2020 (12) TMI 339 - AT - Income Tax

Unexplained cash credit u/s 68 - Unexplained cash credit u/s 68 - there was no actual transaction of cash credit in the books of accounts which were based on fake entries having no substance. - assessee has used fraudulent device to show the share capital in the books of accounts in order to comply the SEBI Guidelines for bringing the public issue. - whether the share capital increased in the respective years under consideration represents the unexplained cash credit within the meaning of Section 68? - HELD THAT - There was no actual transaction cash inflow carried out by the assessee for enhancing the share capital in the years under consideration - enhancement in the share capital represents merely a book entry which was based on the manipulation of the accounts with collaboration of bank staff. This fact has not been addressed by the authorities below despite such contention was pleaded by the assessee before them. Thus, in the absence of any doubt on the contention of the assessee which is also supported from the report of the bank and the SEBI, it is concluded that the impugned cash credit in dispute is nothing but represents the bogus/fictitious entries after manipulation in the accounts. Whether book entry can attract the provisions of Section 68 ? - There was no iota of doubt expressed by the authorities below on the explanation furnished by the assessee regarding the entries showing the alleged unexplained cash credit - there was no actual transaction of cash credit in the books of accounts which were based on fake entries having no substance. As such the assessee has used fraudulent device to show the share capital in the books of accounts in order to comply the SEBI Guidelines for bringing the public issue. There is a legal fiction created under Section 68 and on the basis of such legal fiction an entry in the books of accounts is deemed to be income of the assessee chargeable to tax in the event the assessee fails to discharge the onus imposed upon it under Section 68 - such legal fiction can be applied in the case of actual transactions incorporated in the books and not be applied on the transactions which are merely book entries and representing the fake transactions, having no substance. Admittedly it is the set-aside proceedings before us. The ITAT on the earlier occasion has set aside the matter to the file of the AO with the direction to verify the identity, credit worthiness and genuineness of the transactions and to adjudicate the issue afresh. Undisputedly, the scope for deciding the issue in the set-aside proceedings is very limited. As such, it is limited to the extent of the direction provided by the higher authority. Question of identity, creditworthiness of the parties and genuineness of transaction arises where there is a real transaction, then the assessee is under the obligation to discharge the onus imposed under Section 68 of the Act. Once it has been established beyond doubt that impugned cash credit entries represents the bogus/fake entries after manipulating the accounts, then in such a situation, in our considered opinion the question of discharging the onus as imposed under Section 68 of the Act does not arise. It is because and for the simple reason that it is beyond the capacity of the assessee to comply the direction of the ITAT as discussed above. Accordingly, a question arises, should the assessee be penalized due to the non-compliance of the conditions imposed under Section 68 of the Act in the given facts and circumstances. It is well-settled that an obligation gets discharged due to impossibility of performance. The law of impossibility of performance does not necessarily require absolute impossibility, but also encompass the concept of severe impracticability. In our humble opinion, the doctrine of impossibility of performance applies in this case. Due to uncontrollable circumstances, the performance of the obligation as specified under Section 68 of the Act became impossible to perform for the assessee. The impossibility of performance releases the assessee from its obligation for the non-compliance of the conditions imposed under Section 68. The assessee cannot be penalized if it fails to furnish the details of the parties to justify the identity, creditworthiness and genuineness of the transaction in the given facts and circumstances. Accordingly, we set aside the finding of the Learned CIT(A) and direct the AO delete the addition - Decided in favour of assessee.

Issues Involved:
1. Validity of reopening assessment proceedings under Section 147 of the Income Tax Act.
2. Confirmation of additions under Section 68 of the Income Tax Act towards share capital.
3. Examination of whether the share capital increase represents unexplained cash credit.

Detailed Analysis:

1. Validity of Reopening Assessment Proceedings under Section 147:
The assessee initially challenged the reopening of assessment proceedings under Section 147 of the Income Tax Act, claiming the proceedings were "bad in law and without jurisdiction." However, during the appellate proceedings, the assessee's representative chose not to press this ground. Consequently, the tribunal dismissed this issue as not pressed.

2. Confirmation of Additions under Section 68:
The primary contention was whether the additions made by the Assessing Officer (AO) under Section 68 of the Income Tax Act towards share capital were justified. The AO treated the sums of ?50,50,000/-, ?11,77,000/-, and ?1,22,34,000/- for the Assessment Years (A.Ys) 1995-96, 1996-97, and 1997-98 respectively, as unexplained cash credits. The AO's decision was based on the assessee's failure to provide satisfactory details regarding the identity, creditworthiness, and genuineness of the transactions, as directed in the set-aside proceedings by the ITAT.

3. Examination of Whether the Share Capital Increase Represents Unexplained Cash Credit:
The assessee argued that the increase in share capital was a result of manipulated book entries, facilitated by a bank officer, to comply with SEBI guidelines for bringing a public issue. The assessee provided evidence including a report from the bank's personal department and a SEBI report confirming the manipulation.

The tribunal noted that despite the assessee's contention and supporting evidence, the AO and the CIT(A) failed to address the claim that no actual cash transactions occurred. The tribunal emphasized that the provisions of Section 68 require an actual cash credit entry, which was not the case here as the entries were merely book manipulations without real cash inflows.

The tribunal concluded that since the entries were fictitious and no real transactions occurred, Section 68 could not be applied. It was further noted that the assessee could not comply with the ITAT's directions to prove the identity, creditworthiness, and genuineness of the transactions due to the nature of the manipulated entries. The tribunal invoked the legal principle "lex non cogit ad impossibilia" (the law does not compel a man to do what he cannot possibly perform) to hold that the assessee should not be penalized for failing to provide details of non-existent transactions.

Conclusion:
The tribunal set aside the findings of the CIT(A) and directed the AO to delete the additions made under Section 68 for all the assessment years in question. The appeals by the assessee were partly allowed, and the tribunal pronounced the order on 29/10/2020 at Ahmedabad.

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