Calcutta HC Upholds ITAT Ruling on deletion of Share Capital Addition

PCIT Vs Hirak Vyapaar Pvt. Ltd. (Calcutta High Court)

Calcutta High Court has dismissed an appeal filed by the revenue challenging an order from the Income Tax Appellate Tribunal (ITAT) which deleted an addition of Rs. 10,60,50,000/- made under Section 68 of the Income Tax Act, 1961, for the assessment year 2008-09. The case, PCIT Vs Hirak Vyapaar Pvt. Ltd., revolved around the treatment of share capital and share premium received by the assessee company.

The revenue had put forth three substantial questions of law for the court’s consideration. These questions essentially argued that the ITAT erred by:

• Deleting the addition of share capital and premium without adequately examining the facts and materials of the case.
• Ignoring the fact that the assessee did not appear or pursue its appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], implying a lack of explanation for the share capital.
• Disregarding the assessee’s alleged failure to discharge its onus of proving the identity, genuineness, and creditworthiness of the subscribing companies, as well as the genuineness of the share transactions.

Mr. Om Narayan Rai, learned standing counsel, appeared for the appellant/revenue, while Mr. Abhratosh Majumder, learned senior advocate, represented the respondent/assessee.

Background of the Case:

The assessment for the relevant year was initially completed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act. Subsequently, the Commissioner of Income Tax (CIT) exercised revisional powers under Section 263 of the Act. On March 30, 2013, the CIT passed an order setting aside the original assessment and directed the AO to conduct further inquiries into the genuineness of the transactions, including the examination of company directors and other related matters concerning the share capital raised.

Following these directions, the AO re-examined the issue and, by an order dated March 31, 2014, disallowed the share application money received by the assessee during the year. This amount was added back to the assessee’s total income as unaccounted cash credit under the provisions of Section 68 of the Act.

Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals)-17, [CIT(A)]. However, the assessee did not appear during the appeal proceedings before the CIT(A), leading to the dismissal of the appeal by an order dated March 20, 2017.

The assessee then appealed to the Income Tax Appellate Tribunal (ITAT). The High Court noted that the Tribunal, in its impugned order, had undertaken a “thorough and elaborate examination of the facts.” It also took note of the response filed to the notices issued under Section 133(6) of the Act. Furthermore, the Tribunal delved into the resources and surplus of the companies which had subscribed to the assessee’s shares.

ITAT’s Factual Findings:

The ITAT’s detailed examination revealed several crucial facts:

• All the share subscribers were regularly assessed to tax.
• They were consistently filing their Income Tax Returns.
• Their books of accounts were regularly maintained.
• Their financial statements were duly audited under the Income Tax Act.
• The transactions involving the share capital had been carried out through banking channels, indicating a transparent flow of funds.
• All the formalities required by the Registrar of Companies for the purpose of issuing share capital had been duly adhered to.
• As of the date the Tribunal considered the matter, all the share subscribers were found to be active companies.

Based on this comprehensive factual appreciation, the Tribunal came to the conclusion that the assessee had successfully discharged the primary onus cast upon it under Section 68 to explain the investment.

Judicial Precedent and Legal Principle:

While the revenue’s arguments implicitly invoked the principles laid down by the Supreme Court in cases concerning Section 68 additions, such as Pr. CIT (Central-1), Kolkata vs NRA Iron & Steel Pvt. Ltd. (412 ITR 161), the Calcutta High Court’s decision indicates that the ITAT’s factual findings satisfied the requirements outlined in such precedents.

The NRA Iron & Steel Pvt. Ltd. case, a significant ruling on Section 68, underscores the assessing officer’s duty to investigate the identity, creditworthiness, and genuineness of transactions, particularly when dealing with share capital and premium. It also reinforces the assessee’s legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO. Failure to do so would justify the addition of the said amount to the assessee’s income.

In the present case of PCIT vs. Hirak Vyapaar Pvt. Ltd., the Calcutta High Court’s affirmation of the ITAT’s order suggests that the detailed factual examination conducted by the Tribunal, including verification through Section 133(6) notices, examination of bank statements, audited financials, and compliance with company law formalities, was deemed sufficient to meet the standards of inquiry mandated by the Supreme Court. The court’s decision implies that once the lower appellate authorities have meticulously reviewed the facts and found the assessee to have discharged its onus by providing credible evidence for identity, creditworthiness, and genuineness of transactions, there is no further “substantial question of law” warranting intervention by the High Court. The initial non-appearance of the assessee before the CIT(A) was overridden by the thorough factual scrutiny at the Tribunal level.

Conclusion:

The High Court concluded that since the Tribunal had conducted a thorough appreciation of the factual position and granted relief to the assessee based on those findings, “no question of law, much less substantial questions of law,” arose for its consideration. Consequently, the appeal filed by the revenue was dismissed, along with the connected stay application. This judgment reiterates the principle that the High Court’s appellate jurisdiction under Section 260A of the Income Tax Act is limited to substantial questions of law, and it will generally not interfere with well-reasoned factual findings of the Tribunal, even if the assessee had initially defaulted at an earlier appellate stage.

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 13t^h April, 2023 passed by the Income Tax Appellate Tribunal, “A” Bench, Kolkata in ITA No. 26/Kol/2019 for the assessment year 2008-09.

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

i) Whether the Learned Income Tax Appellate Tribunal has committed substantial error in law in deleting the addition of Rs.10,60,50,000/- on account of share capital including premium without going into the facts and materials of the case ?

ii) Whether the Learned Income Tax Appellate Tribunal has substantially erred in law in ignoring the fact that when the assessee did not appear during hearing of the appeal before the Commissioner of Income Tax (Appeals) and did not pursue its own appeal then it became obvious that the respondent assessee did not have any clarification or explanation to offer regarding the said share capital and share premium alleged to be paid by the investors to the respondent ?

iii) Whether the Learned Tribunal has substantially erred in law in ignoring that the respondent assessee has failed to discharge its onus of proving the identity, genuineness and creditworthiness of the subscribing companies as well as genuineness of the share transactions ?

We have heard Mr. Om Narayan Rai, learned standing Counsel for the appellant and Mr. Abhratosh Majumder, learned senior Advocate for the respondent.

The assessment for the year under consideration was completed by the Assessing Officer under Section 143(3) of the Act. Subsequently, the Commissioner of Income Tax exercised power under Section 263 of the Act and passed an order on 30t^h March, 2013 setting aside the assessment order and directing the Assessing Officer to examine the genuineness of the transaction, directing examination of the directors of the company and other matters. Thereupon the Assessing Officer took up the matter for consideration and completed the assessment by order dated 31^st March, 2014 holding that the share application money received by the assessee during the year has to be disallowed and added back to the total income of the assessee as unaccounted cash credit as per the provisions of Section 68 of the Act.

Aggrieved by the same, the assessee preferred appeal before the Commissioner of Income Tax (Appeals)-17, [CIT(A)]. Before the Appellate authority the assessee did not appear and the Appellate authority by order dated 20^th March, 2017 dismissed the appeal. The assessee carried the matter in appeal to the learned Tribunal. Learned Tribunal, as we find from the impugned order, has done a thorough and elaborate examination of the facts. It also took note of the response filed to the notices issued under Section 133(6) of the Act. Thereafter it proceeded to examine the resource and surplus of the companies which had subscribed to the shares of the assessee company and found that all the share subscribers are regularly assessed to tax, they are filing Income tax Returns; books of accounts were regularly maintained, financial statements were duly audited under the Income Tax Act and transactions have been carried out through banking channel and all the formalities required by the Registrar of Companies for the purpose of issuing share capital has been duly adhered and as on the date when the Tribunal considered the matter it found that all the share subscribers are active companies.

Thus, after taking into consideration the factual position, the Tribunal came to the conclusion that the assessee has successfully discharged the primary onus cast upon them to explain the investment.

Thus, we find that the Tribunal upon appreciation of the factual position has granted relief to the assessee and therefore, we hold that there is no question of law, much less substantial questions of law, arising for consideration.

The appeal is thus dismissed.

The stay application IA No: GA/1/2023 is also dismissed.