2024 (4) TMI 1269 - AT - Income Tax

Addition u/s 68 - additions have been made on the basis of circumstances which indicated that there was no genuine business transaction - HELD THAT - AR has himself conceded that unless the transaction as a whole is questioned as a farce provisions of section 68 of the Act could not have been invoked with regard to the receipts shown in the nature of income. We find that the tax authorities have examined the whole transaction on that aspect only and at this stage based on our discussion above there is no reason to differ from the same. The provisions of Section 68 of the Act rests initial burden on the assessee to explain the genuineness of the transaction. It being a deeming income provision the burden needs to be sufficiently discharged at least on the preponderance of probability. Here before us there are concurrent findings of two quasi- judicial authorities against the assessee by raising valid concerns about the genuineness of the transaction. Before us also the same set of arguments and explanations have been raised which we also find prima facie lacking the strength to stand on its own legs. Thus we have no hesitation to hold that the assessee has no prima facie case to contend that as for the purpose of section 68 of the Act it had prima facie discharged its burden or that provisions of section 68 of the Act have been patently wrongly invoked. Since there is no prima facie case the balance of convenience in no way comes to assist the applicant assessee. On the contrary when substantial receipts are from the Foreign Body only and assessee is not having any other source of prospective earnings to ensure payments of demands if being unsuccessful here the Revenue is justified in initiating recovery proceedings. We find no malice in the action of the ld. AO in that regard. We do not find any justification to interfere with the impugned recovery proceedings. Nevertheless the assessee shall be at liberty to approach the Assessing Officer with plan to liquidate the disputed tax demand or otherwise seek securitization of the same as may be found satisfactory by the Assessing Officer.

Summary

Issues Presented and Considered

The core legal questions considered by the Appellate Tribunal (AT) in this matter are:

• Whether the Assessing Officer (AO) was justified in invoking the provisions of section 68 of the Income-tax Act, 1961 ("the Act") to treat the foreign remittances received by the assessee as unexplained cash credits, thereby making additions to income.
• Whether the assessee discharged the onus cast upon it under section 68 to establish the identity, creditworthiness of the foreign entity (Justice and Education Fund Inc. - JEF), and the genuineness of the transactions.
• Whether the receipts shown as business income in the books of accounts can be subjected to addition under section 68.
• The relevance and sufficiency of the evidence submitted by the assessee, including service agreements, invoices, and content supplied, to establish genuineness of the transaction.
• The ownership and intellectual property rights (IPR) over the content created by the assessee and whether the content was genuinely supplied to JEF or was the transaction a sham.
• The applicability of principles relating to stay of demand under section 254 of the Act, including the existence of a prima facie case, balance of convenience, and irreparable loss.
• Whether the Tribunal should interfere with the recovery proceedings or grant stay of demand during pendency of appeal.

Issue-wise Detailed Analysis

1. Invocation of Section 68 and Burden of Proof on Assessee

Legal Framework and Precedents: Section 68 of the Act deals with unexplained cash credits. The assessee must establish three limbs: identity of the creditor, creditworthiness of the creditor, and genuineness of the transaction. The Supreme Court in CIT vs. Orissa Corporation (1986 AIR 1849) held that tax authorities cannot question commercial prudence or business expediency to negate genuineness. However, the burden on the assessee to prove genuineness is strict and must be discharged on the preponderance of probability.

Court's Interpretation and Reasoning: The AO invoked section 68 after a survey under section 133A revealed electronic data and foreign remittances totaling approximately Rs. 16.45 crores from 62 entities, mainly JEF. The AO doubted the genuineness of the transactions, considering the receipts as unexplained cash credits. The CIT(A) upheld the AO's findings.

The Tribunal noted that the AO's primary concern was the genuineness of the transactions and the linkage between the expenses incurred and the receipts. The AO found no item-wise cost records correlating expenses with receipts, which raised suspicion about the assessee's ability to deliver the claimed journalistic services. The Tribunal emphasized that the assessee cannot escape its burden by merely calling the AO's queries absurd or misconceived.

Key Evidence and Findings: The assessee submitted service agreements, invoices, and a list of content supplied (videos, stories, scripts). However, the AO and CIT(A) found that the assessee failed to provide a detailed breakup of costs per item, and the payments were largely received in advance without any substantive directions or control from JEF regarding content quality or topics.

Application of Law to Facts: The Tribunal held that the assessee did not discharge its burden under section 68 to establish genuineness. The mere existence of a service agreement and invoices was insufficient without evidence of control, supervision, or correlation between payments and content delivered. The concurrent findings of the AO and CIT(A) that the transactions were not genuine were accepted as prima facie valid.

Treatment of Competing Arguments: The assessee argued that the transactions were genuine, supported by banking channel payments, service agreements, and Creative Commons licensing of content. The Tribunal found these arguments insufficient to rebut the AO's findings. The Tribunal also rejected the contention that recording the receipts as business income precluded additions under section 68, referencing the Supreme Court's ruling that taxability depends on the actual nature of the transaction, not book entries.

Conclusion: The invocation of section 68 was justified as the assessee failed to establish genuineness of the transactions. The Tribunal found no prima facie case in favour of the assessee on this issue.

2. Ownership and Intellectual Property Rights over Content

Legal Framework and Precedents: Ownership of intellectual property and control over content are relevant to ascertain the genuineness of service transactions. The existence of contractual terms and adherence to them is significant.

Court's Interpretation and Reasoning: The assessee claimed that JEF owned the content and that the content was licensed under Creative Commons, allowing free use by third parties including the assessee. The CIT(A) and AO found that the assessee simultaneously uploaded the same content on its own website, indicating ownership rather than mere service provider status.

Key Evidence and Findings: Analysis showed 84% of content was uploaded on both websites within 24 hours, undermining the claim of exclusive ownership by JEF. The AO observed absence of any control or directions from JEF regarding content creation, and the service agreement was not followed in letter or spirit.

Application of Law to Facts: The Tribunal agreed with the AO and CIT(A) that the service agreement was a facade and the transactions were premeditated to receive funds under the guise of service fees, possibly to circumvent regulations such as the Foreign Contribution Regulation Act (FCRA).

Treatment of Competing Arguments: The assessee's reliance on Creative Commons licensing was noted but found insufficient to establish genuine business transactions since the licensing allowed free use and did not reflect commercial control or exclusivity expected in such agreements.

Conclusion: The content ownership and IPR claims by the assessee were not established. The transactions were found to be sham and not genuine business dealings.

3. Evidence and Linkage Between Expenses and Receipts

Legal Framework and Precedents: The genuineness of receipts under section 68 requires establishing a clear nexus between expenses incurred and income generated. The AO is entitled to expect reasonable evidence correlating costs with revenues.

Court's Interpretation and Reasoning: The AO found that the assessee failed to provide item-wise cost details or any linkage between expenses and receipts, despite repeated requests. The assessee's claim that such detailed costing was not maintained was not accepted as it undermined the credibility of the transactions.

Key Evidence and Findings: The assessee incurred expenses on salaries and consultants but could not demonstrate how these related to the content supplied or the payments received. The AO noted that 90% of the funds were received in advance without any budgetary controls or supervision by JEF.

Application of Law to Facts: The Tribunal upheld the AO's view that the absence of detailed costing and control over content creation cast doubt on the genuineness of the transactions.

Treatment of Competing Arguments: The assessee's argument that item-wise costing was not required was rejected as arbitrary and unlawful since the onus to explain receipts under section 68 is on the assessee.

Conclusion: The failure to establish linkage between expenses and receipts further supported the AO's invocation of section 68.

4. Applicability of Section 68 to Business Income

Legal Framework and Precedents: The manner in which receipts are recorded in books does not determine taxability. The Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. vs CIT held that taxability depends on the actual nature of the transaction.

Court's Interpretation and Reasoning: The assessee contended that since the receipts were recorded as business income, section 68 could not be invoked. The CIT(A) and Tribunal rejected this argument, stating that the nature of receipts must be examined independently of book entries.

Conclusion: Recording receipts as business income does not preclude additions under section 68 if the transactions are found to be not genuine.

5. Power of the Tribunal to Grant Stay and Conditions Thereof

Legal Framework and Precedents: The Tribunal has inherent and statutory powers under section 254 of the Act to grant stay of recovery proceedings. The Supreme Court has held that such powers are ancillary to appellate jurisdiction but should not be exercised routinely. Factors to consider include existence of a prima facie case, balance of convenience, irreparable injury, and public interest. The Tribunal may impose conditions such as deposit of a percentage of the demand or furnishing security.

Court's Interpretation and Reasoning: The assessee sought stay of demand on grounds of prima facie case, balance of convenience, and financial hardship due to frozen accounts. The Tribunal examined the merits and found no prima facie case in favour of the assessee, given the concurrent findings against it. The Tribunal also noted the absence of other sources of income to secure payment of demand if appeals failed, justifying recovery proceedings.

Key Evidence and Findings: The Tribunal referred to authoritative decisions including those of Delhi and Mumbai Benches of the ITAT and the Hon'ble High Court, which emphasize the need for a strong prima facie case for stay and the discretion to impose conditions.

Application of Law to Facts: Given the lack of prima facie case and the nature of the transactions, the Tribunal declined to grant stay. However, it allowed the assessee liberty to approach the AO with a plan for liquidation or securitization of the demand.

Treatment of Competing Arguments: The assessee's reliance on judgments granting stay on deposit of 20% of demand was acknowledged but found inapplicable due to the weak prima facie case here. The revenue's reliance on public interest and the need to protect revenue was accepted.

Conclusion: The Tribunal dismissed the stay application, emphasizing that recovery proceedings could continue.

6. Financial Stringency and Extent of Demand

Legal Framework and Precedents: Instruction No. 96 (1969) by CBDT and various High Court decisions provide that when assessed income is substantially higher (twice or more) than returned income, collection of disputed tax should be held in abeyance till appeal disposal, barring any lapse by the assessee.

Court's Interpretation and Reasoning: The assessee's returned income was nil, while assessed income was significantly higher. The assessee claimed financial hardship due to frozen accounts. However, the Tribunal noted that the High Court had earlier rejected the assessee's plea for stay, and the financials did not inspire confidence. The Tribunal found no reason to deviate from the principle that recovery can proceed in absence of a strong prima facie case.

Conclusion: Financial hardship alone did not justify stay given the lack of prima facie case and the nature of the transactions.

Significant Holdings

"The provisions of Section 68 of the Act rests initial burden on the assessee to explain the genuineness of the transaction. It being a deeming income provision, the burden needs to be sufficiently discharged, at least on the preponderance of probability. Here before us there are concurrent findings of two quasi- judicial authorities against the assessee by raising valid concerns about the genuineness of the transaction."

"The manner of recording an entry in the books of accounts is not determinative in deciding the taxability of receipt. Taxability of a receipt or allowance of a deduction is dependent upon the actual nature of transaction."

"The service agreement was basically a facade and smoke screen to hide the actual nature of transaction. In order to circumvent the FCRA regulation, firstly, the LLP was converted into the company and then in the garb of service fee, the amount was received by the appellant."

"The Tribunal has power to grant stay, considering it to be a power which is incidental or ancillary to its appellate jurisdiction. However, such power should not be exercised in a routine way or as a matter of course in view of the special nature of taxation and revenue laws."

"It is only when a strong prima facie case is made out that the Tribunal will consider whether to stay the recovery proceedings and on what conditions and the stay will be granted in most deserving and appropriate cases where the Tribunal is satisfied that the entire purpose of the appeal will be frustrated or rendered nugatory by allowing the recovery proceedings to continue during the pendency of the appeal."

"Since there is no prima facie case, the balance of convenience in no way comes to assist the applicant assessee. On the contrary, when substantial receipts are from the Foreign Body only, and assessee is not having any other source of prospective earnings to ensure payments of demands if being unsuccessful, here, the Revenue is justified in initiating recovery proceedings."

Final Determinations

• The assessee failed to discharge the burden under section 68 to establish genuineness of foreign remittances; the transactions were not genuine business transactions but a facade.
• Ownership and IPR of the content rested with the assessee, not the foreign entity, undermining the genuineness of the service agreement.
• The absence of detailed cost records and lack of control by the foreign entity over content creation justified the AO's and CIT(A)'s findings.
• The recording of receipts as business income does not prevent additions under section 68 if transactions are not genuine.
• The Tribunal declined to grant stay of demand due to absence of prima facie case and in view of public interest and revenue protection.
• The assessee was allowed to approach the AO with proposals for liquidation or securitization of the demand but recovery proceedings were upheld.