Revenue loses appeal: Court upholds deletion of Rs.11.39 crore addition under Section 68

Get the full picture - access the original judgement of the court order here

Case Name

Principal Commissioner of Income Tax Vs M/s. Ambition Agencies Private Limited (High Court of Calcutta)

ITAT/143/2017

Date: 15th November 2021

Key Takeaways

• Proper service of notices is crucial: Tax officers must make genuine attempts to serve notices to taxpayers before completing assessments
• CIT(A) has flexibility in handling appeals: The appellate authority can either remand cases back to the assessing officer or call for remand reports to gather additional facts
• Time pressure doesn’t justify hasty assessments: Even when assessments are getting time-barred, proper procedures must be followed
• Burden of proof in Section 68 cases: Once the assessing officer conducts proper verification and finds transactions genuine, additions under Section 68 cannot be sustained

Issue

The central legal question was: Whether the Income Tax Appellate Tribunal was correct in upholding the CIT(A)'s decision to delete the addition of Rs. 11,39,00,000/- made under Section 68 of the Income Tax Act, 1961, when the assessee allegedly could not satisfactorily explain the genuineness of transactions and creditworthiness of share applicants?

Facts

1. Assessment Year 2006-07: M/s. Ambition Agencies Private Limited filed their income tax return on November 8, 2006
2. Scrutiny Selection: The case was selected for detailed examination, and notices were issued under Section 143(2) and Section 142(1) of the Income Tax Act
3. Service Issues: Here’s where things got messy - the tax inspector tried to serve notices but failed to deliver them at the company’s registered address. They then resorted to “service by affixation” (basically pasting the notice on the door) on September 1, 2008
4. More Notice Problems: A fresh notice was sent by registered post on September 12, 2008, but it came back marked “not known”
5. Time Pressure: The assessing officer realized the assessment was about to become time-barred, so he rushed to complete it
6. The Addition: On December 8, 2008, without proper verification, he added the entire share capital and premium of Rs. 11.39 crore as “unexplained cash credit” under Section 68, suspecting the shareholders weren’t genuine

Arguments

Revenue’s Arguments:

• The company couldn’t satisfactorily prove the genuineness of share transactions
• The creditworthiness of shareholders was questionable
• The CIT(A) should have remanded the matter back to the assessing officer instead of deciding it himself
• The tribunal’s decision was perverse

Company’s Arguments:

• They were conducting business from the given address and all correspondence was happening from there
• The assessing officer didn’t make serious attempts to serve notices properly
• Details of directors and their addresses were available in the income tax return
• The assessing officer could have contacted the directors directly
• Company details were available on their website, but no attempt was made to contact them
• It was contradictory that notices couldn’t be served at the address, but assessment orders and demand notices were successfully delivered to the same address

Key Legal Precedents

The court referenced TIN BOX COMPANY v. COMMISSIONER OF INCOME TAX (2001) 249 ITR Page 216 (SC), which was cited by the revenue to argue that if adequate opportunity wasn’t given at the assessment stage, the matter should be remanded rather than decided on merits.

However, the High Court distinguished this case, noting that the TIN BOX decision dealt with whether an opportunity at the appellate level could substitute for opportunity at the initial assessment stage. The court found this precedent “wholly inapplicable to the facts and circumstances of the case” because the CIT(A) had properly exercised his powers by calling for a remand report.

The relevant sections of law discussed include:

• Section 68 of the Income Tax Act, 1961 (unexplained cash credits)
• Section 142(1) (notice for producing accounts/documents)
• Section 143(2) (scrutiny assessment notice)
• Section 144 (best judgment assessment)
• Section 250(4) read with Rule 46A of Income Tax Rules, 1962 (appellate procedures)
• Section 260A (appeal to High Court)

Judgement

The High Court dismissed the revenue’s appeal. Here’s their reasoning:

Court’s Logic:

1. CIT(A) acted properly: The appellate authority had two options when facts needed verification - either remand to the assessing officer or call for a remand report. The CIT(A) chose the second option, which was perfectly valid and saved time
2. Proper verification was done: After the CIT(A) called for a remand report, the assessing officer conducted thorough verification and found that “the creditworthiness of the share applicants and the genuineness of the transactions stood established”
3. No material to reject findings: Since the revenue had no evidence to contradict the remand report’s findings, the CIT(A) was justified in accepting it and deleting the addition
4. Assessment was hasty: The court agreed that the original assessment was completed hurriedly due to time constraints, without proper service of notices

Final Order: The appeal was dismissed along with connected applications. The judges who decided this case were Justice T.S. Sivagnanam and Justice Hiranmay Bhattacharyya

FAQs

Q1: What is Section 68 of the Income Tax Act?

A: Section 68 deals with “unexplained cash credits.” If money appears in your books but you can’t explain its source satisfactorily, the tax officer can treat it as your undisclosed income and tax it accordingly.

Q2: Why did the assessing officer add Rs. 11.39 crore as income?

A: He suspected that the share capital and premium received by the company were not genuine - meaning either the shareholders didn’t exist, didn’t have the money to invest, or the transactions were fake.

Q3: What’s a “remand report”?

A: It’s a report that the appellate authority can ask the original assessing officer to prepare. Instead of sending the entire case back, they ask for specific information or verification, which saves time.

Q4: Could the revenue have won this case?

A: Possibly, if they had evidence to challenge the remand report’s findings. But since the assessing officer himself confirmed after proper verification that the transactions were genuine, there was no basis to sustain the addition.

Q5: What’s the lesson for tax officers?

A: Don’t rush assessments even when time-barred. Make genuine attempts to serve notices and conduct proper verification. Hasty assessments often get overturned on appeal.

Q6: What’s the lesson for taxpayers?

A: Keep proper documentation of all transactions, especially when receiving money from investors. Also, ensure your registered address is updated and you’re reachable for tax notices.

This appeal by the revenue filed under Section 260A of the Income Tax Act, 1961 (the Act in brevity) is directed against the order dated 9th November, 2016 passed by the Income Tax Appellate Tribunal “C” Bench Kolkata (Tribunal) in I.T.A. No.713/Kol/2011 for the assessment year 2006-07. The revenue has raised the following substantial questions of law for consideration in this appeal;-

(a) Whether on the facts and in the circumstances of the case the Learned Tribunal, erred in law in upholding the order of the CIT (Appeals) by deleting the addition of Rs.11,39,00,000/- made by the Assessing Officer under Section 68 of Income Tax Act, 1961 by disregarding that the assessee could not satisfactorily explain the genuineness of the transactions and

creditworthiness of the share applicants in question ?

(b) Whether on the facts and in the circumstances of the case the Learned Tribunal, erred in law in holding that the manner in which the Learned CIT (Appeals) remanded the issue to the Assessing Officer was in consonance with the provision of Section 250(4) of Income Tax Act, 1961 read with Rule 46A of Income Tax Rules, 1962?

(c) Whether on the facts and in the circumstances of the case conclusion arrived at by the Learned Tribunal in dismissing the Appeal of the revenue, is perverse ?

The assessee filed its return to Income Tax on 8th November, 2006 for the assessment year under consideration 2005-2006. The case was selected for scrutiny and notice under Section 143(2) of the Act was issued. However, notices were issued in terms of Section 142(1) of the act along with the questionnaire. It appears that the inspector of the Income Tax Department attempted to serve notice, but failed to serve notice at the address, which is stated to be available on record, and thereafter resorted to service by affixation on 1st September, 2008. Thereafter, a fresh notice was issued under Section 142(1) dated September 12, 2008 which was dispatched by registered post, which returned unserved with the postal endorsement “not known”. The Assessing Officer found that assessment was getting time barred. Therefore, he proceeded to complete the assessment and passed an order on 8th December, 2008 raising a doubt that none of the shareholders appeared to be benefited.

Thereafter, the entire sum of share capital along with the share premium

was added back as unexplained cash credit under Section 68 of the Act.

Further the order stated that penalty proceedings under Section 271(1)(b)

and 271(1)(c) will be initiated separately. Aggrieved by such order

assessee preferred an appeal before Commissioner of Income Tax

(Appeals)-I, Kolkata, C88 contending that the Assessing Officer

committed an error in treating the entire share capital as undisclosed

cash credit in the absence of proper opportunity to provide details.

Further contentions were also raised before the appellate authority.

Further during the hearing of the appeal before the CIT(A) the assessee

contended that they were carrying on business at the given address and

all correspondence and direct transactions were conducted from the said

address and the copy of the said document were filed before CIT(A) along

with written submissions. Further the assessee contended that as per

the Income Tax return filed by the assessee the details of the directors

along with the address were available with the Assessing Officer and the

Assessing Officer could have contacted the directors of the company to

ensure compliance of the direction issued in the notices. Further

assessee contended that the entire details about assessee company was

available on the website and no attempt was made by the Assessing

Officer to contact the assessee and resorting to service of notice by

affixation is erroneous. The CIT(A) on facts found that Assessing Officer

did not make any serious attempt to service notices on the assessee and

also accepted the submissions made on behalf of the assessee that

though it is alleged that notices could not be served on the assessee in

the given address the assessment order and the demand notices were

served in the very same address. Therefore, the CIT(A) held an order

under Section 144 of the Act was not warranted and proceeded to decide

the matter on merits. The CIT(A) also took note of the fact that the

assessment was getting time barred and this fact was specifically

mentioned by the Assessing Officer in the order of assessment. Therefore

to obtain the full facts the CIT(A) thought fit to call for a remand report

from the Assessing Officer which was submitted vide letter dated 27th

January, 2011. Taking note of the fact placed by the Assessing Officer in

the remand report, the CIT(A) noted that after examination of all the

share applications the Assessing Officer has come to the conclusion that

the transactions with all the share holders were duly cross verified and

found in order and the replies received from all the shareholders were

also forwarded by the Assessing Officer along with remand report. Thus

taking on record the said remand report and noting that there has been

thorough cross verification done by the Assessing Officer, the CIT(A)

allowed the appeal deleting the additions. Aggrieved by the same, the

Revenue preferred appeal before the Tribunal. The Revenue, sought to

sustain the order passed by the Assessing Officer and raised the

contention which were canvassed before us in this appeal. The Tribunal

after taking note of the fact approved the view taken by the CIT(A) as the

appeal filed by the assessee was allowed taking note of the remand report

submitted by the Assessing Officer, who in no uncertain terms has stated

that the creditworthiness of the share applicants and the genuineness of

the transactions stood established. Therefore, the Tribunal upheld the

view taken by CIT(A) holding that CIT (A) was fully justified in deleting

the addition considering the facts and circumstances of the case.

Furthermore, the Tribunal observed that CIT (A) was right in its

observation that Assessing Officer did not make attempt to serve notice

on the assessee and completed the assessment hurriedly, presumably

due to the fact that assessment was getting time barred. Before us the

Learned Counsel for the appellant/revenue contended that in the

memorandum of appeal filed by the Assessee before the CIT(A) it was

contended that assessee did not get adequate opportunity. Therefore, if

the CIT(A) was of the view that adequate opportunity was not afforded to

the assessee then the matter ought to have been remanded to the

Assessing Officer for a fresh decision and the appeal could not have been

allowed. It is further submitted that the same error was committed by

the Tribunal. In support of his contention learned Counsel referred to the

decision of the Hon’ble Supreme Court in (TIN BOX COMPANY v.

COMMISSIONER OF INCOME TAX) 2001(249) ITR Page 216 (SC). We

have heard the learned Counsel for assessee on the above submission. At

the first blush the submission made by the learned Counsel for the

revenue appears to be convincing. However on a close scrutiny we find

that the order passed by the CIT(A) does not suffer from any error. The

CIT(A) is entitled to exercise the power of the Assessing Officer. Therefore, two options were available before the CIT(A), in the event he found that facts were required to be brought on record. The first of the options available was to remand the matter to the Assessing Officer for fresh consideration. The second option would be to call for the remand report from Assessing Officer by keeping the appeal pending. The CIT(A)

exercised the second option which undoubtedly could go to save a lot of

time in the matter of completion of the assessment. Upon direction being

issued by the CIT(A) calling for a remand report, the Assessing Officer

before us treated the matter with more seriousness and after thorough

factual exercise reported that genuineness and creditworthiness of the

share applicants have been established. In absence of any material

available with the revenue to discard the remand report we find the

CIT(A) was fully justified in accepting the remand report in deleting the

addition. The decision in TIN BOX COMPANY (supra) may not be of

assistance to the revenue which is a decision wherein the question was

whether an opportunity afforded to an assessee at the appellate level

would be sufficient opportunity and it was held that the opportunity at

the appellate level cannot be a substitute for an opportunity at the stage

of initial adjudication. We find this decision to be wholly inapplicable to

the facts and circumstances of the case. As pointed out earlier the

Tribunal has also re-examined the facts and rightly accepted the

conclusion arrived at by the CIT (A). Thus we find there is no questions of

law much less substantial questions of law arising for consideration in

this appeal. Consequently, the appeal fails and the same stands

dismissed so also the connected applications.

(T.S. SIVAGNANAM, J.)

(HIRANMAY BHATTACHARYYA, J.)