2023 (1) TMI 762 - AT - Income Tax

Addition u/s 68 - unsecured loan - loan transaction as bogus - Whether creditworthiness of the creditor(s) be decided by the AO of the assessee? - HELD THAT - It is an undisputed fact that the assessee during the assessment proceedings provided the copies of the Income Tax Returns, Confirmation Letters, Bank Statement of M/s. Rudra Enterprise and also produced copies of the interest payment on the unsecured loan with TDS for the subsequent Assessment Year 2017-18. CIT(A) has correctly followed the case of CIT vs. Ranchhod Jivabhai Nakhava 2012 (5) TMI 186 - GUJARAT HIGH COURT wherein it was held that the primary onus had been discharged by the assessee by producing the copies of the Income Tax Returns, Bank Statements and Confirmation Letters of the creditors. The creditworthiness of the creditor(s) cannot be decided by the AO of the assessee. AO of assessee can get the matter investigated through the AO of the creditors. The AO of assessee cannot become AO of the creditors. It is not the case of AO that the impugned amount is assessee's own money generated out of books of account and the same is introduced in its books of accounts through bogus creditors. If that is so, what evidences AO has collected to place it on record. Once confirmations have been filed, further action, if any, is required to be taken in case of creditor and not in case of assessee. Explanation about 'source of source' or 'origins of origin' cannot be asked from the assessee while making inquiry under section 68 as per ratio laid down in the case of DCIT v. Rohini Builders 2001 (3) TMI 9 - GUJARAT HIGH COURT . We have no hesitation in rejecting the grounds raised by the Revenue. Thus, we do not find any infirmity in the order passed by the Ld. CIT(A), therefore it does not require any interference. Appeal filed by the Revenue is hereby dismissed.

Issues Involved
1. Addition of Rs. 2,00,00,000/- under Section 68 of the Income Tax Act, 1961 as unexplained cash credit.
2. Evaluation of the creditworthiness of the lender, M/s. Rudra Enterprise.
3. Burden of proof regarding the source of the source of funds.
4. Application of relevant case laws and legal precedents.

Detailed Analysis

1. Addition of Rs. 2,00,00,000/- under Section 68 of the Income Tax Act, 1961 as unexplained cash credit:

The Assessing Officer (AO) added Rs. 2 Crores received as an unsecured loan from M/s. Rudra Enterprise to the assessee's income, treating it as unexplained cash credit under Section 68. The AO questioned the creditworthiness of M/s. Rudra Enterprise, which had shown Nil income in its return, and deemed the transaction as bogus. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, stating that the assessee had satisfactorily proved the nature and source of the loan, including the source of the source, by providing Income-tax Returns, Confirmation Letters, and Bank Statements.

2. Evaluation of the creditworthiness of the lender, M/s. Rudra Enterprise:

The AO questioned the creditworthiness of M/s. Rudra Enterprise, which had shown Nil income for the relevant assessment year. The assessee countered by providing evidence of interest payments and TDS for subsequent years, partial repayment of the loan, and the financial details of the lender. The CIT(A) found that the assessee had provided sufficient evidence to prove the creditworthiness of M/s. Rudra Enterprise, including details of the source of the source, Arya Tradex Pvt. Ltd., which had a substantial paid-up share capital.

3. Burden of proof regarding the source of the source of funds:

The CIT(A) and the Tribunal emphasized that the primary onus to prove the nature and source of the loan was on the assessee, which had been discharged by providing necessary documents. The AO's responsibility was to verify these details with the creditors' AO, rather than questioning the assessee further. This approach aligns with the jurisdictional High Court's ruling in CIT vs. Ranchhod Jivabhai Nakhava, which stated that the AO should verify the creditors' returns before shifting the burden back to the assessee.

4. Application of relevant case laws and legal precedents:

The CIT(A) and the Tribunal relied on several case laws to support their decision, including:
- CIT vs. Ranchhod Jivabhai Nakhava: The AO should verify the creditors' returns and cannot shift the burden back to the assessee without such verification.
- DCIT vs. Rohini Builders: Mere identification of the source of the creditors can justify acceptance if the assessee provides the PAN and shows that the amounts were received by account payee cheques.
- CIT vs. Dharamdev Finance Pvt. Ltd.: No addition can be made if the assessee provides PAN, confirmations, and bank statements of the creditors.

The Tribunal upheld the CIT(A)'s decision, stating that the assessee had satisfactorily discharged its burden of proof, and the AO's approach was incorrect. The Tribunal dismissed the Revenue's appeal and allowed the assessee's Cross Objection, reinforcing that the addition made by the AO was not sustainable.

Conclusion

The Tribunal concluded that the assessee had provided sufficient evidence to prove the nature and source of the unsecured loan, including the source of the source. The AO's approach of questioning the creditworthiness without verifying the creditors' returns was incorrect. The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 2 Crores under Section 68, dismissing the Revenue's appeal and allowing the assessee's Cross Objection.

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