Commercial expediency not to be examined by AO while examining explanation provided u/s. 68

PCIT Vs Nucleus Steel Pvt Ltd (Delhi High Court)

Delhi High Court held that AO is not required to examine the commercial expediency of the transaction while examining explanation provided by assessee under section 68 of the Income Tax Act.

Facts- The Revenue had appealed the decision of the Commissioner of Income Tax (Appeals) [hereafter CIT(A)] allowing the respondent’s appeal against the assessment order dated 28.03.2013 in respect of the assessment year (AY) 2010-11. The Assessing Officer (hereafter AO) had made an addition to the income as returned by the respondent under Section 68 of the Act and disallowed the addition made under Section 14A of the Act.

Conclusion- The initial onus of establishing or proving the source and the nature of the funds credited in the assessee’s account rests on the assessee. However, once the assessee has discharged its onus of establishing the source of the funds and has also provided the explanation as to the nature of the funds, the onus to substantiate that the explanation provided by the assessee as to the source and the nature, is unsatisfactory, shifts to the AO.

It is also necessary to observe that the AO is not required to examine the commercial expediency of the transaction and supplant its view in place of the transacting parties. The AO is required to give a wide latitude to the commercial discretion of the contracting parties to enter into a transaction. And, unless the AO finds, on the basis of cogent material, that the transaction is a subterfuge and is not genuine, the AO must accept the same.