2025 (5) TMI 1857 - AT - Income Tax

Assessee successfully proves genuineness of loans with creditor details and bank records under section 68

ITAT Kolkata allowed the assessee's appeal regarding unexplained cash credit under section 68 and disallowance of interest expenses following a search and ... Unexplained cash credit u/s 68 - bogus unsecured loan and disallowance of interest expenses - search and seizure operation u/s 132 of the Act was conducted - HELD THAT:- Notice issued u/s 133(6) to all the loan creditors and reply was received from most of the parties. The assessee has fairly submitted that the assessee had repaid most of the loan with accrued interest to the loan creditors. The assessee company has discharged its onus by providing the details of two loan creditors, relevant ledgers of respective bank statement as well as confirmation letter from the creditors to verify the veracity of the loan taken - Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the appeals are:Whether the addition of Rs. 2,15,00,000/- as unexplained cash credit under section 68 of the Income Tax Act, 1961, on account of alleged bogus unsecured loans, was justified.Whether the disallowance of interest expenses amounting to Rs. 43,76,399/- (for AY 2016-17) and Rs. 25,73,753/- (for AY 2017-18) related to these loans was appropriate.Whether the Assessing Officer (AO) correctly discharged his burden of proof in treating the loans as bogus and disallowing interest expenses.The correctness of the appellate authority's (CIT(A)) order in allowing the loans and interest expenses based on evidentiary submissions and remand reports.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legitimacy of Loans and Addition under Section 68 (Unexplained Cash Credit)Relevant legal framework and precedents: Section 68 of the Income Tax Act provides that if any sum is found credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum, it is treated as income. The onus lies on the assessee to prove the genuineness of the credit. Precedents cited include:CIT vs. Orissa Corporation P. Ltd. (1986): If the explanation shows the receipt was not income in nature, the department cannot unreasonably reject it.Dy.CIT vs. Rohini Builders (2002): The identity and genuineness of creditors and actual receipt of money must be established; if satisfied, the credit should be assessed in creditors' hands.Nemi Chand Kothari (HC): The assessee is only required to prove facts within his knowledge; he cannot be required to prove third-party affairs.Court's interpretation and reasoning: The AO treated Rs. 2,15,00,000/- as unexplained cash credit, alleging the loans were bogus, relying primarily on statements of third-party entry operators recorded during search and seizure under section 132. However, the AO did not independently verify the genuineness of the loans with the loan creditors themselves.The CIT(A) remanded the matter for verification of repayment and genuineness of the loans. The remand report revealed:Loan creditors Unity Prodev Ventures Pvt Ltd. and Incredible Nirman Pvt. Ltd. had confirmed providing unsecured loans.These creditors were regularly assessed to income tax and had disclosed sources of funds.The assessee had repaid the loans with interest, supported by ledger copies and bank statements.The AO's suspicion that repayment was made post-search to avoid tax net was deemed an observation without concrete evidence.Key evidence and findings: Confirmation letters from creditors, bank statements, ledger accounts, and remand report verifying repayments.Application of law to facts: The assessee discharged its onus by establishing the identity of creditors, genuineness of transactions, and actual receipt and repayment of loans. The AO's reliance on third-party statements without direct inquiry was insufficient to classify loans as bogus.Treatment of competing arguments: Revenue argued the loans were fabricated and interest disallowance justified; assessee contended AO failed to provide opportunity for cross-examination and relied on unverified statements. The Tribunal sided with the assessee, emphasizing established principles that an assessee cannot be compelled to prove third-party affairs beyond his knowledge.Conclusions: The addition under section 68 was not justified; loans were genuine and properly accounted for.Issue 2: Disallowance of Interest Expenses Related to the LoansRelevant legal framework and precedents: Interest expenses are allowable deductions if the principal loan is genuine and used for business purposes. Disallowance is warranted if the loan is bogus or money is not utilized for business.Court's interpretation and reasoning: Since the loans were held genuine, the interest disallowance was also unwarranted. The CIT(A) allowed the interest expenses on the same ground that the loans were not bogus. The Tribunal upheld this view, confirming the CIT(A)'s order.Key evidence and findings: Repayment of loans with interest, bank statements, and creditor confirmations.Application of law to facts: Genuine loans with proper documentation and repayment entitle the assessee to claim interest expenses as allowable deductions.Treatment of competing arguments: Revenue challenged the deletion of interest disallowance; assessee supported allowance based on genuineness of loans. The Tribunal agreed with the latter.Conclusions: Interest expenses disallowance was rightly deleted.Issue 3: Burden of Proof and Procedural FairnessRelevant legal framework and precedents: The burden to prove unexplained credits lies on the assessee. However, the AO must conduct proper inquiries and provide opportunity for cross-examination if adverse statements are relied upon.Court's interpretation and reasoning: The AO relied on statements recorded by the Investigation Wing without independent verification or affording the assessee an opportunity to cross-examine. The Tribunal held this approach improper and emphasized that mere suspicion or observation without evidence is insufficient.Key evidence and findings: Lack of inquiry with loan creditors by AO, absence of cross-examination opportunity.Application of law to facts: The procedural lapses and failure to independently verify the loans undermined AO's case.Treatment of competing arguments: Revenue relied on investigation statements; assessee highlighted procedural deficiencies. Tribunal sided with assessee emphasizing principles of natural justice and evidentiary requirements.Conclusions: AO's approach was flawed; assessee's explanation accepted.3. SIGNIFICANT HOLDINGSThe Tribunal held:'The AO's observation in the remand report that 'Now it may be noted that the assessee company has made repayment of loan to every loan creditor after the date of search operation i.e. after 26.11.2015... it made the repayment of loan to avoid tax net' is just an observation without any proper evidence.''A person can be required to prove only such facts which are in his knowledge. Once it is found that an assessee has actually taken money from depositor/lender who has been fully identified, the assessee/borrower cannot be called upon to explain, much less prove the affairs of such third party, which he is not even supposed to know or about which he cannot be held to be accredited with any knowledge.'Core principles established:The genuineness of loans must be established by the assessee through credible evidence such as creditor confirmation, bank statements, and ledger accounts.The AO must conduct independent inquiries and cannot rely solely on third-party statements recorded during search without opportunity for cross-examination.Repayment of loans with interest, supported by documentary evidence, negates the presumption of bogus loans.The burden of proof on unexplained credits is on the assessee, but only to the extent of facts within his knowledge.Final determinations on each issue:The addition of Rs. 2,15,00,000/- as unexplained cash credit under section 68 was deleted.The disallowance of interest expenses related to these loans was reversed.The appeals filed by the revenue were dismissed.