2015 (4) TMI 675 - AT - Income Tax

Addition of cash credits u/s 68 of the Income Tax Act, 1961 - Failed to prove credit worthiness of creditors - Disallowance of Interest expenses - Held that - We notice that the assessee has discharged the initial burden of proof placed upon it u/s 68 of the Act by proving the credit worthiness of all the creditors. As pointed out by Ld CIT(A), the quantum of income declared in the income tax returns is not the sole factor that determine the credit worthiness. On examination of the Balance sheet filed by the creditors, the Ld CIT(A) has given a definite finding that all the creditors were having enough sources, either received through realisation of sundry debtors or through loans, for giving advance to the assessee. Before us, the Ld D.R could not controvert the above said findings given by Ld CIT(A). We notice that he assessing officer, as observed by the first appellate authority, has proceeded to assess the creditors u/s 68 of the Act on surmises and conjectures without rebutting any of the evidences furnished by the assessee. Hence, we do not find any reason to interfere with the order passed by the Ld CIT(A) in AY 2008-09. We have earlier noticed that the assessing officer has followed his reasoning given in the assessment order passed for AY 2008-09 to make the addition of creditors u/s 68 of the Act in this year also. However, the Ld CIT(A) has considered the financial statements furnished by the assessee in respect of each of the creditors and has given a definite finding that the creditors have enough sources to advance the loan to the assessee. Thus, the Ld CIT(A) has held that the assessee has discharged the initial burden of proof placed upon it u/s 68 of the Act. Hence, we do not find any reason to interfere with his order in AY 2009-10 also. Since the creditors are held to be genuine, the disallowance of interest made by the AO is also liable to be deleted. Accordingly we confirm the order of Ld CIT(A) on that issue also. - Decided against the revenue.

Summary

Issues Involved:
1. Deletion of addition of cash credits made under Section 68 of the Income Tax Act for AY 2008-09 and AY 2009-10.
2. Disallowance of interest expenditure related to the creditors assessed in AY 2008-09 and AY 2009-10.

Detailed Analysis:

1. Deletion of Addition of Cash Credits under Section 68:

Assessment Year 2008-09:
The assessee, engaged in civil construction, showed an increase in unsecured loans from Rs. 18.03 crores to Rs. 24.75 crores. The Assessing Officer (AO) called for details of fresh loans and, upon examining the creditors' income tax returns and bank statements, found the declared incomes to be disproportionately low compared to the loans given. Additionally, there was rotation of funds among creditors, who shared common addresses and had substantial bank transactions. The AO concluded that the creditors were providing accommodation entries, allowing the assessee to bring back undisclosed income as loans, and assessed Rs. 15.14 crores as income under Section 68.

Appellate Proceedings:
The Commissioner of Income Tax (Appeals) [CIT(A)] examined the financial statements of the creditors and concluded that the sources of funds were explained. The AO failed to submit a remand report on the financial statements, and thus, the CIT(A) held that the assessee discharged the primary burden under Section 68, leading to the deletion of the assessment.

Assessment Year 2009-10:
Following the same reasoning as for AY 2008-09, the AO assessed Rs. 2.33 crores as income and disallowed Rs. 2.01 crores of interest expenditure. The CIT(A) deleted these assessments and disallowances for identical reasons.

Tribunal's Findings:
The Tribunal reiterated that the initial burden of proof under Section 68 lies with the assessee, who must establish the identity, genuineness, and creditworthiness of the creditors. The identity and genuineness were established through confirmation letters, income tax returns, and banking transactions. The AO doubted the creditworthiness based solely on the low income declared by creditors without examining their financial statements. The CIT(A) found that the creditors had sufficient sources to advance the loans, as evidenced by their balance sheets and business turnover. The AO did not rebut the evidence provided by the assessee. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the addition under Section 68 for both assessment years.

2. Disallowance of Interest Expenditure:

Since the creditors were held to be genuine, the disallowance of interest expenditure related to these creditors was also deleted by the CIT(A). The Tribunal confirmed this deletion, as the genuineness of the creditors was established, and the interest expenditure was consequently allowable.

Conclusion:
The Tribunal dismissed the revenue's appeals for both assessment years, confirming the CIT(A)'s orders to delete the additions made under Section 68 and the disallowance of interest expenditure. The judgment emphasized the importance of the AO's duty to rebut the evidence provided by the assessee and not rely on presumptions or conjectures.