2025 (8) TMI 50 - AT - Income Tax

ITAT Upholds Loan Repayment Validity Under Section 68, Deletes Interest Disallowance Under Section 69C, Limits Bogus Purchase Additions

DCIT, Central Circle-2 (4), Kolkata Versus M/s Balaji Agro Pvt. Ltd.

The ITAT Kolkata upheld the CIT(A)'s order, dismissing the Revenue's appeal. Additions under s. 68 were rejected as the loan repayment was established ... Addition u/s 68 - AO noted loan was not explained by the assessee and therefore, treated the same as unexplained investment - HELD THAT:- The provisions of Section 68 of the Act cannot be applied where the repayment of loan has been made even in the subsequent year. The case of the assessee also finds support from the decision of Ambe Tradecorp (P.) Ltd. [2022 (7) TMI 902 - GUJARAT HIGH COURT] in which as held that once the repayment of loan has been established based on the documentary evidences then the credit entries cannot be looked in isolation after ignoring the debit entries despite the fact that debit entries were carried out in the later years. Even the case of the assessee is squarely covered in the case of Poddar Realtors [2023 (11) TMI 628 - ITAT KOLKATA] Consequently, we do not find any infirmity in the order of the CIT (A) and accordingly we uphold the order of the ld. CIT (A)by dismissing the appeal of the Revenue. Addition u/s 69C - disallowance of interest paid on unsecured loan - HELD THAT:- CIT (A) deleted the addition after treating the loan as genuine so far as the loan of Everlight Vincom Private Limited. Since, we have affirmed the order of the ld. CIT (A) on this issue, therefore, the interest paid on the said loan is also rightly deleted by the ld. CIT (A). So far as the interest amount paid to Rasili Barter Private Limited is concerned, we note that the ld. CIT (A) has recorded the finding that in A.Y. 2015-16, the assessee has taken the said loan from Rasili Barter Private Limited and AO has not made any reverse finding and no addition as made. Accordingly, we do not find any infirmity in the order of the ld. CIT (A). The ground no.2 is dismissed by upholding the order of the ld. CIT (A) on this issue. Disallowance of 5% on account of bogus purchase - CIT (A) noted that the entire bogus purchases cannot be added to the income of the assessee and it is only the profit element embedded therein can be added - HELD THAT:- CIT (A) noted that in case of bogus purchases, the purchases are normally made from the grey market where the assessee made saves VAT and other incidental expenses and earn more than normal profit and hence, applied 5% on the bogus purchases over and above the profits declared in the books. Accordingly, we don’t find any infirmity in the order of the CIT (A) and accordingly, we affirm the same. Appeal of the Revenue is dismissed. ISSUES: Whether the addition made under Section 68 of the Income-tax Act, 1961 for unexplained loan received can be sustained when the assessee proves identity, creditworthiness, and genuineness of the creditor and repayment of the loan in subsequent years.Whether the disallowance of interest paid on unsecured loans under Section 69C of the Act is justified when the principal loan is held to be genuine.Whether the entire amount of bogus purchases can be added to the income of the assessee or only the profit element embedded therein can be disallowed. RULINGS / HOLDINGS: Section 68 addition for unexplained loan cannot be sustained where the assessee has proved the 'identity, creditworthiness and genuineness of the creditor' by filing necessary evidence, the loan was received through banking channels, repaid subsequently, and interest was paid after tax deducted at source; thus, the addition was rightly deleted.The disallowance of interest paid under Section 69C is not justified when the principal loan is held genuine, and the interest payment is supported by evidence; hence, the deletion of interest disallowance was upheld.In cases of bogus purchases, the entire purchase amount cannot be added to income; only the 'profit element embedded in the said purchases' can be disallowed, and a reasonable disallowance of 5% on the bogus purchases was correctly applied. RATIONALE: The Court applied the provisions of Section 68 of the Income-tax Act, 1961, which treats unexplained cash credits as income unless the assessee proves the identity, genuineness, and creditworthiness of the lender. The Court relied on the principle that 'once the repayment of loan has been established based on the documentary evidences then the credit entries cannot be looked in isolation after ignoring the debit entries,' following precedent from the jurisdictional High Court and coordinate benches.Regarding interest disallowance under Section 69C, the Court reasoned that since the principal loan was accepted as genuine and the interest payments were substantiated, the disallowance of interest was unwarranted.For bogus purchases, the Court referred to established coordinate bench decisions holding that when bogus bills are used for purchases, the assessee gains by saving VAT and other expenses, thereby earning excess profits. Therefore, only the profit element (reasonably quantified at 5%) embedded in such purchases should be disallowed, not the entire purchase amount, especially when bills and vouchers are produced and the goods are consumed in manufacturing.