Transaction Carried Through Banking Channel Is Not Sufficient To Escape Shackles Of Sec 68

When hearing a matter in which the genuineness of loans given to the Assessee, and the creditworthiness of the lenders had been questioned, the ITAT Bench at Ahmedabad, observed that a genuine transaction must be proved to be genuine from all prospective and not merely on paper & the documentary evidence should not provide a mask to cover the actual transaction or designed in way to present the transaction as true but the same is not.

The Tribunal also clarified that genuineness of transaction could be proved by submitting confirmation of the party along details of mode of transaction but merely showing transaction carried out through banking channel is not sufficient. (Para 12.6)

Noting that part of the loan amount was received from a non-resident creditor, a Division Bench of Mr. Waseem Ahmed, Accountant Member, and Mr. TR Senthil Kumar, Judicial Member, observed that where an assessee has established identity and creditworthiness of a credit in satisfaction of the provisions of Section 68, then loan amount cannot be deemed as unexplained only because the assessee has not got the approval from competent authority to accept foreign direct remittance. (Para 12.8)

Hence the violation of certain other statute cannot be used to draw an inference that the amount received as loan represents unexplained cash credit and deemed income of the assessee under the provisions of section 68 of the Act, the Bench added.

The Appellants-Assessees were represented by SN Soparkar, Senior Advocate, whereas the Respondent-Revenue was represented by Vijay Kumar Jaiswal, Commissioner of Income Tax (Departmental Representative).

Briefly, the Assessee, a person engaged in the business of civil construction, underwent assessment for the relevant Assessment Year. The Assessing Officer (AO) noted that the assessee received an unsecured loan of about Rs 2.38 Crores from a person. The Assessee claimed the lender to be a close friend of his who was a non-resident, and that the amount was loaned interest-free to fund an ongoing project being developed by the Assessee. While the Assessee furnished relevant details of the lender, the AO observed that address details of the lender were missing, as were income details or the creditworthiness of the lender. Hence the AO observed that just because the loan amount was received through banking channels and a confirmation letter was submitted, the onus on the Assessee, as per Section 68 of the Income Tax Act 1961, was not satisfied. Thus, the AO proceeded to frame additions to the assessee’s income.

On hearing the arguments of both sides, the Bench observed Section 68 of the Act fastens the liability on an Assessee to make proper and reasonable explanation regarding the nature and sources of sum credited in the books of accounts to the satisfaction of the AO. The Assessee is liable to provide proof of the identity of the lenders, establish the genuineness of the transactions and creditworthiness of the parties. (Para 12)

In respect of amount received from one Mr. Navjit Singh Anand, the Bench observed – “…the assessee discharged primary onus cast upon him by furnishing copy of PAN, confirmation and Bank statement of Sri Navjit Singh Anand and onus shifted on the revenue to bring contrary material. However, the Revenue failed to discharge its onus before treating the credit of loan from Sri Navjit Singh Anand as unexplained cash credit as per section 68 of the Act which needs to be set aside/deleted…”. (Para 12.6)

In respect of the amount received from one Salim Hamid Memon, the Bench observed that – “…the allegation of the revenue that there is no formal agreement, repayment schedule cannot be the basis for treating the credit of loan as deemed income of the assessee under section 68 of the Act. As such it is the understanding between the assessee and loan parties whether to enter into formal agreement or not and how to & when to make repayment of such loan. Similarly, not filling cash flow statement of loan party does not tantamount the loan party is not genuine or does not have sufficient credit worthiness….” (Para 12.7)

Regarding he amount received from a foreign creditor, the Bench observed – “…Coming to the issue of approval from competent authority for accepting fund from NRI, we are of the considered opinion when the identity and credit worthiness of creditor is established, genuineness of transaction is also not in doubt as the party has confirmed and the transaction was carried out through banking channel by way foreign direct remittance. Then, such amount cannot be deemed as unexplained since the assessee has not got the approval from competent authority to accept foreign direct remittance. As such, it may the violation RBI which is independent to Income Tax Act. But the violation of certain other statute cannot be used to draw an inference that the amount received as loan represents unexplained cash credit and deemed income of the assessee under the provisions of section 68 of the Act…”. (Para 12.8)

With these observations, the Bench held that the Assessee had satisfied the provisions of Section 68 of the Act and had proven the identity of the creditors and sufficiently established their creditworthiness. Hence the Bench directed the AO to quash the additions framed.

Cause Title: Shri Niteshkumar Maganbhai Patel Vs The ITO, Ward-1(2)(4), Vadodara [ITA No. 1763/Ahd/2019 / 2023-Enterslice-1-ITAT-Ahm]

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Niteshkumar-Maganbhai