2012 (4) TMI 272 - AT - Income Tax

Assessee proves identity and creditworthiness of cash creditors, burden shifts to revenue under Section 68

The ITAT Mumbai upheld CIT(A)'s decision deleting major additions made by AO for unexplained cash credits. The tribunal held that the assessee discharged ... Unexplained cash credits - onus of proof - identity, creditworthiness, and genuineness of creditors and transactions - CIT(A) deleted major additions made by A.O. - addition related to amount advanced by non-resident retained in absence of evidences - Held that:- Order of CIT(A) is upheld since assessee discharged his onus by establishing the identity, credit worthiness of parties and genuineness of the transactions and onus shifts to revenue, which is not discharged by it. AO cannot brush aside the evidences submitted during assessment proceedings and make additions. Further, CIT(A) have rightly excluded opening balance pertaining to the earlier years from the total addition - Decided against the Revenue With respect to amount advanced by non-resident – Assessee submitted that since creditor is not assessed to tax in India, details of the tax returned could not be filed – held that:- Since there is no finding in the assessment order about the claim made by the assessee, so it will be proper to remit the matter back to the AO for making verification in this regard and pass a speaking order – Decided in favor of assessee for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:(a) Whether the additions made by the Assessing Officer (AO) under section 68 of the Income-tax Act, 1961 (the Act), on account of unexplained cash credits, were justified where the assessee had furnished evidence regarding identity, creditworthiness, and genuineness of creditors and transactions.(b) Whether the AO was justified in making additions on the basis of the modus operandi of transactions involving loans from relatives and friends, including the treatment of opening balances of creditors.(c) The extent of the burden of proof on the assessee and the Revenue in cases involving cash credits under section 68 of the Act.(d) Whether interest payments related to such cash credits should be disallowed.(e) The treatment of a specific creditor, a non-resident who was not assessed to tax in India, and the genuineness of transactions with such creditor.2. ISSUE-WISE DETAILED ANALYSISIssue (a) and (c): Justification of additions under section 68 and burden of proofThe legal framework revolves around section 68 of the Income-tax Act, which permits the AO to treat unexplained cash credits as income of the assessee if the assessee fails to satisfactorily explain the nature and source of such credits. The Court emphasized that the initial burden lies on the assessee to explain the identity, creditworthiness, and genuineness of the creditors and the transactions. Once the assessee discharges this burden by producing credible evidence such as PAN details, income-tax returns, bank statements, and confirmations, the onus shifts to the Revenue to disprove the genuineness.The Court referred to established precedents and principles, noting that the AO's opinion rejecting the explanation must be based on objective appreciation of material and not on conjectures or surmises. The Court highlighted that the assessee cannot be compelled to prove the 'source of the source' of the credits, and that credibility of explanation is paramount rather than mere materiality of evidence.In the present case, the assessee submitted PANs, bank statements, loan confirmations, and return acknowledgments. The AO did not summon or confront the creditors or conduct further inquiries. The AO's additions were largely based on the observation of a particular modus operandi involving transactions through accounts of relatives and friends and the timing of deposits and withdrawals, but without concrete evidence to rebut the assessee's explanation.The Court found that the AO failed to discharge his burden to rebut the evidence and that the additions were made without proper material. The CIT(A) rightly deleted the additions except for one creditor. The Court emphasized that additions based on conjectures and surmises cannot be sustained.Issue (b): Treatment of opening balances and modus operandi of transactionsThe AO made additions not only on fresh loans but also on opening balances of creditors from earlier years. The CIT(A) observed that additions on account of opening balances were not sustainable as these were reflected in the balance sheet and had been subjected to tax in earlier years. The Court agreed with the CIT(A) that additions pertaining to opening balances should be excluded unless the cash credit was introduced in the relevant year.The AO's reliance on a particular modus operandi-deposits and withdrawals on the same day through accounts of relatives and friends-was held to be insufficient to establish unexplained income. The Court noted that such observations are not conclusive proof and cannot replace the need for tangible evidence.Issue (d): Disallowance of interest paymentsThe AO disallowed interest payments made to the creditors along with the additions on the principal amounts. The CIT(A) deleted the disallowance except in the case of one creditor where the addition was upheld. The Court upheld the CIT(A)'s order on interest disallowance, reasoning that if the principal addition is deleted, interest disallowance cannot survive except where genuineness is not established.Issue (e): Treatment of non-resident creditorOne creditor, Shri Gangu Hingorani, was a non-resident and was not assessed to tax in India. The CIT(A) upheld the addition and interest disallowance on the ground that no evidence was furnished to prove genuineness of the transaction. The assessee contended that the creditor was assessed to tax in the USA and that funds advanced were from foreign remittances, supported by Fixed Deposit Receipts (FDRs).The Court found that the AO's order did not consider the claim or evidence submitted by the assessee regarding the non-resident creditor. Therefore, the Court remitted the matter back to the AO for verification and a speaking order on the genuineness of the transaction with this creditor.3. SIGNIFICANT HOLDINGSThe Court articulated the following crucial legal reasoning and principles:'Section 68 can be invoked when following three conditions are satisfied - (a) when there is credit of amounts in the books maintained by the assessee (b) such credit has to be a sum of money during the previous year (c) either the assessee offers no explanation about the nature and source of such credits found in the books or the explanation offered by the assessee, in the opinion of the AO, is not satisfactory.''The opinion of the AO for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on the record file. The opinion of the AO is required to be formed objectively with reference to the material on record.''An assessee can be asked to prove the source of credit in the books, but cannot be asked to prove the source of the source.''Additions made merely on the ground that the appellant company might have deposited its own money in the accounts of the cash creditors which were taken to the appellant's account in the form of account payee cheque is totally based on conjectures and surmises. No material has been brought on record to prove that the cash credits in the books of accounts of the assessee represents its income from undisclosed sources.''If AO had any doubt about the creditworthiness or identity of the creditors, he had all the rights under the Act to hold further inquiry and confront the assessee with such inquiry. AO did not make any attempt to discharge his burden to rebut the evidences produced by the assessee.'The Court's final determinations were:(i) The additions made by the AO under section 68 on account of unexplained cash credits were not justified except in respect of the non-resident creditor for whom genuineness was not established.(ii) Additions relating to opening balances of creditors are not sustainable unless the cash credit was introduced in the relevant year.(iii) Interest disallowances linked to deleted principal additions must also be deleted.(iv) The matter concerning the non-resident creditor was remitted to the AO for verification and a speaking order.(v) The AO's appeal was dismissed, and the CIT(A)'s order deleting additions was upheld except for the remanded issue.