Repaid Loans Not Accommodation Entries: ITAT Mumbai Quashes Section 68 Addition

Sharda Lab Pvt. Ltd. Vs ITO (ITAT Mumbai)

The Mumbai Bench of the Income Tax Appellate Tribunal allowed the assessee’s appeal for Assessment Year 2012-13, holding that the reopening of assessment under Section 147 read with Section 148 of the Income-tax Act, 1961 was bad in law. The Tribunal found that the Assessing Officer had merely reproduced information received from the DGIT (Investigation), Mumbai concerning alleged accommodation entries and had failed to independently apply his mind before forming the belief that income had escaped assessment.

The assessee had originally filed its return on 27 July 2012 declaring a business loss of ₹6,09,269 for AY 2012-13. The assessment was subsequently reopened after the Assessing Officer received information regarding beneficiaries of accommodation entries allegedly provided through concerns controlled by Shri Praveen Kumar Jain. During reassessment proceedings, the AO noticed unsecured loans aggregating to ₹1.25 crore from Atharv Business Pvt. Ltd. (₹43.50 lakh), Duke Business Pvt. Ltd. (₹51.50 lakh) and Nakshatra Business Pvt. Ltd. (₹30 lakh).

The assessee furnished documents relating to the transactions and contended that the loans were genuine. It submitted that the loans had been received through banking channels and were repaid either during the relevant assessment year or in subsequent years. The assessee also stated that the outstanding balances had subsequently become nil.

The Assessing Officer, however, treated the loans as accommodation entries and made an addition of ₹1.25 crore under Section 68. The CIT(A) sustained the addition by relying upon the findings of the Investigation Wing concerning Shri Praveen Kumar Jain.

Before the Tribunal, the assessee challenged the reopening on the ground that the reasons recorded by the AO were based merely on Investigation Wing information and did not demonstrate independent application of mind. It was argued that the AO had not established any nexus between the material relied upon and the alleged escapement of income. The assessee also challenged the use of material obtained behind its back without supplying the relevant evidence or providing an opportunity of cross-examination.

The Revenue relied upon the Investigation Wing information and submitted that, at the stage of reopening, the AO was only required to have prima facie material. Reliance was placed on Raymond Woollen Mills Ltd. Vs. ITO, 236 ITR 34 (SC), for the proposition that sufficiency or correctness of the material was not to be examined at the stage of reopening.

The Tribunal, after examining the recorded reasons, found that the AO had simply reproduced the Investigation Wing report and thereafter straightaway concluded that the transactions appeared to be non-genuine. The AO had not stated that he had independently examined the Investigation Wing report or its underlying material. According to the Tribunal, the reasons contained conclusions rather than an independent formation of belief.

The Tribunal specifically held that there was no independent application of mind to the Investigation Wing information. The AO had failed to bring anything on record establishing a nexus between the alleged tangible material and the escapement of income. Consequently, the reasons recorded did not satisfy the requirement for valid assumption of jurisdiction under Sections 147/148.

The Tribunal therefore concluded that there was a total non-application of mind while recording the reasons for reopening. The assumption of jurisdiction under Sections 147/148 was accordingly held to be bad in law and the reopening could not be sustained.

The Tribunal also examined the merits of the ₹1.25 crore addition. The assessee produced confirmations of the lenders, ledger accounts and bank statements of both the assessee and the lender parties. The material showed that the unsecured loans were received through banking channels and were subsequently repaid through banking channels either during the same year or in the following year.

The Tribunal observed that merely because the lender companies were concerns in which Shri Praveen Kumar Jain was involved, the transactions could not automatically be characterised as accommodation entries. The allegation had to be established by evidence. In the present case, the assessee had received the loans through banks and had subsequently settled them through banks.

The Tribunal further noted that the AO had considered only the accounting entries and the connection of the lender companies with Shri Praveen Kumar Jain, without properly considering the actual receipt and repayment of the loans through banking channels. The Tribunal observed that the salient feature of accommodation entries was ordinarily that they remained in the books and were carried forward for several years, whereas in the assessee’s case the unsecured loans had been settled within the same year or the subsequent year.

The Tribunal accordingly accepted the assessee’s contention that it had merit in the unsecured loan transactions. It held that the reopening itself was bad in law and, considering the material placed on record, also accepted the assessee’s case on the loan transactions. The grounds raised by the assessee were allowed and the appeal was allowed in full.

Cases Discussed / Relied Upon

• Raymond Woollen Mills Ltd. Vs. ITO — 236 ITR 34 (SC): Relied upon by the Revenue for the proposition that, at the stage of reopening, the question is whether prima facie material exists and not whether that material is ultimately sufficient or correct.
• Deepak Shah — ITA No. 4206/Mum/2017: The assessee relied upon this coordinate Bench decision in support of its contention concerning unsecured loans involving concerns connected with Shri Praveen Kumar Jain.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)-15, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 14.02.2020 for the A.Y. 2012-13.

2. The brief facts of the case are that assessee filed its return of income for assessment year 2012-13 declaring business loss of ₹.6,09,269/- on 27.07.2012. Subsequently, Assessing Officer received information from DGIT(Inv), Mumbai in respect of beneficiaries of accommodation entries of bogus unsecured loan obtained from the concerns operated by one Shri Praveen Kumar Jain. Based on the information, the assessment of the assessee was reopened u/s 147 of the Act by issuing notice u/s 148 duly served on the assessee. Accordingly, notice u/s 143(2) and 142(1) were issued and served on the assessee. In response, Ld. AR of the assessee submitted the relevant information as called for before the Assessing Officer.

3. During the course of assessment, Assessing Officer noticed that assessee has received unsecured loans from the following parties – Atharv Business Pvt Ltd 43,50,000 Duke Business Pvt Ltd

4. The AO observed that the abovementioned parties are the concerns controlled by Shri Praveen Kumar Jain. In this regard, Assessee has submitted the relevant documents relating to these transactions, which were submitted before Assessing Officer and submitted that these transactions were genuine and the loan was also repaid in the same assessment year as well as in subsequent assessment year. As far as balance outstanding is concerned, assessee has already cleared the unsecured loans in subsequent years and balance outstanding are NIL and all the transactions were made through the bank only. Since these transactions were transacted with concerns in which Shri Praveen Kumar Jain is involved, Assessing Officer has not convinced with the submission of the assessee and accordingly, he proceeded to make the addition u/s.68 of the Act.

5. Aggrieved with the above order, assessee preferred an appeal before Ld. CIT(A) and Ld. CIT(A) also sustained the addition based on the reasons given by Assessing Officer and the findings of DGIT (Inv) in the case of Shri Praveen Kumar Jain and therefore, he sustained the addition made by Assessing Officer.

6. Aggrieved with the above order, assessee is in appeal before us raising for following grounds of appeal:

“I. The learned Commissioner of Income Tax (Appeal) failed to note that the learned Assessing Officer merely relied on the information received from DGIT (Investigations), Mumbai to reopen the assessment and neither the assessment order nor the reasons communicated indicate that the Assessing officer had applied his mind to the issue and therefore the entire reassessment proceedings are invalid, without jurisdiction, has no legs to stand and hence must be quashed.

II. On the facts and in the circumstances of the case, The learned Commissioner of Income Tax (Appeal) has erred in confirming the addition of Rs. 1,25,00,000/u/s. 68 of the Income tax Act 1961 as accommodation entry.

III. The learned Commissioner of Income Tax (Appeal) failed to note that the entire evidences do prove the identity, creditworthiness and genuineness of the loan transaction amounting Rs. 1,25,00,000/and therefore the CIT(A) fell into error in confirming the addition of Rs. 1,25,00,000/-.

IV. The learned Commissioner of Income Tax (Appeal) failed to note while confirming the addition of Rs.125 lakhs that the entire enquiry by DGIT (inv.), Mumbai and the information received by the Assessing Officer about Mr. Praveen Kumar Jain was used against the appellant without giving a copy of the evidence/statement received from the DGIT (Inv.), Mumbai, thus violating the principles of natural justice and on this ground alone, the entire assessment must be quashed and more so allowability of that addition of Rs.125 lakhs by the learned CIT(A).

V. The Learned Commissioner of Income Tax (Appeal) erred in ignoring the Fact that it is mandatory for the Assessing Officer to confront the assessee with any material collected by the Assessing Officer at the back of the assessee, and in case of statement of third party recorded at the back of the assessee, opportunity of cross examination has to be offered to the assessee, failing which the said material/statement etc. will be rendered unreliable and additions made on the basis of such material/statement etc. shall be rendered illegal, thus violating the principles of natural justice and on this ground alone, the entire assessment must be quashed.

VI. On the facts and in the circumstances of the case, The learned Commissioner of Income Tax (Appeal) has erred in an addition of Rs. 6,68,988/on account of interest paid on borrowed fund / Short Term Loans considered now as unexplained cash credit u/s. 68 taken from loaner i.e. Atharv Business pvt. Ltd, Duke Business Pvt. Ltd and Nakshtra Business Pvt. Ltd based on information received from investigation.

VII. The appellant craves to add, amend or alter the grounds of appeal at the time of or before the hearing of appeal.”

7. At the time of hearing, the Learned Counsel for the Assessee submitted that reasons are based on information and findings of the Investigation Wing. The A.O. did not apply his mind to the same. The A.O. merely concluded without verifying the facts that it is a case of reopening of the assessment. The A.O. without verifying anything concluded that assessee has taken accommodation entry. The A.O. has not brought any material on record on the basis of which any nexus could have been established between material and the escapement of income. The reasons do not show any application of mind or any belief independently arrived at by the A.O. which is the basic pre-requisite for issue of notice under section 148 of the Act. Ld AR for the Assessee, therefore, submitted that reopening of the assessment is illegal and bad in law and liable to be quashed. He relied upon the various decisions in support of his contention.

8. On the other hand, Ld. D.R. relied upon the Orders of the authorities below and submitted that information was received by the A.O. from DGIT (Inv.), Mumbai which is material for recording the reasons for reopening of the assessment. The Ld. D.R. submitted that enquiries were conducted by the Investigation Wing, therefore, no fresh enquiry is required to be conducted by the A.O.

9. The Ld. D.R. submitted that at the time of commencement of re- assessment proceedings, the A.O. has to see whether there was prima facie some material on the basis of which the department could reopen the case. Sufficiency or correctness of the material is not a thing to be considered at this stage – Raymond Woolen Mills Ltd., vs. ITO [236 ITR 34 (SC)]

10. We have considered the rival submissions and perused the material available on record. It is well settled Law that validity of the reopening of the assessment shall have to be determined with reference to the reasons recorded for reopening of the assessment. The reasons contained in the report of enquiries made by DGIT (Inv.), Mumbai, about accommodation entries given by entry operators. The A.O. reproduced the same facts in the reasons and straightaway concluded that the findings of the report of Investigation Wing shows the creditworthiness of the lender has not been established, therefore, these transactions seem to be non-genuine. The A.O. has not gone through the details of these information and has not even applied his mind and merely concluded that the transactions seems not to be genuine. Then, he has merely further concluded that he has reason to believe that amount of ₹.1.25 crores represents income of the assessee chargeable to tax which has escaped assessment. These reasons to believe are, therefore, not in fact reasons but, only conclusion of the A.O. The A.O. has not stated in the reason that he has gone through the reports of the Investigation Wing. The A.O. merely repeated the report of the Investigation Wing in the reasons and formed his belief that income chargeable to tax has escaped assessment, without arriving at his satisfaction. The reasons to believe contain no reason, but, conclusion of the A.O. without any basis. Thus, there is no independent application of mind by the A.O. to the report of the Investigation Wing which formed the basis for reasons to believe that income chargeable to tax has escaped assessment. The conclusion of the A.O. in the reasons is at the best reproduction of conclusion of the Investigation Report. The A.O. has not brought anything on record on the basis of which any nexus could have been established between the material and the escapement of income. The reasons fail to demonstrate the link between the alleged tangible material and formation of the reason to believe that income has escaped assessment.

11. Considering the above discussion, it is clear that there is a total non- application of mind on the part of the A.O. while recording the reasons for reopening of the assessment. The conclusion was merely based on observations and information received from DGIT (Inv.), Mumbai, which is not brought on record. Since, there is a total lack of mind while recording the reasons for reopening of the assessment; therefore, assumption of jurisdiction under section 147/148 of the I.T. Act, 1961, is bad in law. The A.O. was not justified in assuming jurisdiction under section 147/148 of the I.T. Act, 1961. We, therefore, hold that reopening of the assessment in the matter is bad in law, as such, same cannot be sustained in law.

12. On merits, Ld. AR submitted that assessee has taken unsecure loans from the parties mentioned above and repaid the same either within the assessment year or in subsequent assessment year and he brought to our notice the bank statements evidencing the receipt of unsecured loans and repayment thereon and bank statement, confirming the above transaction, which was made through bank only. All these informations are part of paper book filed by the assessee which are also submitted before Ld. CIT(A). He submitted that Coordinate bench of ITAT has held in favour of the assessee in various cases in which Shri Praveen Kumar Jain has involved and relied upon the decision of Hon’ble Tribunal in the case of Deepak Shah – ITA No 4206/Mum/2017.

13. On the other hand, Ld DR submitted that Shri Praveen Kumar Jain is a hawala operator and he is indulged in various transactions involving hawala as well as accommodation entry and assessee has not proved the genuineness of the transactions and he relied upon the orders passed by the lower authorities.

14. Considering the rival submissions and material placed on record, we notice that assessee has taken unsecured loans from the various parties mentioned above through bank and the same was settled by the assessee within the same assessment year or subsequent assessment year again through the bank only. Assessee has filed before tax authorities, the confirmation of all the parties, ledger copy in the books of parties and bank statement of assessee as well as lender parties. These documents indicate that assessee has received loans from the lenders and settled the same before end of the year or subsequent year. The AO has only considered the accounting entry in the books of accounts and considered the same as accommodation entry without considering the receipt of payment through bank and settlement of the loan by the assessee through bank. Just because these companies are controlled by Shri Praveen Kumar Jain, all the transactions cannot be termed as accommodation entry unless it is proved. But, in the given case, assessee has taken unsecured loan through bank and repaid the same within the same year or subsequent year. By taking loan and repaying the same through bank, what is the benefit assessee would have got, the tax authorities failed to appreciate that the salient features of accommodation entries are, they remain in the books of account and will be carried forward to several years. In this case, that is not the case, the assessee had settled the unsecured loans within the same year or in subsequent year. Further, Assessing Officer has made addition only relying on the report from DGIT(Inv), Mumbai.

15. Therefore, respectfully following the above discussions, we are inclined to accept the contentions of Ld. AR that the reopening of the assessment is bad in law as well as assessee has merit in the unsecured loan transactions and accordingly, grounds raised by the assessee are allowed.

16. In the result, appeal filed by the assessee is allowed.

Order pronounced on 10.02.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board.