2023 (9) TMI 845 - HC - Income Tax

Section 68: Loan Returned via Bank Channels Not Taxable Despite Unexplained Credit; Penalty Under Section 271(1)(c) Set Aside

The HC upheld the ITAT's decision favoring the assessee, noting that the assessee failed to prove the creditor's identity and genuineness of transactions ... Penalty u/s. 271(1)(c) - Addition u/s.68 - assessee miserably failed to discharge initial onus to prove the identity of the creditor so also the genuineness of the transactions - HELD THAT:- What is evident is that the Tribunal found on facts that the amount of loan received by the assessee was returned to the loan party during the year itself and all transactions were carried out through banking channel. ITAT on the decision of Rohini Builders [2001 (3) TMI 9 - GUJARAT HIGH COURT] held in favour of the assessee. The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this, case the legislative mandate is not in terms of the words 'shall be charged to income-tax as the income of the assessee of that previous year'. The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word 'may' and not 'shall'. Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1997 (1) TMI 6 - SUPREME COURT] Issues Involved:1. Whether the ITAT's decision to delete the addition made under Section 68 of the Income Tax Act was justified.2. Whether the ITAT erred in relying on the decision in CIT vs. Rohini Builders.3. Whether the ITAT failed to consider the decision in Ariel Sarees (P) Ltd vs. Income Tax Officer.4. Whether the ITAT failed to consider the Supreme Court decision in CIT vs. P. Mohankala.5. Whether the loan liabilities should be deemed ceased and considered as income under Section 41(1) of the Act.Summary:Issue 1: Justification of ITAT's DecisionThe High Court reviewed the ITAT's decision to delete the addition of Rs. 6,10,38,513/- made under Section 68 of the Income Tax Act. The ITAT found that the assessee had returned the loan amount to the loan party during the same year, and all transactions were carried out through banking channels. The ITAT relied on the decision in Deputy Commissioner of Income Tax vs. Rohini Builders, which supported the genuineness of the transactions when conducted through account payee cheques.Issue 2: Reliance on CIT vs. Rohini BuildersThe ITAT relied on the Gujarat High Court decision in CIT vs. Rohini Builders, which held that the genuineness of transactions is proved when payments and repayments are made through account payee cheques, and the assessee is not required to prove the source of the source of the funds. The High Court found no error in this reliance.Issue 3: Consideration of Ariel Sarees (P) Ltd vs. Income Tax OfficerThe appellant argued that the ITAT failed to consider the decision in Ariel Sarees (P) Ltd vs. Income Tax Officer, where the court confirmed the addition made under Section 68 in the absence of evidence from the assessee. However, the High Court did not find this argument compelling enough to overturn the ITAT's decision.Issue 4: Consideration of CIT vs. P. MohankalaThe appellant contended that the ITAT did not consider the Supreme Court decision in CIT vs. P. Mohankala, which stated that banking transactions alone do not prove the genuineness of the transactions. The High Court, however, upheld the ITAT's findings, noting that the assessee had provided sufficient documentation to discharge its obligation under Section 68.Issue 5: Loan Liabilities as Income under Section 41(1)The CIT(A) had held that the loan liabilities, outstanding for several years without any recovery attempt by the creditors, should be deemed ceased and taxed as income under Section 41(1). The ITAT, however, noted that these amounts were not credited during the year under consideration and thus could not be taxed under Section 68 for that year. The High Court agreed with the ITAT's interpretation.Conclusion:The High Court dismissed the appeal, finding no merit in the appellant's arguments and upholding the ITAT's decision to delete the addition made under Section 68 of the Income Tax Act. The court emphasized that the assessee had discharged its burden of proof by providing necessary documentation and that the transactions were conducted through proper banking channels.