HOLLIS VITRIFIED PRIVATE LIMITED,MORBI, GUJARAT, INDIA vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX - 1, RAJKOT, RAJKOT, GUJARAT, INDIA

Later on, Learned Principal Commissioner of Income-tax (in short “Ld PCIT”) has exercised his jurisdiction under section 263 of the Income- tax Act, 1961. On perusal of case records, it was observed by ld.PCIT that the assessee had introduced huge amount in the company account in the form of Share Application money amounting Rs. 10,15,00,000/-. On perusal of the audit report of the current year (under assessment) vis-a-vis audit report of the previous year revealed that the company has received share Page 2 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. capital & share premium to the tune of Rs. 10,15,00,000/- in financial year (F.Y.) 2017-18. It was further observed by ld.PCIT that share capital and share premium and unsecured loans has been received from 30 persons. Although the assessment record contains the names of all the 30 persons, however, the available details as per the records are incomplete. The records reveal that assessee has submitted only details like Acknowledgement of return of income for all the 30 persons for assessment year (AY) 2018-19 and Bank statements of the depositors only, other than these two details, no others details to prove the credit worthiness of the investors has been filed. The share capital, share premium and unsecured loan received by the assessee from these 30 persons were thoroughly verified. Out of 30 persons, some 25 persons did not have sufficient creditworthiness to make such huge capital. Considering these facts, notice u/s 263 of the Income-tax Act, 1961 was issued, dated 07.02.2024 and duly served upon the assessee, which is reproduced as under. "In your case, the Assessment for A.Y. 2018-19 was finalized u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Act on 01.04.2021 accepting the retum income of Rs. Nil 2. On perusal of record, it was seen that the case was selected for limited scrutiny under CASS mainly on the reason that "large share premium received during the year (verify applicability of section 56(2)(viib) or any other relevant section). Therefore, it was incumbent upon the assessing officer to verify all the aspects of the share capital minutely. It was seen that during the previous year 2017-18 relevant to A. Y. 2018-19, the assessee company has received share capital & share premium to the tune of Rs. 10,15,00,000/- which have been subscribed by 30 persons/ entities. Unsecured loans have also been raised from various persons during the year under consideration. 3.The assessee, during the course of assessment proceedings, submitted various documents in support of such share capital receipt and unsecured loans. On perusal of such documents, it was seen that many of such share subscribers have declared returned income in the income bracket of Rs.0.15 lacs to Rs. 5.00 lacs and claimed to have invested amount 6 to 466 times higher to their income which proves that these subscribers are not persons having capacity of making Page 3 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. investments irrespective of the chances of return on investments. It is not a secret that share investment in an un-listed company does not give easy exit route and are normally illiquid for a considerable time with few/limited exit options. Further, looking to the income declared by the assessee company, it can be stated that no reasonable return on such investment by way of dividend is visible in these cases. In such scenario, no prudent investor would like to stack such huge amount of money in shares of the assessee- company where no return on investment appeared forthcoming. It was also observed that the assessee had not furnished balance sheet of most of subscribers/lenders in order to gauge the creditworthiness of such subscribers. From the submissions, it is seen that the bank entries of these persons who have invested in the share capital or lent unsecured loans to the assessee are backed by immediate cash/cheque deposits. For example, in case of Shri Anandbhai Dhanjibhai Janva who has invested Rs. 7,47,500/- in the shares and given Rs. 17,52,500/- as loan, having capital of Rs. 8,52,800/-, only as per the balance sheet for the year ended as on 31.03.2018 of Shri Anandbhai Dhanjibhai Janve. The assessing officer has not bothered to examine the true nature of this money and its source in the hands of these shareholders/loan providers.

In the present case, apart from filing of ITR, Bank Statement and balance sheet in some cases, no explanation of these share- holders (i.e. the person in whose name the share capital is recorded in the books of assessee-company)is available on record explaining the nature and source of their investment recorded in the books of assessee-company. It is thus seen that the assessing officer accepted the claim of genuineness of Share Capital Investment without making inquiries or verification of the claim, as prescribed in clause (a) & (b) of first proviso to section 68 of the Act.

Further, in respect of cases where balance sheets were filed, it is seen that huge unsecured loans were shown as the source for share investment in the assessee- company. From the Balance Sheets / Bank Statements, it appears that most of these loans have been taken for the purpose of Share Capital Investment and unsecured loans. For example, in the case of Shri Ashishkumar AmarshibhaiKagathara, whereas his own capital is Rs. 55.28 lacs, loan taken is about Rs. 126.04 Lacs from which Share Capital and Unsecured loans are provided. Similarly, in the case of Shri MaulikbhaiHasmukhbhaiHalvadia, it is seen that his own capital is Rs.21.93 lacs whereas Rs.40.60 lacs is claimed to have been taken as loan from which Rs. 12.90 lacs invested in the Share Capital and Rs.37.10 lacs is provided as loan during the year. It is further noted that Shri Jayantilal Prabhudashas shown returned income of Rs. 14,960/- which also raises grave doubts on the creditworthiness of the person of investing Rs.69.81 lacs in share capital and unsecured loan during the year under consideration. These are only few instances of such glaring discrepancies and manipulation of Books. The above point to glaring and obvious mismatch/discrepancies between the source of income/funds and the capacity/creditworthiness for making investment in the Share Capital as well as in providing loans. These glaring Page 4 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. discrepancies/mismatches should have raised the antenna of the assessing officer and he should have conducted necessary enquiries/verifications. However, the assessing officer accepted the share capital investment and loans without carrying out inquiry/verification that should have been done.

First proviso to section 68 of the Act clearly provides that in respect of share capital, explanation offered by the assessee-company shall be deemed to be not satisfactory unless the shareholders offers explanation about the nature and source of such investment and the assessing officer is satisfied about such explanation. First proviso to section 68 of the Act is as under- "Provided that where the assessee is a company (not being a company in which the public are substantially interest), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (1). The person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited, and (2). Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory 7. Recently, Hon'ble Supreme Court in a landmark judgment in the case of PCIT (Central)-1 vs. NRA Iron & Steel Pvt. Ltd [2019] 103 taxmann.com 48 (SC) vide order dated. 5/3/2019 upheld the addition of Share Capital/Share Premium in the hands of the Company, in similar facts. The Hon'ble Supreme Court analyzed and discussed various judgments so far on section 68 and pronounced the said judgement. The relevant portion of the above judgment is reproduced hereunder for ready reference "11. The principles which emerge where sums of money are credited as Share Capital/Premium are i The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the assessing officer, so as to discharge the primary onus. ii The Assessing Officer is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established.

It is evident from the facts of the case that the assessing officer, who is duty bound to verify and enquire/investigate the identity and credit-worthiness of the lenders/shareholder and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders, has failed to conduct even preliminary verifications, leave alone conducting investigations and accepted the share capital as well as the unsecured loans as genuine.

The facts mentioned above show that the assessment order passed u/s 143(3) r.w.s. 143(3A) & 143(38) of the Act on 01.04.2021 by the Assessing Officer for the A.Y. 2018-19 is erroneous in so far as it is prejudicial to the interests of Revenue as the assessing officer has passed the assessment order without making inquiries or verification which should have been made. In view of the above, I hereby initiate proceedings u/s 263 of the Act with a view to pass a suitable order. Before passing of such order, you are hereby given an opportunity of being heard in the matter. In this connection you are requested to furnish your reply/submission / explanation or objection if any by mail address idrajkot.cit1@incometax.gov.in/speed post/personally to this office on or before 14.02.2024” 4. In response to such notice, the assessee, vide letter dated 15.02.2024 has requested for adjournment till 21.02.2024. However, the assessee submitted its reply on 29-02-2024 before the ld. PCIT. The assessee submitted that during the course of assessment proceedings, the A.O. raised specific queries with respect to the said 'Share Premium' charged on the shares allotted during the year including valuation of shares and in response, the detailed submission was furnished before the ld. A.O. by clearly justifying valuation of shares at Rs.25.86 per share against issue price of Rs. 20/- per share as required u/s. 56(2) (viib) of the Act. Besides, the assessee also submitted required details and documents before the assessing officer for each shareholder, to prove identity, creditworthiness and genuineness, therefore assessment order framed by the assessing officer should not be erroneous and prejudicial to the interest of the revenue.

However, the Pr. CIT rejected the above reply of the assessee and observed that the contention of the assessee that as the case was selected for limited scrutiny, examination of the creditworthiness etc. of the persons who have invested in share capital in terms of section 68 was outside the purview of the assessment proceedings. The contention of the assessee was not accepted by ld. PCIT. One of the reasons for selection of case under scrutiny is large share premium received during the year. Share premium is paid as part of investment in share capital of the company, hence while examining the share premium, it was incumbent on the assessing officer to examine the identity and creditworthiness of the persons who have subscribed to share capital and paid share premium and the genuineness of such transactions. During the course of assessment proceedings, assessee submitted various documents in support of such share capital receipt and unsecured loans. On perusal of such documents, it was seen that many of such share subscribers have declared returned income in the income bracket of Rs.0.15 lacs to Rs.5.00 lacs and claimed to have invested amount to 400 times higher to their income which proves that these subscribers are not persons having capacity of making investments irrespective of the chances of return on investments. It is not a secret that share investment in an un-listed company does not give easy exit route and are normally liquid for considerable time with few limited exit options. Further, looking to the income declared by the assessee- company can be stated that no reasonable return on such investment by way of dividend is visible in these cases in such scenario, no prudent investor would like to stack such huge amount of money in shares of the assessee- company where no return on investment appeared forthcoming. It was also observed that the assessee had not furnished balance sheet of Page 7 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. most of subscribers lenders in order to gauge the creditworthiness of such subscribers. From the submissions, it is seen that the bank entries of these persons who have invested in the share capital or lent unsecured loans to the assessee are backed by immediate cash/cheque deposits. For example, in case of Shin Anandthai Dhanithailanva who has invested Rs.7,47,500/- in the shares and given Rs.17,52,500/- as loan having capital of Rs.8,52,800/- only as per the balance sheet for the year ended as on 31.03.2018 of Shri Anandbiha Dhanjibhajanva. The assessing officer has not bothered to examine the true nature of this money and its source in the hands of these shareholders/loan providers.

The ld. PCIT noted that in the present case, apart from fling of ITR, Bank Statement and balance sheet some cases, explanation of these shareholders (i.e., the person in whose name the share capital is recorded in the books of assessor company is available on record explaining the nature and source of their investment recorded in the books of assessee-company. It is thus seen that the assessing officer accepted the claim of genuineness of Share Capital Investment without making inquiries or verification of the claim, as prescribed in clause (a) & (b) of first proviso to sec. 68 of the Act. In respect of cases, where balance sheets were filed, it is seen that huge unsecured loans were shown as the source for share investment in the assessee-company. From the Balance Sheets/Bank Statements, it appears that most of these loans have been taken for the purpose of Share Capital Investment and unsecured loans. For example, in the case of Shri Ashishkumar Amarshibha Kagattara, whereas his own capital is Rs.55.28 lacs, loan taken is about Rs.126.04 Lacs from which Share Capital and unsecured loans are provided. Similarly, in the case of Shri Mallabha Page 8 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. Hasmukhbhal Halvadia, it is seen that his own capital is Rs.21.93 lacs whereas Rs.40.60 lacs is claimed to have been taken as loan from which Rs.12.90 lacs invested in the Share Capital and Rs.37.10 lacs is provided as loan during the year and it is further noted that Shri Jayantilal Prabhudashas shown returned income of Rs.14,960/-, which also raises grave doubts on the creditworthiness of the person of investing Rs.69.81 lacs in share capital and unsecured loan during the year under consideration. These are only few instances of such glaring discrepancies and manipulation of Books. The above point to glaring and obvious mismatch/discrepancies between the source of income/funds and the capacity/creditworthiness for making investment in the Share Capital as well as in providing loans. These glaring discrepancies/mismatches should have raised the antenna of the assessing officer and he should have conducted necessary enquiries/verifications. However, the assessing officer accepted the share capital investment and loans without carrying out inquiry/verification that should have been done. The assessee was also required to furnish the explanation about nature & source as well as to prove the capacity of creditors to advance money. However, the assessee failed to furnish/prove the same. The assessing officer did not carry out any enquiry to examine the creditworthiness of the persons who are said to have subscribed to the share capital in view of the huge discrepancies/mismatches as mentioned above.

The ld. PCIT noted that it is a trite law, approved and reiterated by Hon'ble Supreme Court in several of its judgements, that to satisfactorily explain the nature and source the assessee must establish the following three ingredients: (1) Identity of his creditors, (2) Capacity of creditors to advance money, and (3) Genuineness of transaction. The assessee not only has to Page 9 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. give explanation about nature & source on three basic ingredients, the explanation has to be proper, reasonable & acceptable. Hon'ble Supreme Court in the case of CIT VS. P. Mohanakala 291 ITR 278 (SC), while considering the scope of section 68, observed that the expression the assessee offers no explanation means where the assessee offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. While discussing the phrases proper, reasonable & acceptable, Hon'ble Apex Court in case of CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) has pronounced that "Science has not yet invented any instrument to test the reliability of the evidence placed before a Court or Tribunal. Therefore, the Courts and Tribunals have to judge the evidence before them by applying the test of human probabilities" This test of human probability has again been reiterated by Hon'ble Apex Court in the case of Sumati Dayal v. CIT (214 ITR 801 (SC), wherein it was specifically pronounced that revenue authorities are supposed to consider the surrounding circumstances and apply human probability.The principles which emerge where sums of money are credited as Share Capital/Premium are:

The ld.PCIT also noticed that under section 68, the onus is on the assessee to offer explanation where any sum is found credited in the books of account and where the assessee fails to prove to the satisfaction of the Assessing Officer, the source and nature of the amount of cash credits, he is entitled to draw an inference that the credit entries represent income taxable in the hands of the assessee. It is not the duty of the Assessing Officer to locate the exact source of the cash credits. The burden to identify the source lies upon the assessee and he is required to explain the genuineness of the credit entry. Hon'ble Delhi High Court in the case of CIT v Independent Media (P.) Ltd. [2012] 25 taxmann.com 276 (Delhi) held that for making addition under section 68, it is not incumbent upon assessing officer to establish that money had come from assessee's coffers. In A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR 807 (SC), Supreme Court observed that it was not the duty of the Revenue to adduce evidence to show from what source, income was derived and why it should be treated as concealed income. The assessee must prove satisfactorily the source and nature of cash received during the accounting year. Similarly, observations were made in Page 11 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. CIT v. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC), inter alia holding that it was not necessary for the Revenue to locate the exact source. This principle was reiterated in CIT v. Devi Prasad Vishwanath [1969] 72 ITR 194 (SC), wherein the contention that the Assessing Officer should indicate the source of income before it was taxable, was described as an incorrect legal position. Thus, when there is an unexplained cash credit, it is open to the Assessing Officer to hold that it was income of the assessee and no further burden lies on him to show the source. If assessing officer is not satisfied and asks additional evidences from assessee, the assessee is duty bound to produce further details or persons for verification. The assessee cannot take the plea that he has submitted some papers and his onus has been discharged. If assessing officer tries to probe on his own, and gathers some material, which is sufficient to cast doubt on source & nature of credit, it is the duty of assessee to provide further explanation and material as required by assessing officer. Similarly, if the assessing officer at any stage of probe reaches a dead end, and informs the assessee about the same, it is duty of assessee, to help him in and provide whatever is asked and is in his possession, to resolve that dead end. This position of shifting of onus depends on the specific facts of any case.

The Ld. PCIT relied on the judgment of Hon'ble Delhi High Court in the case of Riddhi Promoters (P.) Ltd. v. CIT [2015] 58 taxmann.com 367 (Delhi) wherein it was held that it is not sufficient that the identity of the share applicant or the creditor should be established for the assessee to discharge the initial onus, which is upon the assessee. Under the requirement of Section 68, the assessee has to further satisfy the Revenue as to the genuineness of the transaction and the creditworthiness of the share Page 12 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. applicant or the individual who is advancing amounts. The ld. PCIT further relied on the following decisions: (1)Though the Assessing Officers, often, acts on confirmatory letters as evidence, the onus does not get discharged merely by such confirmatory letters as found in CIT v. United Commercial and industrial Co. (Pvt.) Ltd. [1991] 187 ITR 596 (Cal). (2)In the case of Kamal Motors v. CIT [2003] 131 Taxman 155 (Raj.), it was held that the responsibility is on the assessee to discharge the onus that the cash creditor is a man of means to allow the cash credit. (3) Hon'ble Rajkot bench of ITAT in the case of Lado Ceramic (P.) Ltd. v. PCIT [2023] 157 taxmann.com 194 (Rajkot - Trib.) held that where assessee had issued equity share to certain persons and out of 21 persons, only four persons had filed their balance sheets, which showed that huge amount of unsecured loans was availed by them and investments in share capital of assessee-company were made out of borrowed funds but A.O had accepted said share capital investment, enquiry made by Assessing Officer was not adequate and accordingly, order passed by Assessing Officer was erroneous and prejudicial to interests of revenue. (4)In the case of Umesh Krishnani v. ITO [2013] 35 taxmann.com 598/217 Taxman 13 (Gujarat), the Gujarat High Court held that where substantial amount was deposited in bank accounts of lenders shortly prior to issuance of cheques by them, transaction in question being sham, loan amount was to be added to assessee's taxable income under section 68. (5) In the case of Neelkanth Commensals (P.) Ltd. v. ITO [2022] 135 taxmann.com (Calcutta), the Hon'ble High Court held that even under non- amended provision of Section 68, an Income-tax Officer was not precluded from making an inquiry about true nature and source of sum found credited in books of assessee, even if same was credited as receipt of share application money. (6) Hon'ble Ahmedabad bench of ITAT in the case of Maharaja Corporate Services (P.) Ltd. v. ITO [2024] 158 taxmann.com 42 (Ahmedabad - Trib.) held that simply because a transaction has been carried out through banking channels or confirmation of the parties has been furnished would not make a non-genuine transaction into genuine one, and all the concerning facts of the case to be looked into in totality.

The ld. PCIT noticed that it is evident from the facts of the case that the assessing officer, who is duty bound to verify and enquire the identity and credit-worthiness of the creditor and ascertain whether the transaction is Page 13 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. genuine, or these are bogus entries of name-lenders etc, has failed to conduct even preliminary verifications and accepted the unsecured loans as genuine. In the case of CIT v. Deepak Kumar Garg [2008] 299 ITR 435 (Madhya Pradesh), the High Court held that where from order of Assessing Officer, it was clear that where the Assessing Officer had done only a semblance of enquiry and, that too, in very slipshod manner and Assessing Officer had accepted version of assessee without proper enquiry, as a result of which substantial amount of taxable income was not brought to tax, Commissioner rightly held assessment order as erroneous and prejudicial to interest of revenue. In view of the above facts, it was observed by ld. PCIT that the order passed u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Income-tax Act, 1961 on 01/04/2021 by the assessing officer is erroneous since the assessing officer not made inquiries regarding creditworthiness of persons who are said to have subscribed to the share capital of the assessee- company. It is a settled legal position that any order passed by the assessing officer without proper inquiry and investigation is erroneous and prejudicial to the interest of revenue. The assessing officer passed the assessment order without examination, enquiry and verification in respect of the issue(s) raised in the Show Cause Notice. It was held by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 109 Taxman 66/243 ITR 83 (SC) that if due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. Hon'ble Supreme Court in the case of CIT v. Paville Projects (P.) Ltd. [2023] 149 taxmann.com 115 (SC) has held as under: "7.2 Thus, even as observed in paragraph 9 by this Court in the case of Malabar Industrial Co. Ltd. (supra) that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. It is further observed that if due to an erroneous Page 14 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. order of the Income-tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. However, only in a case where two views are possible and the Assessing Officer has adopted one view, such a decision, which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under section 263."

Hon'ble Bombay High court in the case of Vedanta Ltd [2021] 124 taxmann.com 435 has held that "Where assessment was completed without proper inquiries, Commissioner was competent to invoke revisional jurisdiction and direct Assessing Officer for fresh assessment". Hon'ble Kolkata High court in the case of Daniel Merchants (P.) Ltd. [2018] 95 taxmann.com 365 (SLP dismissed by Hon'ble Supreme Court in [2018] 95 taxmann.com 366) has held as under: "5. In all these cases, we find that the Commissioner of Income Tax had passed an order under section 263 of the Income-tax Act, 1961 with the observations that the Assessing Officer did not make any proper inquiry while making the assessment and accepting the explanation of the assessee(s) insofar as receipt of share application money is concerned. On that basis the Commissioner of Income Tax had, after setting aside the order of the Assessing Officer, simply directed the Assessing Officer to carry thorough and detailed inquiry. It is this order which is upheld by the High Court. We see no reason to interfere with the order of the High Court."

It has been held in the following cases that jurisdiction of revision proceedings u/s 263 by the Commissioner is warranted in a case where assessments have been made without enquiry or verification: (i) CIT v. Himachal Pradesh Financial Corpn. [2010] 186 Taxman 105 (Himachal Pradesh) The Commissioner has power to exercise jurisdiction, if the order of the Income-tax Officer is erroneous and prejudicial to the interest of the Revenue. An incorrect assumption of fact or an incorrect application of law would satisfy the requirement of the order being erroneous. The expression "prejudicial to the interest of Revenue" as understood in its ordinary meaning is of wide import and not confined to the loss of tax alone. If due to an erroneous order of the Assessing Officer, the revenue is loosing, as lawfully payable by a person, it should be certainly prejudicial to the interest of Revenue. (ii) CIT v. Jawahar Bhattacharjee [2012] 24 taxmann.com 215 (Gauhati)

The ld. PCIT also noted that with effect from 01/06/2015, Explanation 2 to the section 263(1) has been inserted by which scope of section 263 of the Act has been expanded by incorporating the concept of "deemed to be erroneous". The same is reproduced as under: “Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, it, in the opinion of the Principal Commissioner or Commissioner; - (a) The order is passed without making inquiries or verification which should have been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order, direction or instruction issued by the Board under Section 119; or (d) rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. The order has not been passed in accordance with any decision which is prejudicial to the assessee, 14. Once in the opinion of Ld. PCIT, the order is passed without making inquiries or verification which should have been done is not done, such order Page 16 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. needs to be treated as "erroneous". It is apparent from assessment order that assessing officer has not applied his mind and has not conducted any enquiry. Keeping in view above these facts, the ld PCIT was of the view that this is a fit case for invoking section 263 of 1. T. Act, as the twin conditions namely, (i) the order of the Assessing Officer sought to be revised is erroneous: and (ii) it is prejudicial to the interests of the revenue, are satisfied. Accordingly, the impugned assessment order passed by the A.O. u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Income-tax Act, 1961 on 01/04/2021 was set aside by ld. PCIT for fresh assessment only to the extent of the issues discussed (supra) and ld. PCIT directed the Assessing Officer to pass a fresh assessment order after making necessary enquiries.

Aggrieved by the order of ld. Pr. CIT, the assessee is in appeal before us.

Learned Counsel for the assessee, vehemently argued that assessee’s case was reopened for limited scrutiny purpose to verify the exports and to verify the share premium/share capital. The Assessing Officer to verify the share premium, has issued the notice to the assessee, which is placed at paper book page no. 59 wherein specific query was raised by the ld. A.O. In response to the notice of the Assessing Officer during the assessing proceedings, the assessee submitted its reply before the A.O. and following documents were produced:

On the other hand, ld. D.R. for the revenue submitted that assessee’s case pertains to assessment at 2018-19, therefore assessee needs to prove source of the source in respect of the share capital/share premium received by it, however, no any documentary evidences were produced by the assessee, before the assessing officer to prove the source of source as per the mandatory requirement of section 68 of the Act. The ld DR further stated that even to prove the source of the share capital/share premium, assessee has not furnished the sufficient documentary evidences.

The ld. D.R. for the revenue further submitted that assessing officer has not examined the share premium, and no question was asked by the assessing officer about how the share premium is fixed by the assessee. Just to rely on the certificate of the outsider in respect of the share premium is not sufficient. The A.O. need to conduct further inquiry whether the share premium amount fixed the assessee is correct or not.

The Ld. DR for the revenue also submitted that when the AO passed the appeal effect order u/s 143(3) r.w.s. 263 of the Act dated 24.03.2025 wherein the assessee even failed to prove the source of the source in respect of share capital. With effect from AY 2013-14, the assessee needs to prove the source of the source, in respect of share capital / share premium.

We have heard the rival parties and have gone through the material placed on record. For the sake of clarity and also being pertinent, we reproduce, the provisions of section 68 of the Income tax Act 1961, as follows: “Cash credits.

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year : Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,— (a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided also that nothing contained in the first proviso or second proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”

From the above provisions of section 68 of the Income Tax Act, it is vivid that where any sum is found credited in the books of an assessee Page 20 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the assessing officer, the sum so credited may be charged to income tax as the income of the assessee of that assessment year. The assessing officer may consider such sum as cash credit due to lack of sufficient explanation. It is well known that provisions of section 68 have been introduced into the taxing enactments step by step in order to plug loopholes. Even long prior to the introduction of section 68 of the Act, in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the assessing officer, is not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of the relevant assessment year. We note that with effect from assessment year 2013-14, section 68 of the Income Tax Act has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the assessing officer, (source of the source) the same shall be deemed to be the income of the company under section 68 of the Act. We note that the amended provisions of section 68, is applicable to the assessee -company under consideration, as the assessee`s, assessment year is 2018-19. The Hon`ble Bombay High Court, in the case of Gagandeep Infrastructure 80 Taxmann.Com 272 (Bom), held that amendment to section 68 is prospective and applicable only from assessment year 2013-14. Therefore, as per mandatory provisions of section 68 of the Act, the assessee needs to explain the source of the source, however, we note that assessee has failed to file the Page 21 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. relevant documentary evidences before the assessing officer to prove the source of the source, in respect of the share capital/share premium, therefore, assessment order framed by the assessing officer is not sustainable in the eye of law and it is erroneous as mandatory provisions of section 68 were not followed by the assessing officer.

We also note that for unsecured loan, the assessee has also failed to prove the source and assessee also failed to prove the creditworthiness and genuineness of the loan, hence assessment order framed by the assessing officer, is erroneous and prejudicial to the interest of the revenue. We note that the assessee- company has received share capital & share premium to the tune of Rs.10,15,00,000/- in financial year (F.Y.) 2017-18 and the share capital and share premium and unsecured loans has been received from 30 persons. Although the assessment record contains the names of all the 30 persons, however, the available details as per the records are incomplete. The records reveal that assessee has submitted only details like Acknowledgement of return of income for all the 30 persons for assessment year (AY) 2018-19 and Bank statements of the depositors only, other than these two details, no others details to prove the credit worthiness of the investors has been filed. The share capital, share premium and unsecured loan received by the assessee from these 30 persons were thoroughly verified by ld. PCIT and ld. PCIT noted that out of 30 persons, the 25 persons did not have sufficient creditworthiness to make such huge capital and assessing officer has not examined these facts. Therefore, order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue.

We also note that assessing officer has framed the appeal effect order under section 263 read with section 143(3) of the Act, read with section 144B of the Act, dated 14.03.2025. In this appeal effect order, the assessee again failed to file the documentary evidence to prove the source of the source in respect of share capital/share premium, and source in respect of unsecured loan. The findings of the assessing officer in the appeal effect order is reproduced below for ready reference: “3.6 Summary of information evidence collected after SCN (if any). 3.7 Point-wise rebuttal of reply of the assessed including analysis of any case law relied upon. 3.7.1 The assessee in his reply stated the show cause notice issued proposing the addition of Rs.31,34,61,409/- is high pitched assessment and traveling beyond the jurisdiction conferred by virtue of order u/s 263 of the act. The assessee further stated that the Hon'ble PCIT, vide impugned order u/s. 263 of the Act dated 31.03.2024, has set-aside the aforesaid assessment order passed u/s. 143(3) of the Act dated 01.04.2021 by the Id. A.O. under the 'Limited Scrutiny' criterion only by doubting the creditworthiness of shareholders as well as non-compliance to the requirements of the Proviso to Section 68 of the Act. In view of his contention, it is submitted that in similar case of PCIT (Central)-1vs NRS Iron 7 Steel Pvt. Ltd. [2019], Hon'ble Supreme court upheld the addition of share capital/share premium in the hands of the company. The relevant portion of the above judgment is reproduced hereunder for ready reference:- "11. The principles which emerge where sums of money are credited as Share Capital/Premium are: 1. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the question to the satisfaction of the assessing officer, so as to discharge the primary onus.

The Assessing Officer is duty bound to investigate the credit-worthiness of the user, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders 3. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubt, or lack credit-worthiness, then the genuineness of the transaction would not be established.

Therefore, we find merit in the submissions of Learned DR for the revenue, who has explained that proviso to section 68 was inserted with effect from 01.04.2013 and as per the said proviso, the assessee needs to prove “Source of the Source”. The ld DR pointed out that considering the contents of the assessment order, neither the assessing officer examined the “Source of the Source”, nor assessee has submitted documents/evidences to explain “Source of the Source”. Before making investment in shares of the assessee company, there is sufficient cash deposit in the bank account of share applicants and the same has escaped from examination by the assessing officer. As the assessment year involved in the assessee`s case is the assessment year 2018-19, where amended provisions of section are clearly applicable to the assessee. For loan transaction, the Page 33 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. assessee has not furnished the documents pertaining to source. Hence, assessment order passed by the assessing officer, is erroneous and prejudicial to the interest of the revenue.

To deal with the mandate of the provisions of section 263 of the I.T. Act, 1961, it is important to remember that the assessing officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this context. It is because it is incumbent on the assessing officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word 'erroneous' in the section 263 includes the failure to make such an inquiry becomes erroneous because such an -inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.Hence, going by the facts narrated above, the language of the Provisions of Section 263 and the interpretation placed on these provisions by the various Courts, the order of the assessing officer falls within the category of being an order which is erroneous as well as prejudicial to the interest of the revenue. In this interpretation of the provisions of the section 263, we relied on the decision of the Hon'ble Delhi High Court delivered in the case of Gee Vee Enterprises vs Add.CIT(1975) 99 ITR 375 (Delhi). The same view has also been held by the Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd vs. CIT 243 ITR 83 (SC). The relevant portion of this Page 34 of A.Y. 2018-19 Hollis Vitrified Pvt. Ltd. judgment which supports our view made in this paragraph above is reproduced as under: "An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind."

We note that the order u/s. 263 of the I.T. Act, 1961 is valid even if one of the several items dealt with therein is found prejudicial to the interest of revenue and for this proposition of law, we place reliance on the decision of Hon'ble Madras High Court in the case of Indian Textiles Vs. CIT, 157 ITR 112 (Madras). Further, it is also important to mention here that the provisions of section 263 can be invoked even where full facts are disclosed but the assessing officer has not examined these details as per correct provisions of law. In support of this proposition, we place reliance on the decision of the Hon'ble Rajasthan High Court delivered in the case of CIT Vs. Emery Stone Manufacturing Company, 213 ITR 843 (Rajasthan). Further, the provisions of section 263 can be invoked even where the issue is debatable. For this proposition, we place reliance on the decision of Hon'ble Gujarat High Court delivered in the case of CIT Vs. M. M. Khambhatwala, 198 ITR 144 (Gujarat). Considering these facts and circumstances, we find that since the order of the Assessing Officer should be held to be erroneous as well as prejudicial to the interest of the revenue, in the facts and circumstances narrated above, therefore, the usurpation of jurisdiction exercising revisional jurisdiction by the Principal CIT, is valid in the eyes of law and, therefore, we uphold the very assumption of jurisdiction to invoke revisional jurisdiction u/s 263 by the Principal CIT. Therefore, we dismissed the appeal of the assessee.