2025 (4) TMI 899 - AT - Income Tax

Unexplained cash credit u/s 68 - share application money received by the assessee - Onus to prove - HELD THAT - The provision of section 68 as prevailing for year under consideration the ld. AO can make addition u/s 68 only under two circumstances (i) the assessee does not offer any explanation about nature and source of such credit or (ii) Explanation offered by Appellant is not up to the satisfaction of Ld. AO. Therefore here we note that the assessee provided so as prove the identity credit worthiness and genuineness of the transaction by placing all the records such as PAN Application made for Shares Board Resolution and Confirmations Financial Statement and Bank statement of the investor company which were not at all doubted by ld. AO. But all such vital evidence has been ignored solely on the basis of statements of third party recorded by some other officials during the course of search operation conducted. As argued by the ld. AR of the assessee relying on the decision of Padmavati Agrico(India) Private Limited 2024 (9) TMI 1312 - ITAT JAIPUR it is clear that Shri Praveen Jain has retracted from his statement and as held by our jurisdictional Hon ble Rajasthan High Court stating that on the retracted statement no addition can be made in the hands of the assessee. This has been held by our High Court in the case of PCIT Vs. M/s. Esspal International P. Ltd 2024 (9) TMI 652 - RAJASTHAN HIGH COURT stating that the merely based on the retracted statement no addition can be made. Decided against revenue.

Summary

The core legal questions considered in this judgment are:

1. Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961, based on third-party information from the Investigation Wing, was justified and valid.

2. Whether the addition of Rs. 1,70,02,500/- as unexplained cash credit under section 68 of the Act, representing share application money received by the assessee from certain companies, was justified.

3. Whether the assessee discharged the onus of proving the identity, creditworthiness, and genuineness of the investors who provided the share application money.

4. Whether the statement of a third party (Shri Praveen Kumar Jain), recorded during search and seizure proceedings, can be used as conclusive evidence against the assessee without giving the assessee an opportunity for cross-examination.

5. The legal effect of payments made through banking channels and account payee cheques on the genuineness of transactions under section 68.

6. The applicability and interpretation of judicial precedents concerning the burden of proof under section 68 and the rights of the assessee in such cases.

Issue-wise Detailed Analysis

1. Validity of Reopening under Section 147

Legal Framework and Precedents: Section 147 allows reopening of assessment if income has escaped assessment. The reopening must be based on tangible material or information indicating escapement of income. The assessee challenged the reopening as illegal and arbitrary.

Court's Interpretation and Reasoning: The reopening was triggered by information from the Director General of Income Tax (Investigation) regarding accommodation entries involving the assessee and companies controlled by Shri Praveen Kumar Jain. The Tribunal noted that the information was specific and credible, arising from a search and seizure operation, and thus constituted sufficient reason for reopening.

Application of Law to Facts: The Tribunal held that the reopening was valid and justified on the basis of the material received from the Investigation Wing, which revealed that the assessee had taken accommodation entries in the form of share application money. The assessee's cross objection challenging the reopening was not pressed and dismissed as withdrawn.

2. Addition under Section 68 on Account of Unexplained Share Application Money

Legal Framework and Precedents: Section 68 requires the assessee to explain the nature and source of any credit appearing in the books. The burden of proof lies initially on the assessee to establish identity, creditworthiness, and genuineness of the creditor and transaction. If the assessee discharges this onus, the burden shifts to the Revenue to disprove the genuineness.

Relevant precedents include:

• Commissioner of Income Tax v. Odisha Corporation Pvt. Ltd. - assessee discharged burden by furnishing names, addresses, and confirmations; Revenue failed to make further enquiries.
• Lovely Exports (P) Ltd. - verification of source of source is not the AO's domain; Revenue must proceed against bogus shareholders individually.
• CIT v. Nova Promoters & Finlease Pvt. Ltd. - mere filing of documents by entry providers insufficient if incriminating evidence links them to accommodation entries.
• Sumati Dayal v. CIT - in absence of satisfactory explanation, cash credits can be treated as income from undisclosed sources.
• Precision Finance Pvt. Ltd. - payment by cheque is not conclusive proof of genuineness.

Court's Interpretation and Reasoning: The AO relied heavily on the statement of Shri Praveen Kumar Jain, who admitted providing accommodation entries through paper companies controlled by him, charging commission for such entries. The AO rejected the assessee's submissions and documents, including share application forms, bank statements, board resolutions, and confirmations, as insufficient to prove genuineness.

The AO held that payment through banking channels or account payee cheques does not guarantee genuineness. The AO further noted that the assessee failed to produce the investors for examination or provide satisfactory explanation to rebut the incriminating evidence.

The CIT(A), however, took a contrary view. He held that the assessee had discharged its onus by furnishing comprehensive details regarding the investors, including their income tax returns, bank statements, and confirmations. The CIT(A) observed that the AO did not make efforts to verify or disprove the genuineness of the investors, such as issuing summons under section 133(6) or conducting inquiries.

The CIT(A) relied on the Supreme Court's ruling in Lovely Exports that the AO cannot disallow share application money merely because the shareholders are alleged to be bogus; the AO must proceed against the shareholders themselves. The CIT(A) held that the AO's addition was based on vague third-party information and surmises, which was insufficient to rebut the assessee's evidence.

Application of Law to Facts: The Tribunal analyzed the submissions and documents filed by the assessee, including detailed financials, board resolutions, and bank statements of the investor companies. It noted that these companies were registered entities with PANs and were regularly assessed to tax. The Tribunal found that the assessee had established the identity and creditworthiness of the investors.

The Tribunal further observed that the AO did not point to any specific evidence linking the assessee to the accommodation entries beyond the statement of Shri Praveen Kumar Jain, nor did the AO conduct independent inquiries or summon the investors.

Accordingly, the Tribunal held that the addition under section 68 was not sustainable as the AO failed to discharge the burden of disproving the genuineness once the assessee had discharged its initial onus.

3. Use of Third-Party Statements and Right to Cross-Examination

Legal Framework and Precedents: Statements recorded under section 132(4) during search and seizure operations are admissible but the assessee is entitled to a fair opportunity to challenge adverse evidence. However, cross-examination is not a legal right under the Income Tax Act as held by various courts, including the Rajasthan High Court.

Relevant precedents include:

• Rameshwar Lal Mali v. CIT - no provision for cross-examination of persons whose statements are recorded during survey.
• PCIT v. Esspal International Pvt. Ltd. - addition cannot be made solely on retracted statements of third parties.
• Andaman Timber Industries - denial of cross-examination when statements form basis of order violates principles of natural justice.
• Monga Metals Pvt. Ltd. v. ACIT - reliance on third-party evidence without opportunity to cross-examine held illegal.

Court's Interpretation and Reasoning: The AO relied on Shri Praveen Kumar Jain's statement admitting provision of accommodation entries. The assessee sought to cross-examine him and obtain copies of seized documents, but the AO declined, citing sufficient material in possession.

The CIT(A) and the Tribunal noted that while cross-examination is not a statutory right under the Income Tax Act, the AO must still consider the principles of natural justice and ensure that the assessee is not prejudiced by reliance on untested third-party statements.

The Tribunal found that the AO failed to produce any corroborative evidence beyond the statement, and the statement itself was not specific to the assessee. Moreover, it was noted that Shri Praveen Kumar Jain had retracted his statement in a related case, undermining its reliability.

Application of Law to Facts: The Tribunal held that the AO's reliance on the third-party statement without further independent inquiry or opportunity to the assessee to challenge the evidence was insufficient to justify the addition. The absence of specific adverse information against the assessee and the failure to examine investors further weakened the AO's case.

4. Effect of Payment Through Banking Channels

Legal Framework and Precedents: Payment by account payee cheque or through banking channels does not conclusively prove genuineness of transactions under section 68.

Precedents:

• ITAT Jaipur in Kanchwala Gems v. JCIT and Supreme Court affirming that payment by cheque is not conclusive proof.
• CIT v. Precision Finance Pvt. Ltd. - payment by cheque is not sacrosanct.

Court's Interpretation and Reasoning: The AO correctly observed that transactions through banking channels are not automatically genuine. The Tribunal agreed that the genuineness must be established on the preponderance of probabilities, considering all evidence.

Application of Law to Facts: The assessee produced evidence of banking transactions, but the AO found it insufficient without further inquiry into the source and nature of funds. The Tribunal, however, emphasized that the AO's failure to verify the investors' creditworthiness or conduct inquiries weakened the case for addition.

5. Burden of Proof and Onus on the Assessee and Revenue

Legal Framework and Precedents: The initial burden lies on the assessee to prove identity and genuineness of creditors under section 68. Once discharged, the burden shifts to the Revenue to disprove.

Precedents:

• Commissioner of Income Tax v. Odisha Corporation Pvt. Ltd.
• Lovely Exports (P) Ltd.
• Sumati Dayal v. CIT
• CIT v. Morani Automotives (P.) Ltd.

Court's Interpretation and Reasoning: The Tribunal held that the assessee had discharged the initial onus by providing comprehensive documents, including PANs, bank statements, board resolutions, and confirmations. The AO failed to disprove these by independent inquiries or examination of investors.

Application of Law to Facts: The Tribunal found that the AO's addition was based on suspicion and third-party statements without corroborative evidence. The AO's failure to make further inquiries or summon investors resulted in the addition being unsustainable.

6. Treatment of Competing Arguments

The Revenue argued that the AO's findings were based on credible investigation reports and statements, and that the assessee failed to rebut the presumption of bogus transactions. It relied on numerous Supreme Court and High Court decisions supporting addition under section 68 where genuineness is not established.

The assessee contended that it had furnished all requisite documents to prove identity and genuineness, that the AO failed to conduct independent inquiries, and that reliance solely on third-party statements without opportunity for cross-examination violated natural justice. The assessee also cited judicial precedents holding that additions cannot be made merely on suspicion or vague information.

The Tribunal sided with the assessee, emphasizing the need for concrete evidence and independent verification by the AO before making additions. It held that the AO's reliance on third-party statements and investigation reports without further inquiry was insufficient.

Significant Holdings

"If the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee company."

"The primary onus is on the assessee to establish the genuineness of the share application money received. If the investigation done by the department leads to doubt regarding the genuineness of the share applications it is incumbent on the assessee to produce the parties along with necessary documents to establish the genuineness of the transaction."

"Payment by account payee cheque is not sacrosanct and it would not make an otherwise non genuine transaction genuine."

"Verification of source of source is not the realm of the Assessing Officer."

"Cross examination is not a legal right of the assessee under the Income Tax Act."

"An order passed in violation of the principles of natural justice is a nullity."

The Tribunal concluded that the reopening under section 147 was valid; however, the addition under section 68 was not sustainable as the assessee discharged its onus by proving the identity, creditworthiness, and genuineness of the investors. The AO failed to disprove the genuineness by independent inquiry or examination of investors. The reliance solely on third-party statements without opportunity for cross-examination and without corroborative evidence was insufficient. Consequently, the addition of Rs. 1,70,02,500/- was deleted by the CIT(A) and the Tribunal upheld this deletion, dismissing the Revenue's appeal and the assessee's cross objection.