2025 (3) TMI 398 - AT - Income Tax

Assessee wins on Section 68 unsecured loan addition and Section 35(2AB) R&D deduction claims

ITAT Mumbai held in favor of the assessee on multiple issues. The addition under Section 68 for unsecured loan was deleted as the assessee proved identity ... Addition u/s 68 - addition on account of the unsecured loan - HELD THAT:- Assessee sufficiently proved the identity and creditworthiness of the loan lender, who is nothing but a 50% shareholder in the assessee company. Such being the facts even the genuineness of the transaction cannot also be doubted, as the loan was taken not from any stranger but a 50% shareholder for the routine course of business to meet business-related expenditure under a running account. Therefore, assessee has explained the nature and source of the sum credited to its account as an unsecured loan during the year under consideration. Accordingly, we find no basis in the addition made u/s 68. Deduction claimed u/s 35(2AB) period mentioned in Form 3CM - Assessee is entitled to claim deduction under section 35(2AB) of the Act even in respect of the expenditure iHELD THAT:- As R&D facility of the assessee has already been approved by the DSIR, we are of the considencurred prior to 25/10/2019, i.e. from 01/04/2019, for the year under consideration. Amount disallowed twice - We deem it appropriate to restore this issue to the file of the Jurisdictional AO with a direction to allow the claim of deduction under section 35(2AB) of the Act, as per law, in respect of the expenditure incurred from 01/04/2019 after necessary verification of the details of such expenditure. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered the following core legal questions:1. Whether the addition of Rs. 2,30,00,000 under section 68 of the Income Tax Act, 1961, was justified, considering the assessee's claim of having proved the identity, creditworthiness, and genuineness of the loan transaction with Mr. Karius Dadachanji.2. Whether the disallowance of Rs. 33,74,518 under section 35(2AB) of the Act was appropriate, given that the expenditure was incurred prior to the approval date of 25/10/2019, and whether the disallowance of Rs. 5,70,811 was justified as it was alleged to be capital expenditure.3. Whether the alleged double disallowance of Rs. 5,70,811, which was already included in the disallowed Rs. 28,03,707, was valid.ISSUE-WISE DETAILED ANALYSIS1. Addition under Section 68 of the ActRelevant legal framework and precedents: Section 68 of the Income Tax Act requires the assessee to satisfactorily explain the nature and source of any sum credited in its books of account. The explanation must establish the identity, creditworthiness, and genuineness of the transaction.Court's interpretation and reasoning: The Tribunal noted that the assessee received an unsecured loan of Rs. 2,30,00,000 from Mr. Karius Dadachanji, who was a 50% shareholder in the assessee company. The assessee provided the PAN, address, and bank statements to support the transaction.Key evidence and findings: The Tribunal found that the assessee had submitted sufficient documentation, including the lender's PAN and bank statements, to establish the identity and creditworthiness of Mr. Karius Dadachanji. The lender's income tax return showed a substantial income, further supporting his creditworthiness.Application of law to facts: The Tribunal concluded that the assessee successfully demonstrated the identity, creditworthiness, and genuineness of the loan transaction, as the loan was from a significant shareholder and was part of routine business operations.Treatment of competing arguments: The Tribunal rejected the Assessing Officer's conclusion that the transaction lacked credibility, emphasizing the substantial evidence provided by the assessee.Conclusions: The Tribunal deleted the addition of Rs. 2,30,00,000 under section 68, allowing the assessee's appeal on this ground.2. Disallowance under Section 35(2AB) of the ActRelevant legal framework and precedents: Section 35(2AB) allows weighted deduction for research and development expenditure, provided the R&D facility is approved by the DSIR. Precedents from the Delhi High Court and Gujarat High Court support the view that approval applies retrospectively from the start of the financial year in which the application is made.Court's interpretation and reasoning: The Tribunal considered the guidelines issued by the DSIR and relevant case law, which suggest that approval should be considered from the beginning of the financial year in which the application is made.Key evidence and findings: The DSIR granted approval from 25/10/2019, but the assessee argued for retrospective application from 01/04/2019, based on DSIR guidelines and judicial precedents.Application of law to facts: The Tribunal agreed with the assessee, noting that the R&D facility was recognized, and the approval should apply from 01/04/2019.Treatment of competing arguments: The Tribunal rejected the Assessing Officer's limitation of the deduction to post-approval expenditures, citing the broader interpretation supported by case law and DSIR guidelines.Conclusions: The Tribunal allowed the deduction for expenditures incurred from 01/04/2019 and directed the AO to verify and allow the claim accordingly.3. Alleged Double Disallowance of Rs. 5,70,811Relevant legal framework and precedents: The principle of preventing double taxation requires that no amount should be disallowed more than once.Court's interpretation and reasoning: The Tribunal noted the assessee's claim that Rs. 5,70,811 was included in the disallowed Rs. 28,03,707 and should not be disallowed again.Key evidence and findings: The Tribunal found merit in the assessee's argument and decided to remand the issue to the AO for verification.Application of law to facts: The Tribunal directed the AO to ensure no double disallowance occurs and to verify the details of the expenditure.Treatment of competing arguments: The Tribunal considered the assessee's submission and found it necessary to verify the claim to prevent double disallowance.Conclusions: The Tribunal remanded the issue to the AO for verification and appropriate adjustment.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'We find that the assessee has explained the nature and source of the sum credited to its account as an unsecured loan during the year under consideration. Accordingly, we find no basis in the addition made under section 68 of the Act and the same is deleted.'Core principles established: The Tribunal reinforced the principle that the identity, creditworthiness, and genuineness of a transaction must be established for additions under section 68. It also affirmed the retrospective application of DSIR approval for R&D deductions under section 35(2AB).Final determinations on each issue: The Tribunal allowed the appeal regarding the addition under section 68, granted the deduction for R&D expenditures from 01/04/2019, and remanded the issue of alleged double disallowance for verification.