2024 (4) TMI 927 - AT - Income Tax

Addition u/s. 68 - cash deposits in the bank account of the lenders which was the immediate source of credit for the lender - unsecured loan received during the year from lender firm - lender firm which had advanced loan to the assessee is not a Non-Banking Finance Company (NBFC) and is engaged in the business of trading of pulses while the assessee is a trader in cotton cloth. HELD THAT - The primary undisputed facts are that assessee had to invest a sum towards share capital in a company proposed to be set up at Nagpur to produce Denim cloth in the capacity of the promoter of the company. For that purpose the assessee obtained financial support from lender firm M/s Banwari Lal Naresh Kumar with whom the assessee has close relationship for over 40 years. The proposed investment in the company was a step in forward integration of the business interests of the assessee. With regard to cash deposits made in the bank account of the lender firm it is pertinent to note that partner of the lender firm was examined by the ld. AO u/s. 131(1A) who duly explained the sources of cash deposits made in the bank account of his partnership firm and confirmed the fact of advancing loan to the assessee. Since the statement was recorded on 28.12.2018 i.e. during the fag end of the proceedings partner sought to answer all the questions that were posed by the ld. AO to him and also sought time for replying to certain questions to produce further evidence to support his statement. Since no details were called for in the summons issued u/s. 131(1A) of the Act by the ld. AO partner of lender firm had admittedly not carried any material with him while giving the deposition before the ld. AO. So he had to sought time obviously to furnish further evidences in support of his statement. We find that the ld. AO had merely overlooked all the relevant materials submitted by the assessee which also stood confirmed by the lender in the statement u/s. 131(1A) of the Act and proceeded to treat the loan received as unexplained cash credit u/s. 68 of the Act and disallowed consequential interest thereon. Once the cash deposits made in the bank account of the lender firm had been accepted as coming from explained sources by the revenue under scrutiny assessment of the lender the revenue cannot take a divergent stand in the case of the assessee that those cash deposits had emanated out of undisclosed sources of the assessee which had been deposited in the lender s bank account and monies received by assessee in the form of unsecured loan. We find that Shri Naresh Goel in his statement u/s. 131(1A) of the Act had categorically explained the modus operandi of the business of the lender firm and had duly replied that the firm generates cash on a daily basis out of its sales. Hence the said cash sales were deposited by the lender firm in its bank account in cash. That s why no additions were made in the hands of the firm by the ACIT Circle 47(1) Delhi. Even though the case of the assessee was selected only for Limited Scrutiny in the hands of the lender still if the Assessing Officer had found anything alarming he could have converted the Limited Scrutiny into Complete Scrutiny by seeking permission from the competent authority in the manner known to law. This was admittedly not done in the case of the lender which goes to prove that the ACIT Circle 47(1) Delhi did not find anything alarming with regard to cash deposits made in the bank account of the lender firm and did not doubt about its sources. The scrutiny assessment proceedings of the lender firm for the very same assessment year itself explains the creditworthiness of the lender and genuineness of the loan transaction with the assessee. Hence we have no hesitation to hold that assessee had duly proved the three necessary ingredients of section 68 of the Act in respect of unsecured loan received during the year from Banwari Lal Naresh Kumar (lender firm). Consequentially the interest paid thereon would also be allowable as deduction u/s. 36(1)(iii) of the Act as it is not the case of the revenue that the borrowed funds were not used by the assessee for business purposes. Accordingly the grounds raised by the assessee are allowed.

Summary

Issues Involved:
The judgment deals with the appeal in ITA No. 7239/Del/2019 for AY 2016-17, arising from the order of assessment passed u/s. 143(3) of the Income-tax Act, 1961 by the Assessing Officer, ACIT, Circle-47(1), New Delhi.

Grounds of Appeal:
The assessee raised several grounds of appeal challenging the order passed by the Commissioner of Income Tax (Appeals) and the additions made under Section 68 of the Income Tax Act. The primary contentions included the confirmation of certain additions, deletion of proposed interest, and the treatment of unsecured loans received.

Assessee's Position:
The assessee, engaged in trading and commission businesses, declared a turnover and gross profit rate for the relevant year. The Assessing Officer disbelieved a loan received by the assessee from a lender based on cash deposits in the lender's bank account, leading to disallowance of interest expenses.

Lender's Background:
The lender firm, not an NBFC, was involved in trading pulses, lacking direct business connections with the assessee's cloth trading business. The Commissioner granted partial relief, leaving a dispute regarding a significant loan amount and interest expenses.

Investment and Financial Support:
The assessee intended to invest in a new company for producing Denim cloth, receiving financial support from the lender firm with a longstanding relationship. The investment was part of the assessee's business expansion plans.

Examination and Explanation:
The partner of the lender firm explained the sources of cash deposits in the firm's bank account during the assessment proceedings. Despite confirming the loan to the assessee, the Assessing Officer disregarded relevant evidence and treated the loan as unexplained cash credit.

Judgment and Conclusion:
The Tribunal found that the assessee had established the identity, creditworthiness, and genuineness of the loan transaction, supported by the lender's assessment details. The Tribunal allowed the appeal, holding that the interest paid on the loan was deductible under the Act for business purposes. Consequently, the grounds raised by the assessee were upheld, and the appeal was allowed.

Separate Judgment:
The Order was pronounced in the open court on 19/04/2024 by Shri Amit Shukla, Judicial Member, and Shri M. Balaganesh, Accountant Member.