2026 (2) TMI 321 - HC - Income Tax

Unexplained Share Capital and Share Premium: Banked documentary evidence beats AO suspicion; addition deleted, legal effect affirmed

Addition under explanation of unexplained share capital and share premium was contested on whether subjective suspicion ('Test of Human Probability') can ... Addition u/s 68 - unexplained share capital and share premium - perennial conflict between the Revenue’s reliance on the “Test of Human Probability” and the Assessee’s reliance on “Cast Iron Documentary Evidence” - ITAT deleted addition - HELD THAT:- We arrive at a definite conclusion that in a corporate assessment, documented traceability (comprising ITR acknowledgments, PAN details, and Bank Statements) through legitimate banking channels carries greater evidentiary weight than the subjective suspicion of an AO. “Test of Human Probability” cannot be invoked as a tool to disregard a verified and audited paper trail. We also conclude that the ratio in NRA Iron & Steel is applicable only to “phantom” or “non-existent” entities found to be non-traceable upon field inquiry. Unless the Revenue proves a “live link” showing that the funds originated from the assessee’s own coffers, the AO cannot substitute his judgment for that of the marketplace. Tribunal has conducted a meticulous factual inquiry. The Tribunal has recorded a specific finding that the assessee had provided “Cast Iron” documentary evidence to establish the identity and creditworthiness of the subscribers. The audited balance sheets of these companies reflected a substantial net worth, which was far in excess of the amounts invested in the assessee company. We are convinced that the findings of the learned Tribunal are based on a meticulous factual inquiry. Revenue has failed to produce any contrary material to disprove the documents filed. It is a settled position that suspicion, however strong, cannot take the place of evidence. We find no perversity in the findings of the learned Tribunal. No substantial question of law arises for consideration in this appeal. Issues: (i) Whether the addition of Rs. 6,22,00,000 made under Section 68 as unexplained cash credit can be sustained where the assessee produced documentary evidence traceable through banking channels to active taxpayer subscribers; (ii) Whether the Assessing Officer was justified in branding subscribers as shell or phantom entities and making additions based on non-appearance of directors despite availability of documentary evidence and responses to statutory notices; (iii) Whether the ratio in PCIT vs. NRA Iron & Steel (phantom entities) applies to traceable, active investors whose investment amounts appear commercially improbable.Issue (i): Whether the addition under Section 68 can be sustained despite documentary traceability of investment from subscribers.Analysis: Documentary evidence comprising PAN details, ITR acknowledgments, audited balance sheets and bank statements showing transfers through legitimate channels was examined to determine whether identity, creditworthiness and genuineness were established as required by Section 68. The assessment of net worth in audited financials relative to the amounts invested was considered relevant to creditworthiness. The absence of director personal appearance was weighed against the existence of statutory responses under Section 133(6) and robust documentary traceability.Conclusion: The addition under Section 68 cannot be sustained; the assessee discharged the initial onus by providing cast iron documentary evidence establishing identity, creditworthiness and genuineness. This conclusion is in favour of the Assessee.Issue (ii): Whether the AO was justified in treating subscribers as shell entities because directors did not appear and making additions on that basis.Analysis: The statutory power to summon under Section 131 was considered alongside the availability of documentary proof and confirmations received under Section 133(6). The effect of an AO's failure to compel personal attendance was assessed in light of the documentary record and traceability of transactions through banking channels and tax filings.Conclusion: The AO was not justified in characterising the subscribers as shell entities solely due to non-appearance of directors where traceable documentary evidence and statutory responses existed; this conclusion is in favour of the Assessee.Issue (iii): Whether the Supreme Court ratio applicable to phantom or non-existent entities applies to identifiable, traceable investors whose investments may appear commercially improbable.Analysis: The scope of the phantom-entity doctrine was analysed to determine its applicability only where field inquiry demonstrates non-existence or non-traceability. The probative value of commercial improbability was contrasted with the evidentiary value of audited statements, tax records and banking traceability. The absence of proof of a live link showing funds originated from the assessee's own coffers was considered decisive.Conclusion: The phantom-entity ratio does not extend to identifiable, traceable investors whose transactions are supported by documentary traceability; therefore the doctrine is inapplicable here. This conclusion is in favour of the Assessee.Final Conclusion: On the issues decided, documentary traceability through PAN, ITRs, audited financials and bank records prevails over subjective suspicion or the test of human probability, and the impugned addition under Section 68 is rightly deleted in favour of the Assessee.Ratio Decidendi: Where identity, creditworthiness and genuineness under Section 68 are established by verifiable documentary traceability through legitimate banking channels and tax records, an Assessing Officer cannot sustain additions based on mere suspicion or non-appearance of directors absent a demonstrated live link or field inquiry showing non-existence.