Background and Facts

The Assessing Officer made an addition of ₹1.91 crore under Section 68 of the Income-tax Act, 1961, treating the amount as unexplained cash credit. The assessee furnished complete documentary evidence, including ledger account, confirmation, address, PAN details of the creditor, and bank statements evidencing the transaction through banking channels.

The Commissioner of Income Tax (Appeals), after examining the material on record and the remand report, deleted the addition. However, the Income Tax Appellate Tribunal (ITAT) reversed the appellate order on the ground that the assessee failed to establish the genuineness of the transaction and the creditworthiness of the creditor.

Issue for Consideration

Whether the ITAT was justified in reversing the deletion of addition under Section 68 despite:

  • acceptance of the identity of the creditor, and
  • availability of bank trail and supporting documentary evidence.

Findings of the High Court

The Patna High Court observed that the ITAT had accepted the identity of the creditor and had not recorded any finding that the documentary evidence relied upon by the assessee was false or fabricated. The Court held that the Tribunal applied an incorrect legal approach by reassessing the evidence and by placing an enhanced burden upon the assessee beyond what is envisaged under Section 68.

The High Court noted that the CIT(A) deleted the addition after due appreciation of evidence, including ledger accounts, confirmations, PAN details, and bank statements. The ITAT’s conclusion on lack of creditworthiness was found to be based primarily on the absence of return of income filed by the creditor for the relevant assessment year.

The Court clarified that while filing of return by the creditor is a relevant factor, it cannot be the sole determinative criterion, particularly when transactions are routed through banking channels and the identity of the creditor is not in dispute.

The High Court emphasised that once the assessee produces bank statements showing corresponding debit entries in the creditor’s account and establishes identity, the assessee cannot ordinarily be required to explain the source of funds in the hands of a third party, unless the record contains material warranting such deeper enquiry.

Reading the ITAT’s order as a whole, the Court held that the assessee was effectively expected to prove the financial capacity of the creditor beyond the documentary evidence already placed on record, which is not the statutory requirement under Section 68.

Decision and Outcome

The Patna High Court held that the ITAT was not justified in reversing the order of the Commissioner of Income Tax (Appeals) without demonstrating perversity, misreading of evidence, or application of an incorrect legal standard.

Accordingly, the appeal of the assessee was allowed, and the deletion of the addition of ₹1.91 crore under Section 68 by the CIT(A) was upheld.
Decision: In favour of the assessee.

 Related Judicial Principles / Case Law Context

  • Once identity, bank trail, and basic documentary evidence are established, the burden under Section 68 stands discharged.
  • The assessee is not required to prove the source of source unless specific adverse material exists.
  • Appellate interference with a reasoned CIT(A) order requires demonstration of perversity or misapplication of law.