Assessee wins unexplained credit case under Section 68 as loan repayment proves genuine transaction

Dazzling Construction Pvt. Ltd. Versus ITO Ward-7 (2) New Delhi

The core legal questions considered in this judgment include:

1. Whether the notice issued under Section 148 of the Income Tax Act, 1961, was valid or if it was barred by limitation and jurisdictional errors.

2. Whether the assessment order was invalid due to the absence of a Document Identification Number (DIN).

3. Whether the reassessment proceedings were contrary to the provisions of Sections 147 to 151 of the Act.

4. Whether the additions made under Sections 68 and 69C of the Act were justified.

5. Whether the jurisdiction was properly assumed under Section 148 rather than Section 153C.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Notice under Section 148

The legal framework requires that for a notice under Section 148 to be valid, there must be a "reason to believe" that income has escaped assessment. The Court examined whether the reasons recorded for issuing the notice were vague or based on borrowed satisfaction without reliable information.

The Court found that the reasons recorded lacked specificity and were based on general information from an investigation into the Praveen Aggarwal Group, which was alleged to provide accommodation entries. The approval process under Section 151 was also scrutinized, with the assessee arguing it was mechanical and lacked substantive reasoning.

2. Absence of DIN on Assessment Order

The absence of a Document Identification Number (DIN) was raised as a ground for invalidating the assessment order. However, the Court did not focus on this issue in light of its findings on the substantive merits of the case.

3. Reassessment Proceedings and Jurisdiction

The Court considered whether the reassessment proceedings under Section 147 were justified. The assessee argued that the prerequisites for such proceedings were not met, particularly the lack of a valid "reason to believe" and the mechanical nature of the approval process.

The Court found that the reassessment proceedings were not justified, as the information relied upon was not specific to the assessee and lacked direct evidence of income escaping assessment.

4. Additions under Sections 68 and 69C

The Court analyzed the additions made under Section 68 for unexplained credits and Section 69C for unexplained expenditure. The assessee provided documentary evidence, including loan confirmations, bank statements, and financial details of the lender, M/s. Everlike Projects P. Ltd.

The Court found that the assessee had adequately demonstrated the identity, creditworthiness, and genuineness of the transactions. The lender's financial standing and the repayment of the loan further supported the assessee's case. The Court noted that the requirement to prove the "source of source" was not applicable to loan transactions for the relevant assessment year.

The addition under Section 69C was also found to be without cogent evidence, and the Court emphasized that the repayment of the loan negated any inference of unexplained cash credits.

5. Jurisdiction under Section 148 vs. Section 153C

The assessee argued that the jurisdiction should have been assumed under Section 153C, which deals with assessments related to search operations. However, the Court did not delve into this issue, given its decision on the substantive merits.

SIGNIFICANT HOLDINGS

The Court held that the reassessment proceedings and the additions made under Sections 68 and 69C were not justified. It emphasized that:

"The clinching evidences towards loan procurement discharge the primary onus which lay upon the assessee under s. 68 of the Act."

The Court established that the absence of a requirement to prove the "source of source" for loan transactions, as outlined in the judgments of Mod. Creations Pvt. Ltd. and CIT vs Shiv Dhooti Pearls & Investments Ltd., was significant in this case.

The Court concluded that the repayment of the loan was a critical factor that dispelled any suspicion of unexplained cash credits.

In conclusion, the Court set aside the order of the CIT(A) and reversed the additions made by the AO, allowing the appeal of the assessee.