2025 (6) TMI 1219 - AT - Income Tax

Unsecured loans treated as unexplained creditor u/s 68 - HELD THAT - Since the assessee could not furnish any evidence with regard to the amount of Rs. 2, 25, 000/- thus the addition to that extent is confirmed. Regarding the amount received from Lender namely M/s Woodstow Apparels we have gone through the confirmation copy of account of the lender in the books of assessee alongwith bank account of the lender and also the bank account of concerns who had remitted the amount to lender on different dates and that amount has further been lent to the assessee. Thus the assessee has established the source of source and no case has been made out by the Revenue that it is unaccounted income of the assessee which have been routed through M/s Woodstow Apparels. The assessee has proved the three ingredients i.e. identity creditworthiness and genuineness of transactions and merely that ITR of the Lender was not furnished would not go against the assessee as per the judgment in the case of Smt Nirmal Rani 2017 (3) TMI 1470 - ITAT CHANDIGARH The assessee has discharged his onus of proving the source of source. Law in this respect is well settled. The judgment of Hon ble Gujarat High Court in the case of Ambe Trade Corpn. Pvt.Ltd. 2022 (7) TMI 902 - GUJARAT HIGH COURT is also applicable to the facts and circumstances of the case in which it has been held that once the identity creditworthiness and genuineness of loan transactions have been established and the amount has been repaid by the assessee in subsequent years no addition could be made u./s 68. Appeal of the Assessee is partly allowed.

Summary

Two principal issues arise for consideration in this appeal concerning the addition of certain amounts to the assessee's income under section 68 of the Income Tax Act, 1961:

1. Whether the addition of Rs. 1,20,86,000/- (primarily Rs. 1,18,61,000/- from M/s Woodstow Apparels and Rs. 2,25,000/- from another party) as unexplained cash credit under section 68 is justified.

2. Whether the assessee has discharged the onus of proving the identity, creditworthiness, and genuineness of the lender and the transactions, including the source of funds, despite non-furnishing of the Income Tax Return (ITR) of the lender.

Issue-Wise Detailed Analysis

Issue 1: Validity of Addition of Rs. 1,20,86,000/- as Unexplained Cash Credit under Section 68

Legal Framework and Precedents: Section 68 of the Income Tax Act mandates that where any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered is unsatisfactory, the sum may be charged to income tax as the income of the assessee. The three essential ingredients to rebut an addition under section 68 are the identity of the creditor, creditworthiness of the creditor, and genuineness of the transaction.

Precedents emphasize that the assessee must prove these three ingredients to avoid addition. Mere non-filing of the ITR of the creditor does not ipso facto lead to addition if other evidence sufficiently establishes these ingredients (as held in judgments such as Smt. Nirmal Rani, Ambe Trade Corpn. Pvt. Ltd., and others cited).

Court's Interpretation and Reasoning: The Assessing Officer (AO) made an addition of Rs. 1,18,61,000/- treating the unsecured loan from M/s Woodstow Apparels as unexplained credit because the ITR of the lender was not furnished. The AO noted that the amount was routed through M/s Kelly Impex to the lender and then advanced to the assessee, suspecting this as a conduit for unexplained income.

The CIT(A) confirmed this addition, relying primarily on the absence of the lender's ITR and ignoring other evidences submitted by the assessee.

On appeal, the Tribunal examined the entire evidentiary record, including the ledger account of the lender in the assessee's books, bank statements of M/s Woodstow Apparels and M/s Kelly Impex, confirmation letters, and PAN details of the lender. The Tribunal found that the assessee had established the identity, creditworthiness, and genuineness of the lender and the transactions. Importantly, the Tribunal noted that the source of the lender's funds (M/s Kelly Impex) was also proven through bank statements, thereby establishing the "source of source."

The Tribunal observed that the AO's suspicion was not supported by any concrete evidence indicating that the amount was unaccounted income routed through the lender. The mere non-furnishing of the lender's ITR was held insufficient to uphold the addition, especially when the assessee had discharged the onus by furnishing credible evidence.

Further, the Tribunal noted that the amount had been repaid by the assessee in subsequent years through banking channels, which further negated any claim of unexplained income.

Key Evidence and Findings:

• Ledger account of M/s Woodstow Apparels in the assessee's books.
• Bank statements of M/s Woodstow Apparels showing receipt of funds from M/s Kelly Impex.
• Bank statements of M/s Kelly Impex evidencing remittance to the lender.
• Confirmation letter from the lender, duly signed and stamped, along with PAN details.
• Evidence of repayment of the loan amount in subsequent years through banking channels.

Application of Law to Facts: The Tribunal applied the settled legal principle that identity, creditworthiness, and genuineness must be established to rebut an addition under section 68. The Tribunal found these ingredients satisfied by the assessee's evidence, including establishing the source of the lender's funds. The absence of the lender's ITR was not fatal to the assessee's case, especially since the AO did not pursue further inquiries under section 133(6) or otherwise.

Treatment of Competing Arguments: The Revenue's argument was centered on the non-furnishing of the lender's ITR and suspicion about the nature of the transactions. The Tribunal rejected the Revenue's reliance on non-filing of ITR as a sole ground for addition, emphasizing the comprehensive evidence presented by the assessee. The Tribunal also expressed that the AO's failure to make further inquiries weakened the Revenue's case.

Conclusion: The addition of Rs. 1,18,61,000/- under section 68 was unjustified and was rightly deleted by the Tribunal.

Issue 2: Non-Furnishing of Lender's ITR and Its Impact on Addition under Section 68

Legal Framework and Precedents: The identity, creditworthiness, and genuineness of the creditor and transaction are the primary requirements under section 68. The non-filing of the creditor's ITR is not conclusive proof of bogus credit if other evidence sufficiently establishes these ingredients.

Judgments such as those of the ITAT Delhi Bench in Vivek Nagpal, the Hon'ble Apex Court in the case of Sh. Chunni Lai, and various High Court decisions including Ambe Trade Corpn. Pvt. Ltd. and Jeeta Khan, have consistently held that the absence of the creditor's ITR cannot by itself justify an addition where the assessee has otherwise proved the source and genuineness of the credit.

Court's Interpretation and Reasoning: The CIT(A) erred in confirming the addition solely on the ground that the lender's ITR was not furnished, without appreciating the extensive evidence submitted by the assessee. The Tribunal emphasized that the assessee had discharged the onus of proving the identity, creditworthiness, and genuineness of the lender and the transaction.

The Tribunal further noted that the source of the lender's funds had been established through the bank statement of M/s Kelly Impex, which in turn had received payments from the assessee for purchases. This chain of transactions established the "source of source," a crucial factor in rebutting the addition under section 68.

The Tribunal also referred to the fact that the loan amount was repaid through banking channels, which negated any suspicion of unaccounted income.

Key Evidence and Findings:

• Confirmation and PAN details of the lender.
• Bank statements evidencing the flow of funds from M/s Kelly Impex to the lender and from the lender to the assessee.
• Repayment evidence of the loan amount in subsequent years.
• Judicial precedents supporting the proposition that non-filing of ITR is not determinative.

Application of Law to Facts: The Tribunal applied the principle that the onus lies on the assessee to prove the three ingredients and that non-filing of ITR alone cannot negate such proof. The Tribunal found that the assessee had met this onus.

Treatment of Competing Arguments: The Revenue's contention that the non-filing of ITR created doubt was rejected in light of the comprehensive evidence. The Tribunal also criticized the AO for not making further inquiries under section 133(6) to verify the lender's financials.

Conclusion: The absence of the lender's ITR cannot be a ground for addition under section 68 where the assessee has otherwise proved the identity, creditworthiness, genuineness, and source of source of the credit.

Significant Holdings

"The assessee has proved the three ingredients i.e. identity, creditworthiness and genuineness of transactions and merely that ITR of the Lender was not furnished would not go against the assessee as per the judgment of Chandigarh Bench of the ITAT in the case of Smt Nirmal Rani as cited supra."

"The assessee has discharged his onus of proving the source of source. Law in this respect is well settled."

"Once the identity, creditworthiness and genuineness of loan transactions have been established and the amount has been repaid by the assessee in subsequent years, no addition could be made u/s 68 of the Income Tax Act."

"The mere non-furnishing of ITR cannot prove that the unsecured loan was bogus and in genuine and, as such, the addition u/s 68 was not called for."

"The addition of Rs. 1,18,61,000/- as sustained by the CIT(A) deserves to be deleted."

The Tribunal's final determination was to partly allow the appeal by deleting the addition of Rs. 1,18,61,000/- relating to the unsecured loan from M/s Woodstow Apparels, while confirming the addition of Rs. 2,25,000/- where no evidence was furnished. The findings emphasize the importance of establishing the identity, creditworthiness, and genuineness of creditors and transactions to rebut unexplained cash credit additions under section 68, and that non-filing of the creditor's ITR alone is insufficient to sustain such additions.