Burden Shifts To Revenue Once Taxpayer Proves Creditworthiness And Genuineness: Telangana High Court

The Telangana High Court on 22 July held that once a taxpayer establishes the identity, creditworthiness and genuineness of credits through sufficient documentary evidence, the burden shifts to the Assessing Officer to disprove the material with independent and cogent evidence, and deleted income tax additions totalling Rs. 5.58 crore against Agarwal Industries Pvt. Ltd.

A Division Bench comprising Justices P. Sam Koshy and Narsing Rao Nandikonda allowed the company's appeal and set aside the order of the Income Tax Appellate Tribunal (ITAT), which had sustained the additions. The judges held:

“..Once the assessee places on record material sufficient to establish identity, creditworthiness and genuineness, prima facie the onus shifts on the Assessing Officer to dislodge that material by bringing independent and cogent evidence on record. It is not open to the Assessing Officer, much less to the appellate authorities, to reject such material on mere suspicion, however strong, or on the basis of surmise unsupported by any positive finding...”

The dispute arose from three additions made during the assessment for Assessment Year 2010-11. These comprised Rs. 5.25 crore received from a creditor through an account-payee cheque, Rs. 10 lakh towards repayment of an unsecured loan, and Rs. 23.18 lakh arising from a difference in interest income reflected in Form 26AS. The Revenue treated the Rs. 5.25 crore and Rs. 10 lakh credits as unexplained, alleging that the amounts were bogus entries used to introduce the company's own funds.

The company produced confirmation letters, Permanent Account Number (PAN) details, bank statements, income tax returns and other documents to establish the identity and financial capacity of the creditors and the genuineness of the transactions.

The High Court held that the taxpayer had discharged its initial burden by producing documentary evidence establishing the identity, creditworthiness and genuineness of the transactions. Once such material was placed on record, the burden shifted to the Revenue to disprove it through independent and cogent evidence. It stated:

“...It is only when the assessee fails to discharge this initial onus, or where the explanation furnished is found unsatisfactory by the Assessing Officer on cogent material, that the credited sum may be treated as unexplained income and brought to tax...”

The Bench also rejected the ITAT's reliance on the doctrine of real income and the principle of approbate and reprobate, observing that these principles had no application to the facts of the case. With regard to the Rs. 10 lakh credit, it noted that the amount represented repayment of an unsecured loan earlier advanced by the taxpayer. It held that treating the repayment as unexplained income would effectively result in taxing the same amount again. It noted:

“The observation that no share application money was reflected in the balance sheet does not by itself establish that the funds were bogus, particularly when the transactions in question were admittedly not share application money but unsecured loans and their repayment.”

Accordingly, the High Court set aside the ITAT's order to the extent that it sustained the additions of Rs. 5.25 crore, Rs. 10 lakh and Rs. 23.18 lakh, and allowed the appeal.

For Appellant: Vedula Srinivas, Senior Counsel

For Respondent: B. Sapna Reddy, Senior Standing Counsel