Ignoring evidence furnished by the assessee while making a Section 68 addition breaches procedural fairness.

For AY 2011–12, the Assessing Officer (“AO”) made an addition of ₹55 crores under Section 68 of the Income-tax Act, 1961, treating investments made by New Dimension Holdings Ltd., Mauritius, and Velford Ventures Ltd., Cyprus, in the assessee-company as unexplained.

The investments comprised subscription to equity shares and Compulsorily Convertible Debentures (“CCDs”) pursuant to an investment-cum-collaboration agreement, under which the assessee’s name was also changed to Ansal Phalak Infrastructure Pvt. Ltd.

The Commissioner of Income Tax (Appeals) deleted the addition after considering the agreement, audited financial statements of the investor companies and their parent investor, certificates of foreign inward remittance, and other supporting material.

The Income Tax Appellate Tribunal affirmed the CIT(A)’s decision on 18 December 2024.

Whether the addition of ₹55 crores under Section 68 of the Income-tax Act, 1961, could be sustained when the assessee had furnished material establishing the identity of the foreign investors, the remittance of funds, and the nature of the share and CCD transactions?

Whether the concurrent findings of the CIT(A) and the Tribunal deleting the addition gave rise to any substantial question of law warranting interference by the High Court?

Whether the AO had acted in accordance with procedural fairness by adequately considering the assessee’s reply and documentary evidence?

The Court applied Section 68 of the Income-tax Act, 1961, which permits an unexplained credit appearing in an assessee’s books to be treated as income where the assessee fails to satisfactorily explain its nature and source.

The Court proceeded on the basis that the assessee’s explanation had to be evaluated objectively against the documentary evidence establishing the transaction.

It further applied the appellate principle that concurrent factual findings based on relevant material should not be disturbed in the absence of perversity or a substantial question of law.

The Court also reaffirmed the principles of natural justice and procedural fairness, requiring an adjudicating authority to consider the assessee’s replies, documents and pleas objectively.

The Court found that the assessee had produced substantial evidence explaining the ₹55-crore investment: the investment-cum-collaboration agreement, the revised corporate documents, audited balance sheets of both foreign investor companies, certificates of foreign inward remittance issued by HSBC, and details identifying the remittances as share-application money and CCD investments.

The transaction was commercially documented, involved identifiable companies registered and taxed in Mauritius and Cyprus, and included the acquisition of shares and subscription to CCDs, carrying a 16% coupon or interest.

The CIT(A) had examined this material in detail and recorded a finding that the investment was genuine; the Tribunal affirmed that finding.

Since the Revenue could not demonstrate that these findings were perverse or unsupported by the record, the High Court held that no question of law arose.

The Court additionally criticised the AO for ignoring the assessee’s documentary defence instead of dealing with it objectively, characterising such conduct as inconsistent with procedural fairness.

The concurrent findings of the CIT(A) and the Tribunal were neither perverse nor legally erroneous, and no question of law arose for consideration.

The Revenue’s appeal was accordingly dismissed.

The Court also observed that the AO must fairly and specifically consider the assessee’s replies and documents, as failure to do so may breach natural justice and procedural fairness.