Non-Filing Of ITR By Creditor Not Proof For Lack Of Creditworthiness: Patna High Court Deletes Income Tax Additions

A Division Bench of Justice Bibek Chaudhuri and Justice Dr. Anshuman held that the Tribunal interfered with the appellate order without demonstrating perversity, misreading of evidence, or application of an incorrect legal standard, and in doing so, effectively placed a burden on the assessee beyond what is contemplated under Section 68 of the Act.

The appeal was filed against proceedings against Rajnandani Projects Pvt. Ltd. for the assessment year 2015-16. During scrutiny assessment, the Assessing Officer treated a sum of ₹1.91 crore received by the assessee from M/s Champion Group of Companies as unexplained cash credit under Section 68, despite the amount having been received through banking channels. The assessee had furnished the creditor's PAN, address, bank statements, confirmations and copies of income tax returns for other assessment years.

The Commissioner of Income Tax (Appeals), after calling for and examining a remand report from the Assessing Officer, accepted the explanation offered by the assessee and deleted the addition.

However, the Revenue succeeded before the Income Tax Appellate Tribunal, which restored the addition on the ground that while the identity of the creditor was established, the genuineness of the transaction and the creditworthiness of the creditor were not proved, particularly noting that the creditor had not filed a return of income for the relevant year.

Before the High Court, the assessee contended that it had discharged the initial burden under Section 68 by placing all primary evidence on record and that the Tribunal erred in discarding the findings of the first appellate authority without pointing out any defect in the evidence or the remand report. It was argued that non-filing of return by the creditor for a particular year could not, by itself, justify the addition when identity and banking trail were undisputed.

The High Court examined the record and noted that the Commissioner (Appeals) had considered the bank statements, ledger accounts, confirmations and the remand report, and had recorded a categorical finding that the explanation was acceptable. The court observed that the Tribunal accepted the identity of the creditor and did not record any finding that the documents relied upon were false or fabricated.

The Bench further held that while filing of return by the creditor is a relevant circumstance, it cannot be the sole determinative factor to discard the explanation under Section 68, especially when transactions are routed through banking channels and supported by documentary evidence. The court noted that once the assessee shows the identity of the creditor and the banking trail, the question of the origin of funds in the creditor's account would require investigation by the Revenue.

Allowing the appeal, the High Court set aside the Tribunal's order and restored the order of the Commissioner of Income Tax (Appeals) deleting the addition of ₹1.91 crore. The court answered the substantial questions of law in favour of the assessee and held that the Tribunal was not justified in reversing the appellate order in the absence of perversity or legal infirmity.

Case Title: Rajnandani Projects Pvt. Ltd. v. Principal Commissioner of Income Tax-1 & Ors.

Case Number: Miscellaneous Appeal No. 206 of 2023

For Appellant: Senior Advocate Ajay Kumar Rastogi, with Advocates Smriti Singh and Shilpi Keshri

For Respondents: Senior Standing Counsel Archana Sinha @ Archana Shahi, with Advocate Alok Kumar