2020 (11) TMI 45 - AT - Income Tax

Tribunal rules in favor of assessees under Income Tax Act Section 68

The Tribunal ruled in favor of the assessees, finding sufficient evidence to prove the identity and creditworthiness of the lenders under Section 68 of ... Onus under Section 68 - identity and creditworthiness of lender - genuineness of loan transactions - market value of security as indicium of creditworthiness - admissibility and probative value of commission report under Section 131 - admissibility of additional evidence in appellate proceedings - deductibility of interest on business loans - allowability of education cess as deductionOnus under Section 68 - identity and creditworthiness of lender - genuineness of loan transactions - market value of security as indicium of creditworthiness - admissibility and probative value of commission report under Section 131 - admissibility of additional evidence in appellate proceedings - Whether additions made under Section 68 in respect of loans received from two group companies were sustainable. - HELD THAT: - The Tribunal examined the materials placed on record by the assessees - incorporation certificates, audited financial statements, income tax return acknowledgements, assessment orders under section 143(3), bank statements, ROC master data including registered/principal place of business and charges, demat records showing lien on listed shares, loan sanction letters from NBFCs and other statutory filings - and found that the assessees had prima facie discharged the onus under Section 68 by proving the identity of the lenders, their creditworthiness and the genuineness of the loan transactions. The Tribunal accepted that market/intrinsic value of the listed securities (as disclosed) and the presence of proper lien in demat accounts were relevant indicia of creditworthiness and supported the lenders obtaining loans from NBFCs and thereafter advancing funds to group companies. The AO relied on a report obtained under a commission issued in another assessment, which purportedly showed non existence at a registered office address; the Tribunal held that the Revenue failed to convert suspicion into proof by independent inquiries (e.g., under section 133(6)/131) or to controvert the documentary evidence. The appellate admission of additional documents and the assessees' reconciliations were also considered. In the absence of rebuttal material by the Revenue, the addition under Section 68 was deleted. [Paras 41, 42, 43, 44, 45]Additions made under Section 68 in respect of the loans from the two group lender companies are deleted; the assessee discharged the onus of proving identity, creditworthiness and genuineness and Revenue failed to rebut the same.Deductibility of interest - loans used for business purpose - onus under Section 68 - Whether interest paid on the loans (which were added by the CIT(A) by enhancement) is allowable as deduction. - HELD THAT: - The assessing officer had allowed the interest; the CIT(A) enhanced and disallowed it on the premise that loans were unproved under Section 68. Having held that the loans were genuine, used for business purposes, that tax was deducted at source and that the lenders declared the interest as income (accepted in their assessments), the Tribunal concluded that the interest payments were genuine and deductible. No material was shown by the Revenue to demonstrate that the loans were not used for business or that the interest payments were not bona fide. [Paras 46, 47, 48]Disallowance of interest is deleted; interest paid on the proved loans is deductible.Allowability of education cess as deduction - Whether education cess paid is allowable as a deduction while computing income. - HELD THAT: - Relying on recent judicial decisions, the Tribunal observed that education cess is an allowable expenditure. However, for the assessment year in question the assessee had returned a loss and had not paid education cess on income tax; accordingly no deduction in respect of education cess is available to the assessee for this year. [Paras 49, 50]Education cess is in principle allowable as a deduction, but no deduction is allowable for the present assessment year as no education cess was paid on income tax due to the returned loss.Final Conclusion: The appeals are partly allowed: additions under Section 68 in respect of loans from group lender companies are deleted and corresponding disallowance of interest is deleted; education cess is held to be an allowable expense in principle but no deduction arises for the year under consideration as no education cess was paid. Issues Involved:1. Addition under Section 68 of the Income Tax Act.2. Disallowance of interest on loans.3. Allowability of education cess as a deduction.4. Conversion of limited scrutiny into full scrutiny without prior permission.5. Issuance of notice under Section 143(2) on the revised return.Detailed Analysis:1. Addition under Section 68 of the Income Tax Act:Facts and Arguments:- The assessees, part of the Jindal group, contested the addition of loans taken from Glebe Trading (P) Ltd. and Danta Enterprises (P) Ltd. under Section 68, alleging the lender companies were non-existent and merely conduits.- The AO issued a commission to the ADIT (Inv.), Raipur, revealing no physical presence of lender companies at their registered address.- The AO's addition was based on the lack of evidence of the lenders' existence and their financial incapacity to provide such loans.- The assessees provided various documents, including confirmations, bank statements, PAN details, audited financial statements, incorporation certificates, and ROC filings, to prove the identity, creditworthiness, and genuineness of the lenders.Decision:- The Tribunal found that the assessees provided sufficient evidence to prove the identity and creditworthiness of the lenders and the genuineness of the transactions.- The AO's reliance on the commission report was flawed, as the inspector did not visit the specific address and failed to conduct thorough inquiries.- The Tribunal held that the lenders had substantial intrinsic value and creditworthiness, given their investments in listed shares worth thousands of crores and the loans taken from reputed NBFCs.- The Tribunal deleted the additions under Section 68, concluding that the assessees discharged their onus of proof.2. Disallowance of Interest on Loans:Facts and Arguments:- The AO allowed the interest paid on loans as a deduction, but the CIT (A) disallowed it, considering the loans unproved under Section 68.- The assessees argued that the loans were genuine, used for business purposes, and the interest was paid through proper banking channels with TDS deducted.Decision:- Since the Tribunal held the loans to be genuine, the interest on these loans was also held as genuine.- The Tribunal deleted the disallowance of interest, noting that the loans were used for business purposes, and the interest was duly declared and taxed by the lenders.3. Allowability of Education Cess as a Deduction:Facts and Arguments:- The assessees claimed that education cess is an allowable expenditure, relying on judicial precedents.- The Tribunal acknowledged the judicial position that education cess is allowable but noted that the assessees did not pay any education cess for the assessment year in question due to a loss.Decision:- The Tribunal held that education cess is an allowable expenditure but dismissed the ground as the assessees did not incur any education cess for the relevant year.4. Conversion of Limited Scrutiny into Full Scrutiny Without Prior Permission:Facts and Arguments:- The assessees contended that the conversion of limited scrutiny into full scrutiny was done without the prior permission of the PCIT.Decision:- The Tribunal did not adjudicate this ground as the additions were deleted on merits.5. Issuance of Notice under Section 143(2) on the Revised Return:Facts and Arguments:- The assessees argued that the assessment was completed on the revised return without issuing a notice under Section 143(2).Decision:- The Tribunal did not adjudicate this ground as the additions were deleted on merits.Conclusion:The Tribunal deleted the additions made under Section 68, disallowed the disallowance of interest on loans, and acknowledged the allowability of education cess while dismissing the procedural grounds due to the merits-based deletions.