2019 (8) TMI 1113 - AT - Income Tax

Unexplained cash credit u/s. 68 - addition on statement on oath of third party (person) recorded u/s.131 - HELD THAT - There is no case of any cash deposits made either at the time of receipt of loan in the account of M/s. Grafton Merchant Pvt. Ltd., or in the account of assessee while making repayment of loan or payment of interest. Hence, there is no need to suspect the entire gamut of transactions before us. Entire addition of principal amount of loans of ₹ 3.75 Crores and disallowance of interest on loans has been made by the AO with surmise and conjecture and without any basis. No deficiencies whatsoever were found in the documentary evidences submitted by the assessee before the AO which admittedly included copy of PAN, ITR acknowledgement, audited financial statements, computation of income, confirmation from lender, bank statements evidencing the immediate source of credit of the lender etc. All these documents clearly prove the identity, creditworthiness of the lender and genuineness of the transaction in the peculiar facts of the instant case. Hence, it could be safely concluded that assessee had indeed complied with all the three necessary ingredients of Section 68. With regard to non-production of Shri Jagdish Prasad Purohit by the assessee before the Ld. AO for the purpose of cross examination of him by the assessee, we hold that it is the revenue which had placed reliance on the statement of Shri Jagdish Prasad Purohit. Hence, Shri Jagdish Prasad Purohit becomes the witness of the revenue. Hence, it is the duty of the revenue to produce the party as their witness in order to enable the assessee to cross examine the said party, if it so desires. This responsibility cannot be shifted to the assessee by the AO. CIT(A) had rightly deleted the addition made u/s.68 of the Act and disallowance of interest on loans, which in our considered opinion, does not call for any interference. Accordingly, the grounds raised by the revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition towards unsecured loans as unexplained cash credit under Section 68 of the Income Tax Act.
2. Deletion of disallowance of interest paid on loans.

Issue-wise Detailed Analysis:

1. Deletion of Addition Towards Unsecured Loans as Unexplained Cash Credit under Section 68 of the Income Tax Act:

The primary issue is whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the addition of ?3,75,00,000 towards unsecured loans as unexplained cash credit under Section 68. The assessee, a partnership firm engaged in the construction business, had received loans from M/s. Grafton Merchant Pvt. Ltd. The Assessing Officer (AO) based his addition on a statement recorded under Section 131 from Shri Jagdish Prasad Purohit, who admitted to providing accommodation entries through various companies, including M/s. Grafton Merchant Pvt. Ltd. The AO contended that the documentary evidence provided by the assessee, such as bank statements, ITR acknowledgements, and audited financial statements, did not prove the identity, genuineness, and creditworthiness of the lender.

The assessee argued that the loan was genuine, supported by banking transactions, and that Shri Jagdish Prasad Purohit had retracted his statement, claiming it was made under duress. The CIT(A) found that the AO did not conduct any independent investigation and relied solely on the statement of Shri Jagdish Prasad Purohit, which was subsequently retracted. The CIT(A) emphasized that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the transaction. The CIT(A) also noted that similar loans in earlier years were accepted as genuine by the AO.

2. Deletion of Disallowance of Interest Paid on Loans:

The interconnected issue is whether the CIT(A) was justified in deleting the disallowance of ?2,28,92,766 towards interest paid on loans. Since the AO treated the loan as bogus under Section 68, the interest paid on such loans was also disallowed. The assessee argued that the interest was paid on loans received in earlier years, which were accepted as genuine by the AO, and the interest was paid after due deduction of tax at source.

The CIT(A) observed that the assessee had provided sufficient details, including bank statements and TDS certificates, to prove the genuineness of the interest payment. The CIT(A) also noted that the AO did not find any flaw in the documentary evidence provided by the assessee. The CIT(A) concluded that since the loan was genuine, the interest paid on such loan should also be allowed as a deduction.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO relied solely on the retracted statement of Shri Jagdish Prasad Purohit without conducting an independent investigation. The Tribunal also noted that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the loan transaction. Consequently, the Tribunal dismissed the revenue's appeal and upheld the deletion of the addition towards unsecured loans and the disallowance of interest paid on loans.