ITAT prohibits the addition of unsecured loan under section 68 of the Income Tax Act
Devki Nandan Maheshwari Vs ACIT [ITA No. 7239/Del/2019] (ITAT Mumbai)
The appellant appealed to the Commissioner of Income Tax (Appeals)’s ruling on additions made in relation to cash deposits in the lender’s bank account under Section 68 of the Income Tax Act, 1961.
Out of a total addition of Rs.50,00,000, the appellant contested the addition of Rs.36,00,000 under Section 68 of the Act. The appellant challenged the CIT(A)’s ruling to disregard Real Time Gross Settlement (RTGS) transactions that the lender had received prior to the loan being made, as well as the confirmation of the planned interest.
The appellant, who owns two firms, reported a total revenue of Rs.24,95,020 in their income tax return. The Assessing Officer (AO) discovered a loan of Rs. 50 lakhs during the assessment. However, because the lender’s bank account provided the immediate source of credit and there were cash deposits there, the AO doubted the loan’s legitimacy.
To demonstrate the validity of the loan, the appellant produced documentation attesting to the identification, creditworthiness, and veracity of the transaction. Despite this, the AO rejected the loan and refused to reimburse interest costs under Section 68 of the Act.
Moreover, The appellant’s textile trade business did not appear to have any business connection with the lender, a trading organization. The disputed sum was reduced to Rs. 36 lakhs after the CIT(A) granted relief of Rs. 14,00,000. The sources of the loan were deposits made in the lender’s bank account in the form of both cash and cheque.
The appellant planned to forward integrate their business by investing Rs. 5.20 crores in a new company. The appellant’s extended relationship with the lender enabled them to provide financial support for this endeavour. The lender’s partner verified the loan and provided an explanation of the origins of the cash deposits during the evaluation. But because the case was moving slowly, the lender asked for more time to present more proof.
The AO, however, interpreted the loan as an unexplained cash credit under Section 68 and rejected pertinent materials that the appellant had supplied. The lender firm’s scrutiny evaluation, which approved the revenue and showed valid sources for the cash deposits, was presented by the appellant. Notwithstanding the appellant’s insufficient examination, the lender’s evaluation revealed no concerning cash deposit concerns.
After considering the evidence presented by the appellant, the Tribunal allowed the interest deduction under Section 36(1)(iii) on the grounds that the loaned monies were utilized for business purposes. The Tribunal granted the appellant’s appeal, underlining the lender’s trustworthy sources for the loan and rejected the AO’s concerns about the transaction’s legitimacy.
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