ITAT Mumbai Deletes Rs.12.52 Crore Section 68 Addition on Genuine Loans

NH Securities Ltd. Vs DCIT (ITAT Mumbai)

The Mumbai Bench of the Income Tax Appellate Tribunal, in NH Securities Ltd. Vs DCIT, allowed the assessee’s appeal for Assessment Year 1999-2000 and deleted an addition of Rs.12,51,94,466 made under Section 68 of the Income Tax Act, 1961, in respect of loans received from five corporate creditors. The Tribunal held that the loans could not be treated as unexplained cash credits where the assessee had furnished the creditors’ identities, PAN details and countersigned ledger confirmations, the transactions had passed through regular banking channels, and the tax authorities had accepted the corresponding interest expenditure. The Tribunal also considered the assessee’s inability to obtain further financial documents from creditors because of ongoing litigation involving its group concerns.

Background and Assessment Proceedings

The assessee was a public limited company engaged in share and stock broking, investment and trading in shares and securities and was a member of the National Stock Exchange. It filed its return of income on 10 April 2000 declaring business income of Rs.1,37,38,650. The assessment was completed under Section 143(3) on 31 October 2002.

The Assessing Officer treated loans aggregating Rs.12,51,94,466 received from five companies as unexplained cash credits under Section 68, primarily because confirmations from the creditors had not been furnished before him. The disputed loans comprised Rs.6 crore from 20th Century Finance Corporation Ltd., Rs.50,60,411 from Mittal Ispat Ltd., Rs.50,73,644 from Pondy Metals & Rolling Mills Ltd., Rs.50,60,411 from Sharda Castings Ltd. and Rs.5 crore from DSQ Holdings Ltd.

Earlier Tribunal Remand and CIT(A)’s Findings

The matter had previously reached the Tribunal in ITA No.3717/M/2004. By order dated 3 October 2007, the Tribunal remanded the issue to the Commissioner of Income Tax (Appeals) because the creditor confirmations furnished in the assessee’s paper book had not been considered. The CIT(A) was directed to verify the confirmations and adjudicate the issue afresh.

In the second round, however, the CIT(A) again sustained the addition. Although the appellate authority acknowledged the paper book, bank account statements and ledger extracts, it stated that the confirmations were not available in its file and concluded that ledger extracts alone could not establish the genuineness of the transactions or the creditworthiness of the creditors.

Creditor Confirmations, Banking Evidence and Interest Payments

On examining the records, the Tribunal found that the ledger extracts themselves contained countersignatures of the creditors confirming the transactions, together with their PAN details. The accounts reflected continuing loan transactions routed through regular banking channels using account-payee cheques.

The Tribunal attached particular significance to the fact that the assessee had paid interest on the loans after deducting tax at source and that the lower authorities had allowed the corresponding interest expenditure. It questioned the inconsistency in accepting the genuineness of interest payments while rejecting the underlying principal amounts as unexplained.

Existing Litigation and Difficulty in Proving Creditworthiness

In these circumstances, the Tribunal accepted that the assessee had genuine practical difficulties in procuring additional creditworthiness documents. The assessee had nevertheless provided the creditors’ PAN details and had requested the Assessing Officer to issue summons under Section 131 to verify the transactions. The Assessing Officer did not act upon that request.

The Tribunal observed that the authorities could have used the PAN information to make enquiries with the creditors’ respective Assessing Officers and independently ascertain their creditworthiness. It also found that no adverse inference had been drawn from the countersigned ledger extracts.

Loan Repayments and Tribunal’s Decision

The Tribunal noted that the loan from 20th Century Finance Corporation Ltd. had been repaid with interest during the relevant assessment year itself. Loans from Sharda Castings Ltd., Mittal Ispat Ltd. and Pondy Metal & Rolling Mill (P) Ltd. were repaid with interest during Assessment Year 2000-01.

The assessee’s representative also sought to produce further documents concerning DSQ Software and 20th Century Finance Corporation Ltd., which had subsequently been demerged as TCFC Finance Ltd. The Tribunal considered examination of those additional documents unnecessary because the existing record, together with the reasonable explanation for the non-production of further creditor documents, was sufficient to decide the controversy.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal in ITA No.1079/Mum/2018 for A.Y.1999-2000 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-49, Mumbai in appeal No.CIT(A)-49/IT-118/2016-17 dated 29/12/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 31/10/2002 by the ld. Dy. Commissioner of Income Tax, Central Circle 40, Mumbai (hereinafter referred to as ld. AO).

2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in confirming the addition made on account of unexplained cash credit u/s 68 of the Actin respect of loans received by the assessee in the facts and circumstances of the case.

3. We have heard the rival submissions and perused the materials available on record. We find that the assessee is a public limited company engaged in the business of shares and stock broking, investment and trading in shares and securities. We find that the assessee is a member of National Stock Exchange. The business income derived by the assessee in the sum of Rs 1,37,38,650/- was declared in the return of income filed on 10.4.2000.

3.1. We find that this is the second round of proceedings before this tribunal. In the first round, this tribunal in ITA NO. 3717/M/2004 dated 3.10.2007 had remanded the issue to the file of ld CITA for the reason that the loan confirmations that were filed by the assessee before the ld CITA in the paper book were not considered by the ld CITA. Accordingly, this tribunal had directed the ld CITA to verify those confirmations for the following 5 parties for fresh adjudication of the issue :-

3.2. The relevant directions given by this tribunal are reflected in para 22 of its order dated 3.10.2007.  We find that the ld AO in the original assessment had treated the loans received from aforesaid 5 parties as unexplained cash credit u/s 68 of the Actprimarily on the ground that the confirmations from those parties could not be filed before him. During the course of first round of proceedings before the ld CITA, the assessee had indeed furnished confirmations from the aforesaid 5 parties which fact is also mentioned in the order of this tribunal dated 3.10.2007 . We find that the assessee had duly furnished the names and addresses of the aforesaid 5 parties, their PAN together with the copy of confirmations from the parties. But we find that the ld CITA had even in the second round of proceedings had stated that the confirmations were not found to be present in his file. Infact the ld CITA records at page 6 and 7 of his order that the assessee had submitted before him the copy of the submissions made before the tribunal in the first round of proceedings together with the paper book. We find that the ld CITA also records the fact that the paper book filed by the assessee did contain few papers of bank account statement of assessee and ledger extracts in the case of aforesaid 5 parties .We find that the ld CITA once again mentions that the ledger extracts alone have been filed by the assessee and the same would not establish the genuineness of the transaction and creditworthiness of the creditors.

3.3. We find that the ledger extracts given by the assessee before the ld CITA itself contains the counter signature of the creditors duly confirming all the transactions together with their PAN. From the perusal of the ledger extracts, we find that there is a running account maintained by the assessee with these creditors and all the transactions are routed throughregular banking channels in account payee cheques. One more excruciating fact to be noted here is that the assessee had paid interest on these loans after subjecting the same to due deduction of tax at source. We find that the lower authorities had duly granted deduction for the interest expenditure claimed on these loans by the assessee. Once the interest is accepted to be genuine , then how the principal component thereon could be disbelieved by the lower authorities. We are unable to comprehend and unable to persuade ourselves to accept to this act of the lower authorities.

3.4. Moreover, the ld CITA duly admits tha fat that the assessee had also given certain evidences of suits being filed by some of these parties on the group concerns of the assessee. This fact of existing dispute is more pertinent in view of the fact that the assessee could at best only collect the confirmation in the form of counter signatures in the ledger extracts sent by it to the loan creditors and the said loan creditors were not co­operating further with the assessee in view of existing disputes. Hence assessee could not produce those creditors before the lower authorities for proving the genuinity of the loans beyond doubt. Similarly the assessee could not procure the details of their creditworthiness by way of their financial statements and income tax returns and produce the same before the lower authorities. Given this genuine predicament from the side of the assessee, we find that the assessee had requested the ld AO to issue summons u/s 131 of the Act to those loan creditors to find out the truth, which was not acted upon by the ld AO. We find that the assessee had duly disclosed the identity of the creditors and genuineness of the transactions are very much evident from the ledger extracts itself as all the transactions are routed through regular banking channels and assessee had even paid interest on these loans. Due to existing disputes with the parties by the sister concerns of the assessee, the assessee could not procure the financial statements and income tax returns from the loan creditors to prove their creditworthiness. But there is no dispute that the assessee had indeed furnished the PAN of all the loan creditors. The ld AO / ld CITA could have cross verified from the PAN of the creditors with the assessing officers of the creditors and ascertain the creditworthiness. In any case, all these 5 loan creditors had duly confirmed the transactions carried out with the assessee by way of counter signature in the ledger extracts. We find that no adverse inference was drawn on the said ledger extracts by the lower authorities.

3.5. We also find that the loan borrowed from 20^th Century Finance Corporation Ltd had been duly repaid during the assessment year under consideration itself by the assessee with interest.  With regard to loans received from Sharda Castings Ltd, Mittal Ispat Ltd and Pondy Metal & Rolling Mill (P) Ltd, the assessee had repaid the loans in Asst Year 2000­2001 (i.e the immediately succeeding asst year) together with interest. We find that the ld AR before us had tried to produce certain documents connected with DSQ Software and 20^th Century Finance Corporation Ltd (which was demerged later as TCFC Finance Ltd) to prove their creditworthiness. In our considered opinion, these documents are not required to be looked into at this stage as we have already held that the assessee had reasonable cause from not proving the creditworthiness of the creditors by producing the necessary documents due to ongoing legal suits and disputes pending with those creditors vis a vis the sister concern of the assessee. Moreover those disputes are money suits and obviously the loan creditors would not come forward to cooperate with the assessee by furnishing their financials. The relevant disputes that are pending in the case of sister concern of the assessee with these loan creditors are enclosed in pages 15 to 18 and 20 to 41 of the paper book filed before us which are already forming part of records of the lower authorities.

3.6. Since these are factual issues, the various case laws relied upon by the ld AR at the time of hearing need not be gone into as the relief is hereby granted to the assessee on first principle basis itself .

3.7. In view of the aforesaid detailed observations, we are inclined to accept to the contentions of the assessee that the loans received from aforesaid 5 parties are genuine and not to be treated asunexplained cash credit u/s 68 of the Act  in the peculiar facts and circumstances of the instant case. Accordingly, the grounds raised by the assessee are allowed.

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

Order pronounced on 24/03/2021 by way of proper mentioning in the notice board.