2025 (8) TMI 1428 - AT - Income Tax

Taxpayer's unsecured loan entries upheld under Section 68; ledger and bank records substantiated, addition deleted

Gopaal Bhagwandas Ahuja Versus ACIT, Circle- 17 (1), Mumbai

Gopaal Bhagwandas Ahuja Versus ACIT, Circle- 17 (1), Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether an addition under Section 68 (unexplained cash credits) can be sustained where the recorded entry in the assessee's books is by way of journal entry reflecting transfer of amount in the name of a related person, and there is no direct cash receipt by the assessee from that related person. 2. Whether the assessee discharged the onus to prove genuineness of the transaction and creditworthiness of the alleged lender where (a) amounts were received from a related company, (b) those amounts were shown in ledgers as shifted to the related individual by journal entry, and (c) bank statements and ledger details for the related company were produced. 3. Whether inconsistencies in the lower authorities' approach (treating the proprietor as escrow in one place but relying on proprietary books to sustain addition in another) and absence of evidence of circular or unaccounted cash trading undermine the validity of the addition under Section 68. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 68 where transaction appears as journal entry and there is no direct cash receipt by the assessee from the alleged lender Legal framework: Section 68 permits addition of unexplained cash credits where the assessee cannot satisfactorily account for sums shown as received from another person; the assessee bears the onus of proving the genuineness of the transaction and creditworthiness of the creditor. Precedent treatment: No specific precedents were cited or applied in the impugned orders or in the Tribunal's reasoning as contained in the record. Interpretation and reasoning: The Tribunal examined documentary material showing (a) actual receipt of money from the related company into the books of the proprietary concern, (b) ledger entries reflecting transfer of that amount by journal entry to the related individual, (c) deed of assignment/MOU and board resolution documenting the commercial arrangement (lease/assignment and escrow arrangement), and (d) bank statement of the related company evidencing payment. The Tribunal found that the entries were not mere fictitious credits; they reflected an escrow arrangement where the assessee (in his personal capacity) acted as a mere custodian for sums payable to the related individual until the transaction with the third party was finalised. The absence of direct cash receipt from the alleged individual lender to the assessee did not automatically attract Section 68 where the chain of transactions from the paying company to the ledger entries was substantiated. Ratio vs. Obiter: Ratio - where sums are traceable to payments by a third party and are properly reflected in books with supporting bank evidence and contractual documentation indicating fiduciary/escrow role, Section 68 cannot be invoked merely because the ledger shows a journal transfer and no separate cash receipt from the named creditor. Conclusion: The Tribunal held that Section 68 was not attracted on the ground that the amounts were adequately explained as receipts from the related company held in escrow and shifted by journal entry; the addition was therefore not sustainable on this basis. Issue 2 - Proof of genuineness and creditworthiness of the alleged lender (related individual) Legal framework: Once an addition is proposed under Section 68, the assessee must prove the genuineness of the transaction and the creditworthiness of the person from whom the entry is shown as received. Documentary evidence, bank statements, ledgers, and supporting contractual papers are relevant to discharge this onus. Precedent treatment: Not addressed in the text; the Tribunal relied on documentary record rather than authority-based exposition. Interpretation and reasoning: The Tribunal scrutinised the ledger of the proprietary concern in the related company's books, the company's bank statement showing payments, the MOU and deed of assignment and the board resolution regarding escrow payments. The Tribunal found (a) the company's bank statement corroborated receipt/payments, (b) the ledger entries consistently showed transfer to the named individual via journal entry, and (c) there was no contrary evidence of secret/unaccounted income or circular trading. On creditworthiness, the lower authorities doubted the individual's capacity because the individual's personal return showed meagre income; however, the Tribunal observed that when the money flows from the company and is documented as being held in escrow for the individual, the requirement to prove independent sources for the individual is less compelling where documentary trail explains the source and purpose. The Tribunal also noted the absence of contradictory evidence brought by the revenue to show the alleged lender could not have been party to the arrangement. Ratio vs. Obiter: Ratio - production of company bank statements, ledgers and contractual documents establishing that sums were paid by the company and held/transferred as escrow sufficiently explains genuineness such that the named creditor's apparent low personal income does not, by itself, justify addition under Section 68. Conclusion: The Tribunal concluded that the assessee had satisfactorily explained the genuineness of the transaction and the source of funds, and that doubts about the named creditor's creditworthiness were without basis in face of the documentary evidence; consequently, the addition under Section 68 with respect to the amount attributed to the named individual was deleted. Issue 3 - Consistency of governmental findings and relevance of circular trading allegations Legal framework: The weight of an addition depends on coherent assessment reasoning and evidence of unexplained or circular transactions; inconsistent factual positions by taxing authorities may weaken findings. Precedent treatment: No judicial precedents were invoked in the record to address inconsistency doctrine. Interpretation and reasoning: The Tribunal observed an internal inconsistency in the approach of the lower authorities: the CIT(A) emphasised that the assessee, in personal capacity, acted as escrow while simultaneously relying on proprietary books to uphold the addition. The Tribunal noted there was no finding or evidence of circular trading or unaccounted cash movements between related parties. Given this absence of adverse evidence and the inconsistent treatment by the authorities, the Tribunal concluded that the basis for the addition was inadequate. Ratio vs. Obiter: Ratio - inconsistent reasoning by revenue and absence of evidence of circular/unaccounted transactions undermine reliance on Section 68 to make additions. Conclusion: The Tribunal held that the inconsistent approach of the lower authorities, coupled with the lack of evidence of circular trading or unaccounted receipts, compelled deletion of the addition under Section 68. Final Disposition (Connected conclusion) Taking the issues together, the Tribunal concluded that the assessee had satisfactorily explained the receipt and subsequent journal transfer of funds by production of the related company's bank statement, ledger entries, MOU, deed of assignment and board resolution; that the lower authorities' doubts about the named individual's creditworthiness were unsupported by the record; and that the addition under Section 68 was therefore not sustainable and was deleted. The appeal was allowed.