Section 68 Addition Cannot Be Made Merely Because AO Doubts Source From Where Lenders Obtained Funds: ITAT

The ITAT Mumbai deletes the Rs 17.08 crore unsecured loan addition, holding that the tax authorities cannot make additions merely because they doubt the source from which lenders have obtained their funds to lend.

The key issue raised before the ITAT Mumbai was whether the unsecured loans received by the assessee (Savita Homemakers LLP) can be treated as unexplained cash credits under Section 68 of the Income Tax Act merely because some lender companies had themselves received the loans’ funds from alleged shell companies.

In the present case, the assessee’s case was reopened by the tax authorities based on an oral representation made by one R. Sangan in the Prime Minister’s Office (PMO), where Mr Madan Jain and family and his Associate firms, along with the assessee, were alleged to have evaded income tax. Subsequently, a notice under Section 148 was issued. The assessee contested the validity of the reassessment. However, the objection was rejected by the AO.

During the reassessment proceedings, the tax authorities had noted that during the year in consideration, the assessee had received certain unsecured loans amounting to Rs 67.08 crore from eight distinct entities. Thereafter, the assessee was asked to explain the source of these credits. After examining the documents furnished by the assessee, the tax authorities noted that “part of the loan advanced by the lenders were sourced from various other parties who have typical characteristics of accommodation entry providers.” As a result, the AO accepted a major portion of the unsecured loans; however, it considered Rs 17.08 crore as non-genuine under Section 68 of the Income Tax Act.

Thereafter, the aggrieved assessee approached the ITAT Mumbai. The tribunal, when analysing the case, noted that the assessee had furnished all the relevant documents proving the identity of lenders, the creditworthiness of lenders and the genuineness of loan transactions. Further noted that the tax authorities had not conducted any meaningful enquiry under Section 131 or 133(6) of the Act, except for assuming some lender companies obtained their funds from some allegedly bogus companies. However, it also failed to prove the non-genuineness of lender entities and also could not prove that the documents furnished by the assessee were false.

For the relevant assessment years, the assessee was not required to prove the “source of source” once the primary requirements of Section 68 were satisfied. As a result of the aforementioned findings, the tribunal deleted the impugned Section 68 addition and corresponding interest disallowance, holding an addition under Section 68 cannot be sustained merely because the Assessing Officer doubts the source from which the lenders obtained their funds.