Merely because summons issued to some creditors was not served or they failed to attend before AO, is no ground to treat unsecured loans as non-genuine

Recently, the Gujarat High Court held that, merely because summons issued to some of creditors could not be served or they failed to attend before AO, is no ground to treat loans taken by assessee from those creditors as non-genuine.

The genuineness of the transaction is proved by the fact that the payment to the assessee as well as repayment of the loan by the assessee to the depositors is made by account payee cheques and the interest is also paid by the assessee to the creditors by account payee cheques, added the High Court.

The Division Bench of Justice Biren Vaishnav & Justice Bhargav D Karia observed that when all the loans were received by the assessee by account payee cheques and the repayments of loans have also been made by account payee cheques along with the interest in relation to those loans, it is rather strange that although the AO has treated the cash credits as non-genuine, he has not made any addition on account of interest claimed/paid by the assessee in relation to those cash credits, which has been claimed as business expenditure and has been allowed by the AO.

Briefly, on verification of the Audit Report and Balance-sheet of the assessee, it was noticed that assessee had shown particulars of unsecured loan / deposits received during the year and outstanding at the end of year under consideration. The AO therefore issued letters u/s 133(6) on the creditors of unsecured loans. Since assessee failed to establish the loan transactions by all sort of parameters as laid down in section 68, the AO made addition of Rs.6,10,35,513/- to the total income u/s 68 as an unexplained cash credit of the assessee company. Penalty proceedings u/s. 271(1)(c) were also initiated separately.

After considering the submission, the Bench noted that in respect of some of the creditors the interest was credited to their accounts/paid to them after deduction of tax at source and information to this effect was given in the loan confirmation statements by those creditors filed by the assessee before the AO.

Thus, the assessee had discharged the initial onus which lays on it in terms of section 68 by proving the identity of the creditors by giving their complete addresses, GIR numbers/permanent accounts numbers and the copies of assessment orders wherever readily available, added the Bench.

The Bench found that the assessee has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT.

The Bench therefore went on to clarify that six creditors who appeared before the AO have admitted having advanced loans to the assessee by account payee cheques.

Therefore, in case the AO was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69, concluded the Bench.  

Cause Title: Pr CIT vs. Ojas Tarmake [R/Tax Appeal No. 533 of 2023 / 2023-Enterslice-22-HC-Guj-IT]

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Pr.CIT-verses-OJAS-TARMAKE