By TIOL News Service

NEW DELHI, AUG 28, 2017: THE issue before the Bench is - Whether loan entries are generally masked to pump in black money into banking channels and such practices continue to plague Indian economy. YES is the verdict.

Facts of the case:

The Assessee, an individual, had filed his return declaring a total income of Rs.80,45,590/-. During assessment, the AO made additions u/s 68 to the tune of Rs.3,25,50,000/- in respect of loans/advances received from eight persons, on the ground that the Assessee was unable to establish the identity, creditworthiness and genuineness of the said persons and transactions. Prior to the assessment order, a questionnaire was issued to the Assessee and he was called upon to produce the documentary evidence with respect to the said eight persons. Since no documentary evidence or identification or addresses thereof, showing either the identity or creditworthiness of these persons, was furnished by Assessee, the AO concluded "that the Assessee had simply routed through its own unaccounted/undisclosed funds through the channel of banks in these names and as such section u/s 68 would be attracted to the case of Assessee. Thus, the AO added a sum of Rs.3,25,50,000/- to the Assessee’s income and also simultaneously initiated penalty proceedings u/s 271(1)(c).

On appeal, the CIT(A) held that the transactions with Smt. Sunita lacked in genuineness and creditworthiness; transaction with Shri Amar Singh was questionable as to genuineness and creditworthiness; transactions with Shri Ram Chander and Shri Chandan Singh were not genuine; and that the explanation given by Shri Harpreet Singh showed that the transaction was dubious and its genuineness was not established. The CIT(A) thus concluded that the explanation furnished by the creditors and the documents filed did not adequately and sufficiently explain the genuineness of the transactions and the Assessee was also not able to establish the identity and creditworthiness of these persons. The CIT(A) concluded that no source of funds was established by the Assessee for any of these individuals, the amounts credited to the Assessee’s book were unexplained, and were liable to be added to the income of the Assessee u/s 68. On further appeal, the ITAT deleted the additions in respect of four of the creditors and the matter was restored to the file of AO to examine the identity, genuineness and creditworthiness in respect of other four persons.

On appeal, the HC held that,

++ in the case of Shri Amar Singh, a perusal of the bank statement reveals that his account was opened by a cash deposit of Rs.1,000/- and there are several sums running into lakhs withdrawn in cash. There is no explanation, whatsoever, as to why a sum of Rs.50,00,000/- would be given as loan/advance to the Assessee in the absence of any loan agreement either specifying the interest charged on the loan or any security offered in respect of the loan. The CIT(A) had noticed that the monthly income of Amar Singh was in the range of Rs.2,000/- to Rs.2,500/- and his financial strength was clearly not established. Thus, the deletion by the ITAT of the entry of Rs.50,00,000/- is contrary to law and the findings of the CIT(A) qua this transaction deserve to be upheld. As far as Shri Chandan Singh is concerned, the documents filed by Assessee do not inspire any confidence to support a transaction to the tune of Rs.1,10,00,000/-, inasmuch as, the bank statement reveals that while the account was opened with a deposit of Rs.500/-, huge amounts of cash deposits to the tune of Rs.50 Lakhs, Rs.30 Lakhs, Rs.20 Lakhs and Rs.10 Lakhs have been made into the said account. The Income Tax Computation attached to the Income Tax Return does not reveal any unsecured loans. This Court finds that the genuineness of this transaction has not been established by the Assessee. The ITAT has ignored the evidence on record and did not even examine the genuineness of the transaction or the financial strength of the creditor as required in law. Merely because the transaction was by payments through cheque, the ITAT presumes them to be genuine. A creditor who opens a bank account with just Rs. 500/-, depositing huge sums of cash into the account and then lending a sum of Rs. 1,10,00,000/- to the Assessee, without any agreement, interest payment or security, is 'fantastic' and 'incredible' to say the least;

++ insofar as Shri Ram Chander is concerned, first, there is a doubt as to his actual identity as whether he is Ram Chander or Ram Charan. The Assessee has produced a confirmation letter where this person is being referred to as Ram Chander in different places. His voter ID card described him as Ram Chander S/o Shri Bhagwana whereas the letter of confirmation purportedly signed by him refers to him as Ram Chander S/o Bhagwant Sahai. He does not even file an ITR and does not have a PAN number, which clearly points to the irrefutable conclusion that the entire transaction was not genuine and the identity of Shri Ram Chander/Ram Charan was also dubious. Insofar as Smt. Sunita is concerned, she is the wife of the Assessee and from her statement, it is clear that she has no knowledge of any of the transactions being conducted through her bank account. The AO had rightly concluded that her sources of income were not established and her ITR reveals the gross total income of Rs.1,69,144/-. The ITAT grossly erred in holding that, just because Smt. Sunita was the wife of the Assessee and her PAN card was filed, the genuineness of the transaction was established. There was no analysis by the ITAT as to her financial strength to lend such a huge amount to the Assessee;

++ an analysis of the above facts shows that none of these four individuals have the financial strength to lend such huge sums of money to the Assessee, that too without any collateral security, without interest and without a loan agreement. The mere establishing of their identity and the fact that the amounts have been transferred through cheque payments, does not by itself mean that the transactions are genuine. The AO and the CIT (A) have rightly held that the identity, creditworthiness and the genuineness are all in doubt. Moreover, the Court notes that that these amounts have been advanced to the Assessee without any explanation as to their relationship with the Assessee, the reason for the payment of such huge amounts, as also whether any repayments have, in fact, been made. There are contradictions in the explanation given by the Assessee and the statements recorded by these four individuals, which are irreconcilable. Therefore, the order of ITAT is set aside to the extent of the deletion of four entries;

++ the transactions in the present appeal are yet another example of the constant use of the deception of loan entries to bring unaccounted money into banking channels. This device of loan entries continues to plague the legitimate economy of our country. As seen from the facts narrated above, the transactions herein clearly do not inspire confidence as being genuine and are shrouded in mystery, as to why the so-called creditors would lend such huge unsecured, interest free loans - that too without any agreement. In the absence of the same, the creditors fail the test of creditworthiness and the transactions fail the test of genuineness. The findings of the CIT (A) are upheld and the order of the ITAT is set aside to the extent of the deletion of four entries. The deletions made in respect of the transactions of the Assessee with Shri Amar Singh, Shri Chandan Singh, Shri Ram Charan/Ram Chander and Smt Sunita to the tune of Rs.50,00,000/-, Rs.1,10,00,000/-, Rs.10,00,000/- and Rs.98,00,000/-, respectively, are liable to be added back to the returned income of the Assessee for the relevant AY, under Section 68 of the Act.

(See 2017-TIOL-1672-HC-DEL-IT)