2025 (9) TMI 1116 - AT - Income Tax

Revenue appeal dismissed as assessee proved identity, creditworthiness and genuineness of unsecured loan under s.68

ITAT (Mumbai) dismissed the revenue's appeal and upheld the CIT(A)'s deletion of an addition under s.68. The tribunal found the assessee proved the ... Addition u/s 68 - unsecured loan - CIT(A) deleted addition - HELD THAT:- Creditworthiness of the assessee was sufficiently proved. The loan had been received and repaid along with interest through banking channels. It was, therefore, held by the Ld. CIT(A) that the assessee had sufficiently discharged the onus to prove identity and creditworthiness of the lender as well as the genuineness of the transaction. We hold that the assessee has duly discharged its onus by proving the three ingredients of section 68 i.e. identity of the lender, its creditworthiness and genuineness of the transaction. Accordingly, we find no reason to interfere with the decision of the Ld. CIT(A) which is, therefore, upheld. Appeal of the revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the addition made under section 68 treating an alleged unsecured loan as unexplained credit can be sustained where the assessee produced evidence on identity of the lender, its creditworthiness and repayment of the loan through banking channels. 2. Whether information from the Investigation Wing and a statement by an alleged accommodation-entry operator, without providing the assessee a copy of that statement or an opportunity for cross-examination, is sufficient to displace the assessee's onus under section 68. 3. The relevance and application of judicial authorities addressing accommodation entries and the test of human probability (as relied on by revenue) to the present facts where documentary and financial evidence of the lender was produced. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether the addition under section 68 was rightly sustained absent proof of identity, creditworthiness and genuineness of the loan Legal framework: Section 68 casts the onus on the assessee to prove the identity of the person from whom any sum is received, the genuineness of the transaction and the creditor's capacity/creditworthiness. If the onus is discharged, the addition under section 68 cannot be sustained. Precedent treatment: The Tribunal relied on the decision of a coordinate bench which had decided similar facts in favour of the assessee; no binding conflicting precedent was applied to overturn that approach in the present facts. Interpretation and reasoning: The Tribunal examined contemporaneous and statutory records showing (a) the lender was an NBFC registered with the Reserve Bank of India, (b) the company was active on Ministry of Corporate Affairs records, and (c) audited financial statements disclosed substantial share capital and reserves (demonstrating capacity to lend). The Tribunal also noted repayment of the loan with interest through banking channels and deduction/deposit of TDS on interest. These facts were treated as collectively sufficient to establish the three ingredients required by section 68: identity of the lender, its creditworthiness, and genuineness of the transaction. Ratio vs. Obiter: Ratio - where a contemporaneous statutory registration (RBI registration), corroborative MCA records, audited financials showing adequate capital/reserves, repayment through banking channels and TDS on interest are produced, the assessee has discharged the onus under section 68. Obiter - none additional on this point. Conclusions: The Tribunal upheld the appellate authority's deletion of the addition, holding that the assessee discharged the onus under section 68 by proving identity, creditworthiness and genuineness of the loan transaction. Issue 2 - Sufficiency of Investigation Wing information and a statement by an alleged accommodation-entry operator where the assessee was not supplied the statement or permitted cross-examination Legal framework: Fact-finding based on third-party statements, especially investigative material, must respect principles of natural justice; when adverse action is proposed on the basis of a third-party statement, the assessee's right to know the case against it and to test the evidence is relevant to the weight accorded to such material. Precedent treatment: The Tribunal did not treat the investigatory statement as conclusive proof overriding documentary and financial evidence produced by the assessee; it applied evidentiary scrutiny rather than automatically accepting investigative allegations. Interpretation and reasoning: The Tribunal observed that the basis of revenue's case included a statement by an alleged accommodation-entry operator admitting provision of bogus entries. However, the assessee was not provided a copy of that statement nor afforded an opportunity to cross-examine that witness despite specific requests. Given the independent documentary proof of the lender's existence, registration and financial capacity and evidence of repayment and TDS, the Tribunal placed greater weight on the contemporaneous records and transactional proof produced by the assessee than on the untested investigatory assertion. Ratio vs. Obiter: Ratio - uncorroborated statements from investigation records, relied upon without supplying the statement to the assessee or affording cross-examination, do not automatically negate documentary proof that discharges the onus under section 68. Obiter - emphasises procedural fairness in assessing investigatory material. Conclusions: The Tribunal found the investigatory statement insufficient to sustain the addition where the assessee had produced adequate documentary and financial evidence and where natural-justice safeguards (supply of statement, opportunity to cross-examine) were not observed. Issue 3 - Applicability of the 'human probability' test and authorities addressing accommodation entries to the facts Legal framework: Authorities concerning accommodation entries often direct courts/tribunals to apply close scrutiny, including the 'test of human probability,' where documents are prima facie suspicious or where the assessee is shown to be a beneficiary of a racket of accommodation entries; such tests require a holistic assessment of the plausibility of the transaction. Precedent treatment: The revenue invoked a High Court authority that applies in-depth scrutiny (human probability test) where an assessee is a beneficiary of a racket. The Tribunal, however, primarily applied a fact-specific analysis and followed co-ordinate bench authority favourable to the assessee on substantially similar facts. Interpretation and reasoning: The Tribunal acknowledged the principle that courts may apply the test of human probability where accommodation-entry allegations are supported by material. However, it distinguished the present case on facts: the lender was an RBI-registered NBFC shown to be active; audited financials evidenced substantial capital/reserves; bank records showed receipt and repayment with interest; and TDS on interest was deposited. Given these positive indicators, the Tribunal found no need to infer that the transaction was an accommodation entry despite the investigative allegation. The Tribunal thus applied the human probability concept to the factual matrix and concluded the weight of evidence favoured genuineness rather than an accommodation scheme. Ratio vs. Obiter: Ratio - even where the 'human probability' test is available, if independent documentary and financial evidence affirm identity, creditworthiness and genuine repayment, that test will not automatically lead to an adverse inference; factual corroboration can outweigh investigatory allegations. Obiter - reiteration that each case turns on its factual matrix and that the human probability test is a tool of evaluation, not a substitute for evidential proof. Conclusions: The Tribunal held that the human-probability approach did not mandate sustaining the addition on the facts before it; the assessee's documentary and financial proof rebutted the inference of accommodation entry. Overall Conclusion of the Court The Tribunal upheld the appellate authority's deletion of the addition under section 68, concluding that the assessee discharged the onus of proving identity of the lender, creditworthiness and genuineness of the loan transaction; investigatory statements unsupported by opportunity for cross-examination and contrary documentary/financial evidence were held insufficient to sustain the addition.