ITAT allows appeal against Section 68 addition after creditor retracts coerced statement on loan genuineness

ITAT Mumbai allowed the assessee's appeal against addition u/s 68 regarding loan creditors' identity, creditworthiness and genuineness. The AO had disallowed interest expenditure based on a statement by an individual claiming two lending companies were paper companies. However, the individual later retracted his statement through an affidavit alleging coercion. The tribunal held that once the assessee discharged the prima facie burden of proving the loan transactions, the AO should have cross-examined the individual rather than dismissing the retraction affidavit. Since the assessee proved the creditors' credentials and repaid the loans, and the AO relied solely on an untested, retracted statement, the addition u/s 68 was deleted and interest expenditure was allowed.

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Issues Involved:
1. Addition of Rs. 1,17,00,000/- under Section 68 of the Income Tax Act, 1961.
2. Disallowance of interest expenditure of Rs. 4,80,000/- for AY 2014-15 and Rs. 10,53,000/- for AY 2015-16.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,17,00,000/- under Section 68 of the Income Tax Act, 1961:

The main grievance of the assessee was against the addition of Rs. 1,17,00,000/- made under Section 68 of the Income Tax Act, 1961. The assessee, engaged in construction activities, had filed his return of income for AY 2014-15 and declared a total income of Rs. 1,12,28,840/-. Based on information from the DDIT (Inv.) Unit 7(4), Mumbai, the case was reopened, and it was noted that the assessee had transactions with two entities, M/s. Shipra Fabrics Pvt. Ltd and M/s. Lunkad Textile Pvt. Ltd, which were identified as paper companies operated by Shri Vipul Vidur Bhatt. The AO alleged that the loans amounting to Rs. 77 Lakhs and Rs. 40 Lakhs from these entities were accommodation entries and added Rs. 1.17 Cr as income under Section 68.

The assessee provided various documents to prove the nature and source of the loans, including returns of income, balance sheets, P&L accounts, audit reports, bank statements, and confirmations from the lenders. Despite this, the AO was dissatisfied, citing a lack of response to notices issued under Section 133(6) and the statement of Shri Vipul Vidur Bhatt admitting to providing accommodation entries. The AO did not accept the retraction of Shri Vipul Vidur Bhatt's statement, as it was not mentioned in the DDIT (Inv.) report.

The Tribunal noted that the assessee had discharged the burden of proving the nature and source of the credit entries through primary documents. The AO's reliance on the untested statement of Shri Vipul Vidur Bhatt, without allowing cross-examination, was deemed insufficient. The Tribunal cited the jurisdictional High Court's decision in PCIT v. Paradise Inland Shipping (P.) Ltd., which emphasized that once the assessee produces documentary evidence, the burden shifts to the Revenue to rebut it. The Tribunal concluded that the addition under Section 68 could not be sustained and directed the deletion of Rs. 1.17 Cr.

2. Disallowance of Interest Expenditure of Rs. 4,80,000/- for AY 2014-15 and Rs. 10,53,000/- for AY 2015-16:

The assessee also challenged the disallowance of interest expenditure claimed on the alleged bogus loans. For AY 2014-15, the interest expenditure was Rs. 4,80,000/-, and for AY 2015-16, it was Rs. 10,53,000/-. The AO disallowed these amounts, contending that the loans were not genuine.

The Tribunal, after examining the evidence, found that the assessee had duly deducted TDS on the interest paid and had repaid the loans to the lenders. Given that the primary documents provided by the assessee were not effectively rebutted by the AO, the Tribunal directed that the interest expenditure claimed by the assessee should be allowed.

Conclusion:

The Tribunal allowed the appeals of the assessee, directing the deletion of the addition of Rs. 1.17 Cr under Section 68 and allowing the interest expenditure of Rs. 4,80,000/- for AY 2014-15 and Rs. 10,53,000/- for AY 2015-16. The Tribunal emphasized the need for the Revenue to provide cogent evidence to rebut the primary documents produced by the assessee and criticized the AO's reliance on an untested statement without allowing cross-examination. The decision was pronounced in the open court on 02/05/2024.

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