2011 (8) TMI 476 - HC - Income Tax

Unexplained cash credit - under the provisions of Section 68 - genuineness of the transactions and the creditworthiness of their creditors - Whether, the Income Tax Appellate Tribunal was justified in sustaining Rs. 8,24,000.00 on account of unexplained cash credit under the provisions of Section 68 of the Income Tax Act, 1961 - Held that - In the event the revenue still had a doubt with regard to the genuineness of the transactions in issue, or as regards the credit worthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assertion by the A.O. that the credits were a circular route adopted by the assessee to plough back its own undisclosed income into its accounts, can be of no avail. The revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. - If the A.O. was genuinely interested in establishing the allegations made in the assessment order, which is, that the assessee had routed its own money through the device of creditors and sub-creditors, it ought to have given sufficient time to the said noticees to produce relevant material before him. These are aspects which the ITAT did not examine. -

Issues Involved:
1. Justification of the ITAT in sustaining Rs. 8,24,000.00 on account of unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Justification of the ITAT in sustaining Rs. 8,24,000.00 on account of unexplained cash credit under Section 68 of the Income Tax Act, 1961:

Facts and Background:
The assessee, engaged in trading imported tailoring accessories, raised unsecured loans totaling Rs. 8,24,000.00 from its Directors and shareholders during the Assessment Year 2002-2003. The Assessing Officer (AO) added this amount to the assessee's income, questioning the genuineness and creditworthiness of the transactions. The AO issued notices under Section 131 and Section 142(1) of the IT Act, but only one Director appeared, and affidavits along with bank statements and income tax returns were submitted by the creditors.

Assessment by AO:
The AO concluded that the transactions were not genuine and the creditworthiness of the creditors was not established. Consequently, the AO added Rs. 8,24,000.00 to the assessee's income, citing the lack of sufficient balance in creditors' accounts, proximity of cheque issuance to receipt of funds, and non-appearance of four out of five creditors.

Appeal to CIT(A):
The CIT(A) reversed the AO's decision, noting that the identity of the creditors was established, transactions were routed through banks, and necessary documents like bank statements and income tax returns were provided. The CIT(A) found that the creditworthiness and genuineness of the transactions were sufficiently demonstrated by the assessee.

Appeal to ITAT:
The ITAT reversed the CIT(A)'s order, supporting the AO's view that the assessee failed to prove the genuineness and creditworthiness of the transactions. The ITAT emphasized the non-appearance of creditors and the proximity of transactions as indicative of malafide intentions.

High Court's Analysis and Judgment:
The High Court examined the material on record and the principles under Section 68 of the IT Act. It noted that the initial burden of proof lies on the assessee to establish the identity, genuineness, and creditworthiness of the creditors. The Court found that the assessee had provided sufficient evidence, including bank statements and income tax returns, to discharge this burden. The Court criticized the AO and ITAT for not giving adequate time for the sub-creditors to respond to notices and for hastily concluding the assessment.

The High Court emphasized that the revenue failed to provide cogent evidence to support its allegations of circular transactions and malafide intentions. The Court highlighted that the onus shifted to the revenue once the assessee provided sufficient evidence, and mere suspicion or assumptions by the AO were not enough to sustain the addition.

Conclusion:
The High Court reversed the ITAT's judgment and sustained the CIT(A)'s order, allowing the appeal in favor of the assessee. The Court concluded that the ITAT erred in its approach and failed to consider the material evidence provided by the assessee. The question of law was answered in the affirmative, establishing that the ITAT was not justified in sustaining the addition of Rs. 8,24,000.00 under Section 68 of the IT Act.

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