2024 (10) TMI 1700 - AT - Income Tax

Unsecured Loans via Account Payee Cheques Prove Genuine, Section 68 Addition Deleted

Amar Partap Steels Pvt. Ltd. Versus ITO, Ward-7 (2), Jaipur

Amar Partap Steels Pvt. Ltd. Versus ITO, Ward-7 (2), Jaipur - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) erred in not providing the assessee an opportunity to cross-examine the third party whose statements were relied upon for making additions under Section 68 of the Income Tax Act, 1961 ('the Act'). 2. Whether the addition of Rs. 1,50,00,000/- made under Section 68 by treating unsecured loans received as unexplained cash credits was justified, considering the genuineness, identity, creditworthiness of the lenders, and the nature of transactions. 3. Whether the disallowance of Rs. 4,71,202/- under Section 36(i)(va) of the Act on account of delayed payment of employees' contribution to Provident Fund (PF) and Employees' State Insurance (ESI) was justified. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Opportunity for Cross-Examination of Third Party Whose Statements Were Used for Addition Legal Framework and Precedents: - Principles of natural justice require that an assessee be given an opportunity to cross-examine adverse witnesses whose statements form the basis of assessment. - Income tax proceedings are quasi-judicial; however, strict application of Evidence Act is not mandatory, but fairness and opportunity to defend are essential. - Supreme Court decisions emphasize that denial of cross-examination of witnesses whose statements are relied upon renders the order nullity. - Relevant precedents include judgments holding that statements of third parties cannot be unilaterally used against the assessee without opportunity of cross-examination. Court's Interpretation and Reasoning: - The AO relied on statements of a third party recorded during search proceedings to hold the unsecured loans as accommodation entries. - The assessee contended that it was denied the opportunity to cross-examine this third party, which is a violation of natural justice. - The CIT(A) held that due to the large scale of such cases across the country and practical difficulties, it was not feasible to provide cross-examination opportunity. - The Tribunal noted that the statements of the third party did not specifically name the assessee and that the information from the investigation wing was only indicative. - The Tribunal emphasized that reliance solely on untested third-party statements without corroborative evidence is not sufficient for addition. Key Evidence and Findings: - The third party's statement admitted providing accommodation entries but did not specifically implicate the assessee by name. - No opportunity was given to cross-examine the third party or to inspect the seized documents relied upon. - The assessee produced confirmations, bank statements, and income tax returns of the lenders. Application of Law to Facts: - The Tribunal held that the denial of opportunity to cross-examine the third party was a violation of principles of natural justice. - Statements of third parties cannot be used as conclusive evidence without testing through cross-examination. Treatment of Competing Arguments: - Revenue argued practical infeasibility of cross-examination in multiple cases and that income tax proceedings do not strictly follow Evidence Act. - Assessee stressed the fundamental right to fair hearing and cross-examination to challenge adverse evidence. Conclusion: - The Tribunal found merit in the assessee's contention regarding violation of natural justice and held that the addition based solely on untested third-party statements was not sustainable. Issue 2: Addition of Rs. 1,50,00,000/- under Section 68 Treating Unsecured Loans as Accommodation Entries Legal Framework and Precedents: - Section 68 of the Act deals with unexplained cash credits. The assessee must explain the nature and source of the credit. - Post amendment effective from AY 2013-14, companies not substantially public are required to prove not only identity and genuineness but also the nature and source of the sum credited by the lender. - Burden of proof on the assessee is discharged by establishing identity, genuineness, and creditworthiness of the lender and genuineness of the transaction. - Mere suspicion or information from investigation wing is insufficient without corroborative evidence. - Once identity and genuineness of creditors and transactions are proved, source of source is not to be enquired into unless source is traced to the assessee itself. - Repayment of loans through banking channels strengthens the genuineness of transactions. - Relevant judicial precedents hold that addition under Section 68 cannot be made solely on statements of third parties or suspicion without cogent evidence. Court's Interpretation and Reasoning: - The assessee produced confirmations from lenders, bank statements evidencing receipt and repayment of loans through banking channels, and income tax returns of the lenders showing losses but genuine existence. - The lenders were registered companies subject to Companies Act and income tax regulations, indicating credibility. - The AO and CIT(A) disregarded these evidences primarily on the basis of statements of the third party and information received from the investigation wing. - The Tribunal observed that the AO did not investigate or produce any evidence to show that the loans originated from the assessee or were bogus. - The Tribunal noted that the loans were repaid within a short period, further supporting genuineness. - The Tribunal relied on judicial precedents holding that addition under Section 68 is not justified if the assessee proves identity, genuineness, and creditworthiness, and the transaction is through banking channels. - The Tribunal also referred to High Court rulings which held that admission by a third party without corroborative evidence is not conclusive. Key Evidence and Findings: - Confirmation letters from the lending companies. - Bank statements of the assessee showing receipt and repayment of loans through account payee cheques. - Income tax returns and computation of income of the lending companies. - Absence of any direct evidence linking the loans to unaccounted money of the assessee. - Statements of the third party did not name the assessee specifically. Application of Law to Facts: - The assessee discharged the onus by proving identity and genuineness of the loans and lenders. - The AO failed to produce any cogent evidence to rebut the assessee's explanation. - The addition under Section 68 was based on suspicion and untested third-party statements, which is not sufficient. Treatment of Competing Arguments: - Revenue relied on statements of the third party and losses shown by lenders to question creditworthiness. - Assessee relied on documentary evidence and judicial precedents to establish genuineness. Conclusion: - The Tribunal held that the addition of Rs. 1,50,00,000/- under Section 68 was not sustainable and directed deletion of the addition. Issue 3: Disallowance of Employees' Contribution to PF and ESI Paid Beyond Due Date under Section 36(i)(va) Legal Framework and Precedents: - Section 36(i)(va) read with Sections 2(24)(x) and 43B of the Act disallow expenses relating to employees' contribution to PF and ESI if paid beyond the due date prescribed by the authorities. - The Supreme Court in recent judgments has clarified that delayed payment of such contributions is not allowable as expenditure. Court's Interpretation and Reasoning: - The assessee admitted that the payment of PF and ESI contributions was delayed. - The Tribunal followed the binding Supreme Court precedent and held that such delayed payments are not allowable deductions. Key Evidence and Findings: - Details of delayed payment of Rs. 3,57,521 (PF) and Rs. 59,681 (ESI) were on record. Application of Law to Facts: - The disallowance under Section 36(i)(va) is justified as per statutory provisions and judicial pronouncements. Treatment of Competing Arguments: - The assessee did not press this ground in view of binding Supreme Court judgment. Conclusion: - The disallowance of Rs. 4,71,202/- on account of delayed payment of PF and ESI contributions was upheld.