2018 (11) TMI 1320 - AT - Income Tax

Addition u/s 68 - unsecured loans receipt - interest paid on unsecured loans - non appearance by creditors on summons issued to them - test of identity, creditworthiness of loan creditors and genuineness of transactions - Held that - The interest paid on unsecured loans to all the loan creditors till the date of conversion of part of the amounts of the same into equity share capital were duly allowed as deduction by the AO - no scope for treating the loan creditors / shareholders as in-genuine- assessee had furnished all the required documents to prove that the identity of the creditors, creditworthiness of the creditors and the genuineness of transactions within the meaning of section 68 in the instant case. All the creditors had duly filed confirmations before the AO Merely because the summons issued seeking their personal appearance is not complied with, the entire transactions cannot be treated as bogus and cannot be doubted by the revenue, especially when the entire onus has been proved by the assessee in the facts of the instant case. The assessee had only converted the unsecured loans with interest into equity share capital in part in the facts of the instant case. Out of total 8 loan creditors, the assessee had received loans from 6 parties in the earlier years and were carried over as opening balances during the year under appeal. Even the sum of ₹ 15 lacs was received from 2 parties during the year were from existing loan creditors only and not new loan creditors. Hence the test of identity, creditworthiness of loan creditors and genuineness of transactions had already been tested and accepted by the revenue in the earlier year. - Decided in favour of assessee.

Issues Involved:

1. Justification of the addition of ?86,00,000/- under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Justification of the Addition of ?86,00,000/- under Section 68 of the Income Tax Act, 1961:

The primary issue in this appeal is whether the addition of ?86,00,000/- under Section 68 of the Income Tax Act, 1961, was justified. The assessee, a private limited company engaged in the business of transmission line of power service station and civil work, had filed its return of income for the Assessment Year 2012-13, declaring a total income of ?30,97,180/-. During the year under appeal, the assessee had allotted paid-up share capital to the tune of ?86,00,000/-, which was converted from unsecured loans.

The assessee explained that it had received unsecured loans from eight parties, and some of these loans were carried over as opening balances from the previous year. Interest was paid on these loans up to the date of conversion into equity share capital at face value, and the interest paid was allowed as a deduction by the Assessing Officer (AO) in the earlier year. Details of these transactions, including interest paid and TDS, were provided.

The AO questioned the creditworthiness of the shareholders, noting their low taxable income and minimal business activity. Summons issued to the director of the assessee company to produce the share subscribers were not complied with, leading the AO to treat the entire credit of ?86,00,000/- as unexplained cash credit under Section 68.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, leading the assessee to appeal before the ITAT.

Upon review, the ITAT found that the assessee had not received any new sum towards share capital during the year under consideration. The assessee had received unsecured loans from existing creditors, and these loans were converted into equity share capital. The ITAT noted that the interest paid on these loans was allowed as a deduction by the AO in the past and in the year under appeal, indicating the acceptance of the identity, creditworthiness, and genuineness of the transactions by the revenue.

The ITAT referenced several judicial precedents, including decisions from the Karnataka High Court, Gujarat High Court, and the Jurisdictional High Court, which supported the view that amounts received in earlier years and converted into share capital in the current year could not be treated as unexplained cash credits under Section 68.

The ITAT concluded that the assessee had furnished all required documents to prove the identity, creditworthiness, and genuineness of the transactions. The non-compliance with summons for personal appearance did not justify treating the transactions as bogus. The ITAT held that there was no case for making any addition under Section 68 for the sum of ?86,00,000/- and allowed the appeal of the assessee.

Conclusion:

The appeal of the assessee was allowed, and the addition of ?86,00,000/- under Section 68 of the Income Tax Act, 1961, was found to be unjustified. The ITAT emphasized the importance of the identity, creditworthiness, and genuineness of transactions, and the fact that these were accepted by the revenue in earlier years.

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