2022 (7) TMI 77 - AT - Income Tax

Addition u/s 68 - Unexplained credit - scope of amended provisions of section 68 - onus to prove the source of source for the period prior to such amendment - genuineness of transactions and creditworthiness of the payer as well as even the source of the payer for making investment in the share capital of the appellant proved or not? - HELD THAT - When assessing officer has examined the source of the source and asked the assessee to explain, then onus shifts on the assessee to explain the same. Thus, at the cost of repetition we state that credit-worthiness of the company is not established and the amount introduced as share capital is that of received from M/s Texworld Fashions Pvt. Ltd. and M/s Sita Fabric Mills Pvt. Ltd and these two companies had no liability to repay the said unsecured loan. As far as the genuineness of the transaction is concerned when M/s Lily enclave Pvt. Ltd has introduced Rs.55 lakhs as share capital in the books of assessee-company from the amount it was not due to receive, the transaction cannot be termed as genuine. When assessing officer asked the assessee to explain these inter-connected transactions, it was the duty of the assessee to explain the same. In this regard, a useful reference may be made to the decision of the Hon ble Apex Court in the case of Biju Patnaik 1986 (5) TMI 2 - SUPREME COURT wherein it was held that in appropriate cases even the source of source has to be proved by the assessee under section 68 of the Act. Although, the issue before us pertains to assessment year 2012-13 where amended provisions of section 68 do not apply, however, considering the facts of the case, the assessee has to explain the source of the source, as the assessing officer has pointed out the trail of money, and in that circumstances owns shifts on the assessee to provide suitable explanation to Assessing Officer. It is the appropriate case to prove source of the source. At the cost of repetition, we state that when Assessing Officer observed that M/s Tax World Fashions Pvt. Limited and M/s Sita Fabric Pvt. Limited had no liability to repay loan, so it was the assessee s money which came back to the assessee by way of share capital. In that situation, the assessee ought to have proved with evidence that it was not assessee s money, however, assessee has failed to do so. Therefore, considering the complex nature of transactions, we are of the view that one more opportunity should be given to the assessee to explain the transaction before the assessing officer - remand the issue raised by the assessee in the grounds of appeal before CIT(A), for fresh consideration by the assessing officer with a liberty to the assessee to prove his case by producing sufficient evidence/material - Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Confirmation of the addition of Rs. 55,00,000/- made by the Assessing Officer under Section 68 of the Income Tax Act, 1961.
2. Reliance on the ITAT Ahmedabad decision in the case of Pavankumar M. Sanghvi v/s ITO.
3. Examination of the status of the assessee company by the Ministry of Corporate Affairs.

Issue-wise Detailed Analysis:

1. Confirmation of the Addition of Rs. 55,00,000/-:
The assessee, a Private Limited Company engaged in manufacturing and trading of cloth, filed its return for AY 2012-13 declaring a total loss of Rs. 88,28,262/-. During the assessment, it was observed that the company issued shares and introduced share capital amounting to Rs. 55 lakhs from M/s Lily Enclave Pvt. Ltd. The Assessing Officer required the assessee to prove the identity, creditworthiness, and genuineness of the transaction. The assessee provided the income tax return of M/s Lily Enclave Pvt. Ltd. and details of the source of funds from M/s Texworld Fashions Pvt. Ltd. and M/s Sita Fabric Mills Pvt. Ltd. However, these sources were previously treated as cash credits under Section 68 in AY 2009-10. Consequently, the Assessing Officer concluded that M/s Lily Enclave Pvt. Ltd. was a paper company, and the transaction was not genuine, leading to the addition of Rs. 55 lakhs to the income of the assessee.

2. Reliance on the ITAT Ahmedabad Decision:
The CIT(A) upheld the addition, referencing the ITAT Ahmedabad decision in Pavankumar M. Sanghvi v/s ITO, which discussed the nature of shell companies and the lack of genuineness in their operations. The CIT(A) observed that M/s Lily Enclave Pvt. Ltd. was a shell company, and the transaction lacked genuineness, thus justifying the addition under Section 68.

3. Examination of the Status of the Assessee Company:
During the appellate proceedings, it was noted that the name of the assessee company was struck off by the Ministry of Corporate Affairs. However, the assessee's counsel contended that the company's status was still active. The tribunal decided to remit the issue back to the Assessing Officer to verify the status of the assessee company in the ROC records.

Tribunal's Findings:
The tribunal acknowledged that the Assessing Officer has the authority to examine the source of the source. However, for AY 2012-13, the assessee is not required to prove the source of the source as per the Hon'ble Bombay High Court's decision in Gagandeep Infrastructure (P.) Ltd. The tribunal also referenced the Hon'ble Supreme Court's decision in Sreelekha Banerjee v. Commissioner of Income-tax, emphasizing that the disclosure must come from the assessee.

Given the complex nature of the transactions and the failure of the assessee to provide satisfactory explanations, the tribunal decided to remand the issue back to the Assessing Officer. The assessee is granted another opportunity to explain the transactions and provide sufficient evidence to the satisfaction of the Assessing Officer.

Conclusion:
The tribunal set aside the order of the CIT(A) and remanded the issue back to the Assessing Officer for fresh consideration. The appeal of the assessee is allowed for statistical purposes. The order was pronounced on 29th June 2022.