Allahabad HC: Investments through Banking Channels are Presumed Genuine

allahabad high court law insider

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Published on: December 18, 2023 at 12:41 IST

The Allahabad High Court emphasized that investments made through banking channels, duly reflected in regular financial returns, should not be questioned unless the revenue department can establish otherwise.

The bench, comprising Justice Saumitra Dayal Singh and Justice Shiv Shanker Prasad, underscored that if investments in the assessee company are made through legitimate banking channels and disclosed in the investing companies’ returns, there is no basis for disbelief.

The court clarified that the responsibility to prove otherwise lies squarely with the revenue authorities. It held that unless the revenue authorities present evidence demonstrating that the investment did not occur, the burden remains undischarged.

The case involved the receipt of share capital amounting to Rs. 19 crores by the assessee from three entities during the assessment year 2010-11.

The money, invested through banking channels and duly disclosed by the investors in their books, faced scrutiny following search proceedings at the premises of the assessee company and its investor firms. Relying on statements recorded during the search, the department questioned the legitimacy of the Rs. 19 crores investment in the share capital, treating it as an unexplained cash credit entry.

The Income Tax Appellate Tribunal, Agra Bench, Agra dismissed the department’s appeal, upholding the order of the Commissioner of Income Tax (Appeals) that favored the assessee.

The additions made under Section 68 of the Income Tax Act, relating to the share capital of Rs. 19 crores from three entities—M/s Jewellock Trexim Pvt. Ltd., M/s Alberta Merchants Pvt. Ltd., and M/s Gurprasad Holding Pvt. Ltd.—were deleted.

In response, the Income Tax Department filed an appeal under Section 260-A of the Income Tax Act, 1961, challenging the Tribunal’s decision.

The key question before the court was whether the Tribunal’s order was flawed for not addressing material facts, transaction chains, and the probative value of statements, as asserted in the assessment order and Sudarshan Silk and Sarees case.

The court observed that the individuals whose statements were recorded lacked knowledge or were non-functional directors. Additionally, it noted that the assessing authority relied on untested statements without allowing the assessee an opportunity for cross-examination.

The court upheld the Tribunal’s findings, emphasizing that the department failed to produce evidence beyond recorded statements to establish the Rs. 19 crores investment as bogus or not genuine.

It concluded that, prima facie, in the presence of investments through legitimate banking channels, the presumption stands in favor of their authenticity.

As the department could not disprove these transactions, the court dismissed the appeals filed by the department in the case titled “Principal Commissioner Of Income Tax v. M/S Pnc Infratech Ltd.”

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