ITAT is required to examine correctness of the findings recorded by appellate authority and record conclusion why such findings are not acceptable
In a recent judgment, the Hon’ble Calcutta High Court has held the ITAT over-turning the order passed by the appellate authority was required to examine the correctness of the findings recorded by the appellate authority and then come to the conclusion why such findings are not acceptable and while doing so reasons have to be recorded in writing.
ABCAUS Case Law Citation:
4479 (2025) (03) abcaus.in HC
In the instant case, the Income Tax Department/Revenue had challenged the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) in deleting the addition under section 68 of the Income Tax Act, 1961 (the Act) by setting aside the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC).
In the instant case the Assessing Officer (AO) has made addition under section 68 of the Act towards substantial amount of share capital including share premium received by the respondent assessee which was a private limited company engaged in construction activities.
The Hon’ble High Court noted that the Assessing Officer issued notices under section 133(6) for which reply has been stated to have been received. Summons was issued under section 131 on the directors of the assessee/company to appear personally and to produce various documents. However, the assessee filed written statement in response to the summons with photo identity of the directors of the investor companies but no reason was assigned as to why the directors did not appear in response to the summons.
The Assessing Officer noted that due to noncompliance on the part of the assessee the details of the shareholders were not available and, hence, identity of the shareholders was questionable. If the identity of the creditors were not established, consequently, question of establishment of genuineness of the transaction or creditworthiness of the creditors did not and could not arise. Furthermore, the Assessing Officer observed that the case has to be judged in the light of preponderance of probability and non human behaviour from which it will be easily inferred that the entire transaction lacks substance. Furthermore, on facts the Assessing Officer noted that a company that had been recently incorporated without any proven track record did not in any way justify the hefty premium.
Thus, the Assessing Officer came to the conclusion that the receipt of share application money was only facade for conversion of unaccounted money and the non-appearance of the directors only strengthen on this point.
The assessment was completed holding that the share application money received along with premium remained unexplained and was, accordingly, added back under section 68 of the Act.
The CIT(A) held that as per the settled legal position, the onus is on the assessee to prove not only the identity of the share applicant but also the creditworthiness of the share applicants and last but not the least the bona fide or genuineness of the share application money credited in the books of account. It was held that merely providing proof of identity and other relevant documents was not sufficient as creditworthiness of the share applicant and the genuineness of the transaction was also important.
The appellate authority had also examined factual aspect in respect of each such share subscribers. In one case proportion of the share capital and share premium paid by the subscriber company was abnormal. Further, the registered address of some of the companies are common and the directors of the company were also found to be a group of persons. The accounts of the companies were audited by the same group of auditors. There are no activities apparent from the profit and loss provided except for receipt of interest and all companies have only furniture and computers as assets and there are no vehicles or office premises in the schedule of assets.
The appellate authority noted that interestingly the first two subscribers were individuals and were promoters of the respondent assessee company and the shares were issued to them without premium. The CIT(A) noted this peculiar aspect and pointed out that the promoters did not share the view of the other companies who had subscribed to the shares at premium, about the prospects of the assessee company.
The CIT(A) came to the conclusion that the creditworthiness of the share subscriber remains unproved and the genuineness of the transaction is also not proved from the documents produced.
The Tribunal however allowed the appeal of the respondent assessee.
The Hon’ble High Court observed that in the given case, the three factors were required to be established namely, creditworthiness of the investors, the genuineness of the transaction and the identity of the subscribers. The Hon’ble High Court further observed that identity of share subscriber companies had been established, as they were registered companies. However, to escape from the rigor of section 68 of the Act, the assessee was also bound to prove the creditworthiness of the parties and also genuineness of the transaction.
However, the Hon’ble High Court observed that Tribunal allowed the assessee’s appeal without discussing or dealing with the correctness of the findings recorded by the appellate authority, which was a detailed factual exercise.
The Hon’ble High Court observed that the Tribunal had merely stated in the impugned order that on perusal of the paper book and document three factors had been proved by the assessee.
The Hon’ble High Court opined that the tribunal was required to examine the correctness of the factual findings recorded by the appellate authority and then recorded its views as to why it is not in agreement with the findings of the appellate authority. However, in the impugned order this aspect of the matter was conspicuously absent.
The Hon’ble High Court observed that if the test of human probability is applied in the facts of the case, it should have been established by the assessee as to why and for what reason the share subscription invested in shares of the assessee company at such huge premium despite the factual position being that the assessee company had no track record.
The Hon’ble High Court held that the tribunal did not go into all required aspects and proceeded to accept the case of the assessee solely by making certain observations with regard to the paper book which was filed by the assessee. The tribunal over-turning the order passed by the appellate authority was required to examine the correctness of the findings recorded by the appellate authority and then come to the conclusion why such findings are not acceptable and while doing so reasons have to be recorded in writing. In the absence of all these essential requirements, the impugned order was not sustainable and the tribunal committed an error of law in allowing the assessee’s appeal.
Accordingly, the appeal filed by the revenue was allowed and the substantial questions of law were answered in favour of the revenue.
Download Full Judgment Click Here >>
- ITR-1 Sahaj and ITR-4 Sugam has been notified for AY 2025-26
- SC upheld constitutional validity to section 34, 47 & 58 of Consumer Protection Act 2019
- Appointment of internal auditor in GCE, Keonjhar for FYs 2009-10 to 2023-24
- Empanelment of Stock & Receivable Auditors in State Bank Of India, Thiruvananthapuram.
- If a contribution is not voluntary, it cannot be taxed as income u/s 11 r.w.s. 12(1) – ITAT
