2023 (4) TMI 1434 - AT - Income Tax

Addition under Section 68 deleted as loan treated genuine after lender identity, creditworthiness, bank evidence and repayments confirmed

Shri Ratan Lal Agarwal Versus The ACIT, Central Circle-1, Jaipur

ITAT JAIPUR - AT allowed the appeal, holding the assessing officer's addition under section 68 unsustainable. The tribunal found the lender company's ... Addition u/s 68 - Identity, genuineness and creditworthiness not proved - lender company treated as ‘shell company’ - HELD THAT:- As notice u/s 133(6) sent by AO was returned unserved and AO wanted the director of lender company to appear before her which was not materialized as director being located from Jaipur and reluctant to appear before AO, AR furnished various further details and evidences before the AO in order to substantiate his claim. The balance sheet and profit & loss account of the lender company for AY 2014-15 and copy of the ITR was furnished before the AO. Moreover the copy of bank account of the lender company was also furnished to further substantiate about loan being genuine. Moreover, the ld. AR has submitted that this company is not the defunct company and is active as it has been filing its financial statements on the online portal of Ministry of Corporate Affairs. Company has never been declared a ‘shell company’ by the MCA. Other argument of no any tangible asset of the company is also not so relevant so as to treat the company as ‘shell company’, as there are many companies which have been accepting deposits and giving loans and these companies do not generally have physical assets in their balance sheet. Thus it is clear that the finding of the AO of the lender company as ‘shell company’ on the basis of the aforesaid observations does not stand to merit in view of the discussion made as above regarding the observations of the AO and accordingly this finding of the AO of treating the company as ‘shell company’ is rejected and deserves to be ignored. It is seen that AR has brought to our notice that as on today no amount is outstanding and the loan was gradually repaid in various years and was completely repaid as of 31.03.2020. This also supports the aforesaid finding of existence of the company not being in doubt. Whether the loan so taken from the lender company fulfils the parameters of genuineness as generally prescribed by the decisions of various courts? -Considering the facts and in the circumstances of the case existence and identity of the lender company cannot be said to be non-genuine. Now coming to the creditworthiness of the lender company, AR has rightly pointed out that the company had reserve and surplus amounting to Rs. 36,36,39,628/-, whereas advance given to the appellant is only to the tune of Rs. 4,47,43,000/-. Genuineness of the transaction, the ld. AR has rightly pointed out that from perusal of the balance sheet of the lender company, it is seen that schedule 9 contained ‘short term loans and advances’ totaling to Rs. 21,39,99,802/- as on 31.03.2014 and on further perusal of details, it is seen that name of the assessee is appearing wherein debit balance of Rs. 4,47,43,000/- has been shown against the assessee. It is seen that loan has been given through banking channels and from perusal of the copy of bank statement of the lender company so furnished before AO and also before us it is seen that amount has been duly debited in the bank account of the said company. We have also noted the submission of the ld. AR that there is no immediate cash deposit prior or even after to the giving of loan by the lender company to the assessee. It has been brought to our notice of us by the ld. A/R that the same assessing officer for the same assessment year in other two cases of the group has accepted the loan received from the same lender company as genuine without any adverse view related to existence of the company or creditworthiness of the company and without any adverse view regarding treating the lender company as ‘shell company’ in these two cases. Appeal of assessee allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the assessing officer's addition of a cash credit under section 68 was sustainable where the assessee produced documents to establish (i) identity of the creditor, (ii) creditworthiness of the creditor, and (iii) genuineness of the loan transaction. 2. Whether adverse inferences could be drawn from (a) non-service of summons under section 133(6) on the lender, (b) non-production of the lender's director, and (c) an investigative spot enquiry report asserting non-existence of the lender, when documentary evidence and affidavits supporting existence and transactions were on record. 3. Whether reliance on inspector's oral statements (not subjected to cross-examination) and brief spot enquiries can outweigh contemporaneous documentary records (PAN, audited financials, bank statements, confirmations) submitted by the assessee. 4. Whether inconsistent treatment by the same assessing officer in respect of loans from the same lender to other related assessees (accepted as genuine) is material in assessing the correctness of the addition. 5. The extent and effect of the assessee's burden under section 68 and when the burden shifts to Revenue to rebut documentary evidence. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of addition under section 68 where identity, creditworthiness and genuineness are evidenced Legal framework: Section 68 permits charging to income any sum found credited in an assessee's books where the assessee offers no explanation about the nature/source or the explanation is unsatisfactory. Jurisprudence requires the assessee to establish identity of creditor, creditworthiness and genuineness of the transaction to discharge the onus. Precedent treatment: The Court relied on established authorities holding that once documentary evidence demonstrating the three ingredients is produced, the burden shifts to the Revenue to prove the contrary (cited decisions include rulings emphasizing identity/creditworthiness/genuineness criteria and that suspicion alone is insufficient). Interpretation and reasoning: The assessee produced PAN details, account confirmations, audited financial statements and ITRs of the lender, bank statements showing payments through banking channels and ledger entries in the lender's accounts showing the advance. The AO did not point to any specific contradiction in those documents; the AO's conclusion that the lender was a 'company of no means' was inconsistent with the AO's own acknowledgement of significant reserves in the lender's balance sheet. The Tribunal examined the documentary matrix and found it adequate to establish the three statutory requirements. Ratio vs. Obiter: Ratio - Documentary proof of identity, creditworthiness and genuineness, unrebutted by cogent material, suffices to discharge the assessee's onus under section 68. Obiter - Observations on acceptability of low profit but high reserves or lack of tangible assets are contextual comments. Conclusion: Addition under section 68 was not sustainable on the record; the assessee discharged the onus and the addition was deleted. Issue 2 - Effect of non-service of summons and non-production of director combined with spot enquiry report Legal framework: Non-service of a notice or non-appearance of third parties does not ipso facto negate documentary evidence placed by the assessee. Revenue must show why the documentary evidence is unreliable; principles of natural justice apply where Revenue wishes to rely on third-party statements - the assessee should be permitted to test them. Precedent treatment: The Court referred to authorities holding that returned service of summons cannot automatically be visited upon the assessee and that denial of opportunity to cross-examine witnesses relied upon by the Department is a material procedural infirmity (citing high-court and Supreme Court pronouncements on cross-examination and fair opportunity). Interpretation and reasoning: The AO's reliance on non-service and non-production, coupled with a spot enquiry by Investigation Wing, was insufficient because (a) the AO did not disclose any substantive investigative material demonstrating the lender's insolvency or sham status, (b) the assessee provided alternative and contemporaneous documentary proofs, and (c) relevant witnesses whose statements were relied upon by Revenue were not made available for cross-examination and their affidavits submitted by the lender contradicted the inspector's notes. The Tribunal emphasized that spot reports about past existence without corroborative contemporaneous evidence do not override detailed financial records. Ratio vs. Obiter: Ratio - Non-service/non-production or adverse spot reports cannot substitute for positive evidence discrediting the documentary proof; where Revenue relies on third-party statements the assessee must be afforded opportunity to test them. Obiter - Practical reasons for non-service (office moved, closed etc.) and the limited weight of absence of physical assets. Conclusion: Adverse inferences based solely on non-service, non-production and the spot enquiry were unjustified and could not sustain the section 68 addition. Issue 3 - Admissibility and weight of investigative statements not subjected to cross-examination Legal framework: Statements or reports relied upon by the tax authority which form the basis of adverse findings must be amenable to testing; denial of cross-examination where requested is a breach of natural justice and can render the reliance unsafe. Precedent treatment: The Court relied upon decisions holding that refusal to permit cross-examination of witnesses whose statements underpin an adverse order constitutes a serious flaw and may vitiate the order. Interpretation and reasoning: The ledger/financials/bank records were contemporaneous, while inspector reports comprised oral recollections of neighbours about periods several years earlier. Two shopkeepers subsequently provided affidavits contradicting the inspector's notes and averring that the lender existed at the address. The Tribunal found the Department's reliance on untested statements and the absence of opportunity for cross-examination to be significant; the statements could not be given determinative weight against detailed documentary records. Ratio vs. Obiter: Ratio - Untested third-party statements cannot, by themselves, override documentary proof especially when cross-examination has been sought but denied. Obiter - Critique of investigative note taking where witnesses were not allowed to verify their recorded statements. Conclusion: The inspector's report could not legitimately displace the documentary evidence; reliance on such untested statements was improper. Issue 4 - Relevance of inconsistent treatment by the assessing officer in related assessments Legal framework: Administrative consistency and uniform application of assessment standards are relevant; materially identical facts treated differently by the same officer without justification may indicate arbitrariness. Precedent treatment: Courts have treated materially inconsistent treatment of like cases as a factor militating against the credibility of adverse findings. Interpretation and reasoning: The Tribunal noted that the same assessing officer accepted loans from the same lender as genuine in other contemporaneous assessments of related assessees. There was no logical basis recorded for treating the present assessee's identical transaction differently. Such inconsistency undermined the AO's conclusion and supported the finding that the AO's adverse view was arbitrary. Ratio vs. Obiter: Ratio - Unexplained inconsistent treatment of identical transactions by the same authority is material and can support deletion of an addition. Obiter - Administrative observation on need for reasoned differentiation when treating similar cases differently. Conclusion: The contradictory acceptance of identical loans in related assessments weighed in favour of the assessee and against the AO's addition. Issue 5 - Burden of proof under section 68 and shifting to Revenue Legal framework: The initial onus is on the assessee to explain credits; satisfactory documentary proof of identity, genuineness and creditworthiness shifts the burden to Revenue to demonstrate unreliability or fabrication. Precedent treatment: Authorities cited confirm that mere inability of creditors to explain their source of funds does not automatically convert credits into assessee's income; Revenue must show nexus or other positive material. Interpretation and reasoning: The assessee produced PAN, confirmations, audited accounts showing reserves, bank debits corresponding to advances, and ledger entries in lender's books. No convincing material was placed on record by Revenue to show these records were fabricated or that the funds originated from the assessee. Revenue's case rested on suspicion, returned summons and an adverse spot report - none of which rebutted the documentary proof on a preponderance of probabilities. Ratio vs. Obiter: Ratio - When the assessee produces adequate contemporaneous documentary evidence satisfying the three ingredients, the legal burden shifts and Revenue must produce affirmative contrary material to sustain an addition under section 68. Obiter - Observations on factual sufficiency of reserves vis-à-vis loan quantum. Conclusion: The assessee discharged the statutory onus; absent positive rebuttal by Revenue, the addition could not be sustained and was deleted. Final Disposition The Court deleted the addition under section 68 and allowed the appeal, concluding that the assessee had established identity, creditworthiness and genuineness of the loan and that the AO's adverse conclusions (based on non-service, non-production and spot enquiry) did not constitute satisfactory rebuttal. The Tribunal found procedural and evidentiary infirmities in the Revenue's reliance on untested statements and unexplained inconsistent treatment in related assessments.