2022 (6) TMI 662 - AT - Income Tax

Unexplained credits u/s. 68 - identity of creditor not established - HELD THAT - As it can be held that the settled proposition of law so far is that when identity of creditor is established then the assessee is not under obligation to establish the source of source of the creditor. It is for this reason that now an amendment has been brought in Section 68 of the Act and which is to take effect from 1st April, 2023 to apply in relation to the assessment year 2023-24 and subsequent assessment years, whereby it is provided that the nature and source of any sum, whether in form of loan or borrowing, or any other liability credited in the books of an assessee, shall be treated as explained only if the source of funds is also explained in the hands of the creditor or entry provider. In the case in hand even the source of source was explained or to say discovered by the Ld. AO during the remand proceedings but then by putting suspicion on the transactions of the source of source, the amounts in the hands of assessee have been considered to be unexplained credits u/s. 68 - Decided in favour of assessee.

Summary

Issues:
Appeal against appellate order u/s. 250(6) of the Income Tax Act, 1961 - Assessment year 2006-07 - Unexplained credits u/s. 68 of the Act - Source of source verification - Credibility of creditor - Addition made by Assessing Officer - Remand report - Judicial review of findings.

Analysis:
The appeal was filed against the appellate order u/s. 250(6) of the Income Tax Act, 1961 for the assessment year 2006-07. The case involved unexplained credits u/s. 68 of the Act, where the Assessing Officer considered the unsecured loan reflected in the balance sheet as unexplained credits due to lack of response from the assessee. The Commissioner of Income Tax (Appeals) called for a remand report from the Assessing Officer, but the appeal was dismissed as the explanation of the source was not satisfactory.

The Tribunal considered the seven grounds of appeal raised by the assessee, challenging the impugned order for not considering the remand report and relevant evidence explaining the source. The assessee argued that the source of source need not be proved, citing relevant case laws to support the contention. On the other hand, the Revenue argued that unaccounted money was infused into the company, questioning the substantial business activities justifying the unsecured loan.

Upon review, the Tribunal observed that the authorities below focused on finding a trail of transactions to taint the funds in the hands of the assessee, which seemed unjustified. The financial standing and worthiness of the creditor were not disputed, but the authorities presumed unaccounted money based on transactions with other companies. The Tribunal noted discrepancies in the transactions and found no conclusive evidence linking the unaccounted money to the assessee.

Considering the settled proposition of law and the obligation to establish the source of funds, the Tribunal held that the assessee was not required to prove the source of source of the creditor. The Tribunal highlighted an upcoming amendment to Section 68 of the Act, emphasizing the need to explain the source of funds in the hands of the creditor. As the source of source was explained during the remand proceedings, the Tribunal set aside the addition made u/s. 68 of the Act and allowed the appeal.

In conclusion, the Tribunal found in favor of the assessee, setting aside the impugned order of the Commissioner of Income Tax (Appeals) and the addition made u/s. 68 of the Act. The judgment was pronounced in open court on 31st May, 2022.