The Surat Bench of Income Tax Appellate Tribunal ( ITAT ) in Surat has directed the Assessing Officer ( AO ) to delete additions made under Section 68 of the Income Tax Act, 1961, in relation to a loan of Rs. 25,00,000 received by Prarthana Gems, a Surat-based firm.
The case pertains to the assessment year 2016-17, where the AO had made additions under Section 68, claiming that the creditworthiness of the lender, had not been established.
The appellant, Prarthana Gems, had received the unsecured loan of Rs. 25,00,000 from Rafique Peer Mohammad during the financial year 2015-16. However, during the assessment proceedings, the AO noted that while the other creditors had provided the necessary details, no response was received from the lender’s side.
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The AO contended that the creditworthiness of the lender was not demonstrated, and as a result, added the amount to the appellant’s income under Section 68, which deals with unexplained cash credits.
The appellant, represented by its authorized representative, submitted that the lender had a well-established identity, and the loan was genuine. The firm provided the lender’s PAN, death certificate, and bank statements, showing the movement of funds. It was also pointed out that the lender had earlier loaned Rs. 25,00,000 to the appellant in 2010, which was repaid in 2012.
The funds for the subsequent loan in 2015 came from a repayment received by the lender from another entity, Pranjal Star. The amount was subsequently repaid in kind, with polished diamonds being transferred by a partner of Prarthana Gems.
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Despite these explanations, the AO remained unconvinced about the lender’s creditworthiness, leading to the addition. However, the ITAT took a different view. The Tribunal noted that the appellant had satisfactorily explained the identity and creditworthiness of the lender, pointing out the lender’s residential address in an upscale locality in South Mumbai, his business operations in the diamond industry, and the fact that the loan was advanced through banking channels.
Two member Bench comprised of Pawan SSinfh (Judicial Member) and Bijayananda Pruseth (Accountant Member) observed that the lender’s legal heir could not respond to notices after his demise in June 2016, but this should not overshadow the strong circumstantial evidence presented by the appellant.
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Tribunal highlighted that the loan repayment had been made through a sale of diamonds, which had been duly accounted for in the firm’s books. Based on these facts, the ITAT set aside the findings of the AO and directed the deletion of the addition under Section 68.
Furthermore, the Tribunal also allowed the appellant’s third ground, which pertained to the disallowance of interest payment amounting to Rs. 1,25,000. The appellant had made the interest payments through banking channels, with appropriate TDS deductions. Since the addition related to the loan itself was deleted, the disallowance of interest was also found to be unjustified and consequently removed.
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In conclusion, the ITAT ruled in favor of the assessee, granting relief by deleting the additions and allowing the deduction of interest paid on the loan. This ruling emphasizes the importance of providing adequate documentation and evidence to establish the genuineness of loans and the creditworthiness of lenders in such cases.
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