2025 (4) TMI 873 - AT - Income Tax

Tax Reassessment Upheld: Genuine Loans Validated, Interest Expenditure Reinstated Under Section 147 and Section 68

Ramesh Kumar Chirimar, C/o. Subhash Agarwal & Associates Versus ACIT, Circle-40, Kolkata

The Tribunal addressed reassessment proceedings and unsecured loan challenges in tax law. It upheld the validity of reassessment under section 147, ... Validity of reassessment proceedings u/s. 147 - no independent application of mind and no independent enquiry by the AO and that no proper approval u/s. 151 was obtained - HELD THAT:- Assessee failed to place credible evidence to support his legal ground. Therefore dismiss the legal grounds raised by the assessee. Accordingly, Grounds of appeal No.1 to 3 are dismissed. Addition u/s. 68 for unsecured loans and disallowance of the interest expenditure - HELD THAT:- The nature and source can be explained by way of placing evidence to prove the Identity, Creditworthiness of the alleged loan creditors and genuineness of the transactions. The assessee is carrying out the business in the name of M/s. Krishna Road Carriers and books of accounts are regularly maintained and audited u/s. 44AD of the Act. The gross freight during the year is approximately Rs. 12.55 crore and net income is declared at Rs. 15.66 lakh. It gives an overview that assessee is into the genuine business activity. Now the assessee has taken the unsecured loans in the course of business from the alleged three parties. The details of the parties are duly reflected in the Form No.3CD attached to the Tax Audit Report. The assessee has furnished the loan confirmations, ITRs, Audited financial statements, relevant pages of bank statement, source of alleged sum available in respect of all the three cash creditors. It is also not in dispute that all the three cash creditors named above have replied to the notices issued u/s. 133(6) of the Act. So the identity is not in dispute as all the cash loan creditors are Private Limited Companies and provided their identity details. So far as the creditworthiness of the loan creditors are concerned, all the three cash creditor companies are having sufficient credit worthiness and have given the alleged loans through banking channel to the assessee for its business purposes. Genuineness of the transactions, have gone through the confirmation of accounts for succeeding year also which are placed and find that the alleged loans have been fully repaid during the subsequent financial year. Interest paid during the year as well as subsequent year has been duly accounted for in the books of account. It thus proves the genuineness of the transaction also. Now since all the three ingredients have been fulfilled, in my considered opinion, assessee has successfully explained the nature and source of the alleged sums. There remains no room for invoking section 68 of the Act in the present state of affairs. Addition made by the AO u/s. 68 of the Act is hereby deleted. Further since the unsecured loans have been found to be genuine, the interest expenditure also deserves to be allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:Whether the reassessment proceedings initiated under section 147 read with section 143(3) of the Income-tax Act, 1961 (the Act) were valid, particularly in light of the alleged lack of independent application of mind by the Assessing Officer (AO) and absence of proper approval under section 151 of the Act.Whether the addition of Rs. 30,00,171/- under section 68 of the Act on account of alleged unsecured loans was justified.Whether the disallowance of interest expenditure of Rs. 1,08,407/- paid on the said unsecured loans was proper.2. ISSUE-WISE DETAILED ANALYSISValidity of Reassessment Proceedings (Section 147 r.w.s. 143(3) and Section 151 of the Act)Relevant Legal Framework and Precedents: Section 147 authorizes reopening of assessment if the AO has reason to believe that income has escaped assessment. Section 151 requires prior approval for issuance of notice under section 148 (reassessment notice). The principle of independent application of mind by the AO before reopening is well established in case law.Court's Interpretation and Reasoning: The assessee challenged the reassessment on grounds of no independent enquiry and lack of proper approval under section 151. However, the Tribunal found that the assessee failed to produce credible evidence supporting these grounds. The Tribunal upheld the validity of the reassessment proceedings.Key Evidence and Findings: No evidence was placed by the assessee to demonstrate procedural lapses or lack of independent mind.Application of Law to Facts: The procedural requirements under sections 147 and 151 were satisfied, and the AO had applied independent mind before reopening.Treatment of Competing Arguments: The Tribunal dismissed the assessee's legal grounds due to lack of substantiation.Conclusion: Grounds 1 to 3 challenging reassessment validity were dismissed.Addition under Section 68 of the Act on Account of Unsecured LoansRelevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits. To avoid addition under this section, the assessee must satisfactorily explain the nature and source of the cash credits by proving identity, creditworthiness of the lender, and genuineness of the transaction. The Supreme Court in CIT Vs. Orissa Corporation (P) Ltd. 159 ITR 78 and various Tribunal decisions have laid down these principles.Court's Interpretation and Reasoning: The AO invoked section 68 to add Rs. 30,00,171/- representing unsecured loans from three private limited companies. The assessee furnished extensive documentary evidence including loan confirmations, audited financial statements, ITRs, bank statements, and replies from the creditors to notices under section 133(6). The Tribunal examined the identity and creditworthiness of the lenders and found that all three companies had substantial net worth (ranging from Rs. 21.13 crore to Rs. 33.51 crore), far exceeding the loan amounts. The genuineness of the transactions was supported by confirmations for the succeeding year and evidence of repayment of the loans. The interest payments were accounted for in the books.Key Evidence and Findings: The assessee maintained books regularly audited under section 44AD, and the business showed genuine activity with gross freight of approximately Rs. 12.55 crore and declared net income of Rs. 15.66 lakh. The creditors' identity was undisputed, and their financial capacity to advance loans was established. Repayment and interest payments further corroborated genuineness.Application of Law to Facts: The three essential ingredients to rebut section 68 addition-identity, creditworthiness, and genuineness-were satisfactorily demonstrated by the assessee.Treatment of Competing Arguments: The Revenue's reliance on the AO and CIT(A) orders was rejected by the Tribunal in view of the cogent evidence furnished by the assessee and supportive judicial precedents.Conclusion: The addition of Rs. 30,00,171/- under section 68 was deleted.Disallowance of Interest Expenditure on Unsecured LoansRelevant Legal Framework and Precedents: Interest expenditure is allowable if the underlying loan is genuine and utilized for business purposes. Disallowance is justified only if the loan itself is not accepted as genuine.Court's Interpretation and Reasoning: Since the unsecured loans were held genuine, the disallowance of interest expenditure of Rs. 1,08,407/- was not sustainable. The Tribunal set aside the CIT(A)'s disallowance on merits.Key Evidence and Findings: Interest payments were duly accounted for in the books and related to genuine loans.Application of Law to Facts: Allowance of interest expenditure logically follows the acceptance of the loan's genuineness.Treatment of Competing Arguments: The Revenue's contention was rejected based on the findings on the genuineness of loans.Conclusion: Interest expenditure disallowance was reversed, and the interest was allowed.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Now since all the three ingredients have been fulfilled, in my considered opinion, assessee has successfully explained the nature and source of the alleged sums. There remains no room for invoking section 68 of the Act in the present state of affairs.''Further since the unsecured loans have been found to be genuine, the interest expenditure of Rs. 1,08,407/- also deserves to be allowed.'Core principles established include the reaffirmation that to rebut an addition under section 68, the assessee must establish identity, creditworthiness, and genuineness of the cash credits to the satisfaction of the AO. The genuineness of the loan automatically entitles the assessee to claim the related interest expenditure.Final determinations:Reassessment proceedings under section 147 r.w.s. 143(3) were valid and properly approved under section 151.Addition of Rs. 30,00,171/- under section 68 was deleted as the assessee successfully explained the cash credits.Disallowance of interest expenditure of Rs. 1,08,407/- was reversed and interest was allowed.