Receipt of amount via banking channel doesn’t make transaction genuine

Mayuri P. Patel Vs ITO (ITAT Ahmedabad)

ITAT Ahmedabad held that mere receipt of amount via banking channel doesn’t make the transaction as genuine. Addition u/s 68 of the Income Tax Act sustainable because of non-establishment of identity of creditor, genuineness of transaction and credit worthiness of the parties.

Facts- During the course of assessment proceeding, the AO found that the assessee has shown unsecured loan from three parties.
The assessee in support of impugned loan transactions only furnished copy of confirmation letter from the loan parties. Thereafter, the AO issued notice under section 13 1(1) to the loan parties seeking necessary detail which were complied with by them.

After going through respective replies, AO was of the opinion that the credit worthiness and genuineness of loan parties namely M/s Akshar Trading and M.S. Carting Contractor were not established. AO held that the assessee failed to explain genuineness and creditworthiness of the lender creditor and made addition of Rs. 3,86,35,000/- to the total income of the assessee under section 68 of the Act.

The aggrieved assessee preferred an appeal to the learned CIT(A). CIT(A) rejected the contention of the assessee and confirmed the addition. Being aggrieved, the present appeal is filed.

Conclusion- Held that the link in all these adjustment entry was not properly explained. Further the provision of section 68 requires the assessee to establish the identity of creditor, genuineness of transaction and credit worthiness of the parties. Merely the fact that the amount received through banking channel does not make the transaction as genuine. The assessee needs to explain the transaction properly based on the documents within the parameters of section 68 of the Act.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-5, Vadodara, dated 25/11/2019 arising in the matter of assessment order passed under s. 143 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2012-13.

2. The assessee has raised following grounds of appeal:

1. The ld.CIT(appeals) erred in law and on fact in confirming action of the Ld.AO in treating the unsecured loans received from the depositors (i) Akshar Trading Co. of Rs.2,33,85,000/- (ii) Rs.36,00,000/- from Ashok Khurana and (iii) Rs.1,16,50,000/- from M.S Carting Contractor aggregating Rs.3,86,35,000/- as unexplained Cash credit U/s.68 of the Income Tax Act.

2. Your appellant most humbly reserves the right to add, amend, alter or substitute the ground in this appeal on or before the time of hearing.

3. The only issue raised by the assessee is that the learned CIT-A erred in deleting the addition of Rs. 3,86,35,000/- made by the AO on account of unexplained cash credit under section 68 of the Act.

4. The assessee is an individual and engaged in the business of trading and manufacturing of machinery in the name and style of AR Chem Industries. During the course of assessment proceeding, the AO found that the assessee has shown unsecured loan from following parties:

4.1 The assessee in support of impugned loan transactions only furnished copy of confirmation letter from the loan parties. Thereafter, the AO issued notice under section 13 1(1) to the loan parties seeking necessary detail which were complied with by them.

4.2 The AO from the reply furnished by the loan party namely Shri Ahsok M Khurana found that he has given loan of Rs. 50 lakh on 24-04-2011 to the assesse and same was received back by him dated 29-04-2013. However the assessee has shown loan credit of Rs. 36 lakh only from Shir Ahok M Khurana which has not been extended by him. Thus the assessee failed to explain the credit of Rs. 36 lakh.

4.3 The other two parties in their reply only furnished copy of bank statement and stated that they have incurred huge losses in their business, therefore no return was filed by them. Consequently, the AO issued summons under section 131(1) of the Act to the loan parties to appear in person for verification of credit worthiness.

4.4 The proprietor of M/s Akshar Trading namely Shri Sanjay Jashvantlal appeared before the AO dated 02-03-20 15. In the statement recorded under section 13 1(1) he stated that due to loss in business of sand trading, he closed his business and now working as supervisor in a company namely Saint Gobain Pvt. Ltd for last two years and drawing annual salary of Rs. 4 lakh. With regard to sources of providing interest free loan of Rs. 2,33,85,000/- to the appellant assessee, he stated that on the death of his father, he received an amount of 2.4 crore from his father bank as legal heir which utilized in making interest free loan to the assessee. The AO asked him to provide death certificate and bank statement of his father to which he stated that the same will be submitted on next day. However, Shri Sanjay Jashvantlal failed to furnish the same despite issuing several notices.

4.5 Likewise, the proprietor of MS Carting Contractor appeared dated 13-03-2015 and stated that due to loss in sand trading business, he closed down the same. Now, he is working in a company namely Crompton Graves and withdrawing annual salary of Rs. 4 lakh only. With regard to source of giving interest free loan to the assessee, he stated that same was provided out of amount credited in his bank on account of sale of materials.

4.6 The AO in view of the above was of the opinion that the credit worthiness and genuineness of loan parties namely M/s Akshar Trading and M.S. Carting Contractor were not established. Both these parties not filed return of income due to low income at relevant point of time. However, in subsequent year, the assessee has meager income from salary from which the parties can merely meet their day to day requirement. Therefore in such a situation giving such huge loan to the assessee that too without charging interest is highly improbable and not possible. Thus, the circumstantial evidence suggest that the assessee has utilized their bank account to channelize her own unaccounted money. In this regard the AO referred the judgment of Hon’ble Supreme court in case of Durga Prasad More reported in 82 ITR 540 where the Hon’ble court held that it is very easy for making self-serving document if assessee want to evade tax. Therefore, the taxing authority is required to look beyond the documentary evidence produced and entitled to look into surrounding circumstantial evidence to find out the reality. The AO further made reference to various judicial pronouncement with regard to onus to prove under section 68 of the Act. Accordingly, the AO held that the assessee failed to explain genuineness and creditworthiness of the lender creditor and made addition of Rs. 3,86,35,000/- to the total income of the assessee under section 68 of the Act.

5. The aggrieved assessee preferred an appeal to the learned CIT(A).

6. The assessee before the learned CIT(A) with regard to addition of Rs. 36 lakh shown as outstanding loan from Mr. Ashok Khurana submitted that during the year she received an amount of Rs. 50 Lakh from M/s Ashka Construction Ltd. The fund was arranged on the instruction of Shri Ashok Khurana therefore inadvertently the same was credited in the ledger account of Shir Khurana instead of M/s Ashka Construction Ltd. Likewise a cheque of Rs. 14 lakh dated 31-03-2012 issued in the name of Smt. Kanaklata P Pandya but inadvertently the same was debited in the ledger of Shri Ashok Khurana. Subsequently, the cheque of Rs. 14 lakh issued in the name of Smt. Kanaklata P Pnadya got cancelled, hence the same is not reflecting in the bank statement. The assessee further claimed that mistakes as discussed above got rectified in the subsequent year which can be verified from the ledger account of all these parties i.e. Shri Ashok Khurana, M/s Ashka Construction Ltd and Smt. Kanaklata P Pandya.

6.1 With regard to the loan of Rs. 2,33,85,000/- and Rs. 1,16,50,000/- from Akshar Trading (Prop- Shri Sanjay Parmar) and M.S. Carting Contractor (Prop. Shri Vasant Chowdhry) respectively, the assessee submitted that during the assessment proceeding, she has furnished copy of confirmation, PAN, Bank statement along bank statement of the parties and copy of ITR acknowledgment. The AO on the basis of the same issued notices under section 133(6) of the Act to both these parties and in reply they confirmed to have given loan through banking channel. Thereafter, summons under section 131 of the Act were issued and they appeared before the AO and got recorded their statement wherein the source of making loans and advances was duly explained. Therefore, the identity of the creditor, the genuineness of loan and the credit worthiness of the creditor was proved by the fact that the creditor, themselves appeared before the AO and confirmed the transaction which was duly carried out through the banking channel. The assessee further submitted that the provision of section 68 of the Act requires the assessee to explain the source of the credit in the books of assessee and not the sources of source. The requirement of section of section 68 of the Act has been duly discharged by her and onus shifted upon the AO to establish his allegation that the assessee routed her unaccounted income. The AO has not brought anything on record in this respect. Hence, the addition made by the treating the genuine loan transaction with above said parties namely Akhsar Trading Company and MS Carting Contractor as unexplained cash credit needs to be deleted.

7. The learned CIT(A) after considering the facts in totality rejected the contention made by the Assessee and confirmed the addition made by the AO by observing as under:

4.2 Sole ground of appeal pertains to addition u/s 68 amounting to Rs. 3,86,35,000/- on account of unexplained unsecured loan from three parties as under:

From pages 2 to 6 of the assessment order. AO has discussed capacity of each lender, identity and genuineness of loan. AO has also cited case laws in favour of revenue. AR on the other hand vehemently argued before AO that all the transactions were through banking channel & identity has been proved hence addition u/s 68 was not required. However, dissatisfied with the AR w.r.t. capacity of all the lenders, AO proceeded to add entire unsecured loan of Rs. 3,86,35,000/- u/s 68 of the Act.

4.3.1 find that sole dispute pertains to creditworthiness and genuineness of lender. AR’s only argument is that since lender had sufficient balance in his bank a/c arid there was no cash deposit prior to date of lending, hence sources of unsecured loan stands unexplained. However, AR conveniently forgot to explain the immediate credit through cheque/RTGS, just pñor to giving loan. AO has specifically asked . AR/appellant to produce all the lenders before him for examination/ confirmation from lender, ITR and purpose of loan taken. I shall discuss each lender one by one as under:

I) Ashok Khurana: Rs. 36,00,000/-

AR argued that actually Rs. 50,00,000/- was received from Aashka Construction Ltd. (Later merged with Myraj Consultancy Ltd.) and later known as M/s Madhav Infra Projects Ltd. Amount of Rs,.50,00,000/- was credited in appellant’s books against the name of Ashok M. Khurana (lender). Ledger also contained Rs. 14,00,000/-repayment of loan. AR, however denied Rs. 14.00,000/- was repaid to Ashok M Khurana and instead AR claimed that Rs. 14.00.000/- paid by appellant to Kanaklata Pandya. When I asked AR to show appellant’s bank statement effecting debit entry of Rs. 14,00,000/- then he again took U turn and claimed that Rs. 14,00,000/-was issued by appellant but later on cancelled. Entry in books has been rectified as on 01-04-2012. In overall, AR tried to convince actual lender was Aashka Construction and not Ashok M Khurana, However. I find AR’s argument not supported with facts.

i) As per ledger, appellant received loan of Rs.50 lakh on 28-04-2011.

ii) AR claimed it received through cheque but in actual transaction are through RTGS.

iii) AR Finally claimed Rs.. 14,00,000/- repayment to Ashok M. Khurana, but later denayed.

iv) 14,00,000/- was claimed to have been repaid/returned to Kanaklata Pandya whereas Bank transfer date 19-04-2012 suggest name “Krishna”,

v) Payment of Rs. 14.00,000/- was actually made on 19-04-2012 but in the ledger it is shown on 31-03-2012.

From the above, I find AR has mixed up its own books entry with nowhere to reach the conclusion. One important aspect to understand here is as to how appellant repaid Rs. 14,00,000/- by issuing cheque to lender, but that cheque was never cleared. Very clearly, once cheque issued to creditor but not cleared has to be part of unexplained income.

The Hon. ITAT Visakhapatanam in case of ITO V SriTadi Vasudeva Rao, held that AO was justified in making addition u/s 68 of credit balance showing in assessee’s books of account against the Nil balance shown by the creditors in their books of account as on verification of books of accounts of the creditors.

AR’s make belief story of mistake in ledger books of accounts w.r.t. loan of Rs. 36,00,000/- (50,00,000 – 14,00,000) fails to convince me. Even if, I believe ARs theory then once again, I don’t find any interest payment was made by appellant. Neither purpose of loan has been explained. Therefore, loan of Rs. 36,00,000/- has rightly been considered as unexplained by AO.

II) Loan from Akshar Trading – Rs. 2,33,85,000/-

AR submitted confirmation, identity DUE could not prove genuineness of transaction. On reply to notice u/s 133(6} issued by AO, lender stated that it did not file return due to heavy loss incurred by the firm. Sanjay Parmar appeared on behalf of Akshar Trading before AO against summon issued u/s 131(1) of the Act. He confessed to have meager income sufficient to make both ends meet. Sanjay could not explain credit entry in bank account. He merely staled that all credited amount belonged to his late father. Bank account is jointly held by the Sanjay Parmar. Money equivalent to unsecured loan is seen credited in the month of March 2012 and immediately thereafter similar amount was transferred to Appellant’s bank account claimed to have unsecured loan. Sanjay Parmar could not explain sources of credit entry in the joint bank a/c. AR did not submit any documentary evidence to show the sources of fund lent to appellant amounting to Rs. 2,33,85,000;-. I also find appellant did not pay any interest on such loan from Akshai Trading. AO has rightly doubted capacity and genuineness of unsecured loan. Addition u/s 68 of Rs. 2,33,85,000/- is upheld,

III) Ms. Carting Contractor: Loan of Rs. 1,16,50,000/-.

AO has categorically asked AR to prove capacity and genuineness of unsecured loan. AR did not submit purpose of loan taken. I also find that no interest has been paid against such loan. AR could rut explain the reason for non-payment of unsecured loan or its interest even rill date. Against summon u/s 133(1) issued to M/s Carting Contractor, ShriVasant Kumar Chaudhari appeared before AO. As per ITR, his income is Rs.3,92,383/- in AY 2012-13. Upon inquiring about immediate credit in his bank account prior to lending the money during the month of March 2012 he stated that sources were out of collection from debtors. He submitted list of seven debtors without complete identity, address, contacts. However. AR could not explain as to when lenders himself is / living hands to mouth then how can he lend Rs.1,16,50,000/- that also interest free. Lender did not have capital to run his own business of Carting. Obvious! capacity and genuineness of unsecured loan is in deep doubt. Thus, unsecured loan of Rs. 1,16,50,000/- remains unexplained u/s 68 of the Act.

4.4 The Hon. 1TAT Mumbai, vide order dated Oct. 22, 2019 [2019] 110 taxmann.com 15(Mumbai-Trib) 227 has upheld invoking Sec. 68 observing as under:

“Where assessee NBFC immediately after receiving loans from several entities in its bank account gave further huge amount of loans and advances towards share application money to several companies without charging any interest and assessee could not prove financial viabilities of investor companies, it could be said that assessed was a shell company engaged in money laundering by providing bogus accommodation entries through a web of bank accounts thus addition u/s 68 was justified. “

4.5 The Hon. High Court of Mumbai, [2014] 110 Taxmann.com 71 (Bombay) in case of Swastik Realtors v. ACIT, held as under:

“Merely because certain entries had been shown in book of account of accommodation entry provider, loan transaction could not be held to be genuine where entry provider had no financial capacity. “

4.6 The Hon. High court of Madhya Pradesh in ITA No. 223/2017 in case of SSP Enterprise Pvt. Lrd. vs. ACIT vide its order dated 07-05-2018 has upheld the additions u/s 68 in respect of unsecured loan taken by assessee. Shree Shyam Polymers, this lender has shown meager income in his return, no interest is provided and appellant had proved identity of the depositor. Observing serious doubt on capacitv of the lender, addition us 68 of Rs. 16,39,960 was upheld.

4.7 The Hon’ble Gujarat High Court in the case of Bomin P. Ltd. Vs CIT 160 ITR 477 has ruled that section 68 enjoins upon the assessee to officer an explanation about nature and source of any sum found credited in the books of account and for any previous year and if there is no explanation or if the explanation is unsatisfactory in the opinion of the Assessing Officer, the sum so credited is to be treated as income and brought to tax according.

4.8 In the case of CIT Vs Dew Prasad Vishwanath Prasad (1969) 72 ITR 194. the Hon ‘ble Apex Court has also held that the onus of proving the genuineness of cash credit is upon the assessee.

5. Apart from the above, AR was requested to produce audited books of account of next AY 2013-14 so as to see the status of unsecured loan. AR stated that appellant has closed its business. Upon this when asked AR as to how the appellant would repay a huge unsecured loan. At this. AR remained silent. One peculiar facts 1 have observed is that all the unsecured loan was credited in bank account offenders between 10 to 20 March 2012 and soon thereafter similar amount was transferred to appellant’s bank account. Transaction in bank account confirms unusual as also not explained by the lenders themselves. Clearly, appellant own money has been route through banking channel giving a colour of genuineness of transaction. I also find appellant did not pay interest to any lender on unsecured loan of Rs.3,86,35,000/. Appellant proved sources from where she could pay the unsecured loan. Appellant’s books does not show any provision to this effect as well. As discussed above, lender’s capacity is in deep doubt. Case laws relied upon by AR duly been considered and found not applicable on facts involved in this case. Given these setting of facts. I am inclined to support AO’s findings. Thus, A.Rs argument fails. Addition u/s.68 amounting to Rs.3,86,35,000/- is hereby upheld. Sole ground is dismissed.

8. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.

9. The learned AR before us filed a paper book running from pages 1 to 178 and also filed the paper book of the additional evidence containing 10 pages and reiterated the submissions made before the authorities below. The learned AR has also filed additional evidences to justify that the amount of loan received from the parties the namely Akshar Trading Co and M.S. Carting Contractor were returned

10. On the other hand, the learned DR before us submitted that the assessee has not established the genuineness of the transaction and creditworthiness of the parties which is a mandatory requirement in order to avoid the rigorous provisions of section 68 of the Act. The learned DR vehemently supported the order of the authorities below.

11. We have heard the rival contention of both the parties and perused the materials available on record. The fact of the case have been elaborated in the previous paragraphs. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. The provision of section 68 of the Act fastens the liability on the assessee to provide the identity of the lenders, establish the genuineness of the transactions and creditworthiness of the parties. These liabilities on the assessee were imposed to justify the cash credit entries under Section 68 of the Act by the Hon’ble Calcutta High Court in the case of CIT Vs. Precision Finance (P) Ltd. reported in 208 ITR 465 wherein it was held as under:

“It was for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. On the facts of this case, the Tribunal did not take into account all these ingredients which had to be satisfied by the assessee. Mere furnishing of the particulars was not enough. “

11.1 Now first we proceed to understand the identity of the party. The identity of the party refers existence of such party which can be proven based on evidences. As such the identity of a party can be established by furnishing the name, address and PAN detail, bank details, ITR etc.

11.2 The next stage comes to verify the genuineness of the transaction. Genuineness of transaction refers what has been asserted is true and authentic. A genuine transaction must be proved to be genuine in all respect not merely on a piece of a paper. The documentary evidences should not be a mask to cover the actual transaction or designed in way to present the transaction as true but same is not. Genuineness of transaction can be proved by submitting confirmation of the parties along the details of mode of transaction but merely showing transaction carried out through banking channel is not sufficient to prove the genuineness. As such the same should also be proved by circumstantial surrounding evidences as held by the Hon’ble Supreme court in the case of Shri Durga Prasad More reported in 82 ITR 540 and in case of Smt. Sumati Dayal reported in 214 ITR 801.

11.3 The last stage comes to verify the creditworthiness of the parties. The term creditworthiness as per Black Law Dictionary refers as:

“creditworthy, adj. (1924) (Of a borrower) financially sound enough that a lender will extend credit in the belief default is unlikely; fiscally healthy-creditworthiness.”

11.4 Similarly in The New Lexicon Webster’s Dictionary, the word “creditworthy” has been defined as under:-

“creditworthy, adj. of one who is a good risk as a borrower.”

11.5 It the duty of the assessee to establish that creditor party has capacity to advance the loan and having requisite fund in its books of account and in banks. The capacity to advance loan can be established by showing sufficient income, capital and reserve or other fund in the hands of creditor. It is required by the AO to find out the financial strength of the creditor with judicious approach and in accordance with materials available on record but not in arbitrary and mechanical manner.

11.6 In the light of the above discussion, we proceed to adjudicate the issue on hand. From the preceding discussion we note that the addition under section 68 of the Act was made on account of unsecured loan from 3 different parties. The first party was namely Shri Ashok Khurana against which assessee has shown outstanding loans liability of Rs. 36 lakh treating the same as unexplained credit by the AO for the reason that AO on verification from the Shri Ashok Khurana found that there was no such loan extended by the such party to the assessee. However, during the appellate proceeding, the assessee explained that the loan amount of Rs. 50 Lakh dated 29^th April 2011 was credited from M/s Aashka Construction Limited on the instruction of Shri Ashok Khurna. But by mistake entry was made in the ledger account of Shri Ashok Khurana. M/s Aashka Construction Ltd was subsequently merged with M/s Myraj Consultancy Ltd. vide order of Hon’ble Gujarat High Court dated 15^th February 2013, thereafter it was renamed as M/s Madhav Infra Projects Ltd with effect from 12-06-20 13. The assessee before the learned CIT(A) claimed mistake committed in the books of account for the year under consideration was got rectified in the subsequent year. The assessee to substantiate her claim furnished ledger copy of Ashok Khurana for F.Y. 2011-12 and 12-13, ledger copy of M/s Aashka Construction Ltd for F.Y. 20 12-13 in her books of account. The assessee also furnished copy of bank statement of Aashka Construction Ltd for period 01-04-2011 to 30-06-2011 and her ledger in the books of M/s Madhav Infra Project Ltd for F.Y. 2012-13, merger order, name change certificates. All these details are available at page 45 to 73 of paper book. On perusal of bank statement of M/s Aashka Construction Ltd we find that there was transfer of an amount for Rs. 50 lakh in the name of the assessee proprietary concern namely AR Chem Industries dated 28-04-2011. However on perusal of ledger accounts we find certain ambiguity. On perusal of ledger account of M/s Aashka Construction Ltd. placed at page 69 of paper book we find that the assessee as on 1^st April 2012 has credited the ledger account of M/s Aashka Construction Ltd by debiting the account of Shri Ashok Khurana. However on perusal ledger account of Shri Ashok Khurana for F.Y. 2012-12 placed at page 46 of paper book no such entry found though there was another ledger account of Shri Khurana placed at page 73 of paper book, the same entry found recorded. Likewise, in the ledger of M/s Aashka Construction another journal entry as on 1^st April was made in which ledger account was set off by transferring the loan to the account of Madhav Infra Project Ltd. However, on perusal of ledger account of assessee, in the books of Madhav Infra Project Ltd we found that the Madhav Infra as on 1^st April 2012 has debited the ledger of the assessee by the account of one Shri Mahendra Solanki. The link in all these adjustment entry was not properly explained. Further the provision of section 68 requires the assessee to establish the identity of creditor, genuineness of transaction and credit worthiness of the parties. Merely the fact that the amount received through banking channel does not make the transaction as genuine. The assessee needs to explain the transaction properly based on the documents within the parameters of section 68 of the Act.

11.7 Coming to the loan amount credited from other two parties namely Akshar Trading Co and M.S. Carting Contractor for Rs. 2,33,85,000/- and Rs. 1,16,50,000/- respectively. We note that the learned AR for the assessee before us filed a fresh evidences regarding repayment of loan to the above mentioned two parties. In our considered opinion the evidences of the repayment of the loans by the assessee is very crucial for deciding the genuineness of the loan entries. However, these fresh evidences were not available before the lower authorities and therefore, the same needs to be verified at the level of the AO.

11.8 Therefore, considering the ambiguity in the evidences field by the assessee with regard to the addition of Rs. 36 lakh on account alleged loan from Shir Ashok Khurana and fresh material furnished with respect to other two parties, we hereby set aside the issue to file of the AO for de-novo assessment in the light of above discussion as per the provisions of law. The AO is directed to provide proper opportunity to the assessee to represent her case and needless to say the assessee will furnish required details and explanation necessary for deciding the issue. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.

12. In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the Court on 23/11/ 2022 at Ahmedabad.