2022 (3) TMI 1281 - AT - Income Tax

Addition u/s 68 - Unexplained cash credit - onus to prove -HELD THAT - It is not just entry of cash credit in the books of accounts that would create liability of explanation from the assessee, but there should be an actual flow of funds. Once the flow of funds is established then the question of explanation from the assessee actually arises. Where the books of accounts on its own establish that the entry was fictitious and sham for window dressing , then as such the initial burden on the revenue is not discharged to shift onus on the assessee to explain further identity, capacity and genuineness of the source. It can be seen in present case that the Ld. AO had observed from the books of accounts that the entry was fictitious and was reversed immediately in next FY on 1/4/2014, without any actual cash flow. But Ld AO was carried away by morality of accounting practices by holding that there is no concept like notional entries in the preparation of books of accounts and to which more pragmatic view was taken by the Ld FAA by accepting the plea of assessee and observing in para 11 of its order that the entire story is one of series of entries passed with a view of shoring up its current ratio for showing the same to the bank for better interest on loans raised onus on the assessee was discharged with the explanation that there was no actual flow of funds and that explanation being factual could not have been rebutted on deemed fiction. Thus Ld. FAA was correct in following the ratio laid in Jatia Investment Co. Ltd. 1992 (8) TMI 16 - CALCUTTA HIGH COURT that fictitious entry not backed up by funds may not be taxable as Cash Credit . FAA has also taken into consideration the fact that the entries were not from strangers but from the partners by way of introduction of capital so the correct course would have been to bring the capital introduced to tax in the hands of the partners as their unexplained income. - Decided against revenue.

Issues:
1. Addition of unexplained cash credit of ?4 crores in the assessment year 2014-15.
2. Whether the explanation provided by the assessee regarding the source of the amount of ?4 crores introduced by the partners is acceptable.
3. Application of Section 68 of the Income Tax Act, 1961 in the case.
4. Consideration of fictitious entries and actual flow of funds in determining tax liability.

Issue 1: Addition of unexplained cash credit of ?4 crores
The case involved an appeal by the revenue against the order of the First Appellate Authority (FAA) deleting the addition of ?4 crores made by the Assessing Officer (AO) as unexplained cash credit. The AO had treated the amount shown in the books of accounts as unexplained cash credit under Section 68 of the Act. However, the FAA deleted the addition, considering the entry as fictitious and noting that there was no movement of cash. The Tribunal upheld the FAA's decision, stating that the entry was made to improve the bank ratio and did not involve actual funds, thereby not constituting taxable cash credit.

Issue 2: Acceptability of the explanation provided by the assessee
The assessee explained that the amount introduced by the partners was by way of cheques to enhance the current ratio for bank compliance, and the reversal of the entry was done without any actual flow of funds. The AO rejected this explanation, deeming the entry as unexplained cash credit. However, the FAA accepted the explanation, emphasizing that the entry was fictitious and did not involve real funds. The Tribunal concurred with the FAA's reasoning, highlighting the importance of actual fund flow in determining tax liability.

Issue 3: Application of Section 68 of the Income Tax Act
The Tribunal referred to the judgment of the Hon'ble Rajasthan High Court and other decisions, emphasizing that under Section 68, the burden of proof lies on the assessee to establish the identity, capacity, and genuineness of cash credits. It was noted that if the cash credit is not satisfactorily explained, it can be treated as income from undisclosed sources. The Tribunal also cited cases where entries without actual cash flow were not considered as unexplained cash credit under Section 68.

Issue 4: Consideration of fictitious entries and actual flow of funds
The Tribunal analyzed previous decisions where entries without actual fund transfers were not deemed as unexplained cash credit. It was highlighted that in cases of fictitious entries aimed at window dressing, the burden of explanation shifts to the revenue only when actual fund flow is established. The Tribunal agreed with the FAA's decision to delete the addition, as the entry was fictitious and not supported by actual funds, thereby not constituting taxable cash credit.

In conclusion, the Tribunal dismissed the revenue's appeal, affirming the FAA's decision to delete the addition of ?4 crores as unexplained cash credit, as the entry was fictitious and did not involve actual funds. The judgment emphasized the importance of actual fund flow in determining tax liability under Section 68 of the Income Tax Act.

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