The Income Tax Appellate Tribunal ( ITAT ) Rajkot Bench sent a case back to the Assessing Officer (AO) for fresh adjudication, stating that the authorities failed to conduct a proper inquiry regarding unsecured loans amounting to Rs.1.82 crore and Rs.1 crore. The tribunal observed that the additions under Section 68 of the Income Tax Act, 1961, were made without adequate verification of the loan providers’ creditworthiness.
The case involved Comet Granito Pvt. Ltd., a manufacturer of ceramic vitrified tiles, which filed its income tax return for Assessment Year (AY) 2013-14, declaring a loss of Rs.2.07 crore. The Assessing Officer (AO) added Rs.1.82 crore as unexplained cash credit, stating that the company failed to prove the creditworthiness of loan providers. Another Rs.1 crore was added for unsecured loans from four Kolkata-based companies on similar grounds.
For Assessment Year 2017-18, the AO made additional disallowances, including Rs.50 lakh under Section 69C for unexplained expenditure on excess stock, Rs.2.25 crore due to a decline in net profit ratio, and Rs.19.75 lakh in disallowed interest on unsecured loans. The Commissioner of Income Tax (Appeals) CIT(A) upheld most of these additions, leading to cross-appeals by both the assessee and the Revenue before the ITAT Rajkot.
The ITAT Rajkot observed that the tax authorities failed to conduct proper verification of the unsecured loans and relied on assumptions rather than evidence. The tribunal noted that the AO and CIT(A) did not use their powers under Sections 131 and 133(6) to summon loan providers or verify financial records.
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Two Member Bench of Dinesh Mohan Sinha (Judicial Member) and Dr. Arjun Lal Saini (Accountant Member) ruled that a proper inquiry was necessary before treating the loans as unexplained cash credit. It also pointed out that the loan providers had submitted bank statements, tax returns, and confirmation letters, but the AO rejected them without further verification.
The tribunal stated that the tax department should have conducted an independent investigation instead of dismissing the evidence outright.
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The tribunal also found that the CIT(A) failed to properly analyze how the excess stock was generated and ruled that the AO must conduct a fresh examination of unaccounted purchases. The disallowance of interest expenses was also linked to loans that were already under reassessment, making it necessary for the AO to review this aspect along with the main inquiry.
The ITAT Rajkot set aside the previous orders and remanded the case back to the AO, directing a detailed investigation into the unsecured loans, the source of excess stock, and the interest disallowance. The tribunal emphasized that authorities must conduct thorough inquiries before making additions under Section 68.
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