2025 (4) TMI 725 - HC - Income Tax

Addition u/s 68 - unexplained cash credits - various incriminating material and documents were seized during the course of the search and it was found that the said persons were engaged in providing accommodation entries by issuing cheques (pay orders in lieu of cash) to a large number of beneficiary companies - HELD THAT - Revenue has handed over a tabular statement to indicate that apart from three companies which had extended credit to the assessee in FY 2005-06 relevant to AY 2006-07 all other companies in respect of which the transactions in FY 2006-07 were found to be non-genuine by the AO are different. A finding as to the genuineness of the companies from whom the assessee had availed credit in the FY 2005-06 relevant to AY 2006-07 cannot be a foundation for a finding that the companies from whom the assessee had availed the credit in FY 2006-07 relevant to AY 2007-08 are genuine. The learned ITAT has not examined the capacity or the creditworthiness of eight companies which were not subject matter of examination in the proceedings relating to the earlier assessment years AY 2006-07 . Accordingly the present appeal is allowed and the impugned order to the extent that it relates to AY 2007-08 is set aside. The matter is remanded to the learned ITAT to consider afresh.

ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the addition of INR 3,34,31,000/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961, as unexplained cash credits, without adequately assessing the capacity or creditworthiness of the investor companies involved in the transactions for the Assessment Year (AY) 2007-08.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework revolves around Section 68 of the Income Tax Act, which pertains to unexplained cash credits. The section allows the AO to add such credits to the income of the assessee if the nature and source of the credits are not satisfactorily explained. The judgment also references the precedent set in the case of Pr. Commissioner of Income Tax (Central)-2 v. Nagar Dairy Pvt. Ltd., which influenced the decision on the maintainability of the cross-objections filed by the respondent (assessee).

Court's interpretation and reasoning:

The Court observed that the ITAT had set aside the addition made by the AO for AY 2007-08 based on findings related to the genuineness of companies for a different assessment year (AY 2006-07). The Court noted that the ITAT had not independently verified the genuineness or creditworthiness of the companies involved in the transactions for AY 2007-08. The Court emphasized that findings from one assessment year cannot be automatically applied to another without proper examination.

Key evidence and findings:

The Court examined the tabular statement provided by the Revenue, which detailed the companies involved in the transactions for AY 2006-07 and AY 2007-08. It was found that only three companies overlapped between the two assessment years, and the remaining eight companies had not been examined by the ITAT for their creditworthiness or genuineness concerning AY 2007-08.

Application of law to facts:

The Court applied Section 68 to the facts of the case, highlighting the necessity for the ITAT to independently assess the genuineness and creditworthiness of the companies involved in the AY 2007-08 transactions. The Court concluded that the ITAT's reliance on findings from a different assessment year without proper examination was insufficient to justify the deletion of the addition made by the AO.

Treatment of competing arguments:

The Revenue argued that the ITAT failed to assess the creditworthiness of the companies involved in AY 2007-08 transactions. The Assessee contended that the companies were genuine and existing, as previously determined by the ITAT. The Court sided with the Revenue, emphasizing the need for independent verification for each assessment year.

Conclusions:

The Court concluded that the ITAT erred in setting aside the addition made by the AO without examining the genuineness and creditworthiness of the companies involved in AY 2007-08 transactions. The matter was remanded to the ITAT for fresh consideration.

SIGNIFICANT HOLDINGS

The Court held that findings related to the genuineness of companies in one assessment year cannot be used as a basis for determining the genuineness of companies in another assessment year without proper examination. The Court emphasized the necessity for the ITAT to assess the capacity and creditworthiness of investor companies for each relevant assessment year independently.

Core principles established:

The judgment reinforced the principle that each assessment year must be evaluated on its own merits, and findings from one year cannot be automatically applied to another without thorough examination. The assessment of unexplained cash credits under Section 68 requires a detailed analysis of the capacity and creditworthiness of the entities involved in the transactions.

Final determinations on each issue:

The Court set aside the ITAT's order concerning AY 2007-08 and remanded the matter for fresh consideration, instructing the ITAT to independently verify the genuineness and creditworthiness of the companies involved in the transactions for that year. Pending applications were also disposed of as part of the judgment.

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