Addition of opening balance of unsecured loan u/s 68 is unsustainable

ITO Vs Rahul kantilal Shah (ITAT Mumbai)

ITAT Held that addition on the basis of the opening balance of unsecured loan treating the same as current year transaction by invoking section 68 of the Income Tax Act is unsustainable.

Facts-

The assessee was deriving income from profit and gains from partnership firm M/s. Sadguru Properties and M/s Sadguru and Krishna Developers and interest income is offered under the income from other sources. The A.O on perusal of the balance sheet as on 31-03-2012 found that the assessee has unsecured loans of Rs. 9,44,02,666/-. The AO has called for the details to substantiate the loan creditors with confirmations and supporting documents. The assessee has filed the loan confirmations, however the A.O found that they are not properly filed and does not have addresses and PAN of the concerned party. Therefore, the loan documents could not prove the genuineness of the transactions. Since the details are not filed with proper information. A.O. found that the loan confirmations to the extent of Rs.1,94,93,998/- in respect three groups were not filed and the assessee failed to prove the identity, genuineness and creditworthiness of the lenders and the interest on loan of Rs 14,17,828/-and made addition u/s 68 of the Act.

On the second disputed issue, the A.O. found that the assessee has disclosed loan obtained from the M/s Timestar Ltd and to test the genuineness of the transaction has issued notice u/s. 133(6) and the lender has denied about the loan transaction. The AO was not satisfied and no explanations were offered and made the addition of Rs.3,02,25,000/- and assessed the total income of Rs. 5,11,36,830/- and passed the order u/s 143(3) of the Act dated 31.03.2015.

Aggrieved by the order the assessee has filed an appeal before the CIT(A). CIT(A) deleted the additions made by AO. Being aggrieved, the revenue has preferred the present appeal.

Conclusion- Held that AO has made addition of opening balance of unsecured loan amount which was wrongly treated as the current year transaction. Concluded that the provisions of section 68 of the Act cannot be invoked on the opening balance of unsecured loan.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal is filed the by the revenue against the separate orders of the Commissioner of Income Tax (Appeals)-77, Mumbai passed u/s 143(3) and 250 of the Act.

The revenue has raised the following grounds of appeal:

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,94,93,998 / – u/ s 68 of the I.T. Act, 1961 even though the assessee failed to verify the genuineness and creditworthiness of the lenders.

02. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of interest expenses of Rs. 14,17,828 /- u/s 57 of the I.T. Act, 1961 since the genuineness and creditworthiness of the loan transactions are not proven by the assessee.”

3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3,02,25,000 / – on account of unsecured loan taken from M/s Time Star Pvt. Ltd. and the Ld. CIT(A) failed to appreciate the fact that in response to reply to notice u/s 133(6), M/s Time Star Pvt. Ltd. stated that it was not a loan transaction but repayment of outstanding balance for M/s Sad guru Homes and given to the assessee as a partner of M/s. Sad guru Homes, as full and final settlement (proportionate).

04. “The appellant prays that the Order of the Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”

05. “The appellant craves leave to amend or to alter any ground or add a new ground, which may be necessary

2. The brief facts of the case are that the assessee is an individual and is a partner in partnership firms engaged in real estate and development of properties. The assessee has filed the return of income for the A.Y 2012-13 on 09.05.2013 disclosing a total income of Rs. Nil. Subsequently the case was selected for scrutiny and notice us 143(2) and 142(1) of the Act along with questionnaire was issued. In compliance to the notice the Ld.AR of the assessee appeared from time to time and submitted the various details and the case was discussed. The assessee was deriving income from profit and gains from partnership firm M/s. Sadguru Properties and M/s Sadguru and Krishna Developers and interest income is offered under the income from other sources. The A.O on perusal of the balance sheet as on 31-03-2012 found that the assessee has unsecured loans of Rs. 9,44,02,666/-. The AO has called for the details to substantiate the loan creditors with confirmations and supporting documents. The assessee has filed the loan confirmations, however the A.O found that they are not properly filed and does not have addresses and PAN of the concerned party. Therefore the loan documents could not prove the genuineness of the transactions. Since the details are not filed with proper information, The A.O. has issued show cause notice referred at Para 5.5 of the AO order.

3.The assessee has filed the information and whereas the A.O. found that the loan confirmations to the extent of Rs.1,94,93,998/- in respect three groups were not filed and the assessee failed to prove the identity, genuineness and creditworthiness of the lenders and the interest on loan of Rs 14,17,828/-and made addition U/sec68 of the Act. On the second disputed issue, the A.O. found that the assessee has disclosed loan obtained from the M/s Timestar Ltd and to test the genuineness of the transaction has issued notice U/sec133(6) of the Act and the lender has denied about the loan transaction. Whereas, in response to notice the assessee has filed a letter dated 30-03-2015 but remained silent on the disputed issue. Finally the AO was not satisfied and no explanations were offered and made the addition of Rs.3,02,25,000/- and assessed the total income of Rs. 5,11,36,830/- and passed the order u/s 143(3) of the Act dated 31.03.2015.

4. Aggrieved by the order the assessee has filed an appeal before the CIT(A). Whereas the CIT(A) has considered the grounds of appeal, submissions of the assessee and findings of the AO . The assessee has filed an application for admission of the additional evidence which could not be filed in the assesseement proceedings. The CIT(A) has admitted the additional evidence and has called for the remand report from the A.O. and the assessee was provided the remand report copy for filling rebuttal referred at Para 4 and 5 of the order. The CIT(A) considered the facts, circumstances and the remand report has observed that the remand report does not specify any contrary facts of the assessee and the assessee has filed the detailed evidences and documents in the course of appellate proceedings and has deleted the additions made by the A.O and allowed the appeal. Aggrieved by the order the CIT(A), the revenue has filed an appeal before the Hon’ble Tribunal.

5. At the time of hearing the Ld. DR submitted that the CIT(A) has erred in granting the relief in unsecured loans and interest on loan irrespective of the facts that the additional evidence does not provide complete details. The contention of the Ld. DR that the CIT(A) should have call for the additional information for supporting the claims and also the payment made by the erstwhile partnership firm to the assessee being partner in the earlier years .Further the CIT(A) has erred in observing that the A.O does not found discrepancy in evidences furnished by the assessee and there could not be any adverse comments. The Ld.DR supported the order of trhe A.O. and prayed for allowing the appeal.

6. Contra, the Ld. AR submitted that in the case of unsecured loans, the A.O. has made addition of the opening balances of loan accounts carried forwarded from earlier years and also disallowed the interest paid on loans by invoking the provisions of section 68 of the Act. Whereas in respect of M/s Time Star Pvt Ltd unsecured loan, the assessee has received the amount towards the repayment of outstanding balance from the partnership firm in the earlier years and was carried forward and disclosed in the Balance sheet. The Ld.AR supported the order of the CIT(A) and substantiated the submissions with the paper book and prayed for dismissal of revenue appeal.

7. We heard the rival submissions and perused the material on record. The sole crux of the disputed issue as envisaged by the Ld. DR that the CIT(A) has erred in deleting the addition of unsecured loans and interest on loans considering the additional evidences filed.

Further, the CIT(A) has overlooked the facts that the investor group companies are providing accommodation entries. The Ld.AR has demonstrated the submissions made before the lower authorities and emphasized that the CIT(A) has rightly considered the facts, submissions and evidences and relied on the judicial decisions and deleted the addition. The contentions of the Ld. AR that the assessee has cooperated in submitting the information in reassessment proceedings and in response to notice u/s 142(1) of the Act a questionnaire was filed and also complied with the information. Whereas the A.O. has made addition of opening balance of unsecured loan amount which was wrongly treated as the current year transactions. At this juncture, we consider it appropriate to refer to the observations of the CIT(A) at page 8 Para 6.1 to 10.11 of the order read as under:

6.1 I have considered the facts, oral contentions and written submissions of the appellant as against the observations/findings of the AO in assessment order and remand report. The submissions and contentions of the appellant are being discussed and decided as under:-

7. I have carefully gone through the additional evidence filed by the appellant, remand report and also the appellant’s comments on remand report. In the remand report, the AO has objected to the admission of additional evidence. In the decision rendered in the case of Smt. Prabhavati S. Shah vs. CIT reported at 231 IT 1, the Hon’ble Bombay High Court, categorically pointed out that with the object of ensuring that evidence is primarily led before the Assessing Officer, Rule 46A (1) puts fetters on the right of the appellant to produce before the Commissioner of Income-tax (Appeals) any additional evidence, not previously raised before the Assessing Officer. However, the Court has clarified that putting fetters on the right of appellant in the matter of producing additional evidence before the Commissioner of Income-tax (Appeals), clarified the Court; does not mean affecting in anyway the powers of the first appellate authority conferred by sub-rule (4) and section 250 of the Act. The relevant part of the said order is as under:-

“3 . On a plain reading of rule 46A, it is clear that this rule is intended to put fetters on the right of the appellant to produce before the AAC any evidence, whether oral or documentary, other than the evidence produced by him during the course of the proceedings before the ITO except in the circumstances set out therein. It d oes not deal with the powers of the AAC to make further enquiry or to direct the ITO to make further enquiry and to report the result of the same to him. This position has been made clear by sub-rule (4) which specifically provides that the restrictions placed on the production of additional evidence by the appellant would not affect the powers of the AAC to call for the production of any document or the examination of any witness to enable him to dispose of the appeal: Under sub­section (4) of section 250, the AAC is empowered to make such further inquiry as he thinks fit or to direct the ITO to make further inquiry and to report the result of the same to him. Sub-section (5) of section 250 empowers the AAC to allow the appellant, at the hearing of the appeal, to go into any ground of appeal not specified in grounds of appeal, on his being satisfied that the omission of the ground from the form of appeal was not wilful. It is clear from the above provisions that the powers of the AAC are much wider than the powers of an ordinary court of appeal. The scope of his powers is coterminous with that of the ITO. He can do what the ITO can do. He can also direct the ITO to do what he failed to do. The power conferred on the AAC under sub­section (4) of section 250 being quasi-judicial power, it is incumbent on him to exercise the same if the facts and circumstances justify. If the AAC fails to exercise his discretion judicially and arbitrarily refuses to make enquiry in a case where the facts and circumstances so demand, his action would be open for correction by a higher authority.

4. On a conjoint reading of section 250 and rule 46A, it is clear that the restrictions placed onthe appellant to produce evidence do not affect the powers of the AAC under sub-section (4) of section 250. The purpose of rule 46A appears to be to ensure that evidence is primarily led before the ITO.

5. We are supported in our above conclusion by the decision of the Orissa High Court in B.L. Choudhury v. CIT (1976] 105 ITR 371 in which it was held:

“Wide provision has, thus, been made conferring jurisdiction on the first appellate authority 10 make such inquiry as he deems fit. The provision seems to have been based on the fact that before the Appellate Assistant Commissioner there is generally no opposite party. The appellate authority himself is the departmental authority representing the revenue. Therefore, he has been invested with the power of making further inquiry. He does not exceed his jurisdiction if he asks or allows the assessee to produce or file additional papers or additional evidence in the matter he thinks fit.. “(p. 376)

It was further held that- .. In fact, receiving new material by the Appellate Assistant Commissioner cannot be equated with receipt of additional evidence as contemplated in Order 41, rule 27 of the Code of Civil Procedure or even at the stage of second appeal by the Tribunal. ” (p. 376)”

Thus, a conjoint reading of section 250(4) and, (5) of the Act and rule 46A(1) and (4) of the Rules clarifies that only restriction is imposed on the appellant’s right to produce additional evidence before the Commissioner of Income-tax (Appeals).

7.1 In the decision rendered in the case of K. Ravindranathan Nair reported at 184 CTR (Ker) 46, the Kerala High Court.took cognizance of the decision in the case of Prabhavati S. Shah and further specified that “if the provisions of r. 46A sub-rule (1) thereof is held to be mandatory that will go against the provisions of section 250 of the Act conferring power on the first appellate authority to enquire into the matter and pass appropriate orders. In other words, rule 46A without sub-rule (4) will be open to challenge as ultra vires section 250 of the Act”. The Kerala High Court, in the instant case, accordingly held that in spite of the restrictive provisions of rule 46A(1), section 250 of the Act read with sub-rule (4) of rule 46A enable the Commissioner of Income-tax (Appeals) to accept additional evidence in appropriate cases. The Court, therefore, upheld the impugned order of the Tribunal whereby the Assessing Officer was directed to consider the evidence produced by the appellant before the first appellate authority to prove the genuineness of the credits.

7.2 Therefore, a bare reading of the exposition of law relating to the power of the Commissioner of Income-tax (Appeals) to admit additional evidence as made by the Bombay High Court and relied on by the Kerala High Court (discussed above) clearly indicates that even if the repeated opportunities were given to the appellant to produce evidence and even if the appellant does not suomotu produce any additional evidence, in the spirit of justice and fair-play, it is incumbent on the first appellate authority, being a quasi-judicial authority, to require the appellant to produce requisite evidence or to mäke necessary inquiry and admit any such fresh and additional evidence, by virtue of section 250(4) and (5) read with sub-rule(4) of rule 46A.

7.3 In the present case, the details submitted by the appellant are crucial to the grounds raised in appeal. The impugned order and remand reports do not contain any details to controvert the assertion of the appellant nor do they bring on record -anything to establish that the appellant willfully abstained from attending during the scrutiny proceedings. As noted before, the evidence produced by the appellant is relevant to the grounds in appeal. Therefore after considering the principles laid down by the jurisdictional High Court in the case of Smt. Prabhavati S. Shah (cited supra) the additional evidence submitted by the appellant is admitted and taken on record.

Ground No.1:

8. During the assessment proceedings, the A.0. has asked loan confirmation from concerned parties and appellant failed to file necessary documents and details during the assessment proceedings. Therefore, A.O. has made addition of R5.1,94,93,998/-. The appellant has submitted detailed explanation along with the documentary evidence during the appellate proceedings. The same was forwarded to the A.O. for verification of transactions. The A.O. has submitted the remand report and discussed the issues briefly. However, the appellant has submitted counter comments on the observation of remand report. It is reported by the A.O. that the appellant has submitted the loan confirmation of the party and the loans are genuine. The opening and closing balance are the same. The loan amount should be accepted.

8.1 During the remand, the appellant has submitted Confirmations, Copy of Acknowledgement and Copies of the Bank statements. The identity of the creditors has been established as they are having PAN and they are regularly filing return of income. The genuineness of the transaction is established from the fact that both the acceptance and repayment of loan has been through banking channels. The creditworthiness of the lenders can be established from the statements. The source of receipt through banking channels to substantiate the genuineness of the credits reflected in its books of Account. After considering the totality of facts and remand report, the appellant has submitted sufficient documents during the remand proceedings and established the genuineness of transactions. The A.O. did not found any discrepancy of submission of appellant. In view of the above, I have come to the conclusion that nature and source of loan transactions of Rs. 1,92,93 998/- stands explained. Consequently, addition made by. A.O. cannot be sustained. Therefore, A.O. is directed to delete the addition of Rs. 1,92,93,998/-.This ground is allowed.

Ground No.2:

9. During the assessment proceedings, the A.O. has observed that the appellant has claimed interests against the loan of Rs. 1,92,93,998/-, as the appellant failed prove the identity, genuinity and creditworthiness of the loan party. Therefore, the A.0. had disallowed loan of Rs. 1,92,93,998/-.Further, considering the disallowance of loan of Rs. 1,94,93,998/-, the A.O. has disallowed the interest of Rs. 14,17,828/- accordingly. The appellant has submitted detailed explanation along with the documentary evidence during the appellate proceedings. The same was forwarded to the A.O. for verification of transactions Further, during the remand proceedings, the appellant has submitted necessary sufficient documents before the A.0. and A.O. did not Found any discrepancy in their submission except interest of Rs. 89,960/-.The A.0. has stated in this regard that interest paid of Rs. 89,960/-cannot be accepted as the Pan is not evident on confirmation. Further, the appellant has stated that the PAN is already mentioned in confirmation on bank statement.

9.1 During the remand proceedings, the appellant has submitted sufficient documents and established the genuineness of loan transactions of Rs.1,92,93,998/- : The A.O. did not found any discrepancy of submission of appellant. Therefore, after considering the totality of facts and judicial decision, it is decided by the undersigned in the ground no.1 that. the loan transactions of Rs. 1,92,93,998/- are genuine. In view of the above decision, there is no question of disallowance of interest thereof. Therefore, I have come to the conclusion that interest expenditure of Rs. 14,17,828/- stands explained. Consequently, addition made by A.O. cannot be sustained. Therefore, A.0. is directed to delete the addition of Rs. 14,17,828/-. This ground is allowed.

Ground No. 3:

10. During the assessment proceedings, the A.O. has observed that the appellant has shown loan of Rs. 3,02,25,000/- from Time Star Ltd. The A.O. has issued notice U/5.133(6) to the Time Star Ltd. asking for verification of transaction. In response, M/s. Time Star submitted that he has not given loan to the appellant and the same amount is the re-payment outstanding balance of Sadguru Homes in the capacity of partner of full and final settlement. In view of the findings, the A.O. has issued show cause notice to the appellant for detailed explanation. The appellant failed to submit explanation during the assessment proceedings. Therefore, A.O. has disallowed Rs. 3,02,25,000/- U/5.68 of I.T.Act and added to the appellant’s income. The appellant has submitted detailed explanation along with the documentary evidence during the appellate proceedings. The same was forwarded to the A.O. for verification of transactions.

10.1 During the appe | late proceedings, appellant has stated that appellant was in partner of Sadguru Homes and the said firm had developed jointly real estate project with Time Star Ltd, M/s.Sadguru Homes had advanced certain money to Time Star, out of funds received from its partner., M/s. Time Star could not continue with the development project and refunded the money directly to the partner of Sadguru Homes at the time of filing of Income-tax return, M/s.Sadguru Homes was under litigation. Therefore, the said amount classified as loan payable. However, the A.O. has reported in the remand report that the appellant has fled IT and balance sheet of Sadguru Homes for the assessment year 2006-07 to prove that the capital in firm of appellant was to the tune of Rs.3.02 crores. The appellant has submitted ledger accounts in Time Star Ltd. The A.0. has stated that evidence filed by the appellant is insufficient and appellant failed to submit any contract MOU with Time Star Ltd. During the appellate proceedings appellant has stated that the appellant has submitted that Time Star Ltd. has paid to partner of Sadguru Homes directly in proportion of their capital investment of M/s. Sadguru Homes Ltd. Further stated that as the Sadguru Homes was closed and no IT return beyond A.Y.2006-07 could be filed. The last balance sheet of Sadguru Homes has already submitted and prove the capital balance of appellant.

10.2 The expression “nature and source” has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. The Hon’ble Supreme Court, in Kale Khan Mohd.Hanif vs. CIT,. pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. If the prima facie inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue. As far as the creditworthiness or financial strength of the creditor/subscriber is concerned, that can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharged the onus cast upon him. Thereafter, it is for the Assessing Officer to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, to prove the matter further.

10.3 Element of credit worthiness and satisfaction of AO thereafter is subjective and requires more efforts/inquiry on the part of the AO to give a finding in the order that lender is not credit worthy. The AO must make proper enquiry before making any addition. In Khandelwal Constructions v. CIT 227 ITR 900 (Gau.), it has been held that empowers the Assessing officer to make enquiry. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation, A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained. The Hon’ble Supreme Curt in Anees Ahmad & Sons v. CIT (A)(297 IT 441)(SC), the Hon’ble Court has held that merely for non-compliance with section 131(1) by other parties, no ‘negative inference could be drawn and the assessee could not be penalized. Following the decision in Anees Ahmad (supra), the Hon’ble Rajkot Tribunal in ITO v. Oris Ceramics (ITA No. 1 122/Rjt/2012, order dated December 15, 2011)also held that for non­compliance to 133(6) notice by third parties, assessee should not be penalised and addition could not be sustained. The observation of the Hon”ble jurisdictional High Court in CIT v. Nikunj Exim Enterprises Pvt. Ltd. (ITA 5604 of 2010, order dated December 17, 2012) is also worth to rely upon.

10.4 Further, the A.O. has not given opportunity to clarify his suspicion or doubts. The Hon’ble Apex Court in the case of Andaman Timber Industries in CIVIL APPEAL No.422&-OF 2006 held that not allowing the assesse to cross examine the fact is serious flaw and it is a violation of principles of natural justice. The relevant part of decision are as under: –

“According to us, not allowing the assessee to cross examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such, an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. As far as the Tribunal is concerned, we find that rejection of this plea is totally untenable. The Tribunal has simply stated that cross-examination of the said dealers could not have brought out any material which would not be in possession ofthe appellant themselves to explain as to why their. ex-factory prices remain static. It was not for the Tribunal to have guess work as to for what purposes the appellant wanted to cross-examine those dealers and what extraction the appellant wanted from them.

As mentioned above, the appellant had contested the truthfulness of the statements of these two winesses and wanted to discredit their lestimony for which purpose it wanted to avail the opportunity of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the said dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination. That apart, the Adjudicating Authority simply relied upon the price list as maintained at the depot to determine the price for the purpose of levy of excise duty. Whether the goods were, in fact, sold to the sold dealers/witnesses at the price which is mentioned in the price list itself could be the subject matter of cross-examination Therefore, it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross examination and make the remarks as mentioned above. We may also point out that on an earlier occasion when the matter came before this Court in Civil Appeal No.2216 of 2000, order dated 17-03­2005 was passed remitting the case back to the Tribunal with the directions to decide the appeal on merits giving its reasons for accepting or rejecting the submissions.

In view the above, we are of the opinion that if the testimony of these two witnesses is discredited, there was no material with the Department on the basis of which it could justify its action, as the statement o the aforesaid two witnesses was the only basis of issuing the Show Cause Notice.

10.5 The Hon’ble High Court of Mumbai in the case of H.R.Mehta vs. ACIT ITA No.58 of 2001 in the judgement delivered on 30-06-2016 held as under: –

“In Ms. Andaman Timber Industries, the Supreme Court found that the adjudication authorities has not granted an opportunity to the assessee to cross examine the witness and the tribunal merely observed that the cross examination of the dealers in that case, could not have brought out any material which would not otherwise be in possession of the appellant assessee. The Supreme Court set aside the impugned order and observed that it was not for the adjudicating authority to presuppose as to what could be subiect matter of the cross examination and make the remarks such as was done in that case. In the instant case, although the appellant has called upon us to draw an inference that the burden shifted to the revenue in the present case, be need not hasten and adopt that view after giving out though to various issue raised and the decisions cited by Mr Traishawalla and finding that on a very fundamental aspect, the revenue was not justified in making an addition at the time of re-assessment without having first given the assessee an opportunity to cross examine the deponent on the statements relied upon by the ACIT. Ouite apart from denial of an opportunity of cross examination, the revenue did not even prove the material on the basis ofwhich he department sought to conclude that the loan was a bogus transaction.

10.6 It is clear from the submission of appellant that the transactions were through account payee cheques and appellant has submitted sufficient details before the AO during the assessment proceedings. The source of receipt through banking channel clearly establish the genuineness of the credit which is reflected in the books of accounts. The decision of the Hon’ble Gujarat High Court in the case of Dy. CIT vs Rohini Builders – [256 IT 3601 is held that all the loans were received by the assessee by account payee cheques and the repayment of loans have also been made by account payee cheques along with interest in relation to those loans and that the assessing officer having allowed the interest claimed/paid by the assessee in relation to the cash credits cannot treat the cash credits as not genuine. It held that the assessee had discharged the initial onus which lay on it in terms of Section 68 by roving the identity of the creditors by giving their complete addresses, GIR nos./PAN nos. and copies of assessment orders wherever readily available and that it has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from the bank accounts of the creditors. It held that the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of accounts but not the source of the source.

10.7 As far as the creditworthiness or financial strength of the lender is concerned, that can be proved by producing, the bank statement, IT and confirmations of the lender showing that it had sufficient balance in its accounts to. enable it to lend to us. Once these documents are produced, the assessee would have satisfactorily discharged the onus cast upon him. Thereafter, it is for the Assessing Officer to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, to probe the matter further. However, to discredit the documents produced by the assessee on the aforesaid aspects, there has to be some cogent reasons and materials for the Assessing Officer and he cannot go into the realm of suspicion. Thus element of credit worthiness and satisfaction of AO thereafter is subjective and requires more efforts/inquiry on the part of the AO to give a finding in the order that lender is not credit worthy. In this regard, the appellant discharged the onus by providing the sufficient details and documents of all lenders during the remand report. However, the. A.O. has not made any further inquiries regarding the parties. The A.O. has not issued any notices under section 133(6) or summons under section 131 against these lenders to prove that there are non-genuine.

10.8 The assessee must satisfy three important conditions, namely, (i) the identity of the creditor; (ii) the genuineness of the transaction; and (lli) the financial capacity of the of the person, i.e. the credit worthiness of the creditor. However, the onus of the assessee is limited to the extent of proving the source from which he received the cash credit. The credit worthiness of the creditor has to be judged vis-à-vis the transaction which had taken place between the assessee and the creditor, and it is not the burden of the assessee to find out the source of creditworthiness of the lender to prove the-genuineness of the transaction. This issue is dealt by the Gauhati High Court in the case of CIT v. Smt. San ghamitra Bharali (2014) 361 IT 481 (Gau). The aforesaid points were also affirmed in the past by the Appex Court in the case of CIT v. Ofissa Corporation P. Ltd reported in (1986) 159 IT 78 (SC). In the case of CIT v. Varinder Rawley (2014) 366 IT 232 (P & H) the court held that “where the assessee shows that the entries regarding credit in a third party’s account were in fact received from the third party and are genuine, he discharges the onus. In that case, the sum, cannot be charged as the assessee’s income in the absence of any material to indicate that it belongs to assessee”, particularly in a case where no summons u/s 131 is jssued against the third party.

10.9 From the assessment order and remand report, it transpires that the AO has totally ignored the documentary evidences submitted by the appellant. The AO has not pointed out any defect in the above mentioned documentary evidences submitted during assessment proceedings. Without pointing out any lacuna in the evidences submitted by the appellant, the sources and the genuineness of transaction cannot be doubted. Once evidences related to a transaction is submitted before the A.O., the onus shifts on him to prove these as non-genuine. The A.O. has not discharged the onus “casted on him. The section 68 can be invoked when there is credit of amounts in the books maintained by the assessee” (b) such credit has to be a sum of money during the previous year (c) either the assessee offers no explanation about the nature and source of such credits found in the books or the explanation offered by the assessee, in the opinion of the AO, is not satisfactory. It is only then that the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression the assessee offers no explanation means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. The opinion of the AO for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on the record. The opinion of the AO is required to be formed objectively with reference to the material on record file. While considering the explanation of the assessee, the AO has to. act reasonably-application of mind is the sine qua hon for forming the opinion. Phrase appearing in the section – nature and sources of such credits – should be understood in right perspective, so that genuineness of the transaction can be decided on merits and not on prejudices. The evidence produced by the assessee cannot be brushed aside in a causal manner. In the matters related to section 68 burden of proof cannot be discharged to the hilt. Such matters are decided on the particular facts of the case as well as on the basis of preponderance of probabilities. Credibility of the explanation, not the materiality of evidences, is the basis for deciding the cases falling under Section 68 of the IT Act 1961.Further, it may be pointed out that section 68 under which the addition has been made by the Assessing Officer reads as under-:

“68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation. offered by him ls not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

10.10 The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this, case the legislative mandate is not in terms of the words “shall be charged to income-tax as the income of the assessee of that previous year”. The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word “may” and not “shall”. Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 IT 570.

10.11 During the assessment proceedings and remand proceedings, the appellant has submitted sufficient evidence and establish that the fact that both the acceptance and repayment of transaction has been through banking channels. Further, M/s. Time Star has already clarified during the assessment proceedings that the amount of Rs.3,02,25,000/- was given to the appellant on account of the payment of outstanding balance of Sad guru Homes in the capacity of partner as full and final settlement. In the assessment order and remand proceeding, the A.0. did not at all discuss the merit of submission made by the appellant and casually brushed aside the details filed by the appellant. Further, the appellant has stated that he had furnished all the relevant details during. the course of the remand proceedings and accordingly had duly discharged its onus by furnishing the identity and address of the parties. Further, the source of receipt through banking channels to substantiate the genuineness of the credits reflected in its books of Account.

After considering the totality of facts, rival submissions, the applicable law and on the basis of discussion mentioned above, I have come to the conclusion that nature of transactions of Rs.3,02,25,000/- stands explained. Consequently, addition made by A.O. cannot be sustained. Therefore, A.O. is directed to delete the addition of Rs.3,02,25,000/-. This ground is allowed.

8. We find that the CIT(A) has considered the provisions of Sec 68 of the Act in respect of addition of unsecured loans and judicial decisions and relied on the supporting additional evidences furnished. Whereas, the assessee has received the unsecured loans from 9 parties aggregating to Rs.9.46 lakhs referred at 7&8 of the A.O. order, who are having the opening balance of unsecured loans with the assessee in the F.Y.2011-12. The Ld.AR demonstrated the confirmations at page 4 to 6 of the paper book. We are of the view that the CIT(A) has considered the submissions and evidences and granted the relief. Further the provisions of section 68 of the Act cannot be invoked on the opening balance of unsecured loan. The Ld.AR has demonstrated the Assessment order passed U/sec143(3) of the Act for A.Y.2011-12 of the assessee , where the return of income was accepted. On the second disputed issue of unsecured loan disclosed in the Balance sheet received by the assessee in the earlier years in full and final settlement with the partnership firm, the Ld.AR has demonstrated the submissions made before the A.O by letter filed on 27-03-2015 at page 8 of the paper book explaining the facts and circumstances of receipt of money in the financial year 2007-08. The Ld.AR has highlighted the transactions with the details of payments made to the assessee and supporting bank statements of M/s Time Star Ltd at page 10 to 16 of the paper book which cannot be over looked. Whereas, the Ld. DR could not controvert the findings of the CIT(A) with any new evidence or information to take a different view. We find that the CIT(A) relied on the judicial decisions and also the facts, additional evidence, remand report and provisions of Sec. 68 of the Act has passed a reasoned order. Accordingly, we are not inclined to interfere with the order of the CIT(A) and upheld the same and dismiss the grounds of appeal of the revenue..

9. In the result, the appeal filed by the revenue is dismissed.

Order pronounced in the open Court on 26.07.2022