Once AO Scrutinises Identity & Creditworthiness Of Shareholders, No Reassessment Action Without 'Additional Info' About Income Escapement: Delhi HC

The Delhi High Court recently rejected Revenue's appeal against deletion of additions made to the income of an assessee-company alleged to have evaded tax, observing that the AO had already scrutinised the identity and creditworthiness of the shareholders and in the absence of any additional material coming to light, reassessment action could not have been initiated.A division bench of Justices Vibhu Bakhru and Tejas Karia observed,“During the original proceedings, the AO had issued a questionnaire…The Assessee had furnished the response to the said questionnaire and had submitted the share application money, share application form, proof of identity, copy of PAN and copy of ITR as well as the bank statements of the share applicants. Thus, the identity as well as the creditworthiness of the applicants was duly scrutinized…Therefore, the AO was required to have some additional information, beyond what had already been examined, in order to form reasons to believe that the Assessee's income had escaped assessment.”Assessee is a public limited company engaged in manufacturing brown paper used for packaging. Revenue was aggrieved by deletion of ₹25,32,35,000/- addition made to Assessee's income under Section 68 of the Income Tax Act, 1961 on account of unexplained share capital and share premium received during the relevant AY.Assessee contended that documents and details forming the basis of the original assessment had been duly submitted and stood accepted in the order under Section 143(3) of the Act and the reassessment action did not disclose how it failed to disclose relevant material facts during the original assessment.Revenue submitted although the original assessment was completed under Section 143(3), the AO at that stage had only examined the details of share capital and premium received on a test-check basis. However, during the post-search enquiries, the Investigation Wing found that the Assessee had received share capital with exorbitant premium from non-existent companies.While quashing Revenue's action, the Commissioner of Income Tax (Appeals) had found that a substantial number of Assesse's investors were registered as NBFCs with RBI and had been in existence prior to the incorporation of the Assessee. Thus, there was no basis to treat them as paper companies.Agreeing, the High Court said that in the present case, the AO did not have any tangible material at the stage of issuance of the notice under Section 148 of the Act. “His reasons for issuing the notice was based on certain information from Investigation Wing. The AO did not have any specific details regarding the income that was alleged to have escaped assessment…The copy of the ITR of the share applicants would reflect their capacity to subscribe to the shares. Thus, the income declared by the companies could not furnish any reasons for the AO to believe that the Assessee's income had escaped assessment.”Adding that a notice under Section 148 of the Act could not be issued on mere suspicion, the Court dismissed Revenue's appeal.Appearance: For the Appellant : Mr. Sanjay Kumar, Ms. Monica Benjamin and Ms. Easha Kadian, Advocates. For the Respondent : Mr. Gautam Jain and Mr. Manish Yadav, Advocates.Case title: Pr. Commissioner Of Income Tax (Central)-2 v. M/S K.R. Pulp And Papers Ltd.Citation: 2025 LiveLaw (Del) 704Case no.: ITA No. 529/2023Click here to read order

Once AO Scrutinises Identity & Creditworthiness Of Shareholders, No Reassessment Action Without 'Additional Info' About Income Escapement: Delhi HC

Kapil Dhyani

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