2016 (5) TMI 850 - AT - Income Tax

Unexplained cash credit u/s 68 - Held that - The assessee had brought the loan balances from these three parties to Nil as on 31.3.2009 in its books of accounts. It is not in dispute that the assessee was indeed carrying on money lending business in the past and had derived interest income thereon. This is quite evident from the copy of audited balance sheets filed by the assessee for the years ended 31.3.1998 and 31.3.1999, wherein the interest income is admitted by the assessee as income from business. It is also not in dispute that the revenue had also accepted the same as income from business in the past. It is not in dispute that the assessee had continued to carry on its money lending business. It is also not in dispute that the lending to these parties were made in the ordinary course of money lending business of the assessee. Since the assessee has claimed that the monies have been realized from these parties, it is estopped from proceeding against these parties from making any recoveries. It is also not in dispute that the assessee had brought the balances of these parties to Nil as on 31.3.2009 in its books of accounts. Hence the assessee is entitled to claim the balances of these three parties as a trading loss u/s 28 of the Act. Thus we find lot of force in the alternative argument of the assessee that the non-recovery of the loan dues , according to Learned AO, should be allowed as a deduction as regular business loss from money lending activity , which in turn would only go to increase the business loss of the assessee for the year under appeal and the same would in turn be available for set off against the alleged income from other sources u/s 68 of the Act. Hence in any case, no addition could be made in the hands of the assessee - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the sum of ?36,50,036/- received by the assessee could be added as unexplained cash credit under Section 68 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Addition of ?36,50,036/- as Unexplained Cash Credit under Section 68 of the Income-tax Act, 1961
The assessee, involved in the trading of cotton and money lending, had cash deposits totaling ?42,30,036/- in its bank account. Out of this, ?5,80,000/- was accepted as deposited out of cash in hand. The remaining ?36,50,036/- was claimed to be repayments from three parties (M/s Raj Enterprises, M/s Brand Alloys Ltd, and Mr. Vinay Baid) towards old loans. The assessee provided confirmation from Mr. Vinay Baid but could not provide confirmations for the other two parties.

The Assessing Officer (AO) added ?36,50,036/- as unexplained cash credit under Section 68 of the Act, citing that the identity, creditworthiness, and genuineness of the transactions were not proven. The assessee argued that the AO should have issued summons under Section 131 to verify the claims, and alternatively, if the amounts were not considered genuine, they should be allowed as bad debt under Section 36(1)(vii) or as a regular business loss.

First Appeal:
On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, agreeing that the assessee failed to discharge the onus of proving the transactions' genuineness. The assessee reiterated that the amounts were old loan recoveries and should either be accepted as genuine or allowed as a business loss.

Tribunal's Findings:
The Tribunal reviewed the materials, including partnership deeds and financial records, and noted that the assessee had indeed engaged in money lending as part of its business. The Tribunal observed that the assessee had shown these amounts as loans and advances in its balance sheet for over ten years and had reduced these balances to nil in the financial year under appeal.

The Tribunal found that:
- The assessee could not prove the creditworthiness of M/s Raj Enterprises and M/s Brand Alloys Ltd, nor the genuineness of the transactions.
- The AO's decision to treat the amount as unexplained cash credit under Section 68 was justified.
- However, since the assessee was engaged in money lending and had shown these amounts as loans and advances, the non-recovery of these amounts should be treated as a business loss.

Conclusion:
The Tribunal concluded that the non-recovery of the loan dues should be allowed as a deduction as a regular business loss from the money lending activity. This business loss would offset the income from other sources, making the addition of ?36,50,036/- revenue neutral. Therefore, the Tribunal allowed the appeal of the assessee, negating the addition made by the AO.

Judgment:
The appeal of the assessee was allowed, and the addition of ?36,50,036/- as unexplained cash credit was set aside. The non-recovery of the loan dues was treated as a business loss, offsetting the income from other sources.