The High Court of Chhattisgarh, in a significant income tax appeal, has ruled that an assessee cannot discharge the heavy burden of proof under Section 68 of the Income Tax Act, 1961, merely by producing superficial documents like incorporation certificates, PAN details, or income tax returns of an investor company. The court set aside an order of the Income Tax Appellate Tribunal (ITAT) that had deleted an addition of ₹6,40,50,000 made on account of unexplained share capital and premium from a shell company.
The Division Bench, comprising Chief Justice Ramesh Sinha and Justice Bibhu Datta Guru, held that the ITAT’s finding was “not only contrary to record but also perverse in law” as it ignored “unimpeachable evidence” gathered by the Assessing Officer (AO) that demonstrated the investor was a shell entity used for routing the assessee’s own unaccounted funds.
Background of the Case
The matter originated from a search and seizure operation under Section 132 of the Income Tax Act conducted on February 8, 2017, at the premises of the respondent, Agrawal Infrabuild Pvt. Ltd. Consequently, a notice under Section 153A was issued, and the assessee filed its returns of income.
During the assessment for the Assessment Year 2014-15, the Assessing Officer made an addition of ₹6,40,50,000 under Section 68 of the Act, treating it as unexplained cash credit from bogus share capital/premium received from shell companies.
The AO recorded a detailed finding, stating: “The investigation in the case of Satya Group has brought to light a clear modus operandi of introducing unaccounted income into the books of account in the guise of share capital and share premium. The so-called investor companies are nothing but shell/paper entities…created and controlled by entry operators…for the sole purpose of providing accommodation entries in lieu of commission.” The AO’s investigation, which included analyzing bank statements and recording statements of key persons, concluded that “the funds, ostensibly shown as share application money, originated from the Satya Group itself” and were routed back to the assessee.
The assessee appealed to the Commissioner of Income Tax (Appeals)-3, Bhopal [CIT(A)], who dismissed the appeal on November 27, 2019. The CIT(A) found that the investor company, M/s Artline Fiscal Services Pvt Ltd, was a “shell company with no business activity, no employee and without any physical existence” and was “engaged in giving accommodation entries.” The CIT(A) concluded that the assessee had failed to discharge the onus of proving the identity, creditworthiness, and genuineness of the transaction as required under Section 68.
However, the assessee found relief at the Income Tax Appellate Tribunal (ITAT), Raipur, which allowed its appeal on March 30, 2023, and deleted the addition. This led the Revenue to file the present appeal before the Chhattisgarh High Court.
Arguments Before the High Court
Mr. Ajay Kumrani, appearing for the Revenue, argued that the ITAT had grossly erred by relying solely on documents filed by the assessee without appreciating the incriminating material unearthed by the AO. He contended that investigations had revealed the investor company was a paper entity controlled by the Satya Group to launder unaccounted income. He placed strong reliance on the Supreme Court’s judgment in PCIT (Central)-1 v. NRA Iron & Steel (P.) Ltd. (2019), which held that if investor companies lack financial capacity, the assessee cannot be said to have discharged its burden under Section 68.
Representing the assessee, Mr. Siddharth Dubey supported the ITAT’s order. He submitted that the assessee had discharged its statutory burden by furnishing ITRs, audited accounts, bank statements, and evidence of compliance under the Vivad Se Vishwas Scheme (VSVS) by the investor. Citing the Supreme Court’s decision in CIT v. Lovely Exports (P) Ltd. (2008), he argued that once the investor’s identity is established, the department must proceed against the investor, not the assessee.
High Court’s Analysis and Decision
The High Court meticulously analyzed the scope of Section 68, reiterating that the law requires an assessee to “satisfactorily establish three cumulative ingredients: (i) the identity of the creditor/investor; (ii) the capacity or creditworthiness of such investor; and (iii) the genuineness of the transaction.”
The Bench, led by the Chief Justice, observed that the AO had undertaken a “painstaking exercise” which revealed that the investor company was controlled by the assessee’s group and used as a conduit. The court noted, “The money trail unearthed by the AO further demonstrated that the funds originated from the coffers of the Satya Group itself, were routed through a web of layering and multiple accounts controlled by entry operators, and eventually reintroduced into the assessee’s books.”
The Court heavily criticized the ITAT’s approach, stating, “In our view, the approach of the ITAT is wholly unsustainable. It failed to consider that accommodation entry operators also routinely obtain PAN, file ITRs, and maintain bank accounts, which are used precisely to give a facade of legitimacy to sham transactions. Such superficial compliance cannot, by itself, prove creditworthiness or genuineness.”
Distinguishing the precedents cited by the assessee, the Court clarified that the judgment in Lovely Exports (supra) cannot be interpreted to mean the inquiry ends once identity is shown. The subsequent ruling in NRA Iron & Steel (supra) makes it clear that capacity and genuineness must also be proven.
Answering the substantial question of law in favour of the Revenue, the High Court held, “…it is clear that the assessee has failed to discharge the heavy burden cast upon it under Section 68 of the IT Act. The AO and CIT(A) were justified in treating the share capital and premium as unexplained cash credit. The ITAT, in ignoring this unimpeachable evidence and deleting the addition merely on the basis of superficial documents, has recorded a finding that is not only contrary to record but also perverse in law.”
The Court allowed the Revenue’s appeal, setting aside the ITAT’s order dated March 30, 2023, and restoring the order of the CIT(A) which had confirmed the addition of ₹6,40,50,000.
