2024 (5) TMI 1207 - AT - Income Tax

AO failed independent inquiry on unsecured loans under section 68, CIT(A) denied proper verification opportunity

The ITAT Delhi held that the AO failed to conduct independent inquiry regarding unsecured loans under section 68, while the CIT(A) neither investigated ... Addition u/s 68 - taxability of unsecured loans - Burden of Proof - HELD THAT:- AO did not make any independent inquiry as no such details were made available by the assessee however the CIT(A) before whom certain details were furnished did neither carry out investigation nor allowed the AO to do so by providing reasonable & sufficient opportunity to the AO to carry out the investigation for verifying the creditworthiness of the parties, the source of funds and the genuineness of transaction. This view was further held in the case of Nemi Chand Kothari [2003 (9) TMI 62 - GAUHATI HIGH COURT] wherein it was held that it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Once the assessee has proved the identity of his creditors the genuineness of the transactions, and the creditworthiness of his creditors vis-à-vis the transactions which he had with the creditors, his burden stands discharged and the burden then shifts to the revenue to show that though covered by cheques, the amounts in question, actually belonged to, or was owned by the assessee himself. Similar findings have been given in case of N. R. Portfolio Pvt. Ltd. [2012 (12) TMI 762 - DELHI HIGH COURT] We are of the considered opinion that the details/documents filed by the respondent/ assessee to discharge its primary onus of explaining the loans before the CIT(A) have not subjected to the requisite enquiry/examination/investigation. Thus, the respondent/assessee deserves reasonable opportunity of being heard to make shortcomings or non-compliances. Appeal of Revenue is allowed for statistical purposes. Issues Involved: The judgment involves the issue of taxability of unsecured loans under section 68 of the Income Tax Act, 1961, specifically focusing on whether the loans were adequately explained in accordance with the provisions of the Act.Summary:Issue 1: Unsecured Loans ExplanationThe case pertains to unsecured loans totaling Rs. 1,93,50,000/- obtained by the appellant from three individuals. The Commissioner of Income Tax (Appeals) allowed the appeal of the assessee, citing that the loans were adequately explained as per Section 68 of the Income Tax Act during the appellate proceedings. However, the Assessing Officer (AO) taxed the amount under section 68 due to non-compliance by the assessee. The CIT(A) dismissed the addition after the AO's show-cause notice. The appellant submitted additional evidence during the first appellate proceedings, but technical difficulties hindered the AO's investigation. The Senior Departmental Representative argued that the CIT(A) did not provide sufficient time for investigation in the faceless environment, leading to a lack of proper examination of the issue.Issue 2: Burden of ProofThe burden of proof under Section 68 of the Act lies with the assessee to explain the nature and source of any sum found credited in their books. While the identity of lenders was proven, the creditworthiness and genuineness of transactions were not adequately demonstrated by the respondent/assessee. The AO did not conduct an independent inquiry, and the CIT(A) did not allow for a thorough investigation into the creditworthiness of the lenders. Citing relevant case laws, it was emphasized that proving the identity alone does not discharge the burden of proof, and the creditworthiness must also be established.Decision:The Appellate Tribunal found that the loans were not adequately explained, and the necessary investigations were not conducted by the AO or the CIT(A). Therefore, the matter was remitted back to the AO for de-novo consideration, providing the respondent/assessee with a reasonable opportunity to address the shortcomings. The AO was instructed to allow for a fair hearing before deciding on the case's merits. The appeal of the Revenue was allowed for statistical purposes.This judgment highlights the importance of thorough investigation and compliance with procedural requirements in tax matters, particularly regarding the burden of proof in explaining financial transactions under Section 68 of the Income Tax Act, 1961.