ITAT upholds deletion of Section 68 additions on unsecured loans, rejecting Revenue's claim of accommodation entries

ITAT Mumbai upheld the CIT(A)'s deletion of additions under section 68 relating to unsecured loans, rejecting the Revenue's claim of accommodation entries within the group. The tribunal found the CIT(A)'s detailed examination and reasoning sound and noted precedent where similar transactions were accepted by a coordinate bench. The appeal by the assessee was allowed.

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ISSUES:

Whether addition under section 68 of the Income-tax Act for unsecured loans received can be sustained where the assessee claims genuineness and creditworthiness of the lender company.Whether statements recorded during search proceedings, which are subsequently retracted, can form the basis for addition under section 68.Whether the Assessing Officer was justified in treating the loan as unexplained cash credit based solely on oral statements without corroborative material.Whether interest paid on the loan can be disallowed if the loan transaction itself is held genuine.Whether notice issued under section 153A of the Act is valid in the absence of incriminating material found during search.

RULINGS / HOLDINGS:

The addition of Rs. 6,93,00,000/- under section 68 was deleted as the assessee discharged the onus by proving the "identity, genuineness and creditworthiness" of the lender company through documentary evidence including RBI compliances, merger approvals, audited financials, and assessment orders of related entities.Statements recorded during search proceedings, which were subsequently retracted and affirmed as retracted before the Assessing Officer, cannot be solely relied upon for making additions under section 68, especially in absence of corroborative evidence.The Assessing Officer's reliance on oral statements without material evidence was held improper, following CBDT instructions and judicial precedents emphasizing that additions cannot be sustained merely on oral confessions devoid of evidentiary support.Interest paid on the loan was allowed as the underlying loan transaction was held genuine.The issue regarding validity of notice under section 153A was rendered academic due to dismissal of substantive appeal on merits and thus was not adjudicated.

RATIONALE:

The Court applied the legal framework of section 68 of the Income-tax Act, which is a "deeming fiction dealing with the burden of proof" placing initial onus on the assessee to prove the genuineness of the transaction and creditworthiness of the lender. Once discharged, the onus shifts to the Assessing Officer to disprove or bring new evidence.The Court relied on CBDT Instruction F.No.286/98/2013-IT (INV.II) dated 18/12/2014 and Ministry of Finance letters emphasizing that search proceedings must focus on evidence collection rather than mere oral admissions, and that additions cannot be made solely on oral confessions.Judicial precedents were followed where retracted statements recorded under coercion were held inadmissible for sustaining additions under section 68.The Court noted that the lender company was a registered NBFC with substantial net worth and turnover, merged with multiple companies with approved schemes by the High Court, and had complied with statutory requirements, thereby substantiating its creditworthiness.Coordinate Bench decisions on similar facts were relied upon to uphold the deletion of addition and acceptance of genuineness of loan transactions with the same lender company.The Court did not adjudicate on the validity of notice under section 153A as the substantive issue was decided on merits, rendering the legal challenge academic.

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