Section 68 Additions Cannot be made if Assessee has proved the Credit Worthiness of Creditors

Facts of the Case:

• During the year under consideration the assessee issued shares and received share application money amounting to Rs. 34 Crore from three Kolkata based companies.
• Assessing officer doubted the genuineness and creditworthiness of the companies and made addition of Rs. 34 crore under section 68 of the Act. Also the assessing officer referred the matter to the investigation wing of Kolkata for making inquiries into the three creditors. And in the report of investigation wing it was mentioned that the companies were in existence, are genuine and has sufficient amount in their bank accounts to invest in assessee.
• Instead of paying consideration to the reports of investigation wing the assessing officer recorded that these creditors had very meager income as disclosed in their return of income and therefore, doubted creditworthiness of the three creditors.

Contention of the Assessee:

• According to the assessee, he has duly furnished PAN of the company which proves company’s existence, copy of board resolution, share application and other additional document to prove genuineness of the company and copy of bank statements to prove that the creditor company has sufficient amount of money to invest in assessee. Thus he is not required to explain the source of source. Therefore section 68 addition should not be made on it.

Contention of the Revenue Department:

• According to the assessing officer the return of income of creditor companies reflects that the companies are meager and does not have creditworthiness to invest such a big amount. Also these companies had not responded to the letters written to them which could have established the creditworthiness of the companies. Hence addition shall be made u/s 68 of the Act.

Decision of Hon’ble High Court (Bombay):

• After hearing both the respondents it was held that, assessee had produced sufficient evidence in support of proof of identity of the creditors and confirmation of transactions by many documents, such as, share application form etc. and under section 68 it is not required to explain source of source.
• Further it is not necessary that share application money shall be invested out of taxable income only. It may be brought out of borrowed funds. It was further held that non-responding to notice would not mean that the creditors had no credit worthiness. Also while framing assessment order the assessing officer does not considered the report of investigation wing.
• Hence all material evidence in support of explanation of credits in terms of identity, genuineness of the transaction and credit-worthiness of the creditors were available, without any infirmity in such evidence and therefore explanation required under section 68 of the Act having been discharged, Assessing Officer was not justified in making the additions. Therefore, the additions were deleted.

Conclusion:

As per section 68 of the Act, for any cash credit appearing in the books of assessee, the assessee is required to prove Identity of the creditor, Genuineness of the transaction, Credit-worthiness of the party and if the assessee is able to prove all the requirement mentioned supra he is not required to explain the source of source, therefore addition cannot be made under section 68 of the Act.

Source: [2020] 116 taxmann.com 34 (Bombay)

Principal Commissioner of Income Tax v. Ami Industries (India) Pvt. Ltd.