2025 (10) TMI 403 - AT - Income Tax

Section 68 addition deleted where assessee proved creditor identity, creditworthiness, bank routed loans, repayments and interest with TDS

ITAT MUMBAI-AT upheld deletion of an addition u/s 68, finding the assessee had established identity and creditworthiness of creditors with relevant ... Addition u/s 68 - unexplained credit - onus to prove - CIT(A) deleted addition -HELD THAT:- Relevant documents which have been produced by the Assessee to establish identity and creditworthiness of the parties from whom the Assessee had taken the loans and genuineness of the transactions but also based on the legal precedents and the fact that the Assessee has taken the unsecured loan through banking channel and repaid the loan amount along with interest after deducting TDS thereon, through banking channel itself and then only deleted the addition under consideration. We observe, as demonstrated by Assessee that in the case of Bhupendra Chmpaklal Dalal [2024 (3) TMI 436 - BOMBAY HIGH COURT] has also dealt with the fact that where major portion of the credit has been repaid during the year and the AO has accepted the debit entries of trading transactions as genuine and the creditor was having an opening balance and has paid the interest regularly and credit is continuing from the earlier years. Appeal filed by the Revenue Department. ISSUES PRESENTED AND CONSIDERED 1. Whether unsecured loans totalling Rs. 2,09,99,195/-, credited in the assessee's books, can be treated as unexplained credits taxable under section 68 where the assessee produced bank statements, ITRs, confirmations and repaid the amounts through banking channels with TDS. 2. Whether the Assessing Officer's adverse opinion under section 68 can be sustained on the basis of conjecture and surmise (including features such as creditor companies being located in another city and alleged incomplete contact details) where the assessee has prima facie discharged the onus by documentary evidence and repayment through banking channels. 3. What is the extent of the AO's duty to make further inquiry (e.g., use of powers under sections 131/133(6)) before rejecting the assessee's explanations under section 68, and whether failure to make such inquiries renders the addition unsustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of section 68 where loans are evidenced by banking transactions, ITRs, confirmations and repayments with TDS. Legal framework: Section 68 provides that sums found credited in the assessee's books may be charged as income where the assessee offers no explanation or the explanation is unsatisfactory; where the credit is a loan, the person in whose name the credit is recorded must also offer an explanation and such explanation must, in the opinion of the AO, be satisfactory. Precedent treatment: The authorities below relied upon and applied recent judicial precedents which hold that unsecured loans shown in books, routed and repaid through banking channels, together with supporting documents, may discharge the assessee's onus under section 68 and warrant deletion of additions where the factual material supports genuineness. Interpretation and reasoning: The Tribunal noted that the assessee produced ITRs, loan confirmations, bank statements, NBFC registration details and evidence of repayment through banking channels with TDS deduction. These materials, taken together, constituted a prima facie discharge of the onus cast by section 68. The fact that the loans were repaid through banking channels and interest was paid reinforced the genuineness of the transactions and reduced the plausibility of an accommodation-entry theory. Ratio vs. Obiter: Ratio - where documentary evidence and banking trail show receipt and repayment of unsecured loans and the lender's credentials are supplied, such material can satisfy the assessee's onus under section 68 and the AO must not substitute conjecture for evidence. Obiter - reference to factual distinctions in certain cited authorities). Conclusion: The Tribunal affirmed that, on the facts, the assessee had discharged the onus under section 68 and the loans could not be treated as unexplained credits solely on the AO's adverse opinion. Issue 2 - Reliance on conjecture/surmise (e.g., creditors being Kolkata-based; alleged lack of mobile number for facilitator) to reject explanations under section 68. Legal framework: AO's opinion under section 68 must be based on material and not mere suspicion; rejection of an explanation requires cogent reasons and, where documentary evidence is furnished, the AO must examine and, if necessary, make further enquiries before concluding the explanation is unsatisfactory. Precedent treatment: The Tribunal relied on judicial pronouncements holding that additions founded on assumptions without corroborative evidence are unsustainable, and that mere geographic location of creditors or lack of immediate personal contact does not ipso facto render a transaction bogus. Interpretation and reasoning: The AO premised disbelief on (a) absence of a mobile number (initially) for the intermediary, (b) companies being Kolkata-based, and (c) perceived lack of business activity of the creditor companies. The Tribunal observed that the assessee had in fact provided contact details (including the intermediary's phone number) and documentary proof. The AO did not pursue available statutory avenues for corroboration (e.g., issuing notices to creditors) and arrived at conclusions based on presumption rather than verification. Mere geographic origin of creditors or absence of collateral does not by itself prove accommodation entries where evidence of banking transactions and repayment exists. Ratio vs. Obiter: Ratio - rejection of explanations on the basis of conjecture or stereotype in absence of further inquiry is not permissible; AO must seek corroborative evidence where the assessee furnishes prima facie material. Obiter - comments on the robustness of particular documentary proofs in other fact patterns. Conclusion: The AO's reliance on conjecture and the mere fact of creditors being located elsewhere to impugn genuineness was held unsustainable; the addition could not stand on such surmises. Issue 3 - Duty of the AO to make further inquiries (sections 131/133(6)) before treating explanations as unsatisfactory. Legal framework: Where the assessee furnishes explanations and documentary proofs, the AO may, but is not automatically obliged to, use statutory powers (section 131/133(6)) to verify third-party statements; however, an AO who declines to make any verification while rejecting the assessee's documentary material must have reasonable justification for declining corroboration. Precedent treatment: Authorities considered by the Tribunal indicate that the AO should take reasonable steps to verify disputed facts; failure to do so, especially where the assessee has produced bank records and confirmations, militates against sustaining additions based on disbelief alone. Interpretation and reasoning: The Tribunal found that the AO did not issue corroborative notices or make independent enquiries to substantiate his adverse opinion despite the assessee's provision of documentary material and contact details of the intermediary. In such circumstances, the AO's failure to deploy investigatory powers undermined his negative conclusion under section 68 and rendered the addition arbitrary. Ratio vs. Obiter: Ratio - where prima facie documentary evidence is produced, the AO's failure to undertake available verification before rejecting explanations is a material defect, and additions based on that rejection are unsustainable. Obiter - delineation of the circumstances in which issuance of third-party notices is imperative. Conclusion: The AO's omission to exercise verification powers weighed materially in favour of the assessee; the addition could not be sustained without such inquiry. Cross-references and reliance on precedents The Tribunal treated prior decisions which held that repayment through banking channel and documentary proof remove the suspicion of accommodation entries as persuasive and applicable on the facts; those precedents were followed to the extent they support deletion where credit was proved and repaid through banking channels and the AO failed to verify contrary conjectures. Final conclusion On the totality of evidence - bank statements, ITRs, loan confirmations, repayment with interest and TDS, provision of intermediary contact details, and the AO's failure to verify contrary hypotheses - the addition under section 68 was unsustainable. The order deleting the addition was held to be neither perverse nor illegal, and the Revenue's appeal was dismissed.