2025 (6) TMI 158 - AT - Income Tax

Unsecured loans u/s 68 - Appellant failed to provide any satisfactory documents in support of creditworthiness and genuineness of the transaction Share Capital - HELD THAT - CIT(A) has already given relief of Rs. 47 lakhs based upon the documentary evidence. No infirmity in the same as the ld. CIT(A) has passed a watertight order and need not be tinkered with. Mere deposit of cash because funds were transferred to company may be suspicious but link nexus with the unaccounted income of the investee has to be established. Only addition sustained in respect of Mr. Pranav Rajeev of Rs. 3 lakhs is not sustainable because the very fact of the cash deposit is borne out from the cash flow submitted on record. Further there is no enquiry by the AO to link it with the company. Moreover the identity creditworthiness and genuineness of the transaction have been established by the appellant beyond doubt. Since the assessee has established the identity genuineness of the transaction and creditworthiness of the Creditors/share holders we direct the addition of Rs. 3 lakhs so sustained by the Ld. CIT(A) is required to be deleted. Unsecured loan - Deposit of cash has not been linked with the company. Moreover the AO did not make any enquiry whatsoever regarding the source of cash with the lender. Accordingly the addition of Rs. 3 lakhs is also directed to be deleted. Particularly in view of the fact that the ld. CIT(A) has given relief of Rs. 9 lakch out of Rs. 12 lakhs given as loan. We further hold that once when books of accounts are rejected no separate addition u/s 68 is possible. Rejection of books of accounts - Ad-hoc G.P. addition - Under section 145 sub-section(3) of the Act where the AO is not satisfied with the correctness and completeness of the accounts of the assessee or the method of accounting has not been regularly followed by the assessee or income has not been computed in accordance with notified standards the Assessing Officer may reject the books of accounts and continue to pass a best judgment assessment. In this case the Ld. CIT(A) has noted that the list of sundry creditors has filed later on though could not be faulted by the Assessing Officer but the same cast shadow of doubt on the accuracy of the books of accounts maintained by the appellant. The appellant has explained that there was a data corruption in tally software by subsequently it got corrected and the correct financial statements were subjected to verification and examination the books of accounts was subject to regular audit. No flimsy explanation can be made to challenge the correctness and completeness of the accounts. Accordingly we hold that the rejection of books of account is improper and non-est in the eyes of law. Once a rejection of books of accounts is demolished these cannot be an application of estimation of income as a natural corollary. Assessee s appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

- Whether the addition of Rs. 3,00,000 under section 68 of the Income Tax Act, 1961, relating to unexplained share application money from Mr. Pranav Rajeev, was justified.

- Whether the addition of Rs. 3,00,000 under section 68 relating to part of the unsecured loan borrowed from Manu Rishi HUF was justified.

- Whether the rejection of the assessee's books of account under section 145(3) of the Income Tax Act, 1961 was legally sustainable.

- Whether the application of an ad hoc gross profit (G.P.) rate of 11.14% for estimating income, resulting in an addition of Rs. 67,54,705, was appropriate.

- Whether the Commissioner of Income Tax (Appeals) erred in deleting substantial additions made by the Assessing Officer (AO) on account of unexplained share application money and unsecured loans without proper opportunity or remand.

- Whether the AO was justified in making additions on account of unexplained share capital, unsecured loans, and other income, including the treatment of arbitration award receipts.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 3,00,000 under Section 68 on Share Application Money from Mr. Pranav Rajeev

Legal Framework and Precedents: Section 68 mandates that where the assessee receives any sum as share application money, the identity, creditworthiness, and genuineness of the transaction must be satisfactorily explained. Judicial precedents cited include Commissioner of Income Tax vs Lovely Export (P.) Ltd., CIT vs AKJ Granites Pvt. Ltd., CIT vs Dolphin Canpak Ltd., and ACIT vs Lesh Industries Ltd., which collectively emphasize the need for establishing identity, genuineness, and creditworthiness to discharge the onus under section 68.

Court's Interpretation and Reasoning: The AO added the entire share capital of Rs. 50 lakhs as unexplained, including Rs. 3 lakhs from Mr. Pranav Rajeev, on the ground that the cash deposit was unexplained and the share applicant was not produced for verification. The CIT(A) deleted Rs. 47 lakhs of the addition but upheld Rs. 3 lakhs as unexplained.

The Tribunal observed that the cash deposit was evidenced by the cash flow submitted by the assessee, and no enquiry was made by the AO to link the cash deposit with the company or to establish nexus with unaccounted income. The Tribunal held that since the identity, creditworthiness, and genuineness of the transaction were established beyond doubt by the appellant, the addition of Rs. 3 lakhs was unsustainable.

Key Evidence and Findings: Documentary evidence including cash flow statements and compliance with summons under section 131 were placed on record. The AO did not conduct further enquiry to establish any nexus of the cash deposit with unaccounted income.

Application of Law to Facts: The Tribunal applied the principles established in the cited precedents to the facts and found that the assessee had discharged the onus under section 68. Mere suspicion arising from cash deposit without further link to unaccounted income is insufficient for addition.

Treatment of Competing Arguments: The Revenue argued that the cash deposit was suspicious and unexplained, but the Tribunal rejected this, noting lack of enquiry and the documentary evidence produced.

Conclusion: The addition of Rs. 3 lakhs on account of share application money from Mr. Pranav Rajeev was deleted.

Issue 2: Addition of Rs. 3,00,000 under Section 68 on Unsecured Loan from Manu Rishi HUF

Legal Framework and Precedents: Similar to share capital, section 68 requires explanation of identity, creditworthiness, and genuineness of unsecured loans. The onus lies on the assessee to furnish satisfactory evidence.

Court's Interpretation and Reasoning: The AO added the entire unsecured loan of Rs. 60,15,406 as unexplained, including Rs. 3 lakhs from Manu Rishi HUF. The CIT(A) deleted Rs. 57,15,406 but sustained Rs. 3 lakhs addition, citing lack of creditworthiness of the lender.

The Tribunal noted that the AO did not make any enquiry regarding the source of cash with the lender and that the assessee had discharged the onus to the extent of Rs. 9 lakhs out of Rs. 12 lakhs loan. The Tribunal further held that once the books of account are rejected, separate addition under section 68 is impermissible.

Key Evidence and Findings: The assessee complied with summons under section 133(6) and produced documents regarding unsecured loans. No enquiry was made by AO into the source of cash of the lender.

Application of Law to Facts: The Tribunal applied the principle that the AO must make enquiries before making additions and that unexplained cash deposits without nexus cannot be added. It also emphasized that rejection of books precludes separate addition under section 68.

Treatment of Competing Arguments: The Revenue contended the loan was unexplained and the lender's creditworthiness was not established. The Tribunal rejected this due to lack of enquiry and evidence produced by the assessee.

Conclusion: The addition of Rs. 3 lakhs on account of unsecured loan from Manu Rishi HUF was deleted.

Issue 3: Rejection of Books of Account under Section 145(3)

Legal Framework: Section 145(3) empowers the AO to reject books of account if they are not correct or complete, or if the method of accounting is not regularly followed, or income is not computed in accordance with notified standards. The AO can then proceed to make a best judgment assessment.

Court's Interpretation and Reasoning: The AO rejected the books on grounds including filing of two different balance sheets with different sundry creditors, deficiency in valuation of closing stock, and material discrepancies. The CIT(A) upheld the rejection.

The Tribunal examined the explanations of the assessee, including data corruption in tally software and subsequent correction, regular audit of books, and submission of correct financial statements. The Tribunal held that no flimsy explanation can challenge the correctness and completeness of accounts. It found the rejection improper and non-est in law.

Key Evidence and Findings: The assessee's explanation regarding technical issues with accounting software and audit evidence was considered. The AO's grounds were found to be insufficient to justify rejection.

Application of Law to Facts: The Tribunal emphasized that rejection must be based on cogent reasons and not mere suspicion or procedural irregularities. The correctness and completeness of accounts must be demonstrably flawed.

Treatment of Competing Arguments: The Revenue relied on discrepancies and filing of multiple balance sheets, but the Tribunal found these insufficient to reject books.

Conclusion: The rejection of books of account was set aside, and the AO was directed to accept the returned accounts.

Issue 4: Application of Ad Hoc Gross Profit Rate for Estimation of Income

Legal Framework: When books are rejected, the AO may estimate income based on past years' profit rates or other reasonable methods. However, such estimation must be rational and based on sound data.

Court's Interpretation and Reasoning: The AO applied an average net profit rate of 2.12% based on three previous years to sales of Rs. 20.62 crores and added Rs. 3.54 crores as other income from arbitration awards. The CIT(A) rejected this and applied a gross profit rate of 11.14% from AY 2010-11 to sales, resulting in an addition of Rs. 67,54,705.

The Tribunal held that since the books were not liable for rejection, the basis for estimation was flawed. The method adopted by CIT(A) was also found to be at tangent with the AO's approach and bereft of rhyme or reason. The Tribunal directed deletion of the ad hoc gross profit addition.

Key Evidence and Findings: The Tribunal noted absence of cogent basis for estimation and that no expenses were incurred against other income, making the addition unsustainable.

Application of Law to Facts: The Tribunal applied the principle that estimation must be reasonable and based on reliable data, which was lacking here.

Treatment of Competing Arguments: The Revenue argued for estimation based on AO's method, but the Tribunal rejected both AO's and CIT(A)'s approaches.

Conclusion: The ad hoc gross profit addition of Rs. 67,54,705 was deleted.

Issue 5: Procedural Fairness and Opportunity of Hearing

The Revenue contended that the CIT(A) erred in deleting additions without giving opportunity to the AO or calling for remand reports. The Tribunal did not find merit in this contention as the CIT(A) had examined the evidence and submissions on record thoroughly. The Tribunal noted that the AO had not conducted adequate enquiries before making additions and that the CIT(A)'s order was reasoned and based on material on record.

3. SIGNIFICANT HOLDINGS

- "Mere deposit of cash because funds were transferred to company may be suspicious but link nexus with the unaccounted income of the investee has to be established."

- "The identity, creditworthiness and genuineness of the transaction have been established by the appellant beyond doubt."

- "Once a rejection of books of accounts is demolished, these cannot be an application of estimation of income as a natural corollary."

- "No flimsy explanation can be made to challenge the correctness and completeness of the accounts."

- "The methodology adopted by the ld. CIT(A), which is completely at tangent with the route adopted by the ld. Assessing Officer. Be it as my, the estimation is nebulous and bereft of any rhymes or reasons."

- The Tribunal concluded that additions of Rs. 3 lakhs each on account of share application money and unsecured loan were unsustainable and directed their deletion.

- The Tribunal set aside the rejection of books of account and directed the AO to accept the returned income.

- The ad hoc gross profit addition of Rs. 67,54,705 was also deleted.

- The Departmental appeal was dismissed, and the assessee's appeal was allowed.