Earlier acceptance is relevant evidence in evaluating subsequent allegation of fictitious investment

Earlier acceptance of investment is a relevant evidence in evaluating subsequent allegation that investments were fictitious from inception – High Court

In a recent judgment, Hon’ble High Court has dismissed appeal of the Income Tax Department alleging fictitious investment observing that the earlier acceptance of the investments does not create an absolute bar against examination of a later sale transaction. However, it is a relevant evidence in evaluating the Revenue’s subsequent allegation that the very investments were fictitious from inception.

ABCAUS Case Law Citation:
5242 (2026) (10) abacus.in HC

Important Case Laws relied upon by Parties:
Commissioner of Income Tax v. Swati Bajaj, reported in [2022] 446 ITR 56.

In the instant case, the Revenue had challenged the deletion of an addition made by the ITAT under Section 68 of the Income Tax Act, 1961 (the Act) in respect of sale proceeds received by the respondent assessee on the sale of unlisted equity shares.

The Revenue contended that the purchaser entities were shell or paper companies, that the transactions were accommodation entries, and that the Tribunal failed to apply the test of human probabilities and the principles stated by the Hon’ble High Court.

The Hon’ble High Court observed that a substantial question must be a real, debatable question of law, not a question already settled by binding authority or a mere dispute as to the appreciation of evidence. A finding of fact may be interfered with only in a limited situation where it is shown to be perverse, namely, where it is based on no evidence, ignores material evidence, proceeds on an inadmissible basis or is such that no reasonable tribunal properly instructed in law could have reached it. The mere formulation of questions in the memorandum cannot convert factual grounds into substantial questions of law.

The Hon’ble High Court further observed that the Tribunal recorded that the investments had been acquired in earlier years and that the relevant investment transactions had been disclosed in the books of account. It further recorded that the respondent had furnished purchase and sale bills, investment statements, bank statements, confirmations, income-tax returns, addresses, audited financial statements and other particulars concerning the purchasers. The Tribunal also noted that notices issued to the purchasers under Section 133(6) had been responded to and that the material placed by the respondent was not displaced by any independent and substantive evidence produced by the Assessing Officer.

The Hon’ble High Court also noted the Tribunal also took note of the respondent’s regular activity of purchase and sale of investments, the movement of investments over the years, the fact that the sale proceeds were received through banking channels and the fact that the investments had not been doubted in earlier scrutiny proceedings. On that evidentiary record, it concluded that the Revenue had not established that the entire sale consideration represented unexplained cash credit in the hands of the respondent

The Hon’ble High Court further observed that the applicability of Section 68 of the Act depends upon the nature of the credit and the material available in the particular assessment year. The assessee must explain the nature and source of the credit and the explanation must be tested on the entirety of the evidence. The Assessing Officer shall consider the surrounding circumstances and the test of human probabilities, but shall not authorise an addition founded on suspicion, generalised allegations or an inference unsupported by evidence.

The Hon’ble High Court pointed out that the case law relied upon by the Revenue, does not lay down the proposition that every sale of unlisted shares, or every transaction involving a company alleged to be a shell entity, must automatically be treated as bogus. The principles laid down therein require a holistic examination of the evidence and surrounding circumstances. In the present case, the Tribunal undertook such an examination. Whether the documents furnished by the respondent sufficiently established identity, creditworthiness and genuineness, whether the purchasers‟ responses were reliable and whether the surrounding circumstances warranted an inference of accommodation entry are essentially questions of fact.

The Hon’ble High Court opined that the Revenue had not demonstrated that the Tribunal applied an incorrect legal test. Nor has it identified any material evidence which the Tribunal failed to consider. The submission that the purchasers were shell or paper companies, without pointing to independent material establishing that the particular sale proceeds received by the respondent represented the assessee’s own undisclosed money, seeks a reappraisal of the factual record. That exercise is outside the limited jurisdiction under Section 260A.

The Hon’ble High Court held that an earlier acceptance of the investments does not create an absolute bar against examination of a later sale transaction. However, it is a relevant evidence in evaluating the Revenue’s subsequent allegation that the very investments were fictitious from inception. In the present case, the Tribunal did not treat earlier assessments as an estoppel in law rather it considered them cumulatively with the books, investment statements, sale documents, bank records, purchaser confirmations and replies to statutory notices. The Revenue’s contention therefore does not raise any substantial question of law.

The Hon’ble High Court held that the appeal did not give rise to any substantial question of law and accordingly, the appeal was dismissed.

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