2025 (7) TMI 1220 - AT - Income Tax

Section 68 addition upheld for Rs. 75 lakh unexplained cash deposits due to unproven lender creditworthiness and transaction genuineness

The ITAT Chandigarh upheld additions under Section 68 for unexplained cash deposits of Rs. 75 lakhs. The assessee received funds from a lender who ... Addition u/s 68 - Cash deposits in bank account - creditworthiness of the lender not proved - bank account was reopened without following KYC norms and without obtaining any evidence of address / age / details of spouse etc. of depositor but merely with the endorsement of Sarpanch - assessee contended that it was not required to explain the source of the source since the amendment to Sec.68 was with effect from 01-04-2013 - HELD THAT:- It transpired that lender/Smt. Surjeet Kaur deposited cash of Rs.75 Lacs in her bank account and transferred the same to the assessee on same day. The funds were, in turn, were transferred by the assessee to another concern. In FY 2013-14, the loan was converted into share capital and the lender became shareholder in assessee-company. The investigation revealed that the bank account was reopened without following KYC norms. Smt. Surjeet Kaur was not a resident in India. The bank account of the lender was opened on 21-11-2011 and closed on 22-10-2013 by banking authorities due to non-maintenance of the account. The account was opened without proper KYC. The assessee did not carry out any business activity during the year. To establish fulfillment of conditions of Sec.68, the assessee merely stated that the lender and the directors of the assessee-entity were from native village and the families were known to each other. The assessee could not file even the address and PAN of the lender despite that fact that the lender became shareholder of the assessee-entity in FY 2013-14. The cash was deposited in the bank account and the same was transferred on the same very day which is evident from the bank statement of the lender as placed on record. The lender was not residing in India for more than 50 years and she had no source of income except for sale proceeds of agricultural land for Rs.59.99 Lacs. Nothing was brought on record to establish that the funds were deposited out of sale of agricultural land and then transferred to the assessee-entity. On these facts, the adjudication of lower authorities could not be faulted with on merits. AR has urged that source of source is not required to be proved. However, in this year, the assessee has failed to prove the first source of unsecured loans. Considering the facts of the case, we would hold that the assessee failed to prove the creditworthiness of the lender as well as the genuineness of the transaction. Reassessment jurisdiction - As we find that the case was reopened pursuant to receipt of tangible material in the shape of information from DDIT (inv.) which prima facie revealed escapement of income in the hands of the assessee. In our considered opinion, at the stage of reopening, conclusive case of escapement of income was not required to be made out but only prima facie reasons to believe that income escaped assessment was to be formed by Ld. AO and nothing more was required at this stage. The case has been reopened as per due process of law after obtaining requisite approval of higher authorities. ISSUES: Whether the addition of Rs. 75 Lacs under Section 68 for an unsecured loan was justified in absence of fulfillment of conditions regarding genuineness and creditworthiness of the lender.Whether the assessee was required to prove the 'source of the source' of the unsecured loan for the Assessment Year 2012-13.Whether the reopening of assessment under Section 147 read with Section 148 was valid and in accordance with law, based on the reasons recorded and information received.Whether the Assessing Officer was required to establish conclusive escapement of income at the stage of reopening the assessment. RULINGS / HOLDINGS: The addition of Rs. 75 Lacs under Section 68 was upheld as the assessee 'failed to prove the creditworthiness of the lender as well as the genuineness of the transaction,' and did not fulfill the conditions of Section 68.The Court held that the amendment requiring explanation of the 'source of the source' of loans was not applicable for unsecured loans for the relevant Assessment Year, but the assessee still failed to prove the genuineness of the loan on merits.The reopening of the assessment was held valid since the Assessing Officer had 'formed a reasonable belief' based on tangible information from DDIT (Inv.), and 'was not expected to conclude the issue finally or ascertain the fact by evidence or conclusion' at the reopening stage.It was held that at the stage of reopening, 'reason to believe and not established fact of escapement of income' is required, and the Assessing Officer complied with due process including obtaining requisite approval and providing opportunities of hearing. RATIONALE: The Court applied the statutory provisions of Section 68 of the Income Tax Act regarding unexplained cash credits and the procedural safeguards under Sections 147 and 148 for reopening assessments.The Court relied on precedent that at the reopening stage, the Assessing Officer need only have 'reason to believe' and not conclusive proof of escapement of income, citing decisions such as Rajesh Jhaveri Sock Brokers Pvt. Ltd. and Raymond Woollen Mills Ltd.The Court emphasized the failure of the assessee to provide basic KYC details, PAN, address of the lender, and any evidence linking the funds to a legitimate source, despite the lender becoming a shareholder.No unique doctrinal shift or dissent was noted; the Court affirmed established principles concerning reopening jurisdiction and evidentiary requirements under Section 68.