ITAT Mumbai Deletes Section 68 Addition on Repaid Unsecured Loans Through Banking Channels

ITO Vs Bhagwati Prasad N Rungta (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai, decided the Revenue’s appeal against the order of the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC) for Assessment Year 2015-16, which had deleted an addition of ₹2,09,99,195 made under Section 68 of the Income-tax Act, 1961 in respect of unsecured loans received by the assessee from ten parties.

During the relevant year, the assessee had obtained unsecured loans aggregating to ₹2,09,99,195 from ten entities. To verify the identity, creditworthiness of the lenders and genuineness of the transactions, the Assessing Officer (AO) issued summons under Section 131 and recorded the assessee’s statement on oath. The assessee submitted copies of income tax returns, loan confirmations, bank statements and other supporting documents, and stated that the loans had been repaid with interest through banking channels after deduction of tax at source.

The AO nevertheless treated the loans and accrued interest as unexplained cash credits under Section 68. The AO relied on the assessee’s statement, observed that the assessee had not furnished the mobile number of Shri Manoj Tibrewal, who allegedly assisted in arranging the loans, and noted that several lender companies were based in Kolkata. According to the AO, these circumstances indicated that the entities were engaged in providing accommodation entries rather than genuine business transactions, and that the assessee had failed to establish the identity, genuineness and creditworthiness of the lenders.

Before the CIT(A), the assessee submitted that all loans had been received and repaid through banking channels with interest after deduction of TDS. It also contended that during the assessment proceedings it had furnished income tax return acknowledgements, loan confirmations, bank statements and certificates of registration with NBFCs to establish the identity, creditworthiness and genuineness of the creditors. The assessee argued that the AO had neither conducted further enquiries under Sections 131 or 133(6) nor brought corroborative evidence to disprove the documents produced. It further relied upon several judicial precedents supporting deletion of additions where loans were received and repaid through banking channels after establishing the required ingredients under Section 68.

The CIT(A) accepted the assessee’s contentions. The appellate authority observed that the assessee had furnished all relevant documentary evidence during the assessment proceedings but the AO had ignored those documents while concluding that the identity, creditworthiness and genuineness of the creditors were not proved. The CIT(A) also noted that the loans had subsequently been repaid through banking channels and relied on PCIT v. Ojas Tarmake Pvt. Ltd. and DCIT v. Bhaijee Commodities Private Limited. The CIT(A.) further held that merely because some creditors were Kolkata-based companies did not establish that they were bogus entities. The appellate authority also recorded that the assessee had provided the phone number and other details of Shri Manoj Tibrewal during the assessment proceedings, but the AO had not conducted any further enquiry. It concluded that the addition had been made on assumptions, conjectures and without conclusive enquiry, and therefore deleted the addition of ₹2,09,99,195.

The Revenue challenged the deletion before the Tribunal, while the assessee supported the appellate order.

The Tribunal observed that it was undisputed that the unsecured loans had been received and repaid through banking channels with interest after deduction of TDS. It also found that the assessee had furnished income tax returns, confirmations, bank statements and other documents establishing the identity of the creditors, their creditworthiness and the genuineness of the transactions, thereby discharging the initial onus under Section 68. The Tribunal noted that the AO had questioned the transactions primarily on the basis of certain answers recorded under Section 131 and because some lenders were Kolkata-based companies.

The Tribunal agreed with the CIT(A) that the AO had not carried out further enquiry after receiving the details of Shri Manoj Tibrewal and that merely describing the lenders as Kolkata-based companies could not establish that they were bogus. It also relied upon the Gujarat High Court decision in PCIT v. Ojas Tarmake Pvt. Ltd., which held that where unsecured loans were received and repaid through banking channels, the addition under Section 68 was liable to be deleted. The Tribunal further referred to the Bombay High Court decision in Pr. Commissioner of Income Tax, Central v. Bhupendra Champaklal Dalal, noting that it dealt with circumstances where substantial repayments had been made and the Tribunal’s deletion of the addition had been affirmed.

After considering the facts, documentary evidence and judicial precedents, the Tribunal held that the CIT(A)’s decision deleting the addition was based on the material on record and applicable legal precedents and did not suffer from perversity, impropriety or illegality. Accordingly, the Tribunal dismissed the Revenue’s appeal and upheld the deletion of the addition under Section 68.

Cases Discussed

• Pr. Commissioner of Income Tax, Central Vs. Bhupendra Chmpaklal Dalal (Bombay High Court), (2024) 160 taxmann.com 645 (Bom.)
• Principal Commissioner of Income-tax v/s Ojas Tarmake (P.) Ltd. (Gujarat High Court), (2023) taxmann.com 75 (Guj.)
• Omar Salay Mohamed Salt vs Commissioner Of Income-Tax, Madras (SC), AIR 1959 SC 1238; (1959) 37 ITR 151 (SC)

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been preferred by the Revenue Department against the order dated 02.02.2024, impugned herein, passed by the National Faceless Appeal Center (NFAC)/ Ld. Commissioner of Income Tax (Appeals) (in short Ld. Commissioner) under section 250 of the Income Tax Act, 1961 (in short ‘the Act’) for the A.Y. 2015-16.

2. In this case, the Assessee during the year under consideration, has taken unsecured loans totaling to Rs.2,09,99,195/- from 10 parties as detailed below:

2.1 The AO, therefore, in order to verify the identity and creditworthiness of the lenders and genuineness of the transactions, issued a summon dated 06.12.2017 u/s 131 of the Act to the Assessee, in response to which the Assessee on dated 12.12.2017 attended the Assessing Officer (AO), who recorded the statement of the Assessee on oath u/s 131 of the Act and on the basis of statement, the AO doubted the transactions. Though the Assessee in order to show that the Assessee has repaid the unsecured loans along with interest through banking channel after deducting TDS thereon and in order to prove the identity, creditworthiness and genuineness, submitted various documents before the AO such as copy of ITRs of the parties, confirmation note, bank statement etc., however, the AO mainly on the following reasons “that the Assessee has not furnished the mobile number of Shri Manoj Tibrewal, who assisted the Assessee for getting the loans and the contention of the Assessee that all transactions were carried out through banking channels only, is also not acceptable and the companies from whom the loans have been taken are Kolkata based companies, which prove that none of the companies have engaged in genuine business activity and just providing accommodation entries on unsecured loans to the beneficiaries, the AO ultimately held that in view of the above findings it can safely be concluded that the Assessee has failed to prove the identity, genuineness and creditworthiness of the parties and the loan transactions with these entities are non genuine transactions and was entered to avoid the payment of legitimate taxes” ultimately added the amount of Rs.2,09,99,195/- along with interest accrued in respect of above entities, treating the same as unexplained credits and added back to the income of the Assessee.

3. The Assessee, being aggrieved, challenged the said addition before the Ld. Commissioner and by filing written submissions claimed as under:

“An appeal has been filed in your Honor’s office on 16th January 2018 against the order passed by the A.O. under section 143(3) of the Income Tax Act 1961 (‘the Act’) dated 29.12.2017, copy of Form no. 35 is attached in Paper Book Pg. No. 49 to 51.

At the outset, we would like to state the brief facts of the case as under: –

The appellant is an individual, engaged in the business of trading in cotton. The appellant filed his return of income declaring total income of Rs. 19,03,120/- on 01.10.2015 which is attached in Paper Book Pg. No. 1 to 38. The case of the appellant was selected for scrutiny and a notice u/s. 143(3) of the Act dated 29.12.2017 was issued which is attached in Paper Book Pg. No. 39 to 48. The AO observed that there is large increase in unsecured loans, so the case was selected under limited scrutiny to examine this issue. Subsequently, notice u/s 142(1) of the Act along with the Questionnaire dated 08.5.2014 was issued to the appellant. In response to the notice, the AR of the appellant, Shri Sunil Wankawala, C.A. submitted the required details. Further, with a view to verify the identity, creditworthiness and genuineness of the transaction, a notice u/s 131 of the Act dated 06.12.2017 was issued to the appellant. On 12.12.2017, the appellant had attended the office and statement was recorded by the AO under the oath, in the presence of Shri Sunil Wankawala, AR of the appellant.

The AO asked 25 questions relating to the parties who have given loan to the appellant. The appellant in response, promptly replied to the questions asked by the AO. The extract of the same was reproduced by the AO in para 3.1 of the assessment order which is attached in Paper Book Pg. No. 52 to 55. After going through the statement recorded by the appellant which is reproduced in para 3.1 of the assessment order, your Honour will realise that appellant has clearly and fairly given answers to all the questions put in front of him and accordingly, their stands no chance of any addition to be made u/s. 68 of the Act. Regrettably, despite all the answers by the appellant, the AO with prejudiced mind, went on making addition u/s.68 of the Act. Aggrieved by the same, the appellant has preferred an appeal before your Honour. The ground-wise submission is as under: –

Ground no.1:

“On the facts and circumstances of the case and in law the Appellant respectfully submits that the Learned Assessing Officer has erred in treating the unsecured loans as undisclosed income.”

In this regard, it is stated that the appellant has submitted all the details relating to the unsecured loans during the course of the assessment proceedings. The appellant has also mentioned that the loan was obtained through proper banking channel and the same was also repaid with interest after deducting TDS, during the year through proper banking channel. The same can also be verified from the submission of the appellant dated 26.12.2017, which is attached in Paper Book Pg. No. 56 to 105.

During the course of the assessment proceedings, the appellant filed a letter dated 26.12.2017 wherein the appellant furnished the income tax returns acknowledgements, loan balance confirmation, bank statement and certificate of registration with NBFC, to prove, from whom the loan was obtained during the year. The copy of the said submission is attached supra.

From the above, your Honour can clearly see that the appellant has discharged his onus to prove the identity, genuineness and the creditworthiness of the parties from whom the loan was obtained. Also, it is pointed out that if your Honour may please see para 3.1 of the assessment order wherein questions raised by the AO are mentioned along with the appropriate answer of the appellant, your Honour may clearly see that the AO was of the biased mind just to add the loans as an undisclosed income in the hands of the appellant. In question no. 11, your Honour can clearly see that the AO was asking the appellant about the business association with the parties from whom the loan was obtained. Further, in question nos. 12, 17, 18, 20 and 21 your Honour can clearly see that the AO was trying to fix a nexus with the parties from whom the loan was obtained. The appellant in his answers to these questions, had clearly denied any connections. The answers of the appellant was that, he has obtained the loans from the strong reference of Shri Manoj Tibrewal who was the business associate and who had a good standing in the market. Even during the course of recording of the statement, the AO asked about the phone number of Shri Manoj Tibrewal that was also provided to the AO. From all these questions, it can be clearly ascertained that, the AO was not of an open mind, he was completely prejudicial to make an addition u/s. 68 of the Act. As already mentioned earlier, appellant had given all the answers in detail and details relating to the loan obtained was also provided to the AO vide appellant’s submission dated 26.12.2017 which is already annexed, supra. Here in this context, we would like to state the provisions of section 68 which 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 is 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:

[Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless –

(a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that) where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee- company shall be deemed to be not satisfactory, unless-

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

[Provided also] that nothing contained in the first proviso for second proviso] shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”

From the above, it is quite clear that the appellant, to whom the allegation of cash credit is made, has fully and truly disclosed all the material facts to discharge his onus u/s. 68 of the Act to prove the genuineness of the transactions. The AO on the contrary, has neither performed any further investigation nor has issued any notice u/s. 131 or u/s. 133(6) to gather further corroborative evidences from the parties from whom loan was obtained to substantiate his view. This clearly shows a gross negligence on the part of the AO. The AO did not further investigate in the matter since he was of the prejudicial mind to add the loan obtained as undisclosed income or cash credit of the appellant. Since the appellant has proved the genuineness, identity and creditworthiness of the transactions and the parties from whom the loan was obtained, merely the current year returns do not justify the capacity of individual or a company to advance loan as during the year the persons advancing loan might have suffered loss and might have filed loss return or below taxable income return which does not justify their capacity to advance loan. The AO should have taken further steps and should have collected corroborative evidence to justify his stand. Since the AO has not followed the procedure prescribed under the I.T.Act and the appellant has discharged his onus as required under the Act, the addition made by the AO may please be deleted.

The appellant places reliance on the following judicial pronouncements: –

• • • Decision of Honorable High Court of Gujrat in the case of Principal Commissioner of Income-tax v/s Ojas Tarmake (P.) Ltd., wherein it is held that-

“Where appellant showed unsecured loans received during relevant assessment year and AO made addition on ground that appellant failed to discharge onus of liability as laid down under section 68, since amount of loan received by appellant was returned to loan party during year itself and all transactions were carried out through banking channels, impugned addition was to be deleted.” [Attached in Paper Book Pg. No. 106 to 113]

Decision of Honorable ITAT Delhi Bench “G” in the case of Deputy Commissioner of Income-tax Circle 4(2), New Delhi v/s Bhaijee Commodities Pvt. Ltd. [Attached in Paper Book Pg. No. 114 to 131].

In the light of the above submission and case laws cited supra, we request your Honour to kindly delete the addition of Rs. 2,09,99,195/- made u/s. 68 of the Act.

Ground no.2:

“The Learned Assessing Officer has erred in holding that no proper documents to establish the identity and other credentials of parties from whom loans were taken were not submitted. The Appellant respectfully submits that the bank statements and balance confirmation s of loan parties and Certificates of NBFC and ROC Master data were submitted vide letter dated 26.12.2017. The Appellant therefore humbly prays that this addition is based on conjectures and surmises without appreciating the necessary documents submitted which is against the principles of Natural Justice be deleted.”

In this regard, we would like to state that the appellant during the course of assessment proceedings vide letter dated 26.12.2017, the copy of the acknowledgement is attached supra, for your ready reference, wherein your Honour can see that appellant has discharged his onus by providing all the details, such as income tax acknowledgement, loan balance confirmation, bank statement, certificate of registration with NBFC before the AO. Therefore, there is nothing left on the part of the appellant to prove further. If the AO wanted to inquire further, he has powers under the provisions of the section 131 and section 133(6) of the Act which he could have opted and could have verified whatever is submitted before him. The AO did not do so. This shows clearly the biased mind of the AO.

Further, we would like to state that the loan obtained by the appellant was not interest free. The companies who have provided the loan to the appellant have charged interest @ 12% on the same, which is reasonable. Here we would like to point out Q. no. 16, wherein the AO questioned the appellant as how he was able to obtain the loan without any collateral securities. For that, the appellant clearly mentioned that his business associate, Shri Manoj Tibrewal who was a renowned person and had a very good standing in the market, because of his reference and because of his personal guarantee, the loan was given to him, on which they have charged interest @12%. This clearly shows the genuineness of the transaction and this also clearly indicates that appellant has fulfilled all the conditions as required u/s. 68 of the Act. If the AO was of the other view, he could have further interrogated in the matter through the powers given to him under the law which he did not exercise. This clearly indicates his prejudicial mind in the matter. Therefore, we hold that the addition made may kindly be deleted.

The appellant places reliance on the following case laws: –

• • Vachitra Builders Pvt Ltd Vs ITO (ITAT Delhi), wherein the ITAT Delhi held that addition towards unexplained credits under section 68 of the Income Tax Act unsustainable as genuineness, identity and creditworthiness of the creditors proved (Copy attached in Paper Book Pg. No. 132 to 151).

Commissioner of Income Tax -II vs Kamdhenu Steel & Alloys Ltd. (High Court of Delhi) (Copy attached in Paper Book Pg. No. 152 to 209).

PCIT vs. M/s. Sree leathers (Calcutta High Court) (Copy attached in Paper Book Pg. No. 210 to 223).

Based on the above submission and case laws cited supra, we request your Honour to kindly delete the addition of Rs. 2,09,99,195/-.

Ground no.3:

“The Learned Assessing Officer erred to appreciate as loans were already repaid and communicated vide letter dated 26.12.2017. The Assessee respectfully submits that the Assessing Officer ought to have appreciated that since loans were repaid even before assessment the loans are genuine and not bogus. The Appellant therefore humbly prays that since the said additions is unjust and unfair and against the principles of natural justice be deleted,”

In this regard, it is stated that, we have already submitted our submission before the AO that the loans were duly repaid. The copy of the letter is already attached in the PB Pg. No…….. All the transactions were done through proper banking channel. There was nothing which was undisclosed in the books of the appellant. Everything was reported. The payment was received through banking channel and repayment was also done through proper banking channel. The AO was not able to pinpoint that it was the money of the appellant which he received through inappropriate means. Therefore, this loan transaction which was undertaken and repaid

• • Omar Salay Mohamed Salt vs Commissioner Of Income-Tax, Madras on 5 March, 1959 Equivalent citations: AIR 1959SC1238, (1959) 37 ITR 151 (SC), AIR 1959 SUPREME COURT 1238. (Copy attached in Paper Book Pg. No. 235 to 253).

In the light of the above submission and case law cited supra, we request your Honour to kindly delete the addition”.

4. The Ld. Commissioner, by considering the written submissions of the Assessee and the assessment order, ultimately deleted the addition by allowing the appeal of the Assessee and observing and concluding as under:

“5. Decision: I have considered facts of the case and submission of appellant. In this case, the AO made addition of Rs. 2,09,99,195/-under section 68 of the Act by considering unsecured loan taken by the appellant as unexplained. The details of these loans are as under:

5.1 During the appellate proceedings, the appellant has submitted that the above mentioned loans were received through proper banking channel and the same were also repaid with interest through banking channel after deducting IDS thereon. Further, the appellant submitted copy of ITR, confirmation note, bank statement to prove identity, genuineness and creditworthiness. As per appellant, the AO made addition on the basis of conjuncture and surmises. It is worthy to mention that the above mentioned details were also submitted during the assessment proceedings.

5.2 After perusing the appellant’s submission, it is noticed that the AO has not considered the appellant’s submission and made addition with predetermined mind. As can be seen from the submission filed by the appellant before the AO that the appellant had furnished ITR, Acknowledgment, loan balance confirmation, bank statement and certification of registration with NBFC, however ignoring all these, the AO had concluded that identity, creditworthiness of the creditors and genuineness of transaction has not been proved. Further, since the said loans have been repaid in the subsequent years, the question of getting accommodation entries does not survive anymore as Hon’ble Gujarat High Court has held in the case of PCIT Vs Ojas Tarmake Pvt Ltd by observing that-

“Where appellant showed unsecured loans received during relevant assessment year and AO made addition on ground that appellant failed to discharge onus of liability as laid down under section 68, since amount of loan received by appellant was returned to loan party during year itself and all transactions were carried out through banking channels impugned addition was to be deleted”.

Similar view has been taken by the Hon’ble ITAT, Delhi in the case DCIT VS Bhaijee Commodities Private Limited as referred by the appellant in his submission.

5.3. Moreover, the AO has said that the said creditor companies are Kolkata based companies. This also shows that the AO has done addition only on assumption basis. Merely saying Kolkata based companies does not mean that these are the bogus companies. In the assessment order, the AO has mentioned that the appellant could not demonstrate that how these companies have advanced such loans without any collateral securities when the assessee either do not have any business relation with them or he did not met personally any of them but here the fact is that in his statement recorded before the AO, the appellant has clearly stated that he has obtained loan from those parties through Shri Manoj Tibrewal who has been his business associate since long and who had good standing in the market. The appellant also provided phone no and other details of Shri Manoj Tibrewal to the AO while assessment proceedings. However, the AO did not carry out further enquiry to substantiate his view that the loans taken by the appellant are not genuine. Mere discussing the issue theoretically without any corroborative evidence and passing sweeping remarks serve no purpose and accordingly, any addition /disallowance made on the basis of surmises and conjuncture is not sustainable. The AO has not done conclusive inquiry before making this addition.

5.4 As the loan transaction which was undertaken and repaid through the proper banking channel cannot be treated as undisclosed income of the appellant under section 68 of the Act. In view of the above discussion, it is held that the AO has wrongly made addition of Rs.2,09,99,195/- and the same is hereby deleted. Accordingly, appeal is allowed.”

5. The Revenue Department, being aggrieved, is in appeal before us. The Ld. D.R. supported the assessment order, whereas the Ld. A.R. supported the impugned order.

6. Heard the parties and perused the material available on record and given thoughtful consideration to the rival claims of the parties. It is admitted fact that the Assessee had received the unsecured loan Rs.2,09,99,195/- through banking channel and also repaid the same while deducting TDS thereon, through banking channel itself. It is also a fact that the Assessee has duly submitted the copy of ITR, confirmation note, bank statement etc. to prove the identity and creditworthiness and genuineness of the transaction and therefore prima-facie discharged its onus cast u/s 68 of the Act. However, still the AO doubted the transactions on some of the answers given by the Assessee to the questions raised by the AO, while recording statement u/s 131 of the Act and by considering the fact that some of the companies from whom the Assessee has taken the loans are based at Kolkata and the Assessee has not provided even the mobile number of Shri Manoj Tibrewal during the assessment proceedings.

6.1 The Ld. Commissioner while deleting the addition in hand, not only considered the filing of the relevant documents for discharging the onus cast upon the Assessee u/s 68 of the Act but also considered the fact that the Assessee has duly provided the phone number and other details of Shri Manoj Tibrewal to the AO during the assessment proceedings and also claimed that Shri Manoj Tibrewal has been his business associate since long, who had good standing in the market and therefore arranged the unsecured loans, however, the AO did not carry out further enquiry to substantiate his view that the loans taken by the Assessee are not genuine. Further, merely saying Kolkata based companies does not mean that these are bogus companies. The loan transactions were carried out and repaid through proper banking channel in the subsequent years and therefore the question of getting accommodation entries does not survive anymore in view of the judgment passed by the Hon’ble Gujarat High Court in the case of PCIT vs. Ojas Tarmake Pvt. Ltd. (2023) taxmann.com 75 (Guj.) wherein it was held as under:

“Where appellant showed unsecured loans received during relevant assessment year and AO made addition on ground that appellant failed to discharge onus of liability as laid down under section 68, since amount of loan received by appellant was returned to loan party during year itself and all transactions were carried out through banking channels impugned addition was to be deleted”.

6.2 We have again given thoughtful considerations to the peculiar facts and circumstances of the case and the determinations made by the authorities below and the relevant documents filed by the Assessee and raising the factual and legal issues and the plausible explanation and are of the considered view that the decision of the Ld. Commissioner as observed above, is not only based on the relevant documents which have been produced by the Assessee to establish identity and creditworthiness of the parties from whom the Assessee had taken the loans and genuineness of the transactions but also based on the legal precedents and the fact that the Assessee has taken the unsecured loan through banking channel and repaid the loan amount along with interest after deducting TDS thereon, through banking channel itself and then only deleted the addition under consideration. We observe, as demonstrated by the Ld. Counsel of the Assessee that the Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax, Central Vs. Bhupendra Chmpaklal Dalal (2024) 160 taxmann.com 645 (Bom.) (6^th March 2024) has also dealt with the fact that where major portion of the credit has been repaid during the year and the AO has accepted the debit entries of trading transactions as genuine and the creditor was having an opening balance and has paid the interest regularly and credit is continuing from the earlier years. The Hon’ble court on the said facts ultimately affirmed the decision of the Tribunal in deleting the addition.

6.3 On the aforesaid analyzations, decision of the Ld. Commissioner in deleting the addition in hand does not require any interference, as the same is neither suffered from any perversity or impropriety and nor illegality.

7. In the result, the appeal filed by the Revenue Department is dismissed.

Order pronounced in the open court on 22.01.2025.