2016 (5) TMI 427 - AT - Income Tax

Addition on unsecured loans - Held that - Assessee had not received any fresh loan during the year under consideration, that all the loans were appearing on the first date of the assessment year are older loans. In the earlier years, the assessee had filed confirmation letters or other documentary evidences to show the genuineness of the transaction. In those years, the AO. s had dealt the loans independently. Either they had not made any addition u/s. 68 of the Act by holding that the loan transactions were fictitious or they have made additions in that particular year. In our opinion, the AO can invoke the provisions of section 68 of the Act for the loans taken during a particular assessment year. But, if a loan is received in earlier years and accepted by him in those year/(s) or not doubted in those year/(s), then in the subsequent years, he cannot add said amount, while computing the total income of an assessee. In short, opening balances of loans of earlier years cannot be added to the income of the assessee, under section 68 of the Act, in subsequent years. In the case, under consideration, all the loans are of earlier years, as stated earlier. In the cases of Manju Bafna, Praveen Bafna, Shailesh Bafna additions were made in earlier year . Therefore, in our opinion no addition can be made for the year under appeal, as it would result in double addition of the same amount. As far as the provisions of section 28 (iv) of the act is concerned we are of the opinion that the FAA had wrongly applied the section. The provisions of the section can be invoked if the benefit or perquisite is not in form of cash. It cannot be said that the loan received by the assessee could be termed as benefit/perquisite. No justification in invoking the provisions of section 68 - Decided in favour of assessee

Summary

Issues Involved:
1. Addition in respect of unsecured loans of ?50.76 lakhs under Section 68 of the Income Tax Act.
2. Application of Section 41(1) and Section 28(iv) of the Income Tax Act.

Detailed Analysis:

1. Addition in respect of unsecured loans of ?50.76 lakhs under Section 68 of the Income Tax Act:

The assessee, a firm engaged in building construction, filed its return of income declaring total income at NIL. The AO completed the assessment determining the income at ?5.10 Crores. The first ground of appeal concerns the addition of ?50.76 lakhs as unsecured loans. During the assessment, the AO directed the assessee to file confirmation of these loans. Despite multiple opportunities and issuance of summons, the assessee failed to provide confirmations for loans from 14 parties. Consequently, the AO added these loans as unexplained cash credit under Section 68 of the Act.

On appeal, the FAA upheld the AO’s addition for loans from nine parties amounting to ?33.76 lakhs, citing the assessee's failure to prove the genuineness and identity of the lenders. The FAA also noted that the loans were carried forward year after year without repayment, indicating cessation of liability. The FAA referenced legal precedents, including Sumati Dayal and Nanakchand Laximdas, to support the conclusion that the transactions lacked genuineness.

2. Application of Section 41(1) and Section 28(iv) of the Income Tax Act:

For the remaining five parties, the FAA invoked Section 28(iv) of the Act, treating the loans as taxable benefits arising from business. The FAA argued that since no repayments were made since AY 2003-04, the liabilities ceased to exist, qualifying them as taxable income under Section 28(iv). However, the FAA rejected the application of Section 41(1), which pertains to remission or cessation of trading liabilities, as the loans were not trading liabilities.

Tribunal's Findings:

The Tribunal found that all the loans in question were from earlier years and appeared in the balance sheets of those years. The assessee had provided confirmation letters and other documentary evidence in earlier years, and the AO had either accepted the loans or made additions in those years. The Tribunal held that the AO could not invoke Section 68 for loans received in earlier years and accepted in those years. Adding these amounts in subsequent years would result in double addition, which is unjustifiable.

The Tribunal also disagreed with the FAA's application of Section 28(iv), stating that the section applies to benefits or perquisites not in the form of cash. Since the loans were in cash, they could not be treated as benefits/perquisites under Section 28(iv).

Conclusion:

The Tribunal reversed the FAA's order, concluding that there was no justification for invoking Section 68 for the year under consideration. The appeal filed by the assessee was partly allowed, and the addition of ?50.76 lakhs as unexplained cash credit was deleted.

Order Pronounced:

The order was pronounced in the open court on 6th May, 2016.