2016 (5) TMI 1628 - AT - Income Tax

Addition u/s 68 - unsecured loan taken - onus to prove - several bank accounts and numerous entries have routed from cash deposit to ultimate beneficiaries - Penalty u/s 271(1)(C) initiated on this issue - HELD THAT - Assessee had taken the loan from M/s. K.K. Patel Finance Limited. The assessee has submitted the copy of loan account of the creditor giving complete details of PAN nos. and copy of acknowledgement. We found that the assessee has proved the identity of the creditor by filing the name and addresses of the creditor and PAN details. The loan was obtained from Limited Companies and that has allotted PAN and it was registered with the Registrar of Companies and filed its annual return and income tax returns which proves the identity of the creditor. The assessee has also submitted the copy of accounts of the creditor in assessee s books. The assessee has also produced the confirmation of account by M/s. K.K. Patel Finance Limited for repayment of loan. The assessee has also filed the copy of account from the date of acceptance of the loan up to the date of repayment of the loan confirmation and copy of the bank account. Copies of acknowledgement of creditors were furnished. The assessee has filed the copy of bank account of the creditor wherein it is proved that it had sufficient balance of Rs. 34 lakhs and he has given loan on 01.09.2006 which proves the creditworthiness of the transaction. Section 68 requires that there has to be credit in the books maintained by the assessee. Such creditor has put a sum during the year and the assessee offers no explanation about the nature and source of such credit or explanation offered by the assessee not in the opinion of assessing authorities satisfactorily then sum so credited may be charged to tax as income of the assessee s previous year. As per Section 68 of the Act once there is credit in the books maintained by the assessee the primary onus is on the assessee to offer explanation as to the nature and source of the credit. When the assessee produced the identity of the creditor the genuineness of the transaction was established. The primary onus which rested with the assessee to discharge but the Revenue does not satisfy with the source of the fund in the hands of the assessee. It was the Revenue to take the appropriate action. The burden of proof in loan transaction it is well settled law that while considering the question whether the alleged loan taken by the assessee was genuine transaction the initial onus always upon the assessee and if no explanation is given or explanation given by the assessee is not satisfactory the AO can disbelieve the alleged transaction of a loan but the Law is equally settled that if the initial burden is discharged by producing the sufficient material in support of loan transaction the onus is upon the AO and after verification he can call for further explanation from the assessee and in the process the onus may again shift upon the Assessee. AO failed to verify the same the onus is discharged and no addition can be made. In this case the assessee has proved the identity of the creditor. The assessee has produced books of accounts confirmation of party copy of the bank account of the creditor proved the genuineness of the transaction. The assessee had taken loan and creditor has sufficient funds prior to giving the loan of Rs. 5 lakhs that proves the creditworthiness. Therefore in our opinion the ld. CIT(A) is not justified in his action. Assessee appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the addition of Rs. 5,00,000/- under Section 68 of the Income-tax Act, 1961, as an unexplained cash credit, was justified.
• Whether the disallowance of interest payment of Rs. 34,684/- on the alleged unsecured loan was valid.
• Whether the addition of Rs. 25,000/- as out-of-books expenditure under Section 69A was appropriate.
• Whether the penalty under Section 271(1)(c) for concealment of income was correctly initiated.

ISSUE-WISE DETAILED ANALYSIS

1. Addition under Section 68 of the Income-tax Act, 1961:

• Relevant legal framework and precedents: Section 68 of the Income-tax Act, 1961, pertains to unexplained cash credits. If an assessee cannot satisfactorily explain the nature and source of a credit in their books, it may be treated as income.
• Court's interpretation and reasoning: The Tribunal found that the assessee had provided sufficient evidence to prove the identity of the creditor, M/s. K.K. Patel Finance Limited, and the genuineness of the transaction. The assessee submitted PAN details, bank statements, and confirmation from the creditor.
• Key evidence and findings: The assessee submitted the creditor's PAN, bank account details, and confirmation of the loan transaction. The creditor had sufficient funds before advancing the loan.
• Application of law to facts: The Tribunal applied the precedent set in Dy. CIT vs. Rohini Builders, which held that once the initial burden of proving the identity and genuineness of the transaction is discharged, the onus shifts to the Revenue to disprove it.
• Treatment of competing arguments: The Department argued that the loan was an accommodation entry, citing a survey on the Lunkad Group. However, the Tribunal found no direct evidence linking the assessee to the alleged fraudulent activities of the Lunkad Group.
• Conclusions: The Tribunal concluded that the addition of Rs. 5,00,000/- under Section 68 was not justified as the assessee had discharged its initial burden of proof.

2. Disallowance of Interest Payment:

• Relevant legal framework: Interest payments are generally deductible if they relate to genuine business transactions.
• Court's interpretation and reasoning: The Tribunal found that since the loan transaction was genuine, the interest payment should also be considered legitimate.
• Key evidence and findings: The assessee provided evidence of interest payment through banking channels, and tax was deducted at source.
• Application of law to facts: The Tribunal applied the principle that disallowance of interest is unwarranted if the underlying loan is genuine.
• Conclusions: The Tribunal deleted the disallowance of Rs. 34,684/- as interest payment.

3. Addition under Section 69A for Out-of-Books Expenditure:

• Relevant legal framework: Section 69A deals with unexplained money, where the assessee is unable to explain the source of the expenditure.
• Court's interpretation and reasoning: The Tribunal found no evidence of out-of-books expenditure related to the loan transaction.
• Conclusions: The addition of Rs. 25,000/- under Section 69A was not justified and was deleted.

4. Penalty under Section 271(1)(c) for Concealment of Income:

• Relevant legal framework: Section 271(1)(c) imposes a penalty for concealment of income or furnishing inaccurate particulars.
• Court's interpretation and reasoning: Since the primary additions were not upheld, the basis for the penalty did not exist.
• Conclusions: The initiation of penalty proceedings under Section 271(1)(c) was not warranted.

SIGNIFICANT HOLDINGS

• The Tribunal held that the assessee had discharged the initial burden of proof regarding the loan transaction, and the Revenue failed to provide contrary evidence.
• "The assessee has proved the identity of the creditor by filing the name and addresses of the creditor and PAN details... The loan was obtained from Limited Companies and that has allotted PAN and it was registered with the Registrar of Companies..."
• The Tribunal concluded that the interest payment was legitimate as the underlying loan was genuine.
• The Tribunal found no basis for the addition under Section 69A or the initiation of penalty proceedings under Section 271(1)(c).
• The appeal was allowed, and the additions and disallowances were deleted.