No addition under section 68 if one can prove the authenticity of a transaction

The Delhi High Court in the case of Commissioner of Income Tax vs. Gangeshwari Metal (P.) Ltd., I.T. Appeal No. 597 OF 2012 has held that an assessee shall not be subjected to addition under section 68 he can prove the authenticity of a transaction.

Backgrounds of the appeal:

In the appeal the following question of law was framed vide an order dated 16.10.2011:
Whether the Tribunal by the impugned order dated 19.12.2011 was wrong in upholding the order of the Ld. CIT directing deletion of Rs. 55, 50,000/- added by the Assessing Officer under Section 68 of the Act for the reason of unexplained share application?
The learned counsel for the revenue contended that the Commissioner of Income Tax (Appeals) and the Tribunal were both wrong in deleting the addition for unexplained share application money under section 68 of the Act.

The instant case related to the assessment year 2004-05. The assessment proceedings were concluded by the assessing officer on 16.12.2009. The assessment order shows that initially the respondent was asked to show cause as to why Rs. 1, 11, 50,000/- should not be added to his income.

The assessee explained that there were many entries which were considered and by removing the duplicate entries the amount received for share application was only Rs. 55,50,000/- instead of Rs. 1,11,50,000/-.

In response to the query about the said sum of Rs. 55.5 lakhs, the respondent had furnished many documents in support of the share application money he received. Such documents included:

(i) Names and addresses of the share applicants and their PAN details.
(ii) Letters of the share applicants.
(iii) Copies of bank accounts of the share appellants.
(iv) Certificate of incorporation of the applicants.
(v) Memorandum of Association of the applicants.
(vi) Share application forms.

Despite of furnishing the above documents, the assessing officer was not satisfied with the explanation and held that the sum of Rs. 55.5 lakhs should be added to the assessee’s income.

Being aggrieved by the assessment order, the assessee filed an appeal before the Commissioner Income Tax (Appeals) who passed a judgment in favour of the assessee vide order dated 31.03.2011.

The CIT (Appeals) held that the documents filed by the assessee stated that the identity of the share applicants were beyond any doubt as each of them was an assessee.

The CIT (Appeals) held that where the return of income is filed by the creditors and is accepted by the Department, and the payments have been done through a/c payee cheques, the genuineness of the transaction cannot be doubted.
The CIT (Appeals) also relied upon the decision of the Supreme Court in CIT v. Lovely Exports (P) Ltd. [2009] 319 ITR (St.) 5 (SC).

The CIT finally held that the addition of Rs. 55, 50,000/- made by the Assessing Officer towards unexplained share application money should be deleted.
Being aggrieved by the decision of the CIT (Appeals), the revenue filed an appeal before the Income Tax Appellate Tribunal which was dismissed by an order dated 19.12.2011 passed in ITA No.2886/Del/2011.

Provisions of Section 68 of the Income Tax Act:

According to Section 68 of Income Tax Act 1961, where any amount is found to be credited in the books of an assessee kept for any previous year, and the assessee fails to offers any explanation about the source of the same or the explanation given by him is not satisfactory as per the A.O., the sum so credited may be charged to income tax in the hands of the assessee.

The pre requisite condition for the Section 68 is that the assessee should furnish a confirmation. Such confirmation has no specific format but it must contain the name and address of the lender.

During hearing of the appeal, the ld. Counsel for the Department failed to provide any material to rebut the findings of the ld. CIT (A) as per documents furnished by the assessee before the Assessing Officer and before the ld. CIT (A).

The ld. DR merely relied upon the assessment order and contended that since there was information that the share applicants were engaged in providing entries, the Assessing Officer was justified in treating the entries as unexplained for taxation in the hands of the assessee.

The judgment:

It was held that the assessee has not been able to discharge its initiation burden of proof. Therefore, in the light of the observations of the CIT (A) in his order it was held that deleting the addition was justified.
In this view of the above, the order of ld. CIT (A) was upheld and the ground raised by the revenue was rejected.

The question of law was answered in the negative. The decision of the Tribunal was found to be correct in law. As a result the appeal was dismissed.