No addition u/s 68 for unsecured loans from genuine lenders

DCIT Vs Supreme Holdings And Hospitality (India) Limited (ITAT Mumbai)

Conclusion: Addition made under Section 68 for unexplained cash credit was not valid as assessee had provided sufficient evidence to prove the genuineness of unsecured loans received from various lenders and lenders were reputable entities with a clean track record, and the transactions were conducted through proper banking channels. Mere AO’s suspicion without any concrete evidence was not enough to justify the addition.

Held: In pursuance of search, notice u/s.153A was issued and in response, assessee also filed its return of income. AO noted that assessee had taken loan from four parties during the years under consideration. AO questioned the genuineness of one of the loans, alleging links to entities providing accommodation entries. Despite assessee submitting loan confirmations, bank statements, and tax returns of the lenders, AO treated the loan amount as unexplained cash credit under Section 68. The entire allegation of AO seems to be based on finding that these entities were doing some circular trading and they had defrauded the bank by adopting modus operandi of rotation of funds from one entity to another and misusing the LC facility from these banks. Despite making such allegation in the respective assessment orders of these entities, he had applied the profit rate on the sales declared by these entities to assess their income. Nowhere in their cases any deemed income had been assessed or any finding had been given that they were bogus entities not doing business. Once AO had accepted source of these loans in the case of these parties, then how can he made the addition u/s.68 in the hands of assessee. Further, nowhere in the various statements as referred by AO, there was any whisper about the assessee or any question was asked by the searched parties or the authorised officers that any such person or entity had given any kind of accommodation entry to the assessee or the loan given by these parties were bogus. There might be movement of funds from one company to other and overdrawing the money from the banks through Letter of Credit without any credentials at the time of Bill Discounting or for any other purpose, but nowhere there was any finding of investigation wing or any material found or statement during the search, that some unaccounted money had been given by the assessee company to accommodate any loan entry or there was any cash trail. Neither there was involvement of any kind of entry operator nor were these companies found to providing accommodation entry of loan by taking some temporary cash. Without such information or material, there could not be any presumption that these companies had provided bogus entry of loan or the transaction was not genuine. Thus, the finding of the CIT(A) could not be tinkered with. Accordingly, the additions made u/s.68 was deleted and the order of CIT (A) was confirmed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the Revenue and Cross Objection by the assessee against order dated 30/01/2024 passed by CIT(A)-49, Mumbai for the quantum of assessment passed u/s.153A r.w.s. 143(3) for the A.Y.2017-18.

2. In the grounds of appeal, the Revenue has challenged the deletion of Rs.43,90,00,000/- on account of unsecured loan received by the assessee which was added by the ld. AO u/s.68.

3. The grounds raised by the Revenue reads as under:-

“On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the appeal of the assessee despite the fact that assessee could not prove the repayment of the unsecured loans along with sources of repayment and reasons there for “

2. “On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the appeal of the assessee despite the fact that assessee could not prove the creditworthiness of the lenders and the genuineness of the transactions.”

3. “On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the appeal of the assessee despite the fact that assessee could not prove any satisfactory explanation about the nature and source of the amount credited in its books of accounts. Therefore, the assessee held that the amounts totaling to Rs 43,90,00,000/- found credited in the books of accounts of the assessee during the year under consideration as unsecured loans are nothing but accommodation entries.”

4. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in allowing the appeal of the assessee despite the fact that assessee could not prove that the entire chain of flow of funds is not provided and there is a complex layering. It is claimed that some of the funds advanced to the assessee were received from the assessee group’s other entities itself. The funds could have been transferred directly from one Group Company to the other group company and the unnecessary layering, and circular movements indicate mala fide intentions.”

4.Where as in the cross objection, assessee has challenged the validity of search and the search warrant issued in the name of M/s. Asuti Trading Pvt. Ltd., where assessee had no direct or indirect co-relationship in the said entity; and secondly, addition has been made without any incriminating material and therefore, the addition is beyond the scope of Section 153A. After hearing the Ld. Counsel on these grounds, we were prima facie of the opinion that there not much substance as validity of search cannot be looked into by this Tribunal especially whether there was proper satisfaction or not or search in case of assessee was on some mistaken identity; and the addition made are based on findings of the search and statements. Thus, we are not going into the grounds raised by the assessee in the cross objection and accordingly, we are deciding the issue raised in Revenue’s

5. The brief facts qua the issue of unsecured loans are that, a search and seizure action was carried out in the case of Jatia Group and other related groups and premises of the assessee was also covered u/s.132, which Counsel had pointed out that it was on some mistaken identity because assessee had nothing to do with Jatia Group or any other related group. However, in pursuance of search, notice u/s.153A was issued and in response, assessee also filed its return of income. The ld. AO noted that assessee has taken loan from four parties during the years under consideration which are as under:-

6. The AO in the assessment order has referred to the various statements of the Director of M/s. Asuti Trading Pvt. Ltd., wherein it was admitted that company was doing circular trading amongst various other companies of Jatia Group. It was also admitted that one, Shri Debasish Pal was the dummy director of one of the company and he was made to sign documents such as Letter of Credit from banks for the companies by Shri P.C. Lodha of Topworth Group of Companies. These companies did not have any actual purchase or sales and all the transaction were bogus without any movement of goods. He has also made a reference to the statement of Shri Raj Kumar Goel another Director and shareholder of the company wherein he has admitted that company had not done any genuine business activities and that all the entries reflected in its books are merely accommodation entries. The ld. AO has also observed that Central Bureau of Investigation (CBI) has also had filed an FIR in a case relating to bank fraud, wherein M/s. Asuti Trading Pvt Ltd. was an accused along with senior officials of Union Bank of India. The fraud was in the form that some private limited companies in connivance with the bank officers by way of opening of letters of credit (LC) without processing, appraisal, assessment, internal rating and regular sanction of the competent authority and without proper mortgage. Thus, AO has referred to certain allegation made by the CBI. He also noted that in the course of search and post search proceedings it was found that various companies of Jatia group, Lloyd group, Top worth group and Uttam Value Group were only paper companies involved in bogus purchases and bogus sales therefore, he came to the conclusion that these companies did not have any genuine business transaction with the assessee company and accordingly, unsecured loan of Rs.12 Crores taken from Lloyd Steel Ltd.; Rs.2,10,00,000/- from M/s. Asuti Trading Pvt. Ltd. was treated as bogus and non-genuine. Regarding unsecured loans from the remaining two companies, i.e., M/s. Elecmec Engineering Products Pvt. Ltd., and Duli Trading & Commodities Pvt. Ltd. of loan of Rs.14.90 Crores each, AO held that these were shell companies created by Uttam Value Group and Lloyd Group. In the course of search, statement of accountant of Shri Vinod Jatia was recorded wherein, he had admitted that the group was involved in bogus purchases /sales and circular trading to avail the benefit of LCs from various banks and there was no physical movement of goods. Based on this information and statement, the ld. AO without considering other documentary evidences filed by the assessee held that unsecured loan of Rs.43.90 Crores as bogus.

7. The assessee during the course of the assessment proceedings had filed copy of ledger accounts, balance confirmation, their income tax returns, audited financial statements and copy of their bank However, nowhere the ld. AO has examined these documents in the course of assessment proceedings.

8. The ld. CIT(A) after noting down the various allegations and observations of the AO, has dealt each and every party; and one very important fact which has been brought on record that in all the cases of the above entities, the assessment order u/s.143(3) or u/s.153A has been passed wherein the source of the funds have been accepted after deep scrutiny including the loan given by these entities to the assessee. The additions in these cases were made by rejecting the books of accounts and applying the profit rate on the sales. The relevant observation and the finding of the ld. CIT (A) qua all these parties are as under:-

“18. I have considered me assessment and submissions of the appellant and facts available on record. The details are discussed as under-

18.2 Duli Trade & Commodities Private Limited –

18.2.1 Before me, the appellant has furnished the ledger account of this party in its books of account, statements of bank accounts of the appellant and Duli Trade & Commodities Private Limited, copies of audit report and income tax returns of Duli Trade & Commodities Private Limited. From the perusal of ledger account, following transactions are found

It can be seen that the appellant has taken loan of Rs. 14.9 crores during the assessment year under consideration and the same has been repaid in the assessment year under consideration itself. The closing balance as on 31.03.2017 is nil.

18.2.2 Further, it is seen that the assessment u/s 143(3) in case of Duli Trade & Commodities Pvt. Ltd for A.Y 2017-18 has been completed on 30.03.2022 wherein the A.O has made addition of Rs. 38.16 crores. On Page no. 87 of this assessment order, the A.O has discussed the issue of rejection of books of accounts u/s 145 of the I.T. Act. After rejecting the books of accounts, the income is computed @ 5% of sales of Rs. 581.59 crores. In the subsequent para, the

A.O has given following findings:

“The searched entities of Vinod Jatia Group of companies used their goodwill and mortgaged their, assets& properties with banks to obtain LC facility from the banks, This funding was passed on to Uttam/Topworth/Lloyds group entities By providing this LC facility to his creditors who in tum passed on this funding to their group companies the searched entities of Vinod Jatia Group took burden of lot of risk on themselves. They did not receive any guarantee or LC from the parties to whom goods were allegedly sold. Therefore, the searched entities of Vinod Jatia Group would have eamed additicinal commission for providing additional facility of LC to various parties. In the case of searched entities where documents are on record-regarding mortgaging properties for LC facility, the income is estimated at rate of 7% of turnover However, the assessee company was not bearing risks of mortgaging properties, hence income is estimated at lower rate in the case of the assessee company Considering the market practices, facts in other similar cases and overall facts & circumstances of the case, the income on such turnover is estimated at 5% This estimated 5% income includes commission on accommodation entries of purchases and sales made/passed on to further the entries obtained from searched entities and other unaccounted incomes like Bill Discounting income, interest received, Discounts, income on account of suppression of GP etc. Further no adjustment on account of existing gross profit is being given to the assessee company since the assessee company has suppressed GP to very miniscule and meagre level and no specific GP information as per the books of the assessee on account of transactions in question is available. Therefore, the estimated additional income in the case of the assessee company is 5% of Rs 581,59,79,082/- which comes to Rs 29,07,98,954/. Therefore, Rs. 29,07,98,954/- is added to the total income of the assessee company”

18.2.3 From the above findings of the A.O, it can be seen that the source of funds in case of M/s. Duli Trade & Commodities Pvt. Ltd is from banks. The assessment in case of appellant has been completed by the DCIT-CC 7(1), Mumbai on 30.09.2021, wherein the A.O held that the unsecured loan received of Rs.14.9 crores from Duli Trade & Commodities Pvt. Ltd is unexplained. The same AO, i.e. DCIT-CC -7(1), Mumbai, has subsequently completed the assessment in case of Duli Trade & Commodities Pvt. Ltd. for the same A.Y. 2017-18, wherein he has not made any addition on account of sources of funds received by Duli Trade & Commodities Pvt. Ltd. In fact, he has given a finding that the source of funds is from the bank. As the source of loan advanced to the appellant has been accepted by the same A.O, no addition in the hands of the appellant can be made u/s. 68 of the I.T. Act.

18.3 Elecmec Engineering and Projects Private Limited –

18.3.1 Before me, the appellant has furnished the ledger account of this party in its books of account, statements of bank accounts of the appellant and Elecmec Engineering and Projects Private Limited, copies of audit report and income tax returns of Elecmec Engineering and Projects Private limited. From the perusal of ledger account following transactions are found to have taken place between the appellant and the above party.

It can be seen from the above that the appellant has taken loan of Rs. 14.9 crores in the financial year 2016-17 and the same has been repaid in the next financial year 2017-18. The closing balance as on 31.03.2018 is shown as nil

18.3.2 Further, the scrutiny assessment in case of Elecmec Engineering Pvt. Ltd for the A.Y 2017-18 has been completed u/s 153C rws 143(3) of the I.T. Act on 30.03.2022. On page No. 88 of the assessment order, the A.O has discussed the issue of rejection of books of accounts u/s 145(3) of the I.T. Act. After rejecting the books of accounts, the income is estimated at the rate of 5% on purchase of Rs. 460.95 crores. The A.O has not made any addition on account of funds received by this party. The A.O has further mentioned in the assessment order are as under

“The searched entities of Vinod Jatia Group of companies used their goodwill and mortgaged their assets& properties with banks to obtain LC facility from the banks. This funding was passed on to Uttam/Topworth/Lloyds group entities By providing this LC facility to his creditors who in turn passed on this funding to their group companies, the searched entities of Vinod Jatia Group took burden of lot of risk on themselves. They did not receive any guarantee or LC from the parties to whom goods were allegedly sold Therefore, the searched entities of Vinod Jatia Group would have earned additional commission for providing additional facility of LC to various parties. In the case of searched entities, where documents are on record regarding mortgaging properties for LC facility, the income is estimated at rate of 7% of turnover

However, the assessee comp company was not bearing risks of mortgaging properties hence income is estimated at lower rate in the case of the assessee company Considering the market practices, facts in other similar cases and overall facts & circumstances of the case, the income on such turnover is estimated at 5%. This estimated 5% income includes commission on accommodation entries of purchases and sales made/passed on to further the entries obtained from searched entities; and other unaccounted incomes like Bill Discounting incorne Interest received, Discounts, income on account of suppression of GPetc Further no adjustment on account of existing gross profit is being given to the assessee company since the assessee company has suppressed GP to very miniscule and meagre level, and no specific GP information as per the books of the assessee on account of transactions in question is available. Therefore, the estimated additional Income in the case of the assessee company is 5% of Rs 460,95 89,290/- which comes to Rs 23,04,79,464/- Therefore, Rs. 23,04,79 464/- is added to the total income of the assessee company”

18.3.3 The A.O has made addition of Rs 14 9 crores in the case of the appellant on account of unsecured loan received from this party. The assessment of Elecmec Engineering & Projects Pvt. Ltd has been completed by the A.O, DCIT- CC-7(1), Mumbai, which is the same A.O who has completed the assessment of appellant. On one hand, the O makes addition u/s 68 on account of loan received from this party, whereas on the other hand, the A. O accepts the source of funds in the case of this party as from the bank. No addition in this regard has been made in the hands of Elecmec Engineering & Projects Pvt. Ltd. In fact, the source of funds as mentioned in the assessment order is from the Banks. Under the circumstances, no addition can be made u/s. 68 of the Act in the case of the appellant on account of unsecured loan received from this party

18.4 Lloyds Steels Industries Limited –

18..4.1 Before me, the appellant has furnished the ledger account of this party in its books of account, statement of bank accounts of the appellant and Lloyds Steels Industries Limited, copies of audit report and income tax returns of Lloyds Steels Industries Limited. It is seen that the following transactions are appearing in the ledger account

It can be seen that the appellant has taken loan of Rs. 12 crores during the year under consideration. The opening balance of loan as on 01.04.2016 was of Rs. 9,20,17,029/- Thus, the closing balance as on 31.03.2017 was Rs. 21 crores. This entire loan has been repaid in the next financial year and the closing balance as on 31.03.2018 is shown as nil.

18.4.2 Further, the scrutiny assessment u/s 153C of the I.T. Act has been completed for A.Y 2017-18 on 31.03.2022 in case of Lloyds Steels Industries Limited, wherein, the A. O has accepted the returned income filed. The A.O has not made any addition on account of the sources of loan given to the appellant company. This assessment order has been completed by DCIT- CC-7(1), Mumbai, which is the same A.O who has completed the assessment of the appellant. On the one hand, the A.O makes the addition u/s 68 in the case of the appellant on account of unsecured loan received from Lloyds Steels Industries Ltd. and on other hand, the A.O accepts the sources of these loans in the case of the lender Accordingly considering these facts and circumstances, I am of the view that no addition u/s 68 of the Act is warranted in the case of the appellant on account of unsecured loan received from this party.

18.5 Asuti Trading Private Limited–

18.5.1 Before me, the appellant has furnished the ledger account of this party in its books of account, statement of bank accounts of the appellant and Asuti Trading Private Limited, copies of audit report and income tax returns of Asuti Trading Private Limited. From the perusal of ledger account following transactions are found

It can be seen that the appellant has taken loan of Rs. 2.1 crores during the assessment year under consideration and the entire loan including opening balance has been repaid in the same assessment year. The closing balance as on 31.03.2017 is shown as nil

18.5.2 Further, the assessment in the case of Asuti Trading Pvt. Ltd has been completed u/s 153A rws 144 on 13,07/2021, wherein after rejecting the books of accounts the income is estimated @ of 5% on total sales turnover. The A.O has not made any addition on account of funds received by these companies. This assessment has been completed by the DCIT-CC-7(1), Mumbai, who is the same A.O who has completed the assessment of appellant. On one hand, the A.O makes addition u/s 68 in the case of the appellant on account of loans received from this party and on the other hand, the A. O accepts the sources of the loan in the case of the lender. Considering the facts and circumstances discussed above, I am of the view that no addition u/s. 68 of the Act can be made in the case of the appellant on account of unsecured loan received from this party

19. From the above discussion, It can be seen that the loans have been accepted through banking channels and the repayments have also been made through the banking channels. There are several judicial decisions wherein it is held that in case of repayment of loan through the banks, addition cannot be made u/s.68 of the I.T. Act.

9. Thereafter, ld. CIT (A) after referring to various judgments, finally deleted the addition after observing as under:-

20 In the appellant’s case the loans were re received through banking channels and the repayments were also made through banking channels, Further, there were sufficient funds in the bank accounts of these parties and no cash was deposited immediately before advancing the loans to the appellant. The appellant has submitted loan confirmations from these parties and also submitted the copies of their Income tax returns, audit report etc. All these 4 parties are assessed with the same A.O as of appellant. Thus, the A.O was having the financial details of these four parties with him

21. Further, the A.O. who has completed the assessment in the case of appellant has also completed the assessment in cases of these four parties and in these assessment orders, he has not doubted the sources of the loans advanced to the appellant by these parties. The A.O has not made any additions regarding the sources of funds for advancing loans. The AO in the assessment order of the appellant has discussed the modus operandi of misusing the LC facility by these parties and held that the loan entries are accommodation entries, however, in their respective assessments, no addition on this issue has been made.

22. In view of the facts and judicial pronouncements as discussed above, the addition of 43,90,00,000/- made by the AO u/s 68 of the IT Act is deleted. Accordingly, this ground of appeal is ALLOWED.

10. We have heard both the parties at length and perused the voluminous documents filed before us and the relevant material referred at the time of hearing. The main case of the Revenue before us is that, all these entities from whom assessee has taken loan were found to be dubious entities without carrying out any actual business. Once they have been admitted to be a shell company, therefore, the entire transaction of loan cannot be treated genuine. Ld. DR further submitted that even if assessee may not be linked directly with these companies but the fact of the matter is that assessee has taken huge loans of several Crores from these dubious entities of Jatia group, Lloyds group and other groups who were covered under the search. Once these group and entities were found to be doing fraudulent practice to de-fraud the bank and did not have any actual business, then how the transaction of giving loan to the assessee can be accepted to be genuine. Thus, the order of the ld. AO should be confirmed.

11. On the other hand ld. Counsel for the assessee strongly referred and relied upon the order of the CIT(A) and pointed out that, this case all these companies assessee had shown their creditworthiness from their audited accounts and profit and loss account and their balance sheet reflected that they had huge surplus funds and also have disclosed the loans given to the assessee. Their revenue from operations have been in hundreds of crores and were duly assessed to tax and therefore, it cannot be held that these companies were dubious. He further submitted that none of these parties who have given the statement were either confronted or put to cross examination and merely relying upon the statement wherein there is no reference of the assessee, no adverse inference can be drawn, when assessee had filed all the documents and especially in case of all these lender companies their creditworthiness and sources of funds have been examined under scrutiny by the same Assessing Officer in their regular assessments. Thus, the loans cannot be treated as non-genuine and assessee had discharged the entire onus cast upon it.

12. From the perusal of the records, we find that identity of all the four companies are not in doubt, because Asuti Trading Ltd is one of the company forming part of Topworth Group of companies which is a very big group having turnover of several 100 Crores and are assessed to tax under the same Assessing Officer as that of the assessee. Similarly, Duli Trading & Commodities Pvt. Ltd. was forming part of Uttam Value Group, regularly assessed to tax and for these years has been assessed with the same Assessing Officer and they have disclosed the transaction in their financials. In the case of Elecmec Engineering Projects Pvt. Ltd. which is farming part of the Lloyds group, is also a big group and was carrying out huge volume of business which is evident from the profit and loss account Lloyds Steel Industry Ltd., which was also part of Lloyds group was also regularly assessed to the tax with the same Assessing Officer and were having substantial business. Thus, identity cannot be doubted.

13. In so far as creditworthiness is concerned, from the perusal of the financial statements / balance sheet of Asuti Trading Pvt. , it is seen that it had capital reserves and surplus of Rs.27.21 Crores and also had huge funds available in the balance sheet. They have also shown loan given to the assessee in their audited accounts. Similarly, in the case of Duli Trading and Commodities Pvt. Ltd. reserves and surplus were more than Rs.28.31 Crores and also reflected huge funds available in the balance sheet and also duly shown the loan in their balance sheet. Similarly, Elecmec Engineering and Projects Pvt. Ltd. it had shown reserves and surplus of Rs.14.10 Crores and Lloyds Steel Industry had shown more than Rs.25.26 Crores as reserves and surplus and had shown huge operations from revenue. In all these cases it is seen that these companies have filed their bank statements which huge flow of funds. Source of these funds have not been doubted by the AO.

14. To prove the genuineness, assessee had filed a copy of their bank statements wherein the amounts have been transferred through clearing and it is not the case that some unknown clearing has come from where they have given loan to the It appears that they had huge funds available in the form of credit balance and there has been regular transaction of business from where these parties had given loans to the assessee. Another important fact is that these loans were repaid either in the same assessment year or in the subsequent assessment year and the closing balance was nil. The loan has been repaid back through banking channels in a short span. This fact has already been noted by the ld. CIT (A) in the foregoing paragraphs. Thus genuineness of the transaction also cannot be doubted.

15. One very important fact which has been noted by the CIT (A) is that in the case of all these four entities, same Assessing Officer has passed regular assessment order u/s.143(3) / 153A where this entire issue has been examined in detail and no adverse inference has been drawn by the same Assessing Officer in case of those entities with regard to the source of funds and loan given to the assessee. If ld. AO had any doubt about the source of funds then, he should have examined in the case of these parties. This fact as noted by the ld. CIT(A) as incorporated above has not been rebutted by the department before us. Accordingly, we do not find any infirmity in the order of the ld. CIT (A) and the same is confirmed..

16. The entire allegation of the ld. AO seems to be based on finding that these entities were doing some circular trading and they had defrauded the bank by adopting modus operandi of rotation of funds from one entity to another and misusing the LC facility from these banks. Despite making such allegation in the respective assessment orders of these entities, he has applied the profit rate on the sales declared by these entities to assess their income. Nowhere in their cases any deemed income has been assessed or any finding have been given that they are bogus entities not doing business. Once ld. AO has accepted source of these loans in the case of these parties, then how can he made the addition u/s.68 in the hands of the

17. Further, nowhere in the various statements as referred by the ld. AO, there is any whisper about the assessee or any question was asked by the searched parties or the authorised officers that any such person or entity have given any kind of accommodation entry to the assessee or the loan given by these parties were bogus. The entire allegation of the AO based on the statement recorded and finding of the search parties is that these groups were doing either bogus sales or purchases or circular trading to get LC from the bank. There might be movement of funds from one company to other and overdrawing the money from the banks through Letter of Credit without any credentials at the time of Bill Discounting or for any other purpose, but nowhere there is any finding of investigation wing or any material found or statement during the search, that some unaccounted money has been given by the assessee company to accommodate any loan entry or there is any cash trail. Neither there is involvement of any kind of entry operator nor were these companies found to providing accommodation entry of loan by taking some temporary cash. Without such information or material, there cannot be any presumption that these companies had provided bogus entry of loan or the transaction is not genuine. Thus, the finding of the Ld. CIT(A) cannot be tinkered with. Accordingly, the additions made u/s.68 is deleted and the order of the ld. CIT (A) is confirmed and the grounds raised by the Revenue are dismissed.

18. Since we have deleted the addition on merits, we are not going into the legal issues raised by the assessee in the cross objection as held by us in earlier part of the order and the same is dismissed as infructuous.

19. In the result, appeal of the Revenue and Cross Objection of the assessee are dismissed.

Order pronounced on 7th January,2025.