2023 (10) TMI 650 - AT - Income Tax

Tribunal Upholds CIT(A) Decision; Deletes Rs. 47.73 Cr Addition by AO, Validates Assessee's Loan Explanation Under Sec 68.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the addition of Rs. 47,72,95,676/- made by the AO under Section 68 ... Unexplained unsecured loan u/s. 68 - AO inter-alia observed that the assessee has shown squared off unsecured loans allegedly received from an entity - bona fides of credits appearing in the books of assessee on the contours of s. 68 - CIT(A) deleted the addition - HELD THAT:- We find ostensible rationale in the view taken by the CIT(A) which is backed by evidences and whole set of speaking circumstances. On the other hand, the reasonings advanced on behalf of revenue lack merits. While the transactions are shown to be impressed with commercial spirit and eventually squared up, the parties to such banking transactions are identifiable on the tax records of the department. Additions made is fundamentally flawed for another reason too i.e. assessing the gross total of all credits disregarding the fact of rotation of money and peak credit being very low in the context. The facts in the present case thus speaks for itself and there appears no need to amplify the findings of CIT(A). Without reiteration of wide ranging observations led by the CIT(A), we are convinced that the onus which lays upon the assessee to explain that the entries made are real and not fictitious, has been duly discharged. Ordinarily, it is difficult to fathom an onus tagged upon the assessee to explain the circumstances as to why third party had needed such funds so long as the transactions are embedded with commercial considerations. Furthermore, the onus towards source in the hands of borrower in relation to repayment entries qua preexisting loans is indeed onerous and can seldom be visualized. We are thus in agreement with the pith and substance of plea advanced on behalf of assessee and endorse the action of the CIT(A) in toto. Appeal of the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts totalling Rs.47,72,95,676 credited in the books constitute unexplained cash credits under Section 68 or are repayments of pre-existing loans discharging the assessee's onus under Section 68. 2. Whether the creditworthiness, identity and genuineness of the counterparty (a company whose name was struck off) were adequately established so as to negate applicability of Section 68. 3. Whether non-appearance of the counterparty's director to summons under Section 131 warranted drawing adverse inference and treating the transactions as sham. 4. Whether the Assessing Officer erred in aggregating gross credits (rotation of funds) instead of considering maximum outstanding/peak balance when invoking Section 68. 5. Admissibility and effect of additional evidence (bank statements, ledgers, auditor's report and depositions of accountant/CFO) produced before the Commissioner (Appeals) and relied upon in determining the applicability of Section 68. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Nature of credits: unexplained cash credits under Section 68 v. repayments of pre-existing loans Legal framework: Section 68 places onus on the recipient of credits to prove identity, genuineness and creditworthiness of the person from whom money is received; bona fides are relevant and receipts through banking channels and documentary evidence are probative. Precedent treatment: Authorities emphasize that repayments of bona fide loans and square-ups during the year weigh heavily against invocation of Section 68; judicial decisions have held fact of repayment entitled to great weight. Interpretation and reasoning: The ledger and audit report showed nil opening and closing balances with total debits/credits equal (rotation) and a peak outstanding of Rs.2.06 crore. Interest receipts and TDS evidence indicated that the assessee had advanced funds and received repayments and interest (not vice versa). Transactions were routed through banking channels and ultimately squared up within the year. These facts demonstrate that the gross credited sum represented multiple rotations/repayments of short-term advances rather than fresh unexplained credits. Ratio vs. Obiter: Ratio - repayments and peak outstanding are controlling factual indicators to determine whether an entry is an unexplained credit under Section 68; courts will weigh commercial intent, banking trails and absence of year-end outstanding. Obiter - general statements on onerousness of proving borrower's source in all cases. Conclusion: The Court held the assessee discharged the onus under Section 68; the credits were repayments of pre-existing loans and not unexplained cash credits liable to be added to income. Issue 2 - Identity, creditworthiness and genuineness of the counterparty Legal framework: To satisfy Section 68, recipient must prove identity of creditor and creditworthiness/genuineness of transaction; creditworthiness may be inferred from ability to honor repayments and contemporaneous financial records. Precedent treatment: Courts have recognized that creditworthiness cannot be judged solely by year-end snapshot of balance sheet; contemporaneous banking operations, taxation records (ITR filings), prior assessments and payment behaviour are relevant. Interpretation and reasoning: Although the counterparty's name was struck off on MCA portal, evidence showed regular electronic ITR filings, prior assessments under Section 143(3), banking entries demonstrating funds flow and repayments, payment of interest with TDS and cooperating officials (accountant/CFO) deposing to explain transactions. The Tribunal found these factors adequate to establish identity and genuineness; narrow reliance on struck-off status or small year-end assets was insufficient to discredit creditworthiness where funds were demonstrably available and repaid. Ratio vs. Obiter: Ratio - proof of creditworthiness can rest on banking records, taxable filings and demonstrated ability to repay; mere striking off from ROC portal does not ipso facto negate identity/genuineness. Obiter - commentary on broader meaning of 'creditworthiness'. Conclusion: The Court accepted that the counterparty's identity and creditworthiness were sufficiently established for the purposes of Section 68. Issue 3 - Effect of non-appearance of the counterparty's director to summons under Section 131 Legal framework: Section 131 empowers summons; non-compliance may permit adverse inference but must be considered against totality of evidence and reasonable explanations for non-attendance. Precedent treatment: Courts allow that if a representative or other responsible officer appears and gives satisfactory evidence, failure of a director to appear (particularly where company status has changed) may not justify adverse inference. Interpretation and reasoning: The counterparty's accountant and CFO attended and provided sworn statements explaining funds' origin and repayment; the company's struck-off status explained director's non-attendance. The Tribunal found the purpose of summons was served and no material contradiction or evasiveness emerged from the deponents to justify rejecting their evidence. Ratio vs. Obiter: Ratio - non-appearance of director is not decisive where other authorized persons furnish coherent, verifiable records and explain circumstances; adverse inference is unwarranted absent material evasiveness. Obiter - reference to expectation of cooperation generally. Conclusion: No adverse inference was drawn; non-appearance of the director did not vitiate the evidentiary value of the counterparty's depositions and documents. Issue 4 - Aggregation of gross rotations v. consideration of peak outstanding Legal framework: Treatment under Section 68 requires assessing the nature of receipt at relevant time; rotation of same funds, where repayments occur in the year, may not convert transactions into unexplained credits - proper assessment looks to maximum outstanding and transactional character. Precedent treatment: Authorities discourage equating total turnover of receipts with fresh undisclosed credits where loans are repeatedly advanced and repaid within the year; peak outstanding is the relevant test to measure retained unexplained monies. Interpretation and reasoning: The AO aggregated total credits amounting to Rs.47.72 crore ignoring that these represented multiple debit/credit rotations and that the highest outstanding at any time was Rs.2.06 crore. The Tribunal held such aggregation is legally and factually misplaced and results in inflated and erroneous determination under Section 68. Ratio vs. Obiter: Ratio - when assessing unexplained credits, gross rotation cannot be treated as a single fresh unexplained receipt; peak outstanding and transactional context must be considered. Obiter - procedural note on AO's duty to distinguish repayments from receipts. Conclusion: Aggregation of gross credits was held to be erroneous; the correct approach is to consider peak liability and rotational nature, supporting deletion of the addition. Issue 5 - Admissibility and effect of additional evidence relied upon by the first appellate authority Legal framework: Tribunal and appellate authorities may admit additional evidence when it bears upon identity, genuineness and source; remand and consideration of such evidence is permissible under procedure. Precedent treatment: Admission is proper if documents materially explain source/flow of funds and were not frivolous; AO's remand comments are relevant but do not preclude reliance where evidence is credible. Interpretation and reasoning: The Commissioner (Appeals) admitted additional bank statements, ledger accounts, audit report and statements under oath; these documents elucidated sources, banking trails and TDS on interest. The Tribunal found the admission appropriate and determinative, noting the AO had not required those precise documents earlier and that the remand examination did not undermine their probative value. Ratio vs. Obiter: Ratio - admissibility of additional evidence that materially explains transactions is acceptable and can change the factual conclusion on Section 68; Obiter - comment that AO should adequately specify what additional assistance was lacking before rejecting evidence. Conclusion: The additional evidence was properly admitted and materially supported the finding that the assessee discharged its onus under Section 68. Final Disposition On the totality of factual and documentary evidence (banking channels, ledger/audit entries, interest receipts with TDS, peak outstanding, depositions of accountant/CFO and prior tax filings), the Court affirmed the first appellate authority's conclusion that the onus under Section 68 was discharged; the addition was unsustainable and the Revenue's appeal was dismissed.