2012 (10) TMI 470 - AT - Income Tax

Unexplained Cash Credits - CIT(A) On remand report of the assessing officer and reply of the assessee classified the loans into two categories, viz. loans pertaining to the period prior to commencement of business, and loans pertaining to the period subsequent to the commencement of business by the assessee. As decided by Court in case of CIT V/s. Kapur Bros 1978 (10) TMI 26 - ALLAHABAD HIGH COURT CIT(A) held that any cash credit introduced before the commencement of business cannot be added in the hands of the firm, as the firm has not earned any income or made any sale. He accordingly directed the assessing officer to identify the cash credits which were made prior to the commencement of business and delete the additions made in that behalf. As for the other cash credits relating to the period subsequent to the commencement of business, the CIT(A) confirmed the additions made by the assessing officer in that behalf. Aggrieved by the relief granted by the CIT(A), Revenue is in appeal, whereas the assessee preferred its appeal objecting to the addition sustained by the CIT(A). Held that - It is for the assessee to prove the genuineness of a cash credit not only by establishing the identity of the creditor, but also his creditworthiness and the genuineness of the transaction, and unless all the three ingredients are satisfied, genuineness of a cash credit cannot be accepted. In the circumstances, the order of the CIT(A) is upheld with regard to cash credit additions relating to the period subsequent to the commencement of business by the assessee - Grounds of the assessee as well as the Revenue are dismissed.

Summary

Issues:
Cross appeals against a common order of the Commissioner of Income-tax(Appeals) for assessment year 2006-07 involving the disallowance of unverified credits under S.68 of the Act.

Analysis:
1. The assessee, engaged in retail trade, declared a loss and showed unsecured loans during assessment. The assessing officer disallowed a significant amount of unverified credits, treating them as unproved under S.68 of the Act.
2. During appellate proceedings, the assessee provided a list of creditors with confirmations for some credits. The CIT(A) classified loans into pre and post commencement of business periods, following precedents to allow credits before business commencement.
3. The Revenue appealed against the relief granted by the CIT(A), arguing that additions for pre-business credits should not have been deleted. The assessee contended that post-business credits were genuine, citing lack of justification for the additions.
4. The ITAT upheld the CIT(A)'s decision to delete additions for pre-business loans, citing the firm's lack of income during that period. However, it supported the additions for post-business credits based on the need to prove the genuineness of transactions, including creditor identity, creditworthiness, and transaction genuineness.

Conclusion:
The ITAT dismissed both the assessee's and Revenue's appeals, upholding the deletion of pre-business loan additions but confirming post-business credit additions based on the requirement to establish the genuineness of transactions.