2025 (6) TMI 1795 - AT - Income Tax

Addition u/s 68 - unsecured loan receipts - onus to prove - documents which are claimed to be incomplete as per the Department - AO opined that the assessee has failed to discharge its onus of proving the genuineness of the unsecured loan - HELD THAT - It is a case of the assessee that the lower authorities have ignored the vital fact that the said loans were taken during the relevant previous year through banking channel and for the purpose of applying section 68 source of the source need not be proved for the year under consideration. It is not the case of the Department that the Assessee has not at all produced any document however it is a case of Department is that the assessee has provided incomplete documents and not produced the director of the lender company. Considering the fact that the assessee has indeed produced certain documents which are claimed to be incomplete as per the Department in the absence of any material available on record to examine the factual dispute in the interest of justice we deem it fit to remand the matter to the file of the ld. CIT(A) for adjudicating issue afresh. The assessee is hereby directed to produce the complete documents to the satisfaction of the Ld. CIT(A) - Appeal of the assessee is allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to the applicability and interpretation of section 68 of the Income Tax Act, 1961, specifically regarding the treatment of unsecured loans received by the assessee from a third party. The issues revolve around:

• Whether the assessee discharged the onus of proving the identity, creditworthiness, and genuineness of the unsecured loan transaction under section 68.
• Whether the addition of Rs. 52,00,000/- to the income of the assessee on account of the unsecured loan was justified in the absence of complete documentation.
• The extent to which the source of the loan needs to be examined, particularly whether the principle of "source of source" applies to unsecured loans under section 68.
• The adequacy and sufficiency of the documents produced by the assessee, including bank statements, ledger accounts, copies of returns, and financial statements of the lender company.
• The propriety of the lower authorities' approach in confirming additions based on incomplete or inconclusive evidence, and whether the appeal was dismissed without proper appreciation of the facts and law.

Issue-wise Detailed Analysis

1. Discharge of Onus under Section 68 in respect of Unsecured Loan

Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act requires that where any sum is found credited in the books of an assessee and the assessee offers it as a loan or deposit from a known person, the assessee must prove the identity, creditworthiness, and genuineness of the transaction. The principle of "source of source" inquiry, i.e., tracing the origin of funds with the lender, is generally applicable in cases of share application money, but not necessarily in unsecured loans.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had produced certain documents such as ledger accounts, bank statements evidencing transactions through banking channels, acknowledgment of income tax returns, and balance sheets of the lender company. The assessee contended that the loans were taken during the relevant previous year through banking channels, thereby establishing genuineness. The Department, however, argued that the documents were incomplete and the lender company was a dummy entity with no real business activity, supported by the fact that the lender's return showed nil revenue from operations.

Key Evidence and Findings: The AO and CIT(A) found the documents incomplete, particularly the absence of complete return of income and balance sheet of the lender, and the non-production of the lender's directors for cross-examination. The Department relied on a precedent where dummy companies were held to be conduits for bogus entries.

Application of Law to Facts: The Tribunal recognized the Department's concerns but also observed that the assessee had produced some documents and that the lower authorities had not identified specific defects conclusively. The Tribunal emphasized that the "source of source" inquiry does not apply to unsecured loans, thus the focus should be on the genuineness of the transaction between the assessee and the lender.

Treatment of Competing Arguments: While the Department argued for dismissal based on incomplete evidence and suspicion of a sham transaction, the assessee argued that all possible documents were produced and that the addition was based on conjecture. The Tribunal found merit in both but noted the absence of conclusive material on record to decide definitively.

Conclusion: The Tribunal found it appropriate to remit the matter back to the CIT(A) for fresh adjudication after the assessee produces complete documents and the CIT(A) examines the matter in detail.

2. Justification of Addition under Section 68

Relevant Legal Framework and Precedents: Additions under section 68 can be made if the assessee fails to prove the identity, creditworthiness, or genuineness of the creditor or the transaction. The burden lies on the assessee to establish these elements to avoid addition.

Court's Interpretation and Reasoning: The AO and CIT(A) held that the assessee failed to discharge this burden due to incomplete documentation and the suspicious nature of the lender. However, the Tribunal pointed out that the assessee did produce certain documents and the addition was made on the basis of incomplete evidence, without a detailed examination of the documents actually furnished.

Key Evidence and Findings: The bank statements showed transactions through banking channels, which is a relevant factor in establishing genuineness. However, the lender's financials showed no real business activity, raising doubts about creditworthiness.

Application of Law to Facts: The Tribunal found that the lower authorities' conclusions were based on surmises and conjectures rather than cogent material. It emphasized that the addition should not be confirmed without a thorough consideration of all documents and facts.

Treatment of Competing Arguments: The Department's reliance on the lender being a dummy company was countered by the assessee's argument that the loan was genuine and properly routed through banking channels. The Tribunal found that the matter required a fresh and detailed inquiry.

Conclusion: The addition of Rs. 52,00,000/- was not upheld outright but remanded for fresh consideration.

3. Applicability of "Source of Source" Inquiry

Relevant Legal Framework and Precedents: The principle of "source of source" inquiry, as laid down in various judicial pronouncements, is applicable primarily to share application money and not to unsecured loans. The assessee contended that this principle was wrongly applied by the lower authorities.

Court's Interpretation and Reasoning: The Tribunal agreed with the assessee that the lower authorities erred in applying the "source of source" test in the present case of unsecured loans. The Tribunal clarified that the focus should be on the genuineness of the transaction and the creditworthiness of the lender, not on tracing the origin of the lender's funds.

Key Evidence and Findings: The assessee's production of banking channel evidence was relevant to establish genuineness.

Application of Law to Facts: The Tribunal held that the lower authorities' approach violated the basic principles under section 68.

Treatment of Competing Arguments: The Department did not contest this point vigorously, focusing more on the completeness of documents and the dummy nature of the lender.

Conclusion: The Tribunal found that the "source of source" inquiry was inapplicable and should not have been imposed.

4. Adequacy of Documents and Procedural Fairness

Relevant Legal Framework and Precedents: The assessee is required to produce sufficient and complete evidence to discharge the burden under section 68. However, the authorities must also specify the defects in the documents and not reject claims on mere conjecture.

Court's Interpretation and Reasoning: The Tribunal observed that the lower authorities criticized the assessee for not submitting complete returns and balance sheets of the lender but failed to specify the exact defects or deficiencies in the documents produced. The Tribunal noted that the appeal was dismissed in a routine manner without detailed reasoning.

Key Evidence and Findings: The assessee produced ledger accounts, bank statements, and some financials. The Department pointed out missing documents and non-appearance of lender's directors.

Application of Law to Facts: The Tribunal emphasized the need for the authorities to identify specific deficiencies and provide reasoned findings rather than relying on surmises.

Treatment of Competing Arguments: The assessee argued that all possible documents were produced and the dismissal was unjustified; the Department relied on incomplete evidence and suspicion.

Conclusion: The Tribunal directed the lower authorities to allow the assessee to produce complete documents and to reconsider the matter afresh with proper reasoning.

5. Remand for Fresh Adjudication

The Tribunal, considering the protracted pendency of the appeal and continuous adjournments sought by the assessee, decided to dispose of the appeal on merits based on the record and submissions of the Department. However, recognizing the factual disputes and incomplete record, the Tribunal remanded the matter to the CIT(A) for fresh adjudication after the assessee produces complete documents, including the full return of income and balance sheet of the lender, and allows the CIT(A) to examine the genuineness, creditworthiness, and identity of the lender in accordance with law.

Significant Holdings

"It is not the case of the Department that the Assessee has not at all produced any document, however, it is a case of Department is that the assessee has provided incomplete documents and not produced the director of the lender company."

"Considering the fact that the assessee has indeed produced certain documents which are claimed to be incomplete as per the Department in the absence of any material available on record to examine the factual dispute, in the interest of justice, we deem it fit to remand the matter to the file of the ld. CIT(A) for adjudicating issue afresh."

"For the purpose of applying section 68 of the Act, source of the source need not be proved for the year under consideration."

"The learned CIT (Appeals), in confirming the additions made by the AO has only gone by surmises, conjecture and guess work in drawing inference and in recording his conclusion. In the absence of any cogent material to support his findings, the same being based on conjuncture and surmises cannot be upheld."

The Tribunal established the principle that additions under section 68 must be based on cogent material and not on conjecture or incomplete evidence. The "source of source" inquiry is not applicable to unsecured loans. The assessee must produce complete and satisfactory documents to establish identity, creditworthiness, and genuineness, and the authorities must provide reasoned findings specifying the defects rather than dismissing appeals on routine grounds.

Ultimately, the Tribunal allowed the appeal for statistical purposes and remanded the matter for fresh consideration, directing the assessee to produce complete documents and the CIT(A) to adjudicate the issue afresh in accordance with law.