Taxpayer Not Required to Prove ‘Source of Source’ Once Creditor Identity is Established: Patna HC on S. 68 Addition, sets aside ITAT Order [Read Order]

The Patna High Court, in its ruling has held that once an assessee establishes the identity of the creditor and the banking trail, the Revenue cannot insist that the assessee must also prove the “source of the source” for the purpose of making an addition under Section 68 of the Income Tax Act, 1961.

Justice Bibek Chaudhuri and Justice Dr. Anshuman observed that “Once the appellant produced bank statements showing the debit entries in the account of the creditor corresponding to the credit was established, the question whether the funds in the creditor’s account originated from some other source becomes a matter requiring investigation by the Revenue.

The court set aside the order of the Income Tax Appellate tribunal ( ITAT ) which had restored an addition of ₹1.91 crore against Rajnandani Projects Pvt. Ltd. for Assessment Year 2015-16 under Section 68.

The High Court observed that the CIT(A) had deleted the addition after examining confirmations, PAN details, bank statements, ledger accounts and a remand report, all of which supported the genuineness of the transaction.

The fact is that the appellant, Rajnandani Projects Pvt. Ltd., a private company furnished its income tax returns declaring total income of Rs. 1,96,95,520/- for the Assessment Year 2015-16. During the assessment, the Assessing Officer ( AO ) issued notices under Section 142(1) along with a questionnaire.

Also, the appellant also received notices under Section 133(6) and a summons under Section 131 of the Act, seeking to verify the amount of Rs. 1,91,00,000/-, received from M/s Champion Group of Companies for the relevant financial year. Later on, the AO treated the same amount as an Addition under Section 68.

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The appellant preferred an appeal before the Commissioner of IncomeTax (Appeals) [CIT(A)], where they received a positive order. The appellate commissioner went through all the documents submitted by the appellant including bank statements, confirmations, copies of returns of the creditor, and the remand report, held that the identity of the creditor stood proved, the source of funds was traceable in the banking channels, and the explanation furnished by the appellant was acceptable. Accordingly, it deleted the addition made under Section 68.

However, the Revenue appealed before the appellate tribunal. Here, the tribunal held that the appellant had proved only the identity of the creditor. The tribunal said that the appellant failed to prove the genuineness of the transaction and the creditworthiness of the creditor were not established, inter alia, noting that the creditor had not filed return of income for the relevant year when the transaction occurred.

The court heard the submissions of both sides. It noted the question of law put forward by the appellant including whether the Tribunal was justified in holding that the appellant failed to establish the genuineness of the transaction and the creditworthiness of the creditor, when the identity of the creditor, the bank statements, the ledger account, and the confirmations were placed on record.

On this issue the High Court observed that the commissioner of income tax appeals did not take the submissions of the appellant mechanically. However, with regards to the decision of the appellate tribunal, the court noted that the tribunal did not record any finding that the documents relied upon by the appellant were false or fabricated.

Also, according to the court, nor did the tribunal point out any specific material to show that the banking transactions were sham. In addition, while noting the reasoning of the appellate tribunal, the court noted that appellant was effectively expected to demonstrate the financial capacity of the creditor beyond the documentary evidence already placed on record.

Further, the court doubted that the tribunal applied a standard higher than required law required. It said that, in the case, it did not demonstrate why the appreciation of evidence by the Commissioner of Income Tax (Appeals) was erroneous in law.

Additionally, it did 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 genuineness.

This Court viewed that the Tribunal applied an incorrect legal approach in reassessing the evidence and in effectively placing an enhanced burden upon the appellant beyond what is contemplated under Section 68 of the Act.

Therefore, in all these absences, the court found that the decision of the appellate tribunal was not proper and thus set aside the order. The order passed by the CIT(A) deleting the addition under Section 68 was restored.