Incomplete Analysis of ₹2.17 Cr Unsecured Loan: ITAT Directs to Verify Documents [Read Order]

Ambey Laboratories Limited (assessee), a company engaged in pesticide manufacturing, filed income tax return for the Assessment Year 2017-18, declaring a loss of Rs. 15,30,39,439. During scrutiny, the AO observed that the assessee had received unsecured loans amounting to Rs. 2.32 crore from various parties.

The AO issued a notice to substantiate these transactions under Section 68 for unexplained cash credits. The assessee submitted documents, including loan confirmations, bank statements, and financials of the creditors, to prove the identity, creditworthiness, and genuineness of the transactions.

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The AO found the submissions unsatisfactory, noting that the creditors had filed returns with losses or meager income, and their bank statements showed credits from unknown sources prior to the loan transactions. The AO added Rs. 2.32 crore as unexplained income under Section68 of the Income Tax Act.

Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) analyzed the transactions of individual creditors. The CIT(A) allowed partial relief by deleting the addition of Rs. 14.50 lakh concerning Bazigar Trading, finding sufficient evidence of the creditor’s funds.

The CIT(A) upheld the addition of Rs. 2.17 crore for loans from Ambey Capital Pvt. Ltd., Aromatic Alloy and Allied Pvt. Ltd., Green World International Pvt. Ltd., Rakshit Chemicals Industries Ltd., and SG Art Entertainment, citing inadequate proof of creditworthiness and genuineness.

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Aggrieved by the CIT(A)’s order, the assessee appealed to the ITAT. The Counsel for the assessee argued that the assessee had discharged its onus under Section 68 by submitting relevant documents, including confirmations and bank statements, and that the tax authorities failed to conduct further inquiries to disprove the evidence.

The assessee contended that the lower authorities rejected the documents without proper analysis and that the concept of proving the "source of source" was not applicable for the Assessment Year 2017-18, as the relevant amendment to Section 68 came into effect from April 1, 2023.

The two-member bench, comprising Vikas Awasthy (Judicial Member) and S. Rifaur Rahman (Accountant Member), observed that the assessee had submitted confirmations and other documents during appellate proceedings, which were only partially analyzed by the CIT(A).

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The Tribunal observed that the CIT(A) rejected the transaction due to the creditor’s accumulated losses and related-party status, despite confirmations showing repayments and additional loans.

The Bench held that the tax authorities did not fully appreciate the documents on record and failed to verify the transactions in light of judicial precedents, which emphasize that creditworthiness depends on the availability of funds, not merely earning capacity.

The bench also observed that the requirement to prove the "source of source" was not applicable for the relevant assessment year. It remitted the issue back to the AO to verify the documents as per law, ensuring the assessee is given a proper opportunity to be heard.

The appeal of the assessee was allowed for statistical purposes.

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