2025 (6) TMI 808 - AT - Income Tax

Receipts received by the assessee from Ms. Luo Jianxia - unexplained income liable to tax u/s 69A r/w sec 115BBE - AO was not satisfied and concluded that the assessee has claimed that receipt was on account of repayment of loan; however the assessee has failed to substantiate advancement of loan through any documentary evidence HELD THAT - The assessee has taken a specific plea that loan was given to someone outside India which was received back and remitted to India but the ld. AO has doubted the fact of making the loan for the reason that it was not established by the bank account of the assessee. The confirmation from the said borrower Ms Luo Lianxia resident of Hong Kong along with an attestation by Hong Kong High Court was filed before the DRP and which was admitted as additional evidence. This disputed addition pertinent to mention is that during assessment AO had also proposed addition on account of certain deposits in US denominations in the bank account of the assessee for which the assessee has filed currency declaration form and certificate of foreign inward remittances which has been accepted by the DRP and consequently deleted by the AO in the final assessment order. Thus where there is no other alleged source of income accruing or arising in India then for failure to file any bank statement of loan being given outside India which landed in India by way of remittance from a non-resident same could not have been made taxable as they are beyond the scope of section 5(2) and certainly not taxable u/s 68 of the Act - Assessee appeal allowed.

Summary

The core legal questions considered in the appeal include:

1. Whether the receipts amounting to Rs. 28,69,580/- received by the assessee from a non-resident individual can be treated as unexplained income and taxed under section 69A read with section 115BBE of the Income Tax Act, 1961, in the absence of documentary evidence substantiating the loan given to the said individual.

2. Whether the failure to produce bank statements evidencing the advancement of the loan outside India justifies the addition of the said receipts as unexplained income.

3. Whether the receipts from a non-resident, allegedly repayment of loan advanced outside India, are taxable in India under the provisions of the Income Tax Act, particularly considering the scope of section 5(2) and section 68.

4. The correctness of the Assessing Officer's and Dispute Resolution Panel's treatment of the receipts as unexplained and taxable income, despite the assessee's submission of confirmation from the borrower and attestation by the Hong Kong High Court.

Issue-wise detailed analysis:

Issue 1 and 2: Taxability of receipts from non-resident as unexplained income under sections 69A and 115BBE in absence of documentary evidence of loan advancement

The relevant legal framework involves sections 68, 69A, and 115BBE of the Income Tax Act. Section 68 pertains to unexplained cash credits, requiring the assessee to satisfactorily explain the nature and source of such credits. Section 69A deals with unexplained investments, and section 115BBE prescribes a special rate of tax on unexplained income or investment. The Assessing Officer initiated proceedings under section 147 r.w.s. 144C(13) due to non-filing of return and flagged transactions under the CBDT's Risk Management Strategy.

The AO noted that the assessee claimed the receipts from Ms. Luo Jianxia were repayment of a loan allegedly advanced in 2016. However, the assessee failed to produce any documentary evidence such as bank statements or loan agreements to substantiate the claim. The AO emphasized that mere confirmations without corroborative documentary proof are insufficient to accept the explanation. The assessee also did not file statements for the year 2016 when the loan was purportedly advanced. Consequently, the AO held the receipts as unexplained money liable to tax under sections 69A and 115BBE.

The Dispute Resolution Panel (DRP) upheld the AO's conclusion, noting that despite multiple opportunities, the assessee failed to furnish complete documentary evidence. The DRP observed that a letter of confirmation alone does not substantiate the claim and must be corroborated by bank statements. The DRP rejected the assessee's objections and sustained the addition.

The assessee contested this approach, submitting a confirmation from the borrower attested by the Hong Kong High Court and claimed that the loan was given outside India and the repayment was remitted back to India. The assessee also placed on record a permanent residence permit from South Africa and tax clearance certificates to establish residential status and absence of other Indian income sources.

Issue 3: Taxability of receipts from non-resident loan repayment under Indian Income Tax Act

The Court examined the scope of section 5(2) of the Act, which deals with income deemed to accrue or arise in India, and section 68 which requires explanation of cash credits. The Court noted that the receipts in question originated from outside India, from a non-resident, and were remittances into India. The Court held that such receipts, being loan repayments from outside India, do not fall within the ambit of income accruing or arising in India under section 5(2), and thus cannot be taxed under section 68.

The Court relied on several precedents from coordinate benches and High Courts, including decisions where receipts from non-resident sources, when adequately explained as loan repayments or foreign remittances, were held not taxable in India. These decisions emphasized that failure to produce bank statements evidencing the loan outside India cannot justify taxing such receipts as unexplained income if the source is otherwise non-taxable.

The Court also distinguished the present case from typical unexplained cash credit cases by noting the absence of any other Indian source of income for the assessee and the presence of documentary evidence such as confirmation letters and attestation from a foreign court supporting the genuineness of the loan transaction.

Issue 4: Treatment of competing arguments and final conclusion

The AO and DRP focused on the absence of documentary evidence like bank statements to establish the loan's advancement. They rejected the confirmation letter as insufficient. The assessee argued that the loan was given outside India and the repayment was remitted back, supported by confirmation from the borrower and attestation by the Hong Kong High Court, along with tax residency proof and clearance certificates.

The Court gave weight to the nature of the transaction being foreign remittance of loan repayment and the absence of any other taxable Indian income source. It held that the failure to produce bank statements of the loan given outside India could not convert a non-taxable receipt into taxable unexplained income. The Court found the AO's and DRP's reliance on the absence of bank statements insufficient to sustain the addition.

Accordingly, the Court allowed the appeal, deleted the addition of Rs. 28,69,580/-, and held that the receipts were not taxable under the Act.

Significant holdings:

"Where there is no other alleged source of income accruing or arising in India, then, for failure to file any bank statement of loan being given outside India which landed in India by way of remittance, same could not have been made taxable, as they are beyond the scope of section 5(2) and certainly not taxable u/s 68 of the Act."

The Court established the principle that in cases involving foreign loans and repayments remitted to India, the absence of bank statements evidencing the original loan transaction outside India cannot justify treating such receipts as unexplained income taxable in India, especially when the assessee has no other Indian income source.

The final determination was to delete the addition of Rs. 28,69,580/- and allow the assessee's appeal, thereby rejecting the revenue's claim of taxing the said receipts as unexplained income under sections 69A and 115BBE.