2017 (2) TMI 721 - AT - Income Tax

Addition on income from unexplained sources u/s 68 - sham transaction - Held that - Assessing officer without making proper enquiries and without any basis considered the transaction of sale and purchase of commodities as sham transaction. The authorities below were not justified in holding that no credible evidence has been filed on record to prove genuineness of the transactions in the matter. The authorities below are also not justified in holding that no known or boanfide source of the transaction have been proved. Considering the totality of facts and circumstances and the fact that the nature of the income and source on the identical transaction have been accepted by the Department in preceding assessment year, authorities below were not justified in holding the income of the assessee from unexplained sources u/s 68 of the I.T. Act. We accordingly set aside the orders of the authorities below and delete the addition - Decided in favour of assessee

Summary

Issues Involved:
1. Addition under Section 68 of the Income Tax Act, 1961.
2. Treatment of income as "Income from Other Sources" vs. "Business Income".
3. Consistency in tax treatment across assessment years.
4. Credibility of evidence and genuineness of transactions.
5. Applicability of Section 115 BBE.

Detailed Analysis:

1. Addition under Section 68 of the Income Tax Act, 1961:
The primary issue was whether the addition of ?4,37,47,870/- should be treated as deemed income under Section 68. The Assessing Officer (AO) noted that the assessee could not prove the bona fide nature of the commodity transactions and thus treated the income as unexplained under Section 68. The CIT(A) upheld this view, emphasizing the lack of credible evidence and the non-production of the proprietor of Ludhiana Comfin Services.

2. Treatment of Income as "Income from Other Sources" vs. "Business Income":
The assessee argued that the profit from commodity trading should be treated as "business income" and not "income from other sources." The AO and CIT(A) disagreed, stating that the income was not relatable to any known or bona fide source, thus falling under Section 68. However, the Tribunal found that the assessee had consistently declared such income as business income in previous years, which had been accepted by the Revenue.

3. Consistency in Tax Treatment Across Assessment Years:
The assessee presented evidence that similar income was treated as business income in the preceding assessment year 2010-11. The Tribunal emphasized the rule of consistency, citing that the same source of income should not be treated differently in subsequent years unless there is a change in circumstances. The Tribunal referenced the Supreme Court judgment in CIT Vs. D.P. Sandhu Bros, Chembur, which supports that if income is included under any one of the heads, it cannot be brought to tax under the residuary provisions of Section 56.

4. Credibility of Evidence and Genuineness of Transactions:
The assessee provided various documents, including confirmed copies of accounts, contract notes, bank statements, and a remand report, to support the genuineness of the transactions. The AO's remand report did not draw any adverse inference from these documents. The Tribunal noted that the AO did not conduct further investigation or request the production of the proprietor at the assessment stage, thus failing to substantiate the claim of sham transactions.

5. Applicability of Section 115 BBE:
The assessee argued that Section 115 BBE, which imposes a flat rate of tax on deemed income, was not applicable for the assessment year 2011-12 as it came into effect from 1.4.2013. The Tribunal agreed with this view, further supporting the deletion of the addition under Section 68.

Conclusion:
The Tribunal concluded that the assessee had declared the income from commodity trading as business income in previous years, which was accepted by the Revenue. The rule of consistency should apply, and the same income source should not be treated differently in subsequent years. The Tribunal found that the AO and CIT(A) did not provide sufficient grounds to treat the transactions as unexplained under Section 68. Therefore, the addition of ?4,37,47,870/- was deleted, and the appeal of the assessee was allowed. The second ground, being consequential, did not require adjudication.