2025 (7) TMI 318 - AT - Income Tax

Addition in respect of unsecured loans u/s 68 - AO observed that one of the lenders had advanced loan to the assessee but he did not file any response to notice issued u/s 133(6) - assessee did not discharge the onus to prove the genuineness of the transaction and creditworthiness of lender - HELD THAT - On going through the evidences placed on record we are of the considered view that instant addition has been made in the hands of the assessee without any reasonable basis. The said party had filed response to the notice issued under Section 133(6) before the AO he had furnished his bank details and ledger account before the AO whereas the assessment order was framed by the AO with the specific remark that the said party / lender had failed to file any response to notice issued under Section 133(6) of the Act. Secondly the assessee had also filed return of income of the said party in which the said party had declared income for the impugned year under consideration which also establishes the creditworthiness of the said party. In addition we observe that CIT(A) has not pointed out to any specific lacuna / shortfall in the supporting evidences produced by the assessee while sustaining the addition made by the Assessing Officer. Addition of sundry creditors - AO issued notice u/s 133(6) of the Act to these creditors and noted that no response was received from one creditor - HELD THAT - In the case of Ivan Singh 2020 (2) TMI 850 - BOMBAY HIGH COURT held that in view of provisions of the Section 68 of the Act which provides that where any sum is found to be credited in the books of accounts maintained for any previous year and for which there is no proper explanation for such credit the sum so credited can be charged to income tax as income of assessee of that previous year. However the aforesaid credit balance could not be brought to tax as income of assessee for A.Y. 2009-10 since such outstanding sundry credit balance pertained to F.Y. 2006-07. In the case of Geeri Fashions Pvt. Ltd. 2021 (7) TMI 732 - ITAT SURAT ITAT held that where alleged money on account of share application or share premium was received in an earlier year same could not be taxed in current Financial Year. Since the aforesaid addition in respect of sundry creditors pertained to an earlier assessment year and represented only the opening balance for the impugned year under consideration no addition is liable to be sustained in the hands of the assessee. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the addition of Rs. 25,00,000/- made under Section 68 of the Income Tax Act in respect of unsecured loans allegedly received from Shri Sanjivkumar Kiritkumar Patel was justified, given the evidence submitted by the assessee and the lender's response to notices under Section 133(6) of the Act.

(b) Whether the addition of Rs. 29,87,775/- made under Section 68 in respect of sundry creditors, specifically M/s Sai Trading Co., was sustainable, particularly considering the nature of the balance as an opening balance carried from prior years and the lack of response from the creditor to notices issued under Section 133(6).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition of Rs. 25,00,000/- in respect of unsecured loans from Shri Sanjivkumar Kiritkumar Patel

Relevant 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 satisfactorily explain the nature and source of such sum. The three essential elements to be established for the genuineness of a loan transaction are identity, genuineness, and creditworthiness of the lender.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer had observed that Shri Sanjivkumar Kiritkumar Patel did not respond to the notice issued under Section 133(6), leading to the addition of Rs. 25,00,000/- treating the loan as unexplained income. However, the assessee contended that the lender had indeed responded to the notice by submitting detailed evidence including a written submission, bank statement from Vijay Co. Op. Bank Ltd., and ledger account copies, all prior to the assessment order. The Tribunal found that the Assessing Officer had not considered this response and proceeded with the addition based on an erroneous assumption of non-response, which violated principles of natural justice.

Key evidence and findings: The lender's response to the Section 133(6) notice dated 27.04.2024, bank statements evidencing the loan transaction, ledger accounts, and the lender's return of income declaring Rs. 25,38,990/- for the relevant year were critical pieces of evidence. These established the identity, genuineness, and creditworthiness of the lender.

Application of law to facts: Since the lender had furnished credible evidence and the Assessing Officer failed to consider the same, the addition under Section 68 lacked a reasonable basis. The Tribunal emphasized that the CIT(A) also failed to identify any specific lacuna or deficiency in the evidence while upholding the addition.

Treatment of competing arguments: The Revenue argued that the Assessing Officer had pointed out lacunae in the evidence and the CIT(A) rightly sustained the addition. The Tribunal rejected this, noting the absence of any specific deficiencies pointed out and the clear evidence on record supporting the genuineness of the loan.

Conclusion: The addition of Rs. 25,00,000/- was held to be unjustified and was deleted.

Issue 2: Addition of Rs. 29,87,775/- in respect of sundry creditors (M/s Sai Trading Co.)

Relevant legal framework and precedents: Section 68 applies to sums credited in the books for a particular previous year which are unexplained. Judicial precedents establish that unexplained credits relating to earlier years cannot be taxed in a subsequent assessment year. The Tribunal relied on decisions affirming that additions under Section 68 must relate to the relevant assessment year and not to balances carried forward from prior years.

Court's interpretation and reasoning: The Assessing Officer had issued notices under Section 133(6) to sundry creditors, including M/s Sai Trading Co., who did not respond. Consequently, the addition was made. The CIT(A) upheld the addition, holding that the ledger entries alone without confirmation were insufficient evidence.

Key evidence and findings: The assessee submitted the ledger account of M/s Sai Trading Co. and PAN details, including opening and closing balances, prior to the assessment. The assessee argued that the addition represented only an opening balance carried from earlier years, not fresh credit during the impugned year.

Application of law to facts: The Tribunal applied the principle that unexplained credits pertaining to earlier years cannot be taxed in the current year. Since the addition related to an opening balance from prior years, it was not liable to be added to the income of the impugned assessment year.

Treatment of competing arguments: The Revenue relied on the non-response to notices and the CIT(A)'s order to sustain the addition. The Tribunal distinguished the matter on the basis of the nature of the balance as a carried forward amount and judicial precedents disallowing taxing of such balances in subsequent years.

Conclusion: The addition of Rs. 29,87,775/- was held to be unsustainable and was deleted.

3. SIGNIFICANT HOLDINGS

The Tribunal established the following core principles and made key determinations:

"The said party had filed response to the notice issued under Section 133(6) of the Act before the Assessing Officer, he had furnished his bank details and ledger account before the Assessing Officer, whereas the assessment order was framed by the Assessing Officer with the specific remark that the said party / lender had failed to file any response to notice issued under Section 133(6) of the Act."

"On going through the evidences placed on record, we are of the considered view that instant addition has been made in the hands of the assessee without any reasonable basis."

"The addition in respect of sundry creditors pertained to an earlier assessment year and represented only the opening balance for the impugned year under consideration, no addition is liable to be sustained in the hands of the assessee."

The Tribunal concluded that additions under Section 68 must be based on a failure to satisfactorily explain the nature and source of credits in the relevant assessment year, and that ignoring credible evidence or taxing balances carried forward from prior years is impermissible.

Accordingly, the Tribunal allowed the appeal on both grounds, deleting the additions of Rs. 25,00,000/- and Rs. 29,87,775/- respectively.