2025 (8) TMI 906 - AT - Income Tax

Unexplained cash credits under Section 68 upheld as unsecured loans after ledger, audit, bank, ITR and sale bill evidence

ITO, Ward 4 (1), Jaipur Versus Pooja Kedia, Jaipur

ITO, Ward 4 (1), Jaipur Versus Pooja Kedia, Jaipur - TMI 1. ISSUES PRESENTED and CONSIDERED 1. Whether the deletion of addition of Rs. 80,00,124/- made on account of unexplained cash credits under section 68 of the Income Tax Act, 1961 is justified. 2. Whether the assessee was involved in taking accommodation entries amounting to Rs. 80,00,124/- in the nature of bogus unsecured loans or other forms during the relevant financial year, connected with companies identified as shell companies during search proceedings. 3. Whether the reopening of assessment under section 147 r.w.s 144B and related procedural compliances including issuance of notices and opportunity of hearing were valid and in accordance with law. 4. Whether the Assessing Officer (AO) violated principles of natural justice by not providing the assessee opportunity to cross-examine key witnesses and by not furnishing relevant materials relied upon for additions. 5. Whether the identity, creditworthiness, and genuineness of transactions with the companies involved were established by the assessee to discharge the burden under section 68. 6. Whether reliance solely on statements of third parties, especially when such statements were retracted, is sufficient for making additions under section 68. 7. Whether the AO exercised independent application of mind in reopening and framing the reassessment order. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Validity of Addition under Section 68 on Account of Unexplained Cash Credits and Alleged Accommodation Entries - Legal Framework and Precedents: Section 68 of the Income Tax Act presumes unexplained cash credits as income unless the assessee satisfactorily proves the identity, creditworthiness, and genuineness of the transaction. Judicial precedents emphasize that the burden lies initially on the assessee to prove these three ingredients, failing which the addition is justified. - Court's Interpretation and Reasoning: The AO relied on information from the Investigation Wing concerning the Banka Group's shell companies and statements of the key person controlling these companies, alleging accommodation entries in the form of bogus unsecured loans. However, the assessee produced comprehensive documentary evidence including audited financial statements, bank statements, ledger accounts, invoices of share sales, and MCA website data confirming the companies' active status and compliance with statutory requirements. The CIT(A) analyzed the financial capacity of the companies, noting sufficient funds and genuine business activities beyond the alleged transactions. The AO's reliance solely on the statement of the key person, which was subsequently retracted, was found insufficient to disprove the genuineness of the transactions. - Key Evidence and Findings: 1. Sale of equity shares by the assessee to the two companies at face value, supported by invoices and banking channel payments. 2. The companies' audited accounts, tax returns, and MCA filings establishing their existence and financial capacity. 3. Retraction affidavits filed by the key person whose statements formed the basis of the AO's case. 4. Absence of any independent inquiry or material brought on record by the AO to contradict the assessee's evidence. - Application of Law to Facts: Given the evidence, the assessee discharged the initial burden under section 68. The AO failed to establish the contrary by independent verification or material beyond the retracted statements. The CIT(A) held that the addition was not sustainable. - Treatment of Competing Arguments: The revenue contended that the companies were shell entities involved in accommodation entries and that the statements of the key person were reliable. The court noted that such statements were retracted and that the AO did not provide opportunity for cross-examination, violating natural justice. The revenue's reliance on search materials without furnishing them to the assessee was also criticized. - Conclusions: The addition under section 68 on account of unexplained cash credits amounting to Rs. 80,00,124/- was deleted as the assessee proved identity, creditworthiness, and genuineness of the transactions. The companies were not shell companies as per the evidence. The AO's reliance on retracted statements without independent corroboration was inadequate. Issue 3 & 7: Validity of Reopening of Assessment and Independent Application of Mind by AO - Legal Framework and Precedents: Section 147 and 148 require the AO to form a bona fide belief, based on tangible material, that income chargeable to tax has escaped assessment. The reasons to believe must be recorded, and the AO must exercise independent application of mind rather than relying on borrowed satisfaction. - Court's Interpretation and Reasoning: The reopening was based on information from the Investigation Wing alleging bogus unsecured loans. However, the assessee clarified the nature of transactions as share sales. The AO did not conduct independent verification or inquiry and proceeded with addition on the basis of third-party statements. The CIT(A) and the Tribunal noted that the AO's reasons recorded for reopening did not match the final addition made, constituting impermissible expansion of scope. The AO failed to apply independent mind and relied on information without verifying or confronting the assessee's evidence. - Key Evidence and Findings: 1. Show cause notices and reasons recorded indicated escapement of income due to bogus unsecured loans. 2. The AO's final order made additions under section 68 for unexplained cash credits, inconsistent with the reasons recorded. 3. The AO did not provide the assessee with relevant materials or statements forming the basis of the reopening. - Application of Law to Facts: The reopening was quashed for lack of independent application of mind and deviation from reasons recorded. The AO's approach amounted to borrowed satisfaction, which is impermissible. - Treatment of Competing Arguments: The revenue argued sufficiency of information and compliance with procedural requirements. The court emphasized the necessity of independent inquiry and matching the scope of reassessment to reasons recorded. - Conclusions: The reassessment proceedings were held invalid due to non-application of independent mind by the AO and impermissible deviation from reasons recorded. The reopening was not sustainable in law. Issue 4: Violation of Principles of Natural Justice - Denial of Opportunity to Cross-Examine Witnesses and Non-Disclosure of Material - Legal Framework and Precedents: Principles of natural justice require that when the AO relies on statements of third parties, the assessee must be given an opportunity to cross-examine such witnesses. Non-disclosure of material relied upon and denial of cross-examination vitiate the assessment. - Court's Interpretation and Reasoning: The AO relied heavily on statements of the key person controlling the shell companies, without providing copies of such statements or other relevant materials to the assessee. No opportunity was granted to cross-examine the witness. The statements were subsequently retracted by the witness. Judicial precedents from various High Courts and the Supreme Court were cited, emphasizing that additions based solely on third-party statements without cross-examination violate natural justice and are liable to be quashed. - Key Evidence and Findings: 1. Statements of Shri Mukesh Banka recorded under sections 131/132(4) of the Act. 2. Retraction affidavits filed by Shri Mukesh Banka. 3. Absence of any summons or cross-examination opportunity granted to the assessee. - Application of Law to Facts: The AO's failure to provide relevant materials and opportunity for cross-examination constituted violation of natural justice. The addition based on such statements was unsustainable. - Treatment of Competing Arguments: The revenue contended that the statements and search materials were sufficient. The court held that reliance on such materials without affording the assessee a chance to rebut or cross-examine is impermissible. - Conclusions: The assessment order was vitiated by denial of natural justice. The addition based on third-party statements without cross-examination was quashed. Issue 5 & 6: Burden of Proof under Section 68 and Reliance on Retracted Statements - Legal Framework and Precedents: Section 68 places the initial burden on the assessee to prove identity, creditworthiness, and genuineness of transactions. Statements of third parties, especially if retracted, cannot be solely relied upon without independent and cogent corroborative evidence. - Court's Interpretation and Reasoning: The assessee furnished extensive documentary evidence including bank statements, audited accounts, ledger copies, invoices, and MCA records. The companies involved were active and compliant with statutory requirements. The AO relied on statements of the key person which were retracted by him through affidavits. Judicial authorities have held that retracted statements require independent corroboration before being relied upon. - Key Evidence and Findings: 1. Documentary evidence proving the transactions and financial capacity of the companies. 2. Retraction affidavits filed by the key person whose statements were the basis of the AO's case. 3. No independent inquiry or evidence to corroborate the statements. - Application of Law to Facts: The assessee discharged the burden under section 68. The AO failed to prove otherwise with independent evidence. The retracted statements could not be the sole basis for addition. - Treatment of Competing Arguments: The revenue's reliance on retracted statements was rejected due to lack of corroboration. The court emphasized the need for independent evidence. - Conclusions: The addition under section 68 was not sustainable as the assessee proved the three ingredients and the AO failed to produce independent evidence beyond retracted statements.