No Notice issued enquiring details of Unsecured Loan received from 5 Person, Income Tax Addition become invalid: Kerala HC remands matter for Readjudication [Read Order]

In a recent judgement, the High Court of Kerala remanded the matter of  Income tax addition for fresh adjudication as the revenue failed to issue a show cause notice enquiring about details of an unsecured loan received from 5 person. The Court found that unless and until the petitioner was put to notice, in respect of the transaction of the aforesaid 5 persons, he did not need to give any response in respect of the proposed additions.

Nirmala Trust, the petitioner is an assessee under the provisions of the Income Tax Act, 1961 ( ‘the IT Act’ ). The petitioner assessee filed returns of his income declaring a total income of Rs. 16,52,780/-. Petitioner is engaged in the business of commercial loan activities. The petitioner case was selected for complete scrutiny under CASS for the reason that the petitioner assessee has taken unsecured loans from such persons who have not filed their return of income.

 Accordingly, a notice under Section 143(2) was issued and served on the petitioner on 28.06.2022. A show cause notice has been placed on record containing the chart of 22 persons from whom the petitioner had accepted deposits on the extent of Rs. 1,28,08,364/. It was also mentioned that on the confirmation of depositors, deposit details ledger and bank account, it was noticed that the assessee had taken loans from 45 lenders. Out of the 45 lenders, only 7 lenders had filed their returns of income. The remaining 38 lenders were not assessed for tax.

It was also noticed from the comparison of letters filed in Form 3CD for the assessment years 2020-2021 and 2021-2022 that the assessee had received new loans from 22 parties, who were not assessed for tax and their details had been given in the show cause notice.

The assessee could furnish the details in respect of only 6 lenders from the tax receipts, the source of the loan given by the lenders was not verified and the same did not prove the genuineness of the loan and creditworthiness of the lending parties. The petitioner had also not submitted the statement of bank account of any lender to prove the source of loan given by the lenders to provide the creditworthiness of these lenders. The petitioner had filed a reply to the said show cause notice. The assessing authority after considering the response of the reply to the show cause notice submitted by the petitioner and after giving him an opportunity of hearing to finalise the assessment order impugned in the present writ petition.

The counsel for the petitioner submitted that the show cause notice would suggest that the petitioner had taken a fresh loan from 22 persons whose details were given in the show cause notice.

A show cause notice was issued and served upon the petitioner-assessee, who was asked to prove the creditworthiness and genuineness with proper documentary evidence regarding the loan advanced to the petitioner by the parties. The petitioner had submitted documentary evidence of some of the lenders. On examination of the documentary evidence submitted by the petitioner, the creditworthiness of 17 lenders was found satisfactory. However, the creditworthiness and genuineness of the loan from the rest of the lenders were not found satisfactory and the said amount of 11 lenders had been added under Section 68 of the IT Act as the income of the petitioner from unknown sources on which the tax, interest and penalty have been levied and demanded.

The counsel for the petitioner submitted that the petitioner was never put to notice in respect of 5 persons, whose names found a place in the assessment order and therefore, without giving an opportunity in respect of the loan advanced by the said persons to the petitioner, the said amount has been added. Unless and until the petitioner would not have been put to notice in respect of loan amount of these 5 persons, the said amount should not have been added to the income returned by the petitioner under Section 68 of the Act.

The petitioner submitted that as the petitioner was not put to notice in respect of the amount of loan advanced by these 5 persons to the petitioner, there has been a violation of the principle of natural justice as the petitioner was not given an opportunity to explain the loan advanced by the five lenders. It was submitted that the extent of the addition of the amount of loan advanced by these 5 persons is incorrect and in violation of the principles of natural justice and therefore, the same is liable to be set aside. The single bench of Justice Dinesh Kumar Singh disposed of the writ petition and the matter is remanded back to the assessing authority, to pass a fresh assessment order. The petitioner is directed to file his response / supporting documents in respect of the loan advanced by the 5 persons. The respondents are directed to activate the link with intimation to the petitioner to enable the petitioner to file his explanation in respect of these 5 transactions only.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates