2025 (4) TMI 1652 - AT - Income Tax

Addition u/s 68 - unexplained cash credits - As per AO entity genuineness of such transaction and the creditworthiness of the parties not proved - CIT(A) deleted addition - examination of source of source HELD THAT - Confirmation of the parties by giving their ITRs copies of PAN copies of bank account statements had been filed and merely that their ITRs were showing loss is not sufficient to doubt the capacity of the parties concerned. Even the Ld. CIT(A) has gone to the extent of examining the source of source of the amount advanced by the two parties to the assessee. Thus the three ingredient i.e. identity capacity of the creditor and genuineness of the transactions have been proved beyond doubt and the reliance by the CIT(A) on the chart in his order giving the details of the amount received by the two concerns from the various parties and the case laws as cited by the CIT(A) is in order and we confirm the order of the CIT(A) deleting the addition on account of unsecured loans as made by the AO u/s 68 - Appeal of the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) (CIT(A)) for Assessment Year 2017-18 are as follows:

• Whether the CIT(A) erred in law by deleting the addition of Rs. 3,60,00,000/- made under section 68 of the Income-tax Act, 1961, on account of unexplained cash credits representing unsecured loans received by the assessee?
• Whether the CIT(A) was justified in ignoring the lack of creditworthiness of the creditors, given that the creditors had shown losses in their Income Tax Returns (ITRs) for the relevant year?
• Whether the CIT(A) was justified in ignoring the incomplete submission of bank account statements of the creditors and the failure to provide the source of funds from which the creditors had obtained the amounts advanced as loans to the assessee?
• Whether a reasonable opportunity should have been given to the Assessing Officer (AO) to examine the additional evidence submitted before the CIT(A) under Rule 46A of the Income Tax Rules?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of deletion of addition under section 68 on account of unexplained cash credits (unsecured loans)

Relevant legal framework and precedents: Section 68 of the Income-tax Act, 1961, places the burden on the assessee to explain the nature and source of any unexplained cash credits appearing in the books of account. The three essential ingredients to be established for the genuineness of such credits are: identity of the creditor, creditworthiness (capacity) of the creditor, and genuineness of the transaction. The CIT(A) has the power to examine these aspects and rely on documentary evidence and precedents to verify the claim of the assessee.

Court's interpretation and reasoning: The Tribunal noted that the unsecured loans in question were received from two parties, namely M/s. Bharat Food & Agro Products and M/s. VIR Food Limited, amounting to Rs. 3.25 crores and Rs. 25 lakhs respectively. The AO had initially disbelieved the genuineness of the loans based on the creditors' ITRs showing losses and the observation that the creditors lacked creditworthiness, leading to the addition under section 68.

However, the CIT(A) directed the assessee to submit detailed sources of income of these creditors, which was complied with by the assessee through submission of bank account statements and a chart explaining the "source of source" of funds. The CIT(A) also attempted to obtain the AO's comments on this additional information but received no response.

The Tribunal emphasized that the CIT(A) had thoroughly examined the identity, capacity, and genuineness of the creditors and the transactions, including tracing the funds to the ultimate sources. The Tribunal held that the CIT(A) rightly relied on the documentary evidence and relevant case law to conclude that the addition under section 68 was not justified.

Key evidence and findings: The assessee submitted copies of ITRs, PAN cards, and bank statements of the creditors, as well as bank statements of the parties who had advanced funds to these creditors. A detailed chart explaining the flow of funds was also produced and examined by the CIT(A).

Application of law to facts: The Tribunal found that the assessee had discharged the burden of proving identity, creditworthiness, and genuineness of the loans. Mere showing of losses in the creditors' ITRs was insufficient to discredit their capacity to advance loans, especially when the source of funds was satisfactorily demonstrated.

Treatment of competing arguments: The Revenue argued that the creditors' losses in ITRs and incomplete bank statements raised doubts about creditworthiness and genuineness. The Tribunal rejected this, noting that the CIT(A) had obtained complete information as per directions and that the AO had not challenged the documentary evidence substantively.

Conclusion: The Tribunal upheld the CIT(A)'s order deleting the addition under section 68.

Issue 2: Whether the CIT(A) erred in ignoring the creditors' losses in ITRs and incomplete bank statements

Relevant legal framework: The capacity of a creditor to advance loans is a critical factor under section 68. However, the mere fact that creditors have shown losses in their ITRs does not ipso facto negate their creditworthiness. The source of funds and genuineness of transactions must be examined holistically.

Court's interpretation and reasoning: The Tribunal observed that the CIT(A) had not ignored the losses but had considered the entire documentary evidence, including bank statements and sources of funds. The CIT(A) had gone beyond the immediate creditors to verify the "source of source" of the funds.

Key evidence and findings: The assessee submitted detailed bank statements of the creditors and their sources of funds, which were examined by the CIT(A) and reproduced in the order.

Application of law to facts: The Tribunal held that the CIT(A)'s approach was in consonance with the legal requirement to consider the entire evidence and not rely solely on ITR losses.

Treatment of competing arguments: The Revenue's contention that losses in ITRs should have led to rejection of creditworthiness was rejected as simplistic and not supported by the evidence.

Conclusion: The CIT(A) was justified in accepting the assessee's evidence and not disbelieving the creditors solely on the basis of losses in ITRs.

Issue 3: Whether the CIT(A) erred in ignoring incomplete bank statements and failure to provide source of funds

Relevant legal framework: The assessee is required to provide satisfactory evidence of the source of funds for unsecured loans. The CIT(A) has the power to direct the assessee to furnish additional evidence and verify the source of funds.

Court's interpretation and reasoning: The Tribunal found that the CIT(A) had specifically directed the assessee to submit detailed sources of the creditors' funds. The assessee complied by submitting complete bank statements of the creditors and the parties who had advanced funds to them. The CIT(A) examined these documents in detail and reproduced them in the order.

Key evidence and findings: The bank statements and the chart explaining the flow of funds were key to establishing the source of funds.

Application of law to facts: The Tribunal held that the CIT(A) did not ignore incomplete evidence but ensured that complete and satisfactory evidence was furnished and examined.

Treatment of competing arguments: The Revenue's contention that incomplete bank statements were ignored was rejected as the CIT(A) had explicitly dealt with the issue and ensured completeness.

Conclusion: The CIT(A) acted within his authority in directing and examining the source of funds, and the assessee complied fully.

Issue 4: Whether reasonable opportunity was given to the AO to examine additional evidence submitted under Rule 46A

Relevant legal framework: Rule 46A of the Income Tax Rules governs the production of additional evidence before the Commissioner of Income Tax (Appeals). Sub-rule (4) empowers the CIT(A) to direct production of documents or examination of witnesses to dispose of the appeal, and the CIT(A)'s powers are coterminous with those of the AO.

Court's interpretation and reasoning: The Tribunal noted that the assessee did not submit any fresh evidence under Rule 46A; rather, the CIT(A) had directed the assessee to submit additional details regarding the sources of the creditors' funds. The CIT(A) shared this information with the AO on multiple occasions but received no response.

The Tribunal emphasized that the CIT(A) has independent powers to make enquiries and decide the case based on evidence available to him, as per Sub-rule (4) of Rule 46A. Since the AO did not respond or point out any discrepancies, there was no violation of the rule.

Key evidence and findings: The order sheet entries directing submission of documents, the bank statements submitted, and the communication between CIT(A) and AO were examined.

Application of law to facts: The Tribunal held that the CIT(A) complied with procedural requirements and afforded the AO reasonable opportunity to examine the evidence. The absence of AO's response did not vitiate the proceedings.

Treatment of competing arguments: The Revenue's argument that the CIT(A) failed to give reasonable opportunity to the AO was rejected as misconceived.

Conclusion: No violation of Rule 46A occurred; the CIT(A) acted within his powers and gave adequate opportunity to the AO.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following significant legal determinations:

• "The three ingredient i.e. identity, capacity of the creditor and genuineness of the transactions have been proved beyond doubt and the reliance by the Ld. CIT(A) on the chart in his order giving the details of the amount received by the two concerns from the various parties at page 23 to 25 of his order and the case laws as cited by the Ld. CIT(A) is in order and we confirm the order of the Ld. CIT(A) deleting the addition on account of 'unsecured loans' as made by the Ld. AO u/s 68 of the Income Tax Act, 1961."
• "No fresh evidence was submitted by the assessee under rule 46A... As per Sub-Rule (4), the CIT(A) can independently examine or call for any information or make any enquiry as he may deem fit and his powers are coterminous with the powers of AO."
• "Though the Assessing Officer did not respond to such sharing of information by the Ld. CIT(A), but still no discrepancy or any omission or error have been pointed out by the Ld. CIT (DR) of the evidences reproduced in the order of the Ld. CIT(A). Thus, there is no violation of Rule 46A and we hold that the Ld. CIT(A) was fully justified as per powers conferred with him under 'Sub-Rule 4' of Rule 46A, to make independent enquiries and thus, this ground of appeal of the department is dismissed."

The Tribunal confirmed the CIT(A)'s deletion of the addition under section 68 and dismissed the Revenue's appeal.