2018 (11) TMI 1593 - AT - Income Tax

Tribunal allows appeals, directing deletion of Section 68 additions, emphasizing cross-examination importance. Dismisses interest and commission.

M/s. Keynote Fincorp Ltd. Versus DCIT, Central Circle-1 (3), Mumbai

M/s. Keynote Fincorp Ltd. Versus DCIT, Central Circle-1 (3), Mumbai - TMI Issues Involved:1. Violation of principles of natural justice by not providing evidence or opportunity for cross-examination.2. Failure to verify confirmations and affidavits of lenders by not issuing notices under Section 133(6) of the Income Tax Act.3. Addition of unexplained cash credit under Section 68 of the Income Tax Act.4. Incorrect invocation of Section 69 of the Income Tax Act.5. Disallowance of interest paid.6. Addition on account of ad-hoc commission on alleged bogus loans.Detailed Analysis:Issue 1: Violation of Principles of Natural JusticeThe assessee argued that the CIT(A) confirmed the AO's action without providing the necessary evidence or allowing cross-examination of the individuals whose statements were relied upon. This was deemed a violation of the principles of natural justice. The Tribunal noted that the assessee was not given an opportunity to rebut the evidence used against them, which is a breach of natural justice principles. The Tribunal emphasized that any addition based on statements without cross-examination is not sustainable.Issue 2: Failure to Verify Confirmations and AffidavitsThe assessee contended that the AO did not verify the confirmations and affidavits of lenders by issuing notices under Section 133(6). The Tribunal observed that the assessee had provided substantial evidence, including confirmations, PAN details, bank statements, and affidavits, to establish the identity, creditworthiness, and genuineness of the lenders. The Tribunal found that the AO's failure to verify these documents was unjustified.Issue 3: Addition of Unexplained Cash Credit under Section 68The AO added Rs. 12,20,00,000 as unexplained cash credit under Section 68. The Tribunal noted that the assessee had provided detailed evidence, including confirmations, bank statements, and audited accounts, to prove the identity and creditworthiness of the lenders and the genuineness of the transactions. The Tribunal referred to several case laws, including CIT vs. Gagandeep Infrastructure Pvt. Ltd., which held that once the assessee establishes the identity and creditworthiness of the lenders and the genuineness of the transactions, the burden shifts to the Revenue. The Tribunal concluded that the assessee had discharged its burden, and the AO's addition was unwarranted.Issue 4: Incorrect Invocation of Section 69The AO initially invoked Section 69, treating the unsecured loans as unexplained investments. The Tribunal clarified that Section 69 applies only to unexplained investments, not loans. The Tribunal found that the AO's invocation of Section 69 was incorrect as no investments were made by the assessee. The CIT(A) also admitted this error but upheld the addition under Section 68, which the Tribunal found unjustified based on the evidence provided by the assessee.Issue 5: Disallowance of Interest PaidThe assessee challenged the disallowance of Rs. 1,20,27,943 out of interest paid. The Tribunal noted that this issue was consequential to the main issue of the addition under Section 68. Since the Tribunal decided in favor of the assessee on the main issue, this ground became moot and was dismissed.Issue 6: Addition on Account of Ad-hoc CommissionThe AO made an addition of Rs. 26,57,000 on account of ad-hoc commission at 0.2% per month on the alleged bogus loans. The Tribunal found this addition arbitrary and unjustified, especially since the main addition under Section 68 was deleted. Consequently, this ground was also dismissed.Conclusion:The Tribunal allowed the appeals filed by the assessee for both assessment years, directing the AO to delete the additions made under Section 68. The Tribunal emphasized the importance of providing opportunities for cross-examination and verifying documentary evidence before making additions. The disallowance of interest and the ad-hoc commission addition were dismissed as they were consequential to the main issue. The Tribunal's order reinforced the principles of natural justice and the proper application of Sections 68 and 69 of the Income Tax Act.