2017 (6) TMI 405 - HC - Income Tax

Addition u/s 68 - not disclosing the source of the source of the investment - Held that - Tribunal was not justified in not accepting the explanation regarding the investment made by her in the property inasmuch as the authorities could not have gone into the question of source of the source and that too by converting the proceedings regarding addition under Section 68 of the Act into that under Section 69 of the Act without proper notice to the assessee in that regard. - Decided in favour of assessee.

Summary

Issues involved:
Assessment Year 2005-06, Addition under Section 68 of the Income Tax Act, 1961, Addition under Section 69 of the Income Tax Act, Justification of Tribunal's decision, Explanation for unexplained investments, Source of source not required to be proved, Adverse inference against the assessee, Legal principle regarding source of source.

Analysis:
The case pertains to the Assessment Year 2005-06 where the appellant filed a return showing income of ?98,998. The Assessing Officer issued a notice under Section 144(1) seeking explanation for adding ?10,07,749 invested in property under Section 68 of the Income Tax Act. The appellant explained the investment was a gift from her mother, supported by the mother's testimony confirming the gift. However, the amount was added under Section 69 by the authorities, leading to the current appeal challenging the Tribunal's decision.

The main issue raised was whether the Tribunal was justified in confirming the addition under Section 69 when the notice sought explanation under Section 68, focusing on the source of the source of the investment. Section 68 deals with unexplained credits in the books, while Section 69 pertains to unexplained investments not recorded in the books. The appellant provided a satisfactory explanation regarding the source of the investment, backed by documentary evidence and witness testimony. However, the authorities deemed the explanation unsatisfactory as the source of the mother's jewelry acquisition was not explained.

Legal precedent, including the Supreme Court decision in C.I.T. vs. Daulat Ram Rawatmull, established that proving the source of the source is not mandatory, and adverse inferences cannot be drawn against the assessee for not disclosing it. A Division Bench of the Allahabad High Court also upheld this principle in a previous case. Therefore, the Tribunal's decision to reject the appellant's explanation based on the source of the source was deemed unjustified. The Tribunal erred in converting the proceedings from Section 68 to Section 69 without proper notice to the assessee.

Consequently, the High Court ruled in favor of the assessee, setting aside the Tribunal's decision, as well as those of the Commissioner of Income Tax (Appeals) and the Assessing Officer. The appeal was allowed, emphasizing that the authorities cannot delve into the source of the source of an investment when the assessee has provided a satisfactory explanation regarding the primary source of the funds used for investment.