2025 (1) TMI 1336 - AT - Income Tax

Directors' payments for land purchase on company's behalf not unexplained cash credits under Section 68

The ITAT Mumbai ruled in favor of the assessee regarding unexplained cash credits under Section 68. The case involved loans from company directors that ... Unexplained cash credits - addition being loan taken from the Directors of the assessee company u/s.68 - Onus to prove - HELD THAT:- One very important fact here in this case which proves the genuineness of the loan is that, these are not direct loan given to the assessee company but payment was made to various persons on behalf of the company in respect of the property to be purchased in the name of the company. These details of payments made to 169 people were filed alongwith their confirmations. Thus, it is not a case of direct loan been given to the assessee company, albeit all the Directors have made payment to various persons for the purchase of the property to start the project of the company and the company has shown this as liability in the balance sheet in the name of the Directors. Accordingly, it cannot be said that the onus cast upon the assessee has not been discharged. Once all these facts have been brought on record, then simply because these Directors have taken unsecured loan for making payments to various parties for purchase of land in the name of the company cannot be added u/s.68 once all these documents have been furnished. Accordingly, addition made by the ld. AO and as confirmed by the ld. CIT (A) is deleted. Decided in favour of assessee. ISSUES: Whether reopening of assessment under Section 147/148 of the Income Tax Act, 1961 was valid. Whether unsecured loans received from Directors can be treated as unexplained cash credits under Section 68 of the Income Tax Act, 1961. Whether the assessee discharged the onus of proving the creditworthiness and genuineness of unsecured loans received from Directors. Whether the source of funds of the Directors (the 'source of the source') must be established by the assessee for the purpose of Section 68 for the relevant assessment year. RULINGS / HOLDINGS: Reopening under Section 147/148 was validly initiated based on the reasoned belief that income had escaped assessment. The addition of unsecured loans amounting to ? 5,01,48,500/- under Section 68 was not justified in respect of two Directors, as the assessee discharged the onus of proving the creditworthiness and genuineness of the loans with documentary evidence. The onus cast upon the assessee under Section 68 was discharged by furnishing income tax returns, balance sheets, confirmations, bank statements, and ledger accounts evidencing the loans from Directors. There is no requirement under Section 68 for the assessee to prove the 'source of the source' - i.e., the origin of funds of the Directors from whom the loans were received - for the relevant assessment year, as such a requirement was introduced only w.e.f. Assessment Year 2023-24. The addition confirmed by the lower authorities on the ground that Directors had advanced loans out of unsecured borrowings from various persons was deleted. The validity of reopening became academic after deletion of the addition on merits. RATIONALE: The Court applied the provisions of Section 147/148 regarding reopening of assessment, requiring a reasoned belief that income has escaped assessment. Section 68 places the onus on the assessee to prove the creditworthiness and genuineness of unexplained cash credits (such as unsecured loans), which was fulfilled by the assessee through submission of relevant financial documents and confirmations. The Court noted that the statutory amendment requiring proof of the 'source of the source' of funds was effective only from Assessment Year 2023-24 onwards, and thus not applicable to the assessment year under consideration (2014-15). The Court emphasized that if the Assessing Officer had doubts regarding the sources of unsecured loans to the Directors, he could have issued notices under Section 133(6) to seek further details, which was not done. The Court recognized that payments made by Directors on behalf of the company to third parties for property acquisition, reflected as unsecured loans in the company's balance sheet, constituted sufficient evidence of genuineness. No doctrinal shift or dissenting opinion was noted; the decision aligns with established principles on the burden of proof under Section 68 prior to the amendment.