TaxTMI 
TaxTMI 
2026 (7) TMI 388
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....iled to appreciate that the Assessing Officer has arrived at the amount of addition by applying ad hoc 20% rate on such differences. 2. The brief facts, as borne out from the record, are that the assessee, a partnership firm engaged in the business of trading in textile products, filed its return of income on 14.10.2017 declaring total income of Rs.21,52,980/ -. The case was selected for scrutiny, inter alia, to examine the introduction of substantial capital during the year and statutory notices under the Income-tax Act, 1961 (in short 'the Act') were issued and duly served. In the course of assessment proceedings, the Assessing Officer noted from the Tax Audit Report(TAR) that the assessee had availed unsecured loans aggregating to Rs.18.46 crores from sixteen parties. Upon being called upon to substantiate the same, the assessee furnished supporting evidences in respect of eleven loan creditors, which were accepted by the Assessing Officer. However, in respect of the remaining five loan creditors, the assessee could furnish only confirmations and income-tax return, but failed to produce their bank statements. 2.1 The Assessing Officer further observed material disc....
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.... figures which were inherently not comparable, thereby vitiating the very foundation of the addition. 2.4 It was also submitted that due to lack of adequate opportunity at the assessment stage, the assessee could not place all relevant materials on record. The additional evidences so filed were forwarded by the Ld. CIT(A) to the Assessing Officer for examination. In the remand proceedings, while the Assessing Officer alleged layering and rotation of funds, the assessee, by way of a detailed illustration in the case of M/s. Abhishek, demonstrated that the figures reflected in the tax audit report represented net borrowings after adjusting reciprocal transactions and could not be equated with the aggregate of credits appearing in the confirmation accounts. The relevant submission of assessee is reproduced as under: "17. In order to appreciate the submission of the assessee that the figure of the loan taken by the assessee firm from M/s. Abhishek as reflected in the Tax Audit Report cannot be compared with the total of the credit side of the loan confirmation, your honour's attention is invited to the account confirmation of M/s. Abhishek which is at pages 245 to 248 o....
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....essee firm during the year ended 31.03.2017 because the said figure includes the amount of loan returned by M/s. Abhishek to the assessee firm. The figure of Rs. 24,47,500/- is composed of the following amounts (see pages 333 & 334): Date Amount 25-11-2016 6,80,000/- 06-01-2017 6,00,000/- 06-01-2017 6,25,000/- 23-02-2017 2,67,500/- 28-02-2017 2,25,000/- 07-03-2017 50,000/- TOTAL 24,47,500/- 18. Similarly in respect of other four parties the AO compared the figure of loan taken by the assessee firm as recorded in the Tax Audit Report with the total of the credit side of the account statement (confirmation) of the said four parties and accordingly made the same error of comparing two figures which are not comparable. The details of the said four parties are as under:" Sr. No. Name of the loan creditor Loan taken during the year shown by the assessee in the Tax Audit Report and submission during the assessment proceedings (in Rs.) (Pgs. 10-11) Loan taken by the assessee during the F.Y. 2016-17 as per the confirmation of loan creditors (in Rs.) Page no. of the paper book 1. M/s. K. Tex 2,11,54,000/- 8,1....
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....founded on any independent finding regarding lack of creditworthiness, but rather on an erroneous comparison of figures. 2.6 The Ld. CIT(A), after forwarding the remand report to the assessee and duly considering the rejoinder filed thereto, proceeded to adjudicate the issue on the basis of the assessment order, remand findings, written submissions and the entire material available on record. Upon a comprehensive evaluation of the factual matrix and the applicable legal principles, the Ld. CIT(A) concurred with the conclusions drawn by the Assessing Officer and upheld the impugned addition. 2.7 The appellate authority recorded a categorical finding that the Assessing Officer had not proceeded in a mechanical or arbitrary manner, but had undertaken a creditor-wise examination and accepted the loans from eleven parties as genuine, while making addition only in respect of five creditors where the statutory requirements under section 68 were found to be unfulfilled. Such a selective and reasoned approach, according to the Ld. CIT(A), lends credence to the findings recorded by the Assessing Officer. Dealing with the principal contention of the assessee that the onus stood discharg....
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....the addition to 20% of the differential figure, thereby adopting a moderated and balanced approach. In the absence of any material to demonstrate that even such restricted addition was unwarranted, the same was held to be justified. In view of the cumulative effect of the disproportionate financial profile of the creditors, the layered movement of funds, absence of commercial substance and the failure of the assessee to satisfactorily explain the true source of the impugned credits, the Ld. CIT(A) held that the requirements of section 68 stood unfulfilled. Consequently, the addition of Rs.3,09,95,030/- was confirmed and the grounds raised by the assessee were dismissed. The relevant finding of the Ld. CIT(A) is reproduced as under: "8.2.4 I have carefully considered the assessment order, remand report furnished by the Assessing Officer, the written submissions and the detailed rejoinder filed by the appellant in response to the remand report issued by AO, the arguments were put forth during the course of video-conference hearing and all other material and documents available on record. The arguments made by both sides have been examined after considering the said documents....
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....itional evidences in support of the five loan creditors, including copies of their returns of income, audited financial statements, tax audit reports, running account statements and bank statements. These additional evidences were forwarded to the Assessing Officer and requested to examine the same and furnish a remand report. The Assessing Officer has submitted a detailed remand report after considering the additional material and re-verifying the facts. The findings of the report and the assessment order show that several serious gaps and contradictions in the explanation were given by the appellant, which are discussed here. 8.2.9 An important point pointed out in the remand report is that the comparison between the loans given by the five creditors and their own income. For each creditor, the Assessing Officer prepared a chart showing the amount of loan given to the appellant, the highest balance in their running account and the income shown in their income-tax return. From this, it is noticed that in more than one case the creditors had shown very low income, but had still given very large unsecured loans to the appellant. Further, their capital and net worth, as seen....
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....ctivities of the creditors. 8.2.12 Based on this analysis, the Assessing Officer has concluded that the money was simply being rotated from one concern to another and that the creditors did not have their own independent source of funds. The money moved through related persons and concerns and finally reached the appellant, without any clear business reason. The appellant has not been able to give a proper explanation for the large deposits made just before issuing cheques or for the several layers through which the money passed before reaching it. Because of this, it is clear from the remand report that the real source of funds remains unexplained and that the bank accounts of the said lenders were used only to pass on the funds. The appellant has also not proved that the creditors had their own genuine financial capacity to give the loans. 8.2.13 The remand report further comments on the terms of the loans, particularly the rate of interest and the overall commercial conditions. in several of the impugned cases, interest has been charged at a significantly lower rate than what is ordinarily prevalent for unsecured loans in the open market; in some cases, interes....
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....er issued several notices and gave enough opportunity, including during the remand proceedings. Even after this, the appellant was not able to give a satisfactory and clear explanation about the real source of funds of the five creditors, the pattern of deposits made before giving the loans, and the abnormal loan-to-income position. 8.2.16 The appellant has itself admitted that there was delay in furnishing replies during the original assessment proceedings due to lack of time. Such delay or omission on the part of the appellant cannot dilute or extinguish the statutory burden under section 68, which squarely lies on the appellant to prove, to the satisfaction of the Assessing Officer, the identity of the creditor, the genuineness of the transaction and the creditworthiness of the creditor. None of the decisions cited by the appellant lay down any proposition contrary to this settled legal rule. It is well established that mere proof of identity of the creditor is not sufficient and that the appellant must also affirmatively establish the genuine financial capacity of the creditor and the reality of the transaction. 8.2.17 On the other hand, the action of the Asse....
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.... the loans as required under section 68 in respect of the five creditors. Though the appellant has filed documents such as confirmations, PAN, ITR acknowledgements and bank statements, these papers, when examined along with the loan-to-income comparison, the money trail and layering seen in the bank accounts, the abnormal pattern of interest and the manner in which funds were routed, do not give proper confidence about the real financial capacity of the creditors or the genuine nature of the loan transactions. The explanation given by the appellant, therefore, does not meet the legal requirements fixed by the apex courts and mere paperwork cannot override the true facts of the case. 8.2.19 It is also pertinent to note that the Assessing Officer has not brought to tax the entire amount of loans or the entire difference in balances. Instead, the Assessing Officer has made an addition of only 20 per cent of the verified difference of Rs. 15,49,75,156/-, which comes to Rs. 3,09,95,030/ -. This shows that, far from being arbitrary or excessive, the Assessing Officer has adopted a fair and balanced approach by making only a reasonable and moderated addition, thereby granting the....
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....mount would not be reflected in the tax audit report. This is for the simple reason that the tax auditor is required to report only the loans taken by the assessee. 5.1.1 The ld Counsel explained with an example of M/s. Abhishek (Prop. Kailash Chandra Goyal, HUF), whose ledger account is available on page no. 142 of PB 2, which shows that the aggregate amounts received from the party during the entire period is Rs. 1,54,43,073/- (page no. 144 of PBP 2). However, out of these receipts, only Rs. 24,47,500/- were loans received by the assessee (PBP 145, 146). The ld Counsel explained that precisely those two amounts i.e. Rs. 1,54,43,073/- and Rs. 24,47,500/- have been compared by the A.O. based on which he came to the conclusion that the figures do not match. 5.1.2 Similarly, the figures noted by the A.O. in respect of M/s. K. Tex (Prop. Anil Rameshwarprasad Goyal) are to be found on page nos. 288 to 297 of PB 2 (Rs. 8,17,40,045) and page nos. 298 to 303 of PB 2 (Rs. 2,11,54,000). The ld Counsel explained discrepancy in respect of balance parties with the help of similar documents contained in PB nos. 2 and 3. 5.2 Secondly, regarding non furnishing of Bank statements of credi....
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....basis of making the impugned addition is that the appellant did not furnish the bank statement of the loan creditors. He submitted that all the said loan creditors are related parties and was not at all difficult for the assessee to furnish the same; time was the only constraint. All the loan creditors are regular taxpayers and have been filing their return of income regularly. Further, the relevant bank statements of the loan creditors were furnished as additional evidence, for admission and subsequent perusal(refer page nos. 109 to 117, 137 to 161, 185 to 221, 242 to 252 and 264 to 303 of the paper book.) 5.2.2 The ld Counsel submitted that above explanation is self- speaking and needs no further comments. Therefore, it is submitted that the assessee was quite justified in filing the bank statements of the parties before the CIT(A) as additional evidence. In any case, the A.O. has gone through the above additional evidence and made several observations in respect of bank account entries. Such observations have been upheld by the CIT(A) also. Thus, the additional evidence has been duly considered on merits by the authorities below. 5.3 Thirdly, regarding comments of ld AO/CI....
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..... 59 of PBP 1). In the remand report, the A.O. raised several new objections that too without granting any opportunity of hearing to the assessee. He submitted that the CIT(A) has merely reiterated the objections of the remand report and confirmed the addition. 5.4.1 Ld Counsel for the assessee submitted that the objections raised by the A.O. in the remand report, are broadly same as the objections raised by the CIT(A). He submitted that some of the objections raised in the remand report were nothing, but repetition of objections raised in the assessment order. 5.4.2 Ld Counsel referred to para 12 of the remand report of ld AO (page no. 64 of PB 1), and submitted that the A.O. objected the stand of the assessee that the ledger account of loan parties are running account. In this regard, it is submitted that a bare perusal of the ledger accounts would show that those are running account in nature. Further, the A.O. has also raised doubt about the amounts given as a loan to these parties as being shown in the tax audit report of these parties. It is submitted that the amounts received by these parties from assessee has been duly shown by these parties in their tax audit report.....
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....ity. In any case, none of the above transactions referred by the A.O. invokes loans received by the assessee. In fact, these are payments made by the assessee. 5.4.5 The ld Counsel submitted that the A.O., while making such baseless allegations, completely brushed aside certain vital facts which are as under: (i) The assessee firm was incorporated on 01.04.2016 and it has eighteen partners, who are related to each other (page no. 126 of PB 1). The firm was incorporated to reorganise the family business. This being the first year of the business and since the erstwhile entities of the group discontinued the existing business, there was a need of transfer of funds amongst the group entities. (ii) The transactions amongst the group entities are through cheque, fully accounted and reported to the Income-tax Department. The group entities had followed a consistent practice of paying as well as charging interest on the outstanding daily balances. Such interest has also been reported to the Income-tax Department which has been taxed/ allowed as a deduction without any objection by the officers of the Department including the A.O. 5.4.6 Further, the ld Counsel submi....
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....e ld CIT(A) has merely repeated the observations made by the AO in remand report and sustained the addition. 6.1 The primary basis for the impugned addition is the alleged 'inconsistency' in figures. However, the Ld. Counsel for the Assessee has successfully demonstrated that this discrepancy is a mathematical mirage. The Tax Audit Report correctly captures only the de novo loans received during the year, whereas the ledger confirmations reflect a 'running account', inclusive of repayments of earlier advances made by the assessee to these related parties. 6.2 Upon a granular examination of the ledger of M/s. Abhishek, we find that the AO conflated gross credit entries (including repayments to the assessee) with fresh loan infusions. In our opinion an addition under Section 68 cannot be sustained on a misunderstanding of accounting entries. Once the credits are identified as repayments of the assessee's own funds previously advanced, they lose the character of "unexplained credits." 6.3 A perusal of the Assessment Order reveals a fundamental legal infirmity. The AO accepted the identity, creditworthiness, and genuineness of eleven out of sixteen lenders.....