2025 (10) TMI 404 - AT - Income Tax

Assessee wins as additions under s.68 deleted after AO relied on third-party statements and s.132 retraction

ITAT upheld the assessee, deleting additions made under s.68 of the Act. The Tribunal found the assessee had prima facie discharged its onus and that the ... Unexplained u/s. 68 - unsecured loans - identity, creditworthiness and genuine of the cash credit not proved - HELD THAT:- Assessee has prima-facie discharged its onus cast u/s 68. It is also admitted fact that the AO, even instead of asking specifically by the Assessee that in case he is still inclined to take a contrary view of the matter, then kindly let the Assessee know the grounds, on which contrary view is to be taken, so as to enable the Assessee to controvert the same however the AO at the back of the Assessee used the statement of the third parties and the material without giving any opportunity for explaining and/or cross examination of the witnesses on whose statements the AO has relied on and to contradict the material which the AO has taken into consideration. Also it as appears from the letter dated 29.09.2014 along with duly sworn affidavit dated 17.10.2013 of the proprietor of M/s. Suman Exports that he retracted his statement made during the search and seizure operation carried out u/s 132 of the Act on 03.10.2013 by the DDIT (Inv.) Unit 9-1, Mumbai at his office/residential premises. Addition in any case is un-sustainable. Hence, the same is deleted. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether sums shown as unsecured loans/credits in books can be held to be unexplained cash credits under section 68 of the Income Tax Act when the assessee furnishes confirmations, lenders' bank statements, PAN/ITR/tax-audit records of the lenders, TDS details and records of repayment routed through banking channels. 2. Whether interest claimed on such unsecured loans can be disallowed where the underlying loans are held to be unexplained under section 68. 3. Whether the Assessing Officer/First Appellate Authority can rely on statements recorded during search under section 132(4) and on an alleged modus operandi of an accommodation entry operator, without confronting the assessee with the material relied upon and without offering opportunity for cross-examination of such third-party witnesses. 4. Reliance on co-ordinate Tribunal and High Court precedents addressing (a) discharge of onus under section 68 by production of documentary evidence showing identity, creditworthiness and genuineness of lenders, and (b) requirement of confronting the assessee with adverse material and affording opportunity of cross-examination where third-party statements are relied upon. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of addition under section 68 when documentary evidence and banking trail are produced Legal framework: Section 68 casts on the assessee the initial onus to explain credits in the nature of unexplained cash credits by establishing identity, creditworthiness and genuineness of the lender and transaction. Documentary evidence, confirmations from lenders, bank statements, PAN/ITR and tax audit reports, TDS records and evidence of repayment through banking channels are relevant to discharge that onus. Precedent Treatment: The Court/Tribunal referred to and followed decisions of the jurisdictional High Court and co-ordinate Benches which hold that repayment and banking channel transactions, together with corroborative documents of the lenders, can establish the reality of creditors and genuineness of loans and thus satisfy the onus under section 68. Interpretation and reasoning: The Tribunal examined the material actually filed by the assessee - ledger accounts, confirmations, PAN/ITR acknowledgements and tax audit reports of the lenders, banks' statements corroborating receipts and repayments, TDS details and the assessee's own bank statements - and found that (i) the loans were routed through banking channels; (ii) the lenders' financial capacity and turnover were demonstrated; and (iii) repayments were made in subsequent year(s). The Tribunal observed that these contemporaneous documents, which were neither controverted nor disowned by the revenue authorities, prima facie discharged the assessee's onus under section 68. Ratio vs. Obiter: Ratio - where the assessee produces adequate documentary evidence showing identity, creditworthiness and genuineness, and transactions are routed through banking channels with subsequent repayment, additions under section 68 cannot be sustained without further independent contrary material. Conclusion: The addition under section 68 (sum added as unexplained cash credit) was unsustainable and deleted because the assessee discharged the onus by producing uncontroverted documentary evidence and banking trail establishing the genuineness of the loans. Issue 2: Disallowance of interest claimed on loans held to be unexplained Legal framework: Interest on loans is allowable as deduction if the underlying loan transaction is genuine and incurred for the purposes of business. If the principal loan is held as unexplained/bogus, interest claimed thereon may be treated as not allowable. Precedent Treatment: Authorities below disallowed interest where they concluded that the underlying cash credit was bogus. The Tribunal's analysis of interest follows the principal finding on genuineness of loans. Interpretation and reasoning: Since the Tribunal concluded that the assessee had established genuineness of the loan transactions and discharged the onus under section 68, the premise for disallowing interest - that the loans were bogus accommodation entries - fails. Therefore, the rationale for denying interest evaporates with the deletion of the section 68 addition. Ratio vs. Obiter: Ratio - the disallowance of interest founded on a finding that the principal loans were unexplained is not sustainable where the principal finding is reversed upon proper appraisal of documentary and banking evidence. Conclusion: The disallowance of interest is not sustainable given deletion of the principal addition under section 68; interest claimed stands allowable to the extent supported by records (including TDS records and lenders' returns). Issue 3: Reliance on search-recorded third-party statements and modus operandi without confronting the assessee or enabling cross-examination Legal framework: Natural justice and principles of fair hearing require that the assessee be made aware of the material relied upon and be afforded an opportunity to meet the case; where adverse reliance is placed on third-party statements, the assessee should be allowed to challenge or seek cross-examination of those witnesses, particularly where reassessment or addition is consequential. Precedent Treatment: The Tribunal relied on High Court authorities which held that where loans were advanced and repaid through account-payee cheques and lenders responded to section 133(6) notices, the AO must provide the assessee with the material used against it and allow an opportunity to cross-examine witnesses whose statements are relied upon; denial of such opportunity vitiates the proceedings. Interpretation and reasoning: The Tribunal found that the authorities below primarily relied on statements recorded during search operations and the alleged modus operandi of an accommodation-entry operator, but did not (a) specify the particular contradictory material to the assessee, (b) offer opportunity for cross-examination of third-party witnesses whose statements were used, and (c) contradict or disprove the documentary evidence produced by the assessee. The Tribunal treated reliance on untested third-party statements and generalized modus-operandi assertions as insufficient to rebut the concrete bank and documentary proof furnished by the assessee. Ratio vs. Obiter: Ratio - where the Revenue relies on third-party statements and investigative material adverse to the assessee, natural justice requires disclosure and opportunity to cross-examine; absent that, such reliance cannot substitute for independent corroboration that negates the effect of the assessee's documentary proof. Conclusion: The additions premised on reliance upon search-recorded statements and alleged modus operandi, without confronting the assessee with that material or offering cross-examination, were unsustainable. Issue 4: Application and treatment of precedents Legal framework & Precedent Treatment: The Tribunal applied jurisprudence from the jurisdictional High Court and co-ordinate Tribunal decisions which (i) recognize that documentary evidence, bank traces and repayments can discharge onus under section 68, and (ii) emphasize the requirement to afford opportunity to meet adverse material based on third-party statements. Interpretation and reasoning: The Tribunal distinguished neither additional binding precedent nor overturned any authority; rather it applied existing principles to the factual matrix, noting similarity to earlier co-ordinate Bench decisions where identical additions premised on the same accommodation-entry allegations were deleted upon appraisal of documentary evidence and banking trail. Ratio vs. Obiter: Ratio - treatment of prior rulings as controlling on similar factual matrices; Obiter - commentary on the accommodation-entry operator's activities insofar as not supported by contemporaneous evidence against the particular loans in question. Conclusion: Prior decisions that deletions are warranted on similar facts were followed; the Tribunal treated those precedents as persuasive and applicable and accordingly allowed the appeals. Overall Conclusion The additions under section 68 and consequential disallowance of interest were deleted because the assessee discharged the onus by producing uncontroverted documentary evidence (lenders' confirmations, PAN/ITR/tax-audit reports, bank statements, TDS records), demonstrated receipt and repayment through banking channels, and was not afforded a fair opportunity to meet adverse third-party statements relied upon by the Revenue. Co-ordinate and High Court precedents supporting these principles were followed. The appeals were allowed and additions deleted.