2023 (3) TMI 354 - AT - Income Tax

Addition u/s 68 - Loans unexplained - HELD THAT - With regard to the statements of certain persons relied upon by the AO, the CIT(A) has noticed that those statements do not turn against the assessee at all. We do not find any reason to interfere with his decision in holding that there is no ground to make addition u/s 68 in respect of the loans. We uphold the order passed by him on this issue. Consequently, the relief granted in respect of interest disallowance relatable to the above said amount of Rs.5.05 crores is also upheld. Addition confirmed by Ld CIT(A), we notice that the Ld CIT(A) as well as AO has placed reliance on a statement given by the director of two companies, viz., M/s Lity Star Constructions Ltd and M/s Pushpanjali Commo Trade P Ltd in some other proceeding before the investigation wing. Thus, the fact remains that the above said statements have not been taken during the course of present assessment proceedings of the assessee. We are of the view that the tax authorities are not justified in placing reliance on the statement given by the director in a third party proceeding without confronting the same with the assessee. On the contrary, the fact remains that both the above said companies have duly responded to the AO during the course of current assessment proceedings by furnishing replies to the notices issued u/s 133(6) of the Act and the summons issued u/s 131 of the Act. All the relevant financial statements have been filed before the AO in respect of above said two companies in order to prove the three main ingredients, viz., identity of the creditor, credit worthiness of the creditor and the genuineness of transactions. Accordingly, we are of the view that the CIT(A) was not justified in sustaining addition relating to the above said two companies. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition relating to the above said two companies. Consequently, the interest disallowance made in AY 2013-14 and 2014-15 are directed to be deleted. Assessee appeal allowed.

Issues Involved:
1. Addition of Rs. 5.35 crores under Section 68 of the Income Tax Act for AY 2013-14.
2. Disallowance of interest expenditure related to the above loans for AY 2013-14 and 2014-15.
3. Confirmation of addition of Rs. 30 lakhs by CIT(A).
4. Appeals by both parties regarding the above issues.

Issue-wise Detailed Analysis:

1. Addition of Rs. 5.35 crores under Section 68 of the Income Tax Act for AY 2013-14:
The AO made an addition of Rs. 5.35 crores under Section 68 of the Income Tax Act, attributing it to unsecured loans taken by the assessee from various parties. The AO classified these loans as unexplained cash credits, citing that the lender companies were merely paper entities without genuine business activities. The AO's conclusion was based on the lack of business operations, insufficient creditworthiness, and statements from directors admitting the companies were used for accommodation entries.

2. Disallowance of Interest Expenditure Related to the Above Loans for AY 2013-14 and 2014-15:
The AO also disallowed interest expenditure amounting to Rs. 25,25,841/- related to the unsecured loans for both AY 2013-14 and 2014-15, based on the premise that the loans themselves were not genuine.

3. Confirmation of Addition of Rs. 30 lakhs by CIT(A):
The CIT(A) confirmed the addition of Rs. 30 lakhs out of the total Rs. 5.35 crores, attributing it to loans from M/s Lity Star Constructions Ltd. and M/s Pushpanjali Commotrade Pvt. Ltd. The confirmation was based on statements from directors admitting to providing accommodation entries and acting as conduits.

4. Appeals by Both Parties Regarding the Above Issues:
Both the assessee and the department filed appeals. The department contested the deletion of Rs. 5.05 crores by CIT(A), while the assessee contested the confirmation of Rs. 30 lakhs and related interest disallowance.

Detailed Analysis:

Addition of Rs. 5.35 crores under Section 68:
The CIT(A) deleted the addition of Rs. 5.05 crores, observing that the assessee had provided sufficient documentary evidence to prove the identity, creditworthiness, and genuineness of the lender companies. The CIT(A) noted that the lender companies had substantial funds and their financial statements were publicly available and had been accepted in their respective assessments. The transactions were conducted through banking channels, and there was no direct evidence of accommodation entries. The CIT(A) also considered judicial precedents, including the Supreme Court's decision in Commissioner of Income Tax vs. Lovely Exports (P.) Ltd., which held that the department should proceed against the shareholders if the share application money is alleged to be bogus, rather than adding it as undisclosed income of the assessee.

Disallowance of Interest Expenditure:
The CIT(A) granted proportionate relief in respect of interest expenditure related to the deleted addition of Rs. 5.05 crores, while confirming the interest disallowance related to the remaining Rs. 30 lakhs.

Confirmation of Addition of Rs. 30 lakhs:
The CIT(A) confirmed the addition of Rs. 30 lakhs based on statements from directors of the lender companies admitting to providing accommodation entries. The assessee's contention that these statements were recorded in unrelated proceedings was not accepted by the CIT(A), who found the statements credible and relevant.

Appeals and Final Judgment:
The ITAT upheld the CIT(A)'s deletion of Rs. 5.05 crores, agreeing that the assessee had discharged its burden of proof regarding the identity, creditworthiness, and genuineness of the lender companies. The ITAT found no reason to interfere with the CIT(A)'s decision on this issue.

Regarding the addition of Rs. 30 lakhs, the ITAT noted that the statements relied upon by the AO and CIT(A) were not recorded during the assessee's assessment proceedings and were not confronted with the assessee. The ITAT observed that the lender companies had responded to the AO's notices and provided necessary information, proving their identity, creditworthiness, and genuineness. Therefore, the ITAT set aside the CIT(A)'s order on this issue and directed the AO to delete the addition of Rs. 30 lakhs and related interest disallowance for AY 2013-14 and 2014-15.

Conclusion:
The revenue's appeal was dismissed, and both the assessee's appeals were allowed. The ITAT upheld the deletion of Rs. 5.05 crores and related interest disallowance, while setting aside the addition of Rs. 30 lakhs and related interest disallowance.

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