ITAT Bangalore Mandates AO to Exercise Section 133(6) Powers for Verifying Unsecured Loans Once Assessee Establishes Identity via PAN and Aadhaar

In a significant ruling concerning the verification of unsecured loans under Section 68 of the Income Tax Act 1961, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, has emphasized the procedural duties of the Assessing Officer (AO). The Tribunal held that once an assessee provides primary documentation such as PAN and Aadhaar cards to establish the identity of lenders, the burden of proof shifts to the Revenue. The Tribunal ruled that an AO cannot summarily reject loan transactions based on assumptions regarding the lenders' socio-economic status without exercising investigative powers under Section 133(6).

The case of Afzal Pasha Vs DCIT highlights the necessity for the Revenue Department to conduct independent inquiries and grant the assessee an opportunity for cross-examination before treating credits as unexplained cash credits.

Background of the Case

The dispute arose from the assessment proceedings for the Assessment Year 2018-19. The assessee, an individual engaged in the business of wholesale and retail trading of waste, scrap, and recycling materials, filed a return of income declaring a total income of Rs. 62,39,520.

The case was selected for "Limited Scrutiny" through the Computer Aided Scrutiny Selection (CASS) mechanism, specifically to examine the issue of "Unsecured Loans." During the assessment, the AO noted from the Tax Audit Report (Form 3CD) that the assessee had accepted unsecured loans totaling Rs. 2,41,50,000 during the relevant financial year.

The Assessment Proceedings

During the scrutiny proceedings, the assessee provided details regarding the loans, including copies of PAN cards and Aadhaar cards of the lenders. The assessee successfully demonstrated the genuineness of a loan amounting to Rs. 39,99,941 from one Mr. Ajaz Baig by submitting comprehensive documentary evidence. The AO accepted this specific transaction as genuine.

However, regarding the remaining unsecured loans amounting to Rs. 2,28,90,059, the AO raised objections. The assessee submitted PAN and Aadhaar details but could not furnish the Income Tax Returns (ITR) of these lenders. The assessee explained that these lenders operated in the unorganized sector with meager capital and, therefore, did not file ITRs or possess GST registrations.