2024 (2) TMI 750 - HC - Income Tax

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

Nirmala Trust Versus The Additional/Joint/Deputy/Assistant Commissioner Of Income Tax, The Principal Chief Commissioner Of Income Tax, The Income Tax Officer, The Principal Commissioner Of Income Tax

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 ... Addition u/s 68 - creditworthiness of 17 lenders were found satisfactory but creditworthiness and genuineness of 11 lenders were not found satisfactory - addition as the income of the petitioner from unknown sources - HELD THAT:- From Ext. P1, it is evident that only the names of 22 persons were mentioned, from whom, the petitioner had taken fresh loan in the assessment year 2021-2022. However, the assessment order would mention that the petitioner had taken loan from 28 persons. The transaction of 5 persons were not put to notice to the petitioner for initiating its response. Unless and until the petitioner was not put to notice, in respect of the transaction of the aforesaid 5 persons, there was no occasion for him to give any response in respect of the proposed additions. Therefore we find to the extend of the addition of amount of loan advanced by the aforesaid 5 persons with the return of income of the petitioner under Section 68, is not in accordance with law and the same has vitiated, the assessment order impugned in the present writ petition to that extent. Present writ petition is disposed of, and the matter is remanded back to the assessing authority, to pass a fresh assessment order. The petitioner is directed to file his response / supporting documents in respect of the loan advanced by the 5 persons. The respondents are directed to activate the link with intimation to the petitioner for enabling the petitioner to file his explanation in respect of these 5 transactions only. It is made clear that no opportunity is given in respect of the other creditors and the remand is only in respect of the 5 creditors as mentioned above. 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.