2025 (3) TMI 1434 - AT - Income Tax

Reopening of assessment - Addition u/s 68 - AO based on the statements and findings of respective accommodation providers assessments came to conclusion that the assessee has taken accommodation entries from the dummy or paper companies controlled by the accommodation providers - HELD THAT - Merely because the assessee has taken the unsecured loan from the companies controlled by them the addition was made rejecting the various supporting documents provided by the assessee relating to transactions. In our considered view the additions were made only on the basis of alleging that the loan taken by the assessee from the above said two companies are only accommodation entries and assessee s own money was routed through these companies with the help of accommodation entry providers. On careful note the accommodation entries are taken which will remain in the books of account and they will ultimately written off over the period of time. These loans were normally not repaid. In the given case it is brought to our notice that the assessee has received the unsecured loan through the banking channel and repaid through the banking channel. Assessee has repaid the loan even before the assessment was reopened. When the assessee takes the loan and repaid along with the interest clearly shows that the transactions are genuine. By returning the loan the assessee has only utilised the loan for the purpose of business and repaid the same. Merely because some operator has managed the affairs and all the transactions cannot be labelled as non-genuine. Every transaction has to be evaluated on its merit rather than on the basis of suspicion. Therefore in this case the assessee has submitted all the documents in support of the transaction before the AO and he has merely rejected the same on the basis of information available with him as the same on the basis of suspicion. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the reopening of the assessment under Sections 147/148 of the Income Tax Act was valid, given the alleged lack of proper recording of satisfaction by the Assessing Officer (AO).
• Whether the additions made under Section 68 of the Act, treating the unsecured loans as unexplained credits, were justified.
• Whether the disallowance of interest expenses and commission under Section 69C of the Act was warranted.
• Whether the principles of natural justice were violated due to the lack of opportunity for cross-examination.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Reopening under Sections 147/148

• Legal Framework and Precedents: The reopening of assessments under Section 147 requires the AO to have "reason to believe" that income has escaped assessment. This belief must be based on tangible material.
• Court's Interpretation and Reasoning: The Tribunal found that the AO initiated reassessment proceedings based on information from the Investigation Wing and search proceedings related to third parties, which was deemed insufficient to establish a valid reason to believe.
• Key Evidence and Findings: The Tribunal noted that the AO relied on borrowed satisfaction without independent application of mind.
• Conclusion: The Tribunal concluded that the reopening was not justified as the AO did not have a valid reason to believe that income had escaped assessment.

2. Additions under Section 68

• Legal Framework and Precedents: Section 68 requires the assessee to prove the identity, creditworthiness, and genuineness of transactions involving cash credits.
• Court's Interpretation and Reasoning: The Tribunal emphasized that the assessee had provided substantial documentary evidence, including financial statements and bank transactions, to establish the genuineness of the loans.
• Key Evidence and Findings: The Tribunal noted that the loans were repaid with interest through banking channels, and the assessee had deducted TDS on interest payments.
• Application of Law to Facts: The Tribunal found that the AO's reliance on the statements of third parties without further independent verification was insufficient to justify the additions.
• Conclusion: The Tribunal held that the assessee had discharged its burden under Section 68, and the additions were unwarranted.

3. Disallowance of Interest and Commission under Section 69C

• Legal Framework and Precedents: Section 69C pertains to unexplained expenditure, which is deemed to be the income of the assessee.
• Court's Interpretation and Reasoning: The Tribunal observed that the interest and commission were genuine business expenses, supported by documentary evidence.
• Key Evidence and Findings: The Tribunal noted that the interest was paid and TDS was deducted, indicating genuine transactions.
• Conclusion: The Tribunal concluded that the disallowance of interest and commission was not justified.

4. Violation of Natural Justice

• Legal Framework and Precedents: The principles of natural justice require that parties be given an opportunity to present their case and cross-examine witnesses.
• Court's Interpretation and Reasoning: The Tribunal noted that the assessee was not given an opportunity to cross-examine the parties whose statements were relied upon by the AO.
• Conclusion: The Tribunal found that this constituted a violation of the principles of natural justice.

SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reinforced the principle that reopening of assessments must be based on tangible material and not merely on borrowed satisfaction. It also emphasized the necessity for the AO to conduct independent verification when making additions under Section 68.
• Final Determinations on Each Issue: The Tribunal allowed the appeal, concluding that the reopening of the assessment was invalid, the additions under Section 68 were unjustified, and the disallowance of interest and commission under Section 69C was unwarranted. Additionally, it highlighted the violation of natural justice due to the lack of opportunity for cross-examination.