Suspicion, Human Probabilities Insufficient For Tax Additions Without Evidence: Telangana High Court

The Telangana High Court on 6 March held that additions under Section 68 of the Income Tax Act, 1961 cannot be sustained merely on suspicion or the test of human probabilities and must rest on concrete evidence.

A Division Bench of Justices Sam Koshy and Suddala Chalapathi Rao dismissed the Revenue's appeals and upheld the Income Tax Appellate Tribunal (ITAT)'s decision to remand the issue of Rs. 182 crore share premium received by Bharathi Cement Corporation Pvt. Ltd. for fresh examination. It observed:

“the Assessing Officer has applied the test of human probabilities and circumstantial evidence, therefore, the learned ITAT, upon appreciation of the material available on record, has remanded the matter for determination by the Assessing Officer to verify the cash flow management of the assessee-company and pass orders based on factual evidence, but not on human probabilities, and directed the Assessing Officer to decide the issues comprehensively based on material on record and also the Assessing Officer can direct the assessee-company to produce any evidence for arriving a just conclusion, in accordance with law.”

The case arose from assessment proceedings for A.Ys. 2009-10 and 2010-11, where Bharathi Cement received substantial share premiums from investor companies and allotted preference shares at high premiums.

The Assessing Officer (AO) treated the amount as unexplained cash credits under Section 68 and also assessed it as income under Section 56, alleging that the transactions were not genuine and constituted quid pro quo arrangements linked to alleged governmental favours. The CIT(A) affirmed these findings.

On appeal, the ITAT set aside the additions and remanded the matter to the AO with a direction to re-examine the issue by verifying the fund flow and cash trail and to arrive at conclusions based strictly on factual evidence, without resorting to circumstantial reasoning or the test of human probabilities.

The Revenue contended that the transactions were commercially irrational, involved negligible shareholding despite massive investments, and were colourable devices warranting confirmation of additions under Section 68.

Bharathi Cement argued that the investments were genuine capital receipts, duly recorded, and that the additions rested solely on suspicion without any cogent material. It contended that the issue must be decided on evidence and proof, and not on suspicion or the theory of human behaviour and predominance of probabilities.

The High Court held that the ITAT's remand was justified and purely procedural, aimed at proper factual verification. It observed that where the Assessing Officer relied on human probabilities and circumstantial evidence, a fresh examination based on actual material was necessary. It held:

“The said findings arrived by the learned ITAT, in directing fresh examination of facts by the Assessing Officer, is essentially procedural in nature and falls within the domain of factual adjudication, to decide the issue comprehensively, solely basing on the material on record but not on human probabilities. Further, in view of the remand, both the Revenue as well as assessee can place sufficient material to prove their respective contentions. Thus, in our considered opinion, the said findings are justified and do not warrant interference by this Court.”

The Bench further held that an order of remand for re-verification of facts does not give rise to a substantial question of law and therefore does not warrant interference.

Accordingly, the High Court dismissed the appeals and directed the AO to undertake a comprehensive reassessment of the transactions.

For Appellant: B. Narasimha Sharma, Additional Solicitor General of India

For Respondent: D.D.Nageshwar Rao, Advocate