To make additions u/s 68 for unexplained cash credits, all three limbs must be proved/established
In a recent judgment, ITAT has dismissed the appeal of the Revenue and upheld the order passed by the CIT(A) that to make additions u/s 68 for unexplained cash credits, all three limbs must be proved/established
ABCAUS Case Law Citation:
ABCAUS 3920 (2024) (03) ITAT
In the instant case, the Department had challenged the order passed by the CIT(A) in allowing the appeal of the assessee on the issue of credit entries holding that all the three limbs of Sec 68 of the Income Tax Act, 1961 (the Act). the Income Tax Act, 1961 (the Act) were not proved/established.
The case of the Revenue was that CIT(A) erred in allowing the appeal of the assessee by holding that identity and creditworthiness of the persons from whom such credits were received, were proved, however, genuineness of the transactions was not established as the purpose of such credit was not explained and hence section 68 was not applicable to the case.
The Assessing Officer (AO) on the basis of report of the Investigation Cell made an addition u/s 68 of the Act of the total credits in the bank account of the company by declaring the appellant company as a shell company.
The CIT(A) observed that the appellant company was having land which was sold five years back by executing registered sale deed and after paying stamp duty. The same AO had assessed Long Term Capital Gain in the hands of the appellant from the said transaction. Further, the appellant company paid earnest money during preceding financial year for purchase of a plot to build flat /apartment and paid TDS u/s 194H of the Act.
In view of the above CIT(A) held that the appellant was having income generating apparatus and was undertaking business activities and was not a shell company.
The CIT(A) observed that there is no definition of shell company given under the provisions of the Act or Companies Act, 1956/2013. Every case needs to be examined on merits as per the peculiar facts and circumstances to draw such inference and consequences out of the same as per the provisions of the Act.
The CIT(A) also observed that in order to decide the merit of addition made by the AO on account of unexplained bank credits u/s 68 of the Act, it is required to examine the source and nature of credits received by the appellant terms of conditions laid down in the provisions of section 68 of the Act. Thus, it required to examine the identity and creditworthiness of the persons from who’s amounts have been received and genuineness of the transactions on merit considering each credit separately. The AO has not discussed each and credit entry separately on merits in the assessment order before drawing the inference that the credits were unexplained.
The AO had made the addition on the ground that the appellant had failed to explain the purpose and utilisation of such credits.
The AO was again directed by CIT(A) to examine such credits on merit in respect of identity and creditworthiness of such persons and genuineness of such transaction. In the remand report, the AO did not bring on record any adverse findings in respect of identity and creditworthiness of such persons and genuineness of such transaction, except by stating that appellant company was a shell company and does not have any profit generating apparatus.
The CIT(A) further observed that amount was received in the appellant’s bank account and it had furnished documentary evidence in support of identity and creditworthiness of such persons and genuineness of transaction during the assessment proceedings.
The CIT(A) held that the appellant has discharged its onus as required u/s 68 of the Act. Although the AO admitted to have received all the documents during the assessment proceedings yet the same were not taken into account by the AO while making addition. The AO had recorded in his order that the appellant could not explain the purpose and utilisation of such credits. However, the AO failed to take cognisance of the fact that addition u/s 68 of the Act is to be made if the appellant doesn’t offer any explanation regarding the source and nature of credits received in the bank account or if the explanation offered is not found satisfactory by the AO. Whereas the appellant had duly furnished its explanation in respect of bank credits received during the year under consideration alongwith necessary documentary evidence.
The CIT(A) opined that if the AO was not satisfied with the explanation of the AO in respect of source and nature of credits received, he should have recorded such dissatisfaction in the
assessment order. However, no adverse finding has been recorded in the assessment order in respect of the documentary evidence furnished by the appellant in support of bank credits. The submissions and documents furnished by the appellant during the appellate proceedings were also forwarded to the AO for remand report. In the remand report also, the AO had not even discussed the documentary evidence furnished by the appellant in support bank credits let alone pointing out any defect in the same.
In view of the above the CIT(A) opined that assessment order was non speaking, mechanical in nature and had been passed without discussing merits of the documents.
Therefore, the CIT(A) deleted the additions made.
Before the Tribunal, the assessee supported the order passed by the CIT(A) and contended that the AO did not make any adverse findings in the remand report and the entire investigation / proceedings of the AO revolves around stating the appellant company as shell company on the dictate of third party. The AO wrongly made addition of all the credit entries in the bank account of the company ignoring all the proofs and documentary evidences submitted by the assessee during the assessment proceeding. However, same documents were submitted before the CIT(A) during the appellate proceedings and the CIT(A) granted relief to the assessee after verification of all the documents.
The Tribunal opined that the Department was unable to repel the evidence based stand taken by the assessee.
Accordingly, the grounds raised by the Department were rejected and the appeal filed by the Department was dismissed.
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