2015 (11) TMI 175 - AT - Income Tax

Unsecured loans added as unexplained cash credit u/s. 68 - Held that - AO had not taken meagre bank balances as the sole criterion for judging creditworthiness of these loan creditors but creditworthiness of the loan creditors is based on examination of all the relevant facts emanating from their I. T. Returns, Computation of total income, Balance Sheets, Bank Accounts statements recorded u/s.131 etc. The contention of the Ld. Counsel for the assessee that necessary documentary evidences in support of the claim of receipt of unsecured loan from the loan creditors were produced before the A.O. and the assessee has discharged its duty properly and therefore it was for the A.O. to verify the documents before treating the loans as not genuine is without any basis. The AO has definitely gone through the documents produced by assessee and only after thorough examination of the documents and statements recorded u/s.131 came to the conclusion that these five loan creditors are not creditworthy enough to advance the loan amounts. If the assessee has not been able to prove the creditworthiness of the loan creditors, the cash credits are liable to be treated as unexplained and added back under u/s.68 of the Act. To sum up, the creditworthiness of the loan creditors must be proved beyond doubt by the assessee to substantiate the claim of receipt of unsecured loan from them. In this case, the assessee has failed to prove the creditworthiness of the five loan creditors and therefore failed to substantiate the receipt of unsecured loan - Decided against assessee.

Summary

Issues Involved:
1. Addition of Rs. 7,00,000 as unexplained cash credit under Section 68 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 7,00,000 as unexplained cash credit under Section 68 of the Income-tax Act, 1961:

Background:
The assessee, engaged in real estate development and promoter-ship business, received unsecured loans totaling Rs. 15,80,000 from eight loan creditors. The Assessing Officer (AO) accepted the genuineness of loans from three creditors but questioned the creditworthiness of the remaining five creditors and added Rs. 7,00,000 to the assessee's income as unexplained cash credit under Section 68 of the Act.

Assessment Proceedings:
The AO observed that for the five disputed creditors (Subhas Jain, Phoolchand Jain, Phoolchand Sarwogi, Softy Jain, and Pannadevi Jain), equivalent amounts of cash were deposited in their bank accounts on the same day cheques were issued to the assessee. The AO found that the sources of income of these creditors did not justify their creditworthiness, and their income tax returns did not substantiate their ability to advance interest-free loans. The AO highlighted that these creditors had meager bank balances and no substantial transactions in their accounts during the year, leading to the conclusion that they were not financially well off.

CIT(A) Proceedings:
The CIT(A) upheld the AO's decision, emphasizing that the assessee failed to prove the creditworthiness of the five loan creditors. The CIT(A) noted that the AO had thoroughly examined the documentary evidence, including bank statements, income tax returns, and statements recorded under Section 131. The CIT(A) referenced various judgments establishing that the assessee must prove the identity, capacity, and genuineness of the transactions. The CIT(A) concluded that the assessee did not meet these criteria and confirmed the addition of Rs. 7,00,000 as unexplained cash credit.

Tribunal's Findings:
The Tribunal reviewed the facts and circumstances, noting that the assessee failed to establish the creditworthiness of the five loan creditors. It reiterated that the assessee must prove the genuineness of the transactions, the identity of the creditors, and their capacity. The Tribunal found that the AO had correctly identified the discrepancies in the creditors' bank statements, where equivalent amounts of cash were deposited just before issuing cheques to the assessee. This pattern raised doubts about the genuineness of the transactions. The Tribunal agreed with the AO's assessment that the creditors' financial status did not support their ability to provide interest-free loans.

Conclusion:
The Tribunal upheld the findings of the CIT(A) and confirmed the addition of Rs. 7,00,000 as unexplained cash credit under Section 68 of the Income-tax Act, 1961. The appeal of the assessee was dismissed, and the order was pronounced in the open court on 17.09.2015.