2021 (3) TMI 717 - AT - Income Tax

Addition u/s 68 - unsecured loan/advances - addition based on third party statement - AO took the support of the statement given by both Shri Raj Kumar Kothari as well as Shri Bijay Kumar Dokania recorded in third party proceedings to take an adverse view against the assessee - CIT-A deleted the addition - HELD THAT - AO ought to have confronted the assessee with the entire statement of both Shri Raj Kumar Kothari as well as Shri Bijay Kumar Dokania or material against the assessee if any with him rather than giving only selective question and answer; and if the AO felt that these two persons, oral testimony is incriminating against the assessee, then in all seriousness he should have summoned them before him and elicited the direct oral evidence against the assessee and thereafter gave a copy of the recorded statement and then afforded an opportunity to assessee to cross-examine the makers of the incriminating oral testimony and thereafter the AO would be justified in using against the assessee, which in this case AO has not done, for reason best known to him; and so the selective questions and answers of the two persons with the legal infirmities discussed supra cannot be used against the assessee. Moreover the AO has not found any infirmity with the documents filed by the assessee to prove the loan transactions as discussed supra. So, other than the third party statements, which was not even examined by the AO and without providing the entire statements to assessee and the statement not tested on the touch-stone of cross-examination, cannot be the basis to draw adverse inference against the assessee. Therefore, no addition was warranted. As statement of these two persons cannot be used against the assessee. And when we remove these two statements with the legal infirmities discussed supra, there is no material at all against the assessee and the AO having failed to find any infirmity with the documents filed by the assessee/lenders to prove the loan transactions as discussed supra, no adverse view was legally tenable. - Decided against revenue.

Issues Involved
1. Whether the amount of ?4,51,00,000/- received by the assessee company as unsecured loan/advances during FY 2014-15 was considered to be unexplained cash credit under Section 68 of the Income Tax Act.
2. Whether the loan creditors' identity, creditworthiness, and genuineness of the transaction were adequately explained.
3. Whether the interest on the disallowed loan should also be disallowed by the Assessing Officer (AO).

Issue-Wise Detailed Analysis

Issue 1: Unexplained Cash Credit under Section 68
The primary issue was whether the ?4,51,00,000/- received by the assessee company as unsecured loans/advances during FY 2014-15 should be considered unexplained cash credit under Section 68 of the Income Tax Act. The AO argued that the lender companies were shell companies and the transactions were not genuine. The AO based his conclusion on the statements of Shri Raj Kumar Kothari and Shri Bijay Kumar Dokania, who were alleged to be entry operators providing accommodation entries.

However, the Ld. CIT(A) found that the AO did not provide the assessee an opportunity to cross-examine these individuals, which violated the principles of natural justice. The Ld. CIT(A) also noted that the lender companies had complied with notices under Section 133(6) by providing necessary documents, including income tax acknowledgments and bank statements, thus establishing their identity and creditworthiness. The Ld. CIT(A) emphasized that the AO's reliance on third-party statements without corroborative evidence was insufficient to classify the transactions as unexplained cash credit.

Issue 2: Identity, Creditworthiness, and Genuineness of Loan Creditors
The AO contended that the assessee failed to prove the identity, creditworthiness, and genuineness of the loan creditors. However, the Ld. CIT(A) observed that the lender companies responded to notices under Section 133(6) by submitting comprehensive documentation, including income tax returns, audited accounts, loan confirmations, and bank statements. These documents demonstrated that the lender companies were legitimate entities with sufficient financial capacity to provide the loans.

The Ld. CIT(A) also noted that the AO did not conduct any independent verification of the documents provided by the lender companies. The AO's conclusion was based on general assumptions and the uncorroborated statements of alleged entry operators. The Ld. CIT(A) held that the AO's approach was flawed and that the assessee had adequately discharged its burden of proving the identity, creditworthiness, and genuineness of the transactions.

Issue 3: Disallowance of Interest on Loan
The AO disallowed the interest on the loan, amounting to ?53,70,163/-, on the grounds that the loan itself was considered unexplained cash credit. The Ld. CIT(A) found that the assessee had paid interest on the loans and had duly deducted TDS on the interest payments. The lender companies had also shown the interest income in their tax returns.

The Ld. CIT(A) noted that the disallowance of interest was consequential to the AO's primary finding that the loans were unexplained cash credits. Since the Ld. CIT(A) held that the loans were genuine and adequately explained, the disallowance of interest was also found to be unjustified.

Conclusion
The Ld. CIT(A) concluded that the assessee had successfully demonstrated the identity, creditworthiness, and genuineness of the loan creditors. The AO's reliance on uncorroborated third-party statements and failure to provide the assessee an opportunity for cross-examination rendered the addition under Section 68 unsustainable. Consequently, the Ld. CIT(A) deleted the addition of ?4,51,00,000/- and the disallowance of interest amounting to ?53,70,163/-. The appeal by the Revenue was dismissed, and the order of the Ld. CIT(A) was upheld.

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