2019 (5) TMI 1130 - HC - Income Tax

Addition u/s 68 - unexplained cash credit - credit entries in capital account represented Trade Advances for purchase of goods - additional evidence u/r 46A - ITAT deleted the addition - HELD THAT - Assessment Orders were passed by the Assessing Authority on 20.12.2016 after holding 3 hearings on 28.9.2016, 1.12.,2016 and 19.12.2016. The only evidence produced by the Assessees and having been examined by the Assessing Authority was a letter dated 8.12.2016 which has been quoted by CIT(A) in its order. Another letter filed by the Assessees dated 19.12.2016 is also quoted by the learned CIT(A) as the last submission made by the Assessees, wherein it is contended that those advances were made to the Assessees against the purchase of goods. Therefore, in our opinion, nothing prevented the Assessing Authority to examine the matter further even summoning the said creditor viz., Proprietor of M/s.Kannan Enterprises, Kollam. Unless the such credit entries were shown to be explained, merely based on assumptions that there were certain increase in the capital of the Assessees which was also explained to the Assessees, the Assessing Authority could not have made such an addition merely on assumptions. Assessing Authority and the Appellate Authority have the power of Civil Court u/s 131 including the power to enforce attendance of the witnesses and the parties. If a half-hearted enquiry was made by the Assessing Authority and additions were made as unexplained cash credits u/s 68 and such finding of facts were reversed by the Appellate Authority, it would not give rise to any substantial question of law for our consideration u/s 260A. The two Appellate Authorities have concurrently held that those credit entires represented Trade Advances for purchase of goods and Rule 46A does not apply in the present case. No substantial question of law .

Summary

Issues:
- Disputed addition under Section 68 of the Income Tax Act
- Validity of the order of the CIT (A) admitting additional evidence
- Interpretation of Rule 46A of the IT Rules
- Justification of the alleged creditor's source of funds

Disputed addition under Section 68:
The Revenue challenged the deletion of an addition made under Section 68 of the Income Tax Act regarding unexplained credits received from M/s.Kannan Enterprises. The Assessees claimed the credits were advances against purchases, supported by explanations and documents. The Assessing Authority added the amounts as unexplained credits, but the CIT (A) deleted the addition, finding the credits genuine and properly explained. The Tribunal upheld the CIT (A)'s decision, emphasizing that the Assessees substantiated the sources of the credits for obtaining credit facility.

Validity of CIT (A) order admitting additional evidence:
The Revenue argued that additional evidence admitted by the CIT (A) should have led to remanding the case to the Assessing Authority per Rule 46A of the IT Rules. However, the High Court found that both the CIT (A) and the Tribunal thoroughly examined the evidence on record, concluding that the credits were legitimate advances for business purposes.

Interpretation of Rule 46A of the IT Rules:
The Tribunal stressed that Rule 46A relevance arises only when additional evidence is crucial for reaching conclusions. The High Court concurred, noting that the Assessees provided substantial support for their claims, justifying the deletion of the addition under Section 68 by the CIT (A).

Justification of the alleged creditor's source of funds:
The High Court analyzed the credibility of the alleged creditor's source of funds. The Assessing Authority's doubts were dispelled as the creditor was assessed to tax, provided necessary details, and confirmed the credits. The High Court found no justification for the addition under Section 68, as the Assessees adequately proved the legitimacy of the credits. The High Court dismissed the Revenue's appeals, deeming the findings of the lower authorities reasonable and not warranting any substantial legal questions.