2025 (6) TMI 886 - AT - Income Tax

Validity of order passed by AO u/s 143(3)/147 - as alleged said order was on the basis of the order passed u/s 143(3) which was never served upon the assessee - HELD THAT -Department was directed to submit the proof of service of the order passed u/s 143(3) and the case was posted for hearing on 18.02.2025. However on that date the Bench did not function and the same was adjourned to 27.02.2025. However on that date too the Department did not furnish any evidence to prove the service of the assessment order on the assessee and then Bench decided to hear the appeal on the premise that the Department has nothing say on this issue. Even the CIT(A) has not commented on the non-service of order despite the same specifically raised by the assessee. Considering the facts and circumstances of the issue we are of the considered view that once the order passed by AO which has never been served upon the assessee is not an order in the eyes of law and therefore reopening of assessment based upon the said order cannot be sustained on this issue alone. Addition u/s 68 - share capital/share premium and share trading loss unexplained - HELD THAT - Addition on share application money is merely on the basis of apprehensions/presumptions which is not sustainable in the eyes of law and is accordingly deleted. Second addition Assessing Officer has simply relied on the statement of Shri Shirish Shah and Shri Naresh Jain and nowhere recorded his finding as to how the assessee has received money from the transactions of shares in the scrip of Scan Steel Limited (formerly known as Clarus Infrastructure Realities Limited) in which the assessee has made a loss. Assessee has furnished all the evidences relating to transactions of purchase and sale of shares through Bombay Stock Exchange and even the ld. AO called for details from Bombay Stock Exchange which were duly furnished, but ld. AO did not point out any flaw in the said documents and simply relied on the finding of Investigation Wing as Shri Naresh Jain was searched on 19.03.2019 and his statement was recorded u/s 132(4) of the Act. Thus addition made by the AO and confirmed by the CIT(Appeals) is wrong and against the facts on record. The addition cannot be made by relying on the statement of a third party unless the same is confronted to the assessee. Appeal of the assessee is allowed.

Summary

The core legal issues considered by the Tribunal in this appeal are:

(i) Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 (the Act) is valid when the original assessment order under section 143(3) was never served upon the assessee;

(ii) Whether the addition of Rs. 1,90,00,000/- made on account of share capital/share premium under section 68 of the Act is justified;

(iii) Whether the addition of Rs. 31,93,720/- on account of trading losses in shares of Scan Steel Limited, treated as unexplained cash credit under section 68, is sustainable.

Issue 1: Validity of Reopening under Section 147 in Absence of Service of Original Assessment Order

The legal framework requires that the original assessment order under section 143(3) must be valid and duly served on the assessee for any subsequent reopening under section 147 to be sustainable. The reopening is predicated on the existence of an original assessment order.

The Tribunal noted that the original assessment order dated 26.03.2015 under section 143(3) was reproduced in the reopening order dated 17.12.2019. However, the assessee contended that this original order was never served. The Department was repeatedly directed to produce evidence of service but failed to do so despite multiple opportunities, including an adjournment to verify and submit proof.

The Tribunal observed that the Commissioner of Income Tax (Appeals) had not commented on the non-service issue, despite it being specifically raised. The Department's failure to prove service meant that the original assessment order was not valid in the eyes of law. Consequently, the reopening based on that order was also invalid.

The Tribunal concluded that both the original assessment under section 143(3) and the reassessment under section 147/143(3) were bad in law and quashed the assessments on this ground alone.

Issue 2: Addition of Rs. 1,90,00,000/- on Account of Share Capital/Share Premium under Section 68

Section 68 places the burden on the assessee to explain the nature and source of any unexplained cash credits, including share capital. The assessee had furnished extensive documentary evidence during the original assessment proceedings, including:

• Share application money from six parties aggregating Rs. 2,09,00,000/-;
• Allotment of shares to five parties;
• Bank statements evidencing receipt of money through banking channels;
• Audited financial statements;
• Company incorporation documents, memorandum and articles of association;
• Income tax return acknowledgments and Ministry of Corporate Affairs master data.

The assessee had also demonstrated the identity, creditworthiness, and genuineness of the investors and traced the source of funds for the shareholders.

The Assessing Officer made the addition without pointing out any defect or deficiency in the documents. The Tribunal held that the addition was based on mere apprehensions and presumptions, which is not sustainable under law. Moreover, since the original assessment order was invalid due to non-service, the addition made thereunder was also invalid.

The Tribunal deleted the addition of Rs. 1,90,00,000/-.

Issue 3: Addition of Rs. 31,93,720/- on Account of Trading Losses in Shares of Scan Steel Limited

The Assessing Officer disallowed the trading loss of Rs. 31,93,720/- by treating it as unexplained cash credit under section 68, relying primarily on the statements of third parties (Shri Shirish Shah and Shri Naresh Jain) recorded under section 132(4) during a search operation. The Assessing Officer also obtained transaction details from the Bombay Stock Exchange (BSE), which were furnished by the assessee.

The Tribunal noted that the Assessing Officer did not record any independent finding on how the assessee received money from the transactions or point out any flaw in the transaction documents. The addition was based solely on third-party statements, which were not confronted to the assessee.

The Tribunal emphasized that additions cannot be sustained solely on third-party statements without confronting the assessee or establishing defects in the documentary evidence. The assessee had furnished complete transaction details from BSE and bank statements.

Accordingly, the Tribunal deleted the addition of Rs. 31,93,720/-.

Significant Holdings and Legal Principles

On the issue of reopening, the Tribunal held: "once the order passed by the ld. Assessing Officer, which has never been served upon the assessee, is not an order in the eyes of law and, therefore, reopening of assessment based upon the said order cannot be sustained on this issue alone." This underscores the fundamental principle that valid service of the original assessment order is a prerequisite for valid reassessment.

Regarding additions under section 68, the Tribunal reaffirmed the principle that the assessee bears the burden to explain unexplained credits but also that additions cannot be based on mere suspicion or third-party statements without corroborative evidence or confronting the assessee. Documentary evidence proving identity, creditworthiness, and genuineness of transactions, when unchallenged, must be accepted.

The Tribunal's final determinations were:

• The assessments under section 143(3) and section 147/143(3) were quashed due to invalidity of the original assessment order for non-service;
• The addition of Rs. 1,90,00,000/- on account of share capital/share premium was deleted as the assessee had discharged its evidentiary burden and no defect was pointed out;
• The addition of Rs. 31,93,720/- on account of trading losses was deleted as it was based solely on uncorroborated third-party statements without confronting the assessee and in the presence of valid transaction documents.