There can be plethora of reasons for failure to execute a formal loan agreement reduced in writing. The need for written agreement should be best left to the judgment of the parties.
In a recent judgment, ITAT Delhi observed that there can be plethora of reasons for failure to execute a formal loan agreement reduced in writing. The need for written agreement should be best left to the judgment of the parties. Besides, oral contracts are also recognized in law and more so, for the purposes of income tax proceedings, neither the existence of any written agreement itself is determinative of character of transaction per se nor absence thereof prevents the AO to assess the circumstantial and surrounding circumstances to arrive at a lawful conclusion.
ABCAUS Case Law Citation:
4515 (2025) (04) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in directing the Assessing Officer (AO) to make addition as benefit/perquisite under section 28(iv) of the Act, being the fair market value of the shares received by assessee as loan from during the year under consideration.
The appellant assessee was a limited company engaged in the business of stock broking under license from NSE/BSE and primarily derived income from trading in its own account as well as from brokerage on transactions carried out on behalf of its constituents.
During the year under consideration, the assessee, as part of its regular business, had received 40,00,000 equity shares of DHFL from another company (the transferor company).
Out of total 40 lakh shares, 1,50,000 shares were sold at Stock Exchange during the year at the prevailing market price and the corresponding amount was paid to the transferor. The remaining shares were ultimately recorded in the books of account at the market value on the date of receipt of loan, with a corresponding credit as ‘unsecured loan’ from transferor company.
The aforesaid shares were, thereafter, pledged for loan or margin to NBFC lenders or Brokers. However, there was a continuous decline in share-price of DHFL which went very low by end of the relevant financial year. As a result of steep decline in the share-price of DHFL, the lending NBFC and Brokers, sold the shares.
The unprecedented fall, resulted in substantial loss to the assessee with respect to its own holding of shares as also on account of forced sale of shares of DHFL at substantial loss, where after reducing cost of borrowing, assessee suffered a huge loss on the said shares and an overall loss as per the books of account.
Considering that the assessee had suffered losses, its net-worth was eroded and it had become illiquid, the corresponding loan to transferor company remain unpaid and continued to remain outstanding under the head ‘unsecured loans’ in the books of account for the relevant Assessment Year.
The assessee filed return of income declaring loss as per the normal provisions of the Act. The Assessee also declared Nil tax liability u/s 115JB also in view of negative book profits.
A survey u/s 133A of the Act was conducted and the return filed by the assessee was selected for scrutiny by issuing notice under section 143(2) of the Act.
As per the assessment order, the AO called for explanations towards receipt of certain equity shares of a company from another company. The AO however, did not accept the explanation offered by the assessee on such transactions and doubted the identity of transferor company, the genuineness of the transaction and the creditworthiness/capacity of the transferor company to hold such shares as unexplained cash credit in the hands of the assessee within the meaning of section 68 of the Act.
Moreover, the AO computed the value of those shares by applying highest prevailing price per share on the date of respective credits of shares. Consequently, while framing the assessment order u/s 143(3) of the Act, the AO made a substantial addition u/s 68 of the Act.
The CIT(A) agreed with the contention of the assessee that addition u/s 68 of the Act could not be made in respect of the impugned transactions in the light of replies and documents filed by the assessee to establish the identity, genuineness of transactions and creditworthiness of the transferor company.
However, while reversing the action of the AO, the CIT(A) went on to a different tangent and alleged that the transaction for transfer of shares was not a loan transaction. That the loan transaction was an after though but and it was a normal business transaction between transferor company and the assessee, owing to huge fall in the value of shares and since the assessee had suffered loss, nothing was payable by the assessee to transferor. Thus, in the absence of liability to pay any amount to the transferor company, it resulted in a ‘benefit’ to the assessee taxable u/s 28(iv) r.w.s. 41(1) of the Act.
The Tribunal expressed inability to understand as to how the transfer of shares to an unconnected company per se will result in any benefit to the recipient. The remission of liability cannot be assumed in this case. It was beyond understanding as to how a lender will exonerate a borrower from such liability merely because losses have been incurred by the assessee resulting in some financial incapacity to pay back the loan/liability. There was nothing on record to arrive at a conclusion that the transferor company had waived its right in any manner to recover shares or equivalent value thereof from the recipient assessee.
The Tribunal observed that one of the reasons that weighed with the CIT(A), there was no formal loan agreement for such staggering value of shares handed over by an unknown party to the assessee and thus the onus was squarely on the assessee to establish character of such receipts.
The Tribunal observed that there can be plethora of reasons for failure to execute a formal loan agreement reduced in writing. The need for written agreement should be best left to the judgment of the parties. Besides, oral contracts are also recognized in law and more so, for the purposes of income tax proceedings, neither the existence of any written agreement itself is determinative of character of transaction per se nor absence thereof prevents the AO to assess the circumstantial and surrounding circumstances to arrive at a lawful conclusion.
The Tribunal opined that neither there was any material to suggest waiver from recovery of share value from the end of the lender nor can it be inferred in the light of human probabilities. Hence, no ‘benefit’ can be said to have accrued to the assessee for the purposes of s. 28(iv) of the Act as sought to unrealistically concluded by the CIT(A). The action of the CIT(A) did not thus stood to reason and is apparently based on figment of imagination.
Accordingly, the appeal of the assessee was allowed.
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