The Delhi High Court has held that the income tax department cannot ignore documents, explanations furnished by assessee while making unexplained-credit additions.
The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta has observed that the findings of the Commissioner of Income Tax (Appeals) [CIT(A)], subsequently affirmed by the Income Tax Appellate Tribunal (ITAT), were supported by material on record and disclosed no question of law warranting interference.
The dispute arose from the assessment of the respondent company for Assessment Year 2011-12. During the assessment proceedings, the AO noticed that two foreign companies had invested an aggregate ₹55 crore in the assessee through subscription to shares and Compulsory Convertible Debentures (CCDs).
The AO questioned why the two foreign entities would make such a substantial investment in the assessee and proceeded to examine their creditworthiness. Since the transaction involved international elements, references were also made to the Transfer Pricing Officer (TPO) and the Foreign Tax and Tax Research (FT&TR) division.
Ultimately, the AO concluded that the assessee had failed to discharge the burden of establishing the creditworthiness of the investors and added ₹55 crore to its income under Section 68 of the Income Tax Act.
The assessee challenged the assessment before the CIT(A), which allowed the appeal on July 28, 2015. During the appellate proceedings, the assessee produced additional material, including the audited accounts of Redfort India Real Estate Fund II LLC, Mauritius, stated to be the parent investor of the two companies that had invested in the assessee.
The CIT(A) examined the material already submitted before the AO as well as the additional evidence. It found that the two foreign companies had entered into an investment-cum-collaboration arrangement with the assessee. The agreement also resulted in a change in the company’s name. The CIT(A) further noted that the CCDs carried interest at 16% per annum.
The Revenue challenged the CIT(A)’s decision before the ITAT. However, the Tribunal affirmed the appellate findings by its order dated December 18, 2024, prompting the Revenue to approach the Delhi High Court.
The department argued that the assessment year involved was 2011-12, predating the amendment to Section 68 that came into effect from April 1, 2013. According to the Revenue, the AO was therefore entitled to examine not merely the immediate source of the investment but also the “source of the source.”
The department contended that the assessee had failed to satisfactorily explain why foreign companies based in Mauritius and Cyprus would invest ₹55 crore in a relatively new real estate enterprise. It argued that the investment consequently remained unexplained and that the Section 68 addition was justified.
The department therefore submitted that both the CIT(A) and ITAT had erred in deleting the addition.
The assessee argued that the AO had failed to properly consider the material already available on record. The Court was specifically taken through portions of the assessment order where the AO had referred to the TPO’s report and recorded that the TPO had not made any adverse finding.
The assessee also relied upon the investment agreement entered into with the foreign entities and pointed out that the 16% CCD arrangement was known to the AO. According to the assessee, these materials demonstrated the commercial basis of the investment but had not been properly dealt with while framing the assessment.
The assessee further relied upon the CIT(A)’s detailed examination of the record, including the audited balance sheet of Redfort India Real Estate Fund II LLC, Mauritius. The CIT(A) had concluded on the basis of the available material that the investment was genuine and duly explained.
The High Court examined the findings recorded by the CIT(A), which had been reproduced and affirmed by the ITAT.
The Court noted that the assessee company had originally been incorporated on September 13, 2010, under the name Phalak Infrastructure Ltd., with share capital of ₹1 lakh, for carrying out real estate development activities. Subsequently, it entered into an investment-cum-collaboration agreement with New Dimension Holdings Ltd., Mauritius and Velford Ventures Ltd., Cyprus.
Pursuant to the collaboration agreement, the company’s name was changed to Ansal Phalak Infrastructure Pvt. Ltd. with effect from May 3, 2011, and its Memorandum and Articles of Association were also revised.
The investment details were also specifically examined. New Dimension Holdings Ltd., Mauritius acquired 25.9% of the assessee company’s shares for ₹5,70,50,000. Velford Ventures Ltd., Cyprus acquired 14 shares for ₹2,03,000 and invested ₹49,90,47,000 in CCDs issued by the assessee.
The CIT(A) also found that both foreign companies were registered in their respective jurisdictions and were taxpayers there.
The High Court held that the findings recorded by the CIT(A) and affirmed by the ITAT were based on material available on record. The Revenue was unable to demonstrate that those findings were perverse.
Consequently, the Bench held that no question of law arose from the Tribunal’s order and rejected the Revenue’s appeal.
The ₹55 crore addition under Section 68 therefore did not survive.
While dismissing the appeal, the Bench specifically observed that the CIT(A) had considered the documents filed by the assessee in considerable detail, even identifying the relevant page numbers of the paper book. In contrast, according to the Court, the AO had completely ignored those documents and had not even referred to them while dealing with the assessee’s defence.
The Court emphasised that an AO performs an adjudicatory function and is required to deal objectively with the assessee’s reply and documentary evidence. The AO’s duty is not confined to protecting the interests of the Revenue or generating revenue for the exchequer. The officer must also judiciously consider the assessee’s pleas, judgments and documents relied upon during the proceedings.
The High Court went further and held that brushing aside or ignoring documents submitted by an assessee can amount to a breach of the principles of natural justice.
According to the Court, such an approach undermines procedural fairness and can result in injustice to the taxpayer. The Bench found that this was precisely the consequence in the present matter, where material placed by the assessee was not properly dealt with by the AO but was subsequently examined by the CIT(A).
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