Meager or nil income of the lender no reason to make addition u/s 68 treating it bogus entry- ITAT

Meager or nil income of the lender no reason to make addition u/s 68 as bogus enty. Income may be a good reason for examining source but certainly not conclusive.

 ABCAUS Case Law Citation:
ABCAUS 2963 (2019) (05) ITAT

In the instant appeal filed by the Revenue before the Tribunal, the solitary grievance was the deletion made by the CIT(A) of the addition on account of unexplained cash credit u/s 68 of the Income Tax Act, 1961 (the Act).

During the course of scrutiny assessment proceedings, the AO found that the assessee had received unsecured loans from five companies.

The assessee was asked to justify the unsecured loans in the light of the provisions of section 68 of the Act. In its reply, the assessee furnished the master data of all lender companies, acknowledgement of Income-tax returns, bank statement and confirmation of account of lender companies. The assessee also filed affidavits from the lender companies in respect of unsecured loans along with audited financial statements of lender companies.

The AO examined the documents furnished by the assessee and found that out of five lender companies, three companies have nil income and the income of remaining two companies was miniscule. On examining the bank statements, the AO noticed that prior to the issue of cheques by these lender companies to the assessee, similar amount was found to be deposited/transferred from other accounts.

The AO issued notices u/s 133(6) of the Act which were returned back by the postal authority with remarks “Incomplete Address”.

The assessee was confronted with this who filed fresh affidavits alongwith the current addresses of the lender companies. The AO did not accept the genuineness of the affidavits and deputed Inspector for field enquiry.

The Inspector in his report stated that these companies are functionally non-existent and no business activity was carried out by these companies.

The AO further found that these lender companies were operated by one person who had admitted himself as entry provider in his statement recorded an oath by the Investigation Wing during the course of search and seizure operation.

The AO finally concluded by holding that the assessee has failed to discharge its onus of establishing the identity, genuineness and creditworthiness of the source of funds introduced in his books of account and added amount u/s 68 of the Act.

The Assessee carried the matter before the CIT(A) who after analyzing each lender company came to the conclusion that the source of the loan given by these companies to the assessee had been explained. Accordingly he deleted the addition.

The Tribunal stated that that income may be a good reason for examining the source of a person but it is certainly not the “be all end all”. The Tribunal explained where a person purchases house in excess of his income, there can not be, merely on the basis of his income any addition as unexplained investment because that person might have taken housing loan to purchase the flat.

Applying the same analogy, the Tribunal while examining the balance sheet of each of the lender company found that each of the lender company had generated either short term borrowings or have liquidated current assets which are more than sufficient to extend the loan to the assessee company.

The Tribunal noted bank statements of the lender companies did not show that any cash was found to be deposited prior to the date of the issue of cheques to the assessee company, this conclusively proved that the assessee had not purchased cheques by paying cash to the lender companies.

Also the Tribunal noted that the banks have responded to the notice u/s 133(6) by furnishing the Articles of Association, Memorandum of Association, bank opening forms of the lender companies which clearly demonstrated that all the companies have fulfilled KYC Norms of banks. Therefore, the identity of these lender companies had been established beyond doubts.

The Tribunal opined that the genuineness of the transaction could be safely concluded as all the transactions had been done through proper banking channel. Also the sources of funds were clearly established from the financial statements of these lender companies irrespective of their meager income or nil income.

Accordingly, the Tribunal opined that the assessee had discharged the onus cast upon it by the provisions of section 68 of the Act and, therefore, there was no reason to interfere with the findings of the CIT(A).

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