entry by the AO - HELD THAT:- As is informed that the rectification application filed before the CIT(A) is pending before him and inappeal order on the basis of the calculation done part of the addition has been confirmed. The assessee has assailed the appeal order on ground of selective acceptance of the submissions made before the Ld. CIT(A) by the assessee. Considering the totality of facts and the submissions made and in the interest of justice and fair play, we are of the view that the order of the CIT(A) may be remitted back to him for deciding afresh all the issues including the issues raised before us and after providing an opportunity of being heard to the assessee as it is alleged by the assessee that the Ld. CIT(A) has accepted partial credits for certain transactions but has failed to apply consistent principle on similar other transactions and the selective approach is unsustainable and fails to appreciate the appellant’s compliance and transparent disclosure throughout the proceedings. Appeal filed by the assessee is partly allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:Whether the addition of Rs. 3.89 crore as unexplained cash credits under section 68 of the Income Tax Act, 1961, is justified on the facts and evidence presented by the assessee.Whether the transactions involving purchase and sale of unquoted shares with various entities, some of which are struck off companies, are genuine business transactions or accommodation entries.Whether the Commissioner of Income Tax (Appeals) erred in selectively accepting certain bank credits while rejecting others without applying consistent principles, thereby violating the principles of natural justice.Whether the assessee adequately explained the source and nature of the credits in its books of accounts and bank statements to discharge its legal obligation under the Act.Whether the Assessing Officer and CIT(A) correctly applied the relevant judicial precedents in determining the genuineness of transactions and the consequent tax liability.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of Addition under Section 68 as Unexplained Cash CreditsLegal Framework and Precedents: Section 68 of the Income Tax Act provides that where any sum is found credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum, it is treated as income. Judicial precedents cited include CIT v. P. Mohanakala, Kale Khan Mohammad Hanif v. CIT, Roshan Di Hatti v. CIT, and CIT v. Durga Prasad More, which establish the principle that the assessee must explain the source of credits, failing which additions can be made.Court's Interpretation and Reasoning: The Assessing Officer received credible information regarding routing of funds through shell/jamakharchi entities with no business rationale. The AO found cash deposits totaling Rs. 15.57 crore in four bank accounts linked to proprietorship firms owned by a common individual. The assessee received Rs. 3.89 crore from four companies, all struck off as per the Registrar of Companies database. The AO held that mere recording of transactions in books does not establish genuineness, especially when the counterparties are shell companies. The AO treated the entire Rs. 3.89 crore as unexplained cash credits and added it to the income.The CIT(A) partially accepted credits amounting to Rs. 2.41 crore based on bank statements showing receipt of money, though without direct one-to-one correlation with share sale proceeds. The remaining amount was disallowed as unexplained cash credits. The CIT(A) emphasized the assessee's failure to satisfactorily explain the source of cash deposits, particularly in the context of demonetisation, concluding that unaccounted income was routed through books of accounts.Key Evidence and Findings: The bank statements showed credits and immediate withdrawals leading to negative balances, raising suspicion. The companies involved were struck off, indicating no active business. The assessee failed to provide direct linkage between share sales and bank credits for the entire amount. The assessee's explanation was considered insufficient to discharge the burden under section 68.Application of Law to Facts: The AO and CIT(A) applied section 68 and relevant case law to conclude that unexplained credits must be added to income. The failure to provide a satisfactory explanation of the source of funds justified the addition.Treatment of Competing Arguments: The assessee argued that all transactions were genuine, supported by audited accounts and banking channels, and that the addition was based on assumptions. The CIT(A) rejected the argument for the entire amount but accepted partial credits where some bank evidence existed. The Tribunal noted the partial acceptance but found the reasoning inconsistent and selective.Conclusions: The addition under section 68 is partially justified based on the evidence but requires reconsideration to ensure consistent application of principles to all transactions.Issue 2: Genuineness of Transactions with Struck Off Companies and Business RationaleLegal Framework and Precedents: The genuineness of transactions is a critical factor under the Income Tax Act. Transactions with companies that are struck off or non-existent raise suspicion of accommodation entries or sham transactions. The burden lies on the assessee to prove the transactions are bona fide.Court's Interpretation and Reasoning: The AO relied on credible information and the status of companies as struck off to question the genuineness of transactions. The CIT(A) acknowledged these facts and found that the assessee failed to satisfactorily explain the source of credits. The Tribunal noted that the AO and CIT(A) did not conduct cross-examination or further inquiry into the accommodation entry providers, which could have clarified the genuineness.Key Evidence and Findings: The struck off status of companies, immediate withdrawal of funds after deposit, and lack of direct correlation between share sales and bank credits indicate absence of genuine business rationale.Application of Law to Facts: The law requires that transactions be genuine and supported by credible evidence. The failure to prove genuineness justifies treating amounts as unexplained credits.Treatment of Competing Arguments: The assessee contended that transactions were business operations involving purchase and sale of unlisted shares, with no profit motive, supported by audited accounts. The AO and CIT(A) found these explanations insufficient, especially given the struck off status of companies.Conclusions: The transactions with struck off companies are prima facie suspect, and the assessee failed to discharge the burden of proving genuineness.Issue 3: Selective Acceptance of Transactions and Violation of Natural JusticeLegal Framework and Precedents: Principles of natural justice require that decisions be reasoned, consistent, and fair. Selective acceptance of evidence without rational basis violates these principles.Court's Interpretation and Reasoning: The assessee contended that the CIT(A) selectively accepted certain bank credits while ignoring others from the same bank statements without providing reasons, amounting to arbitrary and erroneous computation of income. The Tribunal agreed that the CIT(A)'s order was not a speaking order in this regard and lacked consistency in treatment.Key Evidence and Findings: The assessee submitted comprehensive bank statements showing inflow and outflow of funds through recognized banking channels. No adverse findings were made about the authenticity of these documents. Yet, the CIT(A) granted relief only partially.Application of Law to Facts: The Tribunal emphasized that if part of the bank statement is relied upon for relief, the remainder cannot be ignored without justifiable cause. The failure to provide reasoned order for ignoring certain entries is a denial of justice.Treatment of Competing Arguments: The CIT(A) justified partial acceptance based on lack of direct linkage and suspicious nature of some transactions. The assessee argued for holistic consideration. The Tribunal found merit in the assessee's contention.Conclusions: The selective approach by CIT(A) is unsustainable and requires reconsideration with consistent principles applied to all transactions.Issue 4: Adequacy of Explanation by Assessee Regarding Source and Nature of CreditsLegal Framework and Precedents: The assessee has the legal obligation to explain the source and nature of credits in books of accounts to avoid additions under section 68. Mere recording in books is insufficient.Court's Interpretation and Reasoning: The AO and CIT(A) found the explanation unsatisfactory, especially in light of demonetisation and the use of SBNs (Specified Bank Notes). The assessee failed to establish direct linkage between share sales and bank credits for the entire amount.Key Evidence and Findings: Absence of direct correlation, immediate withdrawal of funds, and struck off status of companies weakened the assessee's explanation.Application of Law to Facts: The legal obligation was not discharged by the assessee, justifying additions.Treatment of Competing Arguments: The assessee argued that all transactions were genuine business dealings with transparent disclosure. The authorities disagreed based on evidence.Conclusions: The explanation was inadequate to discharge the burden under section 68.Issue 5: Application of Judicial PrecedentsLegal Framework and Precedents: The CIT(A) relied on Supreme Court decisions to uphold the principle that unexplained credits must be added to income and that the assessee must explain the source of funds.Court's Interpretation and Reasoning: The precedents were applied to support the addition, emphasizing the legal obligation on the assessee.Key Evidence and Findings: The precedents reinforce the legal position but require factual application consistent with evidence.Application of Law to Facts: The authorities applied the precedents appropriately but the Tribunal found the application inconsistent in respect of selective acceptance.Treatment of Competing Arguments: The assessee challenged the selective application of principles.Conclusions: Judicial precedents support the addition but require fair and consistent application.3. SIGNIFICANT HOLDINGSThe Tribunal held that:'The CIT(A) has selectively considered only certain transactions from the appellant's bank statements while completely ignoring others, despite the fact that all transactions are genuine and routed through proper banking channels... Such an inconsistent treatment of identical transactions demonstrates an inherent flaw in the reasoning and has led to an unjustified and erroneous computation of taxable income.''If a part of the bank statement is relied upon for granting relief, then the remaining transactions from the same bank statement cannot be disregarded without justifiable cause. The failure to provide a reasoned order for ignoring certain entries amounts to a denial of justice and has resulted in an erroneous and arbitrary addition.'The Tribunal concluded that the order of the CIT(A) suffers from a selective approach and is not a speaking order in respect of partial acceptance and rejection of credits. Therefore, in the interest of justice and fair play, the matter is remitted back to the CIT(A) for fresh adjudication after providing the assessee an opportunity of being heard and considering all transactions on a consistent basis.The Tribunal also directed that the Assessing Officer be given an opportunity to be heard and a remand report be called for if necessary, especially considering the struck off status of companies involved.The appeal was partly allowed for statistical purposes, indicating that the Tribunal did not uphold the entire addition but required reconsideration with consistent application of law and facts.