2025 (10) TMI 81 - AT - Income Tax

Additions under Section 68 deleted after assessee proved unexplained cash credits with bank statements, repayments and creditor replies

ITAT reversed additions u/s 68, holding the unexplained cash credits were substantiated: creditors responded to s.133(6) notices, bank statements showed ... Addition u/s 68 - unexplained cash credits - HELD THAT:- The assessee had made the repayment of the amounts borrowed in the month of September 2020. Both the parties had responded to the notices u/s 133(6) of the Act issued by the AO and had filed all the details as sought by the Ld. AO. The transactions are substantiated by Copy of Bank Statement of loan creditors and assessee showing details of transactions and copy of bank statement of subsequent year for payment of outstanding balance. Respectfully relied upon judgment of Bairaga Builders (P.) Ltd [2024 (6) TMI 945 - BOMBAY HIGH COURT] wherein it was held that no addition u/s 68 can be made in case where amount credited is repaid back in subsequent year. Related to the struck off companies, the Ld. AR stated that the reason of stuck off due non filing of the company return for three years as per Companies Act. But all the loan creditors had complied the notice of the Ld. AO and filed evidence. Thus, it was submitted that both the additions confirmed by the Ld. AO u/s 68 of the Act are devoid of any merit, unsustainable as assessee has discharged its onus of proving identity, creditworthiness and genuineness of the credits so received. It was further stated that when the assessee has discharged its initial onus cast u/s 68 of the Act no inquiry is made by the Ld. AO, then additions u/s 68 cannot be made. It was submitted that the onus shifts from assessee to the Ld. AO. Here assessee has completely discharged its onus. So, the addition U/s 68 is not sustained. ISSUES PRESENTED AND CONSIDERED 1. Whether additions under Section 68 of the Income-tax Act can be sustained where the assessee produced confirmations, bank statements, ITRs and other documents from lenders (including companies whose names were struck off the Register of Companies) to establish identity, creditworthiness and genuineness of unsecured loans. 2. Whether the fact that lender companies were struck off by the Registrar of Companies for non-compliance, or that their ITRs/financials did not show regular trading income, justifies treatment of loan receipts as unexplained cash credits under Section 68 when the lenders responded to statutory notices and transactional evidence shows receipt and subsequent repayment through banking channels. 3. Whether repayment of credited amounts in a subsequent year affects the correctness of an addition under Section 68 in the assessment year of receipt. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Sufficiency of documents to discharge initial onus under Section 68 (identity, creditworthiness, genuineness) Legal framework: Under Section 68 the assessee bears initial onus to prove identity of the person from whom money is received, and that the source is genuine; once identity and genuineness are satisfactorily established, burden shifts to the revenue to prove contrary facts. Precedent treatment: The Tribunal relied on established principles that mere identification of the creditor together with corroborative documents can discharge the initial onus, and that if the creditor's reply to statutory notices and bank evidence are on record the assessing officer must make further inquiry before making additions. (The judgment applied these precedents as guiding ratios.) Interpretation and reasoning: The Court examined the material placed before the assessing officer and appellate authority: confirmations from creditors, audited accounts, trial balances, ITR acknowledgements, bank statements showing receipts and repayments, and acknowledgements of submissions made in response to notices issued under Section 133(6). The Tribunal found that these materials were filed and available on record but either ignored or not verified by the assessing officer. Given these documents, the assessee discharged the initial onus under Section 68. Ratio vs. Obiter: Ratio - where the assessee furnishes creditor confirmations, bank statements and statutory replies from lenders, the initial onus under Section 68 is discharged and the AO must carry out further verification before making additions. Obiter - observations on the sufficiency of particular items of ledger evidence serve as explanatory guidance. Conclusion: The addition under Section 68 in respect of loans for which such documentary evidence existed could not be sustained; the appellate authority rightly deleted the additions on this ground. Issue 2 - Effect of lenders being struck off or lacking obvious trading income on creditworthiness inquiry Legal framework: The assessment of creditworthiness under Section 68 is fact-sensitive; the mere fact of a company being struck off or not showing trading income is a relevant circumstance but does not automatically render receipts unexplained if the creditor can be identified and can provide documentary explanations for the source of funds. Precedent treatment: The Court adhered to precedent that identification and demonstrable source/genuineness may rebut the presumption of unexplained credits even when the creditor's formal status raises suspicion, provided the creditor's responses and transactional records are on file and verifiable. Interpretation and reasoning: The Tribunal noted that the lenders who were struck off had nevertheless responded to notices under Section 133(6) and filed details; the assessee produced bank records and other supporting documents. The Court emphasized that the reason for a company being struck off (e.g., non-filing of returns) is not in itself conclusive proof that funds purportedly advanced are bogus, particularly where receipts and repayments are routed through banking channels and documentary confirmations exist. Ratio vs. Obiter: Ratio - AO cannot treat a loan as unexplained solely because the lender is struck off; if the lender has replied to statutory notices and provided corroborative documents, the addition is impermissible without further positive evidence of sham/fraud. Obiter - comments regarding regulatory status not being dispositive in all circumstances. Conclusion: The struck-off status of lending companies, standing alone, did not justify additions under Section 68 when the lenders had responded to notices and transaction evidence was on record; the appellate deletion was sustained. Issue 3 - Effect of subsequent year repayment on making addition under Section 68 for the year of receipt Legal framework: While Section 68 relates to unexplained credits in the year of receipt, subsequent repayment and bank transactions can be relevant evidence to test the reality of the original receipt and therefore impact the sustainment of additions. Precedent treatment: The Tribunal followed authorities holding that repayment of credited amounts in a subsequent year, corroborated by banking records, can be a significant circumstance militating against treating the original credit as unexplained. Interpretation and reasoning: The record showed that significant loans were repaid (one within six months, others repaid later) through banking channels and that bank statements for the assessee and lenders reflected the flow of funds. The Tribunal held that such repayment evidence, combined with creditor confirmations and statutory replies, negated the reason for classifying the receipts as unexplained credits for the assessment year. Ratio vs. Obiter: Ratio - subsequent repayment through banking channels and corroborative evidence can preclude additions under Section 68 for the year of receipt unless the AO adduces contrary proof of sham or undisclosed income. Obiter - the extent to which repayment timing alone will suffice is fact-dependent. Conclusion: Repayments demonstrated on record weighed against sustaining the Section 68 additions; therefore additions could not be maintained solely on the basis of unexplained credits. Issue 4 - Adequacy of the assessing officer's inquiry where statutory replies were on record Legal framework: The assessing officer must make enquiries and verify materials and cannot ignore statutory replies and documentary evidence when considering additions under Section 68; failure to do so undermines the validity of additions. Precedent treatment: The Tribunal followed the principle that once an assessee furnishes evidence discharging the initial onus, the AO has to bring positive material to demonstrate that the amounts are bogus; mere suspicion or non-verification is insufficient. Interpretation and reasoning: The Tribunal found that replies to Section 133(6) notices and acknowledgements were placed on record and that the AO did not carry out verification or consider those materials before making additions. Given the available documentary evidence and absence of contrary material from the AO, the Tribunal held the additions to be unsustainable. Ratio vs. Obiter: Ratio - AO's failure to consider or verify statutory replies and transactional evidence before making additions under Section 68 invalidates such additions; the onus shifts back to the revenue to rebut the evidence. Obiter - procedural points on manner of verification. Conclusion: The assessing officer's omission to consider and verify statutory replies and bank evidence rendered the additions unsustainable; appellate deletion was upheld. Final Disposition Given the assessee's production of creditor confirmations, audited accounts, ITR/acknowledgements, bank statements reflecting receipt and repayment, and statutory replies to notices under Section 133(6), and in the absence of positive contradictory material from the assessing officer, the appellate deletion of additions under Section 68 was sustained and the revenue's appeal dismissed.