2025 (6) TMI 1914 - AT - Income Tax

Additions u/s 68 - unexplained capital account difference and sale proceeds of diamonds - CIT(A) deleted addition - HELD THAT - In the capital addition we find that the assessee had submitted a valid gift deed executed by her husband on the occasion of the first birthday of her son whose PAN card was annexed to show the proof of date of birth. Thus there was no dispute about the identity of the donor and the AO did not doubted about the creditworthiness or occasion for the gift. Addition on the ground that the diamonds were not recorded in earlier balance sheet - Assessee has explained the omission as inadvertent since the diamonds received as gift valuing to the extent of Rs. 1.15 crores were sold during the year 5440.2 carats and the balance Rs. 1.35 crores 6359.8 carats were still lying with the assessee as at the end of the year which is evident from the copy of the balance sheet as on 31-03-2016 which was submitted during the course of assessment proceedings. Assessee also substantiated the claim by offering LTCG on their sale. The Ld AO neither doubted about the credit worthiness identity of the donor nor the occasion for the gift thus the assessee discharged its primary onus cast upon it clearly. Therefore CIT A was correct in deleting the addition made u/s.68 of the Act on account of unexplained capital account difference. Unaccounted sale proceeds - Assessee submitted a coherent reconciliation of buyerwise payments with matching bank entries and confirmation of Account with PAN details. The number of buyers was clarified to be 49 parties and not 56 parties as mentioned by the Ld AO. Further their PAN confirmation letters and banking trails were all submitted by the assessee. AO did not point to a single buyer who was found to be non-genuine or whose payment was found to be bogus. Assessee furnished the copy of the Valuation Report namely date of valuation on 15-04-2015 and the Rates prevailing as on 23-08-1988 which was not questioned by the Ld AO. It is the case of the assessee who offered the entire capital gain to tax. The action of the Ld AO in rejecting the evidences without proper verification is against the principles laid down in CIT v. Orissa Corporation (P) Ltd 1986 (3) TMI 3 - SUPREME COURT and reiterated in Mohanakala 2007 (5) TMI 192 - SUPREME COURT Once the assessee has offered a satisfactory explanation with supporting evidences the burden shifts on the Department to rebut the same with cogent materials which has not been done in the present case by the Ld AO. Appeal of revenue dismissed.

Summary

The core legal questions considered in this appeal relate primarily to the validity of additions made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961. Specifically, the issues are:

1. Whether the unexplained difference in the opening balance of the capital account amounting to approximately Rs. 2.50 crores could be treated as unexplained income under section 68, given the assessee's claim of receipt of diamonds as a gift and subsequent sale thereof.

2. Whether the entire sale consideration of Rs. 7.85 crores from the alleged sale of diamonds, beyond the declared Long-Term Capital Gain (LTCG), could be treated as unexplained income under section 68, in the absence of satisfactory evidence regarding the genuineness of the transactions and the buyers.

Issue-wise Detailed Analysis:

1. Treatment of Unexplained Capital Account Difference under Section 68

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act places the burden on the assessee to explain the nature and source of any unexplained cash credits, including unexplained capital additions. The Supreme Court's decision in CIT v. P. Mohanakala (2007) establishes that once the assessee offers a credible explanation supported by evidence, the burden shifts to the Revenue to disprove the genuineness of the transaction.

Court's Interpretation and Reasoning: The AO observed a significant discrepancy between the closing capital balance as of 31.03.2015 and the opening balance as of 01.04.2015, amounting to Rs. 2.48 crores. The AO treated this as unexplained income, reasoning that no investments in diamonds were reflected in earlier years, and thus the increase was unexplained. However, the assessee produced a valid gift deed dated 23.08.1988 evidencing receipt of diamonds from her husband on the occasion of her son's first birthday. The assessee also furnished confirmations from purchasers, bank statements, and valuation reports to substantiate the cost and sale of diamonds.

The Tribunal noted that the AO neither doubted the identity or creditworthiness of the donor nor questioned the genuineness of the gift deed. The omission of diamonds in earlier balance sheets was explained as inadvertent. Further, the assessee had offered LTCG on the sale of diamonds, indicating acknowledgment of the transaction in the tax return. The Tribunal relied on the principle that the initial onus under section 68 was discharged by the assessee through cogent documentary evidence, shifting the burden to the AO to rebut the claim, which was not done.

Key Evidence and Findings: The gift deed, PAN details of the donor (her husband), confirmations from buyers, valuation reports, and balance sheet reflecting diamond assets as of 31.03.2016 were pivotal. The assessee's letters dated 12.12.2018 and 20.12.2018 clarified the nature of the capital difference and the basis of valuation.

Application of Law to Facts: Given the documentary evidence and absence of any adverse material from the AO, the Tribunal held that the addition under section 68 was not justified.

Treatment of Competing Arguments: The Revenue's contention rested on the unexplained nature of the capital difference and the absence of prior recording of diamonds in balance sheets. The Tribunal rejected this on the ground of inadvertent omission and the credible evidence produced by the assessee.

Conclusion: The addition of Rs. 2.50 crores as unexplained income under section 68 was deleted.

2. Treatment of Sale Consideration of Diamonds as Unexplained Income under Section 68

Relevant Legal Framework and Precedents: Again, section 68 applies to unexplained cash credits, and the Supreme Court's ruling in CIT v. Orissa Corporation (1986) and CIT v. P. Mohanakala (2007) emphasize that once the assessee provides a satisfactory explanation and evidence, the Revenue must provide cogent rebuttal.

Court's Interpretation and Reasoning: The AO disbelieved the assessee's claim of sale of diamonds worth Rs. 7.85 crores, treating the entire consideration except declared LTCG as unexplained income. The AO alleged that the sale consideration was unexplained and the transactions were not genuine.

The Tribunal found that the assessee furnished detailed reconciliation of payments buyer-wise, confirmations from 49 buyers (not 56 as incorrectly noted by AO), PAN details, bank statements, and a letter from Axis Bank confirming the transaction trail. The valuation report dated 15.04.2015 and rates prevailing as on 23.08.1988 were also submitted and not questioned by the AO.

The Tribunal observed that the AO failed to point to any single buyer whose genuineness was doubted or whose payments were found to be bogus. The assessee had offered the entire capital gain to tax, indicating transparency. The rejection of evidence by the AO without proper verification was held to be contrary to settled legal principles.

Key Evidence and Findings: Bank statements, buyer confirmations with PAN details, valuation reports, reconciliation statements, and the offer of LTCG were critical in establishing the genuineness of transactions.

Application of Law to Facts: The Tribunal applied the principle that the initial burden is on the assessee to explain the credits, which was discharged. The Revenue failed to rebut with cogent evidence, thus additions under section 68 were unwarranted.

Treatment of Competing Arguments: The Revenue's general allegation of unexplained income was rejected due to lack of specific adverse material or disproving evidence.

Conclusion: The addition of Rs. 7.85 crores as unexplained income under section 68 was deleted.

Significant Holdings:

"Once the assessee has offered a satisfactory explanation with supporting evidences, the burden shifts on the Department to rebut the same with cogent materials, which has not been done in the present case by the Ld AO."

"The Ld AO neither doubted about the credit worthiness, identity of the donor nor the occasion for the gift, thus the assessee discharged its primary onus cast upon it clearly."

"The action of the Ld AO in rejecting the evidences without proper verification is against the principles laid down by the Hon'ble Supreme Court."

The Tribunal affirmed the principle that the burden under section 68 is initially on the assessee to explain the nature and source of the credit. Once discharged, the Revenue must rebut with cogent evidence. Mere suspicion or general allegations without material are insufficient.

On the facts, the Tribunal concluded that the additions made by the AO under section 68 for both the unexplained capital account difference and the alleged unexplained sale proceeds of diamonds were unjustified and rightly deleted by the Commissioner of Income Tax (Appeals). The appeal filed by the Revenue was dismissed accordingly.