2025 (8) TMI 752 - AT - Income Tax

Section 68 additions deleted as assessee proved unsecured loan genuineness and creditworthiness with evidence

ITO, Ward-16 (3) Versus Mansarover Exim Pvt. Ltd., Delhi

ITO, Ward-16 (3) Versus Mansarover Exim Pvt. Ltd., Delhi - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the addition of INR 18,00,10,170/- made under section 68 of the Income Tax Act, 1961, on account of unexplained cash credits representing unsecured loans, is justified where the assessee failed to prove the identity, creditworthiness of the lender, and genuineness of the transactions. 2. Whether the addition of INR 1,05,40,955/- on account of interest expenses paid on the aforesaid unsecured loans is justified. 3. Whether the onus under section 68 to prove identity, creditworthiness, and genuineness of the transaction lies on the assessee, and whether the appellate authority erred in ignoring this principle. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legitimacy of Addition under Section 68 on Unsecured Loan Credits - Legal Framework and Precedents: Section 68 of the Income Tax Act provides that where any sum is credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such credit, the sum may be treated as income. The provisos require the person in whose name the credit is recorded to also provide a satisfactory explanation. The burden of proof initially lies on the assessee to establish identity, genuineness, and creditworthiness of the lender. Relevant precedents emphasize that suspicion alone cannot substitute for evidence and that the assessee's burden is discharged by producing credible documentary evidence. Subsequent burden shifts to the Revenue to disprove genuineness. - Court's Interpretation and Reasoning: The Tribunal examined documentary evidence filed by the assessee including ledger accounts, bank statements of both assessee and lender, audited financial statements, tax audit reports, and income tax returns of the lender. The lender was identified as a proprietor of a consignment sales business with substantial banking transactions and consistent income from commission. The transactions were routed through banking channels, and the loan was partly repaid during the year and fully repaid in subsequent years. The Assessing Officer's suspicion based on the lender's relatively low declared income and non-appearance in person was held insufficient to discredit the transactions without further inquiry or evidence. - Key Evidence and Findings: * Ledger accounts confirming loan receipt and repayment. * Bank statements showing availability of funds in lender's account on dates of loan disbursement. * Audited financial statements and tax returns of lender confirming business activity and income. * Lender's response to summons under section 133(6) of the Act. * Subsequent acceptance of similar transactions in later assessment years. - Application of Law to Facts: The Court applied the principle that only the credits received during the year can be questioned under section 68, not the opening balance. The assessee satisfactorily explained the identity and creditworthiness of the lender and genuineness of the transactions. The AO's failure to conduct further inquiry or produce contradictory evidence rendered the addition unsustainable. - Treatment of Competing Arguments: The Revenue's argument emphasized the lender's non-appearance and low income as grounds to doubt creditworthiness and genuineness. The Tribunal held that non-appearance alone cannot negate the identity or genuineness if documentary evidence is satisfactory. Low income without corroborative evidence cannot justify rejection of the loan's genuineness. The Tribunal also distinguished cases relating to share capital from unsecured loans, noting the latter's repayable nature. - Conclusion: The addition of INR 18,00,10,170/- as unexplained cash credit under section 68 was rightly deleted by the CIT(A) and upheld by the Tribunal. The loan was a genuine transaction supported by adequate evidence. Issue 2: Disallowance of Interest Expenses on Unsecured Loan - Legal Framework and Precedents: Interest paid on a genuine loan is allowable as an expense if the principal loan amount is accepted as genuine. Disallowance of interest is contingent upon disallowance of the principal loan amount as unexplained cash credit under section 68. - Court's Interpretation and Reasoning: Since the principal loan amount was held to be genuine and the addition under section 68 was deleted, the interest paid on such loan cannot be disallowed. The assessee had also deducted tax at source on interest payments and complied with statutory requirements. - Key Evidence and Findings: The assessee produced details of interest booked, tax deducted at source challans, and bank statements evidencing payment of interest. - Application of Law to Facts: The genuineness of the loan being established, the interest expense incurred in respect thereof is allowable. No separate ground was found to disallow interest. - Treatment of Competing Arguments: The Revenue's contention was premised on the disallowance of the principal loan amount. With the principal accepted as genuine, the interest disallowance lacked foundation. - Conclusion: The deletion of interest disallowance by the CIT(A) was affirmed. Issue 3: Onus and Burden of Proof under Section 68 - Legal Framework and Precedents: The initial burden lies on the assessee to explain the nature and source of the credited sum and to prove the identity, genuineness, and creditworthiness of the lender. Once the assessee discharges this burden by producing credible evidence, the burden shifts to the Revenue to disprove the genuineness or creditworthiness. Mere suspicion or non-appearance of lender without corroborative evidence is insufficient to reject the explanation. - Court's Interpretation and Reasoning: The Tribunal emphasized that the Assessing Officer must apply mind objectively and base his opinion on material evidence. The AO's failure to conduct inquiry or produce contrary evidence was noted. The principle of natural justice and audi alteram partem was highlighted, underscoring that adverse conclusions cannot be drawn solely on suspicion or absence of personal appearance. - Key Evidence and Findings: The assessee produced comprehensive documentary evidence and the lender responded to summons under section 133(6). The AO did not rebut the documents or conduct further inquiry. - Application of Law to Facts: The Tribunal held that the assessee discharged the initial onus and the AO failed to discharge the shifted burden. The addition was therefore unsustainable. - Treatment of Competing Arguments: The Revenue's reliance on a recent Supreme Court decision reiterating the onus on the assessee was acknowledged but distinguished on facts as the assessee had discharged the burden. The Tribunal also noted the inapplicability of amendments to section 68 relating to source of source for the assessment year in question. - Conclusion: The onus under section 68 was correctly discharged by the assessee and the CIT(A) rightly deleted the additions. The AO's failure to investigate and produce evidence was fatal to the Revenue's case. Additional Observations: - The Tribunal noted that the loan transactions were routed through banking channels, repaid partly during the year and fully in subsequent years, further supporting genuineness. - The Tribunal distinguished cases involving share capital from unsecured loans, noting the latter's repayable nature and different evidentiary requirements. - The Tribunal relied on several judicial precedents from various High Courts and the Supreme Court emphasizing the requirement of evidence over suspicion and the shifting burden of proof under section 68. - The Tribunal held that the amendment to section 68 requiring explanation of source of funds in the hands of the lender applies only from assessment year 2023-24 onwards and is not applicable to the case at hand. - The Tribunal confirmed that the interest disallowance was rightly deleted as it was connected to the genuine loan. Final Conclusion: The Tribunal upheld the order of the CIT(A) deleting the additions made under section 68 of the Income Tax Act on account of unexplained cash credits representing unsecured loans and interest disallowance. The assessee discharged the initial burden by producing sufficient evidence to establish the identity, genuineness, and creditworthiness of the lender. The AO failed to rebut the evidence or conduct necessary inquiries. Suspicion based on low income of the lender and non-appearance without further evidence was insufficient to sustain the additions. The appeal filed by the Revenue was dismissed.