2025 (6) TMI 1134 - AT - Income Tax

Assessee's appeal allowed for statistical purposes on unsecured loans addition under section 68 remanded for fresh consideration

Urmila Kishan Versus DCIT, Circle-1 (1), Bhubaneswar

ITAT Cuttack allowed the assessee's appeal for statistical purposes regarding addition of unsecured loans under section 68. The tribunal found that the AO ... Addition of Unsecured Loans u/s 68 - HELD THAT:- The assessee has stated that the accounts are audited but the same had not been considered by the Ld. AO. It is further stated that there is evidence for the loans received from the relatives. Before the Ld. AO proper compliance could not be made and before the Ld. CIT(A) also the assessee was not represented properly. Since the CIT(A) has not decided the merits of the case, therefore, we deem it appropriate in the interest of justice and fair play that another opportunity needs to be provided to the assessee to represent his case properly before the Ld. CIT(A). We, therefore, set aside the orders of the Ld. CIT(A) and remand the matter to the Ld. CIT(A) to be decided afresh after considering the documents filed viz. the audit reports and other evidence in support of the reliefs. Appeal filed by the assessee is allowed for statistical purposes. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:- Whether the addition of Rs. 73,48,000/- as unexplained cash credit under section 68 of the Income Tax Act, 1961, relating to unsecured loans received by the assessee, was justified.- Whether the Assessing Officer (AO) erred in treating the loan from Ashadeep Homes Pvt Ltd as unexplained income despite lack of evidence of such a transaction.- Whether the AO failed to consider documentary evidence such as PAN cards, ITR copies, bank statements, and third-party confirmations submitted by the assessee to establish the genuineness and creditworthiness of the loans.- Whether the invocation of section 115BBE of the Act for taxing the unexplained income at a higher rate was appropriate in the facts of the case.- Whether unsecured loans used in the business can be treated as income for tax purposes.- Whether penalty proceedings initiated under section 271AAC were justified given the nature of the additions.- Whether the delay in filing the appeal before the Tribunal should be condoned.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Legitimacy of Addition of Unsecured Loans under Section 68Legal Framework and Precedents: Section 68 of the Income Tax Act provides that if any sum is credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of the sum, it may be charged to income tax as income of that year. The burden lies on the assessee to prove the identity, genuineness, and creditworthiness of the lender and the genuineness of the transaction. Judicial precedents such as the decision in Bansal Separators and Spares Pvt Ltd vs ITO emphasize the requirement for AO to consider documentary evidence and not base additions on conjectures.Court's Interpretation and Reasoning: The Tribunal noted that the assessee had submitted various documents including PAN cards of lenders, copies of their Income Tax Returns, bank statements evidencing receipt and repayment of loans, and third-party confirmations. The loans were received through banking channels from relatives and friends, which is common practice in the petrol pump business where large sums are required for advance payments to IOCL.Key Evidence and Findings: The assessee's turnover was Rs. 33.43 crore, with unsecured loans totaling Rs. 43.70 lakh. Repayments were made through banking channels, and the assessee provided audited financial statements and tax audit reports (Forms 3CB & 3CD). The AO, however, disregarded these submissions and treated the entire amount as unexplained cash credit.Application of Law to Facts: The Tribunal observed that the AO failed to appreciate the documentary evidence and did not provide the assessee an opportunity to be heard adequately. The addition was based on mere conjectures without concrete material. The Tribunal emphasized that loans taken and repaid through banking channels from known persons cannot be treated as unexplained income without valid reasons.Treatment of Competing Arguments: The Department argued that the assessee failed to establish creditworthiness and genuineness. However, the Tribunal found that the assessee had provided sufficient evidence and that the AO's conclusions were arbitrary.Conclusion: The addition under section 68 was unjustified and required reconsideration with proper evaluation of evidence.Issue 2: Treatment of Loan from Ashadeep Homes Pvt LtdLegal Framework: Section 269SS prohibits acceptance of loans or deposits of Rs. 20,000 or more otherwise than by account payee cheque, bank draft, or electronic clearing system. Disclosure in tax audit reports (Forms 3CB & 3CD) under clause 31 is required only for deviations from this mode.Court's Interpretation and Reasoning: The Tribunal noted that no transaction occurred with Ashadeep Homes Pvt Ltd during the relevant year, and no receipt or payment appeared in the assessee's bank accounts. Ashadeep Homes Pvt Ltd was an inactive company with its registration cancelled. The tax auditor erroneously included this loan in Form 3CD, apparently by mistake.Key Evidence and Findings: The assessee voluntarily informed the AO of this error and provided details to prove the non-existence of such a loan. The AO did not consider this explanation nor provide an opportunity to rectify the mistake before making the addition.Application of Law to Facts: Since no such loan existed, and the disclosure was erroneous and void ab initio, the addition on account of this loan was improper.Treatment of Competing Arguments: The Department relied on the tax audit report to justify the addition, but the Tribunal found this reliance misplaced due to the erroneous disclosure.Conclusion: The addition relating to the loan from Ashadeep Homes Pvt Ltd was unwarranted and should be deleted.Issue 3: Non-consideration of Documentary Evidence and Third-Party ConfirmationsLegal Framework: The AO is required to consider all relevant evidence submitted by the assessee, including third-party confirmations and documentary proofs, before making additions.Court's Interpretation and Reasoning: The Tribunal found that the AO did not consider the PAN cards, ITR copies, bank statements, and confirmations submitted by the assessee. Further, the AO did not provide an opportunity to the assessee to prove the genuineness of the loans.Application of Law to Facts: Failure to consider such evidence and to provide an opportunity to the assessee violates principles of natural justice and leads to unjustified additions.Conclusion: The AO's failure to consider evidence and provide hearing was improper and necessitated reconsideration.Issue 4: Incorrect Invocation of Section 115BBELegal Framework: Section 115BBE imposes a higher tax rate on unexplained income or cash credits added under sections 68 to 69D when the assessee fails to satisfactorily explain the nature and source.Court's Interpretation and Reasoning: The Tribunal noted that since the loans were satisfactorily explained with credible evidence, the invocation of section 115BBE was not justified.Application of Law to Facts: Where the assessee provides sufficient documentary proof, section 115BBE cannot be applied arbitrarily.Conclusion: The application of section 115BBE was arbitrary and unsustainable.Issue 5: Treatment of Unsecured Loans as IncomeLegal Framework: Loans are financial liabilities and not income. Accounting standards (GAAP and IFRS) require loans to be recorded as liabilities, not revenue. Income tax laws tax earnings from business operations, not borrowed funds.Court's Interpretation and Reasoning: The Tribunal recognized that unsecured loans taken for business purposes, such as advance payments in the petrol pump business, are not income but liabilities to be repaid.Application of Law to Facts: Treating unsecured loans as income violates fundamental accounting principles and tax law.Conclusion: Unsecured loans cannot be treated as income for taxation.Issue 6: Levy of Penalty under Section 271AACLegal Framework: Penalty under section 271AAC is attracted when there is concealment of income or furnishing inaccurate particulars of income.Court's Interpretation and Reasoning: Since the primary addition under section 68 was arbitrary and without basis, the initiation of penalty proceedings was unjustified.Conclusion: Penalty proceedings should be dropped.Issue 7: Condonation of Delay in Filing AppealLegal Framework: Delay in filing appeals can be condoned if sufficient cause is shown, including ignorance, reliance on consultants, or other reasonable causes.Court's Interpretation and Reasoning: The assessee, an illiterate individual dependent on a tax consultant who failed to inform her of the adverse order, filed an affidavit explaining the delay of 322 days. The Tribunal accepted the explanation as a reasonable and sufficient cause.Conclusion: Delay in filing the appeal was condoned and the appeal admitted for adjudication.3. SIGNIFICANT HOLDINGS- 'Considering the affidavit for condonation of delay and the reasons stated therein, we are satisfied that the assessee had a reasonable and sufficient cause and was prevented from filing the instant appeal within the statutory time limit. We, therefore, condone the delay and admit the appeal for adjudication.'- 'The learned AO should not have treated unsecured Loan as unexplained income under section 68 of the Act and should not have taxed it by applying section 115BBE of the Act because appellant has explained the unsecured loans by providing their PAN card and other details.'- 'The addition was based on mere conjectures and surmises, without bothering to bring any concrete material on record.'- 'There is no such transaction occurred from Ashadeep Homes Pvt Ltd during the FY 2017-18. Neither the amount of receipt nor the amount of payment is appearing in any of the bank accounts of the appellant or the Assessee.'- 'Since the Ld. CIT(A) has not decided the merits of the case, therefore, we deem it appropriate in the interest of justice and fair play that another opportunity needs to be provided to the assessee to represent his case properly before the Ld. CIT(A).'- 'The Ld. AO has not provided sufficient opportunity to the Assessee to prove the above unsecured Loan and pass the adverse order.'- 'Unsecured loan is a debt, not a profit, and must be treated accordingly in accounting and tax records.'- 'The initiation of penalty proceedings under section 271AAC is bad in law and contrary to the facts of the case, as the primary assessment itself is unjustified.'- 'The appeal filed by the assessee is allowed for statistical purposes.'