2024 (4) TMI 1357 - AT - Income Tax

Unsecured loan funded via banking channels: s.68 addition and interest disallowance dropped after identity and genuineness proved

For addition under s. 68 relating to an unsecured loan and consequential disallowance of interest, the ITAT held that once the assessee-firm establishes ... Addition u/s 68 - unsecured loan - onus to prove - consequent interest paid on the loan in view of the finding of fact that the lending company was a shell company, and consequently the genuineness and creditworthiness of the transaction could not be proved - CIT(A) deleted addition - HELD THAT:- Once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee firm is over. The assessee firm cannot ask that person who makes investment whether the money invested is properly taxed or not. If that person owns the entry, then the burden of the assessee firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited the amount. By proving each source, the initial burden has duly been discharged by the appellant. Now burden of proof lies on the department that apparent is not real and such a burden has to be discharged by bringing on record positive material and evidence and not on the basis of suspicion and surmises when there is no live link or specific material brought on record in accordance with the provisions of law and in absence of such finding, it cannot be presumed that the transactions are bogus transactions. The assessee firm has adequately explained with documentary evidence that the transactions made by it with M/s Megapode Vyaapar (P) Ltd are genuine. The coordinate bench of Jodhpur in the case of Sh. Vinod Singhvi [2013 (9) TMI 1327 - ITAT JODHPUR] had held when the assessee has provided the confirmation of account of the clients, Particulars of income tax of the clients, Bank statements of the clients, etc., in such situation, no adverse view can be taken. In the instant case also, the appellant by furnishing all such necessary, details was satisfactorily able to prove that transactions with M/s. Megapode Vyapaar Pvt. Ltd. were genuine. To support this contention reliance was also placed on the assessment order passed u/s 143(3) of the IT Act in the AY 2005- 06 and 2006-07 besides being for the AY: 2013-14 & 2014-15. There is no finding by the authorities in any of the assessment orders which could vitiate the creditworthiness of the company in any manner whatsoever. The non-compliance of the notices issued by the AO u/s 133(6), cannot lead to conclusion that the transactions entered with M/s Megapode Vyaapar (P) Ltd by the assessee were bogus, AO would have made cross enquiry with the jurisdictional AO of that company whose details were already on record. As regards the AO's observation that M/s. Megapode Vyapaar Pvt. Ltd. had shown meagre income in the returns of income filed for AY 2011-12 to 2014-15, these observations have no relevance as far as giving loan of Rs. 1,17,00,000/- is concerned for the reason that loan of Rs. 1,17,00,000/- was not given out of the income, but was actually given out of the fund/amount received by it from IT refund and Dimensional Securities Ltd and Sanjay Jain & Co. through proper banking channel. It is settled that the assessee is not supposed to explain the source of source. Most importantly, the AO has failed to record any adverse findings that interest paid by the assessee to M/s Megapode Vyaapar Pvt. Ltd did not get credited in its books of accounts or the interest paid by the assessee had flown back to the assessee in the shape of unaccounted money meaning thereby that the appellant was the ultimate beneficiary. The appellant has adduced sufficient evidence to establish that it had paid interest on the loan as per the terms of the agreement and was not excessive. Based on these observations we do not find any infirmity in the order of the ld. CIT(A) considering loan as genuine and once the loan is considered as genuine the resultant interest cannot be disallowed. In the light of these observations the appeal of the revenue stands dismissed. Issues: (i) Whether deletion of addition of unsecured loan treated as unexplained cash credit under section 68 of the Income-tax Act, 1961 was justified. (ii) Whether deletion of disallowance of interest paid on such loan was justified.Issue (i): Whether deletion of addition of unsecured loan treated as unexplained cash credit under section 68 of the Income-tax Act, 1961 was justified.Analysis: The legal framework under section 68 requires the assessee to establish the identity of the creditor, the creditor’s creditworthiness, and the genuineness of the transaction. Documentary evidence such as PAN, financial statements, confirmations, and bank statements showing receipt through banking channels was treated as sufficient to discharge the assessee’s initial onus, after which the burden shifted to the Revenue to bring material to show that the transaction was not genuine.Analysis: Reliance solely on general third-party statements describing an accommodation entry modus operandi, without specific linkage of the assessee’s transaction and without further enquiry to controvert the assessee’s documents, was treated as inadequate to sustain an addition. Non-compliance by the creditor with notices/summons and low returned income of the creditor were not treated as determinative, particularly where the transaction trail through bank accounts and confirmation existed and the Revenue did not rebut the entry-wise explanation with contrary evidence.Conclusion: Deletion of the addition under section 68 was upheld.Issue (ii): Whether deletion of disallowance of interest paid on such loan was justified.Analysis: Once the loan transaction was accepted as genuine on the evidence produced and in the absence of rebuttal material from the Revenue, the consequential interest paid on such loan could not be disallowed merely on the same suspicion-based premise.Conclusion: Deletion of the disallowance of interest was upheld.Final Conclusion: The Revenue failed to displace the assessee’s discharged onus under section 68 with cogent rebuttal material; the appellate deletion of both the loan addition and the consequential interest disallowance remained effective.Ratio Decidendi: Where an assessee establishes identity, creditworthiness and genuineness of a loan credit through confirmations and banking records, an addition under section 68 cannot be sustained merely on generalized third-party statements or non-response to notices, absent specific linkage and corroborative rebuttal evidence from the Revenue.