2017 (5) TMI 906 - AT - Income Tax

Addition u/s. 68 - proof of creditworthiness or genuineness - Held that - CIT(A) utterly failed to consider the crucial fact that once the assessee could obtain such documentary evidences from the payee companies, why he failed to assign any reason for his inability to produce any of the parties or their principal officers for examination before the AO. The summons issued to them stood returned unserved with the remark that no such person was found existing at the address given. No other address was pointed out by assessee otherwise than that on which the summons were issued. As far as the documentary evidence filed by the assessee before the authorities below, we find that in the present scenario, such documentary evidence cannot be relied upon which did not render any help to cross verify the impugned transactions and are against the result of ground level enquiry. In our opinion the peripheral documents in the shape of PAN, so called acknowledgement of returns do not go to prove the identity and creditworthiness of the investors companies, particularly when the entities in question were not found to be existing on the given addresses and that none of the parties were produced nor was there any material on record to rebut the objections of the AO regarding capacity of the alleged investors to make the investment. Mere payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine. The bank accounts of various entities show uniform pattern of transactions and that invariably, the issue of cheques is immediately preceded by the deposits of equivalent amounts in the account either in cash or through cheque/transfer entries. Unless the transactions represented by the entries in the bank accounts are correlated with the business activities and the books of account of the said entities, no justification to disregard the finding of the AO that the above pattern and the frequency of deposits and withdrawals at short intervals would render the accounts, having been used only for the purpose of providing accommodation entries and therefore, it cannot be said that the assessee has explained the source of credits or the transactions to be genuine. - Decided against assessee.

Summary

Issues Involved:
1. Deletion of addition of ?35,00,000/- made by the AO under section 68 of the IT Act on account of undisclosed income.
2. Validity of the CIT(A)'s reliance on the Supreme Court judgment in the case of Lovely Exports (P) Ltd.
3. Assessment of the identity, creditworthiness, and genuineness of the transactions related to the share capital money received by the assessee.

Issue-wise Detailed Analysis:

1. Deletion of addition of ?35,00,000/- made by the AO under section 68 of the IT Act on account of undisclosed income:
The Revenue challenged the deletion of the addition of ?35,00,000/- made by the AO under section 68 of the IT Act, which was initially added as income from undisclosed sources. The AO based this addition on the fact that the respondent received ?35,00,000/- credited to its bank accounts from seven parties as accommodation entries. The AO reopened the case under section 148 of the Act after receiving information from DIT (Inv.) and conducted investigations. The AO issued summons to the alleged share applicants, which returned with postal remarks "No such Person." The respondent failed to produce any principal officers or directors of the companies for examination. Consequently, the AO treated the amount as income from undisclosed sources.

2. Validity of the CIT(A)'s reliance on the Supreme Court judgment in the case of Lovely Exports (P) Ltd.:
The CIT(A) relied on the Supreme Court judgment in the case of Lovely Exports (P) Ltd. to delete the addition made by the AO. The CIT(A) accepted various contentions of the assessee on merits and allowed the appeal, deleting the impugned addition. However, the Tribunal found that the CIT(A) failed to consider the crucial fact that the assessee did not produce any of the parties or their principal officers for examination before the AO. The Tribunal emphasized that mere production of documentary evidence like PAN, return of income, and bank statements is insufficient without the ability to cross-verify the transactions.

3. Assessment of the identity, creditworthiness, and genuineness of the transactions related to the share capital money received by the assessee:
The Tribunal highlighted that the assessee is legally obliged to satisfy the three ingredients of section 68: identity, creditworthiness of creditors, and genuineness of the transactions. In this case, the alleged creditors were not found in existence, and the assessee failed to produce any of the creditors or their principal officers. The Tribunal noted that the documentary evidence provided by the assessee did not render any help to cross-verify the transactions and were against the result of ground-level inquiry. The Tribunal referred to the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. N. Tarika Properties Investment Pvt. Ltd., which emphasized that mere production of incorporation details, PAN numbers, or income tax returns is not sufficient to establish the identity, creditworthiness, and genuineness of the transactions.

The Tribunal concluded that the CIT(A) was not justified in deleting the impugned additions and sustained the addition made by the AO. The appeal of the Revenue was allowed.

Conclusion:
The Tribunal found that the CIT(A) erred in deleting the addition of ?35,00,000/- made by the AO under section 68 of the IT Act. The assessee failed to establish the identity, creditworthiness, and genuineness of the transactions. The Tribunal sustained the addition made by the AO and allowed the appeal of the Revenue.