2025 (7) TMI 1285 - AT - Income Tax

Additions u/s 68 - unsecured loans received - onus to prove satisfactorily the source in the hands of the creditor - Denial of opportunity to cross examine - requirement of explaining Source of Source - CIT(A) deleted addition - HELD THAT - We are of the considered view that the decision of the Ld. CIT (A) deleting the additions made is based on the appreciation of fact that all the relevant documentary evidences were produced by the Assessee to establish the identity and creditworthiness of the lender companies and genuineness of the transactions. Further based on the legal precedents and the fact that the loans were received and repaid through banking channel had deleted the additions under consideration. We further observed that that Hon ble Jurisdictional High Court in various cases has dealt with the fact that where assessee has discharged its burden by filing all the necessary evidences to prove the loans provisions of section 68 cannot be invoked. Hon ble Gujarat High Court in the case of PCIT Vs. Ojas Tarmake Pvt. Ltd. 2023 (9) TMI 845 - GUJARAT HIGH COURT has held that where major portion of the credit has been repaid and also looking to the facts that in the instant case the AO had accepted the debit entries as genuine the Hon ble Court on the said facts ultimately affirmed the decision of the Tribunal in deleting the addition. Denial of opportunity to cross examine which goes to the root of the matter and strikes at the very foundation of the assessment and therefore renders the assessment order passed by the AO not sustainable. Thus the additions made by the AO on the basis of such statement without any tangible material is not sustainable in law and liable to be deleted. The assessment should rest on principles of law and one should avoid presumption of evasion in every matter. The assessee in the instant case has sufficiently demonstrated the genuineness of transaction and creditworthiness of the loan creditors. On a broader reckoning the apprehension raised by the Revenue authorities militates against the tangible material and is thus extraneous. Accordingly we find no infirmity in the order of ld. CIT (A) in deleting the additions made u/s 68 towards the unsecured loans by holding the same as accommodation entries. Further since we have already held the loans taken from all four companies as genuine transaction question of treating the interest paid to them as ingenuine does not arise and therefore disallowance of interest on such loans has rightly been deleted by CIT (A) which order is hereby confirmed. Addition towards commission @ 2% as made by AO by alleging the loan transactions as accommodation entries as has been observed above we have already hold these loan transactions as genuine transactions thus question of payment of any commission for obtaining such loan does not arise. We hereby uphold the order of ld. CIT (A) deleting the addition made on account of alleged commission payments. Accordingly all the grounds of appeal of the revenue are dismissed. Reopening of assessment - notice on the basis of the information received by the AO that the assessee has made payment on account of technical services to a foreign company and that these remittances are liable to withhold taxes within the definition of Fee for Technical Services under the provisions of Sec 9(1)(vi) and (vii) of the IT Act and as per Article 12(4) of the DTAA also chargeable to tax u/s 115A(1)(b)(A) and 115A(1)(b)(B) - HELD THAT - AO in the instant case has exceeded its jurisdiction by making additions on the issue which is not forming part of the reasons recorded for reopening the assessment when no addition was made on the issue covered in the reasons recorded. Therefore no additions could be made dehorse the reasons recorded before issue of notice u/s 148 of the Act. Accordingly the reassessment order passed u/s 147 of the Act is hereby quashed. Cross objections No. 1.1 and 1.2 taken by the assessee are accordingly allowed. Unexplained money of the assessee company u/s 69A - enhancement of income of the assessee by CIT (A) on the basis of WhatsApp chats found in the mobile phone of Shri Purushottam Bhageria Managing Director of the company - It is a well settled legal position that a non-speaking document without any corroborative documentary evidence on record and findings that such document has materialized into transaction giving rise to the income of the assessee had not been disclosed to the department by such assessee has to be disregarded for the purpose of assessment to be framed pursuant to search and seizure action. From the search and seizure perspective such non-speaking documents are referred to as the dumb document. The coordinate bench of Delhi ITAT in case of Ashwini Kumar 1991 (8) TMI 142 - ITAT DELHI-D held that in the case of dumb document revenue should collect necessary evidence to prove that the figures represent incomes earned by the assessee. As the WhatsApp chat does not speaks about the real nature the contents of the same cannot be held to be as belonging to the assessee and therefore in our considered view no addition could be made on the basis of such WhatsApp chat have not been corroborated by any other evidence found as a result of search or brought on record by making independent enquiries during the course of appellate proceedings by Ld.CIT (A) before making such enhancements. In view of the above discussions the addition made by ld. CIT (A) at INR 9.65 crores as enhanced income is hereby deleted. Disallowance of claim of education cess u/s 40(a)(ii) - Hon ble Supreme Court in the case of Sesa Goa Ltd. 2023 (9) TMI 952 - SC ORDER wherein as held that education and Health Cess cannot be allowed as deduction while computing the income under head business or profession . The Hon ble apex Court further observed that the amendment made by Finance Act 2022 is retrospective in nature - we find no infirmity in the order of Ld.CIT (A) in confirming the disallowance of expenses claimed towards Education and Health Cess by the assessee. Disallowance on account of delayed payment of employees contribution of PF and ESI u/s 36(1)(va) - By respectfully following the judgment of Checkmate Services 2022 (10) TMI 617 - SUPREME COURT (LB) we find no infirmity in the order of ld. CIT (A) who confirm the disallowance made by the AO by placing reliance on the aforesaid judgement of hon ble Supreme Court.

Summary

ISSUES:

Whether unsecured loans received from certain companies can be treated as unexplained cash credits under section 68 of the Income-tax Act, 1961.Whether interest paid on such loans is allowable as business expenditure or is to be disallowed under section 37(1) of the Act.Whether commission paid for obtaining alleged accommodation entries can be added as unexplained expenditure under section 69C of the Act.Whether additions can be made on the basis of statements recorded under section 132(4) of the Act without corroborative evidence and without opportunity for cross-examination.Whether WhatsApp chats and electronic records can be relied upon as evidence to make additions under sections 68 and 69A of the Act without compliance with evidentiary requirements.Whether reassessment orders can be sustained when additions are made on issues not forming part of the reasons recorded for reopening under section 148 of the Act.Whether the burden of proof under section 68 requires the assessee to prove the creditworthiness and genuineness of the source of funds of the lenders or only the genuineness of the transaction with the lenders.Whether invocation of section 115BBE on enhanced income under section 69A of the Act is justified when the additions themselves are unsustainable.Whether penalty proceedings under sections 271AAC, 271AAB, and 270A of the Act can be initiated prematurely when additions are under challenge.

RULINGS / HOLDINGS:

Unsecured loans received from the specified companies were held to be genuine as the assessee proved the identity, creditworthiness, and genuineness of the transactions by submitting confirmations, audited financials, bank statements, ITR acknowledgments, and compliance with summons under section 133(6); hence, additions under section 68 were deleted. The Court emphasized that "no addition can be made on mere suspicion" and that "the assessee has duly discharged the burden cast upon it u/s 68."Interest paid on the loans, being genuine, was allowed as business expenditure; disallowance under section 37(1) was rightly deleted since "interest paid on account of bogus unsecured loan is also bogus in nature" does not apply when loans are genuine.Additions made under section 69C on account of alleged commission for obtaining accommodation entries were deleted as the loans themselves were held genuine, negating the premise for such additions.Additions based solely on statements recorded under section 132(4) without corroborative evidence and without providing the assessee an opportunity for cross-examination were held unsustainable; the Court noted that "additions made by AO on the basis of such statements without any tangible material is not sustainable in law."WhatsApp chats and electronic records were held insufficient to sustain additions under sections 68 and 69A without corroborative evidence and compliance with section 65B of the Indian Evidence Act; mere existence of such chats "cannot be considered proof of any financial transaction" and "WhatsApp messages alone do not constitute valid evidence."Additions made in reassessment proceedings on issues not forming part of the reasons recorded for reopening under section 148 were quashed; the Court held that "no additions could be made dehorse the reasons recorded before issue of notice u/s 148."The burden on the assessee under section 68 is to prove the identity, creditworthiness, and genuineness of the transaction with the lender; the assessee is not required to prove the creditworthiness of the lenders' sources. The Court observed that "it is not the business of the assessee to find out the source of money of creditors."Invocation of section 115BBE on enhanced income under section 69A was held academic and not adjudicated as the additions themselves were deleted.Penalty proceedings under sections 271AAC, 271AAB, and 270A were held premature and dismissed when the underlying additions were under challenge and deleted or partly allowed.

RATIONALE:

The Court applied the statutory framework of sections 68, 69A, 69C, 37(1), 132(4), 133(6), 147, 148, and 115BBE of the Income-tax Act, 1961, alongside relevant judicial precedents, including those emphasizing the burden of proof on the assessee and the necessity of corroborative evidence for additions.The Court underscored the principle that "suspicion, howsoever strong, cannot take the place of proof" as held in Daulatram Rawatmull and other Supreme Court decisions, reinforcing that additions must be based on tangible evidence rather than presumptions.It was noted that the amendments to section 68 relating to the requirement of proving "source of source" apply only from assessment year 2023-24 onwards and are not applicable to the years under consideration.The Court relied on precedents holding that statements recorded under section 132(4) are not conclusive evidence and cannot be used without opportunity for cross-examination and corroboration.Regarding electronic evidence, the Court referred to section 65B of the Indian Evidence Act, highlighting the necessity of certification and procedural compliance for admissibility, which were not met in the present case.The Court followed established jurisprudence that reassessment must be confined to the reasons recorded for reopening and cannot be extended to unrelated issues without fresh notice.The Court recognized the legal position that the assessee's burden under section 68 is limited to proving the genuineness of the transaction with the lender and not the lender's source of funds, as per Supreme Court rulings like CIT v. Kamdhenu Steel & Alloys Ltd.The Court's approach reflects a doctrinal adherence to principles of natural justice, evidentiary standards, and statutory interpretation, ensuring that additions and penalties are not sustained on speculative or procedural infirmities.