2025 (9) TMI 1179 - AT - Income Tax

Section 68 additions deleted after assessee proved deposits' identity, creditworthiness and source; Section 37(1) disallowance reversed

M/s Lighthouse Developers Private Limited Versus DCIT, Circle 3 (2) (1), Mumbai

ITAT allowed the appeal: additions under section 68 relating to an interest-free security deposit and closing balance were deleted after the assessee ... Addition u/s 68 - unexplained cash credits - receipts from interest free security deposit and closing balance of fund received - HELD THAT:- Assessee has demonstrated and substantiated source of deposit from long-term borrowing by producing ledger confirmation from the books of APPL and bank statement of APPL - We do not find any reason to sustain the addition u/s 68 of the act as the assessee has discharged its onus of proving identity, creditworthiness and genuineness of the transaction by producing details of the depositor which are neither controverted by the AO or CIT(A) and failed to make any inquiry to throw onus back to the assessee. Assessee has shown source of source of funds available with depositor. Accordingly. The orders of the revenue authorities are reversed, and AO is directed to delete the addition receipt from APPL. Addition u/s 68 in respect of closing balance of fund received from NRPL - Assessee has proved identity, creditworthiness, and genuineness of the transaction of the amount received from NRPL and proved the initial onus cast up on the assessee. AO and CIT(A) did not make any further investigation to how onus back on the assessee. Substantial evidence produced by the assessee proves the source and nature of receipt by the assessee. Thus, the orders of the revenue authorities with respect to above addition u/s 68 of the act is not correct. Disallowance of expenditure u/s 37(1) - CIT(A) noted assessee has failed to provide any documentary evidence during assessment proceedings and appellant proceedings - HELD THAT:- As expenses which are disallowed were incurred by assessee in previous years and formed part of opening stock of inventory. During the year under consideration what is claimed as deduction is opening stock of inventory which was sold during the year and not the other expenses. Hence, disallowance of other expenses u/s 37 is deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received as interest-free security deposits (closing balances and receipts during the year) can be treated as unexplained cash credits under section 68 of the Income-tax Act when the assessee furnishes MoUs, bank statements, ledger confirmations, audited accounts/ITR of depositors and other documents to establish identity, creditworthiness and genuineness. 2. Whether, upon the assessee discharging the initial onus under section 68 by producing documentary evidence of identity, creditworthiness and genuineness, the Assessing Officer is obliged to make further inquiry before treating receipts as unexplained cash credits, and onus/ burden shifts back to the revenue. 3. Whether a closing balance of security deposit that is repaid in a subsequent year can be assessed as unexplained cash credit under section 68. 4. Whether expenses incurred earlier and forming part of opening stock (work-in-progress) and realized on sale in the year can be disallowed under section 37(1) as not exclusively for business or as non-genuine when they are claimed through reduction of opening stock on sale. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Treatment of security deposits under section 68; onus of proof; sufficiency of documentary evidence Legal framework: Section 68 treats unexplained cash credits as income unless the assessee explains the nature and source of the credit; the initial onus lies on the assessee to prove identity, creditworthiness and genuineness of the creditor/transaction; if that onus is discharged, further inquiry is incumbent on the revenue to rebut the explanation. Precedent treatment: The Tribunal applied established principles that documentary evidence such as MoUs, ledger confirmations, bank statements, audited accounts and ITRs are materials to discharge the assessee's initial onus. Where AO/CIT(A) do not conduct further inquiries to controvert such evidence, additions under section 68 are unsustainable. Precedents relied upon by the assessee regarding repayment in subsequent year (see Bairaga Builders, Ambe Tradecorp, Ayachi Chandrashekhar N.) were followed on the repayment point (see Issue 3). Interpretation and reasoning: The Court examined whether the assessee produced the required documents: MoUs, confirmations, audited accounts or ITRs of the depositors, bank statements reflecting the transactions, ledger entries showing intercompany movements and replies to statutory notices. For the amounts from the first depositor (Amity Properties Pvt. Ltd.) the assessee produced a detailed set of documents including audit accounts/ITR, bank statements, ledger confirmations and a tabulated source-of-fund showing long-term borrowings and receipts from a related company; the AO had not made specific inquiries to contest these sources and had incorrectly relied on the lack of audit of the assessee's own accounts and absence of revenue in the depositor as a reason to sustain addition. The Tribunal held that the material produced established identity, creditworthiness and genuineness and that the AO/CIT(A) failed to make any further inquiries to discharge the counter-onus; mere conjecture and surmise by AO/CIT(A) are insufficient. Ratio vs. Obiter: Ratio - Where the assessee furnishes documentary evidence establishing identity, creditworthiness and genuineness of credits under section 68, and the revenue fails to make further enquiries to rebut that evidence, additions under section 68 cannot be sustained. Obiter - Observations on adequacy of particular documents (e.g., the specific tabular reconciliations shown) are explanatory but not essential beyond the stated ratio. Conclusions: The addition of Rs. 6,52,35,600 made under section 68 in respect of security deposits from Amity Properties Pvt. Ltd. was deleted. The Tribunal reversed the orders of the revenue authorities because the assessee discharged its initial onus and the revenue did not properly controvert or investigate the asserted sources. Issue 3: Closing balance repaid subsequently - treatment under section 68 Legal framework: Section 68 requires explanation of nature and source of credits; courts and tribunals have held that where an amount credited in one year is explained and is repaid in a subsequent year, it militates against the classification as unexplained cash credit. Precedent treatment: The Tribunal expressly followed authorities holding that no addition under section 68 can be made if the credited amount is repaid in the subsequent year (cases referred by the assessee were applied). Interpretation and reasoning: For receipts from the second depositor (Neelkanth Realty Pvt. Ltd.) the assessee produced MoU, confirmations, audited accounts/ITR of the depositor, bank statements reflecting the receipts and repayments, and documentary evidence showing that most receipts were repaid in the same year and the remaining closing balance of Rs. 1,04,50,000 was repaid by July of the subsequent year by account-payee cheque. The AO/CIT(A) accepted genuineness of the bulk of receipts but treated the closing balance as unexplained, in part because the assessee's books were not audited; the Tribunal held that (a) the identity, creditworthiness and genuineness of the depositor were adequately proved; (b) subsequent repayment confirmed the transactional nature and negated classification as unexplained cash credit; and (c) absence of audit of the assessee's books, without more, is insufficient to sustain an addition when source documents for the depositor are on record. Ratio vs. Obiter: Ratio - A closing balance of credited amount which is subsequently repaid and for which documentary evidence of receipt and repayment exists cannot be treated as unexplained cash credit under section 68. Obiter - Comments on reasons for non-auditing of the assessee's accounts are peripheral and do not justify addition where depositor's records substantiate the transaction. Conclusions: The addition of Rs. 1,04,50,000 under section 68 in respect of the closing balance from Neelkanth Realty Pvt. Ltd. was deleted; the Tribunal directed the Assessing Officer to delete that addition. Cross-reference (Issues 1-3) When considered together, the Tribunal's conclusions on both depositors rest on the single principle that the assessee satisfied the statutory initial onus under section 68 by producing contemporaneous and corroborative documentary material, and the revenue failed to carry out further enquiries necessary to displace that explanation; subsequent repayment reinforced the finding as to genuineness of the credit. Issue 4: Disallowance of expenses under section 37(1) where expenses formed part of opening stock and sale occurred in the year Legal framework: Section 37(1) disallows expenditure not incurred wholly and exclusively for business; however, costs previously capitalised as part of inventory/opening stock and realized on sale are allowable as forming the cost of goods sold where books show reduction of stock and sale proceeds arise from that stock. Precedent treatment: The Tribunal applied standard accounting and tax principles that expenses forming part of opening stock and realized on sale in the year cannot be disallowed by treating those prior expenses as non-genuine for the year of sale if they legitimately formed part of inventory cost. Interpretation and reasoning: The Assessing Officer disallowed sundry expenses incurred for purchase of land on the ground of non-genuineness and absence of documentary evidence. The Tribunal noted that the expenses in dispute were incurred in prior years and formed part of opening work-in-progress; during the year the assessee sold land and accordingly reduced stock on the books, thereby claiming as cost of goods sold amounts previously capitalised. Since the deduction related to opening stock sold during the year and not fresh expenses claimed in the assessed year, disallowance under section 37(1) was not sustainable. Ratio vs. Obiter: Ratio - Expenses earlier incurred and included in opening inventory that are realized by sale in the year cannot be disallowed under section 37(1) on the basis that they were not exclusively for business in the absence of evidence undermining the original inclusion in stock. Obiter - Remarks on particular documentary lacunae in previous years are explanatory. Conclusions: The Tribunal deleted the disallowance of Rs. 1,67,495 under section 37(1) and allowed the grounds challenging that disallowance. Overall Conclusion The Tribunal allowed the appeal: additions under section 68 in respect of the two security deposits were deleted because the assessee discharged its initial onus (identity, creditworthiness, genuineness) and revenue failed to make further enquiries; a closing balance subsequently repaid cannot be treated as unexplained cash credit; and disallowance under section 37(1) of expenses forming part of opening stock sold in the year was deleted. The Tribunal directed the Assessing Officer to give effect to these deletions.