2020 (12) TMI 1198 - AT - Income Tax

Addition u/s 68 - Unexplained cash creditors - onus to prove - HELD THAT - A perusal of the material on record shows that the entire sum credited stands explained with reference the creditor's existing capital and/or current income. No verification of the same was however done by the AO. In fact, as explained by Sh. Bardia during hearing, the production of the creditors by the assessee was sought by the AO in the assessment proceedings as an alternate to the submission of an explanation in writing - Even so, the assessee, despite furnishing documentary evidences, offered to produce the creditors, and for which he referred to the assessee's communications to the AO dated nil and 07/12/2017 - It was for this reason that we have opined that the impugned credits are to be regarded as explained upon confirmation of the claims not clarified with reference to the material on record. Our decision, it may be appreciated, is in complete agreement with Metachem Industries 1999 (9) TMI 21 - MADHYA PRADESH HIGH COURT by the jurisdictional High Court, wherein it stands held that once it is established that it is the creditors' money that has found its way in the books of the assessee, no adverse inference u/s. 68 could be drawn in its respect in the case of the assessee. The said establishment, it may be though clarified, is to be, in terms of the settled law, not on the basis the creditors' identity alone, as where the sum credited is shown to originate from his bank account, but also his capacity as well as the genuineness of the credit transaction. Assessment is bad in law inasmuch as the same is not u/s. 153C as the filing of the return of income for the year on 26/9/2015 was followed by a search u/s. 132(1) at the premises of Sh. Tara Chand Khatri, loose papers and documents from whose residence relating to the assessee were found and seized - We are wholly unable to appreciate the assessee's case in this regard. A seizure of a document pertaining to the assessee would not by itself give rise to the jurisdiction to the AO to proceed u/s. 153C by issuing notice u/s. 153A. The same could only be on the AO being positively satisfied as to the said material having a bearing on the assessee's income for a specified year/s. There is no whisper of any reliance by the AO on the said material while assessing the assessee's income for the relevant year, or even in the appellate proceedings. Now it could be nobody's case that the AO ought to be necessarily so satisfied - a matter of fact, and which therefore is to be demonstrated, and, further, without in any manner stating, much less showing, the basis thereof, even as there is nothing on record, nor any pointed out, to exhibit the said satisfaction. The provision, as its' reading would show, is for the benefit of the Revenue, providing it additional time to frame an assessment in search and search-related cases. No case stands made out, with there even being no reference to any such material relied upon in determining the assessee's income even during hearing. The assessee's challenge is without any basis on facts and in law

Summary

Issues Involved:
1. Unexplained credits under Section 68 of the Income Tax Act, 1961.
2. Verification of the creditworthiness of creditors.
3. Procedural aspects of assessment under Section 153C.

Issue-wise Detailed Analysis:

1. Unexplained Credits under Section 68:
The primary issue in this appeal is the treatment of fresh credits amounting to ?117.60 lacs and ?252.50 lacs from two creditors, Tarun Khatri (TK) and Jetha Nand Khatri (JK), respectively. The Assessing Officer (AO) classified these credits as unexplained under Section 68 due to a significant mismatch between the creditors' reported annual earnings and the credited amounts. The AO relied on precedents such as Roshan Di Hatti vs. CIT and CIT vs. Korlay Trading Co. Ltd. to support his assessment.

2. Verification of the Creditworthiness of Creditors:
The Commissioner of Income Tax (Appeals) (CIT(A)) found the AO's additions untenable, stating that the assessee had submitted all necessary documents, including the balance sheets of the creditors, proving their creditworthiness. The CIT(A) noted that the credits were loans from family members for business financing, and the AO should have issued summons to the creditors under Section 131 to enforce their attendance. The Tribunal observed that the AO did not doubt the genuineness or identity of the creditors but questioned their creditworthiness due to the mismatch between their reported earnings and the credits. The Tribunal emphasized that the AO's sole reliance on the creditors' taxable income to measure their creditworthiness was incorrect. The Tribunal conducted a preliminary verification and found the credits largely explained through the creditors' existing capital and non-taxable income.

3. Procedural Aspects of Assessment under Section 153C:
The assessee raised an additional plea regarding the validity of the assessment, arguing that it should have been conducted under Section 153C following a search at the premises of Sh. Tara Chand Khatri, where documents relating to the assessee were seized. The Tribunal dismissed this plea, stating that the mere seizure of documents does not automatically trigger jurisdiction under Section 153C. The AO must be satisfied that the seized material has a bearing on the assessee's income, which was not demonstrated in this case. The Tribunal found no reference to any such material in the assessment or appellate proceedings, rendering the assessee's challenge baseless.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order. The Tribunal found that the assessee had satisfactorily explained the credits in terms of the creditors' existing capital and non-taxable income. The AO was directed to verify specific claims regarding long-term capital gains and the balance in the creditors' accounts as on 31/3/2015. The Tribunal expressed dissatisfaction with the manner in which both the AO and CIT(A) handled their verification obligations, leading to the matter reaching the second appellate stage. The Tribunal also rejected the assessee's procedural challenge under Section 153C, finding no basis for it in facts or law.