2022 (4) TMI 1652 - AT - Income Tax

Assessment u/s 153A - Unexplained cash credits u/s. 68 and unexplained expenditure u/s. 69C - unsecured loans claimed to have been obtained by the assessee and interest expenses thereon - A.Y. 2012-13 A.Y. 2014-15 - HELD THAT - While making an assessment u/s 153A of the Act in pursuance of a search under s. 132 no addition could have been made by the AO in the assessee s income in a completed year of assessment without having recourse to any incriminating material. Accordingly in our considered view the action of the ld. CIT (A) in confirming the AO s action of making additions in completed years of assessment i.e. A.Y. 2012-13 and A.Y. 2014-15 without having any recourse to any incriminating material was unjustified and unwarranted. Addition on account of unsecured loans obtained by the assessee company from various entities - A.Y. 2012-13 A.Y. 2014-15; A.Y. 2015-16 to A.Y. 2017-18 - As none of the basis taken by the AO during the course of the assessment proceedings has any nexus with any incriminating document or material found during the course of the search operations carried out u/s132 of the Act in the premises of the assessee and its directors. In our considered view the report of the Special Auditors obtained during the course of the assessment proceedings or the statements of third parties recorded either prior to or after the search or for that matter finding of one excel sheet containing the detail of loans already recorded in the books of accounts cannot be said to be incriminating evidence or material against the assessee recovered during the course of search. Since while adjudicating the ground no. 2 of the assessee for A.Y. 2012-13 and A.Y. 2014-15 we have already held that in respect of the completed assessment years no addition in an assessment made u/s. 153A of the Act can be made without having recourse to any incriminating material the aforesaid additions so made by the AO vide para (8) of his Order on account of unsecured loans and unexplained interest are not sustainable on this legal ground itself. Addition u/s 68 - unexplained loan creditors - We find full substance in the contention of the assessee that in the instant case the AO was not only duty bound to provide copies of the statements of Shri Dinesh Agrawal and Shri Sharad Darak which were recorded by some other authorities in some other proceedings and which were intended to be used against the assessee as an evidence but was also required to afford opportunity of cross examination of such witnesses to the assessee which he miserably failed to do. In such circumstances in our considered view merely on the basis of unconfronted statements the AO was not legally justified in making the additions in respect of the aforesaid loan creditors. We find absolutely no justification in the AO s making the additions in respect of the aforesaid loan creditors in the income of the assessee either u/s. 68 of the Act or u/s. 69C of the Act for various assessment years. We find that the sole basis for making the addition by the AO was some statements of Shri Dinesh Agrawal and Shri Sharad Darak recorded by some of the Income Tax Authorities in some other cases but since neither the copies of such statements were provided to the assessee nor the assessee was given an opportunity of cross examination of such persons making the statements in our considered view such statements have no evidentiary value in the eyes of law against the assessee. Neither during the course of the search any evidence was found that the assessee company itself provided cash to the lender companies for procuring cheques under the garb of loans nor the AO could bring any single material to this effect on record. In our considered view except leveling a bald charge against the lending companies the AO by himself has not conducted any independent inquiry to substantiate his allegation that the lender companies were mere accommodation entry provider companies. We find that in the similar circumstances in the case of Oriental International Company Pvt. Ltd. 2018 (1) TMI 607 - DELHI HIGH COURT has dismissed the appeal of the Revenue by holding that the AO did not conduct his task diligently and had not brought on record that whether the amounts were infused in the shareholders account in cash. We also find that the various case laws relied upon by the AO are not applicable to the assessee s case. We are of the considered view that in respect of all the named eight loan creditors by furnishing the documentary evidences as discussed hereinabove the assessee could be able to fully discharge its onus of proving all the three ingredients as contemplated u/s. 68 of the Act viz. (i) identity of the creditor; (ii) genuineness of the loan transactions; and (iii) creditworthiness of the loan creditor beyond all doubts. Accordingly in our considered view the entire additions u/s. 68 as well as u/s. 69C of the Act is not justified.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core issues considered in this judgment include:

• Whether the additions made by the Assessing Officer (AO) on account of unexplained cash credits under Section 68 and unexplained expenditure under Section 69C of the Income Tax Act, 1961, in respect of unsecured loans and interest payments, were justified.
• Whether the assessments for Assessment Years (AY) 2012-13 and 2014-15, which were completed years, could include additions without any incriminating material found during the search.
• Whether the identity, genuineness, and creditworthiness of the loan creditors were sufficiently established by the assessee.
• Whether the AO's reliance on statements and findings from other proceedings without providing an opportunity for cross-examination was justified.
• Whether the provisions of Section 115BBE were correctly invoked for disallowance of interest on unsecured loans for AY 2017-18.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Additions under Section 68 and 69C

- Legal Framework and Precedents: Section 68 allows additions for unexplained cash credits, requiring the assessee to prove the identity, genuineness, and creditworthiness of creditors. Section 69C pertains to unexplained expenditure.

- Court's Interpretation and Reasoning: The Tribunal found that the AO made additions based on regular books of accounts without any incriminating material found during the search. The AO relied on statements and reports from other cases without confronting the assessee.

- Key Evidence and Findings: The assessee provided documents establishing the identity, genuineness, and creditworthiness of loan creditors, including certificates of incorporation, PAN, bank statements, and affidavits from directors of creditor companies.

- Application of Law to Facts: The Tribunal concluded that the assessee discharged its burden under Section 68 by providing substantial evidence. The AO failed to provide contrary evidence or conduct independent inquiries.

- Treatment of Competing Arguments: The Tribunal noted that the AO did not offer the assessee an opportunity for cross-examination of witnesses whose statements were used against it, violating principles of natural justice.

- Conclusions: The Tribunal found the additions under Sections 68 and 69C unjustified and directed their deletion.

Issue 2: Additions in Completed Assessment Years

- Legal Framework and Precedents: In completed assessment years, additions can only be made based on incriminating material found during a search, as established in cases like CIT vs. Kabul Chawla.

- Court's Interpretation and Reasoning: The Tribunal noted that for AYs 2012-13 and 2014-15, no incriminating material was found during the search, and the assessments were completed years.

- Key Evidence and Findings: The AO's additions were based on regular books of accounts, not on any seized material.

- Application of Law to Facts: The Tribunal concluded that in the absence of incriminating material, the additions were not sustainable.

- Conclusions: The Tribunal allowed the assessee's appeal for these years, deleting the additions.

Issue 3: Cross-Examination and Natural Justice

- Legal Framework and Precedents: The principles of natural justice require that evidence used against a party must be disclosed, and the party must be given an opportunity for cross-examination.

- Court's Interpretation and Reasoning: The Tribunal criticized the AO for relying on statements from other proceedings without providing cross-examination opportunities.

- Conclusions: The Tribunal found the AO's actions in violation of natural justice principles, affecting the validity of the additions.

Issue 4: Invocation of Section 115BBE

- Legal Framework and Precedents: Section 115BBE deals with tax on income referred to in Sections 68, 69, 69A, 69B, 69C, or 69D.

- Court's Interpretation and Reasoning: The Tribunal noted that the assessee did not press this ground, and therefore, it was dismissed.

3. SIGNIFICANT HOLDINGS

- Verbatim Quotes of Crucial Legal Reasoning: The Tribunal emphasized that "completed assessments can be interfered with by the AO while making the assessment under Section 153A only on the basis of some incriminating material unearthed during the course of search."

- Core Principles Established: Additions in completed assessment years under Section 153A require incriminating material found during a search. The principles of natural justice, including the right to cross-examination, must be upheld.

- Final Determinations on Each Issue: The Tribunal allowed the assessee's appeals for AYs 2012-13 and 2014-15, deleting the additions. It found the AO's reliance on statements without cross-examination unjustified and dismissed the ground related to Section 115BBE as not pressed.