2011 (9) TMI 753 - HC - Income Tax

Undisclosed income - the first and foremost requirement in respect of cash credit is to establish the identity of the creditor - Held that the creditor of the assessee is a registered company which subsequently transferred its activities to Mumbai and changed its bank account, the address of which was available and even subsequently, the loan in question was paid back to the said creditor through the account payee cheque - the address of the said deponent is also available from the materials placed before the Assessing Officer and the said affidavit was in all respect made by complying with the formalities prescribed by law - the director of the creditors of the assessee affirmed affidavit before the Assessing Officer confirming the loan transaction which was effected to account payee cheques and the address of the bank in the transferred address was also available - Decided in favor of the assessee

Issues Involved:
1. Justification in law for the Tribunal withdrawing the relief granted by the CIT(A) regarding the loan and interest.
2. Justification in law for the Tribunal upholding the addition of the loan and disallowance of interest, questioning the identity, creditworthiness of the creditor, and genuineness of the transaction.

Issue-wise Detailed Analysis:

1. Justification in law for the Tribunal withdrawing the relief granted by the CIT(A) regarding the loan and interest:

The Tribunal had set aside the order of the CIT(A) which had deleted the additions made by the Assessing Officer (AO) concerning the loan of Rs. 3,00,000 and the interest thereon. The AO had disallowed the interest claim and questioned the genuineness of the loan from M/s. East West Arbitrage Investment Pvt. Ltd. due to the inability to verify the existence of the creditor at the given address. The CIT(A), however, had found the addition unjustified based on the materials on record, including an affidavit from one of the directors of the creditor company confirming the loan and its repayment.

2. Justification in law for the Tribunal upholding the addition of the loan and disallowance of interest, questioning the identity, creditworthiness of the creditor, and genuineness of the transaction:

The Tribunal's decision was based on its observation that the affidavit provided by the director of the creditor company did not conform to legal requirements, lacking details such as the age, address of the deponent, and proper verification. The Tribunal also noted that the company was not found at the given address, and there were no tax assessments for the company, raising doubts about its existence and the genuineness of the transaction. However, the High Court found that the Tribunal had misread the materials on record. The affidavit did include the necessary details, and the address of the creditor's bank account in Mumbai was available, which the AO could have used for further verification. The High Court concluded that the creditor was a registered company, the loan was repaid through account payee cheques, and the transaction was confirmed by an affidavit compliant with legal formalities.

Judgment:

The High Court set aside the Tribunal's order and restored the CIT(A)'s order, which had deleted the additions made by the AO. The High Court found that the Tribunal's reversal was based on a misreading of the materials on record and that the assessee had successfully established the identity of the creditor, the creditworthiness, and the genuineness of the transaction. The decisions cited by the Revenue were found inapplicable to the facts of this case. The appeal was allowed, answering both formulated questions in the negative and against the Revenue, with no order as to costs.

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