Assessing Officer Not Required To Examine Commercial Expediency Of Transaction & Supplant Its View In Place Of Transacting Parties: Delhi HC

The Delhi High Court observed that the Assessing Officer is not required to examine the commercial expediency of the transaction and supplant its view in place of the transacting parties.

The Court observed thus in an Appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 (ITA) against an Order of the Income Tax Appellate Tribunal (ITAT).

A Division Bench comprising Justice Vibhu Bakhru and Justice Swarana Kanta Sharma emphasised, “… it is also necessary to observe that the AO is not required to examine the commercial expediency of the transaction and supplant its view in place of the transacting parties. The AO is required to give a wide latitude to the commercial discretion of the contracting parties to enter into a transaction. And, unless the AO finds, on the basis of cogent material, that the transaction is a subterfuge and is not genuine, the AO must accept the same.”

Advocate Sunil Kumar Agarwal appeared for the Appellant while Advocate Sameer Rohatgi appeared for the Respondent.

In this case, the Revenue had appealed the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] allowing the appeal of the Respondent-Company against the Assessment Order in respect of the Assessment Year (A.Y.) 2010-11. The Assessing Officer (AO) made an addition to the income as returned by the Respondent (Assessee) under Section 68 of ITA and disallowed the addition made under Section 14A of ITA. The Respondent filed its return of income but the same was picked up for scrutiny and a notice under Section 143(2) of ITA was issued. According to the Respondent, it had received a sum of ₹67.50 crores from Unitech as an advance against sale of certain lands in Maharashtra.

The Assessee had executed an Agreement to Sell on a stamp paper. The AO found that the stamp paper was issued after the date on the deed and concluded that the same was executed on a fake and bogus stamp paper. Hence, the AO held that the said credit standing on the books of accounts of the Respondent was unexplained credit and liable to be included in the total income. Being aggrieved, the Respondent filed an Appeal before the CIT(A) and the same was allowed. The Revenue appealed the Order before the ITAT which was rejected and hence, the case was before the High Court.

The High Court in the above regard, noted, “In view of the present case, there is no dispute as to the creditworthiness of Unitech and that it had paid the amount of ₹67.5 crores to the Assessee. There are no attendant circumstances, which would suggest that the Assessee had camouflaged its taxable income as an advance against the sale of property. It is material to note that Unitech has also not reflected the payment as an expense and has derived no tax advantage by making a payment of ₹67.5 crores to the Assessee. The transaction is, thus, tax neutral.”

The Court said that, whether a flaw in documentation is indicative of a subterfuge must necessarily be determined bearing in mind other attendant facts of the case and in a case where the attendant facts and material indicates that the assessee has taxable income/ undisclosed assets, which would have been brought to tax but for being disguised as another transaction, any irregularity or flaw in the documentation may be of significance.

“However, in absence of any material indicating that the credit reflected in the books, but for being so reflected, may be chargeable to tax, it would not be reasonable for the AO to reject the Assessee’s explanation on account of any irregularity or flaw in the documentation of the transaction”, it added.

Furthermore, the Court observed that the questions of law as projected by the Revenue and as noted at the outset are premised on the assumption that the creditworthiness of Unitech was in doubt and that there is no cavil that Unitech had sufficient funds to make the payment that it had.

Accordingly, the High Court dismissed the Appeal, answered the questions framed in favour of the Assessee and against the Revenue.

Cause Title- The Pr. Commissioner of Income Tax-6 v. Nucleas Steel Pvt. Ltd. (Neutral Citation: 2024:DHC:8694-DB)

Appearance:

Appellant: Advocates Sunil Kumar Agarwal, Shivansh B. Pandya, Viplav Acharya, and Utkarsh Tiwari.

Respondent: Advocates Sameer Rohatgi and Kartikey Singh.

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