DCIT Vs Khimji Karamshi Patel (ITAT Mumbai)
ITAT Mumbai held that no additions or disallowances can be made u/s. 153C of the Income Tax Act in absence of any incriminating material found during the search on a third person.
Facts- Assessee is an individual, filed his original ROI on 26.09.2008 declaring total income of Rs. Nil and the return was processed u/s. 143(1). Later on, information was received from the DDIT(Inv.) Unit-3(1) and 3(2), Mumbai vide letter dated 04.03.2015 that during search/survey action conducted on 09.10.2014 in the case of Kamdhenu/Green Valley Group, it was noticed that the assessee has received unsecured loans of Rs. 50,00,000/- from M/s. Divine Tradecom Pvt. Ltd., a Kolkata based company in the year under consideration.
Further, it is informed that statement of Shri Pradeep Poddar, Director of M/s. Divine Tradecom Pvt. Ltd., M/s. Bhawna Computers Pvt. Ltd., M/s. Rowland Trexim Pvt. Ltd. and many other Kolkata based companies was recorded u/s. 131 of the Act on 02.12.2014 wherein he stated that he has used above companies to provide accommodation entries to the Kamdhenu Group and assessee is one of the directors in Patel/Patni group of concerns, an associate group of Kamdhenu Group.
Accordingly, case of the assessee was reopened by issuing notice u/s. 148 of the Act dated 16.03.2015. Subsequently, notice u/s. 143(2) and 142(1) of the Act were issued and served.
In the reassessment order passed u/s. 143(3) r.w.s. 147 of the Act dated 29.03.2016, AO made addition of Rs. 3,00,00,000/- u/s. 68 of the Act being Rs. 2,50,00,000/- received from M/s. Divine Tradecom Pvt. Ltd. and Rs. 50,00,000/- received from M/s. Rowland Trexim Pvt. Ltd. and consequential interest of Rs. 3,17,213/- and further disallowed loss of Rs. 30,93,410/- thereby assessing the total income at Rs. 3,03,17,260/-.
CIT(A) granted partial relief to the assessee. Aggrieved by the relief granted by CIT(A) to the assessee, revenue is in appeal before us.
Conclusion- When the source of money is accepted as compliant with provision of section 68 of the Act, in absence of any further inquiry and findings , the amount received by assessee form those companies cannot be held to be taxable in the hands of the assessee u/s 68 of the Act. Thus, reassessment orders in lender companies accepting the money if at all received from companies operated by some unscrupulous persons, then money received by assessee cannot be held to non-genuine. In fact, that is the only allegation of LD AO, which is demolished by the reassessment orders of the lender companies. We therefore do not incline to interfere with the findings and reasoning of the ld. CIT(A) and uphold the order of ld. CIT(A).
we find that the said issue is squarely covered by the decision of the Hon‟ble Apex Court in the case of Sinhgad Technical Education Society Ltd. (2017) 84 com 290 (SC), wherein it is held that there has to be incriminating material pertaining to the assessment year in question in order to make any addition or disallowance in an assessment made u/s. 153C of the Act. In light of the above background of facts and settled judicial precedent, we are of the considered view that no additions or disallowances can be made devoid of any incriminating material found during the search on a third person. Accordingly, the Cross objection filed by the assessee is allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. This is the bunch of three appeals filed by the learned assessing officer and 2 cross objections filed by the assessee with respect to same assessee arising out of the same search, involving Assessment year 2008-09, 2011-12 and 201415, involves common issues, both the parties argued them together, therefore, these appeals and cross objections are disposed of bm2qiy this common order.
ITA no. 3039/Mum/2019
Assessment year 2008 – 09
02. The learned Deputy Commissioner of income Tax Central Circle 7 (3), Mumbai (the learned AO) is in appeal in ITA no. 3039/Mum/2019 before us against the order of Commissioner of Income Tax (Appeals)-49, Mumbai [for short, “CIT(A)”] dated 28.02.2019 for A.Y. 2008-09 raising following grounds of appeal :-
ITA No.3039/MUM/2019
(Assessment Year 2008-09)
“1. On the facts and circumstances of the case, the Learned CIT(A) has erred in deleting the addition of ₹ 3,00,00,000/- made by the AO on account of unsecured loan u/s. 68 of the I.T. Act, 1961 without appreciating the fact that the assessee failed to prove the genuineness of the transaction and creditworthiness of the M/s. Divine Tradecom Pvt Ltd and M/s. Rowland Trexim Pvt Ltd.
2. On the fact and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of ₹ 3,17,213/- made by the AO on account of interest expenditure on unsecured loan without appreciating the fact that the assessee failed to prove the genuineness of transactions during assessment proceedings.
3. On the fact and circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of business loss of ₹ 30,93,410/- made by the AO on account of interest expenditure u/s. 57(iii) of the Act on unsecured loan without appreciating the fact that the assessee failed to explain the interest expenditure.”
03. Brief facts of the case are that
i. Assessee is an individual , filed his original return of income on 26.09.2008 declaring total income of Rs. Nil and the return was processed u/s. 143(1) of the Income Tax Act, 1961 [for short, “the Act”].
ii. Later on, information was received from the DDIT(Inv.) Unit-3(1) and 3(2), Mumbai vide letter dated 04.03.2015 that during search/survey action conducted on 09.10.2014 in the case of Kamdhenu/Green Valley Group, it was noticed that the assessee has received unsecured loans of Rs. 50,00,000/- from M/s. Divine Tradecom Pvt. Ltd., a Kolkata based company in the year under consideration.
iii. Further, it is informed that statement of Shri Pradeep Poddar, Director of M/s. Divine Tradecom Pvt. Ltd., M/s. Bhawna Computers Pvt. Ltd., M/s. Rowland Trexim Pvt. Ltd. and „many other Kolkata based companies‟ was recorded u/s. 131 of the Act on 02.12.2014 wherein he stated that he has used above companies to provide accommodation entries to the Kamdhenu Group and assessee is one of the directors in Patel/Patni group of concerns, an associate group of Kamdhenu Group.
iv. Accordingly, case of the assessee was reopened by issuing notice u/s. 148 of the Act dated 16.03.2015. Subsequently, notice u/s. 143(2) and 142(1) of the Act were issued and served.
v. In the reassessment order passed u/s. 143(3) r.w.s. 147 of the Act dated 29.03.2016, ld Assessing Officer made addition of Rs. 3,00,00,000/- u/s. 68 of the Act being Rs. 2,50,00,000/- received from M/s. Divine Tradecom Pvt. Ltd. and Rs. 50,00,000/- received from M/s. Rowland Trexim Pvt. Ltd. and consequential interest of Rs. 3,17,213/- and further disallowed loss of Rs. 30,93,410/- thereby assessing the total income at Rs. 3,03,17,260/-.
vi. Aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the ld. CIT(A) who granted partial relief to the assessee vide order dated 28.02.2019 and a subsequent Corrigendum Order dated 17.06.2019.
vii. Aggrieved by the relief granted by the ld. CIT(A) to the assessee, revenue is in appeal before us.
04. The ground no. 1 and 2 relates to the deletion of addition of Rs. 3,00,00,000/- made u/s. 68 of the Act and consequential interest of Rs. 3,17,213/-. During the year under consideration, the assessee obtained unsecured loan of Rs. 2,50,00,000/- from M/s. Divine Tradecom Pvt. Ltd. and Rs. 50,00,000/- from M/s. Rowland Trexim Pvt. Ltd.
05. The ld. Departmental Representative submitted that
i. These lender companies are operated by one Shri Pradeep Poddar who is an accommodation entry provider and that in his statement-recorded u/s. 131 of the Act on 02.12.2014, he himself had stated that he was just acting as a Dummy Director in these two companies. In this regard, primary analysis of money received by these companies was made and it was found that these companies have in turn received share capital from various other Kolkata based companies, which belonged to identified entry operators. In fact, in past, these entry operators have accepted before the department that they are in the business of providing accommodation entries and for that purpose, they have created shell companies. These entry providers provided accommodation entries in lieu of cash and rotated these cash in numerous self-controlled shell entities.
ii. Merely because the assessee furnished the confirmation, ITR acknowledgement, financial statements and bank statement of these lenders that, itself is not sufficient to say that the assessee has discharged his onus u/s. 68 of the Act.
iii. companies do not have their own fund and accumulated profits are negative or just meager and that in these entities, the funds are influxed through web of other entities by way of share premium or unsecured loans and then the same are transferred to other entities.
iv. M/s. Divine Tradecom Pvt. Ltd. and M/s. Rowland Trexim Pvt. Ltd. were purchased by Kamdhenu Group at a very low price than the net worth of these companies, which also proves that the loan transaction with the assessee is not a genuine transaction and merely an accommodation entry.
06. The LD AR submitted that the observations made by the Assessing Officer and that addressed by the ld. DR are misplaced and not properly appreciated. The ld. Counsel submitted that
i. All the three ingredients of section 68 of the Act viz. identity of the lender, genuineness of the transaction and creditworthiness of the lender have been duly established by furnishing relevant documentary evidences in the form of confirmations, ITR acknowledgement, financial statements, bank statements of the lender, PAN card copies, details of interest paid and TDS deducted thereon, Affidavit of Shri Pradeep Poddar retracting the statement earlier made on 02.12.2014.
ii. Statement of Shri Pradeep Poddar on whom the revenue has placed reliance upon was taken on 02.12.2014 and on very next day i.e. on 03.12.2014, Shri Padeep Poddar had filed a Police Complaint that his said statement was taken under duress and coercion and he was forcefully made to sign the statement and declaration. In this regard, the ld. Counsel drew our attention to the copy of Police Complaint placed at page nos. 39 to 43 of Paper Book. The said statement was further retracted by Shri Pradeep Poddar in his Affidavit dated 09.12.2014 which is placed at page nos. 36 to 38 of Paper Book. Hence, statement of Shri Pradeep Poddar recorded u/s. 131 of the Act on 02.12.2014 cannot be relied upon.
iii. No defects/ infirmities have been found by the department in any of the documentary evidences placed on record. It is also not the case where any cash was deposited in any of the bank accounts of the lenders and that the lenders had sufficient bank balance out of which loans were advanced to the assessee.
iv. Placed reliance on the decision of Hon‟ble Jurisdictional High Court in the case of PCIT v. Ami Industries (India) P. Ltd. (ITA no. 1231 of 2017) and CIT v. Oasis Hospitalities (P.) Ltd. (2011)198 taxman 247 (Delhi) wherein it is held that adequate bank balance establishes the creditworthiness of the parties.
vi. Nothing adverse is also found in the course of inquiry by the Assessing Officer. In fact, both these lenders viz. M/s. Divine Tradecom Pvt. Ltd. and M/s. Rowland Trexim Pvt. Ltd. are reassessed u/s. 143(3) r.w.s. 147 of the Act post search conducted in Kamdhenu Group on 09.10.2014 and the concerned Assessing Officer has accepted the share capital along with premium raised by these lenders and no adverse view has been formed in the said reassessment orders of both these lenders which are placed on page nos. 13 to 15 and 28 to 30 of Paper Book.
vii. Even source of source of loan stands established.
viii. Merely because Kamdhenu Group acquired the shares of these lender companies at a very low rate does not have any relevance in regard to the transaction of interest bearing loan taken by the assessee.
Accordingly, ld. Counsel submitted that the ld. CIT(A) has rightly deleted the addition of Rs. 3,00,00,000/- made u/s. 68 of the Act and also the consequential addition of interest of Rs. 3,17,213/- thereon.
07. We have considered the rival submissions of the parties and have gone through the orders of lower authorities and the material placed on record. The issue under consideration is the addition of loan of Rs. 3,00,00,000/-from two lenders viz. M/s. Divine Tradecom Pvt. Ltd. (Rs. 2,50,00,000/-) and M/s. Rowland Trexim Pvt. Ltd. (Rs. 50,00,000/-) u/s. 68 of the Act made by the Assessing Officer but deleted by CIT(A). The case of the revenue is that the director, Shri Pradeep Poddar of both these lender companies had admitted in his statement recorded u/s. 131 of the Act on 02.12.2014 to have provided mere accommodation entries to the assessee in the form of loan. However, this statement cannot be seen in isolation more so when the same person had immediately on next day, i.e. 03.12.2014 had filed a Police Complaint about the statement given on 02.12.2014 to be under duress and pressure and that even the said statement is retracted in his Affidavit dated 09.12.2014. On perusal of the balance sheet of these lender companies, it is seen that these companies have not taken any loan from third parties but have raised share capital with premium. The ld Assessing Officer in his order have stated that the companies from whom the lender companies have raised share capital and premium are also shell companies and run by entry operators. However, the said averment of the ld Assessing Officer dislodged by the fact that both these lender companies are reassessed to examine the genuineness of the share capital and share premium raised by them and that the concerned Assessing Officer have found the same to be genuine and no adverse inferences were made in their reassessment orders passed u/s. 143(3) r.w.s. 147 of the Act in March, 2016 which is much later to the search conducted on the Kamdhenu group on 09.10.2014. Hence, in this case source of source of loan to assessee is clearly stands explained by the revenue itself. The argument of the ld. DR that both these lender companies were later purchased by Kamdhenu Group at a very low price than the net worth of these companies are also not relevant in so far as the loan transaction of the assessee is concerned. The ld. CIT(A) has deleted the addition of Rs. 3,00,00,000/- made u/s. 68 of the Act and the consequential interest thereon of Rs. 3,17,213/- for the reasons as under:-
“7.5 I have perused the aforesaid documents and found that the assessee has furnished all the relevant documents in support of the transactions entered with M/s. Divine Tradecom Pvt. Ltd. & M/s. Rowland Trexim Pvt. Ltd. to establish the identity, genuineness and creditworthiness of the lenders. During the course of hearing, the appellant stated that the unsecured loans taken from M/s Divine Tradecom Pvt Ltd through personal capacity as well as through proprietary concern M/s. Trishul Developers along-with interest were repaid back in the months of September and October 2011. On the contrary, it is seen that the AO has not pointed out any discrepancies or deficiencies in the evidences so filed except that the accumulated profits of the said entities are negative or just a meagre amount and that statements of certain parties reveal the nature of said transactions in the form of accommodation entry.
7.6 In its rebuttal, the assessee submits that mere low income cannot be the criteria to dislodge the creditworthiness of the lenders and that due consideration should be given to the net worth of the companies which is Rs. 24,29,03,235/- in case of M/s. Divine Tradecom Pvt. Ltd and Rs.27,94,00,737/- in case of M/s. Rowland Trexim Pvt. Ltd. for the year under consideration. I find merit in this contention of the assessee more so as the source of the lender companies have been examined by the revenue while reopening their case for the same year and accepting the genuineness of the investors therein. Thus, it is a case where the source of source of alleged loans cannot be doubted. In this very perspective, the allegation of the AO that the income of the lender companies in the year under consideration is very low without giving due consideration to the overall net worth of the companies which is already accepted by the revenue in the assessment is totally misplaced and unwarranted. Without prejudice, attention was also invited to the decision of the Hon’ble Delhi High Court in the case of CIT vs Vrindavan Farms Pvt Ltd (ITA No. 71/2015) in which the sole basis for the revenue to doubt the creditworthiness was the low income as reflected in the return of incomes. It affirmed the view of the ITAT that the AO had not undertaken any investigation of the veracity of the documents submitted to him by the assessee and wrongly completed the assessment only on the presumption of the low return of income.
7.7 The expression “nature and source” has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. The Hon’ble Supreme Court, in Kale Khan Mohd. Hanif vs.CIT [1963] 50 ITR 1, pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. If the prima facie inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue. As far as the creditworthiness or financial strength of the creditor/subscribers is concerned, that can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharged the onus cast upon him. Thereafter, it is for the Assessing Officer to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, to probe the matter further.
7.8 Element of credit worthiness and satisfaction of AO thereafter is subjective and requires more efforts/inquiry on the part of the AO to give a finding in the order that lender is not credit worthy. The AO must make proper enquiry before making any addition. In Khandelwal Constructions v. CIT 227 ITR 900 (Gau.), it has been held that section 68 empowers the Assessing officer to make enquiry. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation, A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained.
7.9 Further, in the case of Nemichand Kothari vs. CIT – [264 ITR 254] [Gau], the Hon’ble High Court had held that:
“…..Hence, the harmonious construction of section 106 of the Evidence Act and section 68 of the Income-tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been, eventually, received by the assessee. It, therefore, further logically follows that the creditor’s creditworthiness has to be judged, vis-a-vis, the transactions, which have taken place between the assessee and the creditor, and it is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transaction, which took place between the creditor and sub-creditor and/or creditworthiness of the sub-creditors, for, these aspects may not be within the special knowledge of the assessee…”
7.10 The assessee must satisfy three important conditions, namely, (i) the identity of the creditor; (ii) the genuineness of the transaction; and (iii) the financial capacity of the person, i.e. the credit worthiness of the creditor. However, the onus of the assessee is limited to the extent of proving the source from which he received the cash credit. The credit worthiness of the creditor has to be judged vis-à-vis the transaction which had taken place between the assessee and the creditor, and it is not the burden of the assessee to find out the source of creditworthiness of the lender to prove the genuineness of the transaction. This issue is dealt by the Gauhati High Court in the case of CIT v. Smt. Sanghamitra Bharali (2014) 361 ITR 481 (Gau). The aforesaid points were also affirmed in the past by the Apex Court in the case of CIT v. Orissa Corporation P. Ltd reported in (1986) 159 ITR 78 (SC). In the case of CIT v. Varinder Rawley (2014) 366 ITR 232 (P & H) the court held that “where the assessee shows that the entries regarding credit in a third party’s account were in fact received from the third party and are genuine, he discharges the onus. In that case, the sum cannot be charged as the assessee’s income in the absence of any material to indicate that it belongs to assessee.
7.11 It is clear from the submission of appellant that the transactions were through account payee cheques and appellant has submitted sufficient details before the AO during the reassessment proceedings. The source of receipt through banking channel clearly establishes the genuineness of the credit which is reflected in the books of accounts. The present case is on a much better footing in view of the fact that source of source of loan is explained by the assessee on one side whereas the AO has not brought on record any cogent evidence to disbelieve the evidences submitted by the assessee.
7.12 In the light of the above, it is now important to examine the validity of addition based on the statement of Shri Pradeep Poddar and Shri Anand Sharma.
