Onus to prove source of source of loan/ borrowing mandatory from AY 2023-24

Onus to prove source of source of a loan/borrowing mandatory from AY 2023-24

In a recent judgment, ITAT Raipur has held that under section 68, onus to prove source of source of a loan or borrowing is mandatory w.e.f. 01.04.2023 i.e. from A.Y 2023-24

ABCAUS Case Law Citation:
ABCAUS 4086 (2024) (06) ITAT

Important Case Laws relied upon:
CIT vs. Lovely Exports Pvt. Ltd. (2008) 216 CTR 195 (SC)

In the instant case, the Income Tax Department had challenged the order passed by the CIT(A) in inter alia deleting the addition made u/s 68 made by the Assessing Officer (AO).

The assessee company was engaged in the business of real estate. The case of the assessee company was selected for scrutiny assessment u/s 143(2) of the Act. During the course of the assessment proceedings, it was inter alia observed by the AO that the assessee company had during the subject year had raised an unsecured loan from a Kolkata-based company (the lender) and also paid interest on the said loan after deduction of TDS.

The A.O. to verify the authenticity of the claim of the assessee company of having raised a genuine loan from the aforementioned company directed it to place on record copies of the return of income, balance sheet, bank statement, and confirmation of the lender.

In compliance, the assessee company filed requisite details/documents as were called for by the A.O. On verification of the return of income of the lender company, the A.O observed that the latter had for the subject year returned only a meagre income, which, as per him was not commensurate with the loan that was claimed to have been advanced to the assessee company.

The A.O further observed that the assessee company had received a much larger amount as loan from the aforementioned lender company out of which approximately half was returned to the latter during the subject year. Also, the A.O. observed that a perusal of the bank account of the lender company revealed deposits and immediate withdrawals of identical amounts leaving behind a low balance in the said account.  Apart from that, the A.O. from a perusal of the financial statement of the lender company, observed that it had not carried out any significant business operations during the subject year.

Accordingly, the A.O based on his aforesaid observations held the amount received by the assessee company from the lender company was as an unexplained cash credit.

The Tribunal observed that AO had drawn adverse inferences as regards the authenticity of the loan transaction primarily for two reasons, viz. (i) that the income returned by the lender company that had carried out insignificant business operations during the subject year was not commensurate with the advance stated to have been given to the assessee company; and (ii) a perusal of the bank statement of the lender company revealed that the amounts credited/received during the subject year were immediately invested with the assessee company.

The Tribunal further observed that the A.O. to verify the authenticity of the loan, required copies of return of income, balance sheet, bank statement, and confirmation of the lender company, which were duly submitted.

The Tribunal opined that as the assessee company had placed on record documentary evidence substantiating the authenticity of its claim of having raised a genuine loan from the aforementioned lender and, thus, had discharged the primary onus that was cast upon it, therefore, the A.O without dislodging the said documentary evidence and proving to the contrary could not have summarily based on his generalized observations drawn adverse inferences as regards the authenticity of the subject loan transaction.

The Tribunal opined that as observed by the CIT(Appeals), on a simplicitor basis that the lender company had returned a low income during the subject year would not suffice for treating the loan transaction as sham/bogus. Considering the totality of the facts, adverse inferences as regards the authenticity of the transaction under consideration could not have been drawn by the A.O. on the standalone basis that the lender company had returned a low income for the subject year.

As regards the creditworthiness of the lender company. The Tribunal concured with the CIT(Appeals) that as the lender company had advanced the loan out of capital and reserves available with it, therefore, its creditworthiness to advance the subject loan to the assessee company was established.

The Tribunal further noted that the AO had observed that the amount of credits/receipts by the lender company in its bank account were primarily utilized for advancing the loan to the assessee company, therefore, the claim of the assessee company of having raised a genuine loan from the lender company did not merit acceptance.

The Tribunal observed that although the lender company had received certain amounts in its bank account through transfer but, on no occasion, there were any cash deposits in the said account which, thereafter, had found its way as an investment with the assessee company. Also, neither was it the case of the department nor discernible from the record that the amounts received/credited in the bank account of the lender company was the unaccounted money of the assessee company that was through circuitous transactions routed back to its coffers in the garb of the aforesaid loan transaction.

Regarding the identity of the lender company, the Tribunal observed that the lender company was registered as a Non-Banking Finance Company (NBFC) with the RBI, and was filing ITR and assessed. Further, it was an in-house company of the assessee, wherein the family members of the directors of the assessee company were the directors in it. Accordingly, the identity of the aforementioned lender company was established beyond doubt.

The Tribunal pointed out that onus to prove the source of source of a sum credited in the books of accounts consisting of a loan or borrowing or any such amount, by whatever name called, had been made available on the statute vide the “1st proviso” (re-numbered) to Section 68 of the Act by the Finance Act, 2022 w.e.f. 01.04.2023 i.e. from A.Y. 2023-24, but in the absence of applicability of the same during the subject year, the assessee company remained under no obligation to put forth an explanation regarding the source of source of the subject loan which it had raised from the lender company.

Accordingly, the Tribunal held that that the loan raised by the assessee company from the lender company could not have been held as unexplained cash credit u/s. 68 of the Act.

As a result, ground of appeal raised by the revenue was dismissed.

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