2020 (12) TMI 657 - AT - Income Tax

Addition u/s 68 - Unsecured loan - HELD THAT - Primary onus of establishing the identity of the lender, proving its creditworthiness and to establish the genuineness of the transactions was duly been discharged by the assessee. The assessee was not required to prove the source of source as noted in the opening paragraphs. This is in the backdrop of the fact that the assessee had paid interest on loan after deduction of TDS. Another pertinent fact to be noted is that the loan stood fully squared up 3 years back and therefore, there could be no occasion to treat the same as assessee s income. Merely because the party did not respond after such a long period, the same could not be the sole basis to make additions in the hands of the assessee. By furnishing the documentary evidences, the onus had shifted on revenue to dislodge assessee s claim by bringing on record cogent evidences. The assessee, all along, denied having any business connection with the tainted group. Except for the fact that the party did not respond to summons, there is nothing adverse against the assessee. It is trite law that no addition could be made merely on the basis of suspicion, conjectures or surmises. There is nothing in revenue s armory which would indicate that any cash got exchanged between the assessee and the said entity while accepting as well as while repaying the unsecured loan. We are not inclined to concur with the view of the revenue authorities. Hence, by deleting the impugned addition, we allow ground thus raised before us.Consequently, the interest as claimed on the loans would be deductible from work-in-progress as done by the assessee.

Summary

Issues:
1. Interpretation of Section 68 of the Income Tax Act, 1961 regarding unexplained credits.
2. Burden of proof on the assessee to establish identity, creditworthiness, and genuineness of transactions.
3. Principles of natural justice in assessment proceedings.
4. Admissibility of documentary evidence to substantiate transactions.
5. Validity of additions u/s 68 for alleged unsecured loans.

Analysis:

Issue 1: Interpretation of Section 68
The judgment discusses the provisions of Section 68 of the Income Tax Act, emphasizing the requirement for the assessee to explain any sum credited in their books. It highlights that the proviso added by the Finance Act, 2012 applies to companies receiving share application money. The judgment clarifies that this proviso is not retrospective and does not apply to unsecured loans or deposits.

Issue 2: Burden of Proof
The judgment establishes that to avoid the implications of Section 68, the assessee must prove the identity, creditworthiness of lenders, and genuineness of transactions. Once the assessee fulfills these requirements, the onus shifts to the revenue to disprove the claim with material evidence. The judgment cites the Supreme Court's decision in Lovely Exports P. Ltd., emphasizing the importance of fulfilling the initial burden of proof.

Issue 3: Principles of Natural Justice
It is reiterated that no additions can be made based on doubts or conjectures. The judgment emphasizes that once the assessee substantiates transactions, the revenue must provide corroborative evidence to challenge the claim. Failure to confront adverse material to the assessee violates natural justice principles, depriving the assessee of the opportunity to defend their position.

Issue 4: Admissibility of Documentary Evidence
The judgment details the documentary evidence submitted by the assessee, including account confirmations, bank statements, and financial documents to establish the legitimacy of transactions. It underscores the importance of documentary evidence in substantiating claims and shifting the burden of proof to the revenue authorities.

Issue 5: Validity of Additions for Unsecured Loans
In the specific case discussed in the judgment, the assessee contested additions under Section 68 for an alleged unsecured loan. Despite the revenue authorities' findings, the appellate tribunal found in favor of the assessee. The tribunal noted that the assessee had discharged the primary burden of proof by providing substantial documentary evidence. As the revenue failed to disprove the claim with concrete evidence, the additions were deemed unjustified, and the appeal was partly allowed.

Overall, the judgment underscores the importance of fulfilling the burden of proof, the admissibility of documentary evidence, and adherence to principles of natural justice in income tax assessment proceedings.