2014 (8) TMI 679 - HC - Income Tax

Assessee must prove genuineness of credit entries under Section 68; AO bears burden if genuineness shown

The HC held that the assessee bears the initial onus to prove the genuineness of credit entries by identifying the creditor and source of funds. Once the ... Penalty proceedings u/s 271(1)(c) r.w Explanation 1(1A) – Addition u/s 68 – onus to establish the genuineness of transaction – Credit entry in account books – Held that:- It is for the assessee to prove the genuineness of the transaction by identifying the creditor and its capacity to advance money - The onus lies upon the assessee to explain the credit entry but it shifts upon the Assessing Officer under certain circumstances - Where the assessee shows that the entries regarding credit in a third party's account were in fact received from the third party and are genuine, he has discharged the onus - it cannot be charged as the assessee's income in the absence of any material to indicate that they belong to the assessee. Relying upon Orient Trading Co. Ltd. v. CIT [1962 (8) TMI 69 - BOMBAY HIGH COURT] - If the AO had any doubts about the entry, instead of drawing any inference, the AO could have summoned the proprietor of the firm - No attempt was made by the AO to ascertain the factum of clearance of cheque from the bank and subsequent refund of the amount – thus, the assessee had sufficiently discharged the burden which lay upon it to explain the nature and source of the credit entry appearing in its accounts and the burden clearly shifted on to the Department to prove to the contrary and hold that in spite of the assessee's explanation, the entries could still be held to represent the assessee's income - The AO failed to invoke the provisions u/s 131 of the Act, the Tribunal has rightly concluded that it was sufficient to delete the addition – Decided against Revenue. Issues:1. Legality and propriety of the order dated December 1, 2006 passed by the Income-tax Appellate Tribunal.2. Deletion of addition in the income of the respondent and initiation of penalty proceedings.3. Whether the Tribunal erred in deleting the addition despite the onus lying on the assessee to establish the genuineness of the transaction.4. Whether failure to issue summons under sections 133(1) to the creditor was sufficient to delete the addition.5. Whether the addition made based on the satisfaction recorded by the Assessing Officer was without factual basis.Issue 1: Legality and propriety of the Tribunal's orderThe appellant-Revenue challenged the order passed by the Income-tax Appellate Tribunal, questioning the legality and propriety of the order dated December 1, 2006. The Tribunal had set aside the addition of an amount in the income of the respondent and the initiation of penalty proceedings under section 271(1)(c) read with Explanation 1(A).Issue 2: Deletion of addition and penalty proceedingsThe Tribunal allowed the appeal of the assessee and directed the deletion of the addition in the income of the respondent. The Tribunal concluded that the genuineness of the entry could not be doubted as the credit and debit transactions were made through account payee cheques, and the identity of the creditor was established. The Tribunal also set aside the penalty proceedings initiated under section 271(1)(c).Issue 3: Onus to establish genuineness of the transactionThe Tribunal was questioned on whether it erred in deleting the addition despite the onus lying on the assessee to establish the genuineness of the transaction. The Tribunal found that the assessee had sufficiently discharged the burden by proving the identity and capacity of the creditor, shifting the burden onto the Department to prove otherwise.Issue 4: Failure to issue summons and deletion of additionThe Tribunal's decision to delete the addition based on the failure to issue summons under sections 133(1) to the creditor was challenged. The Tribunal concluded that the assessing authority failed to invoke the provisions under section 131 of the Act and that it was sufficient to delete the addition based on the explanations provided by the assessee.Issue 5: Addition made based on Assessing Officer's satisfactionThe Tribunal's finding that the addition made based on the satisfaction recorded by the Assessing Officer was without factual basis was questioned. The High Court upheld the Tribunal's decision, stating that the Assessing Officer failed to invoke necessary provisions and that the burden had shifted to the Department to prove the entries represented the assessee's income.In conclusion, the High Court dismissed the appeal, answering the questions against the appellant and in favor of the assessee, upholding the Tribunal's decision to delete the addition in the income of the respondent based on the explanations provided and the burden of proof being shifted to the Department.