2025 (6) TMI 236 - AT - Income Tax

Unsecured loan - Addition u/s 68 - AO has initiated the proceedings on the basis of information received from the Asstt. Director Of Income tax and case was selected for manual scrutiny - HELD THAT - Additions were made only on the basis of alleging that the loan taken by the assessee from the M/s Aarti Securities are only accommodation entry. In the case in hand the amounts were paid by the parties through banking channels - assessee has not received any amount in cash and loan was repaid after deducting the TDS. The assessee has repaid the loan even before the assessment was reopened. When the assessee takes the loan and repaid along with interest clearly shows that the transactions are genuine. Merely because some operator has managed the affairs and all the transactions cannot be labelled as non-genuine. In the present case the assessee has submitted all the documents in support of the transaction before the Ld. AO and he has rejected the same on the basis that the assessee has obtained the accommodation entry while the transaction was made through banking channel. The ground raised by the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the assessment order passed under section 143(3) of the Income Tax Act, 1961, based solely on investigation wing's report and search-based findings, without following the prescribed procedure under section 153C, is valid;

(b) Whether the assessment order and first appeal order are invalid due to the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT-A) acting on "borrowed satisfaction" without independent application of mind;

(c) Whether there was a violation of the principles of natural justice during the assessment proceedings, particularly regarding non-confrontation and non-testing of back material such as statements;

(d) Whether the additions made under sections 68 and 69C of the Act, amounting to Rs. 51,00,000 and Rs. 1,02,000 respectively, are arbitrary and without application of mind, especially when the loan transactions were routed and repaid through banking channels;

(e) Whether the transactions characterized as accommodation entries are genuine, given the repayment of loans with interest through banking channels and submission of supporting documents by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) - Validity of Assessment under Section 143(3) vis-`a-vis Section 153C

Legal Framework and Precedents: Section 153C of the Income Tax Act mandates a specific procedure for assessment or reassessment when the income is found during search or seizure operations in the case of a different person. Section 143(3) pertains to regular scrutiny assessments based on the return filed. The procedural distinction is critical to ensure legality and validity of the assessment.

Court's Interpretation and Reasoning: The Tribunal noted that the grounds challenging the validity of the assessment under section 143(3) instead of 153C were not pressed by the assessee. Consequently, the Tribunal decided against the assessee on this issue, implying acceptance of the validity of the assessment procedure followed.

Application of Law to Facts: Since the assessee did not pursue this ground, the Tribunal refrained from further adjudication, effectively upholding the assessment order's procedural validity.

Issue (b) - Allegation of "Borrowed Satisfaction" and Non-application of Mind

Legal Framework and Precedents: The principle that the AO and appellate authorities must exercise independent judgment and not act merely on the directions or dictates of the investigation wing is well established in tax jurisprudence.

Court's Interpretation and Reasoning: Similar to issue (a), this ground was not pressed by the assessee at the hearing. The Tribunal accordingly ruled against the assessee on this issue, implying no finding of borrowed satisfaction.

Issue (c) - Violation of Principles of Natural Justice

Legal Framework and Precedents: The principle of natural justice requires that the assessee be given an opportunity to confront and rebut any adverse material or evidence, including statements or back material relied upon by the AO.

Court's Interpretation and Reasoning: The Tribunal observed that this ground was general in nature and did not warrant separate adjudication. No specific findings of violation were recorded.

Issue (d) & (e) - Validity of Additions under Sections 68 and 69C and Genuineness of Loan Transactions

Legal Framework and Precedents: Section 68 deals with unexplained cash credits, requiring the assessee to prove identity, genuineness, and creditworthiness of the lender. Section 69C relates to unexplained investments. The law mandates that the AO cannot make additions solely on suspicion or on the basis of information from third parties without independent verification of facts and documents.

Several precedents were cited by the assessee's counsel, including rulings by coordinate benches and higher authorities, which emphasize that mere suspicion or association with accommodation entry providers does not justify additions if the assessee can prove the genuineness of transactions through documentary evidence and banking channels.

Key Evidence and Findings: The assessee submitted financial statements and bank documents showing that the loan amount of Rs. 51,00,000 was received and repaid through banking channels, with TDS deducted. The repayment was made even before the assessment was reopened. The AO had rejected these documents relying on information from the investigation wing alleging accommodation entries.

Court's Interpretation and Reasoning: The Tribunal examined the facts and found that the transactions were routed through banking channels, the loan was repaid with interest, and supporting documents were filed by the assessee. The Tribunal relied on the precedent in Real Innerspring Technologies Pvt. Ltd. vs ACIT, which held that repayment of loan along with interest through banking channels indicates genuineness of the transaction and that suspicion alone cannot override documentary evidence.

Further, the Tribunal referred to the ruling in CIT vs. Minda Industries Ltd., which held that when the assessee establishes the identity, genuineness, and creditworthiness of the creditor, additions under section 68 are unjustified.

Application of Law to Facts: The Tribunal concluded that the AO's additions were arbitrary and based on suspicion rather than on an independent application of mind. The fact that the loan was repaid through banking channels and the assessee had submitted all relevant documents established the genuineness of the transactions.

Treatment of Competing Arguments: The Department contended that the transactions were accommodation entries and pointed to the payment of commission as indicative of this. However, the Tribunal found that the mere involvement of an operator or commission payment does not negate the genuineness of the loan, especially when the loan is repaid with interest through banking channels.

Conclusions: The Tribunal allowed the grounds raised by the assessee regarding the additions under sections 68 and 69C, holding that the transactions were genuine and the additions were unjustified.

3. SIGNIFICANT HOLDINGS

"Merely because some operator has managed the affairs and all the transactions cannot be labelled as non-genuine. Every transaction has to be evaluated on its merit rather than on the basis of suspicion."

"When the assessee takes the loan and repaid along with interest clearly shows that the transactions are genuine."

"The assessee has submitted all the documents in support of the transaction before the AO and he has merely rejected the same on the basis of information available with him as the same on the basis of suspicion."

"With the submission of details of net worth copy of income-tax returns and permanent account number of creditors, requirement of identity, genuineness and creditworthiness was fulfilled and therefore, addition made under section 68 was not Justified."

Core principles established include:

• The validity of assessment under section 143(3) is not undermined if procedural objections under section 153C are not pressed.
• The AO and appellate authorities must apply independent mind and cannot act merely on the basis of investigation wing's report or "borrowed satisfaction."
• The principles of natural justice require specific and substantiated allegations for violation; general claims do not suffice.
• For additions under sections 68 and 69C, the assessee must be given due opportunity to prove the genuineness of transactions through documentary evidence and banking channels.
• Repayment of loans with interest through banking channels is a strong indicator of genuineness and negates the presumption of accommodation entries.
• Suspicion or association with operators or commission payments alone cannot justify additions without independent verification.

Final determinations:

The Tribunal dismissed the procedural and natural justice related grounds as not pressed or general. However, it allowed the appeal on merits, holding that the additions under sections 68 and 69C were unjustified and the transactions were genuine. The appeal was allowed accordingly.