2025 (6) TMI 133 - AT - Income Tax

Unsecured loans being unexplained cash credit u/s 68 - AO acted on the basis of a concrete investigation report in which the loan creditors were mentioned as hawala accommodation entry providers from whom the assessee had taken unsecured loans - AO noted that these companies had nominal fixed assets and meagre income and therefore no creditworthiness for lending money to the assessee and the said companies were stated to be shell companies by the director of investigation in the database - HELD THAT - AO made the addition was the report of the investigation wing and the statement of Shri Pankaj Agarwal however we note that the nowhere Shri Pankaj Agarwal has ever mentioned or uttered about the assessee. Therefore we do not subscribe to the conclusion drawn by the ld. CIT (A) that these loans were taken from shell companies by routing assessee s own money. The case of the assessee find support from the decision of PCIT vs. Sreeleather 2022 (7) TMI 747 - CALCUTTA HIGH COURT wherein as held that the reliance cannot be placed on the statement of person who has never made any allegation against the assessee in his statement and no evidence was brought on record by the ld. AO to connect the entry operator to the assessee that loan transactions done with the assessee. The Hon ble High Court has also noted that the assessee in that case had filed all the evidences before the ld. AO qua the loan creditors and even the notice issued u/s 133(6) of the Act were duly responded. Appeal of the assessee is allowed.

Summary

The primary legal issue considered in this appeal is the validity of the addition of Rs. 3,49,00,000/- made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, treating unsecured loans received by the assessee as unexplained cash credit. The core questions are:

• Whether the unsecured loans raised by the assessee from five entities during the assessment year 2017-18 are genuine and creditworthy.
• Whether the AO was justified in relying on the investigation wing's report and statements of hawala operators to treat these loans as accommodation entries and consequently add the amount to the assessee's income.
• Whether the assessee has discharged the onus of proving the identity, creditworthiness, and genuineness of the loan creditors and transactions under section 68.
• Whether the appellate authorities erred in confirming the addition without adequately considering the documentary evidence and responses furnished by the assessee and the lenders.

Issue-wise Detailed Analysis:

1. Validity of Addition under Section 68 on Account of Unsecured Loans

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act requires that where any sum is found credited in the books of an assessee and the assessee offers no satisfactory explanation about the nature and source of such sum, it may be treated as income. The legal burden lies on the assessee to prove the identity and creditworthiness of the lender and the genuineness of the transaction. Precedents relied upon include the decisions of the Calcutta High Court in PCIT vs. Sreeleathers and CIT vs. Dataware Private Limited, which emphasize the necessity of concrete evidence to disprove genuineness and the inadmissibility of relying solely on suspicion or investigation reports without corroboration.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had raised unsecured loans amounting to Rs. 3.49 crores from five parties during the relevant year. These loans were taken on interest, with tax deducted at source (TDS) and deposited with the government, and were routed through banking channels. The assessee furnished extensive documentary evidence including loan confirmations, audited financial statements of the lenders, Income Tax Returns (ITRs), ledger accounts, municipal tax receipts, and replies to notices issued under section 133(6) of the Act. The AO also issued notices to the lenders, who responded with requisite details.

The AO and the first appellate authority (Ld. CIT(A)) had relied heavily on the investigation wing's report and statements of hawala operators, which allegedly named the lenders as entities involved in accommodation entries. However, the Tribunal observed that the key statement of Shri Pankaj Agarwal recorded under section 131 did not implicate the assessee or link the loan transactions to hawala operations. The Tribunal found no direct evidence connecting the assessee to any illicit accommodation entries or shell companies.

Key Evidence and Findings: The assessee's comprehensive documentary submissions and the lenders' responses to statutory notices demonstrated the existence, identity, and creditworthiness of the loan creditors. The loans were transacted through proper banking channels, and interest payments were made with TDS compliance. The investigation report was uncorroborated by any direct evidence against the assessee. The Tribunal also examined the comparative financial data of the lenders, which supported their capacity to lend.

Application of Law to Facts: The Tribunal applied the principles established in the cited High Court decisions, which require the AO to verify the genuineness of transactions through proper enquiry, including from the lenders' assessing officers, before making additions under section 68. The AO's reliance solely on the investigation report without such enquiry or pointing out any defects in the documents filed by the assessee was held to be insufficient.

Treatment of Competing Arguments: The assessee's argument that the addition was based on unsubstantiated investigation reports and that all statutory requirements and evidentiary standards were met was accepted. The Revenue's contention that the investigation report was a concrete basis for addition was rejected due to lack of direct evidence and failure to link the assessee to hawala operations. The Tribunal also distinguished the facts from the appellate authority's reliance on the investigation report.

Conclusions: The Tribunal concluded that the assessee had satisfactorily proved the identity, creditworthiness, and genuineness of the unsecured loans and that the AO had not discharged the burden of disproving the same. Consequently, the addition under section 68 was not sustainable.

2. Reliance on Investigation Wing Report and Statements of Hawala Operators

Relevant Legal Framework and Precedents: While investigation reports may be a source of information, their evidentiary value must be tested and corroborated before being used as a basis for addition. Statements of third parties, such as hawala operators, must specifically implicate the assessee to justify adverse inferences. The Calcutta High Court in PCIT vs. Sreeleathers clarified that uncorroborated statements without direct allegations are insufficient.

Court's Interpretation and Reasoning: The Tribunal found that the investigation report and the statement of Shri Pankaj Agarwal did not contain any direct allegation against the assessee. The mere presence of lenders' names in a list of entities associated with accommodation entries, without specific linkage to the assessee, was held to be inadequate for drawing adverse conclusions. The Court emphasized that suspicion alone cannot substitute for evidence.

Key Evidence and Findings: The investigation wing's report was not supported by any material showing that the loans were routed back to the assessee or were fictitious. The statement of the alleged hawala operator did not mention the assessee as a beneficiary. The AO did not point out any discrepancy or deficiency in the documents filed by the assessee.

Application of Law to Facts: The Tribunal applied the principle that adverse inferences cannot be drawn solely based on investigation reports or statements that do not directly implicate the assessee. The AO is required to conduct a thorough enquiry and verify facts before making additions based on such reports.

Treatment of Competing Arguments: The Revenue's reliance on the investigation report was countered by the assessee's detailed documentary evidence and the absence of direct allegations. The Tribunal sided with the assessee, holding that the AO and appellate authority erred in relying on uncorroborated investigation findings.

Conclusions: The Tribunal rejected the addition based on the investigation report and statements of hawala operators, holding that these did not constitute sufficient evidence to treat the loans as unexplained cash credits.

3. Onus of Proof and Verification under Section 68

Relevant Legal Framework and Precedents: The onus lies on the assessee to prove the identity, creditworthiness, and genuineness of the loan creditors and transactions. However, once the assessee discharges this onus by furnishing credible evidence, the AO must verify the genuineness through independent enquiries, including from the lenders' assessing officers. The CIT vs. Dataware Private Limited decision underscores that the AO cannot reject the creditors' returns or brand them as unworthy without proper enquiry.

Court's Interpretation and Reasoning: The Tribunal highlighted that the assessee had furnished all necessary evidence and that the AO had issued notices to the lenders, who responded with details including PAN numbers and financials. The AO did not make any enquiries from the lenders' assessing officers to verify the genuineness of their returns or transactions. The Tribunal found this approach contrary to settled legal principles.

Key Evidence and Findings: The lenders' responses to section 133(6) notices, the audited financial statements, and the TDS compliance on interest payments demonstrated the genuineness of the transactions. The AO's failure to conduct further enquiries or produce evidence to discredit the lenders' financials was noted.

Application of Law to Facts: The Tribunal applied the principle that the AO must conduct proper enquiries before making additions under section 68 once the assessee proves the identity and creditworthiness of the creditors. The AO's reliance on his own opinion about the lenders' financials without enquiry was held to be legally untenable.

Treatment of Competing Arguments: The Revenue's contention that the lenders were shell companies was based on the investigation report rather than independent enquiry. The Tribunal rejected this, emphasizing the need for procedural fairness and proper verification.

Conclusions: The Tribunal held that the AO failed to discharge his duty to verify the genuineness of the creditors and transactions and therefore, the addition under section 68 was unjustified.

Significant Holdings:

"We do not subscribe to the conclusion drawn by the ld. CIT (A) that these loans were taken from shell companies by routing assessee's own money."

"The Hon'ble High Court has also noted that the assessee in that case had filed all the evidences before the ld. AO qua the loan creditors and even the notice issued u/s 133(6) of the Act were duly responded."

"No substantial question of law is involved in this appeal. Both the Commissioner of Income Tax (Appeal) and the Tribunal below have in details considered the fact that the share application money was paid by account payee cheque, the creditor appeared before the Assessing Officer, disclosed its PAN number and also other details of the accounts but in spite of that the Assessing Officer did not enquire further from the assessing officer of the creditor but instead, himself proceeded to consider the profit and loss account of the creditor and opined that he had some doubt about the genuineness of such account."

"So long it is not established that the return submitted by the creditor has been rejected by its Assessing Officer, the Assessing officer of the assessee is bound to accept the same as genuine when the identity of the creditor and the genuineness of transaction through account payee cheque has been established."

The Court established the core principle that additions under section 68 cannot be sustained merely on suspicion or uncorroborated investigation reports. The assessee's discharge of onus by furnishing credible documentary evidence and the lenders' responses to statutory notices must be given due weight. The AO must conduct independent enquiries, including from the lenders' assessing officers, before making adverse additions. The absence of any direct allegation or evidence linking the assessee to hawala operations or accommodation entries negates the basis for addition.

Accordingly, the Court set aside the orders of the AO and the first appellate authority, directing deletion of the addition of Rs. 3,49,00,000/- treated as unexplained cash credit under section 68. The appeal was allowed in favor of the assessee.