2024 (12) TMI 812 - AT - Income Tax

Addition u/s 68 - loan taken by the appellant as accommodation entry - main reason for making the addition by the AO was the source of the loan taken by the assessee from certain company alleged to having links with an accommodation entry provider who admitted such act on his part during search and seizure - HELD THAT - There is nothing on record from the lender company admitting the loans given in the nature of accommodation entries to the company or the same have been channelized out of the undisclosed income of the appellant company. Nowhere it has been proved that the lender company was in chain in the accommodation entry cycle and the final beneficiary was the assessee company. As per the allegation of the AO, had the assessee been the final beneficiary of the accommodation entries, then no repayment of the said loans would have been made by it to the lender. On the contrary, their accounts have been settled and squared up in the subsequent year as discussed in the preceding paras of this order, which itself disproved the allegation of the AO. So far as identity of the lender is concerned, the complete address and their PAN No. besides Income Tax Return etc. have been submitted, therefore, the same does not remain in doubt. With regard to the genuineness of the unsecured loans, the lender companies have provided their bank account statements highlighting the withdrawals towards the account payee cheque given as a loan to the company. Therefore, the same cannot be doubted. The immediate sources of the lending to the assessee company have been duly explained by the lender companies. Therefore, in view of the aforesaid discussion, the identity, creditworthiness and genuineness of the borrowings have been proved from the details and evidences submitted in the assessment proceedings and does not call for any adverse inference. Denial of cross examination - It is also an admitted fact that no cross-examination was granted to the assessee though materials were considered adversely in its case. As decided in Andaman Timber Industries 2015 (10) TMI 442 - SUPREME COURT held that when statements of witnesses are made basis of demand, not allowing assessee to cross-examine witnesses, is a serious flaw which makes order nullity, as it amounts to violation of principles of natural justice. Moreover, if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement of the aforesaid two witnesses was the only basis of issuing the Show-Cause Notice. AO was not justified in treating the impugned sum as unexplained credit u/s 68 of the Act and adding to the income of the assessee. The addition made is, therefore, deleted. Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of reassessment proceedings under Section 147/148 of the Income-tax Act, 1961.
2. Addition of Rs. 15,00,000 under Section 68 of the Income-tax Act as unexplained cash credit.
3. Addition of Rs. 27,740 under Section 69C as interest paid on a loan treated as unexplained expenditure.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Proceedings under Section 147/148:

The appellant argued that the Assessing Officer (AO) incorrectly assumed jurisdiction under Section 147 of the Income-tax Act, as there were only "reasons to suspect" rather than "reasons to believe" that income had escaped assessment. The AO had merely received certain information without conducting preliminary enquiries to form an opinion. The CIT(A) concluded that the AO had taken due approval, supplied reasons to the assessee, and disposed of objections. The return was processed under Section 143(1) without scrutiny, and new information justified the reopening. The tribunal found no merit in the appellant's argument, as the reopening was based on information from the Investigation wing, and the objections were addressed. Therefore, the ground was dismissed.

2. Addition under Section 68 of the Income-tax Act:

The assessee contested the addition of Rs. 15 lakh under Section 68, arguing that the loan from Marine Gems Ltd. was genuine. The AO alleged that the company was involved in providing accommodation entries, and the documents submitted were insufficient. Despite opportunities, the appellant failed to produce fresh evidence or the creditor for verification. The tribunal noted that the AO should have provided the assessee with material used against him and an opportunity for cross-examination. The tribunal referred to case laws, emphasizing that the identity, genuineness, and creditworthiness of the transaction were not disproved. The loan was repaid through banking channels, and the lender company was active and compliant with tax laws. The tribunal held that the AO was not justified in treating the loan as unexplained credit under Section 68, and the addition was deleted.

3. Addition under Section 69C as Interest Paid on Loan:

This ground was consequential to the decision on the second issue. Since the loan was treated as genuine, the addition of Rs. 27,740 as interest paid on the alleged cash credit under Section 69C was also deleted.

Conclusion:

The appeal was partly allowed, with the tribunal upholding the validity of the reassessment proceedings but deleting the additions under Sections 68 and 69C. The tribunal emphasized the importance of providing the assessee with an opportunity to cross-examine and access the material used against them, adhering to principles of natural justice.