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2019 (12) TMI 988 - HC - Income TaxAddition u/s 68 - Reason for taking cash loan - HELD THAT - From the record of the Assessing authority, we do not find any kind of examination of Affidavits or cross examination by the Assessing authority of these persons. The Affidavit of Mr.N.Rajagopalan, inter alia states that he is a retired employee of the Southern Railways and out of his retirement benefits received, he advanced a sum of ₹ 3,00,000/- (Rupees three lakhs only) to his brother's son who is the Managing Director of the Assessee Company. The other Affidavit of Ms.Dhanam shows that she has advanced a sum of ₹ 1,00,000/- (Rupees one lakh only) as loan to the Managing Director of the Assessee Company, from the amount received out of the business carried out by her husband and agreed to take interest at the time of final settlement. In the absence of any cross examination or rebuttal or controverting of these Affidavits, the learned Assessing Authority could not have concluded that the Assessee has failed to adduce the evidence to prove the identity of the creditor, genuineness of the transaction and creditworthiness of the creditor. The Managing Director who was drawing a sum of ₹ 60,000/- p.a. as salary had advanced only a sum of ₹ 10,000/- out of the sum of ₹ 4,10,000/-. He has also stated in his Affidavit dated 05.09.2007 about the adverse legal consequences under Section 58A of the Companies Act, 1956, as the direct cash deposits will tantamount to the acceptance of Deposits, in violation of Section 58A of the Companies Act. Therefore, the Managing Director, for obtaining the required unsecured loan, had chosen the route of taking cash loans from his own relative and friend and had given the same to the Assessee Company without attracting Section 58A of the Companies Act. About the non- mentioning of the said fact in his own return of income, the said Managing Director has explained that since he was not maintaining the Books of Accounts and nor he furnished any Balance Sheet, he was not bound to give any note for the same in his Return of Income, as there was no statutory requirement for disclosing the personal cash loan taken by Managing Director in the Return of Income, where only income earned during the year is required to be disclosed and not the loan taken during the year. In the absence of maintaining of the Books of accounts, there was no question of producing the Balance sheet with the Return of Income, which was a reasonable explanation and these explanations of the Managing Director at least required the consideration on the part of the Assessing Authority as the said Assessing Authority enjoyed the powers of a Civil Court but he has not undertaken the exercise of cross examination in respect of the Affidavits filed by the Managing Director and two other persons as aforesaid. Without undertaking this exercise, the conclusions drawn by him in the Appeal proves that he has failed to discharge his duty and therefore such foundation less findings cannot be sustained, as they are perverse. The power to make additions under Section 68 of the Act of the un-explained cash credit, requires such an exercise to be undertaken by the authorities in a diligent, just and fair manner. But we do not find any such solemn exercise undertaken by the Authorities in the present case. The affirmation of findings without undertaking similar exercise also cannot be sustained. They just glossed over and mechanically affirmed the findings of Assessing Authority. Therefore, we are inclined to remit the case back to the Assessing Authority for the limited purpose of holding enquiry on the issue of additions made under Section 68 of the Act in the present case. We allow this Appeal filed by Assessee only for this limited purpose and remand the case back to the Assessing Authority without answering the Substantial Questions of Law at this stage and grant six months time to the Assessing authority to complete the said exercise.
Issues Involved:
1. Whether the sum of ?4,10,000/- being a loan from the Managing Director is 'unexplained cash credit' assessable to tax under Section 68 of the Income Tax Act, 1961. 2. Whether the Appellate Tribunal erred in not accepting the evidence by way of confirmatory letters and sworn affidavits of the Managing Director and his creditors, thereby treating the sum as unexplained income. Issue-Wise Detailed Analysis: 1. Unexplained Cash Credit under Section 68: The primary issue revolves around the addition of ?4,10,000/- as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the unsecured loan given by the Managing Director to the Assessee Company, citing the lack of documentary evidence and the fact that the transaction was not routed through banking channels. The AO emphasized that the Managing Director's income was insufficient to substantiate the loan amount, and there was no mention of the loan in his return of income. The Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) upheld the AO's decision, agreeing that the Assessee failed to prove the creditworthiness and genuineness of the transaction. 2. Rejection of Evidence: The Assessee argued that the loan was taken by the Managing Director from his relatives and friends, supported by affidavits from the creditors. However, the AO rejected these affidavits without cross-examination, concluding that the Assessee did not provide satisfactory evidence to prove the genuineness and creditworthiness of the creditors. The CIT(A) and ITAT also dismissed the Assessee's evidence, maintaining that the Assessee failed to establish the credibility of the loan transaction. Detailed Analysis: Assessment Proceedings: The AO noted that the Managing Director, who had an annual salary of ?60,000/-, advanced ?4,10,000/- to the Assessee Company. The Managing Director claimed to have taken loans from Mr. M. Rajagopalan (?3,00,000/-) and Ms. S. Dhanam (?1,00,000/-), and contributed ?10,000/- from his savings. The AO found discrepancies in the Managing Director's return of income, which did not mention these loans. The AO concluded that the Assessee failed to prove the creditworthiness and genuineness of the transaction, as there was no evidence of the loan being routed through banking channels. CIT(A) Findings: The CIT(A) upheld the AO's decision, stating that the Managing Director's income was insufficient to justify the loan amount. The CIT(A) emphasized that the Assessee failed to prove the genuineness of the transaction and the creditworthiness of the creditors. The CIT(A) observed that the loan was not reflected in the Managing Director's return of income, and the transaction was conducted in cash, raising doubts about its authenticity. ITAT Findings: The ITAT affirmed the findings of the AO and CIT(A), highlighting that the loan transaction was not routed through banking channels and was conducted in cash. The ITAT questioned the Assessee's decision to route the loan through the Managing Director instead of directly from the creditors. The ITAT concluded that the Assessee failed to prove the genuineness and creditworthiness of the transaction, as the explanation provided was not convincing. High Court's Observations: The High Court noted that the affidavits provided by the Assessee were not cross-examined by the AO, which was a significant procedural lapse. The Court emphasized that the AO, enjoying the powers of a Civil Court, should have conducted a thorough examination of the affidavits and cross-examined the creditors. The Court observed that the explanations provided by the Managing Director regarding the non-mention of the loan in his return of income and the route taken to avoid legal consequences under Section 58A of the Companies Act were reasonable and required consideration. Remand for Fresh Examination: The High Court concluded that the findings of the AO, CIT(A), and ITAT were perverse due to the lack of proper examination of the evidence. The Court remanded the case back to the AO for a fresh examination, directing the AO to summon the concerned persons, conduct proper cross-examination, and arrive at fresh findings within six months. The Court emphasized the importance of a diligent, just, and fair assessment process, highlighting the duty of tax authorities to discharge their functions properly. Conclusion: The High Court allowed the Assessee's appeal for the limited purpose of re-examination of the evidence related to the addition under Section 68 of the Income Tax Act. The case was remanded to the AO for a fresh enquiry, with specific instructions to conduct a thorough examination and cross-examination of the affidavits and creditors involved. The Court did not answer the substantial questions of law at this stage, pending the outcome of the fresh assessment.
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