2023 (1) TMI 525 - AT - Income Tax

Addition of non-existing liability as unexplained cash credit u/s.68 of the Act as well as u/s.41(1) - HELD THAT - We noted that neither AO nor CIT(A) is sure whether this is a transaction of unexplained loan or credit or this is a cessation of liability to be added u/s.41(1) of the Act or it is a business receipt to be added u/s.28(iv) of the Act, as noted by CIT(A). During the year the assessee received a sum as confirmation filed by assessee and this entry has routed through banking transactions and none of the authorities below i.e., CIT(A) or AO could not understand the nature of transaction and treated that as cessation of liability u/s.41(1) of the Act as well as unexplained credit u/s.68 . CIT(A) moved a further step and treated this amount as profit chargeable to tax u/s.28(iv) of the Act as profits and gains of business or profession in view of decision of T.V.Sundaram Iyengar Sons Ltd 1996 (9) TMI 1 - SUPREME COURT . Admittedly, this is a simple transaction of loan received by assessee s wife in the books and therefrom she has advanced this amount and assessee is able to prove the sources by filing confirmation from the third party and assessee s wife, although Trimex Resources Pvt. Ltd., does not file return of income for these years i.e. assessment year 2014-15 to 2016-17. But the AO has not taken any step to verify from the accounts of the company. In our view, the Revenue is not clear under which provisions this addition is to be made and hence, once this is not established the addition cannot be sustained. We delete the addition and allow the appeal of assessee.

Summary

Issues:
1. Addition of non-existing liability as unexplained cash credit u/s.68 of the Income Tax Act.
2. Treatment of liability as cessation of liability u/s.41(1) of the Income Tax Act.
3. Understanding the nature of transaction undertaken with the alleged party.

Issue 1: Addition of Non-Existing Liability as Unexplained Cash Credit u/s.68:
The appellant contested the Commissioner of Income Tax (Appeals)'s decision confirming the action of the Assessing Officer (AO) in adding a non-existing liability as an unexplained cash credit under section 68 of the Income Tax Act. The AO noted discrepancies in the ledger account of M/s. Trimex, indicating an amount payable to the appellant. The AO concluded that the amount received was unexplained income as the appellant failed to provide evidence of its source. The CIT(A) upheld this decision, citing the non-filing of returns by Trimex Resource Pvt. Ltd. and lack of independent verification. However, the Tribunal found that the transaction was a loan received by the appellant's wife from Trimex Resources Pvt. Ltd., supported by confirmations. As Trimex Resources Pvt. Ltd. did not file returns, the Tribunal held that the addition under section 68 was not justified, ultimately allowing the appeal.

Issue 2: Treatment of Liability as Cessation of Liability u/s.41(1):
The AO treated the liability due to M/s. Trimex as a cessation of liability under section 41(1) of the Act, as the company was non-existent. The CIT(A) affirmed this decision, emphasizing the lack of proof regarding the source of funds for property purchase. However, the Tribunal disagreed with this characterization, noting that the amount was a loan from Trimex Resources Pvt. Ltd. to the appellant's wife, which was subsequently advanced to the appellant. As the authorities failed to understand the nature of the transaction, the Tribunal ruled that the liability could not be treated as a cessation under section 41(1). Consequently, the Tribunal allowed the appeal, rejecting the addition under this provision.

Issue 3: Understanding the Nature of Transaction:
The crux of the matter revolved around the authorities' misunderstanding of the transaction, leading to conflicting interpretations under different sections of the Act. The Tribunal highlighted the lack of clarity from the AO and CIT(A) regarding whether the transaction constituted an unexplained credit, cessation of liability, or business receipt. By analyzing the ledger account and confirmations, the Tribunal determined that the transaction was a loan from Trimex Resources Pvt. Ltd. to the appellant's wife, refuting the previous assertions. This lack of understanding by the authorities led to the incorrect application of provisions, ultimately resulting in the Tribunal allowing the appeal and deleting the addition.

In conclusion, the Tribunal ruled in favor of the appellant, overturning the additions made by the lower authorities due to their misinterpretation of the transaction and failure to establish the nature of the funds received. The judgment emphasized the importance of accurately assessing the facts and understanding the legal provisions before making additions to the taxable income.