2019 (2) TMI 2129 - AT - Income Tax

Addition u/s 68 - bogus share capital - assessee has failed to discharge its onus - as per AO share capital received by the assessee company is unaccounted income - HELD THAT - We have tried to verify the trail of the transactions for all these 16 shareholder companies with the relevant documents in support thereof. After verification the contention of the AR seems to be acceptable that the money have been routed within the group/associate companies. Each of the transaction may be verified. It is a case where one company has advanced money to another company which in turn has advanced money to another company and such another company has advanced money to the company where the money was originated. Thus it is a circulation of the money within the various entities where complete trail right from origin till the end is available with the assessee. All these transactions are verifiable from the bank statements of the respective companies. Thus the contention of AR that the money received by it is not any unaccounted money seems to be justified. DR also could not point out any error or flaw in the submission advanced by the AR explaining step by step the movement of the money from one entity to another entity. All are transfer entries through bank accounts and there is no cash deposit as stated by the AR on the basis of evidences produced before us. Despite taking note of the above contention of the assessee the AO instead of examining the contention of the assessee has held that there has been a careful planning of routing unaccounted money to the main companies of the ACCIL group by creating a web of companies and executing the requisite paper work. This observation of the AO that it is routing of unaccounted money is factually incorrect. It is in fact the accounted money which has been routed from one company to another company. DR could not show any credit which represents unaccounted money as alleged by the Assessing Officer in the assessment order. From the above explanation and the facts of the assessee on record it is clear that money has not come from outside the group/associate companies. It is the money which is being re-routed within the group/associate companies. Statements of various employees which have been relied upon by the Assessing Officer to draw adverse inference against the assessee - We are of the view that it has never been the stand of the assessee that these are not group/associate companies. In fact assessee has all along stated that these are transactions within the group/associate companies. We have also gone through the statement of each of these employees/directors. Ongoing through the same we find that no one has alleged that the money which is deposited in the bank account of the company is unaccounted money or the source which is dubious. There is no allegation coming out in these statements that any transaction outside the books of accounts have been carried out or any cash transactions have been carried out. In these statements the main allegation coming out is that these directors were not aware whether they are directors. The issue before the AO was the source of the share capital received by the assessee company. For finding out the source one has to go to the trail of the money received by way of share capital. In case the source is not traceable or the source is such for which there is no satisfactory explanation the AO will be justified in drawing adverse inference. However where the there is satisfactory explanation as to the nature and source of the credit no addition could be made u/s. 68 of the Act. In the present case there is no such statement or involvement of any entry operator. As against this in the present case the assessee has provided complete trail and source of money. All these companies are group/associate companies where the money have been routed and hence the source of the money is clearly identifiable. Thus it cannot be said that assessee has not discharged its onus under section 68 of the Act. There is no adverse observation about the evidences submitted by the assessee in support of its contention. In fact in the assessment order there is no discussion of the document and evidences submitted by the assessee. Simply the total figure has been added by the Assessing Officer. The ld. CIT(A) has also confirmed the addition without even considering the facts and contention of the assessee. The CIT(A) has totally ignored the facts and in a mechanical way confirmed the order passed by the Assessing Officer. The assessee having submitted the details and explanation with evidences in support thereof it was incumbent upon the Assessing Officer to verify the same before forming any adverse view against the assessee. Instead of examining the facts and the explanation the AO has in an arbitrary manner made the addition. AR before us though has tried to explain the entire trail and the source of the share capital and has argued for deletion of the addition however taking into consideration the entire facts we are of the view that in the interest of justice it will be appropriate to restore the matter back to the file of Assessing Officer for carrying out proper verification at his end. Accordingly we remit this issue to the Assessing Officer to verify the trail of the money received by the assessee by way of share capital with the direction to make the assessment order afresh on this issue after making proper verification regarding the trail of the money received by the assessee by way of speaking order in accordance with law. Whether in the absence of any incriminating material the addition per se are unsustainable ? - As against this the contention of the Ld. DR is that from the assessment order it is not evident whether assessee has originally filed the return or not and whether assessment has abated or not consequent upon the search. We are in agreement with the contention of the Ld. DR that from the facts it is not clear whether the assessee has originally filed the return before the date of the search or whether assessment was pending or not as on the date of search. Accordingly these facts also need examination at the stage of Assessing Officer. Taking into consideration the fact that we have remitted the matter back to the AO on merit for verification of the Share Capital received during the year we remit this issue also to the Assessing Officer as well for verification of above facts which are not discernible from the orders of the authorities below. The Assessing Officer shall decide the stand of the assessee after verification as noted above. Needless to say the assessee shall be given reasonable opportunity of being heard. In the result the appeal of the assessee deserves to be allowed for statistical purposes.

Summary

The core legal questions considered in this judgment include:

1. Whether the assessment order passed under section 153A of the Income-tax Act, 1961 (the Act) is valid, given the circumstances of the search and seizure operation and compliance with statutory procedures.

2. Whether the assessment order is barred by limitation or suffers from procedural defects such as improper service of notices.

3. Whether the additions made by the Assessing Officer (AO) under section 68 of the Act, relating to share capital and share premium, are justified and sustainable.

4. Whether the assessee has discharged its onus to prove the identity, creditworthiness of the investors, and genuineness of the share capital transactions.

5. Whether the incriminating material found during the search operation was sufficient to initiate proceedings under section 153A and sustain additions.

6. The correctness of reliance on statements recorded during the search and the inspector's report in making additions.

7. The applicability and relevance of various judicial precedents concerning unexplained share capital and accommodation entries.

Issue-wise Detailed Analysis:

Validity of Assessment under Section 153A and Procedural Compliance:

The parties agreed that the facts and issues in these appeals are identical to those in a leading appeal (ITA No. 6319/Del/2018). The assessee challenged the validity of the assessment framed under section 153A, contending that the search was unlawful, the statutory conditions and procedures were not complied with, and notices were not properly served. However, these grounds were not pressed before the Tribunal and were dismissed accordingly. The Court noted that the assessment was initiated following a search and seizure operation and that notices under section 153A were issued and responded to by the assessee. The Court found no merit in procedural objections as the assessment was carried out within the framework of the Act.

Additions under Section 68 on Account of Share Capital and Share Premium:

The AO made additions totaling approximately Rs. 46.75 crore on account of share capital and share premium, holding that the amounts represented unaccounted income. The AO relied on investigations by the Income Tax Investigation Wing, spot enquiries by inspectors, and statements recorded during the search. The AO concluded that a complex web of companies was created to route unaccounted money through share capital transactions.

The assessee contended that the share capital was raised entirely from group/associate companies and that the money was routed internally within the group, with no outside or cash transactions involved. The assessee provided detailed reconciliations, bank statements, and documentary evidence to demonstrate the trail of funds within the group companies. The assessee argued that the AO and CIT(A) failed to properly consider this evidence and made additions arbitrarily without applying their mind.

The Tribunal examined the detailed reconciliation chart submitted by the assessee, which showed the allotment of shares and corresponding receipts of funds routed through various group companies. The Tribunal accepted the assessee's contention that the money was circulated within the group and that a complete and verifiable trail of transactions was available. It was noted that the AO did not point out any specific defect or discrepancy in the evidences submitted by the assessee, nor did the AO conduct further verification or investigation to challenge the genuineness of the transactions.

Reliance on Inspector's Report and Statements Recorded During Search:

The AO relied on an inspector's report dated 12.12.2017, which stated that many companies were non-existent at their registered addresses and that caretakers/security guards were not available. The Tribunal observed that these companies had merged prior to the date of the inspector's visit, and thus no adverse inference could be drawn from the report. Moreover, the report did not allege any cash transactions or unaccounted money.

The AO also relied on statements of various employees/directors recorded during the search, wherein some directors claimed ignorance about their directorships. The Tribunal held that these statements did not prove the share capital to be unaccounted money. The assessee had consistently maintained that these were group/associate companies and that the share capital was routed within the group. The Tribunal emphasized that the issue was the source and genuineness of the share capital, not the knowledge of individual directors about their directorships.

Onus and Discharge under Section 68:

Section 68 places the onus on the assessee to explain the identity and creditworthiness of the shareholders and the genuineness of the share capital transactions. The Tribunal acknowledged this legal principle but found that the assessee had provided credible documentary evidence, including bank statements and confirmations, to trace the source of funds within the group companies. The Tribunal noted that the AO and CIT(A) failed to properly examine or verify this evidence before making and confirming the additions.

The Tribunal distinguished the present case from precedents cited by the Revenue, which involved share capital received from outside parties, accommodation entries, or cases where the assessee failed to produce shareholders or provide credible evidence. In contrast, the present case involved intra-group transactions with a complete paper trail and no evidence of cash deposits or involvement of entry operators.

Incriminating Material and Initiation of Proceedings:

The assessee argued that no incriminating material was found during the search to justify the initiation of proceedings under section 153A or the additions made. The Revenue contended that statements recorded during the search and other material constituted sufficient incriminating evidence. The Tribunal observed that from the record, it was not clear whether the original assessment had abated or whether the assessee had filed the return before the search, facts which the AO must verify. Accordingly, the Tribunal remitted this issue to the AO for fresh examination and decision after giving the assessee an opportunity to be heard.

Judicial Precedents and Their Applicability:

The Revenue relied on numerous decisions of various High Courts and the Supreme Court to support the additions under section 68. These precedents generally uphold additions when the assessee fails to prove the identity, creditworthiness, or genuineness of share capital transactions, especially in cases involving accommodation entries, non-existent shareholders, or untraceable addresses.

The Tribunal carefully considered these precedents but held that they were distinguishable on facts. Unlike those cases, the assessee in the present matter provided detailed evidence and explanations, and the share capital was raised from group/associate companies with a verifiable trail of funds. The Tribunal noted that the AO did not challenge the evidences substantively or conduct further inquiry.

Conclusions and Directions:

While accepting the assessee's contention that the share capital was routed within the group and was accounted money, the Tribunal found that the AO had not conducted adequate verification. Therefore, in the interest of justice, the Tribunal remitted the matter back to the AO for a fresh assessment on the issue of share capital and unsecured loans. The AO was directed to verify the trail of money with proper scrutiny and pass a speaking order in accordance with law. The assessee was to be given a reasonable opportunity of being heard.

Similarly, the issue of additions made without incriminating material found during search was also remitted for fresh consideration by the AO.

The Tribunal's decision in ITA No. 6319/Del/2018 was made applicable mutatis mutandis to all other appeals with identical facts and issues, which were disposed of by the consolidated order allowing the appeals for statistical purposes.

Significant Holdings:

"It is a case where one company has advanced money to another company which in turn has advanced money to another company and such another company has advanced money to the company where the money was originated. Thus, it is a circulation of the money within the various entities where complete trail right from origin till the end is available with the assessee. All these transactions are verifiable from the bank statements of the respective companies."

"The AO has not pointed out any error or mistake in the documents submitted by the assessee. There is no adverse observation about the evidences submitted by the assessee in support of its contention. In fact in the assessment order there is no discussion of the document and evidences submitted by the assessee. Simply the total figure has been added by the Assessing Officer."

"The statements emanating in search (or as a result of search), are sufficient incriminating material(s) for purposes of passing the aforesaid assessment order." (As noted by CIT(A) in concurrence with AO)

"Where the there is satisfactory explanation as to the nature and source of the credit, no addition could be made u/s. 68 of the Act."

"In the interest of justice it will be appropriate to restore the matter back to the file of Assessing Officer for carrying out proper verification at his end."

Core principles established include the necessity for the AO to conduct proper verification and inquiry before making additions under section 68, especially where the assessee provides detailed documentary evidence tracing the source and genuineness of share capital. The burden on the assessee to prove identity, creditworthiness, and genuineness remains, but the AO must not make additions arbitrarily or mechanically without examining the evidence. The presence or absence of incriminating material found during search is a relevant factor for initiating proceedings under section 153A.

Final determinations: The Tribunal allowed the appeals for statistical purposes, remitting the issues of additions under section 68 and the validity of assessments under section 153A to the AO for fresh adjudication after proper verification and opportunity to the assessee. The procedural objections were dismissed as not pressed.