2018 (8) TMI 2007 - AT - Income Tax

Addition u/s 68 - AO had issued commission u/s 131(1)(d) to the Assessing Officers of the lender companies who have conducted enquiries from the directors of the lender companies by issue of summons u/s 131 and submitted report to the Assessing Officer of the assessee - HELD THAT - Directors in their statements recorded u/s 131 have confirmed to have given loans to the assessee company and their bank statements, PAN numbers, audited accounts were also forwarded by AO of the lender companies to the Assessing Officer of the assessee. No adverse finding given by the concerned AO of the lender companies - find that from the date of receipt of the report from the concerned Assessing Officers till the date of finalizing of the assessment order, the Assessing Officer has not made any further efforts to find out that the balance sheets showing creditworthiness of the lender companies and the transactions made through banking channel are false or untrue. The assessee in the instant case, in our opinion, has discharged the onus cast on it and nothing has been brought on record by the Assessing Officer to disprove the same. Merely because these lender companies have done meager business or have declared meager income, the same cannot be a ground to disbelieve their creditworthiness especially when their respective balance sheets show sufficient capital and reserves to advance such loans to the assessee company. The assessee in the instant case , in our opinion, has proved the identity and creditworthiness of the loan creditors and genuine of the transaction. Since the Assessing Officer in the instant case has accepted the identity of the loan creditors and genuineness of the transaction in the letter addressed to the assessee and the concerned Assessing Officers of the loan creditors while giving the report along with their profit and loss account and balance sheet have not given any adverse finding about the creditworthiness of the loan creditors, therefore, considering the totality of the facts of the case, we are of the considered opinion that the assessee in the instant case has discharged the burden cast on it by proving all the three ingredients of provisions of section 68 - Grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Addition of ?3,48,50,000/- under Section 68 for unsecured loans.
2. Disallowance of ?37,23,402/- out of the interest account.

Issue-Wise Detailed Analysis:

1. Addition of ?3,48,50,000/- under Section 68 for unsecured loans:

The assessee, a partnership firm, filed its return of income declaring ?71,330/-. During assessment, the Assessing Officer (AO) noted unsecured loans totaling ?3,85,50,000/- from 25 persons, including ?3,48,50,000/- from 20 private limited companies. The AO issued a commission under Section 131(1)(d) to the respective AOs of the lender companies for verification. Despite receiving documents such as audited profit and loss accounts and bank statements, the AO doubted the genuineness and creditworthiness of the transactions, suspecting the involvement of shell companies. Consequently, the AO issued a show cause notice to the assessee and made an addition of ?3,48,50,000/- under Section 68, citing unsatisfactory establishment of creditworthiness and genuineness.

The assessee argued that the identity and creditworthiness of the loan creditors were proven through submitted documents, including bank accounts and net worth details. The AO, however, remained unconvinced, noting that the transactions appeared to be mere paper entries involving shell companies. The AO's decision was upheld by the CIT(A), who emphasized that mere banking transactions do not validate the genuineness of the loans.

Upon appeal, the Tribunal found that the assessee had provided sufficient details, including the names, addresses, PAN numbers, and financial statements of the lender companies. The respective AOs of the lender companies confirmed the loans through recorded statements and submitted reports without adverse findings. The Tribunal noted that the AO had accepted the identity and genuineness of the transactions but doubted only the creditworthiness. The Tribunal referenced several judicial precedents, including the Hon’ble Calcutta High Court's decision in CIT vs. M/s Dataware Private Limited and the Hon’ble Delhi High Court's decision in CIT vs. Kinetic Capital Finance Ltd., which supported the assessee's position that the initial burden of proof was discharged, shifting the onus to the AO.

The Tribunal concluded that the assessee had proven the identity, creditworthiness, and genuineness of the loan creditors. The AO failed to disprove the evidence provided. Therefore, the addition of ?3,48,50,000/- under Section 68 was deemed unwarranted and was deleted.

2. Disallowance of ?37,23,402/- out of the interest account:

The AO disallowed the interest of ?37,94,738/- paid on the unsecured loans due to the perceived lack of genuineness of the loans. The CIT(A) upheld the disallowance, agreeing with the AO's reasoning.

However, given the Tribunal's decision to delete the addition of ?3,48,50,000/- under Section 68, the disallowance of interest related to these loans also lacked basis. The Tribunal found that the interest payments were genuine and supported by proper documentation, including TDS deductions and deposits to the Central Government. Consequently, the disallowance of ?37,23,402/- was also deleted.

Conclusion:

The Tribunal allowed the appeal, setting aside the orders of the AO and CIT(A). The addition of ?3,48,50,000/- under Section 68 and the disallowance of ?37,23,402/- out of the interest account were both deleted, favoring the assessee. The judgment emphasized that the assessee had sufficiently discharged its burden of proof regarding the identity, creditworthiness, and genuineness of the loan creditors and transactions.