2020 (12) TMI 254 - AT - Income Tax

Addition in the proceedings u/s 153A - Unexplained cash credit u/s 68 - third party statements relied upon - addition based incriminating material recorded in the course of the search conducted upon the appellant or not - HELD THAT - On perusal of the notices issued u/s 142(1) we note that the AO had initially requisitioned several details documents from the assessee, inter alia including the details of the unsecured loans raised during the relevant years. It is noted that in none of these notices issued u/s 142(1) the AO did not mention of any incriminating material , which was found in the course of search, based on which such details of unsecured loans had been requisitioned. Upon obtaining the details of unsecured loans, it is noted that the AO made enquiries from the loan creditors u/s 131 of the Act, and some of the notices went un-served. From the contents of the show cause, it is nowhere discernible as to what was the incriminating material unearthed in the course of search , which led the AO to make the impugned additions u/s 68 69C of the Act. It is noted from the show cause that the AO only made a passing reference to statements of alleged entry operators who had admitted to providing accommodation entries through these loan creditors. AO without giving the copy of entry operators to the assessee, could not have relied upon the same for drawing any adverse inference against the assessee and made the additions. So, the additions made by Assessing Officer itself is bad in law. We having examined the contents of the statements, it is noted that none of them were neither recorded in the course of the search conducted upon the appellant nor by the AO on his own during re-assessment proceedings. Moreover it is noted that, in none of these statements did these persons name the assessee nor in the sworn statements had the so-called entry operators admitted of providing accommodation entries to the appellant or issuing cheques in lieu of cash received from the appellant. Such third party statements could not be said to constitute incriminating material found in the course of search upon the assessee . , we hold that the material referred to by the lower authorities for justifying the additions made in the unabated assessments for AYs 2011-12 to 2013-14 did not constitute incriminating material and therefore no additions were legally permissible in the assessments framed u/s 153A - Decided in favour of assessee. Addition u/s 68 and 69C - From financial position of the loan creditors, we note that the lower authorities did not objectively take into consideration the financial net worth of the creditors and the facts and figures available in the audited accounts. On examination of the financial statements of the loan creditors, we find that each loan creditor possessed sufficient investible funds out of which the creditors had advanced the loans to the assessee. We also find that in each case, the loan creditor had reported substantial interest income and they are income taxpayees. Further, compared with the gross interest accounted in the books of the creditor, the amount of interest paid by the appellant was relatively lower. We also note that the interest paid by the appellant was accounted in the books of the loan creditor and before payment of interest, the tax was duly deducted u/s 194A - Having regard to the totality of the facts and circumstances of the case therefore, we do not find merit in the conclusion of the lower authorities that the loan creditors did not have financial credentials to advance loans and on that ground justify the addition u/s 68 69C of the Act. It is neither the AO s case that the loan creditors are not income-tax assessee s nor has he alleged that the documents and evidences furnished by the appellant in support of loan transactions were false or suffered from defects or do not tally with the Department s records. Aggregate additions being principal loan amount received by the appellant from the fifteen bodies corporate did not constitute its income chargeable u/s 68 of the Act. Consequently, for the same reason we also do not find any justification in sustaining the disallowance being the interest on such loans u/s 69C - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition made on account of receipt of unsecured loans treating it as unexplained cash credit under Section 68 of the Income Tax Act, 1961.
2. Disallowance of the interest paid on such loans under Section 69C of the Act.

Detailed Analysis:

1. Addition made on account of receipt of unsecured loans treating it as unexplained cash credit under Section 68 of the Income Tax Act, 1961:

Background and Arguments:
- The appellant contested the additions made by the Assessing Officer (AO) and sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] on the grounds that no incriminating materials were found during the search.
- The appellant argued that the assessments for AYs 2011-12, 2012-13, and 2013-14 were unabated as they were completed before the search date, and no additions could be made without any incriminating material.
- The appellant relied on the Tribunal's decision in the case of its sister concern, M/s Mani Square Ltd., to support their claim.

Tribunal's Findings:
- The Tribunal reiterated that in the case of unabated assessments, no additions are permissible under Section 153A unless based on incriminating material found during the search.
- The Tribunal examined the materials cited by the CIT(A) as incriminating and found them insufficient to justify the additions.
- The Tribunal noted that the AO did not rely on any specific incriminating material found during the search but rather on third-party statements and post-search investigations, which were not directly linked to the appellant.

Conclusion:
- The Tribunal held that the additions made under Section 68 for AYs 2011-12 to 2013-14 were unsustainable as they were not based on any tangible, cogent, and relevant incriminating material found during the search.
- Consequently, the Tribunal allowed the appellant's grounds for these years.

2. Disallowance of the interest paid on such loans under Section 69C of the Act:

Background and Arguments:
- The appellant provided extensive documentation to prove the identity, genuineness, and creditworthiness of the loan creditors, including PAN details, financial statements, bank statements, and confirmation of loans.
- The AO disallowed the interest paid on the loans, citing the inability to verify the creditors' existence and financial capacity.

Tribunal's Findings:
- The Tribunal noted that the appellant had discharged its onus by providing sufficient evidence to substantiate the identity, genuineness, and creditworthiness of the loan creditors.
- The Tribunal emphasized that the AO did not find any defects or falsity in the documents provided by the appellant.
- The Tribunal criticized the AO for relying on third-party statements without allowing the appellant to cross-examine the individuals or independently verifying the statements.

Conclusion:
- The Tribunal found that the AO's reliance on third-party statements and the non-service of summons to some creditors were not sufficient grounds for disallowing the interest paid.
- The Tribunal concluded that the disallowance of interest under Section 69C was unjustified and allowed the appellant's grounds for all the assessment years in question.

Final Judgment:
- The Tribunal allowed the appeals of the appellant for all the assessment years from 2011-12 to 2014-15, 2016-17, and 2017-18, deleting the additions made under Section 68 and the disallowances under Section 69C.