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The Income Tax Appellate Tribunal, most commonly referred to as ITAT, is a quasi-judicial body with the specialization of dealing in matters related to direct taxes, the orders of which are binding in nature. The ITAT has passed some remarkable orders in respect of direct taxation since its establishment.
The article discusses the ITAT Approach towards Section 68 of the IT Act with special reference to the case Dwarkadish Spinners Limited Vs. DCIT wherein the assessee filed the appeal against the order dated 16th July 2019 which was pronounced by the CIT(A)-34, New Delhi
Table of Contents
Section 68 of IT Act states that if the books of account that the assessee has maintained reflects a credited amount wherein the assessee has not provided any explanation or the explanation is not satisfactory according to the assessing officer, such amount is deemed to be undisclosed income and would form a part of the total income, which shall be chargeable under the Income Tax act 1961 and considered as the income of the previous year.
However, if the assessee is a company (not a company wherein the public is substantially interested), and the credited amount contains share application money, share premium, share capital or any such amount, any explanation offered by such assessee company shall be considered unsatisfactory, unless—
Section 68 of the IT Act shall be applicable in the following cases –
The assessee must prove the following to avoid application of the deeming provision, which the Hon’ble Calcutta High Court has observed in CIT vs Precision Finance Pvt. Ltd. (1994)208 ITR 465 (Cal) wherein the criteria for avoiding the application of Section 68 of IT Act was laid down.
This concept is also referred to as identifying the source of the source wherein the assessee is required to disclose the identity of the creditor who has provided the sum that has been credited in the books of account of the assessee. Such identification is important to ascertain the genuineness of the creditor.
The next criterion is the capacity of the creditor to advance money which showcases the creditworthiness of the creditor; the creditworthiness acts as additional proof of the genuineness of the transaction.
This is an integral aspect in respect of avoidance of the application of Section 68 of the IT Act as it can prove that the transaction is devoid of any malafide intentions or the intention of committing any form of financial fraud. The genuineness of a transaction can be proved through furnishing the requisite documents, such as income tax return , balance sheet among others which can help the assessee to provide a satisfactory explanation to the Assessing Officer.
According to 115BBE of the IT Act, the income tax must be calculated at 60%, wherein the total income of the assessee is inclusive of the following income:
There shall be no deduction of any allowance, expenditure, set off of any loss would be allowed to the assessee while the computation of his income as provided in (1)(a) of Section 115BBE
This is a landmark case regarding section 68 of the IT Act, which was decided on 14th October 2022 by Hon’ble Judge Chandra Mohan Garg. The facts, arguments and judgement of the same are discussed below-
The facts of the case are briefly discussed herein under –
The assessee in appeal before the Tribunal and has raised the following grounds:
It was held that the alleged funds had been received by the assessee company by the companies listed in the stock exchange, which are very much in the public domain. The tribunal also examined the relevant pages of the paper book, which reflects that the assessee company has filed sufficient documentary evidence before the appropriate authorities like the acknowledgement of return of income, and balance sheet as on 31st March .2012 for the impugned A.Y. 2012-13, bank statements, PAN etc., of both the companies thereby discharging its initial onus of proving the transaction’s genuineness and creditworthiness in the matter and have met the prerequisites of Section 68 of the I.T. Act, 1961.
It was further observed that it is already a settled law that when the assessee has successfully proved the genuineness and creditworthiness of the lenders, the said transaction won’t attract any additions as per section 68 of the IT Act.
The tribunal declined to accept the reasoning recorded by the Ld. CIT(A), and confirmed the part addition made by the assessee regarding two creditors totalling Rs. 32,67,859/-and, allowed the grounds of the assessee, directing the A.O. to delete the entire addition confirmed by the Ld. CIT(A)
ITAT’s approach towards Section 68 of IT Act has been discussed through numerous judgements, but the decision in the case Dwarkadish Spinners Limited Vs. DCIT can provide the much-needed relief to the assessee in respect of matters of Section 68 of the IT Act, as it has been clearly discussed in the order that the assessee cannot be booked under Section 68 of IT Act if he is successful in providing a satisfactory explanation regarding the sum credited as reflected in the assessee’s books of accounts.
Read our Article:Income Tax Return Filing Due Date Extended for Businesses by CBDT
Shubhangi has completed her B. A.LLB (H) with specialization in Business Laws from Amity University. She is particularly interested in legal research and writing and wishes to utilize her knowledge to create informative legal content. She has prior experience in corporate and criminal litigation and has great drafting skills. She has also published various research papers in reputed journals.
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