Assessee wins appeal as undisclosed turnover from asset sales reconciled and Section 68 burden discharged

ITAT Jaipur allowed the assessee's appeal on two grounds. First, regarding undisclosed turnover, the tribunal found that the difference between turnover declared in income tax returns and GST returns was due to sale of fixed assets, which are treated differently in both systems. The Rs. 5,10,495/- addition was deleted as the difference was properly reconciled through sale of vibrating machine and electric transformers. Second, regarding addition under section 68 for unsecured loans from directors/shareholders, the tribunal held that the assessee had discharged its burden of proof and the revenue failed to bring contrary evidence. The CIT(A)'s confirmation on different grounds without providing opportunity was overturned, with the tribunal noting all loans were repaid.

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Issues Presented and Considered

1. Whether the assessment completed under sections 144/144B of the Income Tax Act, 1961 (the Act) was justified despite the assessee's compliance with notices issued by the Assessing Officer (AO).

2. Whether the addition of Rs. 4,59,890/- on account of difference between turnover declared in Income Tax Return (ITR) and GST returns was justified.

3. Whether the addition of Rs. 10,24,75,690/- under section 68 of the Act, treating unsecured loans as unexplained cash credits, was justified despite the assessee furnishing evidence regarding identity, creditworthiness, and genuineness of the transactions.

4. Whether the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in making and confirming the addition without making adequate enquiries from loan creditors or bringing any adverse material on record.

5. Whether the CIT(A) erred in confirming additions on grounds not raised by the AO and without affording the assessee an opportunity to respond.

Issue-wise Detailed Analysis

1. Validity of Assessment Completion under Sections 144/144B

Legal Framework and Precedents: Section 144 permits the AO to complete assessment to the best of his judgment where the assessee fails to comply with notices or where books of accounts are not reliable. Section 145(3) mandates that before invoking section 144, the AO must reject the books of accounts on grounds of incorrectness or incompleteness.

Court's Reasoning: The assessee complied with all notices issued under sections 142(1) and 143(2), furnishing all required details including ITR, audit reports, ledger accounts, and confirmations. The AO, however, completed the assessment under section 144 without recording any finding rejecting the books of accounts under section 145(3). The Tribunal noted that the AO failed to satisfy the mandatory precondition for invoking section 144.

Application of Law to Facts: Since the AO did not reject the books of accounts or record dissatisfaction with the method of accounting, the completion of assessment under section 144 was held to be legally unsustainable.

Conclusion: The assessment completed under section 144/144B was erroneous and liable to be quashed.

2. Addition of Rs. 4,59,890/- on Account of Turnover Difference

Legal Framework: The AO is empowered to make additions where discrepancies in turnover between ITR and GST returns are unexplained.

Findings and Reasoning: The AO observed a turnover difference of Rs. 4,59,890/- between the ITR and GST returns. The assessee explained that the difference arose due to sales of fixed assets recorded under fixed assets in the balance sheet and not reflected in the profit and loss account. The assessee submitted a reconciliation chart during assessment proceedings.

The CIT(A) upheld the addition, noting absence of reflection of fixed asset sales in the profit and loss account.

Application of Law to Facts: The Tribunal observed that the difference between turnover in GST and ITR is attributable to inclusion of fixed asset sales in GST returns, which are not part of business turnover in ITR. The reconciliation chart demonstrated this fact, and the addition was thus unwarranted.

Conclusion: The addition of Rs. 4,59,890/- was deleted.

3 & 4. Addition of Rs. 10,24,75,690/- under Section 68 on Account of Unsecured Loans

Legal Framework and Precedents: Section 68 casts the burden on the assessee to explain the nature and source of any unexplained cash credits. The assessee must establish the identity, creditworthiness, and genuineness of the lender and the transaction. Jurisprudence mandates that mere suspicion or surmise cannot substitute evidence. Relevant precedents include:

• Commissioner of Income Tax vs. Orissa Corporation (1986): Once the assessee discharges the burden by furnishing names and addresses of creditors known to the Revenue, the addition cannot be sustained without contrary evidence.
• Aravali Trading Co. vs. ITO (2008): Once the existence of creditors is proved, the onus shifts to the Revenue to prove that the source of funds is unaccounted.
• Deputy Commissioner of Income Tax vs. Mahalaxmi TMT Pvt. Ltd. (2021): Furnishing confirmations, ITRs, bank statements, and other documents establishes the identity and genuineness of creditors.
• Principal Commissioner of Income-tax v. Bairagra Builders (P.) Ltd. (2024): Concurrent factual findings in favour of the assessee regarding genuineness of unsecured loans cannot be overturned without substantial evidence.

Court's Interpretation and Reasoning: The AO doubted the genuineness of the unsecured loans based on the following:

• Loans were advanced by 120 creditors, many with low income tax returns (Rs. 3-4 lakhs).
• Bank statements of some creditors showed amounts credited just prior to transferring to the assessee, with negligible other transactions.
• AO issued notices under section 133(6) to eight creditors; replies were received and examined.
• AO concluded these were accommodation entries, i.e., sham transactions.

The CIT(A) confirmed the addition but on different grounds, holding that the assessee failed to specify the purpose of the loans and failed to explain the phenomenal fall in gross profit and net profit ratios during the year under consideration, suggesting tax evasion.

Assessee's Submissions:

• The assessee furnished extensive evidence including confirmations, PAN details, ITRs, bank statements, ledger accounts, and repayment details for all 121 creditors.
• Loans were interest-free and taken for a business purpose, specifically to fund a joint venture project with Nakshatra Corporate Advisors Limited for acquiring stressed assets.
• The assessee executed a "Mandate cum Sourcing Agreement" with Nakshatra Corporate Advisors Limited, which was supported by ledger accounts and agreements.
• The loans were repaid in subsequent years as the acquisition did not materialize.
• The bank accounts of creditors showed multiple transactions, no cash deposits, and transfers through banking channels, establishing creditworthiness and genuineness.
• The AO and CIT(A) relied on suspicion and surmises without bringing concrete evidence to disprove the genuineness.

Application of Law to Facts: The Tribunal noted:

• The assessee discharged its primary burden under section 68 by furnishing all required evidence.
• The AO's sample examination of eight creditors was inadequate to generalize about all 121 creditors.
• The bank accounts showed multiple transactions, indicating financial capacity and genuine dealings.
• No evidence of round-tripping or cash deposits was found; all transactions were through electronic modes.
• The CIT(A) confirmed addition on grounds not raised by AO and without giving opportunity to the assessee to respond, violating principles of natural justice.
• Precedents mandate that suspicion alone cannot justify addition when the assessee furnishes credible evidence.

Conclusion: The addition of Rs. 10,24,75,690/- under section 68 was not sustainable and was deleted. The additional grounds raised by the assessee regarding non-affording of opportunity and reliance on different grounds by CIT(A) were admitted and allowed.

5. Admission of Additional Grounds and Evidence

Legal Framework: The Tribunal has discretion to admit additional grounds and evidence if they arise from the order under appeal and are necessary for proper adjudication, especially where no prejudice is caused to the Revenue.

Court's Reasoning: The additional grounds raised by the assessee arose from the CIT(A)'s order and required admission for justice. The additional evidence, including agreements and ledger accounts, was relevant to establish the business purpose of loans and rebut the CIT(A)'s findings.

Conclusion: The Tribunal admitted the additional grounds and evidence for consideration.

Significant Holdings

"The completion of assessment under section 144 without rejection of books of accounts under section 145(3) is bad in law."

"Suspicion, surmises, and conjectures cannot substitute for evidence to treat unsecured loans as unexplained cash credits under section 68."

"Once the assessee discharges the burden of proving identity, creditworthiness, and genuineness of the creditors by furnishing confirmations, PAN, ITRs, bank statements, and ledger accounts, the addition under section 68 cannot be sustained without contrary evidence."

"The failure of the CIT(A) to afford opportunity to the assessee before confirming additions on new grounds is a violation of principles of natural justice and renders the order liable to be quashed."

"Differences between turnover declared in GST returns and Income Tax Returns explained by sale of fixed assets, supported by reconciliation, cannot be added back as income."

"Repayment of unsecured loans in subsequent years further establishes the genuineness of the transactions."

"The Tribunal has discretion to admit additional grounds and evidence arising out of the order under appeal to ensure justice."

Final Determinations

1. The assessment completed under section 144/144B was quashed for non-compliance with section 145(3).

2. The addition of Rs. 4,59,890/- on account of turnover difference was deleted.

3. The addition of Rs. 10,24,75,690/- under section 68 was deleted as the assessee discharged its burden and the Revenue failed to bring contrary evidence.

4. The additional grounds and evidence filed by the assessee were admitted and allowed.

5. The appeal was allowed in favour of the assessee.

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