The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that the Assessing Officer ( AO ) cannot question the creditworthiness of creditors when the assessee’s books of account and supporting evidence clearly establish the source, identity, and repayment of funds.
F.M. Amin Co. (Dashrath), the assessee, a dealer of Hindustan Petroleum engaged in the sale of petrol, diesel, and CNG, filed its income tax return for the Assessment Year 2017-18 declaring a total income of Rs. 24,43,860. The income tax return was selected for scrutiny and the assessing officer (AO) added unsecured loans totaling Rs. 23,50,000 to the assessee’s income as unexplained cash credits under Section 68 of the Income Tax Act, 1961.
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The AO noticed issues with the loan transactions, including Rs. 15,50,000 from Pravinbhai Mavani, where cash deposits were made in his account shortly before giving the loan. Likewise, Rs. 6,50,000 from Vandanaben Mavani involved unexplained credits in her account, and Rs. 1,50,000 from Sagar Mavani showed a large credit entry in his account just before the loan was provided.
Despite the assessee furnishing confirmations, bank statements, and PAN details, the AO determined the creditworthiness of the creditors was unsubstantiated and taxed the loans at 60% under Section 115BBE of the Income Tax Act, 1961.
The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)] who upheld the AO’s additions citing inadequacies in proving the genuineness of the transactions.
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On appeal before the ITAT, the assessee argued that all loans were genuine, routed through banking channels, interest payments were made with TDS compliance, and the creditors had declared the interest income in their tax returns. The loans were also repaid in full within a short period.
The two-member bench comprising T.R. Senthil Kumar (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) observed that the assessee had provided sufficient evidence, including bank statements, PAN details, loan confirmations, and proof of repayments through banking channels.
The tribunal relied on the Gujarat High Court ruling in the case of PCIT Vs. Ambe Tradecorp (P.) Ltd. [2023] which held that when the books of account and accompanying facts clearly demonstrate the source of funds, and the identity of the party, and reflect both the receipt and repayment of the amount, the assessing officer cannot question the creditworthiness of the creditor.
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The tribunal ruled that the additions under Section 68 of the Income Tax Act and the tax imposition under Section 115BBE of the Income Tax Act were invalid. The tribunal deleted the additions and allowed the assessee’s appeal.
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