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2025 (6) TMI 1475 - AT - Income TaxAddition u/s 68 - unexplained cash credits - HELD THAT - The Hon ble Supreme Court in the case of Orissa Corporation reported in 1986 (3) TMI 3 - SUPREME COURT has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers the burden shifts to the Department to establish the Revenue s case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131 by alleging the creditors will not be sufficient to draw an adverse inference against the assessee. In the present case as observed above no such exercise was carried out by the AO. In case the AO was not satisfied with sources in the bank accounts of the lender company the proper course would have been to make assessments in the cases of the lender company as unexplained investments under section 69 of the Act which also not done in the present case. Additional onus of proof of satisfactorily explaining the source in the hands of the creditor would not apply if the creditor is a well-regulated entity i.e. it is a Venture Capital Fund Venture Capital Company registered with SEBI. This amendment has taken effect from 1st April 2023 and accordingly applies in relation to the Assessment Year 2023-24 and subsequent assessment years. The year before us is AY 2016-17 thus this amendment is not applicable and as has been held in the case of Vrindavan farms 2015 (11) TMI 279 - DELHI HIGH COURT when the assessee had filed all the details the burden of proving the genuineness and creditworthiness of the creditor stood discharged by the assessee. As observed above the requirement of explaining Source of Source in respect of loans is applicable from A.Y. 2023-24 and subsequent years. AO has not brought anything or any material on record to establish that the sources in the hands of lender company is non-genuine. Merely because it had NIL income or no sufficient sources as presumed by AO loan taken by appellant from it cannot be held to be an accommodation entry. It is well-settled position of law that no matter how strong suspicion is it cannot take place of the evidence. Therefore in the absence of any evidence showing that in fact appellant has given cash in lieu of unsecured loan taken merely on the basis of suspicion no addition can be made for this reliance is placed on decision of Hon ble Supreme court in the case of Daulatram Rawatmull 1964 (3) TMI 14 - SUPREME COURT . Decided in favour of assessee. Addition on account of sundry creditors held as bogus by the AO - HELD THAT - During the course of appellate proceedings the assessee has filed confirmed copy of the accounts of the creditors. Further the fact remain that the assessee is a charitable institution registered u/s 12AA 80G therefore it is not a case where addition can be made on account of outstanding creditors. Once it is established that the supplies from the creditors is not doubted outstanding balance in their accounts cannot be treated as income of the assessee. Accordingly we hereby direct the AO to delete the addition made on account of sundry creditors. The grounds of appeal are allowed. Disallowing depreciation on the new assets created during the year under appeal - CIT(A) though deleted the same however has directed the AO to disallow the depreciation and financial expenses on the new assets added during the year - HELD THAT - After perusing the material available and hearing both the parties we find that Ld.CIT(A) has disallowed the depreciation for the sole reason that the assessee has failed to establish that new assets were put to use during the year. It is not disputed that amounts were spent and assets were created therefore once the creation of assets is accepted depreciation should be allowed if the assets is ready for put to use. We direct the AO to allow the depreciation if the assets are ready for put to use at the end of the previous year relevant to assessment year under appeal. With these directions Ground No.5 of the assessee s appeal is partly allowed for statistical purposes.
The core legal questions considered in this appeal primarily relate to the applicability and interpretation of section 68 of the Income Tax Act, 1961, concerning unexplained cash credits, specifically:
Issue-wise Detailed Analysis: 1. Addition of Loan Amount under Section 68 Legal Framework and Precedents: Section 68 of the Income Tax Act provides that if any sum is found 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 provisos require that if the sum is a loan or borrowing, the person in whose name the credit is recorded must also offer a satisfactory explanation. The burden of proof initially lies on the assessee to explain the credit, but once this burden is discharged, the onus shifts to the Revenue to prove otherwise. This principle was reiterated in various judicial pronouncements including the Supreme Court's observations in CIT v. Lovely Exports and CIT v. Daulat Ram Rawatmull. Court's Interpretation and Reasoning: The Court noted that the assessee had furnished detailed confirmations from the lender, copies of the lender's Income Tax Returns (ITR), financial statements, bank statements showing the flow of funds, and other documentary evidence establishing the genuineness of the loan transaction. The AO's reliance on the lender's NIL income to doubt creditworthiness was held to be insufficient without further inquiry. The Court emphasized that the AO failed to invoke his powers under sections 131 or 133(6) to verify the lender's creditworthiness or the genuineness of the transaction, which was a procedural lapse indicating a biased approach. Key Evidence and Findings: The assessee submitted:
The AO and CIT(A) considered the interest credited as part of the loan amount, which was erroneous since interest was separately accounted for and not doubted. Application of Law to Facts: The Court applied the principle that once the assessee discharges the initial burden by furnishing credible evidence, the AO must conduct further investigation if doubts persist. Mere suspicion or presumptions based on NIL income of the lender are insufficient to make additions under section 68. The Court relied on precedents where similar evidence was held adequate to discharge the burden, including judgments from various High Courts and ITAT benches. Treatment of Competing Arguments: The Revenue argued that the assessee failed to prove creditworthiness and genuineness. However, the Court found that the Revenue did not undertake any independent verification or summon the lender for inquiry, which was a necessary step before making additions. The Court also rejected the Revenue's reliance on the lender's NIL income as a sole basis for doubt. Conclusions: The addition of INR 1,57,64,915/- under section 68 was held unsustainable. The Court allowed the ground of appeal relating to this addition and directed deletion. 2. Addition of Sundry Creditors Amounting to INR 74,072/- Legal Framework: The addition was made on the basis that balances were static and creditors were not confirmed. However, the assessee is a charitable institution registered under sections 12AA and 80G, which implies that amounts received and utilized for charitable purposes are not taxable. Court's Reasoning: The Court observed that the AO and CIT(A) had not doubted the genuineness of purchases or services from these creditors. The outstanding balances were due to unsettled accounts and were subsequently paid. Since the supplies were not disputed and the assessee is a charitable entity, the outstanding creditor balances cannot be treated as income. Conclusion: The Court directed deletion of the addition of INR 74,072/- on account of sundry creditors. 3. Disallowance of Depreciation on New Assets Legal Framework: Depreciation is allowable if assets are put to use during the relevant previous year. The AO disallowed depreciation due to lack of bills and failure to prove use. Court's Reasoning: The Court found that the creation of assets was undisputed and amounts were spent. The CIT(A) disallowed depreciation solely because the assessee failed to establish the assets were put to use during the year. The Court held that if assets are ready for use by the end of the previous year, depreciation should be allowed. Conclusion: The Court directed the AO to allow depreciation if assets were ready for use, partly allowing this ground for statistical purposes. 4. Interest and Other Grounds Interest under section 234B was to be charged consequentially on income determined after the present order. One ground was not pressed and dismissed accordingly. Significant Holdings and Core Principles: "A bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum received during the previous year; and the assessee offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessee in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year." "Once the assessee discharges the initial onus by furnishing credible evidence, the Assessing Officer must conduct further inquiry if doubts persist; mere suspicion or presumptions are insufficient to make additions under section 68." "The burden of proving the genuineness of transactions and creditworthiness of creditors lies initially on the assessee, but once discharged, it shifts to the Revenue to establish otherwise." "No addition can be made on the basis of suspicion alone; the Revenue must bridge the gap between suspicion and proof to fasten liability under section 68." "In the absence of any evidence showing that the loan taken is bogus or an accommodation entry, addition under section 68 is not sustainable." "For depreciation, if the asset is ready for use at the end of the previous year, depreciation should be allowed, notwithstanding the absence of bills, provided the creation of assets is established." "In the case of charitable institutions registered under sections 12AA and 80G, outstanding creditors' balances related to genuine purchases or services cannot be treated as income." Final Determinations:
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