Assessing Officer Not Required To Examine Commercial Expediency Of Transaction When Evaluating Assessee's Explanation U/S 68 Of IT Act: Delhi HC

The Delhi High Court has made it clear that once an assessee offers explanation about nature and source of a credit transaction standing in its books, the burden of proof to show that such explanation is unsatisfactory shifts on the Assessing Officer.

A division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma further held that in evaluating the transaction so explained by the assessee, the AO cannot examine the commercial viability of such transaction.

Section 68 of the Act Income Tax Act empowers the AO to tax a credit standing to the books of an assessee, if the assessee does not offer any explanation about the “nature and source” of the same or if the explanation offered by him is not satisfactory in the opinion of the AO.

The High Court held,

“The initial onus of establishing or proving the source and the nature of the funds credited in the assessee's account rests on the assessee. However, once the assessee has discharged its onus of establishing the source of the funds and has also provided the explanation as to the nature of the funds, the onus to substantiate that the explanation provided by the assessee as to the source and the nature, is unsatisfactory, shifts to the AO.

AO is not required to examine the commercial expediency of the transaction and supplant its view in place of the transacting parties. The AO is required to give a wide latitude to the commercial discretion of the contracting parties to enter into a transaction. And, unless the AO finds, on the basis of cogent material, that the transaction is a subterfuge and is not genuine, the AO must accept the same.”

It cited CIT v. P. Mohanakala (2007) where the Supreme Court held that the opinion of the AO to reject the explanation provided by the assessee as unsatisfactory is required to be based on proper appreciation of material as well as the attending circumstances.

In the case at hand, the AO suspected the Respondent-assessee's transactions worth ₹67.50 crores with Unitech, in connection with sale of certain lands. As per the assessee, the stated amount was an advance but further transactions could not be consummated as Unitech did not pay the balance amount.

Unitech's Authorized Representative gave a similar explanation to the AO.

The AO however rejected the explanation citing discrepancy in the date of execution of Agreement to Sell and the date of issue of stamp paper. It accordingly included ₹67.50 crores in the total income of the Assessee under Section 68.

As Commissioner of Income Tax and ITAT favored the assessee, the Department approached the High Court.

At the outset, the High Court observed that there remained no dispute as to the source of the credit in question- Unitech. Thus, it held that the first limb of Section 68 of the Act, which contemplates the situation where the assessee offers no explanation as to the nature and source of the amount found credited, is not satisfied.

“The Assessee has clearly explained the source of the fund and there is no dispute regarding the same. It had also explained the nature of the receipt as being an advance against the transaction for sale and purchase of the subject property.”

Coming to the second limb of the provision- the explanation offered by assessee is not satisfactory- the High Court said there is no dispute as to the creditworthiness of Unitech and that it had paid the amount of ₹67.5 crores to the Assessee.

“There are no attendant circumstances, which would suggest that the Assessee had camouflaged its taxable income as an advance against the sale of property. It is material to note that Unitech has also not reflected the payment as an expense and has derived no tax advantage by making a payment of ₹67.5 crores to the Assessee. The transaction is, thus, tax neutral,” Court noted.

So far as the discrepancy in documentation is concerned, the High Court said that though such discrepancy may be of significance in determining the genuineness of a transaction in some cases however, it may not always be dispositive.

“Whether a flaw in documentation is indicative of a subterfuge must necessarily be determined bearing in mind other attendant facts of the case. In a case where the attendant facts and material indicates that the assessee has taxable income/ undisclosed assets, which would have been brought to tax but for being disguised as another transaction, any irregularity or flaw in the documentation may be of significance. However, in absence of any material indicating that the credit reflected in the books, but for being so reflected, may be chargeable to tax, it would not be reasonable for the AO to reject the Assessee's explanation on account of any irregularity or flaw in the documentation of the transaction,” Court held.

Accordingly, finding no infirmity in the transaction and the explanation offered by the assessee, the High Court dismissed Revenue's appeal.

Appearance: Junior Standing counsels Sunil Kumar Agarwal, Shivansh B. Pandya, Viplav Acharya and Advocate Utkarsh Tiwari for Revenue; Advocates Sameer Rohtagi and Kartikey Singh for Respondent

Case title: The Pr. Commissioner Of Income Tax-6 v. Nucleus Steel Pvt. Ltd.

Case no.: ITA 978/2018

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