ITAT Mumbai Deletes ₹23.98 Crore Section 68 Addition on Preference Share Capital of Chat Computers Limited

Background of the Dispute

The appeal before the Income Tax Appellate Tribunal, Mumbai Bench, arose from an order passed by the Commissioner of Income Tax (Appeals)–49, Mumbai, dated 31.12.2024, for Assessment Year 2005-06. The order in dispute flowed from a reassessment framed under Section 143(3) read with Section 254 of the Income Tax Act 1961 by the Deputy Commissioner of Income Tax, Central Circle 7(1), Mumbai.

The core controversy related to a sum of ₹23,98,00,000 treated by the Assessing Officer (AO) as unexplained cash credit under Section 68, being part of preference share capital received by Chat Computers Limited from several Kolkata-based corporate investors.

The assessee challenged the following issues in essence:

  • Sustaining the addition of ₹23,98,00,000 as unexplained cash credit under Section 68 in respect of preference share capital.
  • Alleged non-compliance by the AO with earlier directions of the ITAT.
  • Violation of principles of natural justice by not providing copies of statements of directors of investor companies before relying on the same.
  • Incorrect onus placed on the assessee to produce directors of investor-companies for cross-examination.
  • Reliance on third-party investigation reports and examinations conducted by other officers, without independent examination by the jurisdictional authority.

Facts and Procedural History

Original Return and First Assessment

  1. The assessee filed its return of income for AY 2005-06 on 31.10.2005 declaring income of ₹1,19,186.
  2. An assessment under Section 143(3) was completed on 28.12.2007 determining total income at ₹28,73,00,000.
  3. The difference was entirely attributable to an addition of ₹28,73,00,000, representing preference share capital and premium, treated as unexplained cash credit under Section 68.

Nature of Share Capital in Dispute

  • During the relevant year, the assessee issued cumulative redeemable preference shares.
  • Total amount received: ₹28,73,00,000
    • Face value: ₹5,74,60,000
    • Share premium: ₹22,98,40,000
  • Number of investors: 37 companies, all based in Kolkata.

The Revenue’s stance was that these companies were part of a larger “accommodation entry” network.

Reopening and Earlier Litigation Rounds

  • The case was subsequently reopened under Section 147.
  • A reassessment under Section 147 read with Section 143(3) was passed on 27.12.2012, wherein separate issues such as set-off of short-term capital loss were dealt with.
  • In the first round of appeal, the CIT(A) deleted the entire preference share capital addition.
  • The Department appealed to the ITAT in ITA No. 2070/Mum/2013.

The ITAT, vide order dated 16.10.2014, did not uphold the blanket deletion. Instead, it:

  • Accepted preference share capital received from five identified companies as genuine:

    1. M/s Regency Share Holding P Ltd – ₹1,35,00,000
    2. M/s Yulam Marketing P Ltd – ₹1,05,00,000
    3. M/s Nihat Promoters & Fiscal P Ltd – ₹1,75,00,000
    4. M/s M G Green Field P Ltd – ₹30,00,000
    5. M/s Hoogly Vinmay P Ltd – ₹30,00,000

  • Total accepted as genuine: ₹4,75,00,000

The Tribunal remanded the matter to the AO to re-examine the balance amount in light of its earlier decision in ITA No. 1714/Mum/2009 dated 08.10.2010.

Pursuant to these directions, the AO, in his order dated 23.03.2016 under Section 143(3) read with Section 254, treated:

  • ₹4,75,00,000 – as genuine preference share capital (as per ITAT directions); and
  • Balance ₹23,98,00,000 – as unexplained cash credit under Section 68.

This balance addition is the subject of the present appeal.

Approach of the Assessing Officer in the Fresh Assessment

Non-Acceptance of Documentary Evidence

In the remand proceedings, the AO issued multiple notices under Section 143(2) and Section 142(1) along with detailed questionnaires, in particular calling upon the assessee to:

  • Produce several specific investor-companies based in Kolkata.
  • Furnish supporting documentation for verification.

When the assessee responded that:

  • All relevant documents (share application forms, board resolutions, PAN details, financial statements, etc.) had already been filed in earlier proceedings, and
  • It was not practicable to compel Kolkata-based directors to attend personally in Mumbai,

the AO rejected this stand. The AO stressed that:

  • No “new” evidence had been produced beyond what had been considered earlier.
  • The onus to conclusively prove genuineness rested squarely on the assessee.
  • Failure to produce directors for cross-examination and repeated adjournment requests indicated an attempt to delay and obstruct.

Reliance on Investigation Report

A critical plank of the AO’s case was an investigation report from the office of Addl. DIT (Investigation)–Unit I, Kolkata, which, according to the AO: