Quantum addition for unexplained cash credits u/s 68 quashed by the Supreme Court based on the findings of penalty proceedings
ABCAUS Case Law Citation:
ABCAUS 3300 (2020) (04) SC
Important case law relied upon by the parties:
Maddi Sudarsanam Oil Mills Co. v. Commissioner of IncomeTax,
Commissioner of Income Tax v. Aggarwal Engg. Co. (Jal.)
Commissioner of Income Tax vs. G.K. Contractors
During the course of the assessment proceedings u/s 143(2) of the Income Tax Act, 1961 (the Act), the Assessing Officer (AO) observed that there were many credit balances appearing the balance sheet / books of account.
Opportunity was granted to the assessee to prove the veracity of balances of the creditors as shown by assessee. However according to the AO, false/wrong particulars/explanation were submitted by the assessee and no correct proof/evidence was produced with respect to income of creditors and source of income.
Rejecting the books of account the AO made the “best judgment assessment” holding the credits as unexplained cash credits u/s 68 and added to the declared income of assessee.
Aggrieved, the appellant assessee preferred an appeal before the Commissioner of Income Tax (Appeals). However, as regards the Trading Account and Credits in question, the CIT(A) upheld the assessment order.
The appellant/assessee then preferred further appeal to the ITAT which however upheld the said addition.
The assessee approached the Hon’ble High Court and his principal argument was that once the books of account had been rejected and an assessment order had been passed, the same books of account could not be then relied upon by the AO to impose consequent addition(s).
The High Court dismissed the appeal as being devoid of merits. The High Court opined that the amount shown as credits was nothing but bogus entries and was justly added to the income of the appellant/assessee.
The appellant / assessee adopted a three pronged plea. First, that the Department committed error in the Assessment Order by mentioning Section 145(2) and not Section 145(3); second, that the assessment order in reference to the said addition incorrectly mentioned the term “not”. According to the assessee, the prefix of the paragraph and the language used, showed that the assessment order refered to Section 145(2) instead of Section145(3). Third, the AO after rejecting the books of account could not then rely on the same books of account to make any subsequent addition(s).
The Hon’ble Supreme Court noted that the appellant/ assessee in penalty proceedings had offered explanation and caused to produce affidavits and statements of the concerned unregistered dealers had been recorded and established their credentials.
It was also noted that the explanation given had been accepted by the CIT(A) who recorded the findings that the AO recorded statements and in majority of cases the identity was also duly established. After analysing the evidence so produced the (CIT(A) noted that the Officer had neither doubted the identity of those dealers nor any adverse comments were offered in reference to sales. Further, there was no denial of purchase.
Thus, the materials on record clearly suggested that the concerned unregistered dealers had made the sales on credit to the assessee, as claimed. As a consequence of this finding, the appellate authority concluded that there was neither any concealment of income nor furnishing of inaccurate particulars of income by the assessee.
Quantum addition quashed based on findings of penalty proceedings
The Supreme Court stated that though the said findings were given by the appellate authority in penalty proceedings under Section 271 of the Act. However, what was important that the stated penalty proceedings were the outcome of the assessment order.
The Hon’ble Supreme Court observed that indeed, at the time of assessment, the assessee had failed to produce any explanation or evidence in support of the entries regarding purchases made from unregistered dealers. But in the penalty proceedings, the appellant produced affidavits of unregistered dealers which were examined by the Assessing Officer. The AO recorded their statements and did not find any infirmity therein including about their credentials. The dealers stood by the assertion made by the assessee about the purchases on credit from them; and which explanation had been accepted by the appellate authority.
In other words, the factual basis on which the AO formed his opinion in the assessment order in regard to addition stood dispelled by the affidavits and statements of the concerned unregistered dealers in penalty proceedings. The appellate authority had not only accepted the explanation offered by the assessee but also recorded a clear finding of fact that there was no concealment of income or furnishing of any inaccurate particulars of income for the said assessment year.
The Hon’ble Supreme Court opined that in view of the indisputable position, it must necessarily followed that the addition could not be justified, much less, maintained.
Accordingly, the appeal of the assessee was allowed and the addition made u/s 68 of the Act towards cash credit was set aside.
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This important judgment of the Hon’ble Apex Court underline again that penalty proceedings are distinct, independent and not a corollary to the assessment proceedings. Therefore the undisputed findings of facts reached at in the penalty proceedings can very much be decisive for quantum proceedings.
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