2025 (5) TMI 820 - AT - Income Tax

Unexplained cash credit u/s 68 rws 115BBE - assessee contends that the aforesaid amount comprises of unsecured loan received from family members and also receipts by way of repayment of loans earlier advanced by assessee - HELD THAT - In the wake of documentary evidences enumerated above for unsecured loans received from closely connected family members and having regard to the large capital held at the disposal of the lenders as narrated in the submissions made on behalf of the assessee we find considerable force in the plea of the assessee towards bonafides. The overwhelming factor that all these loans have been repaid during the year transgresses all considerations. Additions u/s 68 cannot be made merely on the basis of some perception of culpability entertained towards receipt of loan. The money in the instant case has been received from family members whose financial standing has been demonstrated to be fairly good. The factum of repayment quells the apprehension entertained by the Revenue. The overriding factum of repayment of loan itself repels any form of disguise on the part of the assessee and dispels the perception of any sordid or extraneous affairs. The clinching evidences towards loan procurement discharges the primary onus which lay upon the assessee u/s 68 of the Act. Coupled with this the loan itself having been repaid the assessee does not ultimately stand to gain any spurious benefit from such alleged unexplained cash credit. Such fact justifies the plea of the assessee towards existence of bonafides in the transactions. In the totality of facts where the trail for obtaining of loan and repayment thereof is proved and the lender has duly filed its return of income encompassing the transaction carried with the assessee the action of the Revenue cannot be countenanced in law. Thus the additions on account of unsecured loans received from parties noted above stands deleted. Existence of books of accounts maintained by the assessee is a condition precedent for invoking s. 68 - Thus in the absence of books of accounts mandated in law there is no legal scope to invoke the provision of s. 68 at the first place. Disallowance of claim of exempt income on account of receipt of unexplained gifts - We find apparent merit in the plea raised on behalf of the assessee. The assessee has placed the evidence of purchases of loose diamonds by the donors (sons) and shown to be out of their bank balances. In the absence of any adverse evidence the additions made on conjecture are totally uncalled for. Agreeably creditworthiness of a person cannot be measured solely by the income of the current year. The capital available at the disposal of a person is equally relevant to determine creditworthiness. The payment in the instant case has been made by sons for purchase of loose diamonds gifted. The Revenue has not brought anything on record to support the allegations that such gifts are the unexplained income of the mother assessee generated out of unknown sources. The additions made thus cannot be countenanced on facts and law. The action of the AO is set aside and the AO is directed to delete the addition. Appeal of the assessee is allowed.

Summary

The core legal questions considered in this appeal relate to the validity and applicability of additions made under section 68 read with section 115BBE of the Income Tax Act, 1961, concerning unexplained cash credits in the assessee's bank accounts, and the disallowance of claimed exempt income received as gifts. Specifically, the issues are:

1. Whether section 68 of the Income Tax Act can be invoked in the absence of books of account maintained by the assessee, particularly when credits appear only in bank statements/passbooks.

2. Whether the additions made on account of unsecured loans received from family members and repayments of loans advanced by the assessee are justified under section 68 read with section 115BBE.

3. Whether the claim of exempt income by way of gifts in the form of loose diamonds from the assessee's sons can be disallowed on grounds of unexplained gifts and insufficient proof of source.

4. Whether the impugned orders were passed without affording the assessee an opportunity of being heard, thus violating principles of natural justice.

Issue-wise Detailed Analysis

1. Applicability of Section 68 in Absence of Books of Account

Legal Framework and Precedents: Section 68 deals with unexplained cash credits appearing in the books of account of the assessee. The term "books of account" is defined under section 2(12A) of the Act to include ledgers, daybooks, cash books, account-books, and other such records maintained by the assessee. Bank passbooks or statements maintained by banks do not qualify as "books of account" of the assessee. The Supreme Court in Baladin Ram v. CIT held that credits appearing in bank passbooks cannot be treated as credits in the books of the assessee. The jurisdictional High Court in CIT v. Ms. Mayawati also held that section 68 is not applicable where the assessee does not maintain books of account.

Court's Interpretation and Reasoning: The Tribunal emphasized that since the assessee was not engaged in any business activity and did not maintain any books of account, invocation of section 68 was legally impermissible. The bank statements/passbooks are maintained by the bank and do not constitute the assessee's books. Therefore, treating credits appearing only in bank statements as unexplained cash credits under section 68 is contrary to law and a jurisdictional error.

Application of Law to Facts: The assessee's admitted non-maintenance of books of account and lack of business activity precluded the applicability of section 68. The AO's reliance on bank statements to make additions under section 68 was found unsustainable.

Conclusions: The Tribunal held that the additions under section 68 were unsustainable in law in the absence of books of account and quashed the additions on this ground.

2. Additions on Account of Unsecured Loans and Repayment of Loans

Legal Framework and Precedents: Section 68 casts an onus on the assessee to satisfactorily explain the nature and source of credited amounts appearing in the books of account. The Supreme Court and various High Courts have held that genuine loans received from relatives/family members, supported by documentary evidence, confirmations, bank statements, and proof of repayment, cannot be treated as unexplained credits. The repayment of loans during the same financial year strongly indicates bonafides. Further, the creditworthiness of the lender cannot be judged solely on the basis of their income in the relevant year but must consider their overall financial position and capital resources.

Court's Interpretation and Reasoning: The Tribunal meticulously examined documentary evidence including loan confirmations, income tax returns, bank statements, computations of income, and statements of affairs of the lenders (family members). It noted that all loans were either fully or substantially repaid during the financial year through banking channels. The lenders' financial standing was demonstrated by large opening capital balances and other sources of funds such as sale of shares and gifts received by them. The Tribunal rejected the AO's approach of doubting creditworthiness based solely on current year income.

Key Evidence and Findings: Confirmations from lenders, bank statements showing receipt and repayment of loans, income tax returns and computations of income of lenders, and statements of affairs were relied upon to establish genuineness and source of funds. The Tribunal also noted that the loans received were from close family members, strengthening the natural presumption of bonafides.

Treatment of Competing Arguments: The AO and CIT(A) doubted the creditworthiness of lenders and did not accept the explanations. The Tribunal disagreed, holding that the AO failed to consider the entire financial position of the lenders and ignored repayment of loans, which is a critical factor. The Tribunal also relied on judicial precedents that additions under section 68 are not sustainable once loans are repaid.

Application of Law to Facts: The facts showed that the loans were genuine, supported by documentary evidence, and repaid during the year, thus discharging the onus under section 68. The repayments negated any suspicion of disguised income or unexplained credits.

Conclusions: The Tribunal deleted the additions of INR 5,90,73,007/- made under section 68 read with section 115BBE, holding that the assessee had satisfactorily explained the nature and source of loans and repayments.

3. Disallowance of Claim of Exempt Income on Account of Gifts of Loose Diamonds

Legal Framework and Precedents: Gifts received from specified relatives, including sons, are exempt from income tax. The burden lies on the assessee to establish the genuineness of the gift, source of funds used by the donor, and relationship. The Supreme Court and various High Courts have recognized that natural love and affection between close relatives need not be proved beyond establishing relationship. The genuineness of gifts can be supported by gift deeds, purchase invoices, bank statements, and evidence of source of funds.

Court's Interpretation and Reasoning: The Tribunal observed that the assessee had placed on record purchase invoices of loose diamonds, gift deeds, bank statements of the donors showing withdrawal of funds without cash deposits, income tax returns, and computations of income of the donors. The relationship between the assessee and donors was established by ration card copies. The AO's and CIT(A)'s rejection based on meager income and absence of "occasion" for gift was held to be based on mere suspicion and surmises.

Key Evidence and Findings: Documentary evidence included purchase invoices, gift deeds, bank statements showing funds used for purchase, and income tax returns of donors. The Tribunal found no adverse evidence to discredit the gifts.

Treatment of Competing Arguments: The Revenue's argument of lack of occasion and insufficient capacity of donors was rejected as irrelevant and unsupported by evidence. The Tribunal emphasized that natural love and affection is a sufficient basis for gifts between close relatives.

Application of Law to Facts: The gifts were voluntary transfers from sons to mother, supported by credible evidence and consistent with natural familial relationships. The source of funds was explained satisfactorily.

Conclusions: The Tribunal allowed the claim of exempt income of INR 1,11,56,703/- on account of gifts and directed deletion of additions made on this ground.

4. Alleged Violation of Natural Justice

The assessee contended that the impugned orders were passed without providing an opportunity of being heard. However, the Tribunal did not find any merit in this contention as the record indicated that the assessee had ample opportunity to present evidence and submissions before the AO and CIT(A). No further elaboration was deemed necessary.

Significant Holdings

"It is a settled position of law that no addition can be made u/s 68 of the Act in absence of any credit entry in the books as defined u/s 2(12A) of the Act maintained by the assessee."

"The bank passbook/statement do not constitute books of account. The pass book of the bank cannot be treated as a book of account of the assessee because this is provided by the banker, to its customer and is only a copy of the customer's account in the books maintained by the bank."

"The factum of repayment quells the apprehension entertained by the Revenue. The overriding factum of repayment of loan itself repels any form of disguise on the part of the assessee and dispels the perception of any sordid or extraneous affairs."

"When the Department has accepted the factum of repayment, the additions under s. 68 is not sustainable in law."

"The word 'may' in section 68 indicates that the intention of Parliament was to confer a discretion on the Assessing Officer in the matter of treating the source of investment as unexplained. The AO is not necessarily obliged to invoke section 68 in every case where explanation is found unsatisfactory."

"Natural love and affection between sons and mother is a most sacrosanct relationship. Such gifts do occur in Indian societies for varied family reasons. No occasion is required per se for giving gift to mother."

"In the absence of any adverse evidence, the additions made on conjecture are totally uncalled for."

Final determinations on each issue were as follows:

- Additions under section 68 read with section 115BBE on account of unsecured loans and repayments were deleted, as the assessee discharged the onus of explanation with credible documentary evidence and repayment of loans.

- The invocation of section 68 was held to be legally impermissible in absence of books of account maintained by the assessee.

- The claim of exempt income on gifts of loose diamonds from sons was accepted and additions disallowed, as the assessee proved genuineness, source of funds, and relationship.

- No violation of natural justice was found in the impugned orders.