2025 (10) TMI 35 - AT - Income Tax

Assessment additions under s.68 and s.133(6) inquiries deleted where lenders' genuineness and startup expenditures adequately established

ITAT DELHI - AT dismissed the Revenue's appeal. The tribunal found the AO had properly used s.133(6) enquiries and did not identify defects in documents ... Addition u/s 68 - unsecured loans - HELD THAT:- AO has conducted his enquiries u/s 133(6) to satisfy about the veracity of the loans. We have also noted that the Ld.AO has not pointed any defect / deficiency in the details / evidences filed by the assessee u/s 68 of the Act. Thus, the Ld.AO has accepted genuineness of transactions as well as identity and creditworthiness of the lenders u/s 68. Consequently the decision of the CIT(A) in deleting the addition made by the Ld.AO cannot be faulted upon. Accordingly, order of the Ld.CIT(A) is based upon correct understanding and interpretation of the facts of the case. The grounds of appeal nos. 1 & 2 raised by the Revenue is therefore dismissed. Unexplained expenditure - As examined the supporting documents which point to the conduct of the business as the activities stated to have been under taken constitute business activity which is part of the beginning of the business. In view of these observations, the contention of the appellant is acceptable and as such disallowance of expenses is deleted by CIT(A). Thus, it is noted that the Ld. CIT(A) has given the relief to the assessee after considering submissions, details and documents. The relief accorded by the Ld. CIT(A) therefore cannot be faulted as the same is based on correct understanding and appreciation of the facts case. Appeal of the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether additional evidence produced before the first appellate authority was admissible under Rule 46A of the Income Tax Rules where such evidence was not filed before the Assessing Officer and the Assessing Officer objected to admission on the ground of lack of sufficient cause for non-production earlier. 2. Whether addition under section 68 (unexplained cash credits) of the Act in respect of large unsecured loans can be sustained where the Assessing Officer, after remand enquiries under section 133(6), did not find any infirmity in the identity, genuineness or creditworthiness of lenders. 3. Whether disallowance of revenue expenses as unexplained expenditure is justified where the assessee furnishes before the first appellate authority supporting submissions and documents showing that the expenses relate to commencement of business and were appropriately treated as revenue or capital/work-in-progress. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Admissibility of additional evidence under Rule 46A Legal framework: Rule 46A(1)-(4) of the Income Tax Rules restricts production of evidence before the first appellate authority to evidence produced before the Assessing Officer, except in specified circumstances (AO refused evidence; appellant prevented by sufficient cause from producing evidence when called; prevented by sufficient cause from producing evidence relevant to any ground of appeal; or AO made the order without giving sufficient opportunity to adduce evidence). Rule 46A(2) requires recording reasons in writing for admission; Rule 46A(3) mandates that evidence admitted under sub-rule (1) not be taken into account unless the AO is given a reasonable opportunity to examine/cross-examine or produce rebuttal; sub-rule (4) preserves power of the appellate authority to direct production/examination for substantial cause. Precedent treatment: No external precedent was relied upon or overruled in the judgment; the Court applied the statutory text and procedure laid down in Rule 46A. Interpretation and reasoning: The appellate authority has the power to admit additional evidence if statutory conditions are met. The AO's role is limited to being given an opportunity to examine the additional evidence and to file a remand report; the AO does not have a veto over admission. Where the AO, after receiving the remand reference, chose to conduct enquiries under section 133(6) and did not record any infirmity in the loans, the AO's subsequent objection to admission on the ground that the assessee lacked sufficient cause is inconsistent with his conduct. Having investigated the evidence, the AO cannot summarily repudiate its admission; the appellate authority fulfilled Rule 46A by seeking and obtaining the remand report and by recording reasons for admission. Ratio vs. Obiter: Ratio - Rule 46A empowers the first appellate authority to admit additional evidence subject to the AO being given reasonable opportunity to examine; the AO's conduct in investigating the evidence negates a contention that evidence ought to have been rejected for want of sufficient cause. Obiter - observations on the impropriety of the AO conducting enquiries and then objecting to admission address procedural fairness but reinforce the primary statutory rule. Conclusions: Admission of additional evidence by the first appellate authority complied with Rule 46A where the AO was given opportunity to examine and did so; the AO's later objection to admission was untenable. Ground challenging admission is dismissed. Issue 2 - Deletion of addition under section 68 in respect of unsecured loans Legal framework: Section 68 permits addition where unexplained cash credits, including loans, lack satisfactory explanation regarding identity, genuineness and creditworthiness of the creditor and the nature of the transaction. Burden rests on the assessee to satisfactorily explain credits; where the AO is satisfied about identity/genuineness/creditworthiness, addition is not warranted. Precedent treatment: No precedential authorities were cited; decision rests on factual appraisal post-remand. Interpretation and reasoning: The AO, after remand enquiries under section 133(6), accepted the confirmations, ITR acknowledgements and bank statements produced in the appellate proceedings and did not find defects in identity, genuineness or creditworthiness of lenders. Acceptance by the AO (via remand report) of the evidentiary material furnished in support of the unsecured loans removes the statutory foundation for making additions under section 68. The appellate authority's deletion of the addition is thus grounded on the AO's own findings following verification and enquiry. Ratio vs. Obiter: Ratio - Where post-verifications (including AO enquiries under section 133(6)) yield no infirmity in loans, the addition under section 68 cannot be sustained. Obiter - Procedural remarks that AO cannot investigate and then oppose admission of the same evidence are ancillary to the holding. Conclusions: Deletion of the section 68 addition is upheld because the AO's remand enquiries did not point to any defect in the loans; grounds attacking deletion are dismissed. Issue 3 - Disallowance of revenue expenses as unexplained expenditure Legal framework: Expenditure claimed as revenue must be supported by books, bills, vouchers and relevant details; AO may disallow expenses if requisite particulars are not produced or business activity/expenditure is unexplained. Appellate authority may reverse disallowance where supporting documents or credible explanation establish nature and business nexus of expenses. Precedent treatment: None cited; determination based on evidence and appreciation of facts. Interpretation and reasoning: The AO recorded that relevant books and supporting vouchers were not produced and added back most of the claimed expenses. On appeal, the assessee produced submissions and documents showing (a) business activity commenced (purchase of plot from development authority), and (b) certain expenditures were part of commencement activities and/or capitalized as work-in-progress except those legitimately charged to profit and loss. The first appellate authority examined the supporting documents and accepted that the activities and expenses constituted commencement of business and were correctly treated. Where the appellate authority's factual conclusion is based on examination of materials and is plausible, the Tribunal will not interfere. Ratio vs. Obiter: Ratio - Disallowance of expenses as unexplained cannot be upheld where the appellant produces supporting evidence on appeal that satisfactorily demonstrates business activity and the nature of expenditure; appellate findings based on such documents warrant deletion of disallowance. Obiter - Emphasis on appellate fact-finding deference to first appellate authority. Conclusions: The deletion of unexplained expenditure addition is sustained as the appellate authority reasonably accepted the assessee's documentary evidence and explanation; Revenue's challenge is dismissed. Cross-references Issues 1 and 2 are interlinked: admission of additional evidence under Rule 46A was a precondition to the appellate authority receiving materials which, after AO's remand enquiries, led to acceptance of loans' genuineness under section 68 (see Issues 1 and 2 analysis).