Once Cash Deposits In Bank A/C Of Lender Firm Is Accepted As Coming From Explained Sources, No addition Is Permitted U/s 68 As Unsecured Loan: Delhi ITAT

Section 68 of 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.

Finding that lender firm's AO did not find anything alarming with regard to cash deposits made in its bank account and did not doubt about its sources, the Division Bench comprising Amit Shukla (Judicial Member) and M. Balaganesh (Accountant Member) observed that “once the cash deposits made in the bank account of the lender firm had been accepted as coming from explained sources by the revenue under scrutiny assessment of the lender, the revenue cannot take a divergent stand in the case of the Assessee that those cash deposits had emanated out of undisclosed sources of the Assessee which had been deposited in the lender's bank account and monies received by Assessee in the form of unsecured loan”.

As per the brief facts of the case, the Assessee is engaged in the trading of cloth business and commission business thereon. The AO noticed that during the impugned AY 2016-17, the Assessee had received a loan of Rs 50 lacs from one Banwari Lal Naresh Kumar. The AO observed that there were cash deposits in the bank account of the lenders which was the immediate source of credit for the lender and hence, sought to disbelieve the loan given to the Assessee. The AO accordingly made addition of Rs. 50 lacs u/s 68 and disallowed the interest expense thereon.

The Bench noted that partner of the lender firm was examined under Section 131(1A) wherein he duly explained the sources of cash deposits made in the bank account of his partnership firm and confirmed the fact of advancing loan to the Assessee.

The Bench also noted that in Section 131(1A) statement it was stated that cash deposit made in the bank are out of cash generated on a daily basis out of sales and hence, no additions were made in the hands of the firm by its AO.

The scrutiny assessment proceedings of the lender firm for the very same assessment year itself explains the creditworthiness of the lender and genuineness of the loan transaction with the Assessee, added the Bench.

The Bench further found that Revenue overlooked the materials submitted by the Assessee which also stood confirmed by the lender in the statement under Section 131(1A), especially the scrutiny assessment order of the lender firm for the very same impugned AY wherein the returned income was accepted by the AO of the lender firm and the AOs of the Assessee as well as the lender firm fell under the same range.

Hence, the ITAT allowed the Assessee's appeal and concluded that Assessee had duly proved the three necessary ingredients of section 68 in respect of unsecured loan.

Counsel for Taxpayer: K. Sampath & V. Rajakumar

Counsel for Department: Vivek Upadhyay

Case Title: Devki Nandan Maheshwari Vs ACIT

Case Number: ITA No. 7239/Del/2019

Click here to read/ download the Order