Assessee Proving Three Ingredients U/S 68 Shifts Burden to AO: ITAT Pune

DCIT Vs Meridian Chem Bond Private Limited (ITAT Pune)

Does Proving the Three Main Ingredients by Assessee U/S 68 Shift the Burden of Proof On AO?

Assessee is a company that duly files its return of income. The Revenue carried a search in case of another group concern & it was discovered that it was engaged in the business of providing accommodation entries by way of bogus sales/ purchases/ loans & advances. Assessee was found to be one of the beneficiaries of these transactions. Hence, AO reopened the assessment by issuing notice u/s 148. Loans taken from the searched group were assessed as unexplained cash credit u/s 68 in the hands of assessee. Interest expenditure on the same was assessed as unexplained expenditure. Further, purchase of diamonds from a concern relating to the group was treated as bogus in nature & an estimated profit on the same was assessed to tax.

CIT(A) deleted the additions made by AO on the grounds that Section 68 requires  assessee to prove the nature & source of credits found in the books of accounts, to the satisfaction of AO. Assessee submitted that it had discharged its onus by proving three main ingredients, namely, identity of the creditors, creditworthiness & genuineness of the transactions. Assessee had submitted the following: confirmation of accounts, income tax returns, bank statements showing loan transactions, audited balance sheet and P&L A/c, payment of interest to creditors after subjecting the amount to TDS & details of repayment of loans. CIT(A) held that there was no inconsistency in receipt of loans & the source could not be doubted. Additionally, AO could not gather enough evidence to prove that transactions with the said group were bogus & fictitious. Once assessee has proved the three main ingredients to delete such additions, onus was now on the Revenue to prove otherwise. Since Revenue failed to do so, CIT(A) deleted the additions made by AO & the same was upheld by Tribunal on further appeal by Revenue.

The next issue was relating to disallowance of interest expenditure on these loans. The reasoning given by AO for disallowance was that the concerned loans were added u/s 68. Since the addition of loans was deleted, i.e., the very foundation of this interest disallowance no longer existed, CIT(A) deleted this disallowance & Tribunal upheld the same.

The final issue pertains to addition of profit on alleged bogus purchases. CIT(A) noticed that assessee had produced all evidences to prove the purchases & hence the additions were deleted. Tribunal upheld the same.

Thus, by deleting the additions made by AO, CIT(A) & Tribunal emphasize that once the three main ingredients have been proven by assessee u/s 68, onus of proving otherwise is shifted to AO.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These appeals filed by the Revenue and Cross Objections filed by the assessee are directed against the order(s) passed by the Ld. Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’] and they relate to AYs.2008-09 & 2009-10.

ITA No. 1769/Mum/2024 & C.O.No. 252/Mum/2024 (AY.2009-10)

2. At the outset, the Ld.AR submitted that the tax effect involved in this appeal filed by the Revenue is less than Rs. 60 lakhs and hence, the Revenue should not pursue this appeal, as per the CBDT Circular No. 5/2024, dt. 15-03-2024.

3. We heard Ld D.R, who also submitted that the Form-36 filed by the revenue also mentions the tax effect as Rs. 11,52,150/- only. It is not shown to us that the grounds urged by the revenue in AY 2009-10 falls in any of the exceptions prescribed by the CBDT.

4. Accordingly, we are of the view that the Revenue is precluded from pursuing this appeal as per the CBDT circular referred above. Accordingly, we dismiss the appeal of the revenue as not maintainable.

5. Since the appeal of the Revenue is rejected, the legal grounds urged by the assessee in the Cross Objection shall become academic in nature. Accordingly, we decline to adjudicate the same.

ITA No. 1813/Mum/2024 & C.O.No. 253/Mum/2024 (AY.2008-09)

6. We shall now take up the appeal of the Revenue and the Cross Objection of the assessee filed for the AY. 2008-09. In this appeal, the Revenue is aggrieved by the decision of the Ld.CIT(A) in granting relief on the following three issues:-

a. Addition relating to unsecured loans of Rs. 42,50,000/-;

b. Disallowance of interest expenses of Rs. 24,36,498/-;

c. Addition of bogus purchases of Rs.14,96,815/-;

7. The facts relating to the case are stated in brief. The assessee is engaged in the business of manufacturing of chemicals. The assessee filed return of income for the AY. 2008-09 declaring a total income of Rs.70,59,289/- and it was processed u/s. 143(1) of the Act. The Revenue carried out the search and seizure action in the case of Bhanwarlal Jain Group on 03-10-2013 and it was noticed that he and his group of companies were engaged in the business of providing accommodation entries by way of bogus sales/purchases/loans and advances. It was also noticed that the assessee herein is also one of the beneficiaries of the loans and bogus purchases. Hence, the AO reopened the assessment of AY 2008-09 by issuing notice u/s. 148 of the Act.

8. The AO has noticed that the assessee has taken loans of Rs.42,50,000/- from the following three parties:-

The AO assessed the same as un-explained cash u/s. 68 of the Act. He further noticed that the assessee has claimed interest expenditure of Rs.24,36,498/- on the loans taken from the concerns belonging to Bhanwarlal Jain Group. Since the said loans were assessed u/s 68 of the Act, the AO disallowed the interest expenses as un-explained expenditure. The AO also noticed that the assessee has purchased diamonds from M/s. Jewel Diam, a concern belonging to Bhanwarlal Jain group for a value of Rs. 1,66,31,282/-. The AO treated the said purchases as bogus in nature and accordingly estimated profit on the above said bogus purchases @ 9% and accordingly assessed a sum of Rs. 14,96,815/-.

9. In the appellate proceedings, the Ld.CIT(A) deleted all the three additions and hence, the Revenue has filed this appeal before us.

10. The first issue relates to the addition of unsecured loans of Rs.42,50,000/-. The Ld.AR submitted that the assessee has taken additional loans of Rs.5.00 lakhs each from two parties, namely, Sankhala Properties and Sankhala Finvest during the year under consideration and the assessee was already having opening balance of loans from these two parties. Further, the assessee has taken new loan of Rs. 32.50 lakhs from Sundaram Gems during this year. With regard to the above said loans, the Ld A.R submitted that the assessee had furnished all the details before the AO in order to prove the cash credits in terms of section 68 of the Act. He submitted that the assessee has discharged its onus by proving three main ingredients, namely, identity of creditors, creditworthiness and genuineness of the transactions. He submitted that the Ld.CIT(A) has deleted the addition on verifying the details furnished by the assessee. He also submitted that the AO had also made addition of loans taken from Sankhala Properties and Sankhala Finvest in the earlier years and the said additions have been deleted by the Tribunal in the earlier years. Accordingly, the Ld.AR contended that the order of the Ld.CIT(A) on this issue does not require any interference.

10.1. The Ld.DR, on the contrary, supported the order passed by the AO.

10.2. We heard the parties and perused the record on this issue. We notice that the Ld.CIT(A) has deleted this addition with the following observations:-

“3.2.3 It is seen that the appellant has filed the following details in respect of the lenders:

1. Confirmation of A/c

2. Income tax returns.

3. Bank Statements showing the loan transactions.

4. Audited Balance sheet & P & L A/c along with the schedule wherein credit in the name of the appellant is outstanding in their books,

5. Payment of interest to creditors after subjecting the amount to TDS

6. Details of repayment of loans in the form of bank statements and confirmation from the party to that extent

As seen from the details filed before the AO, a set of which were also filed before me, I do not find any inconsistency or incoherence in the receipt of loans from the parties. Firstly, as regards the transactions, the same have been routed through banking channels and the source cannot be doubted. Secondly, as has been held in several cases, whatever may be the strength of presumption it cannot replace evidence. Even though the transactions are with a tainted group, the AO has not gathered any additional/independent evidence to show that the transactions with the appellant company was sham, fictitious or artificial, except for believing the statements givenby the entry operators. He has failed to gather evidence to show that the unaccounted cash of the appellant had changed hands subsequently replacing the cheque payments. Thirdly, he has also not answered several valid points raised by the appellant nor proved how the details like PAN, the IT returns, confirmation letters, bank statements of the creditors, audited balance sheet of the creditors cannot be taken note of.

3.2.4 As seen from the above, the appellant has furnished all the details proving conclusively the three ingredients of identity and creditworthiness of the creditors and the genuineness of the transaction. The amounts were paid by the creditors from their running bank accounts which were accounted in the books of the appellant as well as the creditors as seen from the audited accounts filed. The transactions were also confirmed by all the creditors who are assessed to tax. Further, the appellant has paid interest through banks to the creditors by duly subjecting the interest amount to TDS and repaid the loans in subsequent assessment years and partly in this year along with interest. I find that the AO was in possession of good information in the form of investigation report, to begin with, but he could neither succeed in repudiating the evidences filed by the appellant nor he could gather independent evidence to establish the surrounding circumstances not to speak of leading evidence to prove his hypothesis. In view of the above discussion I hold that the loans taken by the appellant from the above three parties cannot be doubted and the addition made by the AO u/s 68 of the Act cannot survive the test of appeal. I therefore, direct the AO to delete the addition. The ground is, therefore, allowed.”

We notice that that the Ld.CIT(A) has given a clear finding that the assessee has discharged its onus by proving the three main ingredients, namely, identity of creditors, creditworthiness and genuineness of the transactions in terms of section 68 of the Act. We also observed that the AO could not repudiate the evidences furnished by the assessee nor he could gather independent evidences to establish the above said loans are bogus in nature. The Ld.CIT(A) also taken note of the fact that the creditors have responded to the notices issued by the AO in the earlier years. Under these set of facts, we are of the opinion that the view expressed by the Ld.CIT(A) on this issue does not call for any interference. Accordingly, we confirm the order passed by the Ld.CIT(A) on this issue.

11. The next issue relates to disallowance of interest expenditure of Rs.24,36,498/-. The AO had disallowed the interest expenditure on the reasoning that the concerned loans have been added u/s. 68 of the Act. The Ld.CIT(A) noticed that the ITAT had deleted the addition on loans taken by the assessee in the earlier years in ITA No. 7385/Mum/2016.

Further, the addition made u/s 68 of the Act in the instant year was also deleted by him. Since the very foundation on which the interest disallowance made by the AO no longer exists. The Ld.CIT(A) deleted the interest disallowance made by the AO.

11.1. We notice that the AO had disallowed the interest expenditure only for the reason that the concerned loans were added by him u/s. 68 of the Act. It is seen that the addition made by the AO u/s. 68 of the Act has since been deleted by the Tribunal, in which case, the relevant interest expenditure could not be disallowed by the AO. Accordingly, we are of the view that the Ld.CIT(A) was justified in deleting the disallowance of interest expenditure.

12. The next issue relates to addition of profit on alleged bogus purchases. The Ld.CIT(A) noticed that the assessee has produced all the evidences to prove the purchases. The assessee had made the payment through banking channels that purchases had duly entered in stock register also. Accordingly, the Ld.CIT(A) deleted the addition by following the decision rendered by the Hon’ble Bombay High Court in the case of CIT vs. Nikunj Eximp Enterprises (P.) Ltd.

12.1. We heard the parties and perused the record on this issue. We notice that the Ld.CIT(A) has given a finding that the assessee has proved the purchases by producing all the evidences. Before us, the Revenue could not furnish any material to controvert the findings given by the Ld.CIT(A). Accordingly, we do not find any reason to interfere with the decision rendered by the Ld.CIT(A) on this issue.

13. The assessee has filed Cross Objection, raising certain legal contentions for the AY. 2008-09. Since we have dismissed the appeal of the Revenue, the legal grounds urged by the assessee in the Cross Objection shall become academic in nature. Accordingly, we do not find it necessary to adjudicate them.

14. In the result, both the appeals of the Revenue and both the Cross Objections of the assessee are dismissed.

Order pronounced in the open court on 11-03-2025