2025 (9) TMI 655 - AT - Income Tax

Assessee proves genuineness of loan under s.68 via bank records, interest/TDS compliance and timely repayment; addition deleted

Shri Umakant Agrawal Versus Dy. Asst. Commissioner of Income Tax, Central Circle – 25 (1), Mumbai

ITAT Mumbai (AT) held that under s.68 the assessee satisfactorily proved the creditor's identity, capacity and genuineness of the loan by banking ... Unexplained cash credit u/s 68 - onus to prove - HELD THAT:- The law u/s 68 obliges an assessee, when a credit appears in his books, to satisfactorily explain its nature and source. Jurisprudence has crystallised a three-fold enquiry: (i) identity of the creditor, (ii) creditworthiness or capacity of the creditor, and (iii) genuineness of the transaction, typically demonstrated through a verifiable banking trail and commercial incidents such as interest accretion and repayment on arm’s-length terms. Once the assessee places cogent primary material on all three facets, the onus shifts to the Revenue to marshal contrary material or draw a reasonable adverse inference from specific facts and not mere suspicion, conjecture, or generalised reports. Assessee has satisfactorily discharged the onus under section 68 by establishing the identity of the creditor, its capacity, and the genuineness of the loan transaction through banking channels, interest-TDS compliance, and timely repayment. The Revenue, in turn, has not marshalled cogent material to displace this explanation. The impugned addition under section 68 is, therefore, unsustainable and is directed to be deleted. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an addition under section 68 for Rs.1,00,00,000 as unexplained cash credit is sustainable where the assessee produces contemporaneous documentary evidence (PAN and ITRs of creditor, lender's bank statements showing pre-existing balances and RTGS transfers, account-payee instruments, ledger confirmation, interest paid with TDS reflected in quarterly statements, and repayment entries). 2. Whether the Revenue can rely on a later-period investigative report describing the creditor as a 'hawala operator' and on the assessee's non-production of the creditor for examination years after the transaction to displace the assessee's primary evidence under section 68. 3. Whether subsequent administrative irregularities affecting the creditor (e.g., cancellation of VAT TIN) can retroactively vitiate the genuineness of an earlier loan transaction established through banking channels, interest-TDS compliance, and repayment. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Sustainabiity of addition under section 68 given the assessee's documentary evidence Legal framework: Section 68 requires that where a credit appears in the assessee's books, the assessee must satisfactorily explain the nature and source of that credit. Judicial jurisprudence frames this as a three-fold enquiry: (i) identity of the creditor, (ii) creditworthiness/capacity of the creditor, and (iii) genuineness of the transaction demonstrated by verifiable banking trail and commercial incidents (interest, repayment on arm's-length terms). Precedent treatment: The Court reiterates established principles that once cogent primary material is placed on all three facets, the burden shifts to the Revenue to bring contrary material or draw reasonable adverse inferences based on specific facts rather than conjecture. Prior authorities requiring identity, capacity and genuineness are followed in principle. Interpretation and reasoning: The assessee produced PAN and returns (identity); bank statements showing adequate cleared funds preceding transfers and RTGS/trading flows (capacity); account-payee instruments for loan, regular payment of interest at commercial rate (18%) with TDS reflected in quarterly statements, and full repayment within the succeeding year (genuineness). These contemporaneous documentary indicia are held to be strong objective evidence of an arm's-length borrowing rather than a colourable device. Ratio vs. Obiter: Ratio - Where primary documentary material satisfactorily establishes identity, capacity and genuineness under section 68, the Revenue must produce specific contra material to displace it; mere assertion or generalized investigation reports do not suffice. Obiter - Emphasis on commercial rate (18%) and timing particulars serves explanatory value but does not expand statutory test. Conclusion: The assessee satisfactorily discharged the onus under section 68; the addition of Rs.1,00,00,000 as unexplained cash credit is unsustainable on the available record and is to be deleted. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Reliance on later investigative findings and non-production of creditor years after transaction Legal framework: Reopening and onward enquiries may legitimately be triggered by investigation material, but proof of unexplained credit requires specific material displacing the assessee's explanation. The Revenue must marshal evidence of proximate cash introductions, circular layering, or other demonstrable links to the assessee's funds to draw an adverse inference. Precedent treatment: The Court follows authority that adverse inference cannot rest on suspicion or remote investigative labels alone; temporal distance weakens probative value where contemporaneous documentary evidence exists. The requirement that the Revenue bring forward demonstrable contra-evidence is applied. Interpretation and reasoning: The transaction occurred in March 2011 and was repaid by April 2012; reopening occurred in March 2018. Non-production of the creditor for physical examination years after the transaction, when contemporaneous documentary evidence (banking trail, TDS, repayment) exists, cannot by itself eclipse the primary record. The Assessing Officer and first appellate authority did not identify a cash-trail from the assessee into the lender's account or other proximate acts sufficient to rebut the documentary evidence. The investigative report's description of the creditor as untraceable or labelled 'hawala' is an insufficient standalone basis to treat the loan as fictitious. Ratio vs. Obiter: Ratio - Temporal non-production of a creditor, absent demonstrable contrary evidence confronting the primary documentary trail, cannot sustain an addition under section 68. Obiter - Practical burden considerations in long-dated transactions and the expectation of independent verification by the Revenue are observations supporting the ratio. Conclusion: Revenue's reliance on later investigative findings and non-production of the creditor years later does not constitute cogent material to displace the assessee's documentary explanation; the addition cannot be sustained on that ground. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Effect of subsequent administrative irregularities (e.g., VAT TIN cancellation) of the creditor on the genuineness of prior loan Legal framework: The genuineness inquiry under section 68 focuses on the facts and commercial indicia contemporaneous to the transaction; subsequent administrative actions do not ipso facto negate an earlier bona fide transaction unless a direct nexus is shown between the later irregularity and the creation or substance of the loan. Precedent treatment: The Court follows the principle that later adverse facts may be relevant only if they can be shown to have existed at the time of the transaction or to have a direct retroactive effect on the transaction's nature; mere post-factum administrative sanctions are not automatically dispositive. Interpretation and reasoning: The appellate order relied on alleged later cancellation of VAT TIN to impugn the creditor's integrity. The Tribunal finds no basis to infer that such later irregularities existed at the time of loan creation or that they produced a proximate cash-circuit rendering the loan fictitious. In the present record the loan was evidenced and serviced through banking channels with TDS compliance and timely repayment - indicia incompatible with a contemporaneous sham. Ratio vs. Obiter: Ratio - Subsequent administrative or regulatory irregularities of a creditor cannot, without specific connecting evidence, retroactively vitiate a prior loan transaction proved by contemporaneous banking and tax compliance. Obiter - Observations on the limited probative value of VAT cancellation as standalone evidence. Conclusion: The later cancellation of VAT TIN or similar administrative irregularities do not, in themselves, invalidate the earlier loan; absent demonstrable evidence linking those irregularities to the creation of a fictitious transaction, they cannot sustain the addition under section 68. OVERALL CONCLUSION The three-fold statutory enquiry under section 68 (identity, capacity, genuineness) was satisfactorily answered by the assessee's contemporaneous documentary material. The Revenue failed to produce specific contra-evidence (cash-trail, circularity, proximate conduits, or confronted adverse statements) to displace that explanation. Reliance on later investigative labels, inability to produce the creditor many years after repayment, or subsequent administrative irregularities of the creditor do not suffice to sustain the addition. The impugned addition of Rs.1,00,00,000 under section 68 is unsustainable and is directed to be deleted (ratio of the decision).