TaxTMI 
TaxTMI 
2026 (2) TMI 1442
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....n true perspective on the strength of which the assessment order was neither erroneous nor prejudicial to the interest of revenue and therefore, the provisions of Section 263 of the Act were not applicable to the case of the appellant. 3. The Hon'ble Pr. CIT-1, Rajkot has erred in law as well as on facts in passing the order u/s. 263 of the Act directing proper inquiries with respect to share capital subscription u/s 68 of the Act which issue is beyond the scope of 'Limited Scrutiny' criterion for the assessment before the Id. A.O. and thus, the same is without jurisdiction and invalid in the eyes of law 4. The Hon'ble Pr. CIT-1, Rajkot has erred in law as well as on facts in setting aside the assessment order passed by the Id. A.O. (NEAC) u/s 143(3) r.w.s. 143(3A) & (3B) of the Act dated 01.04.2021 and directing de-novo assessment to make proper inquiries with respect to share capital subscription of Rs. 10,15,00,000/- without controverting the submissions of the appellant. The appellant craves leave to add, alter, amend, delete or withdraw one or more grounds of appeal. 2. The relevant material facts, as culled out from the material o....
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....e capital minutely. It was seen that during the previous year 2017-18 relevant to A. Y. 2018-19, the assessee company has received share capital & share premium to the tune of Rs. 10,15,00,000/- which have been subscribed by 30 persons/ entities. Unsecured loans have also been raised from various persons during the year under consideration. 3. The assessee, during the course of assessment proceedings, submitted various documents in support of such share capital receipt and unsecured loans. On perusal of such documents, it was seen that many of such share subscribers have declared returned income in the income bracket of Rs.0.15 lacs to Rs. 5.00 lacs and claimed to have invested amount 6 to 466 times higher to their income which proves that these subscribers are not persons having capacity of making investments irrespective of the chances of return on investments. It is not a secret that share investment in an un-listed company does not give easy exit route and are normally illiquid for a considerable time with few/limited exit options. Further, looking to the income declared by the assessee company, it can be stated that no reasonable return on such investment by way of di....
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....he year. It is further noted that Shri Jayantilal Prabhudashas shown returned income of Rs. 14,960/- which also raises grave doubts on the creditworthiness of the person of investing Rs. 69.81 lacs in share capital and unsecured loan during the year under consideration. These are only few instances of such glaring discrepancies and manipulation of Books. The above point to glaring and obvious mismatch/discrepancies between the source of income/funds and the capacity/creditworthiness for making investment in the Share Capital as well as in providing loans. These glaring discrepancies/mismatches should have raised the antenna of the assessing officer and he should have conducted necessary enquiries/verifications. However, the assessing officer accepted the share capital investment and loans without carrying out inquiry/verification that should have been done. 6. First proviso to section 68 of the Act clearly provides that in respect of share capital, explanation offered by the assessee-company shall be deemed to be not satisfactory unless the shareholders offers explanation about the nature and source of such investment and the assessing officer is satisfied about such expla....
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....ders, has failed to conduct even preliminary verifications, leave alone conducting investigations and accepted the share capital as well as the unsecured loans as genuine. 9. The facts mentioned above show that the assessment order passed u/s 143(3) r.w.s. 143(3A) & 143(38) of the Act on 01.04.2021 by the Assessing Officer for the A.Y. 2018-19 is erroneous in so far as it is prejudicial to the interests of Revenue as the assessing officer has passed the assessment order without making inquiries or verification which should have been made. In view of the above, I hereby initiate proceedings u/s 263 of the Act with a view to pass a suitable order. Before passing of such order, you are hereby given an opportunity of being heard in the matter. In this connection you are requested to furnish your reply/submission / explanation or objection if any by mail address [email protected]/speed post/personally to this office on or before 14.02.2024" 4. In response to such notice, the assessee, vide letter dated 15.02.2024 has requested for adjournment till 21.02.2024. However, the assessee submitted its reply on 29-02-2024 before the ld. PCIT. The assessee submitted that....
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....ible in these cases in such scenario, no prudent investor would like to stack such huge amount of money in shares of the assessee- company where no return on investment appeared forthcoming. It was also observed that the assessee had not furnished balance sheet of most of subscribers lenders in order to gauge the creditworthiness of such subscribers. From the submissions, it is seen that the bank entries of these persons who have invested in the share capital or lent unsecured loans to the assessee are backed by immediate cash/cheque deposits. For example, in case of Shin Anandthai Dhanithailanva who has invested Rs.7,47,500/- in the shares and given Rs.17,52,500/- as loan having capital of Rs.8,52,800/- only as per the balance sheet for the year ended as on 31.03.2018 of Shri Anandbiha Dhanjibhajanva. The assessing officer has not bothered to examine the true nature of this money and its source in the hands of these shareholders/loan providers. 6. The ld. PCIT noted that in the present case, apart from fling of ITR, Bank Statement and balance sheet some cases, explanation of these shareholders (i.e., the person in whose name the share capital is recorded in the books of assesso....
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....e discrepancies/mismatches as mentioned above. 7. The ld. PCIT noted that it is a trite law, approved and reiterated by Hon'ble Supreme Court in several of its judgements, that to satisfactorily explain the nature and source the assessee must establish the following three ingredients: (1) Identity of his creditors, (2) Capacity of creditors to advance money, and (3) Genuineness of transaction. The assessee not only has to give explanation about nature & source on three basic ingredients, the explanation has to be proper, reasonable & acceptable. Hon'ble Supreme Court in the case of CIT VS. P. Mohanakala 291 ITR 278 (SC), while considering the scope of section 68, observed that the expression the assessee offers no explanation means where the assessee offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. While discussing the phrases proper, reasonable & acceptable, Hon'ble Apex Court in case of CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) has pronounced that "Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, th....
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....venue to adduce evidence to show from what source, income was derived and why it should be treated as concealed income. The assessee must prove satisfactorily the source and nature of cash received during the accounting year. Similarly, observations were made in CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC), inter alia holding that it was not necessary for the Revenue to locate the exact source. This principle was reiterated in CIT v. Devi Prasad Vishwanath [1969] 72 ITR 194 (SC), wherein the contention that the Assessing Officer should indicate the source of income before it was taxable, was described as an incorrect legal position. Thus, when there is an unexplained cash credit, it is open to the Assessing Officer to hold that it was income of the assessee and no further burden lies on him to show the source. If assessing officer is not satisfied and asks additional evidences from assessee, the assessee is duty bound to produce further details or persons for verification. The assessee cannot take the plea that he has submitted some papers and his onus has been discharged. If assessing officer tries to probe on his own, and gathers some material, which is sufficient to cast ....
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....f lenders shortly prior to issuance of cheques by them, transaction in question being sham, loan amount was to be added to assessee's taxable income under section 68. (5) In the case of Neelkanth Commensals (P.) Ltd. v. ITO [2022] 135 taxmann.com (Calcutta), the Hon'ble High Court held that even under non- amended provision of Section 68, an Income-tax Officer was not precluded from making an inquiry about true nature and source of sum found credited in books of assessee, even if same was credited as receipt of share application money. (6) Hon'ble Ahmedabad bench of ITAT in the case of Maharaja Corporate Services (P.) Ltd. v. ITO [2024] 158 taxmann.com 42 (Ahmedabad - Trib.) held that simply because a transaction has been carried out through banking channels or confirmation of the parties has been furnished would not make a non-genuine transaction into genuine one, and all the concerning facts of the case to be looked into in totality. 10. The ld. PCIT noticed that it is evident from the facts of the case that the assessing officer, who is duty bound to verify and enquire the identity and credit-worthiness of the creditor and ascertain whether the t....
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...., which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under section 263." 11. Hon'ble Bombay High court in the case of Vedanta Ltd [2021] 124 taxmann.com 435 has held that "Where assessment was completed without proper inquiries, Commissioner was competent to invoke revisional jurisdiction and direct Assessing Officer for fresh assessment". Hon'ble Kolkata High court in the case of Daniel Merchants (P.) Ltd. [2018] 95 taxmann.com 365 (SLP dismissed by Hon'ble Supreme Court in [2018] 95 taxmann.com 366) has held as under: "5. In all these cases, we find that the Commissioner of Income Tax had passed an order under section 263 of the Income-tax Act, 1961 with the observations that the Assessing Officer did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) insofar as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. It is this order which is upheld by the High Court. We see no reason ....
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....o noted that with effect from 01/06/2015, Explanation 2 to the section 263(1) has been inserted by which scope of section 263 of the Act has been expanded by incorporating the concept of "deemed to be erroneous". The same is reproduced as under: "Explanation 2 .- For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, it, in the opinion of the Principal Commissioner or Commissioner; - (a) The order is passed without making inquiries or verification which should have been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under Section 119; or (d) rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. The order has not been passed in accordance with any decision which is prejudicial to the assessee, 14. Once in the opinion of Ld. PCIT, the order is passed without making inquiries or verification which shoul....
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....the Act. The ld DR further stated that even to prove the source of the share capital/share premium, assessee has not furnished the sufficient documentary evidences. 18. The ld. D.R. for the revenue further submitted that assessing officer has not examined the share premium, and no question was asked by the assessing officer about how the share premium is fixed by the assessee. Just to rely on the certificate of the outsider in respect of the share premium is not sufficient. The A.O. need to conduct further inquiry whether the share premium amount fixed the assessee is correct or not. 19. The Ld. DR for the revenue also submitted that when the AO passed the appeal effect order u/s 143(3) r.w.s. 263 of the Act dated 24.03.2025 wherein the assessee even failed to prove the source of the source in respect of share capital. With effect from AY 2013-14, the assessee needs to prove the source of the source, in respect of share capital / share premium. However, in the appeal effect order, the assessee failed to prove the source of the source, hence, order passed by the AO is certainly erroneous and prejudicial to the interests of revenue. The Ld. DR also submitted that some of the....
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.... name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided also that nothing contained in the first proviso or second proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10....
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....were not followed by the assessing officer. 22. We also note that for unsecured loan, the assessee has also failed to prove the source and assessee also failed to prove the creditworthiness and genuineness of the loan, hence assessment order framed by the assessing officer, is erroneous and prejudicial to the interest of the revenue. We note that the assessee- company has received share capital & share premium to the tune of Rs.10,15,00,000/- in financial year (F.Y.) 2017-18 and the share capital and share premium and unsecured loans has been received from 30 persons. Although the assessment record contains the names of all the 30 persons, however, the available details as per the records are incomplete. The records reveal that assessee has submitted only details like Acknowledgement of return of income for all the 30 persons for assessment year (AY) 2018-19 and Bank statements of the depositors only, other than these two details, no others details to prove the credit worthiness of the investors has been filed. The share capital, share premium and unsecured loan received by the assessee from these 30 persons were thoroughly verified by ld. PCIT and ld. PCIT noted that out of 30 ....
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....he user, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders 3. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubt, or lack credit-worthiness, then the genuineness of the transaction would not be established. In view of the above contention of the assessee is not acceptable. The PCIT u/s. 263 of the I.T. Act, has set aside the case for doing the de novo. As the issue under scrutiny assessment was inter-linked, the contention that it should be limited to share capital when the unsecured loans are also from the same source. As the assessee is duty bound to prove the credit-worthiness of creditor/investor to prove the genuineness of the investment in share capital and providing unsecured loan, however he failed to prove the same. 3.7.2 The assessee filed his reply in response to show cause notice issued to him after conducting of VC, wherein he mainly contented the ample time was not provided during the VC. In this regard it is submitted that initially 15 minutes time was allotted for the VC, however it was extended up to pprox .....
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....ge unsecured loan to make investment and to further provide unsecured loan to the assessee company. They are not having any self- sufficient income to make investment and to give unsecured loan to company. For example one case of Mr. Mahadevbhai R.Kanani is reproduced below: On perusal of the above submission of assessee, it is found a very unique case that party has invested at his salary, provident fund, commuted pension and also taken huge unsecured loan to make investment of Rs. 28,05,000/- in the assessee company. How any person can make a huge investment in an unlisted company without any guarantee and possibility of good return on the investment. On the perusal of his balance sheet it is also pertinent to mention here that he has not investment in any other company share. In all the cases a same pattern is observed that parties are investing and providing unsecured loan Assessee Company by taking huge unsecured loan from other parties. Nobody is having credit worthiness to make such a huge investment in Assessee Company. 3.7.5 Further, the assessee in his submission stated that the impugned difference of Rs.8,82,18,007/- (wrongly taken Rs.8,21,51,8....
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....not submitted any reply on this issue in response to SCN issued to him. Therefore, such cash credit is remained unexplained u/s 68 as the assessee failed to provide any reply on this issue. The value of the credit is considered as the income of the assessee for the year under consideration. Therefore, an addition of Rs.10,15,00,000/- is hereby made u/s 68r.w.s. 115BBE of the income Tax Act and Penalty proceedings u/s 271AAC(1) is hereby initiated separately. 3.8.3 During the assessment proceedings, notices u/s 133(6) of the act issued to all 30 parties who had made investment in share capital and share premium, who had made investment in the assessee's company as a share capital/share premium. In response to the said notice the details filed by the parties. The assessee had also provided audited balance sheet and profit and loss account. On perusal of the replies filed by the parties and details submitted by the assessee, following details has been summarized: On perusal of the above table it is found that the assessee has received unsecured loan amounting to Rs.11,17,22,379/- from the above mentioned parties. The creditworthiness of investor and genuineness o....
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....arties. However, the creditworthiness of investor who had also provided unsecured loan to assessee are doubtful. It is observed from the bank account statements of parties that before making investment or provided unsecured loan are backed by immediate cash/cheque deposit. Further, on perusal of the balance sheet filed by parties in response to notice issued u/s 133(6), it is seen that huge unsecured loans were shown as the source for share investment and to provide unsecured loan to the assessee-company. From the Balance Sheets / Bank Statements, it appears that most of these loans have been taken for the purpose of Share Capital Investment and unsecured loans. Therefore as per the provision of section 68 of the Income Tax Act, 1961, whenever any sum is found credited in the books of accounts of the assessee then the assessee has to offer an explanation about nature, and source of such credit and explanation offered by him should be found satisfactory by the Assessing Officer. However, the assessee failed to provide the requisite details as asked during the assessment proceedings. Thus in this case as per provision of section 68 such credit amounting to Rs.11,17,22,379/- reflectin....
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..... 10,02,39,030/- (8,21,51,884 + 1,80,87,146) is found to be owned by the assessee which is not recorded in the books of account of the assessee. In this regard assessee has filed his contention in his reply of show cause notice issued to him. However, he failed to provide any documentary evidence to substantiate his claim. The assessee has not provided copy of share application, bank statement, board resolution for receiving the unsecured loan and allotment of share to investors. In absence of all these documents, the claim of opening balance is not acceptable. In absence of all the requisite documents, the share allotment year is not ascertainable. Therefore, as per provisions of section 69A such money to the tune of Rs. 10,02,39,030/- as owned by the assessee is hereby treated as unexplained money. The above analysis shows that all the conditions mentioned the section 69A is squarely fulfilled. 3.8.7 In view of the above, the assessee is found to be the owner of money, therefore a detailed Show- Cause Notice (SCN) was sent to the assessee requiring him to explain as why the money amounting to Rs. 10,02,39,030/- which is not recorded in the books of accounts maintained by....
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....e", nor assessee has submitted documents/evidences to explain "Source of the Source". Before making investment in shares of the assessee company, there is sufficient cash deposit in the bank account of share applicants and the same has escaped from examination by the assessing officer. As the assessment year involved in the assessee's case is the assessment year 2018-19, where amended provisions of section are clearly applicable to the assessee. For loan transaction, the assessee has not furnished the documents pertaining to source. Hence, assessment order passed by the assessing officer, is erroneous and prejudicial to the interest of the revenue. 25. To deal with the mandate of the provisions of section 263 of the I.T. Act, 1961, it is important to remember that the assessing officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this c....