2025 (1) TMI 1276 - AT - Income Tax

Tribunal Upholds Rs. 36.50 Lacs Income Addition u/s 68; Assessee Must Prove Creditors' Financial Standing.

Mrs. Karunakaran Leela Versus ITO Ward-1 Karur.

The Tribunal held that the addition of Rs. 36.50 Lacs to the assessee's income under Section 68 of the Income Tax Act was justified due to insufficient ... Addition relatable to 12 creditors - assessee could not explain the sources of loan - as argued assessee has discharged her onus by providing the PANs, that the entire transactions were carried through the Banking Channels including repayment - HELD THAT:-Onus was on assessee to establish the creditworthiness of the loan creditors and the assessee has failed to file sufficient documentary evidences, in this regard, to the satisfaction of lower authorities. Further, it would make no difference whether the amounts are received in cash or through banking channel. The provisions of Sec.68 would still be attracted to the assessee in both the cases. In fact, the assessee is debarred from accepting loans in cash beyond specified limits as laid down u/s 269SS. Therefore, these arguments stand rejected. Considering the fact that the assessee has failed to discharge the onus of establishing the creditworthiness of the 12 parties, we provide another opportunity to the assessee to substantiate the same before Ld. AO. Accordingly, the issue of impugned addition stand restored back to the file of Ld. AO for fresh consideration with a direction to the assessee to substantiate the loan creditors. Appeal stand allowed for statistical purposes. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in this judgment was whether the addition of Rs. 36.50 Lacs to the assessee's income under Section 68 of the Income Tax Act was justified. This issue revolves around the assessment of the creditworthiness of the creditors from whom the assessee claimed to have received unsecured loans.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 68 of the Income Tax Act deals with unexplained cash credits. It mandates that if any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered is not satisfactory, the sum so credited may be charged to income tax as the income of the assessee. The burden of proof lies on the assessee to establish the identity, creditworthiness of the creditors, and the genuineness of the transaction.Court's Interpretation and ReasoningThe Tribunal examined whether the assessee had satisfactorily discharged the burden of proving the creditworthiness of the creditors and the genuineness of the transactions. The Tribunal noted that the assessee failed to provide sufficient documentary evidence to establish the creditworthiness of the creditors. The argument that the transactions occurred through banking channels and hence should not attract Section 68 was rejected. The Tribunal asserted that the mode of transaction (cash or banking channel) does not absolve the assessee from proving the creditworthiness of the creditors.Key Evidence and FindingsThe Tribunal found that during the assessment proceedings, the assessee had obtained unsecured loans of Rs. 120 Lacs from 17 creditors. Notices were issued to five creditors, and only three responded. These creditors showed petty income in their ITRs compared to the loans advanced, indicating a lack of creditworthiness. Additionally, there were cash deposits in the creditors' accounts on the same dates the loans were advanced to the assessee, which the assessee could not satisfactorily explain.Application of Law to FactsThe Tribunal applied Section 68 to the facts, emphasizing that the assessee failed to establish the creditworthiness of the 12 creditors for the amount of Rs. 36.50 Lacs. The Tribunal held that the assessee's failure to provide ITRs or other substantial evidence of the creditors' financial standing justified the addition under Section 68.Treatment of Competing ArgumentsThe assessee argued that the source of the source could not be inquired into by the Assessing Officer and that transactions through banking channels should not attract Section 68. The Tribunal rejected these arguments, affirming that the onus to prove the creditworthiness of creditors lies with the assessee, and the mode of transaction does not negate this requirement.ConclusionsThe Tribunal concluded that the assessee did not discharge the burden of proof regarding the creditworthiness of the creditors. However, it provided the assessee another opportunity to substantiate the creditworthiness before the Assessing Officer. The issue of the addition of Rs. 36.50 Lacs was remanded back to the Assessing Officer for fresh consideration.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal stated, 'In our considered opinion, the onus was on assessee to establish the creditworthiness of the loan creditors and the assessee has failed to file sufficient documentary evidences, in this regard, to the satisfaction of lower authorities.'Core Principles EstablishedThe judgment reinforced the principle that under Section 68, the assessee must prove the identity, creditworthiness of the creditors, and genuineness of the transactions, regardless of whether the transactions are conducted through banking channels.Final Determinations on Each IssueThe Tribunal determined that the addition of Rs. 36.50 Lacs under Section 68 was justified due to the failure of the assessee to prove the creditworthiness of the creditors. However, it allowed the appeal for statistical purposes, remanding the issue back to the Assessing Officer for fresh consideration, providing the assessee another opportunity to substantiate the creditworthiness of the loan creditors.