Assessee proves identity & creditworthiness of lender: Upholds deletion of Addition

DCIT Vs Thirumalai Marketing & Investments Limited (ITAT Mumbai)

Revenue filed appeals before ITAT challenging the order of CIT(A) which had deleted an addition of ₹5 crore made u/s 68 , treating it as unexplained cash credit & Quashed a penalty of ₹1.62 crore imposed u/s 271(1)(c) for furnishing inaccurate particulars of income.Background:

Assessee is a registered NBFC. During a search on a third party, it was discovered that the assessee had advanced a loan of ₹6 crore, sourced mainly from ₹5 crore received as share application money. AO during reassessment u/s 147 treated this ₹5 crore as bogus & lacking in creditworthiness. He relied primarily on a field inspector’s report which stated that the lender company did not exist at the stated address. Accordingly, the AO invoked Sec 68 & added the ₹5 crore to the assessee’s income, also initiating penalty proceedings.

Assessee challenged the reassessment & penalty before CIT(A) arguing that the amount was originally received as share application money in FY 2012–13 & later converted into a loan. The lender was a registered company, regularly filing ITRs, & had sufficient capital. The transactions were made via banking channels, supported by ledger accounts, confirmation letters, bank statements & TDS deductions. The change in address was duly intimated to the ROC & reflected in subsequent ITRs.

CIT(A), after detailed examination, concluded that the identity, creditworthiness & genuineness of the lender & the transaction were established. The inspector’s report was not conclusive, especially since the address had changed & the lender was still filing returns from the new location. The lender & the assessee belonged to the same group & operated from the same premises. Thus, CIT(A) deleted the ₹5 crore addition & also the resultant penalty u/s 271(1)(c).

Before ITAT, Department argued that the lender was not found at the registered address & hence its identity was doubtful. AO rightly invoked Sec 68 due to lack of physical verification & the suspicious nature of the entity. CIT(A) ignored the substance of the AO’s findings & wrongly accepted Assessee’s explanation.

ITAT upheld CIT(A)’s decision, observing that Assessee had submitted sufficient documentary evidence to prove all three limbs of Sec 68- identity, creditworthiness & genuineness. The change of address of the lender company was duly recorded on the MCA/ROC portal & reflected in tax filings. Mere non-availability of the entity at an address during inspection, particularly during COVID-affected periods, does not establish it as a shell or bogus entity. Revenue failed to conduct further verification beyond the inspector’s visit & drew adverse conclusions prematurely.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

Both the appeals of the revenue are filed against the order of the Learned Commissioner of Income-tax (Appeals)-48, Mumbai [for brevity, ‘Ld.CIT(A)] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment year 2013-14, date of order 30/11/2024 for both the appeals. The impugned orders are emanated from the orders of the Learned Assistant Commissioner of Income-tax, Central Circle-2(3), Mumbai (for brevity, ‘Ld.AO’) passed under section 147 of the Act, date order 17/04/2021 and penalty order passed under section 271(1)(c) of the Act, date of order 25/03/2022.

2. These appeals are related to quantum and penalty for the same assessment year. Therefore, we have heard them together, and are disposed of by this common order.

3. First, we take up quantum appeal in ITA No.139/Mum/2025.

The revenue has taken the following grounds:-

“Ground(1) “Whether on the facts and circumstances of the case, the Ld CIT(A) has erred in deleting the disallowance of Rs. 5,00,00,000/- made u/s, 68 of the Act, consequent to holding that 1 M/s SM Commodity and Bullion Trading Private Limited, which is having peculiar features of paper/shell companies, is not a paper or bogus entity as it is filing regular ITRs and declaring regular income?”

(ii) “Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in, not considering the physical verification report of Ward Inspector on the non-existence of M/s. SM Commodity and Bullion Trading Pvt. Ltd. at the given address, and also that the assessee could not provide any supporting documentary evidence and explanation on the identity and creditworthiness of the share application money and genuineness of such transactions?”

(iii) “Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in not employing his powers that are coterminous with those of the Assessing Officer as conferred on him by the Hon’ble Supreme Court in examining in sufficient 3 and appropriate detail whether the 3 conditions of genuineness of the creditor, genuineness of the transaction and creditworthiness of the creditor stood satisfied in the credits purportedly received by the assessee from Mix. SM Commodity and Bullion Trading Pvt. Ltd?”

4. The brief facts of the case are that the assessee originally filed its return of income on 30.09.2013, declaring a loss of Rs.15,74,26,662/-, which was subsequently revised to Rs.9,13,91,234/-. The return was assessed under Section 143(3) of the Act, on 15.03.2016. Pursuant to a search and seizure operation conducted on 14.02.2019 in the case of M/s Classic Marble Co. Pvt. Ltd., it was discovered that a sum of Rs.6,00,00,000/- had been advanced as a loan by the assessee. This amount was primarily sourced from Rs.5,00,00,000/- received as share application money from M/s S.M. Commodity and Bullion Trading Pvt. Ltd., a company found to be lacking creditworthiness. Consequently, reassessment proceedings were initiated by issuing a notice under Section 148 of the Act on 11.01.2021. In response, the assessee filed its return on 19.02.2021, declaring a revised loss of Rs.7,87,13,331/-. However, the objections raised by the assessee against the reopening were dismissed on procedural grounds. Thereafter, the reassessment was completed under Section 143(3) read with Section 147 of the Act, resulting in an addition of Rs.5,00,00,000/- under Section 68 on account of unexplained unsecured loans. Penalty proceeding, under Section 271(1)(c) was also initiated separately. The assessee, being aggrieved, filed appeals against both the quantum addition and the penalty before the Ld. CIT(A). The Ld. CIT(A) allowed the appeal on the quantum addition, and accordingly, the penalty was also deleted. Being dissatisfied with the said findings, the revenue has preferred the present appeals before us, challenging both the deletion of the quantum addition and the consequential deletion of the penalty.

5. The Ld. DR argued and stated that the addition was duly deleted by the Ld.CIT(A), is unjustified. The Ld.DR invited our attention to assessment order paragraphs 12.17 to 12.19, which are extracted below:-

“12.17 The transaction also fails on the test of genuineness because the assessee has failed to establish that the 1oan creditors are genuine. The lender companies have been used by the assessee for introduction of capital into Assessee Company by way of loans and the whole transaction is only a colourable device used by assessee to make the transaction appear genuine

12.18 The above bogus entities / shell companies have been used as conduit or layer to route the assessee’s unaccounted money in the guise of unsecured loan. Further, field verification done during the post survey / search proceedings revealed that the above shell/papers company were not found at the available addresses.

12.19 Since the assessee failed to discharge its onus to prove the genuineness of the unsecured loans taken and creditworthiness of above bogus/shell company, as such, share application money of Rs.5,00,00,000/- is not genuine. Accordingly, the share application money of Rs.5,00,00,000/- is disallowed u/s.68 of the I.T. Act treating the same as unexplained cash credit in the books of the assessee. Penalty proceedings u/s.271(1)(c) of the I.T. Act are separately initiated for furnishing inaccurate particulars of income.”

6. The Ld. DR further argued that the identity of the party was not proved and the Ld.CIT(A) in the order wrongly stated that the Inspector has inspected / verified the premises No.8 and not 9, but from the photograph in assessment order, it is clear that the premises No.9 is duly reflected. The loan creditors of the assessee were not available in the said premise. So, in any case, the identity of the party is for stake. Section 68 is correctly applied by the Ld.AO and assesse was not able to fulfil one of the criteria of section 68 of the Act. So accordingly, the Ld.DR prayed for rejecting the impugned appeal order.

7. The Ld.AR argued and filed a paper book containing pages 1 to 32, which is kept on the record. The Ld.AR respectfully relied on the order of the Ld.CIT(A) and the paragraph No.8 on page 21 is reproduced as below:-

“8. Decision on Ground No. 6 to 11: These grounds pertain to addition of Rs. 5 Cr made by AO u/s 68 of the Act. Appellant is a non-banking financial company engaged in business of giving and Thirumalai Marketing & Investments Limited receiving loans. During the course of enquiries with respect to M/s Classic Marble Company Private Limited, it was noted that it has received unsecured loans of Rs. 5 crores from the Appellant company. It was further noted that the source of funds advanced to M/s Classic Marble Company Private Limited as share application money was received from M/s S.M. Commodity and Bullion Trading Private Limited.

8.1 Assessing officer has noted that M/s SM Commodities and Bullion Trading Private Limited is not having creditworthiness to advance such amount to the Appellant. Further AO has relied upon inspectors’ report dated 10.4. 2019and 15.12.2020 wherein inspectors have reported that M/s SM Commodity and Bullion Trading Private Limited is not existent at the available address. Based on these observations, AO concluded that SM commodities and Private Limited is actually a bogus company which does not have worth to advance L 5 crores to the Appellant company. He proceeded with addition of such amount under section 68 of income tax act.

8.2 It is submitted that appellant is a NBFC registered with RBI and received money as share application money from M/s SM Commodity and Bullion Trading Pvt Ltd through cheque on 11.05.2012 however the same outstanding share application money was converted to loan on 30.06.2014. Appellant has filed confirmation, ledger account and bank statements to support its claim.

8.3 It is also brought to my notice that appellant has charged M/s Classic Marble Ltd interest @ 12% over the years with TDS deducted thereupon and this loan was repaid during FY 2015-16. Similarly, appellant has paid interest to M/s SM Commodity and Bullion Trading Pvt Ltd. as soon as the amount was treated as loan. This loan was repaid in FY 2021-22.

8.4 It is also submitted that M/s SM Commodity and Bullion Trading Pvt Ltd. Is regularly filing its return of income. Acknowledgement of such lTRs were also submitted before AO during assessment proceedings. It is noted that the lender company i.e. M/s SM Commodity and Bullion Trading Pvt Ltd. does not appear to be a paper or bogus entity as it is filing regular lTRs and declaring regular income. Moreover, the analysis of balance sheet over the year reflects that it Thirumalai Marketing & Investments Limited has sufficient funds to advance the loan in question. Therefore, I am unable to concur with AO on the question of creditworthiness of lender.

8.5 Now coming to the question of identity of the lender where AO has relied upon inspectors reports to conclude that the said party does not exist on the given address. The first visit of inspector was during pendency of investigation with DDIT (lnv) on 10.04.2019. This visit was done address at Shree Vijaya Residency which was a residential premises. I have noted that appellant has accepted that this used to be its registered office but on 08.06.2019, it applied for change in registered office before RoC and on 16.10.2019 before department. This change has been reflected in the returns of income filed by appellant from respective year. It is also noted that both appellant and lender company are part of same group and running their affairs from same office.

8.6 The second visit was conducted during assessment proceeding on 15.12.2020 at Hirji Gopalji Building, however as per photograph pasted in assessment order, it appears that the visited premise was shop no. 8 though appellant has address at shop 9 on same building. Moreover, this office was also not much in use due to prevailing covid situation then. More over, due to prevailing covid situation and incidents of thefts, premise was not in frequent use during that period. It appears to be live on MCA portal and filing ITR regularly. Under such facts and circumstances, mere a sketchy inspector report cannot be conclusive proof for identity of a company. It is also important to note that both lender and appellant are part of same group of companies. Therefore, the issue of identity is also settles in favour of appellant. In nutshell the ground of appeal is allowed.”

8. The Ld.AR in argument stated that the assesse had regularly made the transactions with the party. The letter of confirmation is duly submitted from the parties where the assessee regularly paid interest, deducted the TDS on interest on loan. It is further argued that the assesse had repaid loan in financial year 2021-22 relevant to Assessment Year 2022-23. The copy of the balance-sheet for impugned assessment year is duly filed where the sufficient capital is reflected for investment of such loan. In the Financial statement, shareholder fund is reflected amount to Rs.7,07,10,048/-. So, in the argument that assesse has sufficient fund to invest in the company. The relevant evidence related to identity, creditworthiness, transaction through banking channel and the copy of ITR were duly file during the assessment and appeal proceedings. The assesse has taken loan from the party, M/s S.M. Commodity and Bullion Trading Company Pvt Ltd (formerly known as GBP Industries Ltd) and the relevant bank statement and the confirmations are duly submitted. Further, the party is a company incorporated under Companies Act, 1956 and the registration is duly reflected in the portal of the Ministry of Corporate Affairs (MCA Portal). The list of documents, which were submitted before the revenue authorities were duly annexed in the paper book, which are as follows:-

9. We have heard the rival submissions and perused the material available on record. It is noted that the assessee had primarily received the share application money from the said party, which was subsequently converted into an unsecured loan. The assessee has duly complied with the conditions prescribed under Section 68 of the Act, during the course of proceedings before the revenue authorities. The concerned party is a company duly incorporated under the Companies Act, 1956. The Ld. CIT(A) has appropriately considered and elaborated upon the identity of the party, noting that the change in its registered address was duly updated on the MCA/ROC portal. Further, the said party has been regularly filing its income tax returns, and copies of returns for the assessment years 2016–17 to 2024–25, including the return for the relevant assessment year, are available on record (refer to pages 21–30 and page 11 of the APB, respectively). The party has disclosed sufficient shareholders’ funds under its capital structure. Supporting documents, including loan confirmation and evidence of TDS deducted on interest payments, have been placed before the revenue authorities. The entire transaction was carried out through regular banking channels, and proper confirmations were submitted. It is observed that the Ld. AO relied solely on the Inspector’s report without conducting any independent verification or investigation. In view of the above, we find no infirmity in the findings and reasoning provided by the Ld. CIT(A) in the impugned appellate order. Accordingly, the grounds raised by the Revenue are devoid of merit and are hereby dismissed.

As a result, the revenue’s appeal in ITA No. 139/Mum/2025 stands dismissed.

ITA No. 474/Mum/2025

10. In this appeal, the assessee has challenged the penalty of Rs.1,62,22,500/-levied under Section 271(1)(c) of the Act. Since the quantum addition forming the basis of the penalty was deleted by the Ld. CIT(A), the penalty order was also quashed. As the Tribunal has upheld the order of the Ld. CIT(A) in the quantum proceedings, the deletion of the penalty under Section 271(1)(c) also stands confirmed. Accordingly, we uphold the order of the Ld. CIT(A) quashing the penalty.

As a result, the revenue’s appeal in ITA No. 474/Mum/2025 is dismissed.

11. In the result, both the appeals filed by the revenue in ITA Nos. 139/Mum/2025 & ITA No.474/Mum/2025 are dismissed.

Order pronounced in the open court on 08^th day of July, 2025.