Condition of Proving ‘Source of Source of Funds’ under 68 not applicable to Non-Residents: ITAT deletes Income Addition*

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By Yogitha S. Yogesh – On December 14, 2022 5:40 pm

Source of Funds - Non-Residents - ITAT - Income Addition - taxscan

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the condition of proving “source of source of funds” under 68 of the Income Tax Act,1961 does not apply to non-residents.

The revenue challenged the order of the CIT(A) in deleting ‘Addition u/ s 68 of the Income Tax Act,1961 amounting to Rs.4,07,88,170/ – without appreciating the fact that except for the identity, M/s. Kansur Developers India Pvt. Ltd., the assessee has not been able to establish the creditworthiness of the person advancing the loan and also the genuineness of the transaction.

Shri Samyak C. Veera, a non-resident has invested  Rs. 3,94,77,984/- (US Dollars $ 9,39,952)  in shares of the company M/s. Kansur Developers (P) Ltd. The Assessing Officer in the order of assessment dated 31 12.2015 has added the said investment under the provisions of section 68 of the Income-tax Act,1961 [‘the Act’ ]. On appeal, the CIT(A) has deleted the addition made.

The assessee contended that the identity of the investor is established, the mode of receipt is through banking channels and hence the genuineness of the transaction is also established.  Copies of the bank accounts have been furnished and the sources for the investor were available in the bank account.

The fact that the remitter is a proclaimed tax offender in the USA does not prove that he does not have any sources.  On the contrary, it is the case of the authorities in the USA that the remitter has substantial income but no tax paid.  This information cannot form a basis to believe to prove that the remitter has enough sources. 

It was observed that the identity of the person and the genuineness of the transaction is established as the assessee company has furnished that all transactions are through banking channels, FIRC and communication with the Reserve Bank of India as per the RBI Guidelines under the FEMA.

A Coram of Shri N V Vasudevan, Vice President and Shri Chandra Poojari, Accountant Member observed that section 68 does not apply to remittances made in India by non-residents. According to the said proviso, if an assessee company, in which the public is not substantially interested, receives money by way of share capital or share premium or any such amount by whatsoever name called, then the source of funds of the resident shareholder has to be established by the assessee to get out of the kin of the deeming provision u/s 68 of the Act.

 While dismissing the appeal of the revenue, the Tribunal held that the proviso to section 68 of the Income Tax Act applies to residents only, who are required to substantiate “source of source of funds”.  This additional burden cast upon by the proviso did not apply to non-resident investors. The Tribunal upheld the deletion of the addition made by the CIT(A).  To Read the full text of the Order CLICK HERE

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