Explanation of source of small loans from friends cannot be dismissed as unbelievable

Arunkumaar Thakurprasad Oza Preet Avenue Vs ITO (ITAT Ahmedabad)

Held that the explanation of the source of these very small loans as given by friends of the assessee to help him in his share trading transactions, and which has been confirmed by two parties, cannot be dismissed as unbelievable.

Facts-

Against the order of CIT(A), the assessee contended on following points –

1. Cash deposits in bank account of the assessee with IDBI Bank and HDFC remained unexplained amounting to Rs.49,000/- and Rs.41,900/- respectively.

2. Unexplained investment in securities of Rs.6,33,270/-, 1,99,156/- and Rs.78,307/-, and

3. Unexplained cash credit relating to borrowings made by the assessee from his friends amounting to of Rs.1,00,500/-.

Conclusion-

1. As long as there is cash withdrawal prior to deposits and gap between the withdrawals and deposits is a reasonably short period of time, it can be, in the absence of any evidence to show the utilization of the cash withdrawal, safely presumed that the cash deposits have been sourced from the cash withdrawn.

2. We find merit in the contention of the assessee that no actual investment was made by the assessee in shares as held by the Revenue authorities, but the assessee had only indulged in buying and selling of shares on the same day, earning profit/loss only in the process without making any investment. The assessee has reasonably demonstrated this fact through broker’s note of the investment.

3. The assessee had given complete list of his friends from whom loans were taken in respect of which, two persons had confirmed having given loan to the assessee. Considering that loans were taken for the purpose of carrying out share trading transactions, which is an accepted fact and were of very small amounts and two persons have confirmed giving loan, we see no reason to treat the loans as unexplained.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against order passed by the ld.Commissioner of Income-Tax (Appeals)-5, Ahmedabad [hereinafter referred to as “CIT(A)”],u/s 250(6) of the Income Tax Act,1961(hereinafter referred to as ‘Act’) dated 03.10.2016 pertaining to the Asst.Year 2008-09.

2. At the outset itself, ld.counsel for the assessee contended that there were six grounds raised in the appeal before us which could be bifurcated as relating primarily to three issues, viz.

(i) cash deposits in bank account of the assessee with IDBI Bank and HDFC remained unexplained amounting to Rs.49,000/- and Rs.41,900/- respectively

(ii) unexplained investment in securities of Rs.6,33,270/-, 1,99,156/- and Rs.78,307/-, and

(iii) unexplained cash credit relating to borrowings made by the assessee from his friends amounting to of Rs.1,00,500/-.

The ld.counsel for the assessee drew our attention to grounds raised as under:

“1. The Ld. A. O. has erred in making and Ld CIT(A) has erred in confirming addition of Rs. 49,000/- towards cash deposit with IDBI Bank, even though it was fully explained that the said cash deposit were made out of the cash available with him from withdrawals as well as from personal borrowings from time to time.

2. The Ld CIT(A)-5, Ahmedabad further erred in not considering the details of cash transactions filed before during the course of the assessment and made available to him at the time of appellate proceedings. The Ld. A. O. has erred in making and Ld CIT(A) has erred in confirming addition of Rs. 41,900/- towards cash deposit with HDFC Bank, even though it was fully explained that the said cash deposit were made out of the cash available with him from withdrawals as well as from personal borrowings from time to time.

(2a) The Ld CIT(A)-5, Ahmedabad further erred in not considering the details of cash transactions filed before during the course of the assessment and made available to him at the time of appellate proceedings.

3. The Ld. A.O has erred in making and Ld CIT(A) has erred in confirming addition of Rs. 6,33,270/- towards unexplained investment even though it was explained that appellant had incurred loss of Rs. 168.19 in share trading with Anagram Stock Broking Ltd. And Loss of Rs. 1,11,253,17 in trading with SSJ finance & Securities P. Ltd. The Ld. A. O. has further erred in not properly deriving and reconciling the details of share transactions produced and explained the source of the same during the course of the assessment proceedings.

(3a) The Ld CIT(A)-5, Ahmedabad has erred in not considering the details of investment filed during, the course of the assessment and made available to him at the time of appellate proceedings.

4. The Ld. A. O. has erred in making and Ld CIT(A) has erred in confirming addition of Rs. l,99,156/-(Investment in share in BSE (Anagram Capital Ltd.) considering peak investment for share trading transactions of the appellant as per the working in agreement vide order sheet dated 10/12/2010 without properly and lawfully considering and reconciling the details of share transactions produced during the course of the assessment proceedings The Ld. A. O. has not furnished the copy of the order sheet dated 10/10/2010 so far eventhough specific request in writing was made.

(4a) The Ld CIT(A)-5, Ahmedabad has erred in not considering the details of investment filed during the course of the assessment and made available to him at the time of appellate proceedings.

5. The Ld. A. O. has erred in making and Ld CIT(A) has erred in confirming addition of Rs. 78,307/- (Investment in share in BSE (SSJ Finance and Securities Pvt. Ltd.)considering peak investment for share trading transactions of the appellant as per the .working in agreement vide order sheet dated 10/12/2010 without properly and lawfully considering and reconciling the details of share transactions produced during the course of the assessment proceedings. The Ld. A. O. has not furnished the copy of the order sheet dated 10/10/2010 so far even though specific request in writing was made.

(5a) The Ld CIT(A)-5, Ahmedabad has erred in not considering the details of investment filed during the course of the assessment and made available to him at the time of appellate proceedings.

6. The Ld. A. O. has erred in making and Ld CIT(A) has erred in confirming addition of Rs. 1,00,5007- towards cash credit as per para 9.4 as regards borrowing from appellant’s friends even though it was fully explained that the same was received as a loan from his friends.

(6a) The Ld CIT(A)-5, Ahmedabad has erred in not considering the issue even though it was brought to his notice that summons issued and served to the cash creditors, and time allowed to then for their representative.

3. Taking up first the ground no.’s 1& 2 relating to the addition made on account of unexplained cash deposits of Rs.49,000/- and Rs.41,900/- in the bank account of the assessee in IDBI and HDFC respectively, the ld.counsel for the assessee pointed out that it had been repeatedly explained to the authorities below that these deposits were attributable to cash withdrawals made from the said accounts itself, that the details were also enclosed for verification but the authorities below did not consider the explanation of the assessee and confirmed the addition. He drew our attention to para 3.2 of the CIT(A)’s order where identical submissions made by the assessee with respect to both cash deposits were produced. For the sake of brevity, we reproduce the submissions made with respect to cash deposits of Rs.49,000/- in IDBI as under:

“It is respectfully submitted that vide Para 4 of the assessment order, learned AO has made an addition of Rs. 49.000/- towards cash deposit by the appellant into 1DBI bank. In response to the notice dated 13/10/2010 the appellant vide Para 7 of his submission dated 23/10/2010 submitted that the cash were deposited into the bank from cash withdrawals from saving accounts maintained with IDBl and HDFC Bank and details of the same were provided to AO for his verification. The learned AO did not verify the same with the bank statement and made an addition of Rs. 49,000/- by simply stating that deposits are not explainable by the appellant hence it is unexplained and brought to tax. The copy of reply of the appellant dated 23/10/2010 together with copy of both the bank statements is enclosed for your kind perusal from where it is clearly seen that there were sufficient cash withdrawals from the bank for the purpose. We further submit here that the A.O. has made addition of Rs. 78,000/- towards borrowing from the appellants Father and Rs. 1,00,500/- towards borrowing from friends. Hence in our opinion addition of Rs. 49,000/- towards cash deposit is mere duplication of addition and deserves to be deleted. Therefore action on the part of Ld. AO is not in accordance with the law and the additions so made on this count ought to be deleted in toto.”

4. The ld.counsel thereafter pointed out that the ld.CIT(A) upheld the addition without appreciating contentions of the assessee by simply stating that the assessee has failed to prove nexus between the deposits and the withdrawals. He drew our attention to para 3.8.1 as under:

“3.8.1 Facts of the case and the submissions are considered. The appellant has simply stated that cash deposits were from the withdrawals from saving accounts maintained by the appellant. However, the appellant ahs failed to prove the nexus between the withdrawals and the deposits with supporting evidences. In the absence of such the addition made by the AO on this account is confirmed.”

5. The ld.counsel for the assessee further drew our attention the copy of bank book of IDBI placed at page no.4 to 10 the paper book, pointing out the withdrawal of cash justifying deposits in the said account. The ld.DR on the other hand relied on the order of the ld.CIT(A).

6. We have heard contentions of both the parties, and we agree with the ld.counsel for the assessee that the addition on account of cash deposits of Rs.49,000/- and Rs.41,900/- in IDBI and HDFC Banks has been confirmed by the ld.CIT(A) without appreciating the contentions of the assessee; that the same could be attributed to the cash withdrawn from the same bank accounts, which were corroborated with the bank statement also. The Revenue has not controverted the fact of sufficient cash withdrawal in Bank prior to deposit.We do not agree with the ld.CIT(A) that the assessee has to demonstrate one-to-one nexus between cash deposits and withdrawals which is virtually impossible. As long as there is cash withdrawal prior to deposits and gap between the withdrawals and deposits is a reasonably short period of time, it can be, in the absence of any evidence to show the utilization of the cash withdrawal, safely presumed that the cash deposits have been sourced from the cash withdrawn.

In view of the above, we find no justification in the order of the ld.CIT(A) upholding the addition made on account of cash deposits in the bank accounts of the assessee. We therefore direct the deletion of addition of cash deposits of Rs.49,000/- and Rs.41,900/-. Accordingly, ground no.1 and 2 are allowed.

7. Ground Nos.3, 4 and 5; it was pointed out, related to addition made to the income of the assessee on account of unexplained investments in shares of the said amount.

8. The ld.counsel for the assessee pointed out that the impugned addition again have been made without appreciating the facts of the case, which was demonstrated to the authorities below. He contended that it had all along been pleaded that the assessee had indulged in share transactions; that he had actually not made any investments but bought and sold shares on the same day retaining or paying only the balance in the process; that the assessee had made no investments in shares as such. In this regard, he first pointed out details of investment of Rs.6,33,270/- noted by the AO at paper book page no.4 as under:

9. He pointed out that these transactions had been made in the NSE. Thereafter, the ld.counsel for the assessee took us to contract note issued by the stock broker relating to these transactions, and specifically took us through first transaction on 23.7.2007 of Rs.1,02,796/-, the contract note relating to which was placed before us at page no.11 of the PB. Drawing our attention to the same, he pointed out that such contract note issued by Anagrm Securities Ltd. was dated 23.7.2007 trade date and pointed out that the 156 number of shares sold of India Bulls for Rs.1,02,796/- was followed by purchase of such shares the same day. That the assessee had booked only the difference and not taken any physically delivery of shares purchased. Similarly he drew our attention to PB.13 being contract note for trade date 19/7/2007 containing identical purchase value of shares of Rs. 1,30,800 of India Bulls and on the same day, at a later time, showed sale of the said shares also. Similarly, he drew our attention to P.B 15reflecting transaction dated 18.7.2007 of Rs.1,31,400/- and pointed out that they related to sale of shares of 200 equity shares of India Bulls bought on the same day only and squared off. He contended that all the transactions which the Revenue had pointed out as investment made by the assessee were similarly demonstrated through these contract notes to the effect that they did not relate to any actual purchase of shares with physical delivery being taken, but only related to immediately purchase and sales of shares and the assessee getting only net balance thereof. The ld.counsel for the assessee pointed out that the evidence in this regard, of the investments so noted by the Revenue authorities, were filed to them, but were not appreciated. He pointed out that the same were also placed before us in Paper Book at pages11-32 .

The ld.DR though was unable to controvert the contentions of the assessee as demonstrated through broker-notes, he however relied on the order of the ld.CIT(A) stating that despite repeated opportunities given, the assessee was not able to substantiate the source of investment made as noted by the ld.CIT(A) in para 3.10, 3.11 and 3.12.

10. The ld.counsel for the assessee, per contra, drew our attention to his submission in this regard and reproduced in the order of the ld.CIT(A) at para 3.2 at page no.4 to 7 wherein he had made contentions to the above effect and also filed evidences being broker-notes to prove his contentions.

11. We have heard contentions of both the parties and we find merit in the contention of the assessee that no actual investment was made by the assessee in shares as held by the Revenue authorities, but the assessee had only indulged in buying and selling of shares on the same day, earning profit/loss only in the process without making any investment. The assessee has reasonably demonstrated this fact through broker’s note of the investment placed at page no.11 to 32 of the PB . The said contract notes clearly reflect the sale and purchase of shares within the same day .The Revenue has been unable to controvert the same.

In view of the above facts the additions made on account of unexplained investment of Rs.6,33,270/- ,Rs.1,99,156/- and Rs.78,307/- as raised in ground no.3, 4 and 5 are not sustainable and are directed to be deleted.

Accordingly, grounds no 3,4,&5 are allowed.

12. Ground no.6 relates to addition made on account of borrowed loan of Rs.1,00,500/- by the assessee from his friends.

13. In this regard, the ld.counsel for the assessee has stated that the assessee had incurred loss in share transactions, therefore, borrowed this amount from his friends to cover the loss. He pointed out that he had submitted date wise details of loans taken from his friends to the AO, and the AO had accepted the part of the details, while he made no inquiry and did not even give any show cause notice to the assessee and made addition. He pointed out that during the appellate proceedings, he had filed additional evidences giving details of borrowing of Rs.1,00,500/- from eight friends ranging from Rs.3,000/- to Rs.15,000/-. The ld.counsel for the assessee stated that the AO had issued summons in remand proceedings to his friends, but none come in response to the summons. However, two confirmation letters had been received from one Rajesh D. Desai and Shri Dilipbhai P. Patel, where they stated to have given loan of Rs.15,000/- and Rs.14,500/- from their labour work. The ld.counsel for the assessee contended that considering the small amount which was taken as loan from various friends and the fact that two of them did confirm the fact of loans, the addition needed to be deleted. He also pointed out that the AO had accepted loan taken by the assessee from Mr.Rajkumar Sharma ,and the CIT(A) had accepted the loan shown to be taken by the assessee from his father of Rs.78,000/- holding that it could not be doubted that his father had given such advances out of his savings and agricultural income in piecemeal. He therefore contended that there was no reason to doubt the genuineness of loans taken from friends as above.

The ld.DR on other hand relied on the orders of the authorities below.

14. We have heard contentions of both the parties. We have noted that during the assessment proceedings, the AO found that the assessee made certain transactions in cash relating to share trading transactions, source of which, he stated was loans from his friends and family. However, the loans amounting to Rs.1,00,500/- was added to his income as source of the same was not explained to the satisfaction of the Revenue authorities.

The assessee had given complete list of his friends from whom loans were taken, and it is evident from the same that he had taken very small amount of loan ranging from Rs.3,000/- to Rs.15,000/-and all the details regarding his friends from whom loan had been taken by the assessee was given to the AO who had issued summons to them and in respect of which, two persons had confirmed having given loan to the assessee. Considering that loans were taken for the purpose of carrying out share trading transactions, which is an accepted fact and were of very small amounts and two persons have confirmed of giving loan, we see no reason to treat the loans as unexplained.

Further we have noted that the AO had accepted the fact of loan taken by the assessee from one Mr.Raj Kumar Sharma ,as stated at para 9.2 of the Assessment Order. Also the fact of loan of Rs.78,000/- taken from the father of the assessee has also been accepted by the Revenue noting that it is not improbable for this amount being given out of savings and agricultural income of his father.

On the same analogy the explanation of the source of these very small loans as given by friends of the assessee to help him in his share trading transactions, and which has been confirmed by two parties to be given out of their labour work income ,cannot be dismissed as unbelievable.

In view of the above we see no reason to uphold the order of the Ld.CIT(A) confirming the addition on account of alleged unexplained loans amounting to Rs.1,00,500/- The addition on account of the same is therefore directed to be deleted. Ground of appeal no.6 is allowed.

15. In the result, appeal of the assessee is allowed.

Order pronounced in the Court on 13^th July, 2022 at Ahmedabad.