Creditworthiness of Creditors cannot be established by Furnishing Loan Confirmations: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that merely furnishing loan confirmation letters is not sufficient to establish the creditworthiness of creditors or the genuineness of loan transactions. The Tribunal observed that proper enquiry and verification are necessary before accepting an assessee's claim regarding unsecured loans.

The assessee, a resident individual, filed her return of income for the assessment year under consideration declaring a total income of ₹5,86,640. The return was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer (AO) issued a show-cause notice proposing to complete the assessment under Section 144 of the Income Tax Act, 1961, due to repeated non-compliance by the assessee.

Since the assessee failed to explain the source of investments made in the immovable properties, the AO treated an amount of ₹1.10 crores as unexplained investment underSection 69 of the Income Tax Act and added the same to the assessee's income.

In the proceedings before the first appellate authority, the assessee furnished additional evidence, which was admitted under Rule 46A of the Income Tax Rules and upon examining the material on record, the appellate authority was satisfied that the investment of ₹35 lakh in one of the immovable properties stood duly explained and accordingly deleted the addition to that extent. However, with regard to the investment of ₹75 lakhs in another immovable property, the appellate authority was not convinced with the explanation furnished by the assessee.

Before the Tribunal, the counsel appearing for the assessee submitted that the source of investment had been explained through documentary evidence. It was contended that an amount of ₹29.84 lakhs had been availed as a housing loan from Jammu & Kashmir Bank, which was duly reflected in the bank statements. It was further submitted that ₹29 lakhs had been received as unsecured loans from friends and relatives, supported by loan confirmation letters issued by the lenders.

The Departmental Representative opposed the submissions and supported the orders of the lower authorities.

The Tribunal Bench comprising Saktijit Dey, Vice President and Prabhash Shankar, Accountant Member observed: “By simply furnishing loan confirmations, the creditworthiness of the creditors and genuineness of the loan transaction cannot be established. There is nothing on record to suggest that any enquiry with regard to the loan transactions were undertaken at the first appellate stage. Thus, without conducting a thorough enquiry with regard to assessee’s claim of availability of unsecured loans, no logical conclusion can be reached.”

The Bench further held that the assessee's explanation regarding unsecured loans, opening capital, and past savings could not be accepted in the absence of any enquiry to verify the authenticity of such claims.

Accordingly, the Tribunal set aside the issue to the Assessing Officer for the limited purpose of verifying the source of investment of ₹45.16 lakhs, representing unsecured loans from friends and relatives, as well as claims relating to opening capital and past savings. The AO was directed to conduct necessary enquiries and verify the assessee's claim regarding the availability of unsecured loans and capital before deciding the issue afresh.

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