2014 (8) TMI 685 - HC - Income Tax

Income from undisclosed sources u/s 68 Amount advanced through proper channel or not Held that - The amounts advanced are not substantial and in most of the cases, the amounts are ranging from 25,000 to 90,000 and in some cases, it is exceeding ₹ 1,50,000 - in some of the cases even the karta of the HUF had produced the cash book and their ledger account before the AO - though u/s 68, the AO is free to show with the help of the enquiry conducted by him into the transaction which has taken place between the creditor and the sub creditor that the transaction between the two were not genuine and that the sub-creditor had no creditworthiness, it will not necessarily mean that loan advanced by the sub-creditor to the creditors was income of the assessee from undisclosed sources unless there is evidence direct or circumstantial, to show that the amount which had been advanced by the sub-creditor to the creditor had actually been received by the sub-creditor from the assessee. All the cash creditors have affirmed in their examination that they had advanced money to the assessee from their own respective bank accounts - when there is categorical finding even by the AO that the money came from the respective bank accounts of the creditors, which did not flow in the shape of the money, such an addition cannot be sustained the order of the Tribunal is upheld Decided against Revenue.

Summary

Issues Involved:
1. Whether the identity, capacity, and genuineness of the cash creditors were proved by the respondent-assessee.
2. Whether the addition of Rs. 17,27,250 under section 68 of the Income-tax Act, 1961, was justified.

Issue-wise Detailed Analysis:

1. Identity, Capacity, and Genuineness of Cash Creditors:
The respondent-assessee, engaged in the business of finance, raised loans from various parties, most of whom were relatives. The Assessing Officer (AO) questioned the genuineness of these loans, noting that cash was deposited in the creditors' bank accounts immediately before issuing cheques to the respondent-assessee. The AO issued a show-cause notice to the respondent-assessee, who contended that the creditors were assessed to income tax, had their own bank accounts, and provided their Permanent Account Numbers (PANs). The Commissioner of Income-tax (Appeals) [CIT(A)] and the Income-tax Appellate Tribunal (ITAT) agreed with the respondent-assessee, stating that once the identity, capacity, and genuineness of the transaction are proved, the assessee is not required to prove the source of the creditors' funds. The High Court upheld this view, emphasizing that the creditors' identity, capacity, and genuineness were established, and the onus shifted to the AO to disprove these facts.

2. Addition Under Section 68:
The AO added Rs. 17,27,250 to the respondent-assessee's income as undisclosed sources under section 68, arguing that the creditors failed to prove the source of the funds. The CIT(A) and ITAT both deleted this addition, stating that the respondent-assessee had discharged the burden of proof by providing the creditors' details, including their PANs and confirmation of the transactions. The High Court concurred, noting that the AO's suspicion, without concrete evidence, was insufficient to justify the addition. The court cited precedents, including the Supreme Court's rulings in CIT v. Orissa Corporation P. Ltd. and CIT v. Daulat Ram Rawatmull, to support the view that the assessee is not required to prove the source of the source. The High Court concluded that the AO's action was based on mere suspicion and that the ITAT's decision was based on a proper appreciation of evidence, thus no substantial question of law arose from the ITAT's order.

Conclusion:
The High Court dismissed the appeal, affirming that the respondent-assessee had adequately proved the identity, capacity, and genuineness of the cash creditors, and the addition under section 68 was unwarranted. The court emphasized that suspicion alone cannot justify such additions, and the AO failed to provide conclusive evidence that the funds belonged to the assessee. The appeal was dismissed in limine, with no order as to costs.