2025 (9) TMI 559 - AT - Income Tax

Assessee proves creditworthiness for Rs 70,00,000 loans under Section 68; Rs 35,00,000 addition sustained for unverified creditors

Sanjay Kumar Agarwal, Hyderabad. Versus The Assistant Commissioner of Income Tax, Circle 1 (1), Hyderabad.

ITAT held that the assessee proved creditworthiness for loans totaling Rs.70,00,000, but failed to substantiate the remaining Rs.35,00,000. The tribunal ... Unexplained cash credits u/s 68 - loans taken by the assessee, which were treated as unexplained cash credits u/s 68 - assessee failed to provide satisfactory explanations and supporting documents - HELD THAT:-Comments made by the AO as noted at the bottom of the tabulation order of CIT(A), are required to be interpreted in line with the specific comments provided for each individual loan creditor. In view of the above, it is clear that the assessee was able to prove the creditworthiness of loan creditors for an amount of Rs. 70,00,000/- only. CIT(A) has not brought any evidence or arguments to dispute the creditworthiness of these five individuals. However, the ld.CIT(A) has made a general observation suggesting that the assessee has failed to substantiate the creditworthiness of all the loan creditors. I We delete the addition to the extent of Rs. 70,00,000/- and confirm the remaining amount of Rs. 35,00,000/-, as the assessee failed to establish the creditworthiness of the loan creditor, i.e., Om Prakash Bahiti, and also failed to furnish the necessary PAN details and supporting documents pertaining to Yashoda Industries. Accordingly, the appeal of the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether cash credits represented by loans can be added to income under section 68 when the assessee fails to satisfactorily establish identity, genuineness and creditworthiness of loan creditors. 2. Whether the provisions of section 68 apply to an assessee who does not maintain books of account and has income from salary, house property and other sources. 3. Whether the assessing officer (AO) and appellate authority are required to verify the 'source of the source' of funds credited to loan creditors, once identity, genuineness and creditworthiness of the creditors are established. 4. Whether procedural lapses alleged by the assessee-non-service of notices, lack of opportunity of being heard, and choice of section under which assessment is completed-vitiate the assessment. 5. Whether partial confirmation by the AO as to creditworthiness of some loan creditors requires deletion of additions to the extent so established and confirmation of additions for remaining unproved amounts. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of additions under section 68 when identity, genuineness and creditworthiness are not satisfactorily explained Legal framework: Section 68 permits treating unexplained cash credits as income where the assessee fails to satisfactorily explain the nature and source of such credits; the AO may call for proof of identity, genuineness and creditworthiness of loan creditors. Precedent Treatment: The judgment does not rely on or cite external judicial precedents; analysis is based on statutory application and fact-findings recorded by AO and appellate authority. Interpretation and reasoning: The AO issued show-cause and sought substantiation; in assessment the AO added the loans and interest as unexplained credits because satisfactory explanations or required confirmations were not furnished for all creditors. On remand the AO recorded specifics for individual creditors showing bank entries and transfers supporting identity and creditworthiness for five creditors but not for two creditors. The Tribunal interprets the AO's remand report as confirming creditworthiness for specified creditors and leaving others unverified. Ratio vs. Obiter: Ratio - where AO's factual findings establish identity and creditworthiness for specific creditors, additions under section 68 must be deleted to that extent; where the assessee fails to establish creditworthiness or produce requisite documents (e.g., PAN, bank evidence), additions can be sustained. Conclusions: The Tribunal deleted additions to the extent of Rs. 70,00,000 for creditors whose creditworthiness was specifically confirmed by the AO, and confirmed additions of Rs. 35,00,000 for creditors whose creditworthiness/source was not established or for whom documents were not furnished. Issue 2: Applicability of section 68 where assessee does not maintain books of account Legal framework: Section 68 scrutiny concerns unexplained cash credits irrespective of whether the assessee maintains books; requirement to establish identity, genuineness and creditworthiness does not turn on maintenance of books as per the record of this judgment. Precedent Treatment: No precedents cited or applied to alter the statutory scope based on book-keeping status. Interpretation and reasoning: The assessee contended that absence of book maintenance precludes application of section 68. The Tribunal did not accept this contention; it proceeded to evaluate documentary evidence produced and AO's findings on identity and creditworthiness. The decision is driven by factual sufficiency rather than formal book-keeping status. Ratio vs. Obiter: Ratio - section 68 can be applied and additions made where documentary and testimonial proof required by AO is not furnished, regardless of whether formal books are maintained. Conclusions: The Tribunal rejected the argument that absence of books bars application of section 68 and assessed the matter on the sufficiency of explanations and documents. Issue 3: Obligation to verify 'source of the source' once identity, genuineness and creditworthiness are established Legal framework: The AO sought and examined bank statements, PANs and ITRs to assess creditworthiness; the question of verifying upstream sources was raised in submissions. Precedent Treatment: Judgment does not adopt or overrule any authority concerning verification of source-of-source; analysis is confined to AO's remand findings and Tribunal's interpretation. Interpretation and reasoning: The assessee argued no requirement to investigate source of source once identity, genuineness and creditworthiness of the creditor are established. The AO's remand report, as interpreted by the Tribunal, confirmed creditworthiness in relation to specific creditors on the basis of bank entries and transfers; for some creditors the AO did not make such confirmations because necessary evidence was absent. The Tribunal held that the AO's specific confirmations are controlling for those creditors and did not demand further source-of-source verification where AO had accepted creditworthiness on provided documents. Ratio vs. Obiter: Ratio - once identity, genuineness and creditworthiness are established by cogent documentary evidence accepted by the AO, further probing of the source of the source is not required to sustain deletion of additions in respect of such creditors; conversely, absence of such proof justifies sustaining additions. Conclusions: The Tribunal limited the need to examine source-of-source to instances where creditworthiness was not satisfactorily demonstrated; where AO's factual findings accepted creditworthiness, no further enquiry was necessary for deletion. Issue 4: Procedural fairness - service of notices, opportunity of hearing and correctness of assessment section Legal framework: Procedural objections included non-service of notices, denial of hearing, and the assertion that order was passed under section 143(3) rather than section 144. Precedent Treatment: No judicial authorities were invoked; the Tribunal assessed the procedural contentions against the record of communications, remand and appellate proceedings. Interpretation and reasoning: The assessee alleged non-service of notices and denial of hearing; however, the record shows multiple notices were issued, remand reports were obtained, and the appellate authority conducted remand and considered documents. The Tribunal's disposal focused on substantive evidentiary findings rather than overturning the assessment on procedural grounds. The contention regarding section under which assessment was completed was raised but not sustained as vitiating the assessment in the facts of the case. Ratio vs. Obiter: Obiter - procedural contentions were considered but not treated as grounds to set aside the assessment where AO's and CIT(A)'s proceedings demonstrated interaction and consideration of materials; the primary decision turned on factual sufficiency rather than procedural infirmity. Conclusions: The Tribunal did not allow the procedural objections to nullify the assessment; it proceeded to adjudicate the merits and partly allowed the appeal on factual grounds. Issue 5: Effect of partial confirmations by AO - apportionment of additions Legal framework: AO's remand report contained creditor-wise factual entries; the Tribunal examined those specific entries to determine which portions of the total addition were justified. Precedent Treatment: No precedent was cited; the approach is fact-specific and grounded in the AO's own tabulation. Interpretation and reasoning: The AO explicitly confirmed creditworthiness for five creditors aggregating Rs. 70,00,000. For two creditors (aggregating Rs. 35,00,000) no confirmation or requisite documents were recorded. The Tribunal held that the AO's specific confirmations must be given effect to and that a general observation by the appellate authority disputing creditworthiness of all creditors could not override the AO's specific factual findings without contrary evidence. Ratio vs. Obiter: Ratio - where AO's factual remand report affirmatively accepts creditworthiness of specified creditors, the Tribunal will delete additions to that extent; unproved portions can be sustained as additions under section 68. Conclusions: Appeal was partly allowed by deleting additions of Rs. 70,00,000 in respect of creditors specifically accepted by the AO and confirming additions of Rs. 35,00,000 where creditworthiness or supporting documents (PAN, bank evidence) were not produced.