2026 (2) TMI 255 - AT - Income Tax

Unexplained cash credits and alleged bogus transactions: Tribunal finds creditor genuine, deletes additions and upholds capital gains claim

Assessee discharged initial burden to prove identity, creditworthiness and genuineness of alleged cash credits by producing company registration, PAN, ... Addition u/s 68 - addition of agricultural income - unexplained cash credit - proof of identity, creditworthiness and genuineness - Onus to prove - genuineness of the transaction between the assessee and FMPL - whether the assessee has been able to successfully prove the Identity and Creditworthiness of the alleged cash creditor as well as Genuineness of the alleged transaction? HELD THAT:- AO in this case has not made any independent enquiry to verify the genuineness of the transactions. The assessee having furnished all the details and documents before the AO and the Assessing Officer has not pointed out any discrepancy or insufficiency in the said evidences and details furnished by the assessee before him. As observed above, the assessee having discharged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifted upon the AO to examine the evidences furnished and even made independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the assessee and confronting with the same to the assessee. Thus, we find that so far as Identity of the cash creditor is concerned, the same is proved beyond doubt as FMPL (later converted to FM LLP) is registered with Registrar of Companies, having PAN, filing ITR and Books of Accounts are audited. Proof of creditworthiness - Assessee has furnished the audited financial statements of FMPL and the income tax return and there is no evidence putforth by the Revenue authorities in the shape of assessment order framed in the case of FMPL and report of the AO of FMPL indicating that it is an entry provider company. Rather AO has not called for any information from the Assessing Officer of FMPL nor carried out any independent enquiry for the transaction entered into between the assessee and FMPL. The above facts demonstrate that FMPL has sufficient creditworthiness in the form of accumulated reserves and share capital which has been utilized for giving the alleged sum to the assessee through proper banking channel. We are therefore satisfied that creditworthiness of FMPL has been proved by the assessee with support of financial statements. Genuineness of the transaction we note that FMPL is in the regular course of making such investments/giving loans for the purpose of purchasing properties. In the current scenario admittedly it is not required for a company which is into business of investment that it should carry on some trading or regular business activity but only a right investment and at the best time can give fortune in the subsequent years. Taking example of various startup companies where huge investments are made where major business activity is not commenced and merely based on an idea, projection of sales and profits based on such projections, investments are received but only a few are able to get good returns. For the remaining the investments turn out to be losses. Therefore, to initiate and carry out business may be easy but to make profits is much harder. For arranging the funds, investment agreement has been entered into between the assessee and FMPL and the details of immovable property to be purchased are mentioned therein. Therefore, it is not a case of unsecured loan or accommodation entry where the funds are received without giving any collateral security but in the instant case there is a registered agreement for purchase of property and the advance has been received towards sale of property to be constructed in future. The terms and conditions in the Investment Agreement clarifies this aspect. Though the agreement is not registered but then it is duly signed and the terms and conditions are to be duly honoured from both the sides and the funds have been received subsequent to entering of such Investment Agreement. We also find that the funds have been received in piece meal basis spread across F.Y. 2013-14 to F.Y. 2015- 16 and further when finally the project could not take up due to litigation between Jadhav family members, assessee has finally started refunding the amount to FMPL. The repayment of ₹3,55,92,000 during F.Y. 2014-15 is in itself an evidence that genuine transaction of receiving advance against sale of immovable property was entered into during the impugned assessment years. To sum up since the assessee has proved the nature and source of the alleged sum and also proved the Identity and creditworthiness of FMPL and genuineness of the transaction and there being no contrary material been placed by the Revenue authorities before us except the observation of the Assessing Officer that too carried out during the course of assessment proceedings of some other assessee, and therefore the facts placed before us about the transaction entered into between the assessee and cash creditor and assessee having explained the nature and source of alleged sum remains uncontroverted. We therefore find that AO erred in invoking section 68 - Decided in favour of assessee. Claim of Agricultural income made by the assessee in the return of income - Alleged addition has been made merely for not furnishing the requisite details of agricultural income. Ld. Assessing Officer has himself observed that in the assessment year assessee owns agricultural land and merely owning agricultural land will not entitle the assessee to make any claim of agricultural land. We however considering the fact that for the preceding assessment hear assessee has made a claim of agricultural income of ₹1.22 lakh which has been accepted by the Revenue authorities, find no reason to question the genuineness of the agricultural income earned by the assessee during the year - Addition to be deleted. Bogus LTCG - denial of claim of assessee having earned long term capital gain u/s. 10(38) from sale of 4,18,000 equity shares - HELD THAT:- We find that assessee has fulfilled the conditions prescribed u/s. 10(38) and after having purchased the shares under preferential allotment from the company and made payment through account payee cheques and held the equity shares for more than a year and selling them through recognised stock exchange after making due payment of STT, has earned the alleged long term capital gain. We also note that AO has not invoked section 68 of the Act and has merely made the addition denying benefit of section 10(38) of the Act and treating it as income in the nature of trading. This indicates that AO has found the alleged transaction to be genuine and only disputed the head of income. We therefore find that a valid clam u/s. 10(38) of the Act has been made and ld. Assessing Officer grossly erred in treating it as bogus long term capital gain. Issues: (i) Whether additions made under section 68 of the Income-tax Act, 1961 in respect of sums received from M/s Frontier Mercantile Pvt. Ltd. (later FM LLP) for A.Ys. 2013-14 to 2015-16 are sustainable; (ii) Whether agricultural income of Rs.99,643 claimed for A.Y.2013-14 is liable to be disallowed; (iii) Whether long-term capital gain claimed under section 10(38) for A.Y.2015-16 on sale of shares of Pearl Agriculture Ltd. is rightly denied; (iv) Whether penalty under section 271(1)(c) for A.Y.2014-15 survives after deletion of the related addition.Issue (i): Whether the Assessing Officer was justified in invoking section 68 to treat advances from FMPL as unexplained cash credits for A.Y.2013-14 (Rs.6.00 crore), A.Y.2014-15 (Rs.82.50 lakh) and A.Y.2015-16 (Rs.3,13,50,000).Analysis: The Tribunal examined documentary evidence including registered agreements for purchase of the land, the unregistered investment agreement with FMPL, bank transaction records, audited financial statements and ITR of FMPL showing share capital and accumulated reserves. The authorities below did not point to specific discrepancies in the documents produced by the assessee and had not carried out independent inquiries with FMPL or its Assessing Officer; some adverse observations were based on findings in another assessment file. Relevant precedents and principles concerning section 68, burden shifting on proof of identity, creditworthiness and genuineness, and the duty of the AO to investigate when prima facie evidence is produced were considered.Conclusion: The assessee discharged the primary onus as to identity, creditworthiness and genuineness of the transactions; in absence of contrary material or independent enquiry by the AO, additions under section 68 are not sustainable. Issue decided in favour of the assessee.Issue (ii): Whether the claim of agricultural income of Rs.99,643 for A.Y.2013-14 should be disallowed.Analysis: The assessee produced 7/12 extracts and earlier year acceptance of agricultural income of similar nature was on record. The Revenue produced no substantive contrary evidence to disprove the agricultural income claim.Conclusion: The Tribunal deleted the addition and allowed the agricultural income claim. Issue decided in favour of the assessee.Issue (iii): Whether long-term capital gain exemption under section 10(38) for A.Y.2015-16 on sale of shares of Pearl Agriculture Ltd. (claimed at approx. Rs.1.80-1.83 crore) was correctly denied.Analysis: The assessee proved purchase by preferential allotment, payments through banking channels, holding in demat for more than one year, sale on a recognised stock exchange through a registered broker and payment of STT; contract notes, demat statements and bank receipts were on record. The AO relied on general investigations and price fluctuations but did not bring specific adverse material linking the assessee to price manipulation, nor point to defects in the documentary proof. Authorities and case-law on LTCG claims for transactions effected through recognised exchanges and evidentiary standards were applied.Conclusion: The conditions of section 10(38) were satisfied and denial of exemption was not justified; the Tribunal allowed the claim. Issue decided in favour of the assessee.Issue (iv): Whether penalty under section 271(1)(c) for A.Y.2014-15 survives where the underlying addition has been deleted.Analysis: The penalty was predicated on the addition which the Tribunal deleted while deciding the section 68 issue for the relevant year; with the quantum deleted there is no basis to sustain penalty.Conclusion: The penalty under section 271(1)(c) is deleted. Issue decided in favour of the assessee.Final Conclusion: On the considered facts and legal authorities, the Tribunal allowed the assessee's appeals on the substantive issues (section 68 additions, agricultural income, section 10(38) exemption) and deleted the consequential penalty; the orders under appeal are set aside as indicated above.Ratio Decidendi: Where an assessee prima facie adduces cogent documentary evidence establishing the identity, creditworthiness of the creditor and genuineness of the transaction, the primary onus shifts and the Assessing Officer must undertake independent enquiries and point to specific discrepancies before invoking section 68; absent such enquiry or contrary material, additions under section 68 cannot be sustained.