2021 (7) TMI 1021 - AT - Income Tax

Unsecured creditors - Addition u/s 68 - Flow of funds inter se the group concerns - loans from directors - Money circulated from one concern to other - HELD THAT - Why the assessee discharged its obligation to M/s. Modsal Frozen Foods Pvt. Ltd. and why the assessee accepted loan from one of its directors need not be enquired by the Assessing Officer. Suffice it to record that the amount is neither tainted nor unaccounted. It is only the accounted money of the assessee that is used for the purpose of discharge of obligation. Therefore, it cannot be said that the amount paid to M/s. Modsal Frozen Foods Pvt. Ltd. is unaccounted money and on the same analogy amounts in the hands of Mohd. Sayed which was given as loan to the assessee cannot be unaccounted money. In the same way, in so far as Mohd. Naeem is concerned, he is also having inter-banking account with the assessee, M/s. Modsal Frozen Foods Pvt. Ltd. and Modern Enterprises - There is no adverse comment on these accounts of any of these entities. It is not the case of Revenue that whatever the amounts that have been credited in the bank accounts of assessee were raised from any third person other than the group concerns. Further by filing the statement of account of Mohd. Naeem with the bank of Baroda and also with M/s. Modsal Frozen Foods Pvt. Ltd. as well as Modern Overseas Pvt. Ltd., it was established that all the money that is circulated inter se the group concerns is that accounted money well reflected in the books and no any funds other than the withdrawals from the group concerns is found to have been deposited by Mohd. Naeem. Coming to Mohd. Saleem, there is no dispute that for the assessment year 2013-14, he declared an income of ₹ 9,09,008/- and for the current assessment year, it was ₹ 9,83,643/-. This declared sum is much more than the deposit of ₹ 5.55 lacs and even according to the Assessing Officer, there were deposits in cash only to the extent of ₹ 1,48,400/-. In these circumstances, it cannot be said that the unaccounted money of the assessee to the tune of ₹ 1,48,400/- travelled back to the assessee through Mohd. Saleem. Thus the flow of funds inter se the group concerns properly explains the creditworthiness of the creditors and there is no reason to suspect the business transactions which are recorded in the books. Hence, we are of the considered opinion that the identity of the creditors, their creditworthiness and genuineness of transactions are not in doubt and are properly explained - Decided in favour of assessee.

Summary

Issues:
Assessment of unsecured loans from directors under section 68 of the Income-tax Act, 1961.

Analysis:
The case involves the assessment of unsecured loans from directors under section 68 of the Income-tax Act, 1961. The appellant, engaged in trading of animal husbandry, declared income for the assessment year 2014-15. The assessing officer noted unsecured loans from directors and raised concerns about the source and legitimacy of these funds. The appellant explained the flow of funds among group companies, stating that the transactions were legitimate and accounted for. However, the assessing officer disallowed certain amounts, suspecting unaccounted money involvement.

Upon appeal, the Commissioner of Income Tax (Appeals) upheld the assessing officer's decision, emphasizing the lack of creditworthiness of the directors providing the loans. The appellant challenged this decision, arguing that the directors were credible, long-standing taxpayers with legitimate funds flow among group entities. The appellant contended that the transactions were normal business practices and not indicative of unaccounted money.

The Tribunal analyzed the case, considering the source of funds, inter-banking transactions, and the credibility of the directors. It found that the loans were accounted for and properly explained through legitimate business transactions among group concerns. The Tribunal emphasized that the creditworthiness of the directors should be evaluated beyond their income and that the flow of funds among entities demonstrated the legitimacy of the transactions. As a result, the Tribunal directed the Assessing Officer to delete the additions, ruling in favor of the appellant.

In conclusion, the Tribunal's decision highlights the importance of establishing the legitimacy and creditworthiness of parties involved in financial transactions, especially in cases of unsecured loans. The ruling emphasizes the need for a thorough assessment of the source of funds and the business rationale behind transactions to determine the presence of unaccounted or tainted money.