No Additions On Mere Suspicion When Shareholders In Capital Assessments Are Traceable: Calcutta High Court

The Calcutta High Court on 4 February held that in share capital assessments, income tax additions cannot be sustained on mere suspicion, when the investors are identifiable, the taxpayers and share subscriptions are backed by audited records, and clear there are clear banking trails for transactions.

A Division Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar dismissed an appeal filed by the Principal Commissioner of Income Tax, Kolkata, against Express Tradelink Pvt. Ltd. (taxpayer) for the Assessment Year 2009-10.

The Bench held:

"In a corporate assessment, documented traceability through legitimate banking channels carries greater evidentiary weight than the subjective suspicion of an officer…”

The appeal arose from an order of the Income Tax Appellate Tribunal, Kolkata Bench, which had deleted an addition of Rs. 7.26 crore based on alleged unexplained share capital and share premium.

The Revenue contended that the taxpayer failed to prove the real identity and creditworthiness of nine corporate shareholders who had subscribed to shares at a high premium, despite declaring comparatively low income. It also argued that the directors of the subscriber companies did not appear in response to a summons issued under Section 131 of the Income Tax Act, and that the Tribunal failed to apply the test of human probability.

Rejecting these submissions, the High Court Bench noted that the taxpayer-company had placed on record extensive documentary evidence, including PAN details, share application forms, allotment advices, bank statements, income tax return acknowledgements, and audited financial statements of all nine investor companies.

The Court observed that the transactions were routed through regular banking channels and that confirmations had been received from the investors in response to notices under Section 133(6) of the Income Tax Act.

The Bench reiterated that once a taxpayer furnishes "cast iron" documentary evidence establishing identity and banking traceability, the initial statutory burden under Section 68 (unexplained cash credits) stands discharged and the onus to prove otherwise shifts to the Revenue.

On the issue of the non-appearance of the investor's directors, the Court held that:

“personal appearance is not a statutory substitute for documented financial traceability. The AO is vested with co-terminus powers under Section 131. If the AO fails to utilize these powers to compel attendance or to seek verification from the creditors' respective Assessing Officers, the Revenue cannot visit the consequences of such investigative failure upon the assessee. Suspicion, however strong, cannot replace evidence.”

The Bench further clarified that for Assessment Year 2009-10, the doctrine of "source of source" was inapplicable, as the proviso to Section 68 introduced by the Finance Act, 2012, is prospective in nature.

The High Court also cautioned against the casual use of expressions such as "money laundering" or "round-tripping" in the absence of concrete evidence establishing a direct link between the funds invested and the assessee's own unaccounted money. It stated:

“Terms like "money laundering" or "round-tripping" should not be used casually without specific, corroborative evidence showing a "live link" that the funds originated from the assessee's own coffers.”

Accordingly, the Court dismissed the Revenue's appeal.

For Appellant: Advocates, Soumen Bhattacharjee, Ankan Das, Raunak Seal, Shradhya Ghosh

For Respondent: Advocates, Subhas Agarwal, Rajarshi Chatterjee, Amit Shaw