ITAT Remands Unsecured Loan Addition to CIT(A) on Cost; Deletes One Addition

ITAT Remands Unsecured Loan Addition to CIT(A) on Cost; Deletes One Addition

Issue

Whether additions made under Section 68 for unsecured loans totaling Rs. 40,00,000/- are sustainable when the assessee claims that the funds were routed through banking channels and repaid, but failed to produce complete documentary evidence before the lower authorities, producing them only before the Tribunal.

Facts

• The Loans: The assessee firm received unsecured loans from four parties:

  1. Balkishan Damani HUF: Rs. 18,00,000/-

  2. Chunilal Kothari HUF: Rs. 7,00,000/-

  3. Kanhaiyalal Rathor HUF: Rs. 10,00,000/-

  4. Smt. Sushma Kabra: Rs. 5,00,000/-

• AO’s Addition: The AO treated the entire Rs. 40 lakhs as unexplained cash credits u/s 68, citing lack of proof regarding identity, creditworthiness, and genuineness.

• Assessee’s Claim:

  • For the HUFs (Total Rs. 35 Lakhs): The assessee argued that these HUFs had earlier lent money to a partner (Shri Sanjay Jaju). Shri Sanjay Jaju repaid these amounts to the HUFs, who then lent the same funds to the assessee firm.

  • For Smt. Sushma Kabra (Rs. 5 Lakhs): The loan was received by cheque and repaid within the same financial year (on 12.02.2012).

• New Evidence: Before the Tribunal, the assessee produced balance sheets, confirmations, and bank statements to prove the “fund flow trail” involving the partner and the HUFs, which were not available before the AO/CIT(A).

Decision

• For HUF Loans (Rs. 35 Lakhs): The Tribunal remanded the matter back to the CIT(A).

  • It noted that the crucial evidence explaining the complex fund flow (Partner -> HUF -> Firm) was never verified by the lower authorities.

  • To serve the interest of justice, the CIT(A) was directed to verify the complete chain of transactions and pass a fresh order.

  • Condition: The remand is subject to the assessee paying a cost of Rs. 3,000/- to the Prime Minister’s Relief Fund. Strict directions were given to produce all documents at the first hearing.

• For Sushma Kabra Loan (Rs. 5 Lakhs): The Tribunal deleted the addition.

  • It found that the lender was a regular taxpayer, the source was explained (funds from husband), and the loan was fully repaid in the same year. The Revenue failed to bring any contrary material.

Key Takeaways

• Additional Evidence at ITAT: Tribunals may admit new evidence and remand the case if it goes to the root of the matter (proving source of funds), but often impose costs for earlier non-compliance.

• Fund Flow Trail: Proving the immediate source is not enough if the creditworthiness is doubtful. Demonstrating the complete trail of funds (e.g., repayment by a partner enabling the loan to the firm) is critical.

• Repayment as Proof: The fact that a loan was repaid through banking channels shortly after being taken is strong evidence of its genuineness.

• Section 68 Verification: The onus is on the assessee to prove identity, creditworthiness, and genuineness. Failure to produce documents at the assessment stage justifies an addition, but appellate authorities can grant a second chance for verification.