2025 (6) TMI 1126 - AT - Income Tax

Assessee wins section 68 case as opening balance and conduit role prove no unexplained cash credits

Virender Kumar Gupta Nai Anaj Mandi Farrukhnagar Versus Income Tax Officer, Ward-4 (5), Gurgaon

ITAT Delhi ruled in favor of the assessee regarding additions under section 68 for unexplained cash credits. The tribunal found that Rs. 61,00,000 was an ... Addition u/s 68 - unexplained cash credits - additions with opening balance - income from unaccounted sources - HELD THAT:- Addition has already observed the sum of Rs. 61,00,000/- was an opening balance as on 31.03.2022 and no addition is possible in the current financial year. As regards the balance of Rs. 1,60,000/- the hon’ble Tribunal has come to the finding that the cheques were issued to MPG Business Information Systems Pvt. Ltd. by way of mere accommodation entry which were arranged in view of paying cash to the assessee who deposit the cash in his bank account. Thus, assessee is merely a conduit and the impugned sum do not belong to him and he has only acted as a mediator in the transaction. It has been established clearly that the cash belongs to MPG Business Information System Pvt. Ltd. It is nobodies case that the assessee has remained earned certain extra consideration to facilitate the transaction. Assessee appeal allowed. Issues Presented and ConsideredThe core legal questions considered by the Tribunal in this appeal are:Whether the addition of Rs. 1,60,50,000/- under Section 68 of the Income Tax Act, 1961, representing unexplained cash credits, was justified in the hands of the appellant.Whether the opening balance of Rs. 61,00,000/- as on 31.03.2012 could be treated as income from unaccounted sources and subjected to addition under Section 68.Whether the transactions involving loans from VKG (Virender Kumar Gupta) amounting to Rs. 2.21 crores were genuine or mere accommodation entries designed to introduce unaccounted money into the banking system.Whether the addition of Rs. 2,21,50,000/- (including the above amounts) resulted in double addition, considering that the same sum had already been taxed in the hands of MPG Business Information Systems Pvt. Ltd.The validity of penalty proceedings initiated under Section 271(1)(c) against the appellant.The overall correctness and legality of the orders passed by the Assessing Officer and the Commissioner of Income Tax (Appeals), particularly regarding the treatment of the disputed sums as income from unaccounted sources.Issue-wise Detailed Analysis1. Legitimacy of Addition of Rs. 1,60,50,000/- under Section 68Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The burden lies on the assessee to prove the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor. The Hon'ble High Court of Calcutta in Narsingh Ispat Ltd. vs. Pr.CIT (2024) 161 taxmann.com 483 (Calcutta) emphasized that when these three conditions are satisfied, no addition under Section 68 is warranted.Court's Interpretation and Reasoning: The Tribunal noted that the addition of Rs. 1,60,50,000/- was confirmed by the CIT(A) based on the view that the amount was unexplained cash credit. However, the Tribunal referred to the coordinate bench's findings in ITA No. 4792/Del/2019, which examined the genuineness of transactions involving VKG and MPG Business Information Systems Pvt. Ltd. The coordinate bench held that the transactions were not genuine and were accommodation entries, despite being routed through banking channels.Key Evidence and Findings: The bank statements of VKG revealed large cash deposits inconsistent with the claimed loan transactions. VKG's failure to attend summons, denial of loan extension during his own assessment, and fabricated balance sheets were critical evidence undermining the genuineness and creditworthiness of VKG as a creditor.Application of Law to Facts: The Tribunal applied the principles from the coordinate bench and held that the addition under Section 68 was justified to the extent of Rs. 1,60,50,000/- as the transactions failed the test of genuineness. However, the Tribunal also recognized that the opening balance of Rs. 61,00,000/- could not be subjected to addition again.Treatment of Competing Arguments: The appellant argued that the sum had already been taxed in the hands of MPG Business Information Systems Pvt. Ltd., and hence addition would amount to double taxation. The revenue contended that the transactions were sham and deserved to be taxed. The Tribunal partially agreed with the appellant on the opening balance but upheld the addition on the fresh receipts.Conclusion: The addition of Rs. 1,60,50,000/- was sustained under Section 68, while the opening balance of Rs. 61,00,000/- was excluded from addition.2. Treatment of Opening Balance of Rs. 61,00,000/-Legal Framework and Precedents: The principle against double addition is well established. If an amount has already been assessed as income in an earlier year, it cannot be taxed again in a subsequent year.Court's Interpretation and Reasoning: The Tribunal observed that the opening balance of Rs. 61,00,000/- as on 31.03.2012 had already been subjected to tax and hence could not be treated as income again for the assessment year 2013-14.Application of Law to Facts: The Tribunal directed that no addition be made on this amount in the current year.Conclusion: The addition on the opening balance was disallowed.3. Genuineness of Loan Transactions from VKG Amounting to Rs. 2.21 CroresLegal Framework and Precedents: The genuineness of loan transactions is tested on the basis of creditworthiness of the lender, existence of agreements, payment of interest, and security. The Supreme Court and various High Courts have condemned the use of accommodation entries to introduce unaccounted money into the banking system.Court's Interpretation and Reasoning: The Tribunal relied heavily on the coordinate bench's detailed findings which concluded that the loans from VKG were not genuine. The presence of huge cash deposits in VKG's bank account, absence of any loan agreement or interest, VKG's denial of the loan, and fabricated financial statements were determinative factors.Key Evidence and Findings: The bank statements, VKG's conduct during assessment proceedings, and the nature of transactions were key evidentiary elements.Application of Law to Facts: The Tribunal held that these transactions were accommodation entries and the appellant was merely a conduit. The cash belonged to MPG Business Information Systems Pvt. Ltd., not the appellant.Treatment of Competing Arguments: The appellant contended that the transactions were routed through banking channels and hence genuine. The Tribunal rejected this contention, emphasizing that banking channel transactions alone do not establish genuineness.Conclusion: The Tribunal found the loan transactions to be not genuine and disallowed addition on this ground.4. Alleged Double Addition of Rs. 2,21,50,000/-Legal Framework and Precedents: The principle against double taxation mandates that income should not be taxed more than once in the hands of different entities for the same transaction.Court's Interpretation and Reasoning: The Tribunal noted that the sum of Rs. 2,21,50,000/- had already been taxed in the hands of MPG Business Information Systems Pvt. Ltd. The appellant had not earned any commission or extra consideration for facilitating the transaction, implying that the amount did not belong to the appellant but was passed through him.Application of Law to Facts: The Tribunal concurred with the appellant's argument and held that addition of Rs. 2,21,50,000/- in appellant's hands was unwarranted and directed deletion of the addition.Conclusion: The addition of Rs. 2,21,50,000/- was deleted in full to avoid double addition.5. Initiation of Penalty Proceedings under Section 271(1)(c)Legal Framework and Precedents: Penalty under Section 271(1)(c) is leviable for concealment of income or furnishing inaccurate particulars. However, penalty cannot be imposed if the addition itself is not sustainable or is based on suspicion.Court's Interpretation and Reasoning: The appellant challenged the initiation of penalty proceedings as arbitrary and against facts. The Tribunal did not explicitly delve into the penalty issue in the order but implied that since the additions were partly disallowed, penalty initiation was questionable.Conclusion: The issue of penalty was not sustained in the absence of valid additions.Significant Holdings'The transactions herein clearly do not inspire confidence as being genuine and are shrouded in mystery, as to why the creditor VKG, a grain merchant, would lend such huge unsecured, interest free loans - that too without any agreement to an assessee in the business of Information /Software technology. In the absence of the same, as also the fact that there were huge deposit of cash in the bank of VKG, VKG fail the test of creditworthiness and the transactions fail the test of genuineness.''The addition has already observed the sum of Rs. 61,00,000/- was an opening balance as on 31.03.2022 and no addition is possible in the current financial year.''The cheques were issued to MPG Business Information Systems Pvt. Ltd. by way of mere accommodation entry which were arranged in view of paying cash to the assessee who deposit the cash in his bank account. Thus, assessee is merely a conduit and the impugned sum do not belong to him and he has only acted as a mediator in the transaction.'Core principles established include the requirement of proving identity, creditworthiness, and genuineness of transactions under Section 68, and the rejection of mere banking channel transactions as proof of genuineness. The Tribunal also underscored the prohibition against double addition of income and recognized the importance of examining the substance over form in financial transactions.Final determinations were:The addition of Rs. 1,60,50,000/- under Section 68 was partly sustained.The opening balance of Rs. 61,00,000/- was excluded from addition.The addition of Rs. 2,21,50,000/- was deleted in full as it constituted double addition and the appellant was merely a conduit.The penalty proceedings under Section 271(1)(c) were not upheld.The appeal was allowed accordingly.