Introduction: The Karnataka High Court recently addressed an appeal by the Revenue, focusing on undisclosed income attributed to investments in shell companies. The Income Tax Appellate Tribunal (ITAT) had previously ruled in favor of the assessee, leading to this legal challenge.
Detailed Analysis: For the 2012-2013 Assessment Year, the assessee filed an income tax return reflecting a profit of Rs. 5,00,92,859. Subsequently, the return was selected for scrutiny, and the Assessing Officer (AO) issued notices to the assessee. The AO observed that nineteen companies had invested money with the assessee company, totaling Rs. 8,64,30,300. The AO considered these companies as “shell” companies and issued notices to them, requiring their appearance before the Assistant Director Income Tax in Kolkata. These companies responded to the notices, providing their respective replies.
Following a review of the companies’ responses, the AO added the entire amount of Rs. 8,64,30,300 as undisclosed income in the hands of the assessee. On appeal to the Commissioner of Income Tax (Appeals), the tax liability was increased by an additional Rs. 35,21,000. However, the Income Tax Appellate Tribunal (ITAT) allowed the assessee’s appeal and deleted the additions made by the AO and CIT(A).
The Revenue then challenged the ITAT’s decision in the Karnataka High Court.
In the appeal, the Revenue argued that the ITAT deleted the additions without requesting a remand report from the AO. They claimed that the ITAT did not provide the AO with a fair opportunity to explain the additions. Additionally, the Revenue pointed out that the nineteen investor companies had reported very meager incomes or losses in the previous financial year, and they classified these companies as “shell” entities. Therefore, the additions made by the AO and CIT(A) were lawful, as per the Revenue’s arguments.
The Revenue referred to the judgment in the case of Principal Commissioner of Income Tax (Central) v. NRA Iron and Steel Private Limited to support its contentions.
In response, the senior advocate representing the assessee noted that the AO had called the nineteen investor companies to appear before the Assistant Director Income Tax in Kolkata. In accordance with the AO’s instructions, these companies’ representatives appeared and submitted relevant documents. These documents were shared with the assessee, and they were subsequently submitted to the CIT(A). The senior advocate emphasized that the ITAT had thoroughly examined all nineteen investments individually. He pointed out that the ITAT had reviewed the replies provided by the companies and noted that copies of bank statements, income tax returns, audited balance sheets, audited reports, and more were part of the records. The senior advocate further highlighted that the ITAT had independently considered the nineteenth investor company and revealed that the directors of this company were the same as the directors of the assessee company. As a result, the ITAT held that the additions made in the hands of the investor company could not be repeated in the investee company’s assessment.
The senior advocate cited the case Commissioner of Income Tax v. Gagandeep Infrastructure Private Limited to argue that the Revenue could reopen the assessment of the investor shareholders. He also mentioned that the Revenue had taken action and added income in the hands of the nineteenth investor company, M/s. Matajawala Investment and Infrastructure Private Limited.
The Revenue pointed out that the case Gagandeep Infrastructure did not apply because it had been remanded by the Supreme Court to the AO.
Conclusion: The Karnataka High Court upheld the ITAT’s decision, affirming the deletion of additions made by the AO and CIT(A). The Court emphasized that the ITAT had considered all nineteen investments independently and determined that the investor companies had sufficiently explained their transactions. As a result, the additions made by the Revenue were found to be unsustainable in this case.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal by the Revenue has been admitted to consider the following questions of law recorded in the Order dated 12th October, 2020:
“1. Whether, in the facts of the case, the impugned Order of the Tribunal is perverse in ignoring the relevant material evidence brought out in the Assessment Order and the Order of Commissioner (Appeals) to the effect that the investor companies have opened the bank accounts in particular bank for a brief period to carry out the transactions?
2. Whether, in the facts of the case, the ITAT is correct in holding that these investors are having creditworthiness even though their total income for these years is very meagre and no evidence is available to prove their capacity to make the said investment thereby leading to perversity?
3. Whether, under the facts and circumstances of the case, the onus cast on the assessee/respondent under proviso to section 68 of the Income Tax Act is discharged by the assessee?“
2. After hearing Shri E.I. Sanmathi, learned standing Counsel for Revenue and learned Senior Advocate Shri A. Shankar, for the assessee, in our opinion, only the following question arises for consideration in this appeal and with the consent of learned Advocates for the parties, we have framed the following question:
“Whether the sums found credited in the assesse’s books for the previous years, the assessee had offered explanation; and if so, whether the order passed by ITAT requires interference?
3. Briefly stated, the facts of the case are that, for Assessment Year 2012-2013, the assessee filed return of income showing a profit of Rs.5,00,92,859/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 (for short hereinafter referred to as “Act”). Later it was selected for scrutiny and notice under Section 143(2) of Act was issued to the assessee. In response, the assessee appeared and explained the return. The AO1 has noted that nineteen companies had invested monies with the assessee Company along with their respective share application totalling to Rs.8,64,30,300/-. The AO issued notices to the said nineteen Companies directing them to appear before the ADIT2, Kolkata. The Companies appeared through their representatives and filed their replies. On consideration of the said replies, the AO recorded his finding at paragraph 3.7 of the order and held that the share application money had remained unexplained. Accordingly, he added back the aforementioned sum in the hands of the assessee. On appeal by the assessee, the CIT(A)3 enhanced the liability by Rs.35,21,000/-. On further appeal, the Income Tax Appellate Tribunal has allowed assessee’s appeal and deleted the additions made by the AO and the CIT(A). Feeling aggrieved, Revenue is before this Court.
4. Shri E.I. Sanmathi, for the Revenue urged following grounds:
5. In support of his contentions, he placed reliance on the judgment of the Hon’ble Apex Court in the case of Principal Commissioner of Income Tax (Central) v. NRA Iron and Steel Private Limited5.
6. In reply Shri A. Shankar, learned Senior Advocate submitted that the AO had called upon the nineteen Companies in question to appear before the ADIT, Kolkata. In compliance with AO’s instructions, the representatives of the respective companies appeared before the ADIT and submitted their papers. The ADIT sent his report to the AO. The copies of the papers filed by the respective Companies before the Income Tax authorities were made over by the Department to the assesse. The said papers have been filed by the assessee before the CIT(A).
7. According to Shri A. Shankar, the ITAT has considered all nineteen investments independently and recorded its opinion from paragraph 6 onwards in the impugned order. Making particular reference to the nineteenth investor, Shri A. Shankar, submitted that the Directors of the said Company and the Directors of the Assessee are one and the same. In substance, Shri Shankar’s argument is that in obedience to AO’s directions, all nineteen Companies have submitted their papers before ADIT. The Revenue had all the material before it to call for further information, if any, required and to take action against the investors and in case of the nineteenth Investor, the Department has taken action and added income in the hands of that company.
8. Placing reliance on the judgment in Commissioner of Income Tax v. Gagandeep Infrastructure Private Limited (Bom)6 he contended that the Bombay High Court has placed reliance on Commissioner Income Tax v. Lovely Exports Private Limited and held that the Income Tax Officer could reopen the assessment of such shareholders. In reply to this submission Shri Sanmathi, submitted that in the case of Gagandeep Infrastructure (supra), the matter has been remanded by the Apex Court to the AO; therefore, it is not applicable to the facts of this case.
9. We have carefully considered the rival contentions and perused the records.
10. Undisputed facts of the case are, nineteen Companies have paid money to the assessee Company along with their share applications. According to the AO, the said Companies are ‘shell’ companies and they did not have the required financial strength to invest money in the immediate previous relevant financial year. On this premise, the AO issued notices to the said Companies calling upon them to appear before the ADIT, Kolkata. After obtaining the report from the said authority, the AO has added Rs.8,64,30,300/- as undisclosed income in the hands of the assessee. The CIT(A), has increased the tax liability by Rs.35,21,000/-. The ITAT has deleted the additions made by the two authorities. It has recorded its reasons from paragraph 6 onwards in the impugned order. A careful perusal of the ITAT order shows that it has considered all nineteen investments individually. It has noticed that the replies given by the Companies were available in the paper books filed before the Tribunal. It has also noticed that the copies of the bank statement, income tax returns along with audited balance sheets, audited reports, etc., were also part of the records. After doing such exercise in respect of nineteen companies, only with regard the nineteenth Company (M/s. Matajawala Investment and Infrastructure Private Limited) the ITAT has noted that the Directors of that Company were the Directors of the Assessee Company and the additions were made in the assessment of M/s. Matajwala Investment and Infrastructure Private Limited as the said Company did not have any income for Assessment Year 2011-2012 and 2012-2013. It is further noticed that once addition is made in the hands of the investor Company, addition cannot be again made in the hands of the investee Company.
11. The undisputed facts narrated hereinabove clearly show that the Revenue has issued notices to all nineteen companies. The Companies have appeared before the ADIT and submitted their papers and in the case of Matajwala Infrastructure, addition has been made by the Revenue.
12. In view of the submission made by Shri Sanmathi, with regard to Gagandeep Infrastructure (supra), we have perused the Order of the Apex Court in Lovely Exports Private Ltd.7, wherein it is held as follows:
“2. Can the amount of share money be regarded as undisclosed income under Section 68 of IT Act, 1961?. We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.“
13. In the case on hand, the identity of the investors have been established. They have appeared before the authority and submitted the records showing the source of income. In the facts of this case, additions made by the Revenue are not sustainable.
14. Insofar as the authority relied upon by Sanmathi in NRA Iron and Steel is concerned, in our opinion, the ITAT has rightly held that the facts in the case of NRA Iron and Steel are not applicable to the facts in this case. In the said authority, the investing companies had not explained the valuation and in this case, the investors have filed all the details.
15. Hence, we find no infirmity in the order passed by the ITAT. In the result, we pass the following:
O R D E R
1. Appeal is dismissed;
2. Question of law, is answered in favour of the Assessee and against the Revenue.
1 Assessing Officer
2 Assistant Director Income Tax (Investigation), Kolkata
3 Commissioner of Income Tax (Appeals)
4 Income Tax Appellate Tribunal, ‘A’ Bench, Bangalore
5 412 ITR 161 (SC) paragraph 3.9
6 2017 394 ITR 680 (BOM),
7 2008 216 CTR 195 (SC)