2024 (12) TMI 1588 - AT - Income Tax

Section 68 addition deleted as assessee proves lender's identity, genuineness and creditworthiness through proper documentation

The DCIT, Central Circle-2, Ludhiana. Versus Malbros International Pvt. Ltd.

The Tribunal upheld CIT(A)'s deletion of Rs. 1.50 crore addition under Section 68 for unexplained cash credit. The assessee successfully proved identity, ... Unexplained cash credit u/s 68 - assessee has not proved the genuineness of transaction and credit worthiness of the loaner - CIT(A) deleted addition - HELD THAT:- Assessee has proved the source of source as mandated by the provisions of Section 68 of the Act. In view of these factual aspects, we find no infirmity in the order of the CIT(A) who has deleted this addition made by the Assessing Officer of unexplained loans received by assessee from Smt. Dimpy Malhtora. Smt. Dimpy Malhtora has discharged her onus by proving these transactions. With regard to argument made by ld. Sr.DR that these are circular transactions, it is evident that these are circular transactions which goes to prove that source of source is explained. Once source of source is proved, no addition can be made by invoking provisions of Section 68 to the unsecured loan. Assessee is able to demonstrate that the amount of Rs.1.50 Cr received from Smt. Dimpy Malhtora is explained and hence genuine. We find no infirmity in the order of the CIT(A) and accordingly, this appeal of Revenue is dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:- Whether the Assessing Officer (AO) was justified in making an addition of Rs. 1.50 crore as unexplained cash credit under Section 68 of the Income Tax Act, 1961, on account of an unsecured loan received by the assessee from Smt. Dimpy Malhotra.- Whether the assessee successfully discharged the onus to prove the genuineness of the transaction and the creditworthiness of the lender, thereby justifying deletion of the addition by the Commissioner of Income Tax (Appeals) (CIT(A)).- Whether the Revenue's contention that the transactions were circular and hence liable to be treated as unexplained cash credits under Section 68 holds merit.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Validity of addition under Section 68 of the Income Tax Act on account of unexplained cash credit of Rs. 1.50 croreRelevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. It empowers the AO to treat any sum found credited in the books of an assessee as income if the assessee fails to satisfactorily explain the nature and source of such credit. The legal principle requires the assessee to prove the identity, genuineness, and creditworthiness of the lender and the genuineness of the transaction.Court's interpretation and reasoning: The AO initially treated the Rs. 1.50 crore unsecured loan from Smt. Dimpy Malhotra as unexplained cash credit because the assessee failed to establish the genuineness of the transaction and the creditworthiness of the lender. The AO also relied on the low returned income of Shri Arun Malhotra, the source of funds for Smt. Dimpy Malhotra, to discredit the genuineness of the transaction.The CIT(A) reversed the AO's addition after detailed scrutiny of the evidence produced by the assessee. The CIT(A) observed that the AO's reliance on the low income return of Shri Arun Malhotra was misplaced, as creditworthiness cannot be strictly correlated with returned income alone. The CIT(A) emphasized that the assessee had furnished confirmations, bank statements, and income tax returns (ITRs) of the lender and the source of funds, establishing the genuineness of the transaction.Key evidence and findings: The assessee submitted:Confirmation from Smt. Dimpy Malhotra regarding the loan.Copy of Smt. Dimpy Malhotra's ITR showing taxable and exempt income totaling Rs. 74,92,487/-.Bank statements evidencing the transfer of funds.Details of the source of funds of Smt. Dimpy Malhotra, i.e., Rs. 1.50 crore received from Shri Arun Malhotra.Further confirmations, ITRs, and bank statements of Shri Arun Malhotra's sources: Rs. 90 lakhs from M/s Om Sons Marketing Pvt. Ltd., Rs. 50 lakhs from Shri Parveen Malhotra (father), and Rs. 20 lakhs from Shri Puneet Rai.Application of law to facts: The Tribunal noted that the assessee had adequately traced the source of the loan through multiple layers, providing documentary evidence at each stage. The evidence satisfied the requirements under Section 68, which mandates proving the identity, genuineness, and creditworthiness of the lender and the genuineness of the transaction.Treatment of competing arguments: The Revenue argued that the transactions were circular and hence should be treated as unexplained cash credits. The Tribunal rejected this contention, holding that circularity in transactions, if established with proper documentary evidence, actually supports the explanation of the source of funds rather than negating it. The Tribunal also found the AO's contradictory approach-disregarding the substantial income declared by Smt. Dimpy Malhotra while emphasizing the low income of Shri Arun Malhotra-unconvincing.Conclusions: The Tribunal upheld the CIT(A)'s deletion of the addition, concluding that the assessee had discharged the onus under Section 68 by proving the genuineness of the transaction and the creditworthiness of the lender and the source of funds.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning is encapsulated in the following observations:'There can not be a strict interpretation of creditworthiness vis-`a-vis returned income. Also, there is not automatic co-relation of creditworthiness with returned income. It has to be considered with respect to facts of individual case and result of enquiry.''The appellant has provided sufficient evidence of source of source i.e Rs.1,50,00,000/- received by said Dimpy Malhotra from Sh. Arun Malhotra. Copy of confirmation along with ITR of said Sh. Arun Malhotra has also been submitted. Furthermore, the appellant has also provided confirmation and copy of ITR of Om Sons Marketing Pvt Ltd.(Rs.90,00,000) and Sh. Parveen Malhotra (Rs.50,00,000) from whom the funds were received by the source of source of the said loan i.e. said Sh. Arun Malhotra.''Once source of source is proved, no addition can be made by invoking provisions of Section 68 to the unsecured loan.'Core principles established include:The burden on the assessee under Section 68 is to prove the identity, genuineness, and creditworthiness of the lender and the genuineness of the transaction.Creditworthiness cannot be strictly equated with the income returned by the lender; it must be assessed in light of the overall facts and evidence.Tracing the source of funds through multiple layers with adequate documentary evidence satisfies the requirements of Section 68.Circular transactions, if supported by documentary evidence, do not render the transaction unexplained but rather substantiate the source of funds.Final determinations on each issue:- The addition of Rs. 1.50 crore as unexplained cash credit under Section 68 was rightly deleted by the CIT(A) and upheld by the Tribunal.- The assessee successfully proved the genuineness of the unsecured loan transaction and the creditworthiness of the lender and the source of funds.- The Revenue's contention of circular transactions did not warrant the addition as unexplained cash credits.