Emphasising that the scope of writ interference under Section 260A of the Income Tax Act is confined to substantial questions of law, the Patna High Court clarified that to discharge the burden under Section 68 of the Income Tax Act, the taxpayer must establish the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor.
The Court pointed out that the ITAT’s order does not indicate consideration of the remand report in its proper perspective, nor does it address why the banking trail accepted by the appellate authority was insufficient to establish the genuineness of transactions, for the purposes of determining additions under Section 68.
As the ITAT had applied an incorrect legal approach in reassessing the evidence and in effectively placing an enhanced burden upon the appellant/ taxpayer beyond what is contemplated under Section 68, the Court overturned the findings of the ITAT and deleted the additions made under Section 68.
A Division Bench of Justice Bibek Chaudhuri and Justice Dr Anshuman observed that, though the ITAT had accepted that the identity of the creditor was established, the ITAT’s decision to reverse the CIT(A)’s order was primarily based on the fact that the creditor had not filed an income tax return for the relevant assessment year. The Bench opined that while the filing of a return is a relevant circumstance, it cannot be the sole determinative factor, especially when the transaction is routed through banking channels, and the creditor’s identity is not in dispute.
The Bench observed that the CIT(A) had considered a remand report from the AO, which did not contain any adverse material suggesting the bank transactions were fictitious or that the funds originated from the appellant. The ITAT, in its order, however, did not find that the documents provided by the appellant were false or fabricated, nor did it point to specific material to show the banking transactions were a sham.
The Bench clarified that the ITAT’s approach effectively required the appellant to establish the “source of the source” of the funds. It held that a taxpayer cannot ordinarily be compelled to explain the origin of funds in the hands of a third-party creditor unless the material on record justifies such an inquiry. Ultimately, the Bench concluded that the ITAT was not justified in reversing the CIT(A)’s order without demonstrating any perversity, misreading of evidence, or application of an incorrect legal standard.
Briefly, the appellant had filed its income tax return declaring a total income of Rs. 1.96 crores. The AO noted that the appellant had received Rs. 1.91 crores from M/s Champion Group of Companies, and treated this amount as unexplained cash credit under Section 68. The appellant initially described the receipt as a loan but later clarified it was an advance against the sale of sand.
On appeal, the CIT(A) called for a remand report from the AO and, after considering the documents and the report, deleted the additions. The Revenue then appealed to the ITAT, which reversed the CIT(A)’s order and held that while the creditor’s identity was established, the appellant had failed to prove the genuineness of the transaction and the creditworthiness of the creditor.
Appearances:
Senior Advocate Ajay Kumar Rastogi, along with Advocates Smriti Singh and Shilpi Keshri, for the Appellant/ Taxpayer
Senior Advocate Archana Sinha, along with Advocate Alok Kumar, for the Respondent/ Revenue
