2015 (1) TMI 1399 - AT - Income Tax

Addition u/s 68 - Held that - If the revenue authorities had any information then, without the knowledge of the assessee, the same was exchanged by the AOs and consequently held against the assessee. In this proceeding, assessee was not even involved. It is a fact that the assessee did not have any dealings with either Hitech or Citibase Multimedia. This fact, even the revenue authorities were not able to controvert. In the statement of Mr. N C Trivedi, proprietor of Hitech, had submitted the sales tax no., its stock accounts and the bank statements and he had stated that Hitech who had a turnover of over 5.60 crores had advanced funds to LFPL. But the revenue authorities went further and quizzed the director of Citibase Multitrade, who stated that they were providing book entries. Probably, this was the reason, why the revenue authorities had been using the pharse, unholy nexus . If the learned AO was in possession of any such information, why instead of supplying the same to respective AO of said parties, the same was used against appellant as there is no connection whatsoever between us and the dealings of said parties. Once the creditor was established, there was no occasion for the revenue to go further to find out whether creditor of creditor was also genuine and creditworthy. Meaning whereby, as in the appeal before us, the AO of Hightech should have corresponded that the transaction with Hightech and LFPL was not genuine. - Decided in favour of assessee

Summary

Issues Involved:
1. Addition of Rs. 1,65,00,000 under Section 68 of the Income Tax Act.
2. Genuineness of loan transaction from Lorraine Finance Pvt. Ltd. (LFPL).
3. Requirement to prove the source of funds of the lender's lender.

Issue-Wise Detailed Analysis:

1. Addition of Rs. 1,65,00,000 under Section 68 of the Income Tax Act:
The assessee contested the addition of Rs. 1,65,00,000 made by the AO under Section 68 of the Income Tax Act. The AO had concluded that the assessee failed to establish the genuineness of the loan transaction from Lorraine Finance Pvt. Ltd. (LFPL) and the creditworthiness or real source of the funds. The CIT(A) upheld the AO's decision, stating that the unsecured loan shown was not from any genuine source and was an arrangement to utilize unaccounted money through banking channels.

2. Genuineness of Loan Transaction from Lorraine Finance Pvt. Ltd. (LFPL):
The assessee provided various confirmations from LFPL, including responses under Section 133(6) and personal appearances under Section 131, demonstrating the source of funds. The AO, however, questioned the source of the funds, tracing them back to M/s Hitech Engineers and Citybase Multitrade Pvt. Ltd., which were involved in hawala transactions. The CIT(A) supported the AO's findings, emphasizing that the loan was not from a genuine source and involved unaccounted money.

3. Requirement to Prove the Source of Funds of the Lender's Lender:
The ITAT noted that the amended Section 68, which requires the assessee to submit details of the source of funds for the party from whom the funds were received, applies from AY 2013-14 onwards and was not applicable to AY 2010-11. The ITAT emphasized that the assessee had provided sufficient evidence to prove the genuineness of the loan from LFPL, including confirmations and bank statements. The ITAT cited various judicial precedents, stating that the assessee is not required to prove the source of the lender's lender (source of source).

Conclusion:
The ITAT found that the AO and CIT(A) had overstepped by investigating the source of source, which is not required. The ITAT held that the assessee had discharged its burden by providing necessary confirmations and bank statements. The addition of Rs. 1,65,00,000 was deleted, and the appeal filed by the assessee was allowed.

Order:
The ITAT set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 1,65,00,000. The appeal filed by the assessee was allowed. The order was pronounced in the open Court on 21st January, 2015.