2012 (11) TMI 853 - HC - Income Tax

Undisclosed Income u/s 68 - held that - While examining creditworthiness and genuineness of the transactions u/s 68 of the IT Act what is to prove is the source of the assessee and not source of the source ignoring the circumstantial evidences, surrounding circumstances - Revenue submitted that CIT was not justified in deleting the additions made under Section 68 of the Act, as the depositors credit worthiness is not proved. The submission is wholly misconceived. CIT(A) has found that the companies are genuine and they are on the record. Copies of the audit report of the depositor companies have also been filed and merely because the names have been changed would not mean that they are not genuine. However the deposit made by the account payee cheque was from their own fund. The finding of CIT (appeal) is based on material on record - No Legal infirmity in the impugned order passed by the Tribunal - appeal fails and is dismissed.

Summary

Issues:
1. Whether the ITAT was legally correct in upholding the order regarding identity and creditworthiness of companies.
2. Whether the ITAT was legally correct in examining creditworthiness and genuineness of transactions under section 68 of the IT Act.

Analysis:

Issue 1:
The appeal under Section 260-A of the Income Tax Act, 1961 was filed against the ITAT's order regarding the identity and creditworthiness of two companies, M/s Sanghal Hotels (P) Ltd. (later changed to Friends Buildtech and Developers (P) Ltd.) and M/s FCS Cold Storage (P) Ltd. (later changed to GIR Shelters and Storage (P) Ltd.). The Assessing Officer added the amount received from these companies under Section 68 of the Act due to alleged lack of creditworthiness. However, the CIT (Appeals) deleted the addition after considering the companies' registration, income tax records, PAN copies, audit reports, and cheque payments. The Tribunal upheld the CIT's decision, emphasizing that the companies were genuine and had sufficient funds for the transactions. The High Court concurred with this finding, stating that the depositors' creditworthiness was proven, and there was no legal infirmity in the Tribunal's order.

Issue 2:
The second issue pertains to the examination of creditworthiness and genuineness of transactions under section 68 of the IT Act. The ITAT observed that the focus should be on the source of the assessee's funds rather than the source of the source, emphasizing circumstantial evidence and surrounding circumstances. The High Court agreed with this approach, noting that the deposit made by the companies through account payee cheques was from their own funds, as evidenced by the audit reports and account records submitted. The Court held that the ITAT's decision was legally sound, dismissing the appeal filed by the Revenue.

In conclusion, the High Court upheld the ITAT's decision, emphasizing the genuine nature of the companies involved and the sufficiency of funds for the transactions. The judgment highlights the importance of proving creditworthiness and focusing on the original source of funds in such cases under the IT Act.