Section 68 addition upheld for Rs. 1.60 crore unexplained credit after lender denied loan transaction during assessment proceedings

ITAT Delhi upheld addition under section 68 for unexplained credit of Rs. 1.60 crores where assessee failed to establish genuineness of unsecured loan transaction. The lender denied extending any loan during his own assessment proceedings despite initially confirming the transaction. Court held that identity, creditworthiness and genuineness must be established cumulatively at the time of credit entry. Subsequent repayment does not validate original transaction. However, ITAT allowed set-off of losses against deemed income under section 68 as prohibition under section 115BBE(2) was not applicable for AY 2013-14, being effective only from 2017-18.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal include:

(a) Whether the addition made under section 68 of the Income Tax Act, relating to an unsecured loan of Rs. 2,21,50,000/- from Mr. Virender Kumar Gupta (VKG) to the assessee company, was justified on grounds of non-establishment of identity, creditworthiness, and genuineness of the transaction;

(b) Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) violated principles of natural justice or committed any legal infirmity in passing their respective orders;

(c) Whether the CIT(A) had the jurisdiction to enhance the addition under section 251 of the Act;

(d) Whether the addition made under section 68 is chargeable as "Income from Other Sources" and the implications thereof;

(e) Whether the assessee was entitled to set off business losses against the addition made under section 68, particularly in light of the amendment to section 115BBE(2) by the Finance Act 2016;

(f) The quantum of addition under section 68, specifically relating to the opening balance and current year loan transactions;

(g) The evidentiary value and credibility of the confirmations and balance sheets submitted by VKG and the implications of contradictory documents and non-cooperation by VKG.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Legitimacy of Addition Under Section 68 Regarding Loan from VKG

Legal Framework and Precedents: Section 68 casts an initial onus on the assessee to explain the nature and source of unexplained credits, requiring proof of identity, creditworthiness, and genuineness of the transaction cumulatively. Once the assessee discharges this primary onus, the burden shifts to the AO to disprove the genuineness. Relevant precedents include PCIT vs Ambe Tradecorp (P) Ltd, Dev Darshan Designs (P) Ltd, and CIT vs Dhooti Pearls & Investment.

Court's Interpretation and Reasoning: The Tribunal closely examined the facts and evidence on record. The assessee claimed an unsecured loan of Rs. 2,21,50,000/- from VKG, supported by confirmations, ledger accounts, bank statements, and a purported audited balance sheet of VKG. However, the AO discovered that the audited balance sheet submitted by VKG to his own AO and uploaded on the Income Tax Department's portal did not reflect any receivable from the assessee. Further, the AO of VKG confirmed the absence of such loan in VKG's accounts during VKG's assessment proceedings.

The AO also noted VKG's failure to respond to summons under section 131 for personal deposition, and the submission of a fabricated balance sheet by VKG to the AO of the assessee. This discrepancy was critical in undermining the genuineness of the loan transaction.

Key Evidence and Findings: The AO's investigation revealed:

• Fabricated balance sheet submitted by VKG to the assessee's AO;
• Authentic audited balance sheet of VKG showing no loan receivable from the assessee;
• Non-cooperation by VKG in personal deposition;
• Statements of VKG's relatives denying any business relationship with the assessee;
• Large cash deposits in VKG's bank account, indicating questionable creditworthiness;
• Contradictory stand of VKG in his own assessment proceedings denying the loan.

Application of Law to Facts: The Tribunal held that the assessee failed to discharge the onus under section 68 as the genuineness and creditworthiness of VKG were not satisfactorily established. The mere banking channel transactions and repayment of loan in subsequent years do not establish genuineness. The Tribunal relied on the Delhi High Court decision in Seema Jain, emphasizing that subsequent squaring off of transactions does not validate their genuineness.

Treatment of Competing Arguments: The assessee contended that the loan was genuine, all transactions were through banking channels, and the loan was repaid, relying on the Ambe Tradecorp case. The assessee also argued that the addition was already made in VKG's hands, and hence the source was explained. The Tribunal distinguished the facts from Ambe Tradecorp, noting VKG's denial of the loan in his own assessment and the fabricated documents submitted. The Tribunal also rejected the argument that repayment establishes genuineness, underscoring that the test applies at the time of credit in books.

Conclusions: The addition under section 68 of Rs. 2,21,50,000/- was justified on grounds of non-establishment of genuineness and creditworthiness of VKG. The Tribunal, however, limited the addition to Rs. 1,60,50,000/- pertaining to the current year, excluding the opening balance of Rs. 61,00,000/- relating to the previous year.

Issue (b): Violation of Principles of Natural Justice and Validity of AO/CIT(A) Orders

The assessee raised grounds alleging violation of natural justice and that the AO/CIT(A) passed orders based on material not confronted to the assessee. However, these grounds were not pressed before the Tribunal and were dismissed accordingly.

Issue (c): Jurisdiction of CIT(A) to Enhance Addition Under Section 251

The CIT(A) enhanced the addition under section 68, disallowing the set-off of business loss against the addition, contrary to the AO's order which allowed such set-off. The Tribunal examined the amendment to section 115BBE(2) by the Finance Act 2016, effective from 01.04.2017, which disallows such set-off only prospectively.

The Tribunal relied on CBDT Circular No. 11 of 2019 and judicial precedents including Vijaya Hospitality and Resorts Ltd and Shree Karthik Papers Ltd, holding that for AY 2013-14, the assessee was entitled to set off business losses against the addition under section 68. Thus, the CIT(A)'s enhancement was set aside to the extent it denied such set-off.

Issue (d): Chargeability of Addition Under Section 68 as Income from Other Sources

The CIT(A) had held that the addition under section 68 is not chargeable as "Income from Other Sources." The assessee challenged this finding but the Tribunal did not elaborate extensively on this point, focusing primarily on the quantum and genuineness issues. The ground was allowed in part by permitting set-off against losses, implicitly recognizing the addition as income under section 68.

Issue (e): Quantum of Addition and Opening Balance Treatment

The assessee argued that the opening balance of Rs. 61,00,000/- pertained to the previous year and should not be added again. The Tribunal agreed, limiting the addition to Rs. 1,60,50,000/- received during the year under consideration, thus partly allowing the appeal on this ground.

Issue (f): Evidentiary Value of Confirmations and Balance Sheets Submitted by VKG

The Tribunal scrutinized the confirmations and balance sheets submitted by VKG and found them contradictory and unreliable. The fabricated balance sheet submitted to the AO of the assessee, the absence of the loan in VKG's own audited accounts, and VKG's non-appearance for deposition were critical factors leading to rejection of the genuineness of the loan transaction.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following principles and made key determinations:

"It is a trite law that for discharging the initial onus cast by section 68 of the Act, the assessee has to establish (1) identity, (2) creditworthiness and (3) genuineness of the transaction and all the conditions are to be fulfilled cumulatively. Once the assessee proves all these three things cumulatively, his primary onus is discharged and the onus is shifted to the AO to prove otherwise."

"The repayment of loan does not make the original acceptance of loan as genuine. Such an argument is against the language of provision of section 68. The criteria of identity, creditworthiness and genuineness of transaction are to be tested at the time of amount being credited in the books of account of the assessee. All subsequent events are immaterial."

"We find no hesitation in rejecting the argument of the assessee that since the transaction has been conducted through banking channel, the loan received should be considered as genuine."

"The transactions in the instant case are yet another example of the constant use of the deception of loan entries to bring unaccounted money into banking channels. The Hon'ble Supreme Court and the High Courts have constantly held that such device of loan entries continues to plague the legitimate economy of our country."

"We are therefore of the considered view that as the denial of set-off of losses against income referred to in section 68, as propounded in section 115BBE(2), only comes in effect from 1.4.2017, the assessee is entitled to set off the loss from the deemed income u/s 68 of the Act."

Final determinations:

• The addition under section 68 of Rs. 2,21,50,000/- was justified but restricted to Rs. 1,60,50,000/- pertaining to the year under consideration;
• The genuineness and creditworthiness of VKG as creditor was not established, and the loan transaction was held to be accommodation entries;
• The CIT(A) erred in disallowing set-off of business losses against the addition under section 68 for AY 2013-14, which was allowed by the Tribunal;
• Grounds alleging violation of natural justice and invalidity of orders were dismissed as not pressed;
• The enhancement by CIT(A) under section 251 was set aside to the extent it disallowed set-off of losses;
• The assessee failed to discharge the onus under section 68, and the addition was upheld accordingly.

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