2025 (2) TMI 935 - AT - Income Tax

Addition u/s 68 - unsecured loan received by the assessee - assessee could not prove the repayment of the unsecured loans along with sources of repayment and reasons there for - CIT(A) deleted addition - HELD THATR - The entire allegation of the ld. AO seems to be based on finding that these entities were doing some circular trading and they had defrauded the bank by adopting modus operandi of rotation of funds from one entity to another and misusing the LC facility from these banks. Despite making such allegation in the respective assessment orders of these entities he has applied the profit rate on the sales declared by these entities to assess their income. Nowhere in their cases any deemed income has been assessed or any finding have been given that they are bogus entities not doing business. Once AO has accepted source of these loans in the case of these parties then how can he made the addition u/s.68 in the hands of the assessee. Nowhere in the various statements as referred by the ld. AO there is any whisper about the assessee or any question was asked by the searched parties or the authorised officers that any such person or entity have given any kind of accommodation entry to the assessee or the loan given by these parties were bogus. The entire allegation of the AO based on the statement recorded and finding of the search parties is that these groups were doing either bogus sales or purchases or circular trading to get LC from the bank. There might be movement of funds from one company to other and overdrawing the money from the banks through Letter of Credit without any credentials at the time of Bill Discounting or for any other purpose but nowhere there is any finding of investigation wing or any material found or statement during the search that some unaccounted money has been given by the assessee company to accommodate any loan entry or there is any cash trail. Neither there is involvement of any kind of entry operator nor were these companies found to providing accommodation entry of loan by taking some temporary cash. Without such information or material there cannot be any presumption that these companies had provided bogus entry of loan or the transaction is not genuine. Thus the finding of the CIT(A) cannot be tinkered with. Accordingly the additions made u/s.68 is deleted and the order of the ld. CIT (A) is confirmed.

Summary

ISSUES PRESENTED and CONSIDERED

The core issues considered in the judgment are:

1. Whether the deletion of Rs. 43,90,00,000/- added as unsecured loans under Section 68 of the Income Tax Act by the Assessing Officer (AO) was justified.

2. Whether the assessee could establish the creditworthiness of the lenders and the genuineness of the transactions.

3. Whether the loans were merely accommodation entries and if the entire chain of flow of funds was genuine or involved complex layering indicating mala fide intentions.

4. The validity of the search warrant issued and the addition made without incriminating material, although this was not addressed by the Tribunal as it was deemed beyond their scope.

ISSUE-WISE DETAILED ANALYSIS

1. Deletion of Addition under Section 68

- Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits. The burden is on the assessee to prove the identity, creditworthiness of the creditors, and the genuineness of the transactions.

- Court's Interpretation and Reasoning: The Tribunal observed that the AO did not adequately examine documentary evidence provided by the assessee, such as ledger accounts, balance confirmations, income tax returns, audited financial statements, and bank statements. The AO relied heavily on statements from directors of related companies and allegations of circular trading without substantial evidence against the assessee.

- Key Evidence and Findings: The CIT(A) noted that the assessments of the lending companies were completed under scrutiny, and their sources of funds were accepted by the AO. The loans were received and repaid through banking channels, and the lenders had sufficient funds and were assessed to tax.

- Application of Law to Facts: The Tribunal agreed with the CIT(A) that the AO's addition under Section 68 was unjustified as the sources of funds were verified and accepted in the lenders' assessments, and the transactions were genuine.

- Treatment of Competing Arguments: The Revenue argued that the lenders were shell companies involved in bogus transactions. However, the Tribunal found that the AO had accepted the sources of funds in the lenders' assessments, contradicting the addition made in the assessee's case.

- Conclusions: The Tribunal concluded that the addition under Section 68 was not warranted, as the assessee had discharged its burden of proof regarding the identity, creditworthiness, and genuineness of the transactions.

2. Creditworthiness and Genuineness of Transactions

- Relevant Legal Framework and Precedents: The assessee must demonstrate the creditworthiness of the lenders and the genuineness of the transactions to avoid additions under Section 68.

- Court's Interpretation and Reasoning: The Tribunal emphasized the importance of documentary evidence and noted that the AO failed to consider the financial statements and confirmations provided by the lenders.

- Key Evidence and Findings: The financial statements of the lenders showed substantial reserves and surplus, indicating creditworthiness. The transactions were conducted through banking channels, supporting their genuineness.

- Application of Law to Facts: The Tribunal found that the lenders had sufficient funds and the transactions were genuine, as evidenced by the banking records and financial statements.

- Treatment of Competing Arguments: The Revenue's argument about the lenders being shell companies was countered by the Tribunal's observation that the AO had accepted the lenders' sources of funds in their assessments.

- Conclusions: The Tribunal concluded that the assessee successfully demonstrated the creditworthiness of the lenders and the genuineness of the transactions.

SIGNIFICANT HOLDINGS

- The Tribunal held that the addition of Rs. 43,90,00,000/- under Section 68 was unjustified, as the assessee had adequately demonstrated the identity, creditworthiness, and genuineness of the transactions.

- The Tribunal upheld the CIT(A)'s decision to delete the addition, noting that the AO had accepted the sources of funds in the lenders' assessments.

- Verbatim Quote: "In view of the facts and judicial pronouncements as discussed above, the addition of Rs. 43,90,00,000/- made by the AO u/s 68 of the IT Act is deleted."

- The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection, affirming the CIT(A)'s findings and conclusions.