2025 (12) TMI 780 - AT - Income Tax

Revenue's appeal fails as addition u/ss 68 and 115BBE on alleged bogus loans is deleted

ITAT Delhi dismissed Revenue's appeal and upheld the order of CIT(A) deleting the addition made under s.68 r.w.s. 115BBE in respect of alleged bogus ... Unexplained credit received u/s 68 r.ws 115BBE - bogus unsecured loan taken by assessee - reliance on statements of third party - establishment of source of source - as alleged assessee failed to discharge the onus of proving the creditworthiness and genuineness of the transactions appearing in its books of accounts during the course of assessment proceedings - CIT(A) deleted addition - HELD THAT:- As per section 68 of the Act, there must be a credit of amounts in the books maintained by an assessee and such credit has to be of a sum received during the previous year; and the assessee offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessee in the opinion of the AO is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression 'the assessee offer no explanation' means where the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. Opinion of the AO for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the AO is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion. We find that the sole allegation of the AO was that the assessee has taken the bogus accommodation entries in the shape of unsecured loans however, as discussed above, the revenue has failed to controvert the finding of the ld. CIT(A) who not only appreciate the facts of the case and the submissions made by the assessee but also make verification at his own end in terms of the powers u/s 250(4) when the AO has filed to response on the request of ld. CIT(A) of making verification of the submissions made by the assessee. Assessee has discharged the burden casted upon it of establishing the genuineness of the loans and creditworthiness of the lender company and further established the source of source though was not required under the law as existed at the relevant time. Once it is accepted that the lender has creditworthiness for part of the amount, the remaining amount cannot be held as unexplained. There is no case of any cash deposited in the account of any of the lender company at the time of issuing cheques/RTGS in favour of the Assessee. Therefore, Appellant has duly discharged the burden casted upon it u/s 68 of the Act. The assessment cannot be framed only on bare suspicion. The assessment should rest on principles of law and one should avoid presumption of evasion in every matter. The assessee, has sufficiently demonstrated the genuineness of transaction and creditworthiness of the loan creditors. On a broader reckoning, the apprehension raised by the Revenue authorities militates against the tangible material and is thus extraneous. No infirmity in the order of ld. CIT(A) in deleting the additions made u/s 68 towards the unsecured loans by holding the same as accommodation entries. Accordingly, all the grounds of appeal of the revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether unsecured loans received through banking channels could be treated as unexplained cash credits under section 68, despite production of confirmations, bank statements, audited financials and tax returns of the lender, and despite availability of funds in the lender's bank account at the time of transfer. 2. Whether additions under section 68 could be sustained primarily on the basis of third-party/employee statements and older statements from earlier search proceedings, in the absence of corroborative incriminating material relating to the impugned year and transaction. 3. Whether reliance on a governmental press release alleging 'shell companies' was sufficient to discredit the lender and uphold section 68 additions, where the appellate authority made independent verification from the competent agency indicating no pending proceedings against the lender. 4. Whether the appellate authority's calling for information and conducting verification under section 250(4), and forwarding such material to the Assessing Officer for comments (without response), amounted to improper admission of 'additional evidence' attracting Rule 46A objections. 5. Whether, once the principal loan transactions were held genuine and not taxable under section 68, the related interest expenditure disallowed by the Assessing Officer could still be denied. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainability of section 68 additions on loans received from the lender Legal framework (as discussed by the Court): The Court noted that section 68 applies where a credit appears in the assessee's books and the assessee either offers no explanation about its nature and source, or the explanation is not satisfactory; the Assessing Officer's opinion must be objective and based on proper appreciation of material on record. Interpretation and reasoning: The Court found that the assessees produced core documentary evidence including confirmed account copies, lender bank statements, audited financial statements and income-tax return acknowledgements. The Court emphasized that the transactions were through banking channels and that, on the dates of lending, sufficient balances existed in the lender's bank account. The Court also noted internal inconsistency in the Assessing Officer's approach: despite doubting creditworthiness, only part of the loans were treated as unexplained while the remainder was accepted on the same factual footing, undermining the basis of selective addition. The Court further accepted the appellate finding that the Assessing Officer misunderstood certain bank credits in the lender's account as 'fresh loans' when they represented repayments of advances previously made by the lender, making adverse inference from the immediate creditors' financials unwarranted for testing the lender's capacity to advance the impugned loans. Conclusion: Section 68 additions on the impugned unsecured loans were not sustainable; deletion by the appellate authority was upheld across the connected appeals where facts were found identical. Issue 2: Reliance on statements without corroborative material Interpretation and reasoning: The Court agreed with the appellate authority that standalone statements, without corroborative documentary evidence linking the impugned loans to any cash-exchange/accommodation-entry activity, could not justify section 68 additions. It was noted that no incriminating document was shown to have been found and relied upon in relation to the impugned loan receipts, and that statements relied on were either not directly admitting bogus loans to the borrowers or were from earlier years with no demonstrated direct linkage to the impugned years' transactions. The Court also accepted the criticism that relevant contrary statements were not addressed by the Assessing Officer, and that the additions rested on suspicion rather than proof. Conclusion: Additions under section 68 could not be sustained merely on statements, particularly older statements, absent corroboration connecting them to the impugned loan credits. Issue 3: Effect of 'shell company' allegation based on a press release and independent verification Interpretation and reasoning: The Court accepted that the appellate authority made direct enquiries under section 250(4) from the competent agency and obtained a written response stating that no investigation was initiated/pending/disposed against the lender. The appellate authority also obtained information indicating statutory compliance filings with regulators. The Court held that, in light of such verification, the Assessing Officer's allegation founded on the press release could not sustain the addition, particularly when the material gathered through enquiry was shared with the Assessing Officer and no rebuttal was furnished. Conclusion: The 'shell company' allegation, unsupported by verified adverse proceedings and not rebutting the enquiry results, was insufficient to uphold section 68 additions. Issue 4: Rule 46A objection vs enquiry powers under section 250(4) Legal framework (as applied by the Court): The Court treated the appellate authority's action as an exercise of statutory enquiry power under section 250(4), distinct from a case where an assessee invokes Rule 46A to file additional evidence. Interpretation and reasoning: The Court relied on the recorded fact that multiple opportunities were provided to the Assessing Officer to respond to the enquiry material and submissions; however, no objections/comments were filed. The Court accepted the appellate authority's characterisation that evidence obtained from third parties/through enquiry was called for by the appellate authority to reach a logical conclusion and was shared with the Assessing Officer, eliminating any claim of prejudice. On these facts, the Rule 46A challenge was rejected. Conclusion: The appellate authority did not err in relying on material obtained through section 250(4) enquiry; no Rule 46A violation was made out. Issue 5: Disallowance of interest when principal loan is held genuine Interpretation and reasoning: For years where the Assessing Officer disallowed interest on the very loans treated as unexplained, the Court held that once the loans were accepted as genuine and not taxable under section 68, the related interest could not be doubted on the same foundation. The Court therefore upheld deletion of interest disallowances and allowed the interest as business expenditure in the concerned appeals. Conclusion: Interest disallowances tied solely to the rejected section 68 findings could not survive after the loans were held genuine; the interest was allowed.