‘Test of Human Probability’ Cannot Disregard a Verified and Audited Paper Trail: Calcutta HC Upholds Deletion of ₹6.22 Cr Addition [Read Order]

The Calcutta High Court has upheld the deletion of an addition of ₹6.22 crore made under Section 68 of the Income Tax Act, 1961, on account of unexplained share capital and share premium. The Bench held that documented traceability through legitimate banking channels carries greater evidentiary weight than subjective suspicion of the Assessing Officer.

The appeal was filed by the Principal Commissioner of Income Tax-1, Kolkata against M/s Shipra Enclave Pvt. Ltd., challenging the order of the Income Tax Appellate Tribunal, Kolkata dated 29th November, 2023 for the Assessment Year 2012-13. The Tribunal had allowed the assessee’s appeal and deleted the addition of ₹6,22,00,000/- made by the Assessing Officer under Section 68 of the Act.

The Division Bench comprising Justice Rajarshi Bharadwaj and Justice Uday Kumar observed that the case brought into sharp focus the conflict between the Revenue’s reliance on the “Test of Human Probability” and the Assessee’s reliance on “Cast Iron Documentary Evidence.”

The Revenue proposed substantial questions of law contending that the Tribunal erred in deleting the addition without considering unjustified payment of high premium to acquire shares of a company and doubtful creditworthiness of the subscribers, ignoring the ratio laid down in PCIT vs. NRA Iron & Steel (P) Ltd. It was also argued that the assessee failed to discharge legal obligation to prove the source of funds.

The facts revealed that the assessee, a Non-Banking Financial Company (NBFC) duly registered with the Reserve Bank of India, had raised share capital and premium from fifteen corporate entities. During assessment, the Assessing Officer noted the receipt of large share premium and issued summons under Section 131 to the directors of the subscriber companies. On their failure to appear personally, the Assessing Officer considered them as “shell entities” and treated the entire amount as unexplained cash credit. The CIT(A) affirmed the addition.

The Tribunal reversed the finding, noting that the assessee had placed before the Assessing Officer PAN details, income tax return acknowledgements and audited financial statements of all fifteen subscriber companies. The subscribers were active taxpayers and had confirmed the transactions in response to notices issued under Section 133(6) of the Act.

The High Court reiterated that to discharge the initial onus under Section 68, the assessee must establish the identity of the creditor, their creditworthiness and the genuineness of the transaction. It recorded that the Tribunal had conducted a factual inquiry and found that the assessee provided a “Cast Iron” documentary foundation. The audited balance sheets of the subscribers demonstrated substantial net worth far in excess of the amounts invested.

The Court held that the Assessing Officer’s reliance on the non-appearance of directors was misplaced. Personal appearance of a director is not a statutory substitute for documented traceability in a corporate assessment, especially when the entities are active taxpayers.

The Bench further observed that the valuation of shares is a matter of commercial wisdom and the Revenue needs to prove that the funds originated from the assessee to establish the otherwise.

Finding no perversity in the Tribunal’s findings, the Court concluded that no substantial question of law arose for consideration. The appeal filed by the Revenue was dismissed and the order of the Tribunal deleting the addition of ₹6,22,00,000/- was upheld.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates