Section 68 Addition in Wrong Assessment Year Is Legally Untenable Even If Colourable Device Is Suspected: Delhi High Court
Background and Context
The Delhi High Court, in the case of PCIT Vs J D Exim Pvt Ltd, delivered a significant ruling clarifying the statutory boundaries within which Section 68 of the Income Tax Act, 1961 can be invoked. The Court categorically held that an amount admittedly received in one financial year cannot be brought to tax as an unexplained cash credit in a completely different — and far later — assessment year, even if the Revenue harbours strong suspicions of deliberate tax structuring or a colourable device.
The matter arose before the Court under Section 260A of the Income Tax Act, 1961 by way of an appeal filed by the Revenue challenging the order dated 28.11.2024 passed by the Income Tax Appellate Tribunal (ITAT) in Appeal No. 8765/DEL/2019 for Assessment Year (AY) 2016-17.
Factual Matrix of the Case
The Original Transaction and Advance Receipt
The assessee, M/s J D Exim Pvt Ltd, had entered into an agreement for the sale of land. In connection with this proposed transaction, the assessee received an advance of ₹10 crore in Financial Year (FY) 2006-07 as consideration towards the proposed sale. At that point in time, the assessee disclosed this amount in its books, asserting that the transaction had not yet been completed or concluded.
Execution of the Sale Deed Without Knowledge of the Assessee
Subsequently, a sale deed pertaining to the said land was executed in FY 2013-14 — not directly by the assessee, but by its power-of-attorney holder. According to the assessee, it was not informed about this execution by its power-of-attorney holder, and consequently, it remained unaware of the completed sale for a considerable period.
Disclosure of Capital Gain in AY 2016-17
Upon becoming aware of the completed sale transaction in FY 2015-16, the assessee reflected the capital gain arising from this transaction in its return of income for AY 2016-17. Crucially, for the same assessment year, the assessee had also incurred a long-term capital loss of approximately ₹16 crore, against which the capital gain from the land sale was set off, effectively neutralising the tax liability on such gain.
The Assessing Officer's Findings and Addition Under Section 68
AO's Inquiry and Discovery
During the assessment proceedings for AY 2016-17, the Assessing Officer (AO) made inquiries with the purchaser of the land. The purchaser confirmed that the sale deed had in fact been executed back in FY 2013-14, and that the transaction had duly been recorded in the purchaser's books of accounts for that very year.
AO's Conclusion Regarding the Colourable Device
Armed with this information, the AO formed the opinion that the assessee had deliberately engineered the timing of disclosure. Specifically, the AO suspected that the assessee had intentionally withheld disclosure of the completed sale for approximately two years — waiting until AY 2016-17, a year in which a substantial capital loss of ₹16 crore was available — so as to facilitate a set-off of the capital gain and thereby reduce its tax liability.