Emphasising that the theory of ‘preponderance of probability’ is applied to weigh the evidence of either side and draw a conclusion in favour of a party which has more favourable factors in his side, the Income Tax Appellate Tribunal (ITAT), New Delhi, held that loans cannot be treated as ‘bogus’ in the absence of any incriminating material unearthed during the course of a search.
The Tribunal noted that the AO has not doubted the expenses claimed by the respondent-taxpayer towards the payment of interest to the loan creditors, though the principal amount of the loan is alleged as bogus. Thus, the Tribunal was shocked to find that, once it is alleged that the principal loan is a bogus accommodation entry, how the interest paid on such an alleged bogus loan could be allowed as genuine expenditure?
The Tribunal was also shocked to find that the AO had not only allowed the interest payment but also accepted the fact of TDS made on such interest payment as genuine and accepted the loss declared by the respondent after claiming such interest as expenditure. This dual approach leads to a belief that the AO has simply proceeded with a preconceived notion of making the addition of the loans as bogus without applying his mind.
The Appellate Tribunal observed that failure to provide the opportunity of cross-examination of the persons whose statements are relied upon for making the additions is not acceptable, when the entire case of the Revenue Department hinges upon the presumption that the loans taken by the taxpayer are bogus and accommodation entries.
The presumption or suspicion, however strong it may appear to be true, needs to be corroborated by some evidence to establish a link that the taxpayer had indulged in accommodation activity, added the Tribunal, while upholding the deletion made by the CIT(A) on the additions under Section 68 of the Income Tax Act.
The Division Bench comprising Sudhir Kumar (Judicial Member) and Manish Agarwal (Accountant Member) observed that the question of getting accommodation entries in the guise of a loan does not survive, once the respondent-taxpayer has established the identity, creditworthiness of the lenders, and genuineness of the loan transactions through every possible evidence like confirmations of the lender companies, their Financial Statements, their Income tax records such as their ITR’s and PAN, bank statements, etc.
The Bench explained that when entries contained in the Excel sheet are duly recorded in the books of accounts of the taxpayer, and the same are duly substantiated through bank statements and the financial statements of the lender companies, the Excel sheet cannot be termed as incriminating material.
Further, the Bench pointed out that the statements recorded during the course of the search, which were later retracted, cannot be made the sole basis for making the additions, more particularly, when such statements are of a third party, and cannot constitute incriminating material in the case of the taxpayer.
The Bench noted that, except for the so-called statements of the employee and the facilitator who assisted in obtaining loans, which were retracted within a month by both persons, no incriminating material whatsoever was found during the course of the search, nor brought on record by making independent inquiries by the AO and all the entries pertaining to the respondent company containing the details of the loans, have already been recorded in the books of accounts, which fact has not been disputed by the Revenue.
Briefly, the respondent company, engaged in the business of developing, building, owning and operating power generation facilities, had furnished its return declaring NIL income, after claiming a loss of Rs. 11.05 crores. In the meantime, a search & seizure operation conducted by the Investigation Wing on the Moser Baer group and the office premises of the respondent, unearthed an Excel sheet titled ‘Funds Position’ from the laptop of an employee of one of the companies with the Moser Baer Group.
Therefore, inferring receipt of accommodation entries of loans by the respondent, the AO issued notices under Section 153A of the Income Tax Act. Later, based on the statement of one facilitator for obtaining these loans, additions of Rs. 25.05 crores were made under Section 68, treating them as unexplained cash credit. Further addition of Rs. 25.05 lacs was made under Section 69C, alleging the same as payment of commission @ 1% of the loan amount. On appeal, the CIT(A) deleted the additions.
Appearances:
CIT DR, Dayainder Singh Sidhu, for the Appellant/ Revenue
Advocates Gaurav Jain and Tarun Chanana, for the Respondent/ Taxpayer
