2023 (7) TMI 928 - AT - Income Tax

Addition u/s 68 - unsecured loans appearing in the books of the assessee treated as unexplained cash credit - assessee company is a sick industrial company and registered with erstwhile BIFR under sick industrial company (Special Provisions) Act, 1985 for rehabilitation since its net worth turned negative and fully eroded in year 1991 - HELD THAT - As lender company has got free reserves which itself proves the creditworthiness to make interest free advances to the assessee company. All the transactions are routed through regular banking channels and duly reflected in the balance sheet of the lender company and duly supported by a confirmation from lender company. Hence, the identity, creditworthiness of the lender and genuineness of the transaction are prove beyond doubt. The loan transactions are routed through regular banking channels and reflected duly in the annual accounts of the lender company. Hence the genuineness of the transactions is also proved beyond doubt. All the three necessary ingredients of section 68 of the Act has been proved in respect of this loan transaction. Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of unsecured loans as unexplained cash credit under Section 68 of the Income Tax Act.
2. Admission of additional evidence by the CIT(A).
3. Creditworthiness and genuineness of the transactions related to unsecured loans.

Summary of Judgment:

Issue 1: Treatment of Unsecured Loans as Unexplained Cash Credit
The primary issue was whether the addition under Section 68 of the Income Tax Act for unsecured loans received by the assessee could be justified. The AO treated unsecured loans from M/s Godavari Pvt. Ltd., M/s Shearson Investment Trading Pvt. Ltd., and M/s Birla Cotsyan (I) Ltd. totaling Rs. 3,50,15,937/- as unexplained cash credit, citing lack of genuineness and creditworthiness.

Issue 2: Admission of Additional Evidence by CIT(A)
The assessee submitted additional evidence under Rule 46A of the Income Tax Rules, including confirmations from lenders, ITRs, and annual reports, which were forwarded to the AO for a remand report. The AO opposed the admission of additional evidence but examined the documents on a without-prejudice basis.

Issue 3: Creditworthiness and Genuineness of Transactions
- M/s Shearson Investment Trading Pvt. Ltd.: The CIT(A) deleted the addition of Rs. 1,68,25,236/- after finding that the lender company had sufficient reserves (Rs. 145 crores) and the transactions were routed through regular banking channels, proving the identity, creditworthiness, and genuineness of the transaction.
- M/s Birla Cotsyan (I) Ltd.: The CIT(A) confirmed the addition, but the Tribunal found that the loan was a conversion of a trading liability into a loan, supported by confirmations and sufficient creditworthiness (Rs. 75.13 crores in reserves), and thus no addition could be made under Section 68.
- M/s Godavari Pvt. Ltd.: The Tribunal found that the lender company, a group company of the assessee, had sufficient free reserves (Rs. 72.36 crores) and the transactions were genuine, supported by confirmations, ITRs, annual reports, and bank statements. Hence, the loan was treated as genuine.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal held that the identity, creditworthiness, and genuineness of the unsecured loans were proved beyond doubt, and no addition under Section 68 was warranted.

Pronouncement:
Order pronounced in the open court on 19th July, 2023.