'Unsecured Loans' Can't Be Treated As Income U/s 68 Once Legitimacy Of Credits Stands Proved: Ahmedabad ITAT

Section 68 of the Income tax Act aims to ensure individuals and corporations transparently disclose their income by addressing unexplained cash credits in their books of accounts, placing the responsibility on the taxpayer to prove the legitimacy of such credits.

While noting that the AO's report did not provide substantial adverse comments on the identity and genuineness of the transactions, the Division Bench of Siddhartha Nautiyal (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) observed that “AO's reliance on the principle of human probability without concrete evidence does not warrant the additions made under sections 68 and 69C”. (Para 6.3)

Facts of the case:

The assessee, engaged in the business of Non-Banking Finance Companies, had taken unsecured loan amounting to Rs.55,05,27,020/- and paid interest thereon amounting to Rs.3,94,15,139/-. When the AO asked for details of the loan creditors, the assessee submitted the list of such parties as well as confirmation from them. However, notices could not be served to these lenders as these were found to be non-existing on their addresses. The Departmental Inspector found that the business activity of the assessee was carried out in State of Gujarat, but the unsecured loans were taken by the assessee from the parties based in Kolkata.

The AO further observed that these companies were declaring negligible income in their returns and these are mere paper companies operated by entry operator for the purpose of providing accommodation entries. Accordingly, the AO added the peak credit in the total income of the assessee u/s.68 and treated the interest paid to these parties to Rs.78,97,385/- as unexplained expenditure u/s 69C of the Act.

Observations of the Tribunal:

The Bench referred to the decision of Gujarat High Court in case of DCIT Vs. Rohini Builders [256 ITR 360], where it was held that mere non-compliance of summons by some creditors cannot be a ground to treat the loans as non-genuine.

The Bench also reiterated while discussing Section 68, that the unsatisfactoriness of the explanation does not automatically result in deeming the amount credited as the income of the assessee.

Going further, the Bench found that the assessee has provided substantial evidence to establish the identity, genuineness, and creditworthiness of the loan creditors, whereas, the AO's conclusions were largely based on assumptions and the principle of preponderance of human probability, without substantial evidence contradicting the assessee's claims.

The assessee also complied with statutory requirements, including the provision of confirmations, ID proofs, bank statements, and tax return details of the loan creditors, added the Bench while highlighting that the repayment of loans in subsequent years further supports the genuineness of the transactions.

Hence, the ITAT dismissed the Revenue's appeal and upheld the action of the CIT(A) in deleting the additions under sections 68 and 69C of the Act.

Counsel for Revenue/ Appellant: Kamlesh Makwana

Counsel for Assessee/ Respondent: Vartik Chokshi

Case Title: DCIT vs. Tripoli Management

Case Number: ITA No.5/Ahd/2024

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