Sec. 68 Couldn’t be Invoked Just Because Unsecured Loan Received Under FDI Not Approved by Competent Authority

Case Details: Niteshkumar Maganbhai Patel v. Income-tax Officer - [2023] 152 taxmann.com 597 (Ahmedabad-Trib.)

Judiciary and Counsel Details

• • Waseem Ahmed, Accountant Member & T.R. Senthil Kumar, Judicial Member
  • S.N. Soparkar, Sr. Adv., Parin Shah & Anil R. Shah, ARs for the Appellant.
  • Vijay Kumar Jaiswal, CIT-DR & Atul Pandey, Sr. DR for the Respondent.

Facts of the Case

Assessee-individual engaged in the business of civil construction. During the year under consideration, the assessee received an interest-free unsecured loan from a Non-Resident Indian (NRI). On questioning by the Assessing Officer (AO), assessee submitted along with a copy of the confirmation letter that the lender was a close friend residing in Dubai. Such an interest-free loan was received on the condition that the amount would be refunded once revenue was generated from the ongoing project.

Considering that the permission of RBI to accept money from NRI was not taken, AO concluded that the assessee had not furnished proper details and treated such an amount as unexplained cash credit under section 68.

On appeal, CIT(A) confirmed the additions made by AO. Aggrieved-assessee preferred an appeal to Ahmedabad Tribunal.

ITAT Held

The Tribunal held that the provision of section 68 fastens the liability on the assessee to make a proper and reasonable explanation regarding the nature and sources of the sum credited in the books of account to the satisfaction of the AO. The assessee is liable to provide proof of the identity of the lenders and establish the genuineness of the transactions and creditworthiness of the parties.

The identity of the party refers to the existence of such a party, which can be proven based on the evidence. As such, the identity of a party can be established by furnishing the name, address and PAN detail, bank details, passport and other details of the Government agencies.

The next stage comes to verify the genuineness of the transaction. Genuineness of transaction refers to what has been asserted is true and authentic. A genuine transaction must be proved to be genuine from all prospective and not merely on paper. The genuineness of the transaction can be proved by submitting a confirmation of the party along with details of the mode of transaction, but merely showing the transaction carried out through banking channel is insufficient.

The last stage comes to verify the creditworthiness of the parties. The assessee has to establish that the creditor party has the capacity to advance such a loan and has the requisite fund in its books of account. The capacity to advance loan can be established by showing sufficient income, capital and reserve or other fund in the hands of creditors.

During the appellate proceeding, the assessee furnished a copy of PAN, confirmation letter and bank statement of the lender. Therefore, the assessee discharged the primary onus cast upon him by furnishing copy of PAN, confirmation and bank statement, and the onus shifted to the AO to bring contrary material.

AO, without bringing contrary material in the assessee’s submission, treated the loan as unexplained cash credit because there was no formal loan agreement, cash flow statement of the lender, schedule of repayment and interest and permission of RBI/authority to accept money from NRI.

It was further held that when the identity and creditworthiness of the creditor are established, the genuineness of the transaction is also not in doubt, as the party has confirmed. The transaction was carried out through banking channels by way of foreign direct remittance. Then, such amount cannot be deemed as unexplained since the assessee has not got the approval from the competent authority to accept foreign direct remittance. As such, it may violate the RBI Act, which is independent of the Income-tax Act. But the violation of certain other statutes cannot be used to infer that the amount received as loan represents unexplained cash credit and deemed income of the assessee under the provisions of section 68.

Since the assessee discharged his onus cast under section 68, the additions made by AO must be deleted.

List of Cases Referred to

• • CIT v. Precision Finance (P.) Ltd. [1995] 82 Taxman 31/[1994] 208 ITR 465 (Cal.) (para 12)
  • CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) (para 12.2)
  • Sumati Dayal v. CIT [1995] 80 Taxman 89/214 ITR 801 (SC) (para 12.2)
  • R. H. International v. ITO [IT Appeal No. 6724 (Delhi) of 2018, dated 20-3-2019] (para 19).