Addition under Section 68 invalid due to lack of notice regarding loan transactions from 5 persons

Kerala HC held that addition u/s 68 for loans from 5 persons was invalid as petitioner was not given notice regarding these transactions. While creditworthiness of 17 lenders was satisfactory and 11 were unsatisfactory, the assessment order mentioned 28 persons but only 22 were in the notice. Court remanded matter to assessing authority for fresh assessment order, directing petitioner to file response regarding the 5 persons only. No opportunity granted for other creditors.

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Issues: Assessment under the Income Tax Act, 1961 for the assessment year 2021-2022 based on unsecured loans from lenders not assessed to tax.

Details of the Judgment:

1. The petitioner, an assessee under the Income Tax Act, filed returns for the assessment year 2021-2022 declaring total income. The case was selected for scrutiny due to unsecured loans from lenders not assessed to tax. Notice under Section 143(2) was issued, and a show cause notice listed 22 persons from whom the petitioner had accepted deposits. It was found that out of 45 lenders, only 7 had filed returns of income. The petitioner's response to the show cause notice was considered.

2. The petitioner could only provide details for 6 lenders, failing to verify the source of the loans and the creditworthiness of the lenders. The assessing authority finalized the assessment order based on the petitioner's response.

3. The counsel for the petitioner argued discrepancies in the number of lenders mentioned in the show cause notice and the assessment order. Only 7 lenders were found to have filed returns, and notices were sent to 8 lenders under Section 133(6).

4. A show cause notice was issued to the petitioner to prove the creditworthiness and genuineness of the loans. Documentary evidence submitted was examined, and the creditworthiness of 17 lenders was satisfactory. However, loans from 11 lenders were added as income from unknown sources under Section 68 of the IT Act.

5. The petitioner was not given notice regarding loans from 5 lenders, leading to a violation of natural justice. The counsel argued against the addition of these amounts without proper notice and opportunity for explanation.

6. The respondent suggested the petitioner could appeal the assessment order, emphasizing the availability of statutory remedies. The court considered the submissions and found the addition of loans from the 5 lenders without notice to be incorrect and a violation of natural justice.

7. The court remanded the matter back to the assessing authority for a fresh assessment order. The petitioner was directed to provide explanations for the loans from the 5 specific lenders mentioned. The assessing authority was instructed to activate the link for the petitioner to submit responses only for these 5 creditors.

8. The petitioner was granted one opportunity to upload responses for the 5 creditors. No recovery was to be made until the fresh assessment order was passed.

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