2025 (3) TMI 1519 - HC - Income Tax

HC overturns ITAT's deletion under Section 68 for ignoring AO's findings on transaction genuineness and creditworthiness

THE PR. COMMISSIONER OF INCOME TAX -CENTRAL - 1 Versus JAGUAR BUILDCON PVT. LTD.

THE PR. COMMISSIONER OF INCOME TAX -CENTRAL - 1 Versus JAGUAR BUILDCON PVT. LTD. - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the findings rendered by the Tribunal in respect of deletion or addition under Section 68 of the Income Tax Act, 1961 ('the Act') are perverse in light of the evidence relied upon by the Assessing Officer (AO). 2. Whether the assessee discharged the onus under Section 68 of the Act by proving the identity, creditworthiness of the investors, and genuineness of the share application money transactions. 3. Whether the Tribunal properly considered the material and factual findings recorded by the AO regarding the genuineness of the transactions and creditworthiness of the parties. 4. Whether the Tribunal's reliance on the statements of directors/representatives of investor companies and documents submitted was justified in the face of contradictory material gathered by the AO. 5. The applicability and interpretation of settled legal principles governing additions under Section 68 of the Act, including the burden of proof and the scope of inquiry by the AO and appellate authorities. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legality and correctness of the Tribunal's findings under Section 68 Relevant legal framework and precedents: Section 68 of the Income Tax Act, 1961 provides that if any sum is found credited in the books of an assessee and the assessee fails to offer a satisfactory explanation about the nature and source of such sum, the amount may be treated as the income of the assessee. The Supreme Court and various High Courts have held that the initial onus lies on the assessee to prove: Identity of the creditors/investors; Creditworthiness or financial capacity of the creditors; Genuineness of the transaction. Once the assessee discharges this onus, the AO must conduct an inquiry and can only reject the explanation if it is unsatisfactory. Mere proof of identity or receipt by banking channels is not sufficient to discharge the onus. Court's interpretation and reasoning: The Court observed that the Tribunal's findings were based on a superficial perusal of the documents and statements produced by the assessee and the investor companies. The Tribunal concluded there was no 'iota of adverse material' to disbelieve the transactions and accepted the explanation of the assessee regarding the source of funds. However, the Court found that the Tribunal failed to engage with or consider the detailed factual findings recorded by the AO, which included extensive investigation into the money trail, verification of bank statements, and inquiries revealing that the investor companies were paper entities or had received funds from multiple layers of other companies with dubious credentials. The Tribunal's reliance on statements of persons who were not duly authorized representatives and acceptance of documents without scrutinizing their authenticity or completeness was held to be perverse, especially when the AO had found these persons lacked proper authority and the letters of authority were inadequate. Key evidence and findings: The AO's investigation revealed: Funds credited as share application money originated from multiple layers of companies, many of which were paper entities operating from limited addresses. Some companies purportedly transferring funds did not exist at their registered addresses. Bank statements showed funds were transferred through a complex web of entities, with no genuine source of income identifiable. Statements of representatives produced by the assessee were from persons lacking valid authorization. The assessee failed to produce the controlling persons or directors of investor companies with proper supporting documents within the stipulated time. Application of law to facts: The Court applied the established legal principles that the burden is on the assessee to prove identity, creditworthiness, and genuineness of transactions. The AO's detailed inquiries and adverse findings on these aspects were not addressed by the Tribunal. The Court emphasized that mere production of documents and statements without proper verification does not discharge the onus. Treatment of competing arguments: The Tribunal's argument that the AO disbelieved the transactions on 'technical and whimsical' grounds was rejected. The Court found that the AO's findings were based on a thorough investigation and credible evidence. The Tribunal's failure to consider these findings amounted to ignoring vital material. Conclusions: The Tribunal's findings were held to be perverse and unsustainable. The appeal was allowed, and the AO's order restored. Issue 2: Discharge of onus under Section 68 by the assessee Relevant legal framework and precedents: The Supreme Court and High Courts have consistently held that for additions under Section 68, the assessee must establish: Identity of the creditors; Creditworthiness or financial capacity of the creditors; Genuineness of the transactions. Proof by banking channels or share certificates alone is insufficient. The genuineness must be established by credible and cogent evidence, and the AO is entitled to make inquiries and reject the explanation if unsatisfactory. Court's interpretation and reasoning: The Court noted that the assessee failed to satisfactorily prove the creditworthiness of the investor companies. The chart relied upon by the Tribunal showing share capital, reserves, and investments was insufficient to establish financial capacity, especially in light of the AO's findings of multiple layers of fund movements and paper entities. The Court also noted that the assessee failed to produce authorized representatives with valid letters of authority to verify the transactions and source of funds. The delay and inadequacy in producing relevant documents and persons further weakened the assessee's case. Key evidence and findings: The AO's inquiries revealed that: The investor companies had received funds from various other companies, many of which were paper entities. Some of these entities had no verifiable business operations or existence at their registered addresses. The assessee's representatives failed to produce valid authorization or credible evidence to establish the source of funds. Application of law to facts: The Court held that the assessee did not discharge the initial onus under Section 68 to prove the identity and creditworthiness of the investors and genuineness of the transactions. The AO's adverse findings were based on cogent evidence and investigations, which the Tribunal failed to consider. Treatment of competing arguments: The Tribunal's acceptance of the assessee's explanation based on documents and statements without scrutinizing their authenticity or addressing the AO's findings was rejected. The Court emphasized that the burden is on the assessee to prove all three ingredients satisfactorily. Conclusions: The assessee failed to discharge the onus under Section 68, justifying the AO's additions. Issue 3: Adequacy of the AO's investigation and inquiry under Section 68 Relevant legal framework and precedents: The AO is duty-bound to investigate the identity, creditworthiness, and genuineness of the creditors and transactions once the assessee offers an explanation. The AO can reject the explanation if found unsatisfactory after due inquiry. Court's interpretation and reasoning: The Court found that the AO conducted a detailed and extensive investigation, including: Verification of bank statements of investor companies and related entities; Tracing the fund trail through multiple layers of companies; Enquiries with the investigation wing regarding existence and business operations of companies; Requesting production of controlling persons and authorized representatives; Scrutinizing letters of authority and documents submitted; Analyzing income and profit/loss statements of related companies. The AO's findings were based on credible material and proper procedure. The Court held that the AO's inquiry was adequate and justified the additions made under Section 68. Key evidence and findings: The AO's findings included: Non-existence of certain companies at their registered addresses; Money trail indicating circular or accommodation entries; Failure of the assessee to produce valid authorization or credible evidence; Identification of multiple layers of paper entities involved in fund movements. Application of law to facts: The AO's inquiry satisfied the requirement of a proper investigation under Section 68. The Court emphasized that the AO's duty to verify the explanation offered by the assessee was fulfilled. Treatment of competing arguments: The Tribunal's criticism of the AO's inquiry as 'technical and whimsical' was rejected as unfounded. The Court held that the AO's findings were based on substantial evidence and proper procedure. Conclusions: The AO's inquiry was adequate and justified the additions under Section 68. Issue 4: Role and weight of statements and documents produced by investor companies Relevant legal framework and precedents: Statements and documents produced by creditor companies must be genuine, authorized, and credible to discharge the assessee's onus under Section 68. Mere production of statements without valid authorization or corroboration is insufficient. Court's interpretation and reasoning: The Court observed that the Tribunal relied heavily on statements of directors/representatives of investor companies and documents submitted in response to notices. However, the AO found that: The persons produced were not directors or authorized representatives at the relevant time; Letters of authority submitted were inadequate, lacking letterheads, place of issue, or proper authorization; Documents submitted did not satisfactorily establish the source of funds or genuineness of transactions; The AO was entitled to disbelieve such statements and documents on these grounds. Key evidence and findings: The AO's findings on the lack of valid authorization and inadequacy of documents were not addressed by the Tribunal. Application of law to facts: The Court held that the Tribunal's acceptance of these statements and documents without scrutiny was erroneous. The AO's rejection of such evidence was justified. Treatment of competing arguments: The Tribunal's view that the AO's disbelief was 'technical and whimsical' was rejected as the AO's findings were based on legitimate concerns regarding authorization and authenticity. Conclusions: The statements and documents produced by investor companies did not discharge the assessee's onus under Section 68. Issue 5: Principles governing additions under Section 68 and burden of proof Relevant legal framework and precedents: The Court reiterated well-established principles: Section 68 applies to any sum credited in the books of an assessee, including share capital and share premium; The assessee bears the initial onus to prove identity, creditworthiness, and genuineness of transactions; Proof by banking channels or share certificates alone is insufficient; The AO must conduct inquiries and can reject explanation if unsatisfactory; If the assessee fails to discharge the onus, the amount can be treated as income of the assessee; The burden then shifts to the Revenue to establish the amount as undisclosed income, but only after the assessee fails to discharge its primary onus. Court's interpretation and reasoning: The Court emphasized that the Tribunal failed to apply these principles correctly by ignoring the AO's detailed findings and focusing only on the production of some documents and statements. Key evidence and findings: The Court relied on authoritative precedents that require a holistic and rigorous approach to the onus under Section 68. Application of law to facts: The Court held that the AO's findings were consistent with these principles and that the Tribunal erred in disregarding them. Treatment of competing arguments: The Tribunal's approach was found to be inconsistent with settled law. Conclusions: The AO's additions under Section 68 were legally sustainable, and the Tribunal's order was set aside.