2023 (2) TMI 223 - AT - Income Tax

Unexplained credit entries in capital account u/s 68 - assessee failed to establish the genuineness of transaction and creditworthiness of the lender parties from whom partners of the firm have received unsecured loan - HELD THAT - Creditworthiness or financial strength of the creditor can be proved by producing the bank statement of the creditor showing that it had sufficient balance in its accounts to enable it to advance money to the assessee. Genuineness of the transaction is to be demonstrated by showing that the assessee had, in fact, received money from the said creditor and it came from the coffers of that very creditor. The Division Bench of Delhi High Court in the case of CIT vs. Kamdhenu Steels and Alloys Ltd. 2011 (12) TMI 394 - DELHI HIGH COURT held that when the money is received by cheque and is transmitted through banking or other indisputable channels, genuineness of transaction would be proved. Once these documents are produced, the onus cast on the assessee can be said to have been satisfactorily discharged. Thereafter, it is for the AO to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, to probe the matter further. However, to discredit the documents produced by the assessee on the aforesaid aspects, there has to be some cogent reasons and materials for the assessing officer and he cannot go into the realm of suspicion. AO cannot burden the assessee with tax liability merely on the ground that summons issued to the creditors were returned back with the endorsement not traceable. CIT(A) noted that in the assessee s case, once the assessee had produced all documents establishing the identity and capacity of creditors of creditors and genuineness of transactions, the initial onus cast upon the assessee was discharged and the onus shifted to the assessing officer to bring material on record to the effect that in spite of identity and creditworthiness of the creditor being proved, the transaction was still not genuine. However, the assessing officer has not made any further inquiries and has not brought only material on record to controvert the documentary evidence submitted by the assessee. CIT(A) noted that AO was not justified in treating as unexplained cash credit. Assessee has satisfactory explained the source of the introduction of capital - Hence, the addition made by the assessing officer was deleted by ld CIT(A). That being so, we decline to interfere with the order of CIT(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer on account of unexplained credit entries in the capital account under Section 68 of the Income Tax Act.
2. Failure to establish the genuineness of transactions and creditworthiness of the lender parties.
3. Whether the order of the CIT(A) should be upheld or the Assessing Officer's order should be restored.

Detailed Analysis:

1. Deletion of Addition under Section 68:
The Revenue challenged the CIT(A)'s decision to delete an addition of Rs.1,48,25,000/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961. The AO had treated the capital introduced by two partners of the assessee firm as unexplained cash credit, doubting the creditworthiness of the persons who provided unsecured loans to the partners. The AO alleged that the partners introduced unaccounted money into the firm by depositing cash in various bank accounts, which was then used to introduce capital in the firm.

2. Genuineness of Transactions and Creditworthiness:
The AO's contention was that the assessee failed to prove the identity, creditworthiness, and genuineness of the transactions. The AO noted that the lenders had no creditworthiness and that cash was deposited in their bank accounts immediately before providing the unsecured loans. The source of these cash deposits remained unexplained.

3. CIT(A)'s Observations and Findings:
The CIT(A) deleted the addition, observing that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the transactions. The assessee furnished names, addresses, PANs, confirmations, and bank details of the lenders. The transactions were conducted through proper banking channels, including account payee cheques, RTGS, and NEFT.

4. Essential Ingredients for Cash Credit:
The Tribunal noted that the three essential ingredients for treating a cash credit as genuine are:
- Proof of identity of the creditor.
- Capacity and creditworthiness of the creditor to advance the money.
- Genuineness of the transaction.

The assessee had discharged the initial onus by providing evidence for these three ingredients. The onus then shifted to the Revenue to disprove the assessee's claims, which the AO failed to do.

5. Legal Precedents:
The Tribunal cited several legal precedents, including:
- CIT v. Dwarkadhish Investment (P.) Ltd.
- CIT v. Sophia Finance Ltd.
- CIT v. Kamdhenu Steels and Alloys Ltd.
These cases established that once the assessee provides necessary documents, the initial onus is discharged, and the AO must then provide cogent reasons to discredit the documents.

6. Tribunal's Conclusion:
The Tribunal upheld the CIT(A)'s order, stating that the AO did not provide any material evidence to counter the documentary evidence submitted by the assessee. The Tribunal concluded that the assessee had satisfactorily explained the source of the introduction of capital, and the addition made by the AO was unjustified.

Final Judgment:
The appeal of the Revenue was dismissed, and the order of the CIT(A) deleting the addition of Rs.1,48,25,000/- was upheld. The Tribunal emphasized that the AO must provide substantial evidence to discredit the assessee's claims, which was not done in this case. The judgment was pronounced on 30/01/2023.