Addition unsustainable as three ingredients engraved in section 68 proved

Bansal Separators and Spares Pvt Ltd Vs ITO (ITAT Mumbai)

ITAT Mumbai held that addition unsustainable as assessee has proved the three ingredients engraved in section 68 of the Act and proved the satisfactory nature of the loan transactions. On the otherhand, AO has not brought any contrary material to show that loan received is bogus or accommodation entries.

Facts- Assessee is engaged in the business of Trader of Machinery and Machinery Parts. During the assessment proceedings the Assessing Officer observed that assessee has received unsecured loans from various parties.

Based on the informations submitted by the parties Assessing Officer observed from the financial statements that all these parties have meagre income and not provided the completed details as asked by the Assessing Officer and with regard to other parties who has not responded to the notices u/s. 133(6) of the Act, Assessing Officer observed that these notices were returned back and it shows that these parties are not in existence and further, he observed that even assessee has not submitted the relevant information specified in notices issued to them. Therefore, he came to the conclusion that the assessee has not established the identity, creditworthiness and genuineness of the transactions.

CIT(A) considered the issue and decided the issue in favour of the assessee. Being aggrieved, the present appeal is filed by the revenue.

Conclusion- Held that assessee has proved the three ingredients engraved in section 68 of the Act and proved the satisfactory nature of the loan transactions and the onus of proving shifted to the Assessing Officer. Since Assessing Officer has not given opportunity to the assessee and also not brought on record any material to prove the nature of transactions other than unsecured loans. Further, he stated that Assessing Officer has not properly verified the transactions.

After considering the submissions of both the parties, we are of the view that assessee has submitted all the relevant information before the Assessing Officer as well as Ld.CIT(A) and Assessing Officer has found certain short comings in the various documents submitted before him and however, has not brought any contrary material to show that the loan received by the assessee are bogus or accommodation entries. Therefore, there is no merit in the case built by the Assessing Officer and Ld.CIT(A) having coterminous power has appreciated the relevant information available before him and decided the issue in favour of the assessee and we are inclined to agree with the findings of the Ld.CIT(A).

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal is filed by the revenue against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 19.10.2022 for the A.Y.2014-15.

2. Brief facts of the case are, assessee filed its return of income on 27.11.2014 declaring total income at ₹.13,55,940/-. The return was processed u/s. 143(1) of Income-taxAct, 1961 (in short “Act”). Subsequently, notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response Authorised Representative of the assessee attended and submitted the relevant information as called for.

3. Assessee is engaged in the business of Trader of Machinery and Machinery Parts. During the assessment proceedings the Assessing Officer observed that assessee has received unsecured loans from the following parties: –

4. In order to verify the genuineness of the transactions, Assessing Officer issued notices u/s. 133(6) of the Act dated 25.08.2016 to all the parties to confirm the loan transaction and also requested to furnish the requisite details viz., nature of transaction along with the confirmation, copy of return of income, copy of profit and loss account, balance sheet and bank statement from 01.04.2013 to 31.03.2014. In response four parties viz., M/s. Sidh Steel, M/s. Spectrum Pop Corn P. Ltd., M/s. Uno Infratech Pvt. Ltd., and Rajneesh H Bansal have responded to the notices issued by the Assessing Officer and submitted relevant information as called for. Rajneesh H Bansal has only forwarded the confirmation of bank statement without giving other details as called for by the Assessing Officer. From the informations submitted by the parties Assessing Officer observed from the financial statements that all these parties have meagre income and not provided the completed details as asked by the Assessing Officer and with regard to other parties who has not responded to the notices u/s. 133(6) of the Act, Assessing Officer observed that these notices were returned back and it shows that these parties are not in existence and further, he observed that even assessee has not submitted the relevant information specified in notices issued to them. Therefore, he came to the conclusion that the assessee has not established the identity, creditworthiness and genuineness of the transactions. Accordingly, by relying on case law of Sumati Dayal v. CIT [214 ITR 801] and Jalan timbers v. CIT [213 ITR 11] he held that the unsecured loans received by the assessee are treated as unexplained cash credits u/s. 68 of the Act. Accordingly, he added to the total income of the assessee. Similarly, he also disallowed interest expenses incurred by the assessee on the above said unsecured loans are also disallowed.

5. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and submitted details submissions, for the sake of clarity it is reproduced below: –

“Assessee company has filed its return of income on 27.11.2014 declaring total income of Rs. 13,55,940/-. The return of income was processed u/s 143(1) of the Act and subsequently notices u/s 143(2) and 142(1) alongwith questionnaire was issued & served upon the company.

Assessee Company is engaged in the business of trader of machinery & machinery parts. Assessee company has taken unsecured loans from various parties for the year under review which are as follows:

Ground No 1: Ld. AO has erred in facts and has added the loans received by the assessee to the tune of Rs. 1,72,79,547/- on the account of unexplained cash credit u/s 68 of the Act.

Ld. AO has sent notices u/s 133(6) to all the lenders to confirm the loan transactions and also requesting to furnish the requisite details viz. nature of transaction with the assessee along with confirmation, copy of return of income, copy of profit & loss account & balance sheet, copy of bank statement highlighting the transactions.

Notice sent to Gangour Infrabuild P Ltd & Sepctrum Pop Corn P Ltd was returned back unserved with the remark ‘no such company in the address’ & ‘not known. Notice to remaining parties Le. Proficient Merchandise P Ltd, Siddhi Steel, Uno Infratech P Ltd & Rajneesh Bansal was served, however no reply was filed. On receipt of show cause notice, appellant company has requested above parties to comply the notices.

Assessing Officer in his order has mentioned the following details:

When the AO sets about seeking explanation for the unaccounted credit entries in the books of accounts of the assessee in terms of Section 68, it is legitimately expected that the exercise would be taken to the logical end, in all fairness taking into account the material submitted by the assessee in support of his assertion that the person making the payment is real, and not non- existent, and that such other person was actually the source of the money forming the subject matter of the transaction as indeed that the transaction is real and genuine, same as it is represented to be. Since Section 68 itself declares that the credited sum would have to be included in the income of the assessee in the absence of explanation, or in the event of explanation being not satisfactory, it naturally follows that the material submitted by the assessee with his explanation must itself be wholesome or not untrue. It is only when the explanation and the material offered by the assessee at this stage passes this muster that the initial onus placed on him would shift leaving it to the AO to start inquiring into the affairs of the third party. Thus, the assessee had provided the identity of the lenders by giving the PAN No…. confirmation of account and even proved the genuineness of the transaction as all were through banking channels and hence the onus was passed on to the AO.

Where the creditor appears before the Income Tax Officer but if he is unable to explain the source of credit in him hand, there cannot be addition in the hands of the asssessee, because the assessee has satisfactorily explained the source of credit shown in his books as also the identity of the creditor has also been established (103 ITR 344 (Pat) and 49 ITR 723 (Bom).

According to Section 68 of the IT Act, 1961, where any sum is found to be credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature & source of the same or the explanation offered by him is not satisfactory in the opinion of AO, the sum so credited may be charged to income tax as the income of the assessee of that previous year.

The basic precondition for Section 68 is that the assessee should file a valid confirmation. In this case, assessee company has filed a valid confirmation of account duly signed by both parties which includes name, address, pan, signature and transactions. As far as the creditworthiness or financial strength of the lender is concerned, the same is proved by producing bank statement of the lenders showing it has sufficient balance in its accounts to lend loans. Once the document was submitted, the onus was casted upon the Ld. AO However, to discredit the documents produced by the company, there has to be some cogent reasons and materials for the Ld. AO and he cannot go on the realm of suspicion.

Lastly, the Hon. Gujarat High Court in case of DCIT v.Rohini Builders (2002) 256 ITR 360 (Guj) held that mere identification of the source of the creditors even without evidence as to the nature of the income could justify acceptance, where the assessee has given PAN and also shows that the amounts were received by account payee cheque. Hon. High Court, in this case, endorsed the finding of the Tribunal that it is not necessary that there should be explanation as to source of the money in every case.

Ground No 2: Ld. AO has failed to appreciate the facts and has disallowed the interest expenses amounting to Rs. 18.63.007/- and added back to the total income.

Assessee has debited interest expense of Rs. 18,63,007/- to Profit & Loss Account. Interest was paid on the unsecured loans. Interest was paid @ 12% p.a. which is the normal prevailing market rate. TDS on the interest expense is deducted and paid into the goverment treasury, TDS return was filed wherein the name, address, PAN of the parties were mentioned. Ld. AO has disallowed interest on the basis that the loan parties are not genuine. Appellant has paid interest Rs.9,60,199/- to Sam Leaseco Ltd.. genuineness of the same was not doubted by the AO.

As the appellant had proved the identity, genuineness of the lenders and hence on the same basis the interest expense can’t be disallowed. Hence, the interest expense of Rs. 18,63,007/- cannot be disallowed.

In view of above and as facts stated above, your appellant prays your honour to kindly delete addition made by the assessing officer.”

6. After considering the detailed submissions and the Assessment Order, Ld.CIT(A) considered the issue in detail and decided the issue in favour of the assessee by observing as under : –

“6. The ground No 1 relates to the addition of Rs. 1,72,79,547/- made on account of unsecured loans from 6 parties. The AO noted that the appellant had submitted reply, explaining the nature of the loan and how the loan had been taken. As such, he came to a finding that genuineness of the transaction and creditworthiness of the lender had not been explained and in these circumstances, the loan had to be treated as unexplained. In the circumstances, the AO proceeded to hold that the said unsecured loan could not be treated as genuine borrowing of the assessee as the three essential ingredients, such as, identity, creditworthiness, genuineness of the loan lender is not proved.

6.1 The Appellant has stated that the loans have been received through banking channels. It was further stated that all the detail like account confirmation by parties, copy of ITR, bank statements of parties showing receipt and payment respectively. confirmation of receipt of repayment have been furnished. Hence the assessee has proved the identity of the lender, genuineness of the transaction and the capacity of the party who gave the loan amount. It is submitted that general and vague statement made by a third party cannot provide reason to believe that chargeable income has escaped assessment in the hand of the assessee. Appellant requested to withdraw addition on account of non-genuine unsecured loan in view of various judicial judgments/pronouncements in the same matter.

6.2 The AO has not referred to any adverse material in the case of loan creditor. Hence, it is to be inferred that the quality of evidence, specific to the appellant is but poor and not fully relied upon. From the impugned assessment order it is seen that though the Assessing Officer appears to have taken the view that the impugned loan creditor is a mere entry provider and that the impugned loan entry has been obtained by the appellant against payment made to the said entry provider in cash, no specific material has been brought on record to show that the creditor, from whom the impugned loan was taken, is an entry provider and that entry for the loan in question have actually been obtained against payment made by the appellant in cash outside regular books of account. There is no evidence brought on record for payment of any commission or fee having been made by the appellant. All this goes to support the contentions of the appellant that AO has passed the order on the basis of mere conjectures and surmises, without bothering to bring any concrete material on record.

6.3 Going by the discussion contained above, it is obvious that the inference drawn by the AO against the appellant is not sustainable for the simple reason that the principles of natural justice have not been followed. First and foremost, the appellant has not been given any access to the material used against it. Secondly, by withholding the said material, the AO has denied to the appellant an opportunity to rebut the evidence by cross-examining the witness, statement, if any made by whom, incriminated the appellant. On both counts, the impugned assessment order fails squarely.

6.4 From the forgoing discussion, it is obvious that there is no scope for arriving at a conclusion that the appellant had taken entry to incorporate the impugned loan in its books of account. Hence, the only issue that remains to be seen is whether on the basis of facts brought on record the impugned loan could be treated as unexplained within the fore-corners of section 68 of the Act. At the outset, it is necessary to look at some legal precedents with regard to the intent and application of section 68. It needs no elaboration that through a catena of decisions the Courts have laid down the following three fundamental tests which have to be established to discharge the burden under section 68 of the Act:

• • • Identity of the creditor
    • Creditworthiness of the creditor and
    • Genuineness of the transaction.

6.5 Hence, it is to be inferred that in a case where the assessee has supplied all possible information to the AO to explain the credit transaction, he has satisfactorily discharged the burden cast on him and it would be for the revenue to prove that the transaction is not satisfactorily explained and provisions of section 68 of the Act are applicable.

6.6 In the case before me, the record shows that to prove the genuineness of the impugned loan entries the appellant has furnished:-

“Loan confirmation, copy of the Return of Income, copy of bank statement of the parties and confirmation of receipt of repayment, during the assessment proceedings as well during appellate proceedings.”

6.7 As such, in so far as the appellant is concerned, it has provided all possible documentary evidence to prove identity of the creditors from whom the impugned loans were obtained. Thus, it has to be said that the appellant had done everything in its power to prove the three ingredients required to prove the satisfactory nature of the loan transactions. In these circumstances, the onus had shifted to the AO. If the AO was still not satisfied, he had the option of making inquiries from the alleged: lender by summoning them. However, as seen from the assessment order, he did not do any such thing. Further, if the AO was not satisfied with what had been given to him by the appellant, he was duty bound to specify what more material he wanted the appellant to furnish. The AO never asked for any further material, which leads to the inescapable conclusion that the AO could not think of any further material to ask for and proceeded to reject the appellant’s claims, relying upon the information/ material, which he never even brought to the notice of the appellant for any rebuttal. The unequivocal conclusion is that all the three ingredients having been satisfied, the impugned loans of Rs. 1,72,79,547/- have to be treated as explained satisfactorily and the AO was wrong in having disregarded overwhelmingly supportive evidence. No cogent material was adduced by him, to show that loans were unexplained. Therefore, the impugned addition made in the Assessment Order, fails on several counts (1) reliance on evidence that is totally inadequate (2) failure to make – available incriminating material forming basis for action by the AO (3) failure to give due opportunity to the appellant to cross-examine witnesses, whose statement has been relied upon and (4) failure to recognize the nature of the explanation/evidence tendered by the appellant to explain identity of creditor, creditworthiness of the creditor and the genuineness of the loan transaction. Hence, the addition of Rs. 1,72,79,547/- on account of unsecured loan is hereby deleted. Resultantly, ground of appeal is treated as ‘Allowed’.

7. The ground no 2 relates to the addition of Rs. 18,63,007/- made on account of disallowance of interest claimed against unsecured loans. As the loans on the basis of which this addition has been made has been held as genuine, there remains no ground for this addition. Accordingly the addition is deleted and the ground of appeal is ‘Allowed’.”

7. Aggrieved revenue is in appeal by raising following grounds in its appeal: –

“1. Whether on the facts and circumstances of the case in law, the Ld. CIT(A) erred in deleting the additions of Rs. 1,72,79,547/- on account of bogus loans / unexplained cash credit u/s. 68 of the I.T. Act, without appreciating the fact that the assessee had failed to provide identity, creditworthiness and genuineness of the parties from whom he had received the said loans.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 18,63,007/- on account of interest paid on bogus loans/ unexplained cash credit u/s. 68 of the I.T. Act, without appreciating the fact that assessee had failed to establish the genuineness of unsecured loan transaction with corroborative evidences.

3. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be

4. The appellant craves leave to amend, or alter any grounds or add a new ground, which may be necessary.”

8. At the time of hearing, Ld. DR submitted that the issue involved in this appeal is Assessing Officer has disallowed the unsecured loans and the relevant interest thereon, after proper verification by issue of notices u/s. 133(6) of the Act that these unsecured loans are unexplained cash credits u/s. 68 of the Act wherein the assessee has not proved the identity, creditworthiness and genuineness of the parties from whom it had received the above said unsecured loans. In this regard he brought to our notice Para No. 4 of the Assessment Order and brought to our notice relevant facts in this case. Further, he brought to our notice Page No. 10 of the appellate order and submitted that all the observations made by the Ld.CIT(A) to give relief to the assessee are only general observations and there is no specific finding given by him. Further, he submitted that assessee has not submitted financial informations for this purposes. He brought to our notice Page No. 7 of the Paper Book wherein one of the unsecured loan party has only submitted confirmation letter and bank statement without providing other informations sought by the Assessing Officer. Further, he also brought to our notice Page No. 27 to 34 of the Paper Book, and submitted that the other parties also not provided the informations before the Assessing Officer. All these informations were only submitted before the Ld .CIT(A).

9. On the other hand, Ld. AR of the assessee submitted that assessee has submitted all the relevant informations before the Assessing Officer giving all the relevant details before him and in this regard he brought to our notice Page No. 26 of the Paper Book. Assessee has submitted all the relevant informations which are received from the parties from whom assessee has availed unsecured loans. He submitted that all the confirmations, financial statements, return of income and bank statements submitted before the Assessing Officer and the same was submitted before the Ld.CIT(A). Ld.CIT(A) has considered the informations which was provided before him were in order and accordingly, he gave the relief to the assessee.

10. Considered the rival submissions and material placed on record, we observe from the record that no doubt Assessing Officer has issued notices u/s. 133(6) of the Act to all the parties i.e., seven parties and only four parties were responded to the above notices and provided the confirmations of the transactions entered by them. After receipt of the relevant information Assessing Officer has found certain issues relating to financials status and profitability of the above parties. Further, we observe that the other three parties were not responded to the notices issued by the Assessing Officer, we observe that assessee has submitted all the relevant informations before the Ld.CIT(A) and Ld.CIT(A) being the Higher Authority to conclude the assessment proceedings having coterminous power has considered the relevant information as submitted before him. It is also fact on record that all the above said parties have confirmed the payments of unsecured loans to the assessee and all these transactions were routed through proper banking channels. We also observe that Ld.CIT(A) has acknowledged that assessee has submitted following documents to prove the genuineness of the transactions.

“8.6 ….

“Loan confirmation, copy of the Return of Income, copy of bank statement of the parties and confirmation of receipt of repayment, during the assessment proceedings as well during appellate proceedings.”

11. However, Ld.CIT(A) allowed the appeal of the assessee with the observation that assessee has proved the three ingredients engraved in section 68 of the Act and proved the satisfactory nature of the loan transactions and the onus of proving shifted to the Assessing Officer. Since Assessing Officer has not given opportunity to the assessee and also not brought on record any material to prove the nature of transactions other than unsecured loans. Further, he stated that Assessing Officer has not properly verified the transactions.

12. After considering the submissions of both the parties, we are of the view that assessee has submitted all the relevant information before the Assessing Officer as well as Ld.CIT(A) and Assessing Officer has found certain short comings in the various documents submitted before him and however, has not brought any contrary material to show that the loan received by the assessee are bogus or accommodation entries. Therefore, there is no merit in the case built by the Assessing Officer and Ld.CIT(A) having coterminous power has appreciated the relevant information available before him and decided the issue in favour of the assessee and we are inclined to agree with the findings of the Ld.CIT(A). Accordingly, Ground No. 1 raised by the revenue is dismissed.

13. Since we have dismissed the Ground No. 1 raised by the revenue, Ground No.2 being consequential to the Ground No. 1 the interest payment of the above said unsecured loans, accordingly, Ground No. 2 is also dismissed.

14. In the result, appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 31^st May, 2023