Third-Party Statement Alone Insufficient for ₹4 Cr Section 68 Addition: ITAT Mumbai

Nisarg Lifespace LLP Vs ITO (ITAT Mumbai)

Summary: The Mumbai Bench of the Income Tax Appellate Tribunal partly allowed the appeal of M/s. Nisarg Lifespace LLP for Assessment Year 2013-14 and directed deletion of the addition of ₹4 crore made under Section 68 of the Income Tax Act, 1961 in respect of unsecured loans. The Tribunal also directed that interest of ₹39,70,001/- paid on the loans be allowed as deduction.

The assessee, a builder and developer, had received unsecured loans aggregating to ₹4 crore from five parties—Sumukh Commercial Pvt Ltd, Olive Overseas Pvt Ltd, Josh Trading Co Pvt Ltd, Casper Enterprises Pvt Ltd and Nakshatra Business Pvt Ltd. The Assessing Officer treated the loans as unexplained cash credits primarily on the basis of the search conducted under Section 132 on Shri Praveen Kumar Jain and concerns managed by him, alleging that those concerns were engaged in providing accommodation entries.

The assessee contended that no statement of Shri Praveen Kumar Jain or his accomplices specifically named the assessee and that Shri Praveen Kumar Jain had subsequently retracted his statement by affidavit dated 15 May 2014. The assessee also sought cross-examination of Shri Praveen Kumar Jain, but such cross-examination was not provided by either the Assessing Officer or the CIT(A).

The Tribunal found that the assessee had furnished substantial documentary evidence concerning all five lenders, including confirmation letters, ROC master data, financial statements, ITR acknowledgements, bank statements evidencing the payments, declarations confirming the transactions and letters filed by the lenders. These documents, according to the Tribunal, established the identity of the creditors, their creditworthiness and the genuineness of the transactions.

The Tribunal further noted that the Assessing Officer had not issued notices under Section 133(6) to the loan creditors to verify the documentary evidence furnished by the assessee. It held that, once relevant documentary evidence had been produced, the Assessing Officer was required to examine its veracity by making appropriate enquiries before drawing an adverse inference.

The Tribunal held that the addition could not be sustained merely on the basis of the statement of a third party, particularly where that statement had subsequently been retracted and no corroborative evidence had been brought on record connecting the assessee with accommodation entries. The Tribunal relied upon the decision of the Bombay High Court in CIT v. Orchid Industries P Ltd., reported in 397 ITR 136 (Bom.), on the issue of the assessee’s discharge of its burden through documentary evidence.

The Tribunal also relied upon the decision of the Bombay High Court in PCIT v. Aquatic Remedies P Ltd., ITA No. 83 of 2016, for the proposition that an addition could not be made merely on a presumption that the assessee had routed its own cash through unsecured loans without concrete evidence.

The Tribunal additionally recorded that the loans had been repaid by the assessee either during the same assessment year or in the immediately succeeding assessment year, with interest after deduction of tax at source. It found that the borrowed funds had been utilised for the assessee’s business purposes. Consequently, the corresponding interest expenditure was allowable under Section 36(1)(iii).

The Tribunal also noted that the same loan parties had been accepted as genuine in the cases of DCIT v. D.N.H. Spinners Pvt Ltd. and ACIT v. Hetali Enterprises.

Accordingly, the Tribunal directed the Assessing Officer to treat the loans received from the five parties as genuine and delete the addition under Section 68. It further directed allowance of the corresponding interest expenditure. Ground No. 1 was dismissed as not pressed, while Grounds 2 to 4 were allowed. The appeal was therefore partly allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal in ITA No.629/Mum/2020 for A.Y.2013-14 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-26, Mumbai in appeal No.CIT(A)-26/IT-10265/2016-17 dated 12/12/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/03/2016 by the ld. Income Tax Officer – 28(2)(3), Mumbai (hereinafter referred to as ld. AO).

2. The Ground No.1 raised by the assessee was stated to be not pressed by the ld AR at the time of hearing. The same is reckoned as a statement made from the Bar and hence the Ground No.1 raised by the assessee is dismissed as not pressed.

3. The Ground Nos. 2 & 3 raised by the assessee are challenging the action of the ld CITA upholding the addition made u/s 68 of the Act in respect of loans received by the assessee. The interconnected issue involved therein is challenged in Ground No. 4 by the assessee with regard to disallowance of interest on aforesaid unsecured loans.

3.1. We have heard the rival submissions and perused the materials available on record. We find that the assessee is engaged in the business of builders and developers. The return of income for the Asst Year 2013- 14 was filed by the assessee LLP on 24.9.2013 declaring total loss of Rs 13,36,999/-. This return was duly processed u/s 143(1) of the Act accepting the same. Thereafter, the case was selected for scrutiny by issuance of notice u/s 143(2) of the Act on 3.9.2014. Various details and documents that were called for by the ld AO wre duly submitted by the assessee during the course of assessment proceedings. The ld AO observed that on perusal of tax audit report for the year under consideration, it was seen that assessee had taken unsecured loans of Rs 4 crores from 4 parties. A search and seizure action u/s 132 of the Act was conducted by the investigation wing of Income tax department on Shri Praveen Kumar Jain and the concerns managed by him on 1.10.2013, wherein it was unearthed that they were found to be indulged in the business of providing accommodation entries of bogus sales / purchases / loans and advances to many parties. The ld AO alleged that the assessee

3 had taken accommodation entries of bogus loans from the concerns used by Shri Praveen Kumar Jain group to run its business.

3.2. We find that the assessee had received unsecured loans during the year under consideration from the following parties for the purpose of its business, apart from other parties together with the details of interest paid to these parties are as under:-

3.3. We find that the ld AO had observed that the aforesaid concerns were operated by Shri Praveen Kumar Jain and belong to his group. During the course of search action u/s 132(1) of the Act on 1.10.2013, Shri Praveen Kumar Jain had given statement on oath that his concerns are engaged in the business of providing accommodation entries and that his concerns do not indulge in real business activities. Accordingly, the ld AO issued a show cause notice to the assessee as to why the aforesaid loans should not be treated as unexplained cash credit u/s 68 of the Act and consequential disallowance of interest thereon should not be made.

3.4. We find that the assessee had responded to the ld AO by stating that a general confession made by a third party that all his transactions are bogus or that he had indulged only in bogus transactions cannot be the basis for addition in the hands of the assessee. It was specifically pointed out that in none of the statements given by Shri Praveen Kumar Jain or his accomplices, the name of the assessee had been mentioned. It was pleaded that the ld AO had not found any material pointing that the transactions of the assessee with the aforementioned loan parties are not genuine. It was also pointed out to the ld AO that Shri Praveen Kumar Jain had retracted his statement subsequently on 15.5.2014 by way of an affidavit filed before the income tax department. The assessee filed a copy of the said affidavit before the ld AO. Accordingly, it was pleaded that the sole basis for proposal for addition u/s 68 of the Act is only statement of Shri Praveen Kumar Jain, which stood subsequently retracted by him. We find that the assessee from its part, had duly discharged its onus, by furnishing the following documents before the ld AO for all the 5 loan creditors:-

a) Confirmation letter from the companies (loan creditors) duly confirming the amount of loan given by them.

b) Master data of the companies (loan creditors) extracted from the website of the registrar of companies (ROC) showing that the compliance have been made by them with ROC and that the company is fully active.

c) Copy of the financial statements of the companies (loan creditors) for the financial year 2012-13.

d) Copy of ITR acknowledgement of the companies (loan creditors) for the Asst Year 2013-14.

e) Extracts of the bank statements of the companies (loan creditors) showing the amounts paid by them to the assessee.

f) Declaration given by the companies (loan creditors) duly confirming the loan transactions.

g) Copy of the letter filed by the said companies (loan creditors).

3.5. It was pleaded that based on the aforesaid documents, the loans taken by the assessee from the aforesaid 5 parties are genuine loans taken for commercial expediency for business purposes and not accommodation entries. The assessee also sought for cross-examination of Shri Praveen Kumar Jain before the ldAO, which was not provided by the ld AO.

3.6. We find that the ld AO completely ignored the aforesaid contentions of the assessee and the documentary evidences filed hereinabove and concluded that the assessee had not been able to satisfactorily explain the nature and source and creditworthiness of the unsecured loan credits totalling to Rs 4 crores purported to have been taken from those 5 parties and accordingly treated the same as unexplained cash credit u/s 68 of the Act. Since the loans were added as income, the interest paid on such loans amounting to Rs 39,70,001/- was sought to be disallowed by the ld AO in the assessment. This action of the ld AO was upheld by the ld CITA.

3.7. From the perusal of the assessment order, we find that the ld AO had given more emphasis in the entire assessment order to discuss the modus operandi adopted by Shri Praveen Kumar Jain and his group which had been unearthed during the search action carried out on him on 1.10.2013. We find that the assessee had submitted before the ld AO that nowhere in the statements of Shri Praveen Kumar Jain or his accomplices, the name of the assessee LLP had been mentioned. This fact has not been controverted by the ld DR before us. Moreover, the assessee had also sought for cross-examination of Shri Praveen Kumar Jain, which was never afforded to the assessee either by the ld AO or by the ld CITA. Hence we hold that the entire addition made by the ld AO and confirmed by the ld CITA, merely based on the statement of Shri Praveen Kumar Jain (third party) (which also stood subsequently retracted by him by way of an independent affidavit), deserve to be deleted on this count itself. No other corroborative evidence was brought on record by the revenue to even remotely suggest that the loan transactions carried out by the assessee with the aforesaid 5 loan creditors to be ingenuine.

3.7.1. It is pertinent to note that the assessee had duly discharged its onus by submitting all the relevant details (as listed supra) that are available with it before the ld AO. All these documents clearly prove the identity of the loan creditors, creditworthiness of the loan creditors and genuineness of transactions. We find that the ld AO had not even bothered to issue notice u/s 133(6) of the Act to the loan creditors to verify the veracity of the documents submitted by the assessee. In other words, the ld AO simply remained silent after receiving all the documentary evidences from the assessee. It is settled law that when documentary evidences are submitted by the assessee, the ld AO is duty bound to examine its veracity by making further enquiries in the manner known to law. Without testing such documents by making proper enquiries, no adverse inference could be drawn by the ld AO on those documents. We hold that once all the relevant documents are submitted by the assessee regarding the loan creditors together with the latest addresses available with it supported by confirmations from them, the onus cast on the assessee u/s 68 of the Act stands duly discharged and no addition could be made in its hands. Reliance in this regard is placed on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Orchid Industries P Ltd reported in 397 ITR 136 (Bom). We further hold that no addition could be made on mere presumption that the assessee routed its own cash in the form of unsecured loans without any concrete evidence to this effect. Reliance in this regard is placed on the decision of Hon’ble Jurisdictional High Court in the case of PCIT vs Aquatic Remedies P ltd in ITA No. 83 of 2016 affirming the tribunal decision in ITA No. 6356/Mum/2014. We further find that all the loans were duly repaid by the assessee either in the same assessment year or in the immediately succeeding assessment year with interest after subjecting the interest to due deduction of tax at source. These facts are not controverted by the revenue before us. Hence the addition made u/s 68 of the Act deserve to be deleted on merits also. Correspondingly, the interest paid on such loans would become allowable expenditure u/s 36(1)(iii) of the Act as there is no dispute that the monies received in the form of loans had been utilised by the assessee LLP for its business purposes.

3.8. Moreover, we also find that all the aforesaid loan parties had been accepted to be genuine and additions made u/s 68 of the Act had been directed to be deleted by this tribunal in the following cases:- a) DCIT vs D.N.H.Spinners Pvt Ltd in ITA Nos. 6315 & 6316/M/2017 for Asst Years 2013-14 & 2014-15 dated 8.8.2019 (Mumbai Tribunal) b) ACIT vs Hetali Enterprises in ITA No. 421/Mum/2018 for Asst Year 2013-14 dated 9.4.2021 (Mumbai Tribunal)

3.9. In view of aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we direct the ld AO to treat the loans received from aforesaid 5 parties as genuine and delete the addition made u/s 68 of the Act. Correspondingly, the interest paid on such loans also should be allowed as deduction. Accordingly, the grounds 2 to 4 raised by the assessee in this regard are allowed.

4. In the result, the appeal of the assessee is partly allowed.

Order pronounced on 11/06/2021 by way of proper mentioning in the notice board.