2021 (11) TMI 510 - AT - Income Tax

Assessment u/s 153A - disallowing the interest - authorities below have held the loan creditors to be bogus and being engaged in the business of providing accommodation entries - HELD THAT - No material was found during the search indicating therein that such transactions were not genuine. Moreover, we find that the assessee had already repaid the whole of the loan amount during the earlier year and present year. At the time of search i.e. on 31/08/2015, both accounts stood squared up as the assessee had already repaid the loans along with interest after deduction of tax at source. The assessee, during the assessment proceedings, specifically asked the Assessing Officer to provide opportunity of cross examination to the assessee. This is apparent from the reply filed by assessee against the show cause notice for disallowance of such interest. In its reply the assessee filed detailed submissions - In both years besides replying to each allegation of Assessing Officer, the assessee sought to cross examine the witnesses. In the present case, all documentary evidences, for the claim made by the assessee, are available with the authorities for which they have not made any adverse comments. The only reason for making and upholding the disallowance of the interest is the statement recorded by the officers of the Department and that too not by the Assessing Officer himself and that too which were not made available to the assessee for cross examination and therefore, these statements cannot be utilized against the assessee. If we ignore these statements, the rest of documentary evidences well support the claim of the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest paid on loans.
2. Proof of identity, genuineness, and creditworthiness of lenders under Section 68.
3. Requirement of cross-examination of persons whose statements were relied upon.
4. Validity of additions based on statements and lack of incriminating material.
5. Adherence to principles of natural justice and opportunity to rebut evidence.

Detailed Analysis of the Judgment:

1. Disallowance of Interest Paid on Loans:
The primary issue is the disallowance of interest paid on old loans taken from M/s Success Vyapar Ltd. and M/s Neil Industries Ltd. The assessee argued that the CIT(A) erred in confirming the disallowance without appreciating the documentary evidence and explanations provided. The total interest disallowed amounted to ?1,50,42,944.

2. Proof of Identity, Genuineness, and Creditworthiness of Lenders:
The assessee contended that it had discharged the onus of proving the identity, genuineness, and creditworthiness of the lenders. The assessee provided all necessary documents, including confirmed copies of accounts, bank statements, ITR copies, and final accounts. The Assessing Officer (AO) had also obtained information directly from the lenders under Section 133(6), which corroborated the assessee's submissions.

3. Requirement of Cross-Examination:
The assessee argued that the assessment was vitiated due to the lack of opportunity for cross-examination of the persons whose statements were relied upon by the AO. The CIT(A) held that cross-examination was not required, stating that the statements were sufficiently confronted to the assessee. However, the Tribunal emphasized that cross-examination is a crucial aspect of natural justice, especially when the assessee has provided substantial documentary evidence.

4. Validity of Additions Based on Statements and Lack of Incriminating Material:
The AO made additions based on statements that the lenders were providing accommodation entries. However, no incriminating material was found during the search. The Tribunal noted that the AO did not find any discrepancies in the documents submitted by the assessee and the lenders. The Tribunal also highlighted that the loans were repaid before the date of the search, and tax was deducted at source on the interest payments.

5. Adherence to Principles of Natural Justice and Opportunity to Rebut Evidence:
The Tribunal referenced the Supreme Court's judgment in the case of Andman Timber Industries vs. Commissioner of Central Excise, emphasizing the importance of cross-examination. The Tribunal found that the AO's reliance on statements without allowing cross-examination violated the principles of natural justice. The Tribunal also referred to similar judgments by the Lucknow Bench of the Tribunal in other cases, which upheld the necessity of cross-examination.

Conclusion:
The Tribunal allowed the assessee's appeals, holding that the disallowance of interest was not justified due to the lack of opportunity for cross-examination and the substantial documentary evidence provided by the assessee. The Tribunal emphasized the importance of adhering to the principles of natural justice and providing the assessee an opportunity to rebut the evidence used against them. The appeals were partly allowed, and the disallowance of interest was overturned.