Cheque Payments & Confirmations Not Enough; Gujarat HC Confirms Section 68 Addition

Pavankumarm Sanghvi Vs ITO (Gujarat High Court)

The assessee filed a tax appeal before the Gujarat High Court challenging the order of the Income Tax Appellate Tribunal dated 17.05.2017. The appeal raised two questions: whether the Tribunal was justified in confirming the addition of ₹20 lakh as unexplained cash credit under Section 68 of the Income Tax Act despite confirmations from the lenders, and whether the Tribunal was justified in confirming the disallowance of ₹3,66,041 towards interest paid on the unsecured loans treated as unexplained cash credits. The additions had been made by the Assessing Officer and were subsequently confirmed by the Commissioner (Appeals) and the Tribunal.

The High Court referred to the Tribunal’s findings, which had undertaken a detailed examination of the financial records and bank statements of the two lenders, Natasha Enterprises and Mohit International.

With respect to Natasha Enterprises, the Tribunal observed that immediately before issuing the cheque of ₹10 lakh to the assessee, an equivalent credit had been received in the lender’s bank account. The account reflected repeated high-value debit and credit transactions while maintaining negligible closing balances. The Tribunal also examined the lender’s financial statements and found that although it reported a turnover of ₹122.92 crore, it had no closing stock, earned a profit of only about 0.09% of turnover, and incurred minimal expenditure on salaries, office expenses, rent and stationery despite dealing in diverse businesses such as diamonds, plywood, aluminium, software and other items. The Tribunal concluded that these financial characteristics were not representative of a genuine business concern.

A similar pattern was noticed in the case of Mohit International. Its bank account showed substantial debit and credit transactions with consistently low closing balances. Despite reporting a turnover of ₹127.87 crore, it earned a profit of less than 0.09%, incurred no expenditure on telephone or travelling, and had overall business expenses of less than ₹5 lakh, except for brokerage and assortment of diamonds. The Tribunal found that the scale of business reflected in the turnover was inconsistent with the negligible expenditure disclosed.

The Tribunal further noted that the assessee was unable to produce the lenders for verification or provide their current whereabouts. It also observed that unsecured loans carrying interest at 12% per annum without any security would ordinarily require a close relationship or trust between the parties. The assessee, however, could not reasonably explain the circumstances under which such loans were advanced by entities that were not regularly engaged in the business of lending. The Tribunal also took note of the assessee’s silence when informed that the lenders were alleged shell entities. Considering these surrounding circumstances, it concluded that the loan transactions were not genuine.

The High Court examined the Tribunal’s order and observed that the controversy rested entirely on appreciation of the evidence on record and was therefore factual in nature. It held that the Tribunal had provided elaborate reasons for concluding that the transactions were not genuine.

The assessee argued before the High Court that the loans had been received through account payee cheques, the lenders had confirmed the transactions, and their audited accounts had been produced before the tax authorities. According to the assessee, the genuineness of the transactions, the lenders’ capacity and the fact of lending had therefore been established, making the addition under Section 68 unsustainable.

The High Court, however, observed that the Tribunal had minutely examined the financial position of the lenders and the surrounding circumstances before concluding that the transactions lacked genuineness. Finding no perversity in the Tribunal’s factual findings, the High Court held that no interference was warranted.

Accordingly, the tax appeal was dismissed.

Also Read: 

ITAT Ahmedabad Judgment in this case: Section 68 Addition Upheld as Assessee Failed to Prove Genuineness of Loan Transactions

SC Judgment in this case: SC Dismisses SLP as Section 68 Addition Was Based on Tribunal’s Factual Findings

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

Appeal is filed by the assessee challenging the judgment of the Income Tax Appellate Tribunal dated 17.05.2017 raising following questions for our consideration:

“[A] Whether on the facts and in the circumstances of the case and law, the ITAT is justified in confirming the addition of Rs.20 lakh as unexplained cash credit u/s 68 for unscecured loan though there is confirmation from lander ?

[B] Whether on the facts and in the circumstances of the case and law, the ITAT is justified in confirming the addition of Rs.3,66,041/­ made on account of interest paid on unsecured loans which is wrongly treated as unexplained cash credit u/s 68 ? ”

2. The issues pertained to additions made by the Assessing Officer of two separate amounts of Rs.20 lakhs and Rs.3.66 lakhs (rounded off) under section 68 of the Income Tax Act, 1961 (‘the Act’ for short). The Commissioner (Appeals) also confirmed such additions, upon which, the issue reached the Tribunal. Tribunal by the impugned judgment, rejected the assessee’s appeal making following observations:

“9. I have noted that the assessee has received an amount of Rs.10,00,000 from Natasha Enterprises on 12^th August 206, and, as a plain look at the Canara Bank statement of the lender, which is placed at pages 40 onwards of the paper book, would show, there is a credit of Rs.10,00,000 just before this cheque is paid. The bank balance before these two transaction, and after these two transactions, was only Rs.13.717. Quite interestingly, again on 14^th August 2006 in the same bank account, these are debit and credit transactions of around Rs.15 lakhs each and the balance as on the end of that date is Rs.8,737. On 18^th and 19^th August 2006, again there are quite a few transactions aggregating to Rs.10 lakhs on debit as also credit side, and yet again closing balance is Rs.7,578. On 22^nd August 2006, there are transactions of debits and credits of around Rs.32.50 lakhs each, and the closing balance at the end of the day is again Rs.7,578. As can be seen from this statement, on 29^th August 2006, there are debit and credit transactions of Rs.15 lakhs each and once again the closing balance of the day is Rs.7,578. This kind of the state of bank account does not inspire any faith in the proposition that the entity in question is a genuine business concern. A look at the financial statements filed by the assessee does not lead to this conclusion either. The lender has shown a turnover of Rs.122.92 crores but there is no closing stock, and a profit of almost 0.09% on the turnover leading to a tax payment of Rs.1,96,138. The lender makes purchases of Rs.123.04 crores in such diversified areas as cut and polished diamonds Rs.73.15 crores), plywood and aluminum (Rs.11.72 crore), rough diamonds (Rs.4.36 crores), software (Rs.25.01 crores) and other items (Rs.8.79 crores), and sells these products too but all that the lender has spent on salaries is Rs.2,26,000, on office expenses is Rs.8,560, on office rent is Rs.27,600 and on printing and stationary is Rs.8,560. All this is simply not representative of what a genuine business would typically be. As regard Mohit International also, the story is no different. The bank statement, which is placed at pages 75 onwards, has the same theme of high transactions during the day and a consistently minimal balance at the end of the working day. On 28^th April 2006, i.e. the day the assessee is given Rs.10,00,000, there are credit entries of almost similar amounts, and he balance after these transactions is a small amount of Rs.13,020. Similar is the pattern of transactions on all the days in respect of which this statement is placed before me. On 23^rd March 2007, for example, the opening balance is Rs.1,36,611 and there are huge debits and credit entries on 23^rd and 24^th March, aggregating to almost Rs.4 crores on debit as also credit, and the closing balance at the end of 24^th March is Rs.85,991. On a turnover of Rs.127.87 crores, the profit is less than 0.09% resulting in tax outgo of Rs.2,96,218. To effect this scale of operations, the lender incurs no travelling or telephone expense, and entire expenses of the business, except on brokerage and assortment of diamonds, are less than Rs.5 lakhs in the year. Interestingly, in today’s world where an average human being, much less a business organization, can live without telephones, this business entity has prospered without a rupees spent of telephones. The level of turnover and the expenditure incurred on achieving such high turnover donot match at all. The numbers do not add up and the details filed in respect of these lenders donot convince me that the lenders are routine businesses. Given this background the assessee’s inability to produce the related persons or even given their current whereabouts makes the story of genuine transactions even more unbelievable. It is also important to bear in mind the fact that lending for an interest @12% p.a. Without any security is not something which people do for rank outsiders. There has to be some close association to get such a kind of unsecured credit at such low rates. When I consider this situation, coupled with the fact that (I) the assessee has not been able to produce these lenders for verification and reasonably explain the complete circumstances in which these lenders, who were not even routinely engaged in the business of giving loans and advances, gave him unsecured loans on 12% p.a. Interest – which essentially is possible in situations of close relationships and trust; and (ii) the assessee has maintained stoic silence on being told about these lenders being alleged to be shell entities, I am not inclined to believe that these are genuine business transactions.”

3. Perusal of the orders on record and in particular, the above quoted portion of the order of the Tribunal would make it clear that the entire issue is based on appreciation of evidence on record and thus factual in nature. The Tribunal has given elaborate reasons to come to the conclusion that the entire transaction was not genuine. In absence of anyperversity, we do not see any reason to interfere.

4. Learned counsel for the assessee however vehemently contended that the assessee had received loans through cheques from lenders who had confirmed the same. Their accounts are audited and filed before the Revenue authorities. Thus, the genuineness of the transactions, the capacity of the lender and the factum of lending all have been established. Addition under section 68 of the Act there could not have been made. However, as noted, the Tribunal has minutely examined the position of the lenders, the circumstances under which, the amounts were allegedly loaned to come to the conclusion that the transactions were not genuine.

5. Under the circumstances, Tax Appeal is dismissed.