Facts of the Case

The assessee, Sheela Overseas Private Limited, is engaged in the business of readymade garments and leather goods. For Assessment Year 2015-16, it filed its return of income on 29.09.2015 declaring a total income of ₹93,660. During the relevant previous year, the assessee received unsecured loans aggregating to ₹83,00,000 from its two directors, namely Mr. R.C. Bhatia and Mr. Hitesh Bhatia.

The case was selected for scrutiny and assessment was completed under Section 143(3) on 30.12.2017. Although the assessee furnished bank statements and confirmations, the Assessing Officer treated ₹51,00,000 received from director Mr. Hitesh Bhatia as unexplained cash credit under Section 68 on the ground that the director did not appear in response to summons under Section 131. The addition was confirmed partly by the CIT(A) to the extent of ₹27,50,000, relying on cash deposits found in the bank account of Mr. Hitesh Bhatia. The ITAT upheld the said addition. Aggrieved, the assessee preferred an appeal before the Delhi High Court.

Issues Involved

Whether unsecured loan received from a director could be treated as unexplained cash credit under Section 68 when the assessee had explained identity, capacity and genuineness, whether the assessee was required to explain the “source of source” of such loan for AY 2015-16, and whether cash deposits in the creditor’s bank account could justify addition in the hands of the assessee-company.

Petitioner’s Arguments

The assessee contended that the loan was received from its director through banking channels and was duly reflected as unsecured loan in the books. The identity of the creditor was undisputed, the transaction was genuine, and the capacity of the director was established through an overdraft facility granted by Lakshmi Vilas Bank against fixed deposits. It was argued that Section 68, as applicable to AY 2015-16, did not require the assessee to explain the source of source for unsecured loans, and that such requirement was introduced only by the Finance Act, 2022. The assessee further contended that any doubt regarding cash deposits in the director’s bank account could not justify addition in the assessee’s hands.

Respondent’s Arguments

The Revenue argued that the assessee had failed to satisfactorily explain the source of funds deposited in the bank account of Mr. Hitesh Bhatia, which were used to reduce his overdraft liability, and therefore the capacity of the creditor was not proved. It was contended that the assessee had failed to discharge the onus under Section 68 and that the addition was rightly sustained by the lower authorities.

Court Order / Findings

The Delhi High Court examined Section 68 as it stood during AY 2015-16 and noted that the proviso requiring explanation of source of source was applicable only to share capital and allied amounts, not to unsecured loans. The Court observed that the requirement to explain source of source for loans and borrowings was introduced only by the Finance Act, 2022 and could not be applied retrospectively.

The Court held that the assessee had discharged its burden by establishing the identity of the creditor, genuineness of the transaction and capacity of the creditor. The loan was routed through banking channels, confirmed by the director, and sourced from a bank-sanctioned overdraft facility secured against fixed deposits. The Court further held that any issue regarding cash deposits in the director’s bank account or repayment of overdraft liability was a matter to be examined in the assessment of the director and could not form the basis for an addition in the hands of the assessee.

Accordingly, the Court held that the addition of ₹27,50,000 under Section 68 was unsustainable in law.

Important Clarification

The High Court clarified that prior to the amendment by the Finance Act, 2022, an assessee receiving unsecured loans was not required to explain the source of source of funds. Where identity, capacity and genuineness are established, additions under Section 68 cannot be made merely because the Assessing Officer harbours doubts about transactions in the creditor’s bank account.

Final Outcome

The appeal filed by the assessee was allowed. The addition of ₹27,50,000 made under Section 68 of the Income-tax Act was set aside, and the questions of law were answered in favour of the assessee and against the Revenue.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769677611_SHEELAOVERSEASPVT.LTDVsPRCOMMISSIONEROFINCOMETAXDELHI08ANR..pdf

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