ITAT Delhi Quashes Section 68 Addition Due to Lack of Cross-Examination

ITAT Delhi: Quashes assessment based on statements without cross-examination; Deletes Section 68 addition

In JSM Oilfields Services Pvt. Ltd. Vs DCIT (ITAT Delhi), the Tribunal ruled in favor of the assessee, overturning the addition of ₹2.10 crore under Section 68 related to alleged unexplained share capital. The Assessing Officer had relied on a third-party statement labeling the funds as accommodation entries, but the statement was neither provided to the assessee nor available for cross-examination. The assessee substantiated the identity, creditworthiness, and genuineness of the shareholder companies through ITRs, audited financials, bank statements, and MCA records. The Tribunal emphasized that general suspicions without factual rebuttal cannot outweigh documentary proof. Additionally, selective disallowance of call money receipts for AY 2013-14 was deemed arbitrary since similar transactions in preceding and succeeding years were accepted. The adhoc 10% disallowance for alleged “personal expenditure” was also struck down, as a Private Limited Company cannot have personal expenses of directors unless specific evidence is provided. The ruling reinforces principles of natural justice, consistency, and evidentiary burden in income-tax assessments.

Facts:

• The assessee, JSM Oilfields Services Pvt. Ltd., is a company engaged in providing technical consultancy services in the oilfield sector. For the Assessment Year 2013–14, it filed its return of income declaring a total income of ₹1,08,61,410. The case was selected for scrutiny under CASS and statutory notices under Sections 143(2) and 142(1) of the Income-tax Act were issued, to which the assessee responded by furnishing the required details and producing its books of account.
• The Assessing Officer thereafter completed the assessment under Section 143(3) on 30.03.2016, determining the total income at ₹3,23,99,877. This was done by making an addition of ₹2,10,20,000 under Section 68 on account of alleged unexplained cash credits representing call money and share premium received from eight companies, along with a disallowance of ₹5,13,453 on account of alleged personal expenditure, and a further disallowance of ₹5,014 under Section 14A.
• The material on record shows that the assessee had allotted 52,550 equity shares in an earlier year, i.e., 2011. During the year under consideration, it received call money of ₹4 per share towards face value and ₹396 per share towards share premium from eight shareholder entities. The assessee placed on record various documents to substantiate the identity and creditworthiness of these companies, including their income-tax returns, audited financial statements, bank statements evidencing payment through normal banking channels, and details retrieved from the Ministry of Corporate Affairs showing these companies to be active.
• The Assessing Officer doubted the genuineness of the share capital transaction and relied heavily on the alleged statement of one Shri Vivek Kumar Jain, who was described as an accommodation entry provider. Extracts of this statement were reproduced in the assessment order, but the assessee was never supplied a copy of the statement during the assessment proceedings. In the course of appellate proceedings, and specifically in his remand report, the Assessing Officer admitted that the statement of Shri Vivek Kumar Jain was not available in the assessment folder and that despite a requisition, the Investigation Wing had not provided a copy of the same.
• Before the Commissioner of Income Tax (Appeals), the assessee contended that it was not afforded any opportunity to rebut the alleged statement or cross-examine Shri Vivek Kumar Jain, and that the funds received were genuine business receipts through banking channels from companies that had also contributed to the same share capital in earlier and subsequent years. It was emphasised that the Department had raised no objections regarding the application money, allotment money, or other call moneys relating to the same shares in those years.
• The CIT(A), by order dated 31.07.2024, partly allowed the appeal but confirmed the addition under Section 68 and sustained a reduced disallowance of 10 percent of the expenses initially disallowed by the Assessing Officer. Aggrieved thereby, the assessee filed the present appeal before the Tribunal.

Issues:

• Whether the addition of ₹2,10,20,000 under Section 68 is sustainable when the Assessing Officer relied upon a third-party statement that was neither supplied to the assessee nor subjected to cross-examination.
• Whether the assessee has duly established the identity, creditworthiness and genuineness of the share subscribers through the documentary evidence placed on record.
• Whether the Revenue was justified in doubting the call-money receipts for the year under appeal when similar receipts forming part of the same share capital were accepted in preceding and succeeding years.
• Whether the adhoc disallowance of 10% of expenses on the ground of “personal use” is legally permissible in the case of a Private Limited Company.

Observations:

• The Tribunal observes that the Assessing Officer placed substantial reliance upon the alleged statement of Shri Vivek Kumar Jain, purported accommodation-entry operator. However, the said statement was never supplied to the assessee at any stage. Further, the AO in his remand report categorically admitted that the statement was not available in the assessment record and that the Investigation Wing had not provided it despite request. The assessee was also not afforded any opportunity of cross-examination. The Tribunal relied upon:

a. Krishna Chand Chela Ram v. CIT, 125 ITR 713 (SC)

b. Andaman Timber Industries v. Commissioner of Central Excise, Civil Appeal No. 4228 of 2006 (SC)

c. CIT v. Odean Builder Pvt. Ltd., 418 ITR 315 (SC)

d. PCIT v. Ace Technologies Ltd., [2023] 154 taxmann.com 45 (SC)

e. Pr. CIT, Central-2 v. JPM Tools Ltd., [2023] 154 taxmann.com 44 (Delhi)

f. Pr. CIT v. Kishore Kumar Mohapatra, [2024] 162 taxmann.com 5 (SC)

• The assessee placed on record extensive documentary evidence: ITRs, audited financial statements, bank statements reflecting payments through banking channels, and MCA records evidencing that each shareholder-company was active, possessed adequate reserves/surplus, and was capable of making the investment. These documents adequately establish the identity and creditworthiness of the subscribers and the genuineness of the transactions. The Revenue produced no contrary material to rebut these documents or to show that the money received originated from the assessee itself. General suspicions regarding worth of certain entities, without factual support, cannot outweigh documentary proof.

The Tribunal relied upon:

a. PCIT v. Agson Global Pvt. Ltd., [2022] 134 taxmann.com 256 (Delhi)

b. Daulatram Rawatmull, (1964) 53 ITR 574 (SC)

c. Umacharan Shaw & Bros. v. CIT, (1959) 37 ITR 271 (SC)

• The Tribunal notes that the shares in question were issued in earlier years, and the assessee had already received application money, allotment money, and other call money in preceding and succeeding years. All such receipts were accepted as genuine by the Department. The call-money received during the year under appeal is merely a continuation of the same share capital transaction. There is no new incriminating material specific to this year to justify differential treatment. The Tribunal held that the principle of consistency, as recognised by courts, must apply. Therefore, the selective addition for AY 2013-14, when the same receipts were not doubted in any other year, is arbitrary and unsustainable.

The Tribunal relied upon:

a. PCIT v. Agson Global Pvt. Ltd., [2022] 134 taxmann.com 256 (Delhi)

b. CIT v. Vrindavan Farms Pvt. Ltd., ITA No. 71 of 2015 (Delhi High Court, 12 August 2015)

• The assessee is a Private Limited Company, which is a separate juristic entity distinct from its directors and incapable of any “personal” expenditure. To disallow expenses on grounds of personal use, the Revenue must show specific evidence of non-business expenditure or direct benefit to directors.In the present case, the AO made a purely adhoc disallowance of 25%, reduced by CIT(A) to 10%, without identifying any instance of personal use or providing supporting evidence.

The Tribunal relied upon:

a. Sayaji Iron & Engg. Co. v. CIT, [2002] 253 ITR 749 (Gujarat High Court)