Documentary Evidence Overrides Non-Appearance: Share Capital Additions Deleted for Satisfying the "Triple Test" of Section 68

Documentary Evidence Overrides Non-Appearance: Share Capital Additions Deleted for Satisfying the “Triple Test” of Section 68

1. The Dispute: Documentary Proof vs. Investigative Suspicion

The Assessing Officer (AO) made an addition under Section 68, treating share capital and premium from nine corporate subscribers as “unexplained cash credits.” The AO dismissed the assessee’s documentation as mere “paper compliance” primarily because the directors of the subscribing companies did not personally appear for questioning.

Revenue’s Stand: The lack of personal attendance by directors suggests the entities are shell companies and the transactions are not genuine.
Assessee’s Stand: The company provided a “voluminous paper book” containing PANs, bank statements, ITR acknowledgments, and audited balance sheets for all subscribers, proving the Identity, Creditworthiness, and Genuineness of the transactions.

2. Legal Analysis: The Shifting Burden of Proof

The Court clarified the mechanics of Section 68, focusing on when the burden of proof shifts from the taxpayer to the Tax Department.

I. The Triple Test of Section 68

To satisfy the requirements of Section 68, the assessee must prove three specific elements regarding the credit:

Identity: Who provided the money? (Proven via PAN, CIN, and incorporation records).
Creditworthiness: Does the subscriber have the financial capacity? (Proven via Audited Financial Statements showing sufficient net worth/funds).
Genuineness: Is it a real business transaction? (Proven via Bank Statements showing the banking flow).

II. The “Personal Appearance” Fallacy

The Court established a critical principle regarding the AO’s investigative powers:

Initial Statutory Onus: Once the assessee provides a banking trail and audited documents, the initial onus is discharged.
The Burden Shifts: After the onus is discharged, the burden shifts to the Revenue to bring contrary evidence to impeach the documents.
Investigative Failure: If the AO suspects the documents, they must use powers under Section 131 (Summons) to compel attendance. If the AO fails to utilize these tools, the Revenue cannot penalize the assessee for the “non-appearance” of third parties. Personal appearance is not a statutory substitute for documented financial traceability.

3. Final Verdict: Deletion Upheld

The Court found that the AO could not merely “brush aside” audited balance sheets without bringing on record evidence to prove they were false.

Verdict: There was no perversity in the Tribunal’s findings; the addition was correctly deleted.
Outcome: The share capital and premium were accepted as genuine business investments.

Key Takeaways for Corporates

Paperwork is King: Maintain a complete “Investor Docket” for every allotment, including the subscriber’s latest audited balance sheet and ITR acknowledgment.
Banking Flow: Ensure all transactions are conducted through banking channels; cash-based share capital is almost impossible to defend under Section 68.
AO’s Duty: Remind the authorities that if they doubt the identity of a corporate subscriber, they have the power to seek verification directly from the subscriber’s Jurisdictional Assessing Officer.

HIGH COURT OF CALCUTTA

Principal Commissioner of Income-tax

Express Tradelink (P.) Ltd.^*

Rajarshi Bharadwaj and Uday Kumar, JJ.

ITAT 95 of 2025
IA NO. GA 2 OF 2025^†

FEBRUARY 4, 2026

Soumen Bhattacharjee, Ankan Das, Raunak Seal and Ms. Shradhya Ghosh, Ld. Advs. for the Appellant. Subhas Agarwal, Rajarshi Chatterjee and Amit Shaw, Ld. Advs. for the Respondent.

ORDER

Uday Kumar, J.- This appeal, preferred by the Revenue under Section 260A of the Income Tax Act, 1961 (“the Act”), is directed against the order passed by the Income Tax Appellate Tribunal (ITAT), “B” Bench, Kolkata, in ITO v. Express Tradelink Ltd. [ITA No. 43(Kol) of 2021, dated 8-2-2024] for the Assessment Year 2009-10. The Revenue has primarily challenge the deletion of an addition of Rs. 7,26,50,000/- made by the Assessing Officer (AO) under Section 68 of the Act on account of unexplained share capital and share premium.

2. The revenue has proposed the following substantial questions of law for consideration:

Whether the Learned ITAT has committed substantial error in law in deleting the addition of Rs 7,26,50,000/- on account of unaccounted cash credit of share capital and premium, ignoring the facts that the assessee failed to prove the identity of the alleged shareholders, their creditworthiness and also the genuineness of the whole transaction?

ii.

Whether the Learned ITAT has committed substantial error in law in coming to the conclusion that the assessee had discharged the initial onus which lay upon him in terms of section 68 of the Income Tax Act, 1961?

iii.

Whether the Learned ITAT has committed substantial error in law in appreciating the facts in proper prospective while concluding in favor of the assessee?

iv.

Whether the Learned ITAT has committed substantial error in law in not following the judicial Principles laid down in the matter of Pr. CIT (Central) v. BST Infratech Ltd. (Calcutta)/?.?.?.?./67/2024 dated 23.04.2024] which is an earlier decision of Hon’ble High Court having a Precedence value.

Whether the Learned ITAT has committed substantial error in law in giving the verdict in favor of the assessee where the matter of unaccounted cash credit of share capital and premium under section 68 of the Act is involved which attracts the Exceptional Clause as stated in para 3.1h of Board’s Circular dated 5/2024 dated 15/03/2024?

vi.

Whether the Learned Tribunal has committed substantial error in law by not considering the principles laid down in the Doctrine of “source of source” and Doctrine of “origin of origin” while passing the impugned order?

3. We have heard Mr. Soumen Bhattacharjee, the learned Advocate for the Revenue and Mr. Subash Agarwal, the learned Advocate for the respondent-assessee.

4. The focal point of the Revenue’s grievance is that the learned Tribunal failed to appreciate the “Test of Human Probability.” It is contended that the nine subscriber companies, while being income-tax assessees, declared meagre income which bore no rational proportion to the high share premium paid. Further, the Revenue places heavy reliance on the non-appearance of the directors of these companies in response to summons issued under Section 131 of the Act.

5. We have carefully perused the records and the findings of the learned Tribunal. It is observed that the respondent-assessee had placed a voluminous “Paper Book” before the authorities, which included PAN details, share application forms, allotment advices, bank statements, ITR acknowledgments, and audited financial statements of all nine corporate subscribers.

6. The law on Section 68 is no longer res integra. Once the assessee offers a reasonable explanation supported by “Cast Iron” documentary evidence of identity and banking flow, the initial statutory onus stands discharged. The burden then shifts squarely to the Revenue. The AO cannot merely brush aside audited balance sheets and PAN details as “paper compliance” without bringing on record contrary evidence to impeach the veracity of such documents.

7. A significant portion of the Revenue’s argument rests on the nonappearance of the subscribers’ directors. We reiterate our settled view 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.

8. Regarding the Revenue’s reliance on the decision of the Hon’ble Supreme Court in PCIT v. NRA Iron & Steel (P) Ltd. (SC), we find the same to be fundamentally misplaced. That case dealt with “phantom” entities where notices were returned unserved. In the present case, the investors are traceable taxpayers who confirmed the transactions through Section 133(6) responses. To equate “traceable investors” with “phantom entities” is a leap in logic that this Court cannot countenance.

9. Furthermore, for the Assessment Year 2009-10, the “Source of Source” doctrine remains inapplicable as the proviso to Section 68, introduced by the Finance Act, 2012, is prospective. The Tribunal noted that the subscribers possessed substantial Net Worth (Reserves and Surplus) far exceeding the investment amounts, thereby satisfying the creditworthiness test.

10. In a corporate assessment, documented traceability through legitimate banking channels carries greater evidentiary weight than the subjective suspicion of an officer. 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. No such evidence has been brought on record by the Revenue.

11. In the result, we find no perversity in the findings of the learned Tribunal. The findings are based on a sound appreciation of facts and settled legal principles. Consequently, no substantial question of law arises for consideration.

12. The appeal being ITAT 95 of 2025, filed by the Revenue stands dismissed, and the connected stay application, IA NO: GA/2/2025, also stands dismissed.

13. There shall be no order as to costs.

14. Urgent certified copy of this judgment, if applied for, be issued to the parties on usual terms.