2025 (6) TMI 1462 - AT - Income Tax

Assessee wins appeal as additional evidence under Rule 46A(3) ignored in Section 68 unsecured loan assessment

Trilok Chand Jaiswal Versus The Income Tax Officer, Ward-2 (1), Bilaspur (C.G.)

Trilok Chand Jaiswal Versus The Income Tax Officer, Ward-2 (1), Bilaspur (C.G.) - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal revolve around the application of Section 68 of the Income Tax Act, 1961, which pertains to unexplained cash credits. Specifically, the issues are:Whether the assessee satisfactorily established the identity, creditworthiness, and genuineness of the unsecured loans received from various lenders during the relevant financial year.Whether the Assessing Officer's (A.O.) addition of unexplained cash credit under Section 68 and consequent taxation under Section 115BBE was justified.Whether the appellate authority correctly appreciated the evidence and legal principles in upholding the addition.Whether the appellate authority erred in not considering additional evidence filed by the assessee in the form of balance sheets and financial details of the lenders as per Rule 46A(3) of the Income Tax Rules.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Establishing Identity, Creditworthiness, and Genuineness of Loan Transactions under Section 68Relevant Legal 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 such sum, it may be treated as the income of the assessee. The Supreme Court in CIT v. P. Mohanakala [2007] 291 ITR 278 has held that if the explanation offered by the assessee is not satisfactory, it constitutes prima facie evidence against the assessee, and the burden shifts to the assessee to rebut this presumption.Court's Interpretation and Reasoning: The Assessing Officer accepted the identity of the lenders, as they had acknowledged the loans and documentary evidence was on record. However, the A.O. found the creditworthiness and genuineness of the transactions doubtful. The A.O. noted that the lenders had very low income as per their returns, which was not commensurate with the amounts of loans given. Further, just before the loans were advanced, equivalent cash amounts were deposited into the lenders' bank accounts, which had meagre balances before and after the transactions. This pattern indicated that the lenders were mere accommodation entry providers.Key Evidence and Findings: The bank statements and income tax returns of the lenders showed low income levels inconsistent with the loan amounts. The cash deposits into lender accounts on the same day as the loans suggested a circular transaction. The assessee could only provide the balance sheet of one lender (M/s. Girdhar Jaiswal, HUF), which was accepted to the extent of Rs. 7 lakhs. For other lenders, no satisfactory evidence of source of funds or creditworthiness was furnished.Application of Law to Facts: The A.O. applied Section 68 to treat Rs. 30 lakhs as unexplained cash credit, adding it to the assessee's income and taxing it under Section 115BBE. The appellate authority concurred with the A.O.'s findings, emphasizing that the identity of lenders was not in dispute but the creditworthiness and genuineness were not established. The appellate authority relied on the Supreme Court precedent to hold that the unsatisfactory explanation constituted prima facie evidence against the assessee.Treatment of Competing Arguments: The assessee argued that the A.O. did not point out defects in documentary evidence and that the lenders' identity and transactions were genuine. The appellate authority rejected this, noting the lack of financial capacity of lenders, family/business relationships among parties, and the timing of cash deposits as sufficient to conclude the transactions were sham. The assessee also contended that the A.O. exceeded jurisdiction under Section 68, but this was dismissed as the A.O.'s opinion was based on material evidence and facts.Conclusions: The Court upheld that the assessee failed to discharge the onus of proving creditworthiness and genuineness of the loan transactions except for one lender. The unexplained cash credit was rightly added to income under Section 68.Issue 2: Consideration of Additional Evidence Filed by the Assessee under Rule 46A(3)Relevant Legal Framework: Rule 46A(3) of the Income Tax Rules provides for the submission and consideration of additional evidence before the appellate authority. The appellate authority is required to consider such evidence if it is relevant and material to the case.Court's Interpretation and Reasoning: The assessee submitted additional evidence in the form of balance sheets and financial details of the lenders along with Form 35. However, the appellate authority did not consider this evidence or call for a remand report from the A.O. to verify the new documents. This omission was seen as a failure to exercise quasi-judicial duty properly.Key Evidence and Findings: The Form 35 clearly indicated attachments of balance sheets and financials of the lenders. These documents were material to establishing creditworthiness and genuineness of the loans.Application of Law to Facts: The appellate authority's failure to consider the additional evidence and not remanding the matter to the A.O. for verification rendered the appellate order legally untenable. The Court emphasized the need for a speaking order that addresses all relevant evidence and provides a reasoned conclusion.Treatment of Competing Arguments: The Revenue did not dispute the existence of additional evidence but relied on the appellate authority's earlier order. The Court found that procedural fairness and natural justice require consideration of all relevant evidence before deciding the matter.Conclusions: The Court set aside the appellate order and remanded the matter to the appellate authority for de novo adjudication, directing it to consider the additional evidence as per Rule 46A(3), seek a remand report from the A.O., and pass a reasoned order within three months.3. SIGNIFICANT HOLDINGS'Section 68 itself provides that where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as the income of the assessee of the previous year, if the explanation offered by the assessee, about the nature and source of such sums found credited in the books of the assessees, is in the opinion of the Assessing Officer not satisfactory. Such opinion found itself constitutes a prima facie evidence against the assessees, viz., the receipt of money, and if the assessees fail to rebut the said evidence, the same can be used against the assessee by holding that it was a receipt of an income nature.''The Hon'ble Supreme Court in case of CIT v. P. Mohanakala clearly held that in case where explanation offered by the assessee about the nature and source of sums found credited in the books of account is not satisfactory then same would constitute prima-facie evidence against the assessee.''The appellate authority as quasi-judicial body is duty bound to consider all relevant evidence placed on record including additional evidence filed under Rule 46A(3) of the Income Tax Rules. Failure to do so and not calling for remand report from the Assessing Officer renders the order legally untenable and violative of principles of natural justice.'Final determinations:The unexplained cash credit of Rs. 30 lakhs was rightly added to the income of the assessee under Section 68 by the Assessing Officer.The appellate authority's confirmation of the addition was based on proper legal principles but was flawed due to non-consideration of additional evidence.The matter is remanded for fresh adjudication with directions to consider additional evidence and call for a remand report from the Assessing Officer before passing a reasoned order.