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Facts
The assessee, Hermon Educational Society, running a school, filed a NIL return claiming exemption under Section 10(23C)(iiiad) for AY 2017-18. The Assessing Officer made additions of Rs.50,07,745/- and Rs.6,28,000/- as unexplained cash credits under Section 68 and denied the exemption, arguing that gross receipts including these additions exceeded the Rs.1 crore threshold. The CIT(A) partly allowed relief by deleting an addition for vehicle loan but upheld the remaining unsecured loan additions of Rs.52,21,021/- and the denial of exemption.
Held
The Tribunal directed the deletion of Rs.29,82,566/- of unsecured loans received from MV Rathnam, as the assessee had discharged its onus regarding identity, creditworthiness, and genuineness. It also directed the deletion of Rs.6,28,000/- for loans from M. Kameswara Rao and MV Rathnam, noting that once part of the loan was accepted as genuine, the remaining could not be added as unexplained cash credit. Furthermore, the Tribunal held that additions made under Section 68 cannot be treated as gross receipts for the purpose of determining the threshold limit for exemption under Section 10(23C)(iiiad) and allowed the assessee the benefit of this exemption.
Key Issues
1. Whether additions under Section 68 for unsecured loans can be sustained when the assessee proves identity, creditworthiness, and genuineness for certain creditors. 2. Whether additions made under Section 68 can be included in gross receipts for determining the threshold limit for exemption under Section 10(23C)(iiiad).
Sections Cited
68, 10(23C)(iiiad)
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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH : VISAKHAPATNAM
Before: SHRI G. MANJUNATHA & SHRI K. NARASIMHA CHARY
ORDER PER MANJUNATHA G. A.M. : This appeal filed by the assessee has been directed against the order dated 15.05.2024 of the learned CIT(A)-National Faceless Appeal Centre [in short “NFAC”], Delhi, relating to assessment year 2017-2018.
2 ITA.No.347/VIZ./2024 2. At the very outset, there is a delay of 45 days in filing the appeal before the Tribunal, for which, the assessee has filed affidavit seeking for condonation of delay duly explaining the medical reasons along with relevant medical certificate. We are satisfied with the explanation of the assessee seeking for condonation of delay of 45 days in filing the instant appeal before the Tribunal. We, therefore, condone the delay of 45 days in filing the appeal before the Tribunal and admit the appeal for adjudication.
Brief facts of the case, are that, the assessee society viz., Hermon Educational Society, Visakhapatnam is running a school by name Hermon School at KRM Colony, Maddilapalem, Visakhapatnam. The assessee society filed it’s return of income for the impugned assessment year 2017-2018 on 31.03.2018 declaring Rs.NIL income, after claiming exemption u/sec.10(23C)(iiiad) of the Income Tax Act, 1961 [in short “the Act”]. The case of the assessee society was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the society has received gross income of Rs.52,45,850/- by 3 ITA.No.347/VIZ./2024 way of fee receipts from students and spent an amount of Rs.48,86,672/- for attaining it’s objects. It was further noted that the assessee society is found to be existing solely for educational purpose and not for the purpose of profit and it had not derived income from any other Head/Activity. The Assessing Officer further noted that assessee society has reported unsecured loans of Rs.50,07,745/- as on 01.04.2016 and further received Rs.16,64,000/- during the F.Y. 2016-2017 relevant to the impugned A.Y. 2017-2018. The Assessing Officer called-upon the assessee to file relevant evidences including details of loan creditors. In response, the assessee has filed complete details of name and address of the loan creditors and also filed confirmation letters from the parties. The Assessing Officer after considering the submission of the assessee and also taken note of the fact that assessee is a non-filer and filed it’s return of income for the first time for the assessment year 2017-2018 and observed that the assessee could not establish genuineness of unsecured loans claimed to have been received from various parties including unsecured
4 ITA.No.347/VIZ./2024 loans received for the earlier financial years and, therefore, made addition of Rs.50,07,745/- u/sec.68 of the Act as unexplained cash credit. Further, the Assessing Officer had also made addition of Rs.6,28,000/- towards unsecured loans received for the year under consideration for Rs.16,64,000/- by holding that except two amounts i.e., of Rs.4,68,000/- on 28.06.2016 and another one on 10.10.2016 of Rs.5,50,000/- aggregating to Rs.10,12,000/- received from M. Kameswara Rao and MV Rathnam, the remaining amount of unsecured loans could not be proved with relevant evidences. Therefore, the Assessing Officer made addition of Rs.6,28,000/- as unexplained cash credit. The Assessing Officer had also rejected the exemption u/sec. 10(23C)(iiiad) of the Act on the ground that, if we consider gross receipts from running of an educational institution and the un-proved unsecured loans for the present assessment year aggregating to Rs.56,35,745/- [Rs.50,07,745/- + Rs.6,28,000], the total aggregate receipts of the assessee society works-out to Rs.1,08,77,595/- which exceeds threshold limit of Rs.1 crore and thus, the assessee
5 ITA.No.347/VIZ./2024 is not entitled for exemption u/sec.10(23C)(iiiad) of the Act. Therefore, the Assessing Officer brought to tax the excess income of Rs.3,59,178/- and made addition of Rs.56,31,745/- u/sec.68 of the Act as unexplained cash credit.
Being aggrieved by the assessment order of the Assessing Officer, the assessee filed an appeal before the learned CIT(A) and filed relevant evidences and argued that the Assessing Officer has erred in making addition towards unsecured loans of Rs.50,03,745/- even though the said unsecured loans have been received for the earlier financial year which is evident from the assessment order passed by the Assessing Officer where the Assessing Officer himself has considered the unsecured loans appearing in the books of accounts of the assessee as on 01.04.2016. The assessee further contended that the Assessing Officer has also erred in sustaining the additions of Rs.6,28,000/-, being loan received from M. Kameswara Rao and MV Rathnam even though the assessee has proved identity, creditworthiness and genuineness of the transaction. Therefore, he submitted
6 ITA.No.347/VIZ./2024 that the additions made by the Assessing Officer should be deleted. Further, the assessee had also challenged rejection of exemption u/sec.10(23C)(iiiad) of the Act.
The learned CIT(A) after considering the submissions of the assessee and also taken note of provisions of sec.68 of the Act and also by following various judicial precedents including the decision of Hon’ble Supreme Court in the case of Pr. CIT vs., NRA Iron and Steel Private Limited [2019] 412 ITR 461 (SC) allowed partial relief to the assessee in respect of additions made towards unsecured loans of Rs.56,31,745/-, and deleted vehicle loan of Rs.4,10,724/- by holding that the evidences filed with regard to vehicle loan is sufficient to prove the credit and, therefore, there is no reason for the Assessing Officer to make addition on vehicle loan. In so far as the balance addition of Rs.52,21,021/-, the learned CIT(A) confirmed the addition on the ground that the assessee could not establish the identity of the creditors, genuineness of the transaction and creditworthiness of the parties. The learned CIT(A) had also upheld the reasons given by the Assessing Officer for 7 ITA.No.347/VIZ./2024 denial of exemption u/sec.10(23C)(iiiad) of the Act. The relevant findings of the learned CIT(A) are as under :
“6.3. Before NFAC, the appellant has claimed that since these loans are brought forward loans, these cannot be added in the relevant F.Y. u/s.68 of the Act. Firstly, it is a fact the neither did the appellant filed its ITR of earlier years nor maintained books of accounts as per law from where this claim of receipt of unsecured loans in earlier years could be ascertained independently. The appellant has claimed in a general manner that the income of the school was offered in the hands of the treasurer Smt. M. Venkata Ratnam whereas the AO has pointed out that 44AD ITR was filed by her, which itself proves that no books of accounts of the school were being maintained by the appellant. Even complete confirmation with PAN etc. has not been filed by the appellant to prove the claim of loans received in earlier years conclusively. It is a fact that for the first time these amounts are introduced in the books of accounts prepared first time by the appellant and first time these amounts are being disclosed in the first ITR filed by the appellant. Therefore, the claim of the appellant that provisions of Section 68 of the Act are not applicable as credits occurred in earlier years is not proved and has no basis. Even before NFAC, the appellant has not clarified its stand properly. The appellant's bank
8 ITA.No.347/VIZ./2024 account has also been used for making chit payments of Smt. M. Venkata Ratnam, which again does not appear to be genuine transaction, and is unrelated to activity of an educational institution. While the appellant has claimed that the school is recognized by State Government & running since 2000, the reason for not maintaining its books of accounts as per law & not filing ITR has not been clarified by the appellant. The appellant has not justified the legality & correctness of the claim that its income was offered with the hands of the treasurer and has claimed inadvertence in this regard. Therefore, it is clear that all such credits were made in the books of accounts of the relevant financial year only, when the appellant filed its ITR for the first time. In para 5.3.4 of the assessment order, the AO has highlighted that mode of receipt is either in cash or not mentioned in the confirmations filed by the appellant and most of these persons are either employees of the school or vegetable/milk seller. Thus even the fact of receipts of impugned loans in earlier years is not proved by the appellant. The only inference that can be drawn in such circumstances is that the appellant does not possess any evidences in support of the various grounds of appeal being raised by it. It is noted that the provisions of section 68 of the Act are clearly applicable in this case. In this regard, the provisions of section 68 are being discussed below :-
9 ITA.No.347/VIZ./2024 6.4.1. Provisions of section 68 Even prior to the insertion of the said section or its predecessor, there were ample authorities to the same effect as section 68. In this regard, one may profitably refer to the judgment of the Apex Court in case of Kale Khan Mohammad Hanif vs. CIT [1963] 50 ITR 1 (SC), wherein the Court has held as under : "It is well established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Income-tax Officer is entitled to treat it as taxable income". Similar finding was given by the Apex Court in case of A. Govindarajulu Mudaliar vs. CIT [1958] 34 ITR 807 (SC).It was only later that the above dictum of the Apex Court found embodiment in section 68 of the Act.
Background of section 68 Section 68 does not need any introduction. To summarise, it taxes any credit appearing in the books of an assessee, where the assessee is not able to or not satisfactorily able to explain the nature and source of 10 ITA.No.347/VIZ./2024 such credit. It is a deeming fiction, which taxes a credit as income on unsatisfactory explanation about nature and source thereof and such fiction is applicable whether or not the credit is otherwise income chargeable to tax. Initial onus is on the assessee to demonstrate the "nature and source of the credit and when the same is discharged, the burden shifts onto the Department to prove that the credit is income chargeable to tax. It is now settled by various judgments that the term "nature and source of a sum found credited" would require an assessee to explain three things (ingredients) viz. Identity of the creditor, Capacity of the creditor to advance money and genuineness of the transaction. In this regard, reliance is further placed on the decisions of CIT vs. Nipun Builders and Developers P. Ltd.-350 ITR 407(Del); CIT vs. Nova Promoters and Finlease (P) Ltd. - 342 ITR 169 (Del.); CIT vs. Oasis Hospitalities Pvt. Ltd. - 333 ITR 119 (Del.); Rajmandir Estates Private Limited vs. PCIT-386 ITR 162 (Cal)). Further, reliance is placed on the decision of Hon'ble Supreme Court in the case of Principal Commissioner of Income-tax (Central)-1 vs. NRA Iron & Steel (P.) Ltd. reported in [2019] 103 taxmann.com 48/262 Taxman 74/412 ITR 161 (SC). The Court gave out its verdict on 05th March, 2019, laying down certain important ratio that initial onus is on the assessee to establish the identity of the person, creditworthiness of the person in the sense of financial 11 ITA.No.347/VIZ./2024 capacity and the genuineness of the transaction, as the facts are within the exclusive knowledge of the assessee. If onus is not discharged to the satisfaction of the AO, then the amount of credit would be treated as income without anything further to be done. This decision is found applicable to the facts of the instant case as the appellant society has failed to prove the identity, creditworthiness and genuineness of the loan creditors. Not only did the appellant not make use of the opportunity granted by the AO during assessment proceedings but also failed to submit proper documents or evidences to substantiate its grounds of appeal before the NFAC despite more than 3 years from the first hearing notice issued by NFAC. This demonstrates that the appellant does not possess any supporting evidence/documents to corroborate the claims made in the grounds of appeal. Thus, it is noted that only the evidence filed with respect to vehicle loan of Rs.4,10,724/- can be said to be having any evidentiary value & hence the addition to the extent of vehicle loan is directed to be deleted. As regards the balance amount of loans of Rs.52,21,021/- (Rs.56,31,745-4,10,724), the appellant has failed to prove the integrity, genuineness and creditworthiness satisfactorily and hence the addition of Rs.52,21,021/- made by the AO is confirmed and thus, grounds of appeal filed by the appellant on 12. ITA.No.347/VIZ./2024 the impugned addition is being treated as partly allowed. 6.5. Further, as a result of other additions sustained by NFAC, the gross receipts of the appellant has exceeded Rs.1 crore and hence denial of exemption u/s.10(23C)(iilad) of the Act is also confirmed and thus, grounds of appeal filed by the appellant on this issue is dismissed.”
6. Learned Counsel for the Assessee submitted that the learned CIT(A) has erred in sustaining the additions towards unsecured loans u/sec.68 of the Act without appreciating the fact that as per the provisions of sec.68 of the Act, any sum found credited in the books of accounts of the assessee, maintained for any previous year can be treated as unexplained cash credit, if the explanation of the assessee is not satisfactory to the Assessing Officer. Since the credit to the extent of Rs.50,07,745/- is not pertains to the year under consideration, the same cannot be assessed for the impugned assessment year 2017-2018. Learned Counsel for the Assessee further referring to the addition of Rs.6,28,000/- towards unsecured loans received from K.
13 ITA.No.347/VIZ./2024 Kameswara Rao and MV Rathnam submitted that once the Assessing Officer has accepted the fact that identity of both the parties is not in dispute, then, merely for the reason that remaining amount of credit is not received in cash or cheque, but, on account of journal entry, the addition made by the Assessing Officer is not in accordance with the provisions of sec.68 of the Act. Learned Counsel for the Assessee further submitted that in respect of amount received from MV Rathnam based on book entry towards various expenditure incurred by the parties on behalf of the society and the same has been accounted. The assessee had also furnished relevant evidences to prove the identity of the parties and creditworthiness. Therefore, he submitted that the additions made by the Assessing Officer should be deleted. He further submitted that the learned CIT(A) has erred in upholding the reasons given by the Assessing Officer for denial of exemption u/sec.10(23C)(iiiad) of the Act, without appreciating the fact that additions made u/sec.68 of the Act cannot be form part of gross receipts of the appellant-trust. Therefore, he submitted that denial of 14 ITA.No.347/VIZ./2024 exemption u/sec.10(23C)(iiiad) of the Act by the Assessing Officer and sustained by the learned CIT(A) should be set- aside.
The Learned DR, on the other hand, supporting the order of the learned CIT(A) submitted that, the assessee has not filed return of income for the earlier assessment years and, therefore, the genuineness of the unsecured loans claimed to have received for earlier assessment years, needs to be examined, when the assessee has filed return of income for the first time. Therefore, the Assessing Officer and the learned CIT(A) considering all the relevant facts has rightly made addition towards unsecured loans u/sec.68 of the Act and thus, the order of the learned CIT(A) should be upheld. Further, the gross receipts of the assessee crossed the threshold limit as per sec.10(23C)(iiiad)of the Act and the assessee is not entitled for exemption. Therefore, the learned CIT(A) has right in denying the benefit of exemption u/sec.10(23C)(iiiad) of the Act which needs to be upheld.
We have heard both the parties, perused the material on record and gone through the orders of the 15 ITA.No.347/VIZ./2024 authorities below. There is no dispute with regard to the fact that assessee-society is not filing return of income regularly and has filed return of income for the first time for the assessment year 2017-2018 on 31.03.2018. Further, there is no details as to the amount of unsecured loans claimed to have been received from various parties on or before 01.04.2016; i.e., where said loans have been received in cash or cheque. Although, the assessee has furnished confirmation from the parties, but, the Assessing Officer and the learned CIT(A) made a categorical observation that except MV Rathnam, all other credtiors are not assessed to tax and, therefore, the creditworthiness of the creditors is not established. The assessee has filed various evidences including confirmations from the parties. On perusal of the details filed by the assessee, we find that MV Rathnam is assessed to tax and once confirmation has been filed by the assessee, then the initial onus cast upon the assessee from the provisions of sec.68 of the Act is shifted to the Assessing Officer to prove otherwise. In the present case, although, the Assessing Officer accepted the fact that assessee has filed 16 ITA.No.347/VIZ./2024 confirmation letter from MV Rathanm along with other evidences, but, made addition only on the ground that she has filed her return of income for the first time and PAN was obtained during the year. In our considered view, once the initial onus was discharged by the assessee, then, the onus shifted to Assessing Officer to prove otherwise and this principle is supported by the decision of Hon’ble Supreme Court in the case of CIT vs., Lovely Exports Private Limited 216 CTR 195 (SC) wherein it has been clearly held that, “if share capital is received from alleged bogus shareholders and their names and addresses are provided to the Assessing Officer, then the department is free to reopen the assessment in accordance with law, but, sum received from creditors cannot be regarded as undisclosed income of the assessee”. Therefore, we are of the considered view that, the unsecured loans claimed to have been received from MV Rathnam to the extent of Rs.29,82,566/- cannot be treated as unexplained cash credits and thus, we direct the Assessing Officer to delete the addition of Rs.29,82,566/-. In respect of balance unsecured loans claimed to have been 17 ITA.No.347/VIZ./2024 received from various parties, since there is no details as to whether the said loans has been received in cash or cheque and further the assessee has filed return of income for the first time, the argument of the assessee cannot be accepted to the effect that no additions can be made for the opening balance of sundry creditors or unsecured loans. Therefore, we are of the considered view that the assessee is not able to establish the identity, genuineness of the transaction and creditworthiness of the parties in respect of unsecured loans claimed to have been received from DV Murali, Gowrisankar, P Krishna Kumari, K. Rohit Kumar, K. Shyam sunder, K Suresh, P Ramana and V V Chennulu. Thus, we sustain the additions made by the Assessing Officer and confirmed by the learned CIT(A) towards unsecured loans received from the above parties.
In so far as addition of Rs.6,28,000/- towards unsecured loans received from M Kameswara Rao and MV Rathnam, in our considered view, the learned Assessing Officer and the learned CIT(A) are erred in making the additions for the simple reason that once part of loan 18 ITA.No.347/VIZ./2024 amount received from the above parties is considered to be genuine, then, there is no reason for the Assessing Officer to make additions towards remaining part of the unsecured loans as unexplained cash credit. If at all, the Assessing Officer is having doubt about the creditworthiness of the creditor, then, he should have proceed to assess the creditors in accordance with law, but, the amount received from two creditors cannot be assessed as undisclosed income of the assessee. Since the assessee has discharged it’s onus by filing relevant evidences and also Assessing Officer has accepted the identity of both the parties, in our considered view, the additions made by the Assessing Officer for Rs.6,28,000/- towards unsecured loans received from M. Kameswara Rao and MV Rathnam cannot be sustained. Thus, we direct the Assessing Officer to delete the addition of Rs.6,28,000/- towards unsecured loans received from M. Kameswara Rao and MV Rathnam.
Coming back to the denial of exemption u/sec.10(23C)(iiiad) of the Act, there is no dispute with regard to the fact that gross receipts from these collections 19 ITA.No.347/VIZ./2024 is less than the threshold limit of Rs.1 crore for claiming benefit of exemption u/sec.10(23C)(iiiad) of the. The Assessing Officer denied the exemption only on the ground that if unsecured loans are treated as given unexplained cash credit is added to turnover, then, the gross receipts exceeds the threshold limit and the assessee looses the benefit of exemption u/sec.10(23C)(iiiad) of the Act, in our considered view, the Assessing Officer has grossly erred in considering the additions made u/sec.68 of the Act as gross receipt of the assessee derived from properly held under Trust for the purpose of computing the threshold limit provided u/sec.10(23C)(iiiad) of the Act. Therefore, we are of the considered view that Assessing Officer has erred in denying benefit of exemption u/sec.10(23C)(iiiad) of the Act and thus, we direct the Assessing Officer to allow the benefit of exemption u/sec.10(23C)(iiiad) of the Income-tax Act, 1961.
In the result, appeal of the assessee is partly allowed.
20 ITA.No.347/VIZ./2024 Order pronounced in the open Court on 19.03.2025.