Court Rules No Substantial Question of Law Under Section 260A; Mere Allegations of Shell Companies Insufficient Without Independent Evidence
In a significant ruling delivered on October 5, 2026, the Calcutta High Court dismissed an appeal filed by the Principal Commissioner of Income Tax-2, Kolkata, challenging the Income Tax Appellate Tribunal's (ITAT) decision to delete an addition of Rs. 9.32 crore made under Section 68 of the Income Tax Act, 1961. The addition related to sale proceeds received by Superdeal Resources Private Limited from the sale of unlisted equity shares during the assessment year 2022-23.
The Revenue contended that the purchaser entities involved were shell or paper companies and that the transactions constituted accommodation entries aimed at tax evasion. It argued that the Tribunal erred in law by not applying the "test of human probabilities" and disregarding the Calcutta High Court's guidelines in Principal Commissioner of Income Tax v. Swati Bajaj ([2022] 446 ITR 56), which caution against accepting such transactions without rigorous scrutiny.
However, the Division Bench comprising Justices Rajarshi Bharadwaj and Sudip Deb observed that Section 260A of the Income Tax Act does not empower the High Court to act as a general appellate authority to reappraise evidence or substitute its view for that of the ITAT. The Court emphasized that interference with factual findings is permissible only when they are perverse-lacking any evidence, ignoring material evidence, or based on no reasonable legal ground.
The ITAT had considered extensive documentation produced by the assessee, including purchase and sale bills, investment statements, bank statements, income-tax returns, audited financials, and confirmations from purchasers. Notices under Section 133(6) issued to the purchasers were replied to, and the Tribunal found no independent substantive evidence presented by the Assessing Officer to dislodge the assessee's case.
Moreover, the Tribunal took note of the assessee's regular business activity involving purchase and sale of investments, the movement of investments over previous years, and the fact that proceeds were received through proper banking channels. Earlier scrutiny proceedings had not doubted these investments. The Tribunal therefore concluded that the Revenue failed to prove that the sale consideration represented unexplained cash credit.
The High Court clarified that while the test of human probabilities and surrounding circumstances are relevant in examining the genuineness of transactions under Section 68, additions cannot rest merely on suspicion, generalized allegations, or inferences unsupported by evidence. The Court underscored that the Swati Bajaj judgment does not mandate treating every sale of unlisted shares or transaction with alleged shell companies as bogus without a holistic evaluation of evidence.
The Court also held that acceptance of investments in prior assessment years does not bar examination of subsequent sale transactions but is a relevant factor when assessing allegations of fictitious investments. The ITAT had rightly considered all relevant materials cumulatively, and the Revenue's arguments amounted to a request for reappraisal of facts, which is impermissible under Section 260A.
Consequently, the Calcutta High Court found no substantial question of law to entertain the appeal and dismissed the Revenue's petition at the admission stage, with no order as to costs.
This judgment reaffirms the principle that tax authorities must produce independent and substantive evidence to substantiate allegations of accommodation entries and cannot rely on mere assertions or suspicion. It also clarifies the limited scope of High Court intervention under Section 260A, reinforcing the finality of factual findings by the Income Tax Appellate Tribunal.
Bottom Line:
Income Tax - Section 260A - High Court cannot reappreciate evidence in appeal unless Tribunal's findings are shown to be perverse - Deletion of addition under Section 68 on account of sale proceeds of unlisted shares upheld - Mere allegation that purchaser companies were shell entities and reliance on test of human probabilities is insufficient without independent evidence linking sale proceeds to assessee's undisclosed income.
Statutory provision(s):
Income Tax Act, 1961 Section 68, Section 133(6), Section 260A
