2025 (6) TMI 300 - AT - Income Tax

AO cannot add unexplained cash credits under Section 68 after accepting creditor identity and genuineness through Section 133(6) notices

ITAT Ahmedabad held that no addition under Section 68 could be made for unexplained cash credits when the AO, in his remand report after issuing notices ... Unexplained loan u/s.69A - genuineness of the transaction, identity and creditworthiness of the lenders not proved - HELD THAT:- As during appellate proceedings the additional documents filed by the assessee were sent to the AO calling for a remand report, thereby the AO issued notice u/s.133(6). When the Ld. AO accepted the identity, creditworthiness and genuineness of the loan creditors in his Remand Report, after issuing notices u/s.133(6) of the Act and replies from the parties, there cannot be any addition u/s.68 of the Act. Thus, we do not find any merit in the grounds raised by the Revenue. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:(a) Whether the addition of Rs. 1,12,13,500/- made by the Assessing Officer (AO) under Section 69A of the Income Tax Act, 1961, on account of unsecured loans received by the assessee, was justified.(b) Whether the assessee discharged the onus cast upon it to establish the genuineness, identity, and creditworthiness of the lenders from whom the unsecured loans were received.(c) Whether the AO and the Commissioner of Income Tax (Appeals) (CIT(A)) correctly applied the legal principles regarding unexplained money and unexplained cash credits under Sections 69A and 68 respectively.(d) Whether the CIT(A) erred in law and on facts in deleting the addition despite certain lenders having low declared incomes and insufficient evidence of source of funds.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Justification of Addition Under Section 69A on Account of Unsecured LoansLegal Framework and Precedents: Section 69A of the Income Tax Act deals with unexplained money credited in the books of account or in the bank account of the assessee. The burden lies on the assessee to prove the identity, genuineness, and creditworthiness of the lender to avoid addition. Section 133(6) empowers the AO to summon any person to produce evidence or documents relevant to the inquiry. The AO's findings on identity and creditworthiness are critical, supported by documentary evidence and confirmations from lenders.Court's Interpretation and Reasoning: The AO initially made the addition as the assessee failed to furnish details of all creditors and their creditworthiness. However, during appellate proceedings, the assessee filed additional evidence, leading to issuance of notices under Section 133(6) to all 11 lenders. The AO's remand report accepted the genuineness of loan transactions, identity, and creditworthiness of lenders based on confirmations, PAN details, affidavits, tax returns, and bank statements. The AO acknowledged that the loans were given through banking channels, which substantiated the genuineness of transactions.Key Evidence and Findings: The AO observed that none of the lenders denied the loan transactions, all responded to notices with documentary evidence, and nine out of eleven lenders were assessed to tax. The two lenders without tax returns submitted affidavits, which the AO did not find adverse. The loans were supported by account payee cheques and bank statements, confirming the flow of funds.Application of Law to Facts: The AO's acceptance of identity, genuineness, and creditworthiness negated the basis for addition under Section 69A. The CIT(A) relied on this remand report and deleted the addition, holding that the assessee successfully discharged the onus.Treatment of Competing Arguments: The Revenue challenged the deletion, pointing to inadequate proof of creditworthiness, especially for lenders with meager incomes and incomplete financial documentation. However, the Tribunal noted that the Revenue did not dispute the AO's remand report findings or the enquiry process. The Tribunal emphasized that the AO's acceptance after due process and evidence was binding unless rebutted by cogent evidence.Conclusion: The addition under Section 69A was not justified as the assessee established the identity, genuineness, and creditworthiness of the lenders, supported by the AO's remand report and documentary evidence.Issue 2: Burden of Proof on Creditworthiness of Lenders with Low Declared Income or Incomplete DocumentationLegal Framework and Precedents: The assessee must prove creditworthiness to demonstrate that the lenders had the capacity to advance loans. This is generally done by furnishing income tax returns, bank statements, and other financial documents. Mere low income or partial documents may raise suspicion but are not conclusive without adverse evidence.Court's Interpretation and Reasoning: The Revenue raised specific objections regarding certain lenders who declared low incomes or failed to submit complete financial documents. However, the AO's remand report found that except for two lenders (Prakash Brothers and Shreenathji Textile), all others were assessed to tax. For these two, the AO acknowledged the absence of ITRs but noted that loans were given by account payee cheques and affidavits were submitted. The AO did not find adverse evidence to reject their creditworthiness.Key Evidence and Findings: The AO's enquiry included issuance of notices under Section 133(6), receipt of confirmations, PAN details, affidavits, and bank statements. The AO found no factual discrepancy or denial of loans by lenders, and the transactions were routed through banking channels, enhancing credibility.Application of Law to Facts: The Tribunal held that the mere fact of low income or partial documentation does not automatically lead to rejection of creditworthiness if there is no adverse or contradictory evidence. The affidavits and banking transactions sufficiently supported the genuineness of loans.Treatment of Competing Arguments: The Revenue argued that the lack of full documentation and low income should lead to additions. The Tribunal rejected this, emphasizing that the AO's findings after thorough enquiry and the absence of adverse evidence outweighed Revenue's contentions.Conclusion: The assessee sufficiently discharged the burden of proving creditworthiness, and the objections regarding low income or incomplete documents were not sufficient to sustain additions.Issue 3: Applicability and Distinction Between Sections 69A and 68Legal Framework and Precedents: Section 69A applies to unexplained money credited in bank accounts or books, while Section 68 deals with unexplained cash credits. The correct classification impacts the nature of addition and its legal implications.Court's Interpretation and Reasoning: The AO inadvertently mentioned both sections in the assessment order but clarified that the addition was made under Section 69A, as the amount was credited in the bank account. The AO's note stated that if the assessee later claimed the amount as unsecured loans in books, the addition would be treated under Section 68. The Tribunal treated this as a typographical error without serious ramifications.Key Evidence and Findings: The AO's remand report and assessment order clearly indicated the addition was under Section 69A, supported by the fact that the transactions were through banking channels.Application of Law to Facts: The Tribunal held that the addition was rightly made under Section 69A and the typographical reference to Section 68 did not affect the validity of the addition or the appellate proceedings.Treatment of Competing Arguments: The Revenue did not contest this point substantively, and the Tribunal treated the error as inadvertent and bonafide.Conclusion: The addition was correctly made under Section 69A; the typographical mistake referencing Section 68 was immaterial.3. SIGNIFICANT HOLDINGSThe Tribunal held:'All the parties have confirmed the loan transactions vide their Confirmation of Ledger Account and there is no factual discrepancy in the claim of the assessee vis-`a-vis confirmation filed by the lenders. So, it can be said that genuineness of the loan transaction stand proved.''Identity is proved in all the unsecured loan parties because not only notices issued u/s 133(6) of the Act has been duly served but they have duly responded to the notice by submitting the necessary documentary evidences. These parties have also filed copies of PAN/Affidavit to prove their existence. Hence, it can be said that 'identity' aspect is satisfactorily proved by the assessee.''As far as creditworthiness of the lenders is concerned, except Prakash Brothers and Shreenathji Textile, all other unsecured lenders are assessed to tax. There is no adverse evidence available to reject the claim of the assessee in respect of credit worthiness of all the loan parties except Prakash Brothers and Shreenathji Textile.''The Impugned addition may be considered u/s.69A of the Act. This fact is substantiated by the concluding words of the AO in the para no.12 of the Assessment Order in which it is mentioned as 'Accordingly the amount of Rs. 1,12,13,500/- is added to the income of the assessee as unexplained money u/s.69A of the Act. However, at any later stage / appellate proceedings, if the assessee produces any books of accounts and claimed that the amount was credited in its books as unsecured loans, this addition will be treated as unexplained cash credit u/s 68 of the IT Act as the assessee has failed to explain the unsecured loans.' Hence, the mistake is only a typographical mistake and hence, the same may kindly be ignored.'Final determinations:- The addition under Section 69A was rightly deleted as the assessee proved the genuineness, identity, and creditworthiness of the lenders.- The objections regarding low declared income or incomplete documentation of certain lenders were insufficient to sustain additions in the absence of adverse evidence.- The typographical reference to Section 68 in the assessment order did not affect the validity of the addition under Section 69A.- The appeal filed by the Revenue was dismissed.