2024 (6) TMI 360 - AT - Income Tax

Addition u/s 68 - income reported in ITR is too low of few lakhs to advance such a high amount and therefore, creditworthiness is not established of the lenders - as argued AO had neither rejected books of accounts nor doubted the genuineness of any document furnished during the appellate proceeding - HELD THAT - AO and CIT(A) had not disputed that the amounts lent to appellant/assessee were duly reflected in the financial statement of the creditors. Appellant / assessee had established the identity, creditworthiness of lenders and genuineness of the transactions. All the transactions were through proper banking channel. Source of source need not be proved for unsecured loan for the year under consideration. Further the lender had made cash deposits out of available cash balances. No adverse comments were given by Tax Auditor of the lender in the tax audit report in this regard. The loan given to assessee is duly reflected in audited balance sheet of the lender. Copies of acknowledgement of return of income of three lenders were filed. Copies of scrutiny assessment orders under section 143(3) of M/s Deepak Sales Corporation and M/s Jagan Nath Enterprises were placed on record, where no adverse inference was drawn on these lendings. Thus genuineness of transaction and credit worthiness of the lender stands established. Therefore the appellant / assessee had proved identity, creditworthiness of lender and genuineness of transaction to show that the case comes within the purview of provisions of section 68 - Accordingly addition is not sustainable. Decided in favour of assessee.

Summary

Issues Involved:

1. Addition u/s 68 of the Income Tax Act for unsecured loans.
2. Admissibility of additional evidence under Rule 46A.
3. Principles of natural justice and adequate opportunity of being heard.

Summary:

1. Addition u/s 68 of the Income Tax Act for unsecured loans:

The Learned Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition of Rs. 4,19,90,000/- u/s 68 of the Act, made by the Assessing Officer (AO) on the grounds that the creditors had low income in their Income Tax Returns (ITRs), thus questioning their creditworthiness. The appellant/assessee argued that the creditors were assessed to tax u/s 143(3) and had provided confirmations, bank statements, and other relevant documents. The Tribunal noted that the AO had accepted the opening balances and repayments of the unsecured loans but questioned the net amount raised during the year. The Tribunal found that the assessee had discharged the onus of proving the identity, creditworthiness, and genuineness of the transactions, as all transactions were through proper banking channels and reflected in the financial statements of the creditors. The Tribunal cited various judgments, including CIT vs. Lovely Exports (P) Ltd., to support its decision that the addition was not sustainable.

2. Admissibility of additional evidence under Rule 46A:

The CIT(A) admitted additional evidence under Rule 46A, which included ITRs, scrutiny assessment orders, audited balance sheets, profit and loss accounts, tax audit reports, and confirmations for the transactions. The Tribunal observed that the CIT(A) had not disputed the amounts lent to the assessee were duly reflected in the financial statements of the creditors. The Tribunal concluded that the additional evidence supported the assessee's claim and that the CIT(A) had erred in upholding the addition based on the low income reported by the creditors.

3. Principles of natural justice and adequate opportunity of being heard:

The assessee contended that the assessment order was framed without granting sufficient opportunity to present its case, violating the principles of natural justice. The Tribunal noted that the AO had disregarded the assessee's responses and evidence during the assessment proceedings. The Tribunal emphasized that the assessee had provided all necessary documents to prove the identity, creditworthiness, and genuineness of the transactions, and the AO had failed to investigate the veracity of these documents. The Tribunal held that the assessment order was not in accordance with the principles of natural justice and set aside the impugned orders.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside both the impugned orders and holding that the addition of Rs. 4,19,90,000/- u/s 68 was not sustainable. The Tribunal emphasized that the assessee had proved the identity, creditworthiness of the lenders, and genuineness of the transactions, and that the source of the source need not be proved for unsecured loans for the year under consideration.