No addition with regard to closing balance of old loan can be made u/s. 68: ITAT Surat

ITO Vs Mahavir Corporation (ITAT Surat)

ITAT Surat held that no addition with regard to closing balance of old loan can be made under section 68 of the Income Tax Act. Accordingly, addition u/s. 68 to that extend is liable to be deleted.

Facts- Case of the assessee was selected for scrutiny. Accordingly, AO treated unsecured loan of Rs. 4.96 crores as non-genuine and added under Section 68 of the Income tax Act, 1961.

CIT(A) confirmed the addition to the extent of Rs.1.42 crores and remaining addition of Rs.3.35 crores, which was closing balance of loans were deleted. Further aggrieved, the revenue has filed present appeal before the Tribunal.

Conclusion- Held that the main contention of assessee was that the loan of Rs. 3.53 crores represent the old balance which is also reflected in the audited balance sheet and no addition with regard to closing balance of old loan can be made under Section 68 of the Act in the assessment order under consideration. We find that ld CIT(A) on verification of the basic facts that majority of the loan was received in earlier years, so no addition can be made in this assessment year (AY 2015- 16). Before us no contrary facts or law is brought to our notice to take other view that the loan which was accepted in earlier years and were reflected in the audited accounts in those assessment years and no adverse view was taken in such assessment years, thereby accepting the transaction in such years, can be added in the year under consideration. In view of the aforesaid factual discussion, we do not find any reason to interfere with the finding of ld. CIT(A) in deleting the addition of Rs. 3.53 crores which we affirm.

FULL TEXT OF THE ORDER OF ITAT SURAT

This appeal by the revenue is directed against the order of National Faceless Appeal Centre, Delhi (NFAC)/ learned Commissioner of Income Tax (Appeals), dated 13/12/2023 for Assessment Year (AY) 2015-16. The Revenue has raised following grounds of appeal:

“1. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in admitting additional evidences as the AO has not got an opportunity to verify the documents submitted by the assesses under Rule 46A(3) of Income-tax Rules, 1962 before the Ld. CIT(A), therefore, the order of the Ld. CIT(A) is bad in law on account of violation of the provisions of Rule 46A(1), 46A(2) and 46A(3) of the Income tax Act Rules ,1962.

2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has violated the principles of natural justice while admitting the additional evidences and not providing opportunity of being heard to the Assessing Officer as per the Rule 46A(3| of the Income tax Rules, 1962.

3. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in deleting the addition made of Rs. 14,64,134/- ignoring the fact that the AO could not verify the details of interest expenses claimed by the assesses whether these expenditure incurred according the provisions of section 40(b) of the Act or not.

4. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in restricting the addition made to Rs.3,53, 70,165/- on account of unexplained unsecured loan u/s 68 of the Act when assessee has failed to prove the creditworthiness and genuineness of the lenders who provided loan to the assessee firm.

5. On the facts and circumstances of the ease and in law, the Id. CIT(A) has erred in deleting the addition made by AO ignoring the fact that merely submission of the identity of the lenders can’t say that the assesses has discharged his onus in this case as the assessee has failed to prove to the satisfaction of the AO that these lenders have sufficient creditworthiness too.

6. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred is deleting the addition made by AO of Rs. 3,35,15,869/- on account of unexplained capital introduction for the year under consideration u/s. 68 of the Act.

7. It is therefore prayed that the order of the Ld. CIT(A) may kindly be set aside and that of the Assessing Officer be restored.

8. The appellant craves leave to add, alter, amend and/or withdraw any grounds ofappeal either before or during the course of hearing of the appeal.”

2. Brief facts of the case are that assessee filed its return of income for assessment year 2015-16 on 27.09.2015 declaring income at Rs.1,30,910/. The case was selected for “scrutiny”. During the assessment, the Assessing Officer noted that the assessee has shown unsecured loan of Rs. 4.96 crores. The Assessing Officer issued show cause notice to the assessee to prove the identity, creditworthiness of creditors and genuineness of transactions of unsecured loans. The Assessing Officer noted that though the assessee furnished reply and confirmation of creditors but no evidence establishing the identity, creditworthiness of depositors and genuineness of transactions were furnished. The Assessing Officer treated the said unsecured loan as non-genuine and added under Section 68 of the Income tax Act, 1961 (in short, the Act). The Assessing Officer also noted that the assessee has debited interest expenses of Rs. 14,64,154/- in its computation of income. On show cause notice, the assessee merely furnished reply without any evidence and valid explanation. The Assessing Officer disallowed the interest expenses of Rs. 14,64,154/-.

3. Aggrieved by the additions in the assessment order, the assessee filed appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee filed detailed written submissions. In the written submissions, the assessee stated that majority of loans were received in earlier years. Out of total loan of Rs. 4.96 crores, the loan aggregating to Rs. 3.496 crores as on 31/03/2015, the majority of which was old loan. Increase in loan is only on account of interest application. The assessee furnished bifurcation of loan as outstanding as on 31/03/2015 which includes interest aggregating of Rs. 3.54 crores as well as loan availed during the year and interest accrued as on 31/03/2015 aggregating of Rs. 1.42 crore. In order to prove the genuineness of loan, the assessee furnished copy of ledger account and confirmation of various parties. The assessee stated that loans taken in earlier years cannot be added under Section 68 for the year under consideration as the said loans were clearly evident in the audit report for A.Y. 2013-14, which was already on record. The assessee thus submitted that the addition to the extent of Rs. 3.53 crores are to be deleted. With regard to loan of Rs. 1.22 crore, the assessee separately furnished the relevant details. To prove the identity, creditworthiness and genuineness of transaction, the assessee stated that the loans were taken through account payee cheques. The assessee furnished confirmation, bank statement, ITR and balance sheets of various lenders. The assessee also filed copy of reply dated 23/12/2017, filed before the Assessing Officer. The assessee stated that despite receiving submission of assessee,the Assessing Officer made addition. Submission of assessee was forwarded to the Assessing Officer for his remand report. The Assessing Officer furnished his remand report dated 17/07/2023 as recorded in para 6.2 of impugned order by the ld. CIT(A). In the remand report, the Assessing Officer accepted that the assessee filed reply but without any documentary evidence about the outstanding loan as on 3 1/03/2015; so it could not be ascertained in absence of proper evidence by his office. The Assessing Officer in his remand report, again submitted that the copy of confirmation of bank accounts of creditors were not furnished. On the remand report of assessee, the comments of assessee was sought by the ld. CIT(A). The assessee filed their reply/rejoinder on 11/12/2023. Alongwith rejoinder/reply, the assessee stated that he has filed numerous evidences during the assessment proceedings as well as alongwith his submission dated 10/08/2020 and 23/12/2023, the assessee reiterated that all such submissions and evidences were forwarded to the Assessing Officer for his remand report, therefore, it is not correct to assert that submission of assessee was not accompanying evidence. The Assessing Officer nor his assessment unit called any further detail or evidence during the assessment proceedings. The evidence is available on assessment record which were ignored. The assessee submitted that unsecured loan has been repaid.

4. On the disallowance of interest expenses, the assessee submitted that out of total interest expenses, Rs. 14,39,318/- was paid as interest on partner’s capital and Rs. 24,836/- was claimed as interest on TDS. The interest was paid on partners’ capital as per reasonable rate provided under Section 40(b) of the Act. The assessee also furnished copy of ITR of partners for current assessment year and submitted that the interest income is shown by the respective partners in their return. On the interest expenses, the Assessing Officer also furnished his remand report. The Assessing Officer objected on filing such evidences. On merit of interest expenses, the Assessing Officer in his remand report submitted that the submission of assessee is general in nature and is not supported by evidence. The assessee has not furnished mode of payment. Copy of return of partners is not available in his office. The Assessing Officer stated that in absence of complete details, the claim of assessee could not be verified.

5. The ld. CIT(A) on considering the submission of assessee held that the interest paid by assessee to its partner is duly declared by the respective partner in their return of income, therefore, the disallowance of interest expenses is not warranted and deleted the same. On the addition of unsecured loan, the ld. CIT(A) held that out of total loan of Rs. 4.96 crores, there is old loan of Rs. 3.53 crores which is duly reflected in the audited balance sheet and no addition in respect of such loan can be made under Section 68 of the Act in the assessment year under consideration. However, for remaining loan of Rs. 1.22 crore, the ld. CIT(A) on considering the submission of held that the submission of assessee was forwarded to the Assessing Officer for his remand report. The Assessing Officer filed his remand report dated 17.07.2023 as recorded in para-6.2 of the order of Ld. CIT(A). In the remand report, the Assessing Officer reported that assessee filed its submission without any documentary evidence that outstanding loan as on 31.03.2015 could not be ascertained as the paper book filed by the assessee is not available in his office. The Assessing Officer reiterated that copy of ITR and confirmation of bank accounts of creditors were not furnished. The copy of remand report was furnished / supplied to the assessee for making his “comment”. The assessee filed its comment vide / reply rejoinder dated 11.12.2023. In rejoinder, the assessee has filed numerous documentary evidence during assessment proceedings as well as along with submission dated 10.08.2020 and 23.11.2023 respectively. The assessee stated that all such submissions and evidence were forwarded before Assessing Officer for furnishing remand report. Therefore, it is not correct to say that submission of assessee was without any evidence, neither the Assessing Officer nor the assessment unit called any further details or evidence during the course of remand proceedings. Even the documents available on assessment record was also ignored. The assessee reiterated that it also furnished repayment of new unsecured loan. Therefore, appeal of assessee may be decided.

6. The Ld. CIT(A) on considering the submission of assessee prepared a summary of unsecured loan from 25 parties as recorded on page-16 of his order. The Ld.CIT(A) prepared a summary of opening cash balance as on 01.04.2014, closing balance as on 31.03.2015 and new funds / loans received during the year. For appreciation of fact, summary prepared by Ld.CIT(A) is reproduced below:

7. The Ld.CIT(A) on examination of aforesaid details noted that income of all the persons except, party No. 22, Suresh S Sheth is of Rs.2.50 lakh to Rs.3.00 lakhs on which no tax is payable as most of these creditors declared presumptive income. Most of the bank accounts have meagre opening balance in almost all cases the amounts were transferred in their bank account a few days prior to date of transfer or deposited just prior to transfer. All the persons are living nearby in Surat. Thus, assessee has not been able to satisfactory prove the genuineness of the transaction and creditworthiness of the creditors. The assessee has paid interest of Rs.20,85,403/- to the creditors. On the basis of aforesaid observation, the Ld.CIT(A) confirmed the addition to the extent of Rs.1.42 crores and remaining addition of Rs.3.35 crores, which was closing balance of loans were deleted. Further aggrieved, the revenue has filed present appeal before the Tribunal.

8. We have heard the submissions of the learned Commissioner of Income Tax-Departmental Representative (ld. CIT-DR) for the revenue and the learned Authorised representative (ld. AR) of the assessee and have perused the orders of the lower authorities carefully. At the outset of hearing, the ld. CIT­DR for the revenue submissions the grounds No. 1 and 2 of the appeal relates to violation of Rule 46A(3) of the Income Tax Rules, 1962 (in short, the Rules) and ground No. 3 of the appeal relates to deleting interest expenses Grounds No. 4 and 5 of appeal relates to deleting the addition under Section 68 of the Act. Ground No. 6 of appeal is alternative ground to the ground No. 4 and the grounds No. 7 and 8 of the appeal are general in nature. The ld. CIT-DR for the revenue submits that the ld. CIT(A) accepted the additional evidence without satisfying the scope of Rule 46A of the Rules. The assessee was given full opportunity during the assessment, however, the assessee failed to discharge his onus in showing the genuineness of interest expenses as well as to prove the identity, creditworthiness of lenders and genuineness of transactions of various loans taken by the assessee. The ld. CIT(A) during the appellate stage accepted the additional evidence and deleted the interest expenses disallowance as well as the addition of loan under Section 68 of the Act. The ld. CIT-DR for the revenue submits that the Assessing Officer was not allowed opportunity to verify the identity, creditworthiness of the lenders and genuineness of transactions of loans. The ld. CIT-DR for the revenue submits that the matter may be restored back to the file of Assessing Officer for examination of all the additional evidences filed by the assessee for the first time before the ld. CIT(A).

9. On the other hand, the ld. AR of the assessee submits that there was no violation of Rule 46A of the Rules. The assessee during the assessment, furnished complete details about the interest expenses which was paid to the partners on their capital contribution. The ld. CIT(A) on the submission of assessee obtained remand report of the Assessing officer. Despite the fact that complete details were furnished to the Assessing Officer, the Assessing Officer took his stand that no details of interest paid to partners were furnished before him. Similarly, against the addition of loan, the assessee furnished complete details of lenders to the Assessing Officer. The Assessing Officer instead of considering such details, concluded that no details were furnished. Though the assessee furnished details but the Assessing officer passed assessment order under Section 144 of the Act. Before the ld. CIT(A), the assessee again filed all the evidences to prove the identity, creditworthiness of lenders and genuineness of transactions. The assessee during the appellate stage, again furnished complete details of lenders and submitted that out of total unsecured loans of Rs. 4.96 crores, unsecured loans of Rs. 3.496 crores were old loan which was availed in earlier years. Bifurcation of old loans outstanding as on 3 1/03/2015 including interest was furnished. The assessee furnished details of loans taken in earlier years which could not be added under Section 68 in the year under consideration as the loans were clearly evident in the audit report for the A.Y. 2013-14 which was already on record. The ld. CIT(A) on appreciation of such fact, deleted the addition to the extent of Rs. 3.53 crores. With regard to fresh loan of Rs. 1.42 crore which includes the interest amount and fresh loans of Rs. 1.22 crore, the assessee challenged the action of ld. CIT(A) by filing separate appeal vide ITA No. 10/Srt/2024 wherein such addition is also deleted by allowing the appeal of assessee vide order dated 3 1/05/2024. The ld. AR of the assessee submits that he has already filed copy of written submission filed before the ld. CIT(A), submission filed before the Assessing Officer, remand report of Assessing Officer and the rejoinder of assessee in response to remand report of Assessing officer. The assessee has also filed details of partners’ capital, interest and remunerations alongwith copy of partnership deed. The ld. AR of the assessee submits that there is no violation of Rule 46A rather the assessee furnished all basic details before the Assessing Officer, however, the same was not considered by the Assessing Officer. The ld. CIT(A) forwarded the submission of assessee for the remand report of Assessing officer. The Assessing Officer furnished his remand report. The ld. CIT(A) allowed relief to the assessee only after giving opportunity to the assessee despite the fact that no new evidence was furnished. The ld CIT(A) has coterminous power as of Assessing Officer. The ld. AR of the assessee submits that he also relied on the submission filed before the ld. CIT(A), copy of which is filed on record.

10. We have considered the submissions of both the parties and have gone through the orders of the lower authorities carefully. Grounds No. 1 and 2 of the appeal relates to violation of Rule 46A(3) of the Rules. Before us, the ld. CIT-DR for the revenue submits that the ld. CIT(A) admitted the additional evidence without giving proper opportunity to the Assessing Officer. We find that the submission of assessee filed during the appellate proceedings was forwarded to the Assessing Officer for his remand report. The Assessing Officer furnished his remand report dated 17/07/2023. Though in the remand report; on the issue of interest expenses, the Assessing Officer objected that relevant evidence is not furnished by the assessee. However, we find that the Assessing Officer nowhere in his remand report reported that any show cause notice during the remand proceedings were issued to the assessee for non-submission of relevant details of interest expenses or unsecured loans. Considering the fact that on the submission of assessee, the ld. CIT(A) had given full opportunity to the Assessing Officer to furnish his remand report, thus, we do not find any violation of Rule 46A of the Act. We further find that before granting relief to the assessee on the basis of submissions and evidences, the ld. CIT(A) himself considered the veracity, relevancy and admissibility of such submissions. Therefore, we do not find any merit in the grounds No.1 and 2 of this appeal and affirm the order of ld. CIT(A) qua this issue. In the result, both these grounds of appeal of revenue are dismissed

11. Ground No. 3 of the appeal relates to deleting the addition of interest expenses. We find that the ld. CIT(A) in his order has clearly recorded that there was no logic for making disallowance on account of interest paid to its partners on their outstanding amount in the capital account. Interest paid by assessee is declared by partner in their return of income. We find that the ld. CIT(A) allowed relief to the assessee on proper appreciation of fact in right perspective. Thus, we do not find any merit in the grounds No.3 of the appeal and affirm the order of ld. CIT(A) qua this issue. In the result, this ground of appeal of revenue is dismissed.

12. Ground Nos. 4 and 5 of the appeal relates to deleting the addition of Rs. 3.53 crores. We find that the Assessing Officer made addition by holding that no details were furnished before the Assessing Officer about the identity, creditworthiness and genuineness of transactions of loans, we find that the ld. CIT(A) after obtaining remand report from the Assessing Officer, prepared the summary of opening balance sheet as on 01/04/2014, closing balance as on 31/03/2015 and new funds/loans received during the year. The main contention of assessee was that the loan of Rs. 3.53 crores represent the old balance which is also reflected in the audited balance sheet and no addition with regard to closing balance of old loan can be made under Section 68 of the Act in the assessment order under consideration. We find that ld CIT(A) on verification of the basic facts that majority of the loan was received in earlier years, so no addition can be made in this assessment year (AY 2015- 16). Before us no contrary facts or law is brought to our notice to take other view that the loan which was accepted in earlier years and were reflected in the audited accounts in those assessment years and no adverse view was taken in such assessment years, thereby accepting the transaction in such years, can be added in the year under consideration. In view of the aforesaid factual discussion, we do not find any reason to interfere with the finding of ld. CIT(A) in deleting the addition of Rs. 3.53 crores which we affirm. In the result, both these grounds of appeal of revenue are dismissed.

13. Ground No. 6 of this appeal is an alternative ground of ground No. 4 which do not require any specific adjudication. Ground No. 7 and 8 of this appeal general in nature and do not require any adjudication.

14. In the result, this appeal of the revenue is dismissed.

Order pronounced on 25/09/2024 in the open court.