2024 (5) TMI 1235 - AT - Income Tax

Addition on protective basis - loan amount received by the assessee from one of its director and his relatives - LTCG earned by the said loan creditors were out of share transactions done in penny stock companies - HELD THAT - Admittedly, in this case, the additions have been made in the hands of the assessee on protective basis only. This fact itself shows that the Assessing Officer, himself, was convinced that the substantive additions were warranted in case of respective loan creditors and not in case of the assessee. All the loan creditors are Income Tax assessees. As substantive additions have been made by the department in the case of 4 loan creditors, out of which, 3 loan creditors have accepted the additions and have availed Vivad Se Viswas Scheme and paid the due taxes. Therefore, the source of the loan in their hands stood explained as their unaccounted income, upon which they have paid the due taxes. The 4th loan creditor is also an Income Tax assessee, in whose case the addition has been made. There is no allegation that the source of the income/LTCG in the hands of the said creditor namely Deepak Kumar Jain was out of any unexplained income of the assessee. The assessment in the case of other 3 persons already stood barred by limitation, no substantive additions have been made in their hands, therefore, the source of the amount/LTCG stands admitted by the department in their hands - Protective additions in the hands of the assessee are not sustainable - Decided in favour of assessee.

Summary

Issues:
Appeal against addition of loan amount on protective basis.

Analysis:
The appeal was filed against the addition of Rs. 2,67,60,000 made by the Assessing Officer on a protective basis regarding a loan received by the assessee from one of its directors and relatives. The Assessing Officer concluded that the loan creditors' LTCG, which funded the loan, was from share transactions in penny stock companies and deemed it bogus. The Assessing Officer invoked section 68 of the Income Tax Act to treat the loan as unexplained cash credit. The CIT(A) upheld the additions made by the Assessing Officer on a protective basis.

The assessee contended that all loan creditors were assessed to tax, provided loan confirmation letters, and the loan amount was received via account payee cheques. The assessee argued that the identity, creditworthiness, and genuineness of the transaction were not in dispute. The assessee also cited legal precedents to support the argument that protective additions cannot be made without substantive additions in the hands of the loan creditors. Out of the seven loan creditors, three parties had substantive additions made, opted for the Vivad Se Viswas Scheme, and paid taxes. The assessments of the remaining creditors were either barred by limitation or had no substantive additions, rendering the protective additions unsustainable.

The Tribunal considered the submissions and found that the additions were made on a protective basis, indicating the Assessing Officer's belief that substantive additions were warranted for the loan creditors, not the assessee. The Tribunal noted that the loan creditors were assessed to tax, and three creditors had accepted the additions, paid taxes, and explained the source of the loan amount. The Tribunal also observed that the assessment for the other parties was barred by limitation or had no substantive additions, confirming the source of the loan amount. Consequently, the Tribunal ruled that the protective additions in the assessee's hands were not legally sustainable and ordered their deletion.

Therefore, the Tribunal allowed the assessee's appeal against the addition of the loan amount on a protective basis, emphasizing the necessity of substantive additions in the hands of the loan creditors for such protective additions to be valid.