Investments Made Through Banking Channels Can't Be Disbelieved, Onus On Revenue To Prove Otherwise: Allahabad HC

Recently, the Allahabad High Court held that investments made through banking channels and show in regular returns cannot be disbelieved unless proven otherwise by the department.

The bench comprising of Justice Saumitra Dayal Singh and Justice Shiv Shanker Prasad held there was “no room” to disbelieve investments made in the assesee company if they have been made through banking channels and have been disclosed in the returns of the investing companies.

“The burden to prove otherwise rested squarely on the revenue authorities. Unless the initial onus had been discharged by leading some evidence that may have led itself to the conclusion that the investment was never made, the burden that was cast on the revenue remained undischarged,” held the Court.

The assessee received share capital Rs. 19 crores from three entities for assessment year 2010-11. The fact that the money was invested through banking channels and had been duly disclosed by the investors in their books was not disputed. Search proceedings were carried out at the premises of the assesee company and its investors firms which gave rise to suspicions. Relying on the statements recorded at the time of search, the Department disbelieved the investment of Rs. 19 crores made in the share capital of the assessee company and added it by way of unexplained cash credit entry.

The Income Tax Appellate Tribunal, Agra Bench, Agra had dismissed an appeal filed by the Department and confirmed the order of Commissioner Income Tax (Appeals) whereby the appeal filed by the assesee was allowed. The additions made under Section 68 of the Act with respect to share capital Rs. 19 crores invested in the assessee company by three entities namely - M/s Jewellock Trexim Pvt. Ltd., M/s Alberta Merchants Pvt. Ltd. and M/s Gurprasad Holding Pvt. Ltd. were deleted.

The Income Tax Department filed appeal under Section 260-A of the Income Tax Act, 1961, against the order of the Appellate Tribunal. The question of law before the Court was

“Whether on the facts and circumstances of the case and in law, the order of the ITAT was perverse on the ground that while deleting the addition of unexplained credits in the hands of assessee company, it did not allude to the material facts, chain of transactions and probative value of the statements and other incriminating facts as pointed out in the assessment order of the assessee as well as that of the investing entities, thus violating the ratio of judgment in case of Sudarshan Silk and Sarees 300 ITR 205 (SC)?”

The Court observed that the persons whose statements were recorded were either non-functional directors or had no knowledge about the transactions. Further, the Court observed that the assessing authority had relied on the unproven/ untested statement of Mr. Lavesh Jain recorded during search proceedings without calling him during the assessment proceedings.

“Clearly, no material witness was examined during assessment proceedings. Yet, the assessing authority without allowing the assessee any opportunity to cross-examine any such witness proceeded to rely on such ex parte statements,” observed the Court.

The Court held that department had not produced any evidence other than the statements recorded to show that investment of Rs. 19 crores made in the assessee company by way of share capital was bogus or not genuine. The findings of the Tribunal declaring the findings of the assessing authority as being conjectural were upheld by the Court.

“Prima facie, in face of investment made through banking channel which according to learned counsel for the revenue was duly disclosed in the regular returns of the investing entities, there does not exist any presumption or room to disbelieve the investment made in the assessee company.”

The Court held that the burden to disprove such investments made through banking channel and duly declared was on the Department. Since the Department had failed to discharge its burden to disprove the transactions, the appeals filed by the Department were dismissed.

Case Title: Principal Commissioner Of Income Tax v. M/S Pnc Infratech Ltd. 2023 LiveLaw (AB) 499 [INCOME TAX APPEAL No. - 46 of 2019]

Citation: 2023 LiveLaw (AB) 499

Counsel for Appellant: Manu Ghildyal

Counsel for Respondent: Rahul Agarwal

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