ITAT Deletes Protective Basis Addition – No Parallel Assessments Allowed

ACIT Vs Rachna Finlease Pvt. Ltd. (ITAT Ahmedabad)

Introduction: The Income Tax Appellate Tribunal (ITAT) Ahmedabad recently ruled on an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) concerning ACIT Vs. Rachna Finlease Pvt. Ltd. The case involved the addition made on protective basis in the assessment year 2010-11. The ITAT examined whether parallel assessments can be made in respect of the same income on two different persons.

Analysis: The appellant, Rachna Finlease Pvt. Ltd., had its name struck off from the Registrar of Companies. The company received a substantial amount of Rs. 26.68 crores in its bank account from various individuals. The Revenue contended that the credit entries were accommodation entries and thus treated them as the company’s income.

However, the appellant provided substantial evidence proving the identity, genuineness, and creditworthiness of the transactions. The ITAT referred to similar cases where the court had already deleted additions made in the hands of other parties involved in the transactions. The tribunal also noted that the provisions of Section 68 of the Income Tax Act, as applicable for the assessment year 2010-11, did not require verification of the source of the source of the funds. ITAT further held that It is settled principle of law the Income Tax Act nowhere provides that parallel assessments can be made in respect of the same income on two different persons.

Conclusion: Based on the evidence provided and the legal aspects involved, the ITAT ruled in favor of the appellant and deleted the addition made on protective basis. The decision highlighted the importance of establishing the genuineness of transactions and creditworthiness of parties involved in such cases.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This appeal is filed by the Revenue as against the Appellate order dated 24-10-2019 passed by the Commissioner of Income Tax (Appeals), Gandhinagar arising out of the assessment order passed under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2010-11.

2. The brief facts of the case is that the assessee is a Private Limited Company and the name of the assessee company has got struck off from the Registrar of Companies w.e.f. 21-07-2011 as per section 560(5) of the Companies Act and the letter dated 21-07­2011 issued by Ministry of Corporate Affairs. However the company has received Rs. 26,68,50,000/- in its bank account from Shri Rameshji Gobarji Thakor and Shri Hansaben Manilal Patel as follows:

2.1. The assessee company was having two directors namely Shri Deep Upendra Shah and Shri Kaushal Nayak who belonged to the JP Iscon group and they were introduced as directors. But the investigation carried out by the department revealed that they were dummy directors and name-givers only. The amount of Rs. 26.68 crores received by the assessee in its bank account remained unverified, since the assessee has not filed the Return of Income u/s. 139(1) of the Act. Therefore a notice u/s. 148 dated 27-03­2017 was issued to the assessee after recording the reasons. The assessee objected to the issuance of notice, since the company name has already struck off by the Registrar of Companies w.e.f. 21-07-2011. The above objection was overruled following the Hon’ble Supreme Court Judgment in the case of Gopal Shri Scrips (Pvt.) Ltd. reported in [2019] 104 taxmann.com 192 (SC). Thus the A.O. held that the credit entries of Rs. 28.68 crores in the bank account of the assessee is nothing but an accommodation entries made by the assessee and hence the same is income of the assessee for the Assessment Year 2010-11. As substantive additions have already been made in the name of Shri Rameshji Gobarji Thakor and Shri Hansaben Manilal Patel by the concerned Assessing Officers and the same amounts are credited in the hands of the assessee on protective basis. Thus the Assessing Officer determined the total income as Rs. 28,68,50,000/-.

3. Aggrieved against the same, the assessee filed an appeal before Commissioner of Income Tax (Appeals), Gandhinagar. The Ld. CIT(A) after detailed discussions deleted the protective addition made in the hands of the assessee observing as follows:

“…… the appellant filed a paper book containing all the documents which were presented before the A.O. who has considered the same and passed the assessment order accordingly. Through the statement of facts, the appellant has contended that the A.O. did not provide the material information during the course of assessment proceedings and proceeded further in making the addition on protective basis. Further, vide submissions made on 11.10.2019, the — appellant has made the contention that no addition could be made once the persons giving money were taxed substantively and the source of source was verified by the respective A.Os. Still further, the appellant has contended that appeals in the cases of two assesses viz. Capaxo Logistics Pvt. Ltd. and Ambe Trade Corp. Pvt. Ltd., have been decided by the CIT(A)-1 and CIT(A)-12 and the additions made on account of receiving the funds from Shri Rameshji Thakor and Smt. Hansaben Manilal Patel were deleted. The copies of these appellate orders have also been filed in the paper book which have been carefully perused. As per these appellate orders dated 21.05.2019 and 27.05.2019 respectively, it has been held that the persons giving money to  both these companies as share application money were having creditworthiness and proved their identities and since the transactions were through banking channels, the genuineness cannot be doubted and deleted the additions made in both the cases The finding of the CIT(A)-I in the case of Capaxo Logistics Pvt. Ltd. is reproduced as under-

“4.7 In view of the above, as the appellant has established identity, creditworthiness and genuineness of the share application money, the addition of share application money u/s.68 is not justified Further, the Honourable Supreme Court in the case of Commissioner of Income-tax Vs. Lovely exports Pvt. Ltd., prior to amendment to proviso to section 68 w.ef. A.Y.2013-14 has held that any addition of share application money is to be made in the hands of share applicants and not in the case of company. In the present case, the Assessing Officers of share applicants have made addition of all bank credits including the ones out of which share application money was made in the hands of appellant company, the ground of appeal is accordingly allowed.”

6.6 Similarly, in case of M/s. Ambe Tradecorp Pvt. Ltd. the CIT(A-12, Ahmedabad has held as under:-

7.8 It is noted from the paper book filed in the case of Shri Asit Surendrabhai Shah(PAN AFUPS64490) for appeals in his case that the ld. CIT(A)-5, Ahmedabad also in the appellate order dated 13.03.2018 in the case of Surendra Mangaldas Shah HUF(PAN: AACHS6590R) against the assessment order for A.Y.2009-10 w/s.143(3) rows. 147 by the ITO, Ward-5(2)(4). Ahmedabad, deleted the addition of Rs.13.25 crores w/s.68 implying thereby that theidentify and creditworthiness of Smt. Hansaben M. Patel in this case also was established the transaction was found genuine.

7.9 The purpose of narrating the assessments in the case of Smt. Hansaben Patel and the appellate orders in the case of Shri Asit Surendra Shah and Surendra Mangaldas Shah HUF is to explore the identity of Smt. Hansaben Patel. The analysis of the facts and concussions of the Id. Cs. IT(A) as reproduced above cannot be Ignored for adjudicating the present appeal under consideration in the case of M/s. Ambe Tradecorp Pvt. Ltd. The assessment in the case of Smt. Hansaben Patel and the registered sale deed of lands sold by her establish her identity and her creditworthiness and accordingly, the creditworthiness of subsequent parties in the chain of transactions up to the appellant M/s. Ambe Tradecorp Pvt. Ltd. are also established.

7.10. I also note that the AO had no rational basis to reject the explanation of the appellant during the assessment proceedings and to hold that the creditworthiness of the creditor M/s. Rachna Finlease Pvt. Ltd was not proven by the appellant and thus invoking the provisions of section adversely in the case of the appellant is not legally tenable. Having examined the facts of the case and in view of the case-laws relied upon by the appellant, it is evident that the appellant having not only discharged its onus u/s.68 but also having furnished the details of source of the source of the source as to the fund and thus establishing the identity and creditworthiness,  the addition of Rs.39,05,50,000/- cannot be sustained. The addition is directed to be deleted.”

6.7 The undersigned has also recently decided the appeal filed by Shri Rameshbhai G. Thakor (Appeal No. CIT(A)/GNR/11/2017-18) vide appellate order dated 22.10.2019 and held that the amounts deposited in his bank account with Indian Bank were received from the three persons including Smt. Hansaben Manilal Patel, Shri Mukesh J. Shah and Shri Kamal Gohil who have sold the lands at Village Sanathal, Tal. Sanand and received the value of the land for which the copies of sale deeds have been made available in that case. The observations made in the case of Shri Ramesh G. Thakor are also relevant for deciding the issue at hand in the case of the appellant.

……………………..

6.8 As observed in the case of Shri Ramesh G. Thakor while deciding the appeal in his case, the money were originated from the four persons to the appellant in that case who ultimately transferred the money to the appellant- company as per the chart drawn in the recent submission made on 11.10.2019 showing the names of Smt. Hansaben M. Patel who sold the lands situated at Sanathal, Tal. Sanand and also through Shri Rameshbhai G. Thakor who received the money from other three persons also. Since the source (Shri Ramesh G. Thakor) and his source i.e. Smt. Hansaben M. Patel for onward transmission has been held as proved, the additions made by the A. O. were deleted. Since the assessment made in the case of Smt. Hansaben M. Patel remained unchallenged by her (allegedly a missing person) through any appeal or revision before the A concerned authorities, it has to be concluded that the source of source (Smt. Hansaben) has been duly taxed on substantive basis for which the copies of the assessment orders in the case of Smt. Hansaben and Shri Mukesh J. Shah have been placed on record in the appellate file of Shri Ramesh G. Thakor. In view of these facts, no addition in the case of the appellant can be sustained, though made on protective basis. Further, the provisions of section 68 of the Act stood prior to its amendment w.e.f. 01.04.2013 stipulating for furnishing the explanation of the source (and not source of source in the case of the company) of the sums so credited in its books of accounts also do not require the verification of the source of the source for the assessment year 2010-11 in view of the old provisions of section 68 of the Act. Considering the above facts coupled with the cogent findings given by the two Cs.I.T.(Appeals) as referred to above with the findings given in the case of Shri Surendra M. Shah(HUF) who also appreciated the identical set of facts, the addition of Rs.28,68,50,000/- made on protective basis is deleted. Ground no.3 of the appeal is accordingly allowed.

4. Aggrieved against the appellate order, the Revenue is in appeal before us raising the following Grounds of Appeal:

i) Whether, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the addition of Rs.28.68,50,000/-made by the AO u/s.68 of the 1.T. Act on protective basis.

ii) On the facts and circumstances of the case, the Ld. Commissioner of Income-Tax (Appeals) ought to have upheld the order of the Assessing Officer.

It is, therefore prayed that the order of the Ld. Commissioner of Income-tax (Appeals) may be set aside and that of the Assessing Officer be restored.

iv) The appellant prays for leave, to amend or alter any ground or add a new ground which may be necessary.

5. The Ld. CIT-DR Shri A.P. Singh appearing for the Revenue strongly supported the order passed by the Assessing Officer and submitted the Ld. CIT(A) erred in deleting the addition of Rs. 28.68 crores made in the hands of the assessee on protective basis. The Ld. CIT(A) failed to consider that the substantial additions made in the hands of Shri Rameshji Thakor was also deleted by Ld. CIT(A). Thus the Ld. CIT(A) ought to have upheld the addition in the hands of the assessee.

6. Per contra, the Ld. Counsel Ms. Nupur Shah appearing for the assessee submitted that there is no provision in the Act to make addition once the persons giving money was taxed substantively and the source of source was verified by the respective Assessing Officer. More particularly, the provisions of Section 68 of the Act as stood prior to its amendment w.e.f. 01-04-2013 wherein assessee is required to establish and explain the source of the credit in the books of accounts and do not require to prove the “source of the source” for the Assessment Year 2010-11. The assessee has proved the source of the loan are from Shri Rameshji Thakor and Smt. Hansaben Manilal Patel. It is proved beyond doubt Smt. Hansaben Manilal Patel sold immovable property of Rs. 102.93 crores and paid Rs. 18.925 crores to Shri Rameshji Thakor and this was paid to the assessee company.

6.1. In the case of M/s. Capaxo Logistics Pvt. Ltd. and Ambe Tradecorp Pvt. Ltd. wherein funds were received from the above two parties namely Shri Rameshji Thakor and Smt. Hansaben Manilal Patel. When the additions made by the Assessing Officer were deleted by Ld. CIT(A) which are now confirmed by the Co-ordinate Bench of this Tribunal in ITA No. 1264/Ahd/2019 and ITA No. 1235/Ahd/2019 observing as follows:

In the case of M/s. Capaxo Logistics Pvt. Ltd (in ITA No. 1264/Ahd/2019

“…14. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly the assessee has received amount of loan and advances for Rs. 5 crore each from Shri Rameshbhai Thakor and Shri Vinod Sharma which was treated as unexplained cash credit under section 68 of the Act by the AO which was deleted by the learned CIT(A).

14.1 At the outset we note that assessee also received share application money for Rs. 3.5 core and 4 crores from each of the party namely, Shri Rameshbhai Thakore and Shri Vinod Sharma which was also treated as unexplained cash credit under section 68 of the Act by the AO on account of lack of proof of identity of party, genuineness of transaction and creditworthiness of the parties. However while dealing with the issue of share application money in the preceding paragraph of this order, we have held that identity of parties, genuineness of transaction and creditworthiness have been established by the assessee. Therefore, the only issue remains whether assessee has given advances to these parties on earlier occasion which has been received back in the year under consideration. In this regard we note that the assessee has submitted ledger copies of both parties for the F.Y. 2008- 09 and 2009-10 which is available on pages 249 to 254 of paper book. On perusal of the same, we find that the assessee as on 28-02-2009 has provided advances to both the parties through cheque which has been received back in the year under consideration through banking channel. The assessee has also submitted bank book and bank statement showing the transaction which is available on paged 245 to 248 and 251 to 252 of paper book.

14.2 In view of the above, there remains no ambiguity that amount of Rs. 5 crore each received from Shri Ramesh Thakor and Shri Vinod Sharma represent repayment of advances given by the assessee in the month of February 2009. Therefore the provision of section 68 will not be applicable on this transaction. Hence the ground of appeal of the Revenue is hereby dismissed.

14.3 In the result appeal of the Revenue is dismissed.”

In the case of Ambe Tradecorp Pvt. Ltd (in ITA No. 1235/Ahd/2019

“….9.2 Furthermore, once the source of fund in the hand of above company was held as explained by learned CIT (A) then amount received by the assessee from that company cannot be held as unexplained under section 68 of the Act in the absence of contrary information. Likewise, there cannot be addition of one item in the hands of two different persons.

9.3 Nevertheless, the assessee has submitted PAN, address, ledger confirmation, own bank statement and bank statement of M/s Rachna Finelease Pvt. showing amount received through banking channel. The assessee also claimed before the learned CIT (A) that M/s Rachna Finelease Pvt. has received money from Smt. Hansaben Patel and Shri Ramesh Thakor which can be verified from the bank statement of M/s Rachna Finelease Pvt. and also from the finding of the AO in paragraph 6.1.3 which reads as under:

On verification of the bank book of Rachna Finelease Pvt. Ltd. it is found that the fund have travelled within minutes of being credited from the bank account of Hansaben H. Patel and Rameshbhai Thakor and immediately the funds have landed in the bank account of JP Fincorp Services Pvt. Ltd.(Renamed as Ambe Tradecorp Pvt. Ltd.).

9.4 Smt. Hansaben Patel sold immovable property for Rs. 102.93 crores and paid due taxes in the assessment framed under section 147 r.w.s. 144 of the Act. Going through all these document it is established that identity, genuineness of transaction and credit worthiness/sources of fund has been established. Further the AO has not pointed out any deficiency in these documentary evidences neither any contrary evidences brought by the learned DR before us at the time of hearing against the finding of the ld. CIT-A. Thus, the finding of the AO that the creditworthiness of the party was not proved was not based on the cogent reasons. Thus the finding of the AO appears to be arbitrary and non-speaking.

9.5 It is also not out of the place to mention that the shares application money received by the assessee in the year under consideration was refunded in the subsequent year. The repayment of the share application amount by the assessee was duly accepted by the Revenue. In this regard, we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of the CIT Vs. Rohini builders reported in 256 ITR 360 wherein it was held as under:

“The genuineness of the transaction is proved by the fact that the payment to the assessee as well as repayment of the loan by the assessee to the depositors is made by account payee cheques and the interest is also paid by the assessee to the creditors by account payee cheques.”

9.6 Thus, the entire basis of allegation by the AO that the credit worthiness of the party i. e. share application money was not proved does not hold well in view of above discussion. As the assessee was able to establish the identity of the share applicant by furnishing PAN and company master data and proving the genuineness of transaction by adducing bank statements and also explained the sources of fund in the hands of the party, which are placed on pages of the paper book as discussed above, no addition is warranted.

9.7 In view of the above facts and after considering the details in totality, we do not find any reason to interfere in the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the Revenue is dismissed. 9.8 In the result, the appeal filed by the Revenue is dismissed.”

7. Thus the Ld. A.R. pleaded that the deletion made by the Ld. CIT(A) does not require any interference and the Revenue appeal is liable to be dismissed.

8. We have given our thoughtful consideration and perused the materials available on record. It is settled principle of law the Income Tax Act nowhere provides that parallel assessments can be made in respect of the same income on two different persons. The assessee right from the beginning of the reassessment proceedings submitted that the source of the funds from the creditors and their source (i.e. source on source) is also proved by the assessee. Therefore the Assessing Officer made a protective addition of Rs. 28.68 crores as unexplained money in the hand of the assessee. The Co-ordinate Bench of this Tribunal in the case of M/s. Capaxo Logistics Pvt. Ltd. and M/s. Ambe Tradecorp Pvt. Ltd. are on identical additions deleted the same observing identity, creditworthiness and genuineness of the transactions are clearly established by the assessee. The Assessing Officer has not pointed out any deficiency in these documentary evidences submitted by the assessee and also not brought on record any contrary evidences in the reassessment proceedings.

8.1. It is seen from the appellate record, the assessment made in the case of Smt. Hansaben Manilal Patel wherein the sale of land has been duly taxed on substantive basis. Though the said order remained unchallenged by her (Smt. Hansaben Manilal Patel allegedly a missing person) by way of appeal or revision. Whereas in the case of Shri Rameshji Thakor that the alleged substantive additions made in his hands were also deleted by Ld. CIT(A) as the source was been clearly proved by the assessee. Thus we do not find any infirmity in the order passed by the Ld. CIT(A) who has deleted the protective addition made in the hands of the assessee herein. More particularly, the provisions of Section 68 as it stood prior to the amendment of the Financial Act, 2013. Thus in our considered view, the grounds raised by the Revenue is devoid of merits and the same is liable to be dismissed.

9. In the result, the appeal filed by the Revenue is hereby dismissed.

Order pronounced in the open court on 05-07-2023