2025 (5) TMI 1710 - AT - Income Tax

Revision u/s 263 - lack of enquiry OR inadequate enquiry - reassessment proceedings initiated u/s 147 and completed u/s 143(3) read with section 147 were legally sustainable especially considering the grounds of reopening related to share issue expenses and not the genuineness of share capital or premium raised. HELD THAT - The assessee could not produce the Managing Director of the assessee company so the identity creditworthiness of the subscribers and genuineness of the transaction remained unexplained. Similarly CIT(A) confirmed the addition on the ground that there was no compliance to notice u/s.131 and assessee has failed to produce the evidences to prove the transactions with the shareholders. We note that AO has not given any details as to when the summons were issued to the shareholders. In this case the assessee has filed all the evidences comprising of confirmations from the subscribers ITRs acknowledgements audited financials of the subscribers list of names and addresses of the subscribing companies bank statements of the subscribers master data of the subscribers down loaded from the MCA portal etc. We even note that notices were issued u/s.133(6) by the AO to 25 share subscribers during the original assessment proceeding and same were complied with by the subscribers. The copies of the details submitted before the AO. Therefore the addition cannot be made only on the ground that summons u/s.131 of the Act were not complied with. No addition can be made in case of non-compliance of the notice u/s. 133(6)/summon u/s.131 of the Act though in the present case the notice u/s.133(6) were complied in the reassessment proceeding which culminated into passing of order u/s.143(3)/147 of the Act dated 29.04.2010. The addition cannot be made when the assessee has filed all the evidences before the authorities below and the authorities have failed to carry out any investigation on the said evidences and not pointed out any defect or deficiency. Appeal of the assessee stands allowed.

Summary

The core legal issues considered in this appeal are:

1. Whether the order passed by the Assessing Officer (AO) under section 143(3) read with section 263 of the Income Tax Act, 1961 (the Act) is valid, given that it was consequent to a revisionary order passed by the Principal Commissioner of Income Tax (Pr. CIT) under section 263, which the assessee contends is itself invalid and a nullity.

2. Whether the reassessment proceedings initiated under section 148 read with section 143(3) of the Act, based on reopening for alleged erroneous claim of share issue expenses, were valid and whether the AO conducted proper enquiry into the genuineness of share capital and share premium raised by the assessee.

3. Whether the AO was justified in making an addition under section 68 of the Act by treating the entire share capital and share premium of Rs. 12,86,00,000 as unexplained cash credit on account of non-compliance with summons under section 131 of the Act issued to the shareholders.

4. Whether the delay in filing the appeal was liable to be condoned.

Issue 1: Validity of the revisionary order under section 263 and consequential assessment order under section 143(3) r.w.s. 263

The legal framework mandates that revisionary powers under section 263 can be exercised only if the assessment order is erroneous and prejudicial to the interests of the revenue. The assessee contended that the reassessment order passed under section 143(3) r.w.s. 147 was valid and the revisionary order passed by the Pr. CIT under section 263 was illegal and a nullity, thus rendering all subsequent proceedings invalid.

The Court noted that the reopening under section 148 was on the ground of wrongful claim of share issue expenses and that the AO had conducted reassessment proceedings, including calling for evidences and issuing notices under section 133(6) to shareholders, which were complied with. The AO accepted the explanations and did not make any addition in the reassessment order dated 29.04.2010.

The Pr. CIT, however, invoked section 263 on the ground that the AO had not conducted proper enquiry into the share capital/share premium transactions, despite the evidences on record. The Pr. CIT set aside the reassessment order for fresh verification.

The Court observed that the assessee was entitled to challenge the validity of the revisionary order in collateral proceedings, citing precedents including the decision in Westlife Development Ltd. vs. PCIT and Barik Biswas vs. ACIT. These authorities establish that if the original assessment order is illegal or without jurisdiction, the validity of subsequent proceedings based on it can be examined in collateral proceedings.

Further, the Court found the show cause notice issued under section 263 defective as it failed to specify the grounds rendering the assessment order erroneous and prejudicial, violating principles of natural justice. This invalid notice vitiated the entire revisionary proceeding.

The Court also held that the AO had carried out enquiry by calling for information from the assessee and shareholders and had taken a plausible view accepting the genuineness of share capital and premium. Merely disagreeing with the AO's view does not empower the Pr. CIT to invoke section 263 unless both conditions of erroneousness and prejudice to revenue are satisfied simultaneously, as held in Malabar Industrial Co. Ltd. vs. CIT.

Additionally, the Court emphasized that section 263 cannot be invoked for inadequate enquiry but only for complete lack of enquiry. Since the AO had conducted enquiries, the revisionary jurisdiction was not validly exercised.

Lastly, even if revision was to be invoked on the original assessment order under section 143(1), it was barred by limitation under section 263(2), as per the Apex Court decision in PCIT vs. Alegendran Finance Ltd.

Accordingly, the Court concluded that the revisionary order under section 263 was invalid and a nullity, rendering the consequential assessment order under section 143(3) r.w.s. 263 invalid as well.

Issue 2: Validity of reassessment proceedings and adequacy of enquiry by AO

The reassessment was initiated on the basis of alleged wrongful claim of share issue expenses of Rs. 22,600. During reassessment, the AO called for evidence regarding share capital and premium raised from 39 subscribers, issued notices under section 133(6) to 25 subscribers, and examined the replies and documents furnished.

The AO accepted the explanations and did not make any addition in the reassessment order. The Court found that the AO had conducted independent verification and taken a plausible view on the facts and evidence.

The Pr. CIT's observation that the AO had not conducted proper enquiry was held to be insufficient to invoke section 263, as the AO's view cannot be substituted by the Pr. CIT merely because the latter disagrees, unless the AO's order is erroneous and prejudicial to revenue.

Thus, the Court held that the reassessment order was valid and the AO had conducted adequate enquiry.

Issue 3: Addition under section 68 on account of unexplained share capital and share premium

The AO, following the Pr. CIT's direction, issued summons under section 131 to shareholders to verify their identity, creditworthiness, and genuineness of transactions. None of the shareholders appeared, and the assessee failed to produce the directors of subscriber companies. Consequently, the AO treated the entire share capital and premium of Rs. 12,86,00,000 as unexplained cash credit and added it to the income under section 68.

The CIT(A) upheld this addition on the ground that initial onus lies on the assessee to establish identity, creditworthiness, and genuineness, especially in private placements where the shareholders are known to the assessee. The CIT(A) found that the assessee failed to discharge this onus satisfactorily.

The Court, however, noted that the assessee had filed extensive evidence including confirmations from subscribers, ITR acknowledgements, audited financials, bank statements, and MCA portal data. The AO had also issued notices under section 133(6) during reassessment, which were complied with by subscribers.

The Court held that non-compliance with summons under section 131 alone cannot justify addition when the assessee has furnished sufficient evidence and the AO failed to point out any defect or deficiency in the submissions. It relied on precedents including Pr. CIT vs. Sreeleathers and CIT vs. Gagandeep Infrastructure Pvt. Ltd., which emphasize that mere suspicion or non-appearance does not justify addition if adequate evidence is on record.

The Court further observed that the proviso to section 68 introduced w.e.f. AY 2013-14 does not apply retrospectively to AY 2008-09, and thus cannot be invoked in the present case.

Accordingly, the Court held that the addition under section 68 was not justified.

Issue 4: Condonation of delay

The appeal was time barred by 132 days. The Court found that the appellate order was served on an incorrect email address instead of the assessee's registered email. Considering the bonafide reasons in the condonation petition, the Court condoned the delay and admitted the appeal.

Significant holdings and principles established:

"The validity of the order passed in the primary (original) proceedings should be allowed to be examined even at the subsequent stages, only for the limited purpose of examining whether the collateral (subsequent) proceedings have been initiated on a valid legal platform or not and for examining the validity of assumption of jurisdiction to initiate the collateral proceedings."

"The jurisdiction under section 263 of the Act can be invoked only if the assessment order is both erroneous and prejudicial to the interests of the revenue and both conditions must be satisfied simultaneously."

"Section 263 cannot be invoked for inadequate enquiry by the Assessing Officer but only in cases of complete lack of enquiry."

"Non-compliance with summons under section 131 alone cannot justify addition under section 68 when the assessee has furnished sufficient evidence to establish the identity, creditworthiness, and genuineness of the shareholders and transactions."

"The proviso to section 68 introduced w.e.f. AY 2013-14 is not applicable retrospectively and cannot be invoked for assessment years prior to AY 2013-14."

"A defective or incomplete show cause notice under section 263 which does not specify the grounds rendering the assessment order erroneous and prejudicial to revenue violates principles of natural justice and vitiates the revisionary proceedings."

Final determinations:

- The delay in filing the appeal was condoned and the appeal admitted.

- The revisionary order passed under section 263 was invalid and a nullity due to defective notice and absence of conclusive findings on erroneousness and prejudice.

- The consequential assessment order passed under section 143(3) r.w.s. 263 was also invalid.

- The reassessment proceedings under section 148 read with section 143(3) were valid and the AO had conducted adequate enquiry.

- The addition under section 68 on account of unexplained share capital and premium was not justified as the assessee had discharged its onus by furnishing sufficient evidence and the AO failed to point out any deficiency.

- The appeal was allowed on both legal and merit grounds.