2025 (6) TMI 1032 - AT - Income Tax

Addition u/s 68 - assessee failed to prove the identity and creditworthiness of the creditors along with the genuineness of the transactions during the assessment proceedings as well as in remand proceedings - CIT(A) deleted addition - HELD THAT - With regard to sum appearing in the name of Vishalkumar K. Jain and Vishalkumar K. Jain (HUF) above two loans were not obtained during the financial year under consideration but since the language of section 68 says that any credit entry made in the books of accounts of the assessee with respect to unsecured loan the explanation offered by the assessee is not satisfactory the addition can be made by the Assessing Officer. Accordingly we find that however these two loans were not obtained during the period under consideration but an entry to this effect was made in the books of accounts under the respective ledger accounts of related parties for the first time therefore the Assessing Officer has right to enquire into the entries made in the books of accounts for the first time. We also find that the person in whose names i.e. Kantilal Jain/ Karta of Kantilal Jain (HUF) had already expired in the year 2010 and it is not clear in between the period what happened who was availing the benefit of interest on loan/ capital advanced to the assessee since last many years. We also do not know why the entries were existing in the name of an expired person and according to us if the person who has provided loan/ capital is no more his credit balances should have been transferred to his legal heirs immediately after his death - we set-aside the order passed by Ld. CIT(A) on this issue and remand the matter back to the file of the AO to decide the issue afresh. Sum appearing in the name of Nikeetaa Vijay Kering - Assessee has only produced the copy of ledger account in his books of account before Ld. CIT(A). Since the copy of income tax return of the lender confirmation letter and the copy of bank account statement of the lender was not produced before Ld. CIT(A) we hold that CIT(A) was not justified in accepting the above said loan received during the year from Nikeetaa Vijay Kering. Accordingly we set-aside the order passed by Ld. CIT(A) and remand the issue back to the file of the Assessing Officer to decide the issue afresh after providing reasonable opportunity of hearing to the assessee. Sum appearing in the name of Manjula N. Parmar - Assessee had produced bank account statement of the lender before Ld. CIT(A) along with confirmation letter however copy of income tax return of Manjula N. Parmar was not furnished before CIT(A). Accordingly we find that the identity of the creditor and genuineness of the transaction is proved but the creditworthiness has not been proved since copy of income tax return was not furnished before CIT(A). Accordingly we hold that Ld. CIT(A) has erred in deleting the addition. We deem it appropriate to set-aside the order passed by CIT(A) on this issue and remand the matter back to the file of AO to decide this issue. Sum appearing in the name of Kushal Estate - We find that the assessee has furnished the copy of bank account statement of Kushal Estate and also furnished confirmation letter of the lender but the copy of Income Tax Return was not furnished. We deem it appropriate to set-aside the order passed by Ld. CIT(A) on this issue remand the matter back to the file of Assessing Officer to decide this issue/. Sum appearing in the name of Naman Developers - We find that the assessee has furnished copy of income tax return of this lender for three years i.e. assessment years 2015-16 and 2016-17 and also for the assessment year 2017-18 secondly confirmation letter in support of loan was also produced by the assessee. Therefore we do not find any error in the order passed by Ld. CIT(A) wherein he deleted the addition. Sum appearing in the name of Kirti I. Chhajed - We find that the Assessing Officer in his remand report has accepted that the copy of bank account statement of this lender has been furnished wherein transaction of Rs. 20, 000/- is appearing. Further the copy of income tax return for 3 years confirmation letter were also produced. Accordingly we do not find any error in the order passed by Ld. CIT(A) wherein he deleted the addition.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

• Whether the Assessing Officer was justified in making additions under section 68 of the Income Tax Act on account of unsecured loans totaling Rs. 11,06,49,590/- shown in the assessee's balance sheet, when the assessee failed to satisfactorily prove the identity, creditworthiness of the creditors, and genuineness of the transactions during the assessment and remand proceedings.
• Whether the deletion of additions made by the Assessing Officer by the Commissioner of Income Tax (Appeals) [CIT(A)] in respect of unsecured loans amounting to Rs. 1,69,54,328/- (pertaining to seven creditors) was justified, given the evidentiary material and legal requirements under section 68.
• Whether the CIT(A) erred in accepting certain unsecured loans without adequate verification of the identity, creditworthiness, and genuineness of the transactions.
• The scope and application of section 68 in relation to credit entries made for unsecured loans in the books of accounts, especially when such entries pertain to loans allegedly transferred from deceased persons or from previous years.
• The evidentiary requirements for proving identity, creditworthiness, and genuineness of unsecured loans, including the relevance of confirmation letters, PAN details, bank statements, and income tax returns of the lenders.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification of addition under section 68 on unsecured loans of Rs. 11,06,49,590/-

Legal Framework and Precedents: Section 68 of the Income Tax Act empowers the Assessing Officer to treat any sum credited in the books of an assessee as income if the assessee fails to prove the identity of the creditor, creditworthiness, and genuineness of the transaction. The burden lies on the assessee to establish these facts with credible evidence such as confirmation letters, PAN details, bank statements, and income tax returns of the lenders.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer had made additions due to the assessee's failure to provide satisfactory evidence regarding the unsecured loans. The CIT(A) deleted most of the additions except Rs. 2,50,000/-, relying on confirmation letters and ledger accounts. However, the Tribunal found that some of the deletions by the CIT(A) were not justified as the evidence was incomplete or insufficient, particularly in cases where the loans were transferred from deceased persons or lacked proper documentation.

Key Evidence and Findings: The assessee failed to respond to notices under sections 143(2), 142(1), and 144, leading to the initial addition. The CIT(A) relied on confirmation letters, ledger extracts, and some bank statements but did not insist on income tax returns for all lenders. The Tribunal scrutinized the evidence for each creditor whose loan deletion was challenged.

Application of Law to Facts: The Tribunal applied the principles of section 68 strictly, emphasizing that entries made for the first time in the books of accounts during the year under consideration require scrutiny. The fact that some loans were transferred from deceased persons without clear documentation or transfer to legal heirs was a critical factor leading to remand for fresh verification.

Treatment of Competing Arguments: The Revenue argued that the identity, creditworthiness, and genuineness were not proved for the loans challenged. The assessee relied on confirmation letters and ledger accounts. The Tribunal balanced these arguments by examining the sufficiency of evidence on a case-by-case basis, accepting some loans and remanding others.

Conclusions: The Tribunal upheld the addition on unsecured loans where the assessee failed to prove creditworthiness or genuineness (e.g., loans from Vishalkumar K. Jain and Vishalkumar K. Jain (HUF), Nikeetaa Vijay Kering, and Manjula N. Parmar). It confirmed deletion for loans where adequate evidence was furnished (e.g., Naman Developers and Kirti I. Chhajed) and remanded others for fresh consideration.

Issue 2: Validity of CIT(A)'s deletion of additions related to unsecured loans from specific creditors

Legal Framework and Precedents: The CIT(A) has the jurisdiction to re-examine the evidence and assess the validity of additions made by the Assessing Officer. However, the CIT(A) must apply the legal tests under section 68, requiring proof of identity, creditworthiness, and genuineness.

Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) erred in deleting additions in respect of certain loans without adequate verification, especially where the loans were transferred from deceased persons or lacked income tax returns of the lenders. The Tribunal emphasized that mere confirmation letters and ledger extracts are insufficient without corroborative evidence such as income tax returns and bank statements.

Key Evidence and Findings: For loans from Vishalkumar K. Jain and Vishalkumar K. Jain (HUF), the CIT(A) accepted the transfer of loans from the deceased father but did not investigate the implications of such transfer or the period during which the loans were outstanding under the deceased's name. For Nikeetaa Vijay Kering, no income tax return or bank account statement was furnished, yet the CIT(A) accepted the loan. For Manjula N. Parmar, bank statements and confirmation letters were produced but income tax returns were missing.

Application of Law to Facts: The Tribunal applied the principle that the identity and genuineness may be proved by confirmation letters and bank statements, but creditworthiness requires income tax returns. The failure to produce these led to remand for reassessment.

Treatment of Competing Arguments: The Revenue contended that the CIT(A) did not apply the legal tests properly and deleted additions without sufficient evidence. The assessee argued that the documents produced before the CIT(A) were adequate. The Tribunal sided with the Revenue on these points, directing fresh verification.

Conclusions: The Tribunal set aside the CIT(A)'s deletion of additions in respect of these loans and remanded the matter for fresh adjudication after providing reasonable opportunity to the assessee.

Issue 3: Treatment of unsecured loans transferred from deceased persons

Legal Framework and Precedents: Under section 68, any credit entry made for the first time in the books of accounts during the year must be scrutinized. When loans are transferred from deceased persons, the legal heirs must be identified and the transfer properly recorded to establish the genuineness and creditworthiness.

Court's Interpretation and Reasoning: The Tribunal held that since the loans in the names of Vishalkumar K. Jain and Vishalkumar K. Jain (HUF) were transferred from the deceased father's accounts, and since the deceased had expired in 2010, the entries appearing for the first time in the year under consideration require scrutiny. The Tribunal found it unclear who benefited from the loans or interest during the intervening period and noted the absence of transfer to legal heirs.

Key Evidence and Findings: The assessee did not clarify the status of the loans or their transfer to legal heirs. The CIT(A) did not inquire into this aspect.

Application of Law to Facts: The Tribunal emphasized that the Assessing Officer has the right to investigate such entries and that the CIT(A) erred in deleting additions without such inquiry.

Treatment of Competing Arguments: The assessee claimed these were not new loans but transferred entries. The Tribunal found this explanation insufficient without proper legal documentation.

Conclusions: The Tribunal remanded the issue for fresh examination by the Assessing Officer.

Issue 4: Evidentiary requirements for proving identity, creditworthiness, and genuineness

Legal Framework and Precedents: The Supreme Court and various Tribunals have consistently held that the assessee must prove identity and genuineness by confirmation letters, PAN details, and bank statements; creditworthiness is established by income tax returns or other financial documents.

Court's Interpretation and Reasoning: The Tribunal applied these principles strictly. It accepted loans where the assessee furnished confirmation letters, PAN details, bank statements, and income tax returns (e.g., Naman Developers and Kirti I. Chhajed). It rejected or remanded loans where income tax returns or bank statements were missing or incomplete.

Key Evidence and Findings: The assessee produced various documents for different creditors. The Tribunal analyzed these on a case-by-case basis.

Application of Law to Facts: The Tribunal applied the three-pronged test of section 68 and found that absence of any of the components justified addition or remand.

Treatment of Competing Arguments: The Revenue stressed the absence of income tax returns and bank statements. The assessee argued that confirmation letters and ledger accounts suffice. The Tribunal favored the Revenue's position.

Conclusions: The Tribunal upheld additions or remanded matters where creditworthiness was not proved.

3. SIGNIFICANT HOLDINGS

"Since the language of section 68 says that any credit entry made in the books of accounts of the assessee with respect to unsecured loan, & the explanation offered by the assessee is not satisfactory the addition can be made by the Assessing Officer."

"The fact that some loans were transferred from deceased persons without clear documentation or transfer to legal heirs was a critical factor leading to remand for fresh verification."

" Mere confirmation letters and ledger extracts are insufficient without corroborative evidence such as income tax returns and bank statements to establish creditworthiness of the lender."

"The Assessing Officer has the right to enquire into the entries made in the books of accounts for the first time during the year under consideration."

"The deletion of additions made by the Assessing Officer on account of unsecured loans is justified only where the assessee satisfactorily proves the identity, creditworthiness, and genuineness of the transactions."

Final Determinations:

• The appeal filed by the Revenue is partly allowed for statistical purposes.
• The additions in respect of unsecured loans from Vishalkumar K. Jain and Vishalkumar K. Jain (HUF), Nikeetaa Vijay Kering, Manjula N. Parmar, and Kushal Estate are set aside and remanded for fresh adjudication.
• The deletions in respect of unsecured loans from Naman Developers and Kirti I. Chhajed are upheld.
• The addition of Rs. 2,50,000/- on account of unsecured loan from Sanjay Kumar Jain is confirmed.