Calcutta HC Affirms ITAT Order, Dismisses Revenue Appeal on Section 68 Addition

PCIT Vs Sitka Mercantile (P) Ltd. (Calcutta High Court)

Calcutta High Court has dismissed an appeal filed by the revenue, challenging an order of the Income Tax Appellate Tribunal (ITAT) that deleted an addition of Rs. 11,07,50,000/- made under Section 68 of the Income Tax Act, 1961, for the assessment year 2009-10. The case, PCIT Vs Sitka Mercantile (P) Ltd., inv68olved the treatment of share capital and share premium as unexplained credits.

The revenue had sought to argue five substantial questions of law. These questions broadly contended that the ITAT erred by:

• Relying solely on “paper submissions” by the assessee without adequately establishing the identity, creditworthiness, and genuineness of the shareholders and transactions as required by Section 68.
• Failing to appreciate the principles laid down by the Supreme Court in Pr. CIT (Central-1), Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161), which mandates the Assessing Officer (AO) to investigate the creditworthiness of creditors/subscribers, verify their identity, and ascertain the genuineness of transactions to prevent bogus entries.
• Not recognizing the Supreme Court’s mandate in NRA Iron & Steel Pvt. Ltd. that the assessee bears the legal obligation to prove the receipt of share capital/premium to the AO’s satisfaction, with failure justifying an addition to income.
• Concluding that the assessee failed to furnish sufficient evidence beyond mere submissions.
• Incorrectly holding that the raised share capital was not the assessee’s own income.

Mr. Om Narayan Rai, learned senior standing counsel, along with Mr. Soumen Bhattacharjee, appeared for the appellant/revenue, while Mr. J.P. Khaitan, learned senior advocate, assisted by Mr. Pratyush Jhunjhunwala, represented the respondent/assessee.

The revenue’s primary contention before the High Court was that the ITAT’s order was not a “speaking order” and did not adequately discuss the factual position. They also argued that the shareholders were not produced before the AO despite summons.

The High Court meticulously examined the ITAT’s order. While acknowledging that the Tribunal had “verbatim extracted the finding recorded by the CIT(A),” the court noted that the Tribunal had subsequently considered the submissions from both the revenue and the assessee. Crucially, the ITAT had also taken into account a substantial paper book (pages 58-705) containing various documents, including share application and allotment details, bank statements, Income Tax Acknowledgment receipts, audited financial statements, and explanations regarding the source of funds.

Furthermore, the ITAT’s order explicitly mentioned that it had considered “other evidences, namely, the name of the share applicants, their addresses, Pan Card numbers etc.” It was also recorded by the Tribunal that in response to notices issued under Section 133(6) of the Income Tax Act, 1961, the share applicants had furnished the requested evidence, thereby establishing their identity, creditworthiness, and the genuineness of the transactions. The court also noted that the director of the assessee company had complied with the summons issued by the AO and provided a statement on oath.

The High Court then referred to the proceedings before the Commissioner of Income Tax (Appeals) [CIT(A)]. The court recalled that the Principal Commissioner of Income Tax (PCIT) had initiated proceedings under Section 263 of the Act, holding that the original reassessment order was “erroneous and prejudicial to the interest of the revenue” due to insufficient inquiries into the share capital raised. In that Section 263 order dated March 10, 2014, the CIT(A) had set aside the assessment and issued three specific directions for further inquiry. The High Court found that the CIT(A), in its subsequent order, had “scrupulously taken into consideration” these directions and had “discussed the entire factual aspect” that the AO had noted.

Judicial Precedent:

The revenue had heavily relied on the Supreme Court’s decision in Pr. CIT (Central-1), Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161). This landmark judgment emphasized the AO’s duty to investigate the identity, creditworthiness, and genuineness of transactions, particularly in cases of share capital and share premium, and reiterated the assessee’s primary onus to prove the source and nature of such credits.

However, the Calcutta High Court in the present case found that the lower appellate authorities (CIT(A) and ITAT) had, in fact, discharged this responsibility by thoroughly examining the facts and the evidence provided by the assessee. The court’s ruling implicitly suggests that once the assessee has furnished sufficient evidence to establish identity, creditworthiness, and genuineness, and these facts have been meticulously examined by the appellate authorities, the onus shifts, and further interference by a higher court under Section 260A (which requires a “substantial question of law”) may not be warranted. The High Court’s decision indicates that the NRA Iron & Steel Pvt. Ltd. ruling sets out the standard of inquiry, and if that standard is met by the lower authorities through factual examination, the case may not raise a “substantial question of law” for a High Court appeal.

Conclusion:

Given the comprehensive factual discussions by the CIT(A) and the subsequent re-appreciation of evidence by the ITAT, including compliance with Section 133(6) notices and the director’s statement on oath, the High Court concluded that the matter was “entirely factual” and did not give rise to any “substantial questions of law” for its consideration under Section 260A of the Income Tax Act. Consequently, the appeal filed by the revenue was dismissed, and the connected application was also closed, upholding the ITAT’s decision to delete the addition under Section 68. This judgment reinforces the principle that appeals to the High Court under the Income Tax Act are limited to cases involving substantial questions of law, and not merely disputes over factual findings that have been adequately addressed by lower tribunals.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

This appeal by the revenue filed under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated 10^th November, 2022, passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Kolkata (Tribunal) in ITA No.232/Kol/2021 for the assessment year 2009-10.

The revenue has raised the following substantial questions of law for consideration :

a) Whether the Learned Tribunal has committed substantial error in law in deleting the addition of Rs.11,07,50,000/-under Section 68 of the Income Tax Act, 1961, relying upon only on the paper submissions made by the assessee, without considering the point of law that when any credit in the particular book of account is a fresh credit and the assessee is required to establish the identity, creditworthiness of shareholders and the genuineness of transaction, which the assessee failed to do?

b)  Whether the Learned Tribunal has committed substantial error in law by not appreciating the principle which has been laid down by the Hon’ble Supreme Court in the case of Pr. CIT (Central-1), Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161) wherein it has been held that the Assessing Officer is duty bound to investigate the creditworthiness 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?

c)  Whether the Learned Tribunal has committed substantial error in law by failing to appreciate the ratio of decision of Apex Court in the case of Pr. CIT (Central-1), Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161) whereby it has been mandated that ‘the assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the A.O., failure of which, would justify addition of the said amount to the income of the assessee?

d)  Whether the Learned Tribunal has committed substantial error in law in failing to appreciate that in the facts and under the circumstances of the instant case, the assessee company has failed to do so inasmuch as nothing has been furnished except submission of mere of various kinds?

e)  Whether the Learned Tribunal has committed substantial error of law by holding that the raised share capital was not the assessee’s own income?

We have heard Mr. Om Narayan Rai, learned senior standing counsel assisted by Mr. Soumen Bhattacharjee, learned standing counsel appearing for the appellant/revenue and Mr. J.P. Khaitan, learned senior advocate assisted by Mr. Pratyush Jhunjhunwala, learned    counsel appearing for the respondent/assessee.

The revenue is aggrieved by the order passed by the learned Tribunal affirming the order passed by the Commissioner of Income Tax (Appeals) – 5, Kolkata [CIT(A)] dated 14^th September, 2020 by which the addition made by the assessing officer stood deleted. The matter arises under Section 68 of the Act and the revenue is on appeal before us largely on the ground that the order passed by the Tribunal is not a speaking order and the factual position has not been discussed by the learned Tribunal. Further, it is contended that the shareholders were not produced before the assessing officer in spite of summons. Regarding the first aspect as to whether the order passed by the learned Tribunal is a speaking order or not, it is no doubt true that the learned Tribunal has verbatim extracted the finding recorded by the CIT(A). After which it has taken note of the submissions made on behalf of the revenue and the submissions made on behalf of the assessee and then took note of the documents which have been filed in the paper book (pages 58-705) which has been comprising share application and allotment of shares, bank statements, ITA acknowledgments, audited financial statements, explanation with regard to source of funds etc. and then took into consideration other evidences, namely, the name of the share applicants, their addresses, Pan Card numbers etc. The learned Tribunal has also noted that pursuant to the notice issued under Section 133(6) of the Act by the assessing officer, the share applicants have furnished the evidence called for by the assessing officer and established their identity, creditworthiness and the genuineness of the transaction. Further, the learned Tribunal noted that summons issued to the director by the assessing officer was complied with and he has given statement on oath by appearing in person before the assessing officer. If we turn back to the findings recorded by the CIT(A), we find that the matter was taken up by the PCIT under Section 263 of the Act and an order was passed on 10^th March, 2014 holding that the reassessment order dated 30^th September, 2011 was erroneous and prejudicial to the interest of the revenue for not making profit and sufficient enquiries into the share capital raised by the assessee during the relevant year. In the said order dated 10^th March, 2014 the CIT(A) had set aside the assessment order and issued three specific directions. These directions were scrupulously taken into consideration and we find from the order passed by the CIT(A), the entire factual aspect has been discussed which have been noted by the assessing officer while completing the assessment. Thus, we find that the matter to be entirely factual and no substantial questions of law arise for consideration.

In the result, the appeal fails and the same is dismissed. The connected application stands closed.