Income Tax Dept. Can't Unreasonably Reject Proof Submitted By The Assessee: Calcutta High Court

The division bench of Justice T.S. Sivagnanam and Justice Bivas Pattanayak noted that the assessing officer brushed aside the explanation offered by the assessee by stating that merely filing PAN details and a balance sheet does not absolve the assessee from his responsibilities of proving the nature of transactions.

The court observed that merely setting aside the explanation offered by the assessee is not enough. The AO should record reasons in writing as to why the documents which were filed by the assessee along with the reply do not establish the identity of the lender, prove the genuineness of the transaction, or establish the creditworthiness of the lender.

The assessee/petitioner is in the business of trading/retailing footwear and other leather and non-leather accessories.

The assessee filed the return of income for the AY 2015-16, declaring a total income of Rs. 7,35,35,310. The case was selected for scrutiny and a notice under Section 143(2) was issued. The Assessing Officer, on examination of the assessment records, noticed that during the year under consideration the assessee had received unsecured loans from various companies and the names of 13 such companies were furnished. It was claimed that those firms were "paper companies," with no worth.The assessee was directed to show cause on the issue in respect of one such company.

The assessee informed the Assessing Officer that all transactions with one of such companies, namely, M/s. Fast Glow Distributors Pvt. Ltd., were made through banking channels. In order to establish the identity of the lender, the assessee enclosed the copy of their PAN card, the income tax acknowledgement, a copy of their bank statement, a certificate of incorporation, master data from the register of companies, and proof to show that the notice under Section 133(6) was duly served on the lender.

As regards the creditworthiness, they enclosed the annual account of the lender and the audited balance-sheet to show the net worth of the lender as Rs. 25.37 crores. The assessee pointed out that a reply has been received from the lender to the notice issued by the Assessing Officer under Section 133(6), which is also valid proof of identity and genuinity of the lender company. The assessee stated that they availed loans during the peak season of their business activity and, after the season is over, the loan is repaid along with interest after deducting taxes on source. Thus, the assessee contended that the identity of the lender has been established, the genuineness of the transaction has been proved, and the creditworthiness of the lender is not in doubt. Therefore, no adverse inference should be drawn.

The Assessing Officer, while completing the assessment by order under Section 143(3), did not accept the explanation offered by the assessee. The Assessing Officer stated that the modus operandi adopted by the assessee is typical and prevalent in this part of the country where black money is being routed under the guise of an unsecured loan.

The Assessing Officer concluded that those lender companies are artificial and the transactions are not genuine. Thus, the unsecured loans availed by the assessee, were considered to be the assessee's own funds, and since they were unsecured cash credits, they were added back to the assessee's income. The penalty proceedings were to be initiated separately.

The assessee was aggrieved by the order of AO and appealed before the CIT (A). The CIT (A) held that the creditworthiness of the parties had been established. The CIT (A) agreed with the assessee that the show-cause notice issued by the assessee referred to only one of the lenders. However, while completing the assessment, all the lender companies were branded as "paper companies," and this was held to be in violation of the principles of natural justice. Ultimately, the appeal filed by the assessee was allowed.

The department filed an appeal against the order of CIT (A) before the Tribunal. The Tribunal re-examined the factual position and dismissed the appeal filed by the department.

The court held that the assessee has discharged the initial burden and, therefore, the burden shifts to the Assessing Officer to examine the source of the credit to be justified in referring to Section 68 of the Income Tax Act. After the Assessing Officer puts the assessee on notice and the assessee submits the explanation with regard to the cash credit, the Assessing Officer should consider it objectively before he takes a decision to accept or reject it.

Case Title: PCIT Versus Sreeleathers

Case No: ITAT/18/2022 (IA NO: GA/02/2022)

Citation: 2022 LiveLaw (Cal) 270 

Dated: 14.07.2022

Counsel For Petitioner: Advocates Vipul Kundalia, Anurag Roy

Counsel For Respondent: Advocate Abhratosh Mazumder, Avra Mazumder, Md. Bilawal Hossain

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