Section 68 Addition Cannot Rest on Non-Filing of Creditor’s Return: Patna HC

Patna High Court: Section 68 addition unsustainable; ITAT wrongly enhanced onus despite established identity & bank trail

The Patna High Court set aside the Income Tax Appellate Tribunal’s order restoring an addition under Section 68 of the Income Tax Act and reinstated the relief granted by the CIT(A). The assessee had received ₹1.91 crore through banking channels and furnished PAN details, confirmations, ledger accounts, bank statements, and income tax returns of the creditor for other years. While the Assessing Officer treated the amount as unexplained cash credit, the CIT(A) deleted the addition after examining the evidence and the remand report. The Tribunal reversed this solely on the ground that the creditor had not filed a return for the relevant year and that creditworthiness was not proved. The High Court held that non-filing of return by the creditor cannot by itself justify addition under Section 68 when identity and banking trail are established. It ruled that the Tribunal erred in requiring the assessee to prove the “source of source” and in overturning factual findings without demonstrating perversity or legal error.

FACTS:

• This Miscellaneous Appeal No. 206 of 2023 has been preferred by M/s Rajnandani Projects Private Limited, a company incorporated under the Companies Act, 1956, against the order dated 03.11.2022 passed by the Income Tax Appellate Tribunal, Patna Bench, Patna in I.T.A. No. 250(Pat)/2019 for the Assessment Year 2015-16, whereby the Hon’ble Tribunal allowed the appeal filed by the Revenue and reversed the order dated 20.09.2019 passed by the CIT(A), Patna under Sec 250 of the Income Tax Act, 1961(‘the Act’).
• The appellant, “M/s Rajnandani Projects Private Limited” is engaged in the business of civil construction and is an assessee under the Act bearing PAN AAECQ0092C. For the Assessment Year 2015-16, the appellant filed its return of income on 28.03.2016, declaring a total income of 1,96,95,520/-. The case was selected for scrutiny and notices under Sec 142(1) of the Act, along with a questionnaire, were issued by the Assessing Officer (‘AO’) during the course of assessment proceedings.
• During the assessment, the AO noticed that the appellant had received a sum of 1,91,00,000/- during the relevant previous year from M/s Champion Group of Companies, whose proprietor is stated to be Amit Kumar Singh, bearing PAN AZPPS7985Q, through banking channels. In order to verify the nature and source of the said receipts, the AO issued notices under Sec 133(6) and summons under Sec 131 of the Act.
• The appellant initially described the amount received as a loan and subsequently submitted that the said amount represented an advance received against the sale of sand proposed to be supplied to M/s Champion Group of Companies. In support of its explanation, the appellant furnished before the AO copies of the ledger account of the said party, confirmation of account, PAN and address details of the creditor, copies of income tax returns of Amit Kumar Singh for the Assessment Years 2015-16 and 2016-17, and bank statements evidencing the transfer of funds through banking channels.
• The AO was not satisfied with the explanation furnished by the appellant. He observed that the appellant had changed its stand regarding the nature of the transaction and held that the appellant failed to establish the genuineness of the transaction and the creditworthiness of the creditor. Accordingly, by an order dated 31.12.2017, passed under Sec 143(3) of the Act, the AO treated the entire amount of 1,91,00,000/- as unexplained cash credit under Sec 68 of the Act and added the same to the total income of the appellant.
• Aggrieved by the assessment order, the appellant preferred an appeal before the CIT(A) of Patna. During the appellate proceedings, the CIT(A) called for a remand report from the AO. The AO submitted his remand report on 13.09.2019. Upon consideration of the assessment order, the submissions made by the appellant, the documentary evidence placed on record including bank statements, confirmations, copies of income tax returns of the creditor, and the remand report, the CIT(A) held that the identity of the creditor was established, the source of funds was traceable through banking channels, and the explanation furnished by the appellant was acceptable. Accordingly, by an order dated 20.09.2019, the CIT(A) deleted the addition made under Sec 68 of the Act.
• The Revenue, being aggrieved by the appellate order, preferred an appeal before the I The Hon’ble Tribunal, upon consideration of the material on record, held that while the identity of the creditor stood established, the appellant failed to prove the genuineness of the transaction and the creditworthiness of the creditor, inter alia, noting that the creditor had not filed return of income for the relevant assessment year in which the transaction occurred. By order dated 03.11.2022, the Hon’ble Tribunal set aside the order passed by the CIT(A) and restored the addition of Rs.1,91,00,000/- made by the AO.
• Challenging the order dated 03.11.2022 passed by the ITAT, the appellant preferred the present Miscellaneous Appeal under Sec 260A of the Act before the Hon’ble High Court of Judicature at Patna.

ISSUE:

• Whether the ITAT erred in reversing the order dated 20.09.2019 passed by the CIT(A) deleting the addition of Rs.1,91,00,000/- made under Sec 68 of the Act.
• Whether, on the facts and in the circumstances of the case, the Hon’ble Tribunal was justified in holding that the appellant failed to establish the genuineness of the transaction and the creditworthiness of the creditor, when the identity of the creditor, the bank statements, the ledger account, and the confirmations were placed on record.
• Whether the Hon’ble Tribunal committed an error in law in drawing an adverse inference on the ground that the creditor had not filed the return of income for the relevant assessment year, when the appellant had furnished copies of the returns of the creditor for other assessment years along with PAN, address and bank details.
• Whether the Hon’ble Tribunal erred in applying an incorrect legal standard by requiring the appellant to establish the source of the source of the funds received from the creditor.
• Whether the findings of the Hon’ble Tribunal, in reversing the well-reasoned order of the CIT(A), are perverse and contrary to the material available on record.
• Whether, in the facts of the case, the Hon’ble Tribunal failed to consider settled judicial precedents relating to the scope and application of Sec 68 of the Act.

OBSERVATIONS:

• The Hon’ble High Court observed that the CIT(A) had deleted the addition after examining the documentary evidence produced by the appellant as well as the remand report submitted by the Assessing Officer. The CIT(A) recorded a categorical finding that the explanation furnished by the appellant was acceptable. The said order was reversed without demonstrating any perversity, misreading of evidence, or application of an incorrect legal standard. The Hon’ble Court held that the Hon’ble Tribunal was not justified in reversing the well-reasoned order of the CIT(A).
• The Hon’ble High Court noted that the appellant had produced documents relating to the identity of the creditor, including PAN, address and bank statements reflecting transfer of funds through banking channels. These documents were examined during assessment as well as remand proceedings. The Hon’ble Tribunal accepted the identity of the creditor but held that genuineness and creditworthiness were not proved. The Hon’ble Court observed that the Hon’ble Tribunal did not record any finding that the documents relied upon were false or fabricated.
• The Hon’ble Tribunal placed substantial emphasis on the fact that the creditor had not filed a return of income for the assessment year corresponding to the transaction. The Hon’ble Court held that while filing of return by the creditor for a particular year is a relevant circumstance, it cannot, by itself, be treated as a determinative factor to reject the assessee’s explanation under Sec 68, particularly when the transaction is routed through banking channels and the identity of the creditor is not in dispute.
• The Hon’ble High Court noted that the CIT(A) had examined the bank statements, confirmations, ledger accounts and the remand report, and accepted the explanation furnished by the assessee. The Hon’ble Tribunal, however, discarded these findings primarily on the basis of non-filing of return by the creditor for the relevant year. The Hon’ble Court held that such an approach was insufficient to dislodge the findings of the CIT(A).
• The Hon’ble High Court observed that once the appellant produced bank statements showing debit entries in the creditor’s account corresponding to the credit entries in its own books and established the identity of the creditor, the assessee cannot ordinarily be compelled to explain the source of funds in the hands of a third party. Hon’ble Tribunal’s reasoning indicated that the appellant was expected to demonstrate the financial capacity of the creditor beyond the material already placed on record. The Hon’ble Court held that such an approach raises a legal issue regarding the extent of burden under Sec 68.
• The Hon’ble High Court held that the Hon’ble Tribunal did not point out any concrete defect in the evidence relied upon by the CIT(A) nor demonstrate why the appreciation of evidence by the appellate authority was erroneous in law and failed to consider the remand report in its proper perspective and did not address why the banking trail accepted by the CIT(A) was insufficient. Reversing findings without adequate reasons gives rise to a substantial question of law. In the present case, the Hon’ble Court found that the Hon’ble Tribunal reassessed the evidence without demonstrating perversity or misapplication of law, rendering its findings unsustainable.
• The Hon’ble High Court noted that reliance was placed by the Revenue on Kale Khan Mohammad Hanif v. Commissioner of Income Tax ((1963) 50 ITR 1 (SC)), which lays down that the burden lies on the assessee to explain cash credits, and on Principal Commissioner of Income Tax v. NRA Iron and Steel Pvt. Ltd. ((2019) 15 SCC 529), which holds that mere production of documents may not be sufficient unless creditworthiness and genuineness are established. The Court also noted reliance on Vijay Kumar Talwar v. Commissioner of Income Tax ((2011) 1 SCC 673), regarding the limited scope of interference with findings of fact.
• The Hon’ble High Court observed that while these decisions lay down settled principles, they also recognize that each case must be decided on its own facts. The Hon’ble Court held that the Hon’ble Tribunal failed to apply these principles in a balanced manner, as it did not demonstrate why the explanation accepted by the CIT(A) on appreciation of evidence was legally unsustainable and concluded that the Hon’ble Tribunal overlooked the settled legal position governing Sec 68 by applying an unduly rigid and incorrect standard.

The Hon’ble High Court answered all the substantial questions of law in favour of the appellant, set aside the order dated 03.11.2022 passed by the ITAT, and restored the order dated 20.09.2019 passed by the CIT(A), deleting the addition of Rs.1,91,00,000/- under Sec 68 of the Act.