HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
versus
Hindon Forge (P.) Ltd.
IT APPEAL DEFECTIVE NO. 288 OF 2009
JULY 30, 2012
ORDER
1. We have heard Shri Dhananjay Awasthi, learned counsel appearing for the revenue. Shri Suyash Agrawal appears for the respondent-assessee.
2. This Income Tax Appeal has been filed with a delay of 2 days. The delay has been sufficiently explained in the affidavit of Shri Lala Ram, Income Tax Inspector, Circle-I, C.I.T. Office, Ghaziabad and is accordingly condoned. The appeal is treated to be filed within limitation. With the consent of parties, it was heard on the following questions of law, as follows:-
“(1) Whether on the facts and circumstances of the case the Hon’ble ITAT was justified in deleting the entire addition of Rs. 17, 83, 571/- by holding that the assessee has proved the identity of the creditors, when the Managing Director of the company was the sole trustee of all these eight trusts and all deposits were made in cash and the trusts instead of utilizing these deposits for the aims and objectives of the trusts, loaned out to the assessee company, which proves that these trusts had no independent identity and acted as a tool in the hands of the assessee-company.
(2) Whether on the facts and circumstances of the case the Hon’ble ITAT was justified in holding that the credit worthiness of 8 trusts was established when the source of funds with all of them was not proved by the assessee, which fact is further fortified by ill placed utilization of trust funds.
(3) Whether on the facts and circumstances of the case the Hon’ble ITAT was justified in holding that the genuineness of transaction was established when the whole transaction apparently is a colourable device just to hoodwink the revenue. These eight trusts were managed by sole and same trustee, who was also managing and controlling the assessee company and the funds deposited in cash in the trusts were simply taken out by the Managing Director of the assessee company to use in the hands of the company.”
3. For the assessment year 2003-04 the assessee-company filed return declaring income of Rs. 9, 45, 430/- which was processed under Section 143(1) of the Income Tax Act, 1961. The case was picked up for scrutiny after the approval given by the Chief Commissioner of Income Tax, Meerut. Notices were issued under Section 143(2) of the Act, in compliance of which books of account were produced.
4. The AO found that out of unsecured loan of Rs. 31, 77, 839/-during the year, the loans of Rs. 17, 83, 571/- were taken from eight different trusts, namely ‘Satyam Shivam Sunderam Trust’; ‘Lord Shankar Ji Trust’; ‘Lord Krishna Ji Trust’; ‘Lord Vishnu Ji Trust; ‘Lord Ganpati Ji Trust’; ‘Goddess Bhawani Ji Trust’; ‘Lord Hanuman Ji Trust’ and ‘Lord Laxmi Ji Trust’. Mr. Rajesh Kumar Agarwal, the director of the company with 28.88% shareholdings in the company, and with his close relatives Mr. Ankur Agarwal and Smt. Urmila Agarwal-the other directors of the company holding shares in the company, had taken loans from these eight trusts. Shri Rajesh Kumar Agarwal the common managing trustee of all these eight trusts is also managing the assessee-company. The AO found that all the cash deposits in bank account of the trusts were out of petty donations received during the year. The last year’s cash balance was kept as cash in hand in imprest account with trustee and some loans and advances. It was observed that the amount of cash in hand and petty donations, as shown in the balance sheet and Income & Expenditure account, is not by any means sufficient for advancing unsecured loans to the extent as shown by the assessee/trusts. The cash was kept in imprest account and for loans & advances, no evidence was produced. In absence of books of account, the availability of funds with the trusts to advance the same as unsecured loans to assessee company was not established and thus the assessee failed to prove the capacity and genuineness of the transactions. The AO did not accept the genuineness of the unsecured loans of Rs. 17, 83, 571/- and added it back to the income of the assessee. The AO also found an adhoc disallowance of Rs. 1, 00, 000/- on account of machinery repairs with which we are not concerned in this appeal.
5. The CIT(A) in the appeal filed by the respondent-company considered the submissions, and recorded findings as follows:-
“3.4 The submissions of the learned A.R. has been considered. I have also considered the facts brought out by the AO in the assessment order as well as in his reported, referred to above. The facts emerges out from the material on record are as follows:-
(i) Shri Rajesh Kumar Agarwal the Director of the Appellant Company is the sole trustee in respect of the 8 trusts.
(ii) The ld. A.R. has pointed out that the said trusts are assessed to tax and the AO has informed that the returns of the trusts are not subjected to scrutiny.
(iii) The AO has also reported that neither the books of account have been produced nor any evidence furnished in respect of the petty charity received.
(iv) A perusal of bank statement shows that these so called trusts are receiving money in cash on regular basis and identical amount is being given away by cheque.
(v) From the entries in the bank pass book apparently there is neither any expenditure shown nor any application of fund towards objective of the trust nor any outgoing towards beneficiary of the trust.
(vi) The appellant has neither furnished copy of trust deed before AO nor before me to prove the genuine existence of the trusts. Shri Rajesh Kumar Agarwal is the common trustee in respect of all the 8 trusts. Neither the author of the trust, nor the beneficiary, nor the object of the trust has been given.
(vii) The genuineness and the validity of the trusts remains to be proved.
(viii) In his report dated 03.03.2008, the AO has observed that “non-production of donation slips/receipts further goes to prove that no donations were received and the entire receipts of donations shown is the Income & Expenditure A/c was mere diversion of income of the assessee company.
(ix) The learned AR has contended that “for intents and purposes of various trusts constituted under respective Trust Deeds were genuine entities separate and independent from the assessee company.” The observation of the AO, the learned AR pointed out, is based on suspicion, conjecture and surmises. The ld. AR has also contended that the AO has not brought any evidence to prove the falsity of the transaction. It was further argued that suspicion, howsoever, strong cannot taken place of positive evidence.
(x) The ld. AR also placed reliance on the following judgments:
(a) DCIT v. Rohini Builders – 256 ITR 360 (Guj.)
(b) Murlidhar Lahorimal v. CIT – 280 ITR 512 (Guj.)
(c) ITO v. M.S. Advance (P) Ltd. ITAT, Amritsar “SMC” Bench..”
6. The CIT(A) thereafter found as follows:-
“On careful consideration of the facts placed hereinabove, it is seen that the diversion theory of the AO apparently has sufficient basis because independent existence of the trusts has not been proved. Neither the Author of the trust, nor the object/beneficiary has been given before the AO or during the appellant proceedings. The accounts of the trusts given does not throw light on independent existence of these trusts. The AO has brought on record various facts, which clearly suggest that Shri Rakesh Kumar Agarwal is the common trustee of these trusts and is also the Director of the appellant company. The fund flow from the trusts to the appellant company through the same person Shri Rakesh Kumar Agarwal has been established. The independent existence of these trusts, however, has not been proved. The AO has rightly pointed out that the Income Tax Returns in respect of these trusts have been processed in summary manner and have not been subjected to scrutiny and hence merely because Income Tax Returns have been filed, it does not conclusively prove genuine and independent existence of these trusts.”
7. The appeal was dismissed.
8. The Income Tax Appellate Tribunal has allowed the appeal with the findings, as follows:-
“8. Considering the facts of the case in the light of these above decisions and decisions cited by both the parties, we are of the view that assessee has discharged the initial onus which lay upon it in terms of S. 68 of the I.T. Act by proving the identity of the creditors, their credit worthiness and genuineness of the transaction in the matter. The assessee has filed copies of the balance sheets and income & expenditure/ac of all the 8 trusts in the paper book. It is not in dispute that the assessee received loans/advances from these 8 trusts through cheques and banking channels. On perusal of the balance sheet of these trusts, we find that these trusts were having initial capital brought from preceding A.Ys which is more than the amount advanced by these Trusts to the assessee. All these 8 trusts are income tax assessee with the same AO (ACIT, Circle-I Ghaziabad) who is also A.O. in the case of the assessee company. The details of the PAN no. of these Trusts are also given in the paper book. All these 8 trusts are therefore assesseed by the same AO who has made addition against the present assessee company. In most of the cases the copy of the intimation u/s 143(1)(a) for the A.Y. in question are filed in the paper book to show that the returns of income of these trusts have been accepted by the same AO. We further find from the balance sheet of these 8 trusts that they have shown loans and advances given to the assessee company in their balance sheet. These facts on record would clearly prove that despite there is objection by the AO that there were deposits in cash in bank account of these Trusts but the fact remained that the opening balances with these 8 trusts were sufficient to advance the loan to the assessee company out of their initial capital which were generated from the preceding A.Y. It is admitted fact that the assessee filed confirmation of all the 8 trusts before the AO. Their copies of bank accounts were also filed and admittedly all the amounts have been advanced to the assessee through cheques and that the details of loans advanced given by these 8 trusts to the assessee company are reflected in the balance sheet for the same A.Y. in question and also certified by the C.A. These balance sheets have been filed with the income tax department and more particularly with the same AO assessing the assessee company. These evidences and material on record clearly prove that assessee had discharged initial onus to prove identity of the creditor, their financial capacity to advance loan and genuineness of the transaction in the matter.
9. The authorities below have rejected the claim of the assessee precisely on the reasons that there were cash deposits in the accounts of the trusts prior to the issue of cheques to the assessee company. However, it is settled law that an assessee could not be asked to prove the source of the source. The assessee could not be directed to prove the source of deposits in its books of accounts. Therefore, objection of the authorities below cannot be sustained. Moreover as noted above the opening capital balances with the 8 trusts were found sufficient out of which loans could have been advanced to the assessee irrespective of the cash deposits in their bank accounts. The authorities below have also noted that the director of the assessee company is also sole trustee of these trusts. Therefore, independent status of the trusts have not been proved. The above objection of the authorities below is also not legally sustainable because assessee is registered under the Companies Act and is a legal entity. All the Trusts are assessed to income tax separately and their returns have been accepted by the AO. Therefore, there is no bar for the M.D. of the assessee company to become trustee in other organizations like the trust in question. The assessee has therefore proved that the assessee company and the 8 trusts are independent legal entities. The authorities below have also noted that books of accounts of the assessee are not produced before them. It was submitted by the assessee that during the A.Y. in question the 8 trusts were having only interest income and no business is carried on by the trusts. Therefore for non-production of the books of the trusts would not be a ground for rejecting the explanation offered by the assessee. If the income tax returns of all the 8 trusts are processed only u/s 143(1)(a) by the same AO, there is no fault on the assessee company in this way. The assessee company can not control the wisdom of the AO whether to process the income tax returns or to make a scrutiny assessment. Such objection would not be valid to reject the claim of the assessee. The authorities below have also noted the transaction appears to be colourable device to avoid payments of taxes. The addition is made u/s 68 of the I.T. Act and the assessee could be directed to explain the nature and source of the deposits/credits in its books of accounts. The assessee has offered explanation to explain credits in its books of accounts. Therefore, such an objection would not be valid. Considering the above discussion and the case laws referred to above, it is clear that since all the 8 trusts are assessed by the same AO, the addition so made by the AO would amount to disputing the roecrds of the Revenue dept. maintained by the AO in respect of the 8 trusts. Such a course of action is not permissible under law. The department thus cannot make adverse inference against the assessee in respect of records maintained in respect of the 8 trusts.
10. Considering the above discussion in the light of the case law relied upon by ld. counsel for the assessee and noted above, we are of the view that the assessee has proved identity of the creditors, genuineness of the transaction and credit worthiness of the creditor. We accordingly set aside the orders of the authorities below and delete the entire addition. As a result ground nos. 1 and 2 of the appeal of the assessee are allowed.”
9. Shri Dhananjai Awasthi, appearing for the revenue, submits that ITAT has committed gross error of law in accepting the genuineness of the transaction in the matter. All the eight trusts, even if their returns were accepted under Section 143(1)(a), were fictitious. In all these eights trusts Shri Rajesh Kumar Agarwal was the common managing trustee. He did not produce the copy of the trust deeds before the authorities to prove the genuineness and existence of the trusts. Neither the author of the trusts nor the object of the trusts was shown. In all the trusts cash amounts were deposited, and on the same day these amounts were transferred to the company managed by Shri Rajesh Kumar Agarwal, by way of cheque. The details of these cash deposits in the trusts and the date of transfer to the assessee-company have been given in the order of AO as follows:-
LORD SHANKER JI TRUST
