2017 (9) TMI 304 - AT - Income Tax

Addition in FDRs from cash received from directors - deemed dividend addition u/s 2(22)(e) - unexplained source of source of investment - Genuineness of transaction - whether sub creditor had the creditworthiness of making the investment? - Held that - The second FDR of ₹ 4 crores was made in cash by the assessee company in CITI Bank, Gurgaon. The Ld. AR has referred to the ledger account in the books of M/s OEC Diascans Ltd. and the ledger account in the books of Mr. Harish Kanwar and Ms. Anjali Kanwar of M/s OEC Diascans Ltd which support the submissions made by the Ld. AR that the amount of ₹ 4 crores were received by the Directors Ms. Anjali Kanwar and Mr. Harish Kanwar from M/s OEC Diascans Ltd.The Department has not brought anything on record to dispute the aforesaid sequence of transactions. Moreover, the return of amount to the Directors and by the Directors to M/s OEC Diascans Ltd. is also evidenced by the bank statements and the certificate given by the bank to the Directors. This clearly shows that the transaction was genuine within the meaning of section 68 of the Act. Department had tried serving notice to M/s OEC Diascans Ltd. which remained un-served. However, the Department despite having the address of the changed company M/s Silver Sand Corporation did not make any enquiry with respect to the aforesaid transactions. The net worth of the company M/s Silver Sand Corporation Ltd. from its balance-sheet reveals that it is regularly filing its return of income and total sources of funds are ₹ 85.46 crores. The DIN and the address of the said company are also on record. The assessee had therefore, proved the genuineness, creditworthiness and identity as required under section 68 of the Act. The addition cannot be made in the hands of the assessee for not proving the source of source of investment and the assessee is not required to prove that the sub creditor had the creditworthiness of making the investment. - Decided in favour of assessee.

Summary

Issues:
1. Validity of the order passed by the CIT(A)
2. Enhancement of income by &8377; 4.00 Crores
3. Treatment of amount received as advance against sale of property
4. Ignoring explanation and evidence submitted by the appellant company
5. Drawing adverse inference without opportunity of rebuttal/cross-examination

Analysis:
1. The appeal challenged the order of the CIT(A) for the assessment year 2011-12. The assessee contended that the order was legally flawed and factually incorrect. The CIT(A) enhanced the income of the appellant company by &8377; 4.00 Crores without following due procedure as prescribed by law. The grounds of appeal raised concerns regarding the validity of the CIT(A)'s order both in terms of law and facts.

2. The core issue revolved around the addition of &8377; 4.00 Crores to the income of the appellant company. The CIT(A) treated this amount as undisclosed income, alleging that it represented an advance against the sale of property. The appellant argued that the amount was received from the Directors against a property deal that did not materialize. The CIT(A) failed to consider the explanations and evidences provided by the appellant, leading to the dispute over the enhancement of income.

3. The CIT(A) questioned the genuineness of the transaction involving the advance received against the sale of property. The appellant presented agreements and receipts to support the claim that the amount was returned to the original source due to the deal falling through. The appellant demonstrated the identity, creditworthiness, and genuineness of the transaction, emphasizing compliance with Section 68 of the Income-tax Act, 1961.

4. The appellant highlighted the failure of the department to conduct a thorough investigation into the transaction and the involved parties. Despite evidence supporting the legitimacy of the transaction, the CIT(A) drew adverse inferences without providing the appellant with an opportunity for rebuttal or cross-examination. The appellant's contentions were supported by legal precedents emphasizing the burden of proof on the assessing officer to establish the undisclosed nature of income.

5. Citing judicial pronouncements, the Tribunal allowed the grounds raised by the appellant company, thereby overturning the CIT(A)'s decision. The Tribunal emphasized the importance of establishing the identity of third parties and the burden on the department to disprove the legitimacy of transactions once the initial burden is discharged by the assessee. The appeal in favor of the assessee was allowed, highlighting the lapses in the CIT(A)'s decision-making process and the need for a more thorough examination of the facts and evidence presented.