The Delhi High Court has made it clear that once an assessee gives explanations about the nature and source of a credit transaction recorded in its books, the burden of proof to demonstrate that such an explanation is unsatisfactory is the responsibility of the assessing officer.

A division bench comprising Justices Vibhu Bakhru and Swarana Kanta Sharma further held that while assessing the transaction thus explained by the assessee, the AO could not examine the commercial viability of such a transaction.

Section 68 of the Income Tax Act empowers the AO to impose a credit recorded in the books of an assessee, if the assessee fails to furnish any explanation as to the “nature and source” thereof whether or not the explanation he offers is not satisfactory in the opinion of the AO.

The High Court held,

“The initial burden of establishing or proving the source and nature of the funds credited to the account of the assessee shall lie with the assessee. However, once the assessee has discharged his responsibility to establish the origin of the funds and also provided an explanation as to the nature of the funds, the onus is on him to prove that the explanation provided by the assessee as to the source and nature is unsatisfactory, goes to AO.

AO is not required to consider the commercial suitability of the transaction and supersede its views on behalf of the parties to the transaction. The AO is required to give wide latitude to the commercial discretion of the contracting parties in entering into a transaction. And, unless the AO concludes, on cogent evidence, that the transaction is a subterfuge and is not genuine, the AO must accept it.

He cited CIT v. P. Mohanakala (2007), wherein the Supreme Court held that the AO’s view rejecting the explanation provided by the assessee as unsatisfactory must be based on a proper appreciation of the material as well as the present circumstances.

In the present case, the AO suspected the transactions of the respondent-assessee worth ₹67.50 crores with Unitech, in connection with sale of certain lands. According to the assessee, the amount declared was an advance, but further transactions could not be completed as Unitech failed to pay the balance amount.

The authorized representative of Unitech gave a similar explanation to the AO.

The AO, however, rejected the explanation citing discrepancy between the date of signing of the sale contract and the date of issue of the stamp paper. He therefore included ₹67.50 crore in the total income of the assessee under Section 68.

As the Commissioner of Income Tax and the 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 does not provide any explanation as to the nature and source of the amount credited, is not complied with.

“The assessee has clearly explained the source of the fund and there is no doubt about it. He had also explained the nature of the receipt as an advance on the sale and purchase transaction of the property in question.

As regards the second part of the provision – the explanation offered by the assessee is not satisfactory – the High Court said that there was no dispute as to the solvency of Unitech and that it had paid the amount of ₹67.5 crores to the assessee.

“There are no circumstances which would suggest that the assessee had camouflaged his taxable income in advance of sale of property. It is important to note that Unitech also did not consider the payment as an expense and did not derive any tax benefit by making payment of ₹67.5 crore to the assessee. The transaction is therefore fiscally neutral,” noted the Court.

Regarding discrepancy in documentation, the High Court said that while such discrepancy may be important in determining the authenticity of a transaction in some cases, it is not always determinative.

“Whether a flaw in the documentation indicates subterfuge must necessarily be determined by taking into account the other facts of the case. In case the associated facts and documents indicate that the assessee has undisclosed taxable income/assets, which would have been taxed if not disguised as some other transaction, any irregularity or defect in the documentation may be important. However, in the absence of any material indicating that the credit reflected in the books, even if so reflected, could be chargeable to tax, it would not be reasonable for the AO to reject the explanation of the assessee due to any irregularity or defect in the documentation of the transaction,” the court said.

Accordingly, finding no weakness in the transaction and in the explanation offered by the assessee, the High Court dismissed the appeal of Revenue.

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

Case Title: Prof. Commissioner of Income Tax-6 c. Nucleus Steel Pvt. Ltd.

Case No: ITA 978/2018

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