2024 (11) TMI 1383 - HC - Income Tax

Unexplained credit u/s 68 - assessee has failed to discharge its initial onus to prove creditworthiness and genuineness of transaction - sum reflected as outstanding in the final books of accounts of the Assessee - HELD THAT - It is settled law that the credit in the books of accounts may be taxed u/s 68 if the AO on the basis of evidence and material on record can reasonably infer that the assessee s explanation regarding the transaction reflected as credit in his books, is a subterfuge and the transaction as disclosed, is not genuine. It is also necessary to observe that the AO is not required to examine the commercial expediency of the transaction and supplant its view in place of the transacting parties. AO is required to give a wide latitude to the commercial discretion of the contracting parties to enter into a transaction. And, unless the AO finds, on the basis of cogent material, that the transaction is a subterfuge and is not genuine, the AO must accept the same. There is no dispute as to the creditworthiness of Unitech and that it had paid the amount of Rs. 67.5 crores to the Assessee. There are no attendant circumstances, which would suggest that the Assessee had camouflaged its taxable income as an advance against the sale of property. It is material to note that Unitech has also not reflected the payment as an expense and has derived no tax advantage by making a payment of Rs. 67.5 crores to the Assessee. The transaction is, thus, tax neutral. Both the parties (Unitech as well as the Assessee) have claimed that the said amount was paid and received as an advance for purchase of the subject property. The AO has found fault with the documentation as the stamp paper had been issued prior to the date of the Agreement as typed on the non-judicial stamp paper. Whilst in some cases the finding to the said effect may be of significant relevance in determining the genuineness of the transaction, but may not be dispositive in other cases. Whether a flaw in documentation is indicative of a subterfuge must necessarily be determined bearing in mind other attendant facts of the case. In a case where the attendant facts and material indicates that the assessee has taxable income/ undisclosed assets, which would have been brought to tax but for being disguised as another transaction, any irregularity or flaw in the documentation may be of significance. In absence of any material indicating that the credit reflected in the books, but for being so reflected, may be chargeable to tax, it would not be reasonable for the AO to reject the Assessee s explanation on account of any irregularity or flaw in the documentation of the transaction. As explained in Sumati Dayal 1995 (3) TMI 3 - SUPREME COURT the apparent transaction may be rejected if there are reasonable grounds to indicate that the same is not real. Thus, it may also be apposite for the AO to draw an inference as to what is the real, while considering rejection of what is apparent. It is material to note that the questions of law as projected by the Revenue and as noted at the outset are premised on the assumption that the creditworthiness of Unitech was in doubt. But as noted before there is no cavil that Unitech had sufficient funds to make the payment that it had. The questions as framed are answered in favour of the Assessee and against the Revenue.

Summary

Issues Involved:

1. Whether the Income Tax Appellate Tribunal (ITAT) was justified in confirming the deletion of addition on account of unexplained credit under Section 68 of the Income Tax Act, 1961, despite the assessee allegedly failing to prove the creditworthiness and genuineness of the transaction.
2. Whether the ITAT was justified in confirming the deletion of addition based solely on documentation provided by the assessee, without concrete evidence of the lender's creditworthiness.

Issue-Wise Detailed Analysis:

1. Unexplained Credit under Section 68 of the Income Tax Act:

The primary issue revolved around the addition of Rs. 67.50 crores to the income of the assessee as unexplained credit under Section 68 of the Income Tax Act. The Assessing Officer (AO) had questioned the genuineness of the transaction, primarily due to discrepancies in the documentation, such as the use of a stamp paper issued after the date of the agreement. The assessee contended that the amount was an advance from Unitech for the sale of land, supported by confirmations and bank statements.

The High Court noted that Section 68 allows for taxation of credits in the books of an assessee if no satisfactory explanation regarding the nature and source is provided. In this case, the source of the funds was undisputedly Unitech, a credible entity with sufficient funds, and the transaction was conducted through banking channels. The Court emphasized that the AO's rejection of the explanation must be based on a proper appreciation of material evidence and circumstances, which was not demonstrated in this case.

The Court referred to precedents, including Commissioner of Income Tax v. P. Mohanakala and Sumati Dayal v. Commissioner of Income Tax, to emphasize that the AO must objectively form an opinion based on evidence. The Court found that the CIT(A) and ITAT had appropriately accepted the assessee's explanation, considering the identity and creditworthiness of Unitech and the genuineness of the transaction.

2. Reliance on Documentation and Absence of Concrete Evidence:

The Revenue contended that the ITAT had erred in relying on the documentation provided by the assessee without concrete evidence of the lender's creditworthiness. The High Court, however, observed that the documentation, including confirmations from Unitech and bank statements, sufficiently established the transaction's genuineness and the creditworthiness of Unitech. The Court highlighted that Unitech had not claimed the payment as an expense, indicating no tax advantage was sought, thereby reinforcing the transaction's credibility.

The Court reiterated that the AO's role is not to question the commercial expediency of a transaction unless there is cogent evidence of a subterfuge. In this case, the AO's concerns were primarily based on documentation flaws, which, without supporting evidence of tax evasion or undisclosed income, were insufficient to justify the addition under Section 68.

Conclusion:

The High Court upheld the ITAT's decision, affirming that the assessee had satisfactorily discharged its onus of proving the source and nature of the credit. The Court dismissed the Revenue's appeal, concluding that the questions of law were resolved in favor of the assessee. The Court emphasized the necessity for the AO to base conclusions on substantial evidence and not merely on procedural discrepancies in documentation.