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2025 (5) TMI 955 - AT - Income TaxAddition u/s 68 on account of loan received - genuineness and creditworthiness of the lender not proved - HELD THAT - Settlement Commission has found that the loan taken from the aforesaid four parties namely Calmo Estates Private Limited Dotch Sales Private Limited Penguin Trading Agencies Limited and Seagold Mercantiles Private Limited are genuine. Once these loans have been found to be genuine in the earlier years then there is no question of any disallowance of interest in this year. Even in the case of Dotch Sales Private Limited apart from the fact that Settlement Commission has held the loan taken from Dotch Sales Private Limited to be genuine we find that documents furnished before us clearly prove the identity genuineness and creditworthiness of the parties and without any enquiry by the AO loan taken from such parties cannot be held to be non-genuine. Accordingly the addition on account of loan and addition on account of interest is deleted. Disallowance of Section 14A under Rule 8D which has been made by the ld. AO on gain of investment made in the partnership firm. It is seen that there was a loss incurred in the previous year from the partnership firm. Once the assessee has not earned any exempt income during the year then there is no question of any disallowance of 14A. Accordingly disallowance made u/s.14A on r.w.r 8D is deleted. In the result appeal of the assessee is allowed. Addition u/s.68 from the loan taken from Dotch Sales Private Limited - In this year assessee has furnished all these details as was filed in A.Y.2017-18 wherein we have found that lender party found has creditworthiness and moreover these parties have been held to be genuine by the Income Tax Settlement Commission in the earlier years. Therefore the loan during the year is held to be genuine and the addition made by the ld.AO is deleted. Disallowance of interest is also deleted once the loan has been held to be genuine. No disallowance of interest can be made.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in the appeals include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Addition of Rs. 1,30,00,000/- under Section 68 on loan from M/s. Dotch Sales Private Limited Relevant legal framework and precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, requiring the assessee to prove the identity, genuineness, and creditworthiness of the lender when loans are received. The burden lies on the assessee to demonstrate that the loan is genuine and not a disguised accommodation entry. Court's interpretation and reasoning: The Assessing Officer (AO) initially disallowed the loan amount, relying on statements recorded during a search operation and holding that the assessee failed to prove the genuineness and creditworthiness of the lender. The AO also invoked Section 115BBE on the disallowed interest. However, the assessee approached the Income Tax Settlement Commission (ITSC), which after detailed examination, including reports from the AO and verification of parties, held that loans from four specified parties, including Dotch Sales Private Limited, were genuine. Key evidence and findings: The assessee furnished ledger confirmations, bank statements, audited financial statements, and income tax returns of the lender companies. The audited accounts of Dotch Sales Private Limited showed substantial revenue (over Rs. 135.7 crores), significant reserves and surplus (Rs. 35.51 crores), and a profit of Rs. 6.64 crores during the relevant year. The Settlement Commission also noted that the AO had the opportunity to examine the lenders, and several parties appeared before the AO but were not examined further. The Commission found no corroborative evidence to disprove the genuineness of the loans and accepted the assessee's claim. Application of law to facts: Given the detailed examination by the Settlement Commission, corroborated by documentary evidence and absence of any adverse findings by the AO or Revenue, the loans were held to be genuine. The Court observed that mere retraction of statements during search proceedings, without corroborative material, cannot override the substantial evidence of genuineness and creditworthiness. Treatment of competing arguments: The Revenue relied on the AO's findings and statements during search proceedings to assert that the loans were accommodation entries. The assessee countered with documentary evidence and the Settlement Commission's findings. The Court gave precedence to the comprehensive inquiry by the Settlement Commission and the documentary proof over the uncorroborated statements. Conclusions: The addition of Rs. 1,30,00,000/- under Section 68 was deleted, recognizing the loan as genuine and creditworthy. Issue 2: Disallowance of interest of Rs. 1,42,28,127/- on loans from five parties Relevant legal framework and precedents: Interest paid on genuine loans is generally allowable as a business expense. Disallowance under Section 68 or invoking Section 115BBE requires establishing that the loan is not genuine or is an accommodation entry. Court's interpretation and reasoning: Since the loans themselves were held genuine by the Settlement Commission and the Court, the interest paid on such loans cannot be disallowed. The assessee had also furnished confirmations, bank statements, and audited financials to prove the genuineness and creditworthiness of the lenders. Key evidence and findings: The Settlement Commission's detailed findings, along with documentary evidence, supported the genuineness of the loans and, by extension, the interest paid. The AO's disallowance was based on the same uncorroborated statements that were retracted and found unreliable. Application of law to facts: The Court applied the principle that interest on genuine loans is deductible and that the disallowance cannot be sustained where the underlying loan is held genuine. Treatment of competing arguments: The Revenue argued in favor of disallowance based on the AO's findings and search statements, but the Court gave weight to the Settlement Commission's conclusive determination and documentary evidence. Conclusions: The disallowance of interest was deleted. Issue 3: Disallowance under Section 14A read with Rule 8D of Rs. 38,82,962/- on expenses relating to investment in partnership firm Relevant legal framework and precedents: Section 14A read with Rule 8D allows disallowance of expenditure incurred to earn exempt income. The disallowance is justified only if the assessee has earned exempt income during the relevant year. Court's interpretation and reasoning: The AO made disallowance despite the partnership firm incurring a loss. The Court observed that since no exempt income was earned by the assessee from the partnership firm during the year, no disallowance under Section 14A can be made. Key evidence and findings: The partnership firm's accounts showed a loss, negating the basis for disallowance under Section 14A. Application of law to facts: The Court applied the principle that Section 14A disallowance is not warranted in absence of exempt income. Treatment of competing arguments: The Revenue did not offer substantial counterarguments, and the Court relied on the factual loss incurred. Conclusions: The disallowance under Section 14A was deleted. Issue 4: Treatment of loss incurred in partnership firm as income of the assessee Relevant legal framework and precedents: Losses from partnership firms flow to partners and are reflected in their income accordingly. The issue was raised but not specifically contested in detail in the judgment, as the primary focus was on disallowance under Section 14A. Court's interpretation and reasoning: The judgment does not indicate any adverse finding on this issue, implying the loss was not treated as income. Conclusions: No addition was made treating the loss as income. Issue 5: Application of Section 115BBE at 60% tax rate on disallowed interest Relevant legal framework and precedents: Section 115BBE prescribes a special tax rate of 60% on income referred to in Sections 68, 69, 69A, 69B, 69C, or 69D, typically relating to unexplained income or cash credits. Court's interpretation and reasoning: The AO applied Section 115BBE on disallowed interest. However, since the Court deleted the disallowance of interest by holding the loans genuine, the basis for invoking Section 115BBE ceased to exist. Conclusions: The appeal against the Section 115BBE application was dismissed as infructuous. 3. SIGNIFICANT HOLDINGS The Court held:
Core principles established include the primacy of documentary evidence and thorough inquiry over uncorroborated statements recorded during search operations, the necessity of exempt income for Section 14A disallowance, and that interest disallowance and application of Section 115BBE depend on the genuineness of the underlying loan. Final determinations on each issue were in favor of the assessee, with additions and disallowances deleted, and the appeal under Section 115BBE dismissed as infructuous.
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