2017 (6) TMI 949 - AT - Income Tax

Unexplained cash credit u/s 68 - proof of creditworthiness of the creditors and genuineness of the lenders - Held that - AO examined six persons only and accordingly made addition by forming the opinion that the loans taken by the assessee were non-genuine and bogus. It is also undisputed fact that the AO has allowed interest on these borrowings amounting to ₹ 7,78,282/- during the year. While making the addition of money borrowed from these parties as being bogus and non-genuine. Similar deduction in respect of interest on these unsecured loans was also allowed in the subsequent years. Now it is very strange that how the AO has accepted the transaction in part by allowing the interest on these loans while making the addition for the amount of loans by treating the same as non- genuine and bogus under section 68 of the Act. Moreover, these loans were repaid by account payee cheques in the subsequent years and no more outstanding in the books of account of the assessee. The identity of the creditors have not been doubted whereas the creditworthiness of the creditors and genuineness of the lenders seems to be doubted which becomes meaningless and absurd in the present case as the AO has allowed interest on the borrowed funds in the current years and also in the subsequent years and therefore the order of the ld.CIT(A) confirming the addition u/s 68 in respect of 31 creditors is not correct and cannot be sustained. - Decided in favour of assessee.

Issues Involved:
1. Confirmation of addition of ?1,28,00,000 as unexplained cash credit under Section 68 of the Income Tax Act, 1961.

Detailed Analysis:

1. Confirmation of Addition of ?1,28,00,000 as Unexplained Cash Credit:

Background:
The assessee, a developer, filed an e-return declaring a total income of ?2,52,25,076. During scrutiny, the Assessing Officer (AO) observed unsecured loans of ?1,80,00,000, out of which loans amounting to ?1,28,00,000 from 31 creditors were deemed non-genuine. The AO noted that these creditors lacked creditworthiness and were essentially laborers under the assessee's sub-contractors. Statements from some creditors confirmed that the loans were arranged by their employer and they had no independent source of funds. Consequently, the AO added ?1,28,00,000 to the assessee's income as unexplained cash credit under Section 68.

First Appellate Proceedings:
The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who called for a remand report from the AO. Despite additional evidence provided by the assessee, including confirmation letters and IT returns, the CIT(A) upheld the AO's addition. The CIT(A) emphasized that the AO's inquiries revealed that the creditors lacked the capacity to lend money, and the transactions were essentially accommodation entries.

Arguments by the Assessee:
The assessee argued that the loans were genuine, supported by PAN details, income tax returns, and bank accounts of the creditors. It was customary for developers to borrow money from laborers, arranged by sub-contractors. The assessee also highlighted that interest on these loans was allowed by revenue authorities in subsequent years, indicating acceptance of the transactions. Furthermore, the assessee contended that the investigation findings were not confronted to them, violating the principle of natural justice.

Arguments by the Revenue:
The Revenue argued that the creditors' bank accounts were opened shortly before the loans were given, with multiple cash deposits and cheque transfers indicating accommodation entries. The mere acceptance of interest payments did not prove the genuineness of the transactions or the creditworthiness of the creditors.

Tribunal's Findings:
The Tribunal noted that the AO allowed interest on the loans in the current and subsequent years, contradicting the claim that the loans were non-genuine. The AO's failure to confront the assessee with the investigation findings and the lack of cross-examination opportunity violated natural justice principles. The Tribunal found that the AO did not prove that the money originated from the assessee. Given these contradictions and procedural lapses, the Tribunal concluded that the addition under Section 68 was not justified.

Conclusion:
The Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition of ?1,28,00,000 as unexplained cash credit, allowing the assessee's appeal.

Order Pronouncement:
The appeal was allowed, and the order was pronounced in the open court on 31st March 2017.

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