2025 (6) TMI 621 - AT - Income Tax

Addition u/s 68 - treating the total accumulated profit of lender company loan amount as deemed dividend in the hands of the Assessee - disallowance of creditors which remained unverified even during the remand proceedings as the notices issued to such creditors returned un-served - CIT(A) deleted the addition HELD THAT - CIT(A) by accepting the contention of the Assessee that the entire dues of the creditors have been paid and squared up without verifying the said fact with the bank statement of respective creditors and in the absence of any confirmation from the creditors deleted the addition. In our considered opinion when an Assessee claims that all the creditors have been paid back it is the duty of the authorities to verify the genuineness of the said claim and should make sure that the list of creditors are not fictitious and the same are genuine by corroborating the same with tangible evidence such as bank statements confirmation letter etc. In the present case the Assessee himself contended before the A.O. during the Remand proceedings that A.O. has not provided any opportunity to the Appellant to present the remaining creditor and also to cross examine those persons. AO should have provided sufficient opportunity to the Assessee to produce all the creditors in order to prove the genuineness of the transaction and also the confirmations from remaining creditors. In our considered opinion the CIT(A) has committed error in deleting the addition made by the A.O. on account of disallowance of creditors without making proper enquiry. We set aside the order of the CIT(A) and remand the matter to the file of the A.O. with a direction to the Assessee to produce all the remaining unverified creditors and also get the confirmation from respective creditors in order to prove the genuineness of the transaction. AO is also directed to make proper enquiry into all the remaining unverified creditors and also examine the claim of the Assessee regarding repayment made to the respective creditors with a tangible evidencesto be produced by the Assessee. Accordingly the Grounds of Appeal of the Revenue are partly allowed.

Summary

The primary issues presented and considered by the Tribunal in this appeal pertain to the validity of the addition made by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, relating to sundry creditors whose identity and genuineness were questioned. Specifically, the core legal questions were:

1. Whether the Commissioner of Income Tax (Appeals) erred in deleting the addition of Rs. 9,11,81,859/- made by the AO on account of disallowance of creditors that remained unverified during remand proceedings, as notices issued to such creditors returned unserved.

2. Whether the CIT(A) ignored the remand report's fact that except seven creditors, the rest either did not appear or their letters were returned with remarks such as "No such office," "No such person," or "Left without address."

3. Whether the CIT(A) erred in ignoring that the identity and creditworthiness of most creditors could not be established, and that merely filing confirmation of PAN and returning amounts in subsequent years was insufficient to discharge the onus on the assessee.

4. Ancillary grounds related to procedural and evidentiary aspects raised by the Revenue.

Issue-wise Detailed Analysis

Issue 1 & 2: Validity of Deletion of Addition for Unverified Creditors

Legal Framework and Precedents: Section 68 of the Income Tax Act stipulates that where any sum is credited in the books of an assessee and the assessee fails to satisfactorily explain the nature and source of such sum, it may be treated as income. The burden of proof lies on the assessee to establish the identity and genuineness of creditors and transactions. Judicial precedents emphasize the necessity of verifying creditors' identity and creditworthiness through tangible evidence such as confirmations and bank statements.

Court's Interpretation and Reasoning: The AO initially passed an ex-parte order under section 144(1) r.w.s. 145(3) due to non-cooperation by the assessee. During remand proceedings, the AO issued notices to 25 creditors; only seven responded with confirmations, while notices to the rest were returned unserved with remarks indicating non-existence or untraceability. The AO's remand report raised serious doubts about the genuineness of the transactions, especially as one creditor filed a police complaint alleging the assessee lacked proper licensing for booking commercial space.

The CIT(A), however, admitted additional evidence filed by the assessee during the appellate proceedings, including confirmations from all 42 sundry creditors, ledger accounts, and proof of repayment through bank transactions. Relying on various judicial decisions, the CIT(A) held that the assessee had discharged the onus under section 68 by proving the identity and genuineness of the creditors and transactions.

Key Evidence and Findings: The assessee produced confirmation letters, PAN details of creditors, ledger accounts, and bank payment proofs showing that all creditors had been repaid in full in subsequent years. The CIT(A) relied heavily on this documentary evidence, which was not produced before the AO but was admitted at the appellate stage under Rule 46A of the Income Tax Rules.

Application of Law to Facts: While section 68 places the onus on the assessee, the CIT(A) exercised judicial discretion to admit additional evidence crucial for just adjudication. The CIT(A) found that the repayments and confirmations sufficed to establish the creditors' genuineness despite the AO's inability to verify all creditors during remand proceedings.

Treatment of Competing Arguments: The Revenue argued that the AO's inability to verify most creditors and the returned notices indicated fictitious creditors and transactions. It contended that confirmations and PAN details filed belatedly before the CIT(A) were insufficient and that the AO's adverse inference should prevail. The assessee countered that the non-cooperation during AO proceedings was due to reasons beyond control and that all creditors had been paid back, supported by documentary evidence.

Conclusions: The CIT(A) accepted the assessee's evidence and deleted the addition, concluding the onus was discharged. However, the Tribunal noted that the AO did not provide adequate opportunity to the assessee to produce the remaining creditors during remand proceedings, and the CIT(A) did not independently verify the repayments with bank statements or confirmations for all creditors.

Issue 3: Sufficiency of Evidence to Discharge Onus Under Section 68

Legal Framework and Precedents: The onus under section 68 requires the assessee to prove the identity, genuineness, and creditworthiness of creditors and the nature of transactions. Mere filing of confirmation letters or PAN details is insufficient if not corroborated by independent evidence. Courts have emphasized the need for tangible proof such as bank statements, ledger accounts, and direct creditor confirmations.

Court's Interpretation and Reasoning: The CIT(A) admitted additional evidence and relied on confirmations and ledger accounts to conclude the assessee discharged the onus. The Tribunal, however, observed that the AO's remand report highlighted the inability to verify most creditors and that the assessee itself admitted the AO did not provide opportunity to produce or cross-examine remaining creditors. The Tribunal held that the CIT(A) erred in deleting the addition without verifying the genuineness of repayments with bank statements or obtaining confirmations from all creditors.

Key Evidence and Findings: The Tribunal noted the absence of independent verification of creditors who did not respond to AO's notices and the lack of confirmation from these creditors. The repayment claims were accepted by the CIT(A) without adequate scrutiny.

Application of Law to Facts: The Tribunal emphasized that the authorities must verify the genuineness of creditors and transactions, especially when notices remain unserved or unresponded. The assessee's claim of repayment must be corroborated by tangible evidence to discharge the onus under section 68.

Treatment of Competing Arguments: The Revenue's argument for setting aside the CIT(A) order was upheld by the Tribunal, which found the CIT(A) had not conducted proper enquiry. The assessee's reliance on confirmations and ledger accounts alone was deemed insufficient without AO's verification.

Conclusions: The Tribunal concluded that the CIT(A) erred in deleting the addition without proper enquiry and verification, and the matter required remand for thorough investigation.

Issue 4: Procedural and Evidentiary Aspects

Legal Framework and Precedents: Rule 46A of the Income Tax Rules empowers the appellate authority to admit additional evidence if it is vital and advances the disposal of the case. Judicial precedents recognize the CIT(A)'s inherent power to direct production of documents or examination of witnesses to ensure justice.

Court's Interpretation and Reasoning: The CIT(A) exercised its discretion to admit additional evidence filed by the assessee at the appellate stage, which was crucial given the ex-parte nature of the AO's order. The Tribunal upheld the CIT(A)'s power to admit such evidence but emphasized that admission of evidence must be accompanied by proper verification and enquiry.

Key Evidence and Findings: The additional evidence included confirmations from creditors, ledger accounts, and bank payment proofs. The Tribunal recognized the importance of such evidence but stressed that it must be verified by the AO.

Application of Law to Facts: The Tribunal acknowledged the CIT(A)'s discretion but found that the appellate authority should not have deleted the addition without ensuring the AO conducted proper enquiry, especially for creditors who remained unverified.

Treatment of Competing Arguments: The Revenue contended that the CIT(A) erred in deleting the addition merely on the basis of belated evidence without verification. The assessee argued for acceptance of the evidence and dismissal of the appeal. The Tribunal sided with the Revenue's position on the necessity of verification.

Conclusions: The Tribunal set aside the CIT(A) order on this ground and remanded the matter for proper enquiry and verification by the AO.

Significant Holdings

"It is the inherent power of the CIT (A) to admit any evidence as deemed fit for the proper disposal of the case as the rule specifically provides that nothing contained in it shall affect the power of the CIT (A) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, he should exercise his power judicially and should make enquiry where facts so demand."

"The onus cast on the appellant in the instant case has been discharged during the appellate proceedings and as the assessment was passed u/s. 144 of the Act and the additional evidence has been admitted at the appellate stage, the appellant has proved the identity of the creditor and the genuineness of the transaction."

"When an Assessee claims that all the creditors have been paid back, it is the duty of the authorities to verify the genuineness of the said claim and should make sure that the list of creditors are not fictitious and the same are genuine by corroborating the same with tangible evidence such as bank statements, confirmation letter etc."

"The Ld. CIT(A) has committed error in deleting the addition made by the A.O. on account of disallowance of creditors without making proper enquiry."

"We set aside the order of the Ld. CIT(A) and remand the matter to the file of the A.O. with a direction to the Assessee to produce all the remaining unverified creditors and also get the confirmation from respective creditors in order to prove the genuineness of the transaction."

Core Principles Established:

- The burden under section 68 lies on the assessee to prove the identity, genuineness, and creditworthiness of creditors and transactions.

- The appellate authority has the discretion to admit additional evidence but must ensure proper enquiry and verification accompany such admission.

- Non-verification of creditors, especially when notices remain unserved or unresponded, justifies adverse inference unless the assessee satisfactorily proves otherwise with tangible evidence.

- Repayment claims must be corroborated with bank statements, confirmations, and ledger accounts, and the authorities must verify such claims before deleting additions.

- The AO must provide adequate opportunity to the assessee to produce creditors and cross-examine them during remand proceedings.

Final Determinations:

The Tribunal partly allowed the Revenue's appeal by setting aside the CIT(A)'s deletion of the addition under section 68 and remanding the matter to the AO for proper enquiry. The AO was directed to verify the identity and genuineness of all remaining unverified creditors, obtain confirmations, and scrutinize the repayment claims with tangible evidence. The appeal was disposed of with these directions, emphasizing the necessity of thorough verification before any addition can be deleted.