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Facts
The Revenue appealed against the CIT(A)'s deletion of an addition of Rs. 2.75 crores made by the AO for AY 2011-12. The addition was on account of share capital and premium treated as unexplained cash credit under Section 68. The AO reopened the assessment based on the forfeiture of this amount by the assessee.
Held
The Tribunal held that the CIT(A) correctly deleted the addition as the assessee had discharged its onus under Section 68 by providing identity, genuineness, and creditworthiness of the investor. The AO failed to disprove the evidence and the amended proviso to Section 68 was not retrospective.
Key Issues
Whether the addition made by the AO under Section 68 on account of share capital and premium as unexplained cash credit is justified, considering the assessee's evidence and the applicability of amended Section 68.
Sections Cited
68, 147, 148, 151, 131, 143(3)
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Income Tax Appellate Tribunal, “ C ” BENCH, AHMEDABAD
Before: MS. SUCHITRA KAMBLE & SHRI MAKARAND V. MAHADEOKAR
आयकर अपील सं / Asst.Year 2011-12 AND Cross Objection No.38/Ahd/2024 – Asst.Year 2011-12 (in – AY 2011-12) The Income Tax Officer Solace Capital Services बनाम/ Ward-4(1)(1) Pvt.Ltd. v/s. Ahmedabad O/702, Chandanbala Opp. Suvidha Shopping Centre Paldi, Ahmedabad-380 007 "थायी लेखा सं./PAN: AAOCS 7840 P अपीलाथ%/ (Appellant) / &' यथ%/ (Respondent / Cross Objector) Assessee by : Shri M. S. Chhajed, AR Revenue by : Shri Rignesh Das, Sr.DR सुनवाई की तारीख/Date of Hearing : 06/01/2025 घोषणा की तारीख /Date of Pronouncement: 08/01/2025 आदेश/O R D E R PER MAKARAND V. MAHADEOKAR, AM:
The present appeal by the revenue is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) – Delhi [hereinafter referred to as “CIT(A)”], dated 04/06/2024, for the Assessment Year (AY) 2011-12. The CIT(A) deleted the addition of Rs.2.75 crores made by the Assessing Officer [hereinafter referred to as “AO”] and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12 under Section 68 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] on account of share capital and premium treated as unexplained cash credit vide his order dated 28-12-2016 passed u/s 143(3) r.w.s. 147 of the Act. The assessee has filed Cross Objection No. 38/Ahd/2024 in case of the said appeal filed before us. The assessee’s cross-objection supports the order of the CIT(A) and raises additional contentions related to the procedural lapses in the reopening of the assessment. Therefore, we dispose both the appeal and cross objection by this common order.
Facts of the Case:
The original return of income was filed on 28/03/2012, declaring an income of Rs.8,450/-. The return was processed u/s 143(1) of the Act. Later on, an escapement of income was noticed, and the AO reopened the case under Section 147 of the Act. A notice under Section 148 of the Act was issued on 19/02/2016 after obtaining approval under Section 151 of the Act. The assessee requested the reasons for reopening, which were provided on 08/07/2016. The assessee raised objections to the reopening on 30/09/2016, but these objections were dismissed by a speaking order dated 14/10/2016.
During the course of the reassessment proceedings, the AO noted that the assessee company issued 1,00,000 shares at a premium of Rs.490/- per share (face value of Rs.10/-). The assessee received Rs.2.75 crores as call money against the share application money from Mr. Bhavik Suryakant Parikh. In the subsequent financial year (A.Y. 2012-13), the assessee recorded the forfeiture of the share application money. The forfeiture occurred because Mr. Bhavik Parikh failed to pay the remaining balance required for the and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12 allotment of shares. The forfeited amount was treated as capital reserve in the books of the assessee, as per the applicable accounting standards. This forfeiture was one of the key factors that prompted the AO to scrutinize the initial receipt of Rs.2.75 crores during A.Y. 2011-12, suspecting that the transaction was unexplained. The AO issued a summons under Section 131 of the Act to Mr. Parikh, requiring his physical appearance to verify the transaction. The AO claimed that Mr. Parikh did not respond to the summons and stated that his whereabouts were unknown. The AO doubted Mr. Parikh's financial capacity based on his gross declared income in his tax return, which was significantly lower than the investment made. The AO remarked that the documents were submitted close to the time-barring date (21/12/2016), making it difficult for the AO to complete further verification. The AO treated the entire amount of Rs.2.75 crores as unexplained cash credit under Section 68 of the Act.
4. The assessee filed an appeal before the CIT(A) with additional grounds of appeal. The CIT(A) admitted the assessee’s additional grounds of appeal regarding the validity of the reopening of assessment, as they related to the jurisdiction of the AO and were legal in nature, going to the root of the assessment proceedings. The CIT(A) noted that the addition was made by the AO on the grounds that the investor, Mr. Bhavik Parikh, was allegedly not produced before the AO and the AO was not satisfied with the investor’s financial capacity based on his return of income for A.Y. 2011-12, which reflected low income. The CIT also noted that the AO pointed to frequent debits and credits in the investor’s bank account as indicating non-genuine transactions. The CIT(A) found that the investor appeared before the AO on 26/12/2016 and submitted his bank statement, ITR acknowledgment, and and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12 other documents. The AO did not record a formal statement and made no corresponding order sheet entry. The CIT(A) issued a letter dated 13/02/2018, requesting a report from the AO regarding these facts, but no response was received. The CIT(A) observed that the summons was served at the investor’s address, and he filed a letter before the AO on 21/12/2016, furnishing his bank statement and ITR, facts that the AO omitted in his assessment order. The CIT(A) observed that the assessee had discharged its onus under Section 68 by providing Proof of identity (PAN details, address, and ITR of Mr. Parikh), evidence of genuineness (bank entries and appearance of Mr. Parikh before the AO) and evidence of creditworthiness (bank statement showing a sufficient balance for the investment). The CIT(A) held that the frequent debits and credits in the bank account were non-cash transactions and did not indicate any adverse inference. The CIT(A) referred to the judgment in the case of Gagandeep Infrastructure P. Ltd. [2017] 80 taxmann.com 272 (Bombay HC) to conclude that the amended proviso to Section 68, requiring an explanation of the "source of source," was applicable only prospectively from 01/04/2013 and did not apply to A.Y. 2011-12. Since the only substantive addition under Section 68 was deleted, the CIT(A) deemed the adjudication of the additional grounds challenging the reopening as academic and did not decide on them separately.
Aggrieved by the order of the CIT(A), the revenue is in appeal before us with following grounds of appeal:
(a) The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs. 2,75,00,000/- made by the AO on account of share capital/share premium treated as unexplained cash credit u/s 68 of the IT Act. and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12 5 (b) The appellant craves leave to add, alter and /or to amend all or any the ground before the final hearing of the appeal.
5.1. The assessee filed cross objection with following grounds:
1. The order passed by the Ld. A.O. is against the law, equity and justice.
2. Reopening of assessment is bad and illegal as Ld. AO has assumed jurisdiction on the basis of reasons to suspect.
3. Reopening of assessment is bad and illegal as the reasons for reopening of assessment are recorded by Ld AO subsequent to the approval granted by the Ld JCIT u/s. 151 of the Act.
Appellant craves liberty to add, modify, amend or alter any grounds of appeal before final hearing.
During the course of hearing before us, the Departmental Representative (DR) contended that the CIT(A) failed to seek a remand report during the faceless appeal proceedings, depriving the AO of an opportunity to defend his order. The DR argued that the documents were submitted late during the assessment proceedings, restricting the AO’s ability to verify the investor’s financial capacity.
The Authorized Representative (AR) on the other hand emphasized that Mr. Bhavik Parikh appeared before the AO with supporting documents, including Bank statement showing a sufficient balance, ITR acknowledgment and computation of income and ledger accounts confirming the transaction. The AR contended that the AO failed to record Mr. Parikh’s statement despite his appearance. and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12
On the legal grounds of Cross Objection, the AR contended that the notice under Section 148 was issued on 19/02/2016 after obtaining approval under Section 151. The AR placed reliance on the decision of the co-ordinate bench in case of Shri Tehmul B. Sethana Vs. DICT (ITA No.1743/Ahd/2019), wherein it was held that the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, were invalid due to a procedural flaw in obtaining approval under Section 151 of the Act as the AO sought approval from the JCIT before recording the reasons to believe that income has escaped assessment.
We have heard the contentions of both the parties, perused the records, and examined the order of the CIT(A) as well as the assessment order. The primary issue for adjudication pertains to the addition of Rs.2.75 crores made by the AO under Section 68 of the Act on account of share capital and share premium treated as unexplained cash credit. The DR argued that the CIT(A) erred in deleting the addition without seeking a remand report from the AO during the faceless appeal proceedings. The DR contended that the late submission of documents by the assessee during the assessment constrained the AO’s ability to conduct a thorough verification, particularly regarding the financial capacity of the investor, Mr. Bhavik Parikh. The AR, on the other hand, submitted that Mr. Parikh appeared before the AO in response to the summons and provided all necessary documents, including his bank statement, ITR acknowledgment, and ledger accounts. The AR emphasized that the AO failed to record Mr. Parikh’s statement despite his physical appearance and instead proceeded with the addition based on assumptions. The AR further contended that the CIT(A), having co-terminus powers with and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12 the AO, was empowered to examine the evidence independently and adjudicate the matter on merit.
9.1. The CIT(A) has co-terminus powers with the AO, allowing independent examination of evidence and adjudication of the issues. In faceless appeal proceedings, the necessity for a remand report is significantly reduced, as all records and submissions are electronically available. The CIT(A) exercised these powers appropriately by thoroughly analyzing the evidence submitted by the assessee.
9.2. The CIT(A) rightly concluded that the assessee discharged its onus under Section 68 by proving the identity, genuineness, and creditworthiness of the investor, Mr. Bhavik Parikh: • Identity: The investor’s identity was undisputed, supported by his PAN, address, and ITR acknowledgment. • Genuineness: The transaction was conducted through banking channels, with payments made via cheque. The bank statement clearly reflected the transfer of share application money. • Creditworthiness: Though the investor’s income for A.Y. 2011-12 was low, the subsequent return for A.Y. 2012-13 showed substantial interest income, indicating an improved financial position.
9.3. The AO’s reliance on frequent debits and credits in Mr. Parikh’s bank account was found to be irrelevant, as they were non-cash transactions. The CIT(A) rightly held that this factor did not warrant an adverse inference.
9.4. We note that Mr. Parikh appeared before the AO on 26/12/2016 and submitted relevant documents, which the AO acknowledged but failed to and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12 formally record in the order sheet. The AO’s failure to record Mr. Parikh’s statement or conduct further inquiries despite his physical appearance demonstrates procedural lapses.
9.5. The amended proviso to Section 68, requiring companies to explain the “source of the source” of the share applicant’s funds, became applicable from 01/04/2013 and is not retrospective. The CIT(A) correctly applied the judgment in Gagandeep Infrastructure P. Ltd. [2017] 80 taxmann.com 272 (Bombay HC) and concluded that this proviso was inapplicable to A.Y. 2011- 12. 9.6. After considering the submissions and examining the records, we find that the CIT(A) conducted a detailed and reasoned analysis before deleting the addition under Section 68. The assessee provided sufficient evidence to prove the identity, genuineness, and creditworthiness of the investor, while the AO failed to disprove the evidence or bring any material to justify the addition. The addition made by the AO appears to be based on assumptions and lacks substantive basis. Accordingly, the appeal filed by the revenue is dismissed.
Since the Revenue’s appeal is dismissed on merit, the grounds raised by the Assessee in the cross-objection regarding the validity of the reopening become academic and are not adjudicated. and CO No.38/Ahd/2024 (By Assessee) ITO vs. Solace Capital Services Pvt.Ltd. Asst. Year : 2011-12
In the combined result, the appeal of the Revenue is dismissed and the Cross Objection filed by the Assessee is also dismissed as infructuous.