2025 (5) TMI 1093 - HC - Income Tax

Unexplained cash credit u/s 68 - neither the identity nor the creditworthiness of the party has not been established - Tribunal had allowed the assessee s appeal on the ground that the source of verification provision was inserted u/s 68 on and from Finance Act 2012 with effect from 1.4.2013 and it cannot have retrospective effect for the assessment year 2011-12 the year under consideration. HELD THAT - This view appears to be inconsistent with the view taken by this court in Neelkantha Commosales P Ltd. 2021 (12) TMI 23 - CALCUTTA HIGH COURT It is no doubt true that the case on hand can be brought on under one of the exceptions drawn by Central Board for preferring appeal before this court nonetheless we are of the view that the tax effect in the instant case is Rs. 4, 95, 000/-. Therefore we are of the view that the legal issue which has been raised by the appellant/revenue in this appeal has to be left open since there are other decisions which the learned senior counsel for the revenue relied upon. Therefore considering the peculiar facts and circumstances of the case we are not inclined to interfere with the order passed by Tribunal. Accordingly the appeal is dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court revolve around the deletion of an addition made under section 68 of the Income Tax Act, 1961, concerning unexplained cash credits amounting to Rs. 15,00,000/-. Specifically, the issues are:

Whether the Tribunal erred in law by deleting the addition when neither the identity nor the creditworthiness of the party providing the cash credit was established.
Whether the Tribunal erred in directing the Assessing Officer (AO) to delete the addition when the genuineness, nature, and source of the cash credit transaction were not proved by the assessee company.
Whether the Tribunal erred by holding that the assessee proved the identity and genuineness of the transaction, ignoring the Supreme Court precedent which held that documents such as certificate of incorporation and PAN are insufficient to establish the identity of the subscriber company when concrete evidence from ITD system data exists.
Whether the Tribunal erred by disregarding the Calcutta High Court ruling that mere proof of the creditor's identity or payment by cheque is insufficient, and that the assessee must establish the creditor's identity, capacity to advance money, and genuineness of the transaction.
Whether the Tribunal failed to consider judicial principles laid down in the case of Pr. CIT 5, Kolkata Vs Swati Bajaj regarding unexplained cash credits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Deletion of addition under section 68 despite non-establishment of identity, creditworthiness, genuineness, nature, and source of cash credit

The legal framework governing unexplained cash credits is primarily section 68 of the Income Tax Act, 1961. Section 68 empowers the AO to treat any sum found credited in the books of an assessee as income if the assessee fails to satisfactorily explain the nature and source of such credit. The burden lies on the assessee to prove the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the party.

The Tribunal allowed the appeal of the assessee by relying on the fact that the source verification provision under section 68 was introduced by the Finance Act, 2012 with effect from 1.4.2013 and thus could not be applied retrospectively to the assessment year 2011-12. The Tribunal's reasoning was that since the provision was not in force during the relevant year, the addition could not be sustained.

The Court noted that this view appears inconsistent with a previous decision of the Calcutta High Court in Neelkantha Commosales [P] Ltd. vs. ITO, where retrospective application of certain provisions was considered. However, the Court refrained from interfering with the Tribunal's order in light of the peculiarity of facts and the relatively small tax effect involved (Rs. 4,95,000/-).

The Court recognized that the legal issue regarding the applicability of section 68's source verification provisions for the assessment year 2011-12 remains open and that other decisions relied upon by the revenue counsel could potentially influence the outcome in a different factual matrix.

Issue 3: Sufficiency of documents such as certificate of incorporation and PAN for establishing identity of creditor

The Supreme Court precedent cited by the revenue held that mere possession of certificate of incorporation, PAN, etc., is insufficient to establish the identity of a subscriber company in unexplained cash credit cases, especially when there is concrete evidence from ITD system data indicating otherwise. This principle emphasizes the necessity of deeper scrutiny beyond formal documents to establish the reality of transactions.

The Tribunal's decision to accept the assessee's proof of identity and genuineness without adequately addressing this precedent was questioned. However, the Court did not explicitly overrule the Tribunal's approach but left the issue open for future adjudication, indicating the need for a more comprehensive examination of evidentiary sufficiency in unexplained cash credit cases.

Issue 4: Requirement to establish creditor's identity, capacity, and genuineness of transaction per Calcutta High Court precedent

The Calcutta High Court in Precision Finance Ltd. held that mere proof of identity of the creditor or payment by cheque is not sufficient. The assessee must establish three elements: (i) identity of the creditor, (ii) capacity of the creditor to advance money, and (iii) genuineness of the transaction.

The Tribunal's acceptance of the assessee's claim without fully applying this tripartite test was challenged. The Court acknowledged the importance of these principles but did not find it appropriate to interfere with the Tribunal's findings on facts, given the limited tax effect and the peculiar circumstances of the case.

Issue 5: Consideration of judicial principles from Pr. CIT 5, Kolkata Vs Swati Bajaj

The judicial principles laid down in Swati Bajaj emphasize stringent scrutiny of unexplained cash credits, requiring the assessee to furnish credible and consistent evidence to prove the identity and genuineness of the transaction.

The revenue contended that the Tribunal failed to consider these principles adequately. The Court, however, did not explicitly analyze this contention in detail but left the question open for future consideration, thereby underscoring the continuing relevance of these principles in unexplained cash credit disputes.

3. SIGNIFICANT HOLDINGS

The Court declined to interfere with the Tribunal's order deleting the addition of Rs. 15,00,000/- under section 68 for the assessment year 2011-12, primarily on the ground that the source verification provision of section 68 was not applicable retrospectively. The Court stated:

"The source of verification provision was inserted under section 68 on and from Finance Act, 2012 with effect from 1.4.2013 and it cannot have retrospective effect for the assessment year 2011-12, the year under consideration."

However, the Court explicitly left open the substantial questions of law raised by the revenue, noting:

"The legal issue which has been raised by the appellant/revenue in this appeal has to be left open since there are other decisions which the learned senior counsel for the revenue relied upon."

Further, the Court emphasized the limited tax effect as a factor in declining to interfere: