2025 (7) TMI 1029 - AT - Income Tax

Validity of reopening of assessment - Reasons to believe - Unexplained cash Credit u/s 68 - neither the identity nor the creditworthiness of OVPL was established - CIT(A) deleted addition - HELD THAT - We find no infirmity in the order of CIT(A) in holding the re-opening of assessment as invalid which is solely based on the borrowed satisfaction. Accordingly the additional ground taken by the Revenue is dismissed. Revenue in the case of lender company i.e. OVPL has already held the share capital and share premium as unexplained cash credit in the assessment completed u/s 144 r.w.s. 263 dated 28.03.2014 for AY 2008-09 and this order has not been challenged by the company. It is further claimed by the assessee that out of these funds which were added in the hands of the assessee company i.e. OVPL loan was given to the assessee company and once the addition has been made of the amount in the hands of one entity of the transaction. The addition should not be made in the hands of the other party of the transaction. As before us the Revenue has failed to controvert the findings of Ld.CIT(A) with regard to the genuineness of the transaction and once the additions have been made in the hands of the lender company identity as well as creditworthiness is established to such extent and therefore we find no error in the order of CIT(A) in deleting the addition made. Accordingly the original grounds taken by the Revenue on merits of the case is also dismissed.

Summary

ISSUES:

• Whether the reopening of assessment under section 147 of the Income Tax Act, 1961 is valid when based on borrowed satisfaction without independent application of mind by the Assessing Officer (AO).
• Whether addition of unexplained cash credit under section 68 of the Act is justified where the identity and creditworthiness of the creditor company is challenged.
• Whether addition can be made in the hands of both parties to the same transaction when addition has already been made in the hands of one party.

RULINGS / HOLDINGS:

• Reopening of assessment under section 147 is not sustainable if the AO's belief is a "product of imagination or speculation" and lacks "independent satisfaction" based on "reasonable grounds" and "material having live nexus with the belief of escapement of income." The AO must disclose "which fact or material was not disclosed by the Assessee fully and truly necessary for assessment."
• The addition of ? 9.15 crores as unexplained cash credit under section 68 was deleted because the AO failed to establish the identity and genuineness of the creditor company was not disproved, and the assessee had furnished sufficient evidence including bank statements, income tax returns, and audited financials of the creditor company. The AO's conclusion was based on incomplete enquiry and contradictory findings.
• Once an addition has been made in the hands of one party to the transaction, addition cannot be made in the hands of the other party for the same transaction, as the identity and creditworthiness of the creditor company was established to the extent of the addition made in its hands.

RATIONALE:

• The Court applied settled principles governing reopening of assessments under section 147 of the Income Tax Act, relying on precedents that require the AO to form an "honest and reasonable belief" based on "specific, reliable and relevant facts" and not mere suspicion or borrowed satisfaction.
• The Court emphasized the burden of proof on the AO to show that income has escaped assessment and recognized that once the assessee discharges its burden by establishing identity and creditworthiness of the creditor, the department must produce sufficient material to disprove the genuineness of the transaction under section 68.
• The Court referred to the principle that the assessee cannot be presumed to have "special knowledge about the source of source or origin of origin" of the creditor's funds, and that failure to explain the creditor's source of funds does not automatically render the cash credit unexplained in the assessee's hands.
• The Court noted that the AO failed to consider relevant documents and replies submitted by the creditor company and did not conduct adequate enquiries to establish the advances as bogus, thereby invalidating the addition on merits.
• The Court upheld the principle that double addition for the same transaction in the hands of both parties is impermissible, especially when addition has been made in the hands of the creditor company which was not challenged.