Section 68 addition cannot be made merely for Low Income of Creditor

Carissa Investment (P) Ltd. Vs ACIT (ITAT Delhi)

In this case assessee-company has been able to prove that both the creditors have availability of sufficient funds to give loan to the assessee-company in assessment year under appeal. Merely because income was low declared by both the creditors, is no ground to make the impugned addition against the assessee-company.

Considering the totality of the facts and circumstances of the case, it is clear that in the ledger account of both the creditors there are loans given to the assessee-company as well as assessee paid back the amounts to them. The debit of financial charges to the profit and loss account is not a relevant criteria to consider under section 68 of the Income Tax Act, 1961. Bank statements are part of the record which also did not show if any cash have been deposited in the bank accounts of the creditors for giving loan to the assessee-company. Their bank accounts clearly show that both the creditors have sufficient funds in their bank account and all the transactions are carried-out through banking channel only. Thus, the initial burden upon the assessee-company to prove the creditworthiness of the creditors and genuineness of the transaction have been established in the matter and burden upon assessee-company have been discharged. It may also be noted that A.O/CIT(A) did not do anything on the documentary evidences produced on record and no further enquiry have been made into the matter. Since the A.O. accepted the creditworthiness and genuineness of the transaction with the same creditors in subsequent assessment year as well, it’s stand proved on record that there were no justification for the authorities below to make any addition against the assessee-company. In view of the above discussion, we set aside the orders of the authorities below and delete the entire addition. Accordingly, appeal of the Assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by assessee has been directed against the order of Ld. CIT(A)-2, New Delhi Dated 31.08.2016 for the A.Y. 2007-2008 on the following grounds :

1. That the order of the Ld. CIT (A) is bad in law and is against the facts and circumstances of the case.

2. That having regard to the facts and circumstances of the case the Ld. CIT (A) has erred in confirming the addition made u/s 68 amounting to Rs.36,19,25,209/- and Rs.12,29,99,000/- credited in the names of Altar Investment (P) Ltd. and Ilac Investment (P) Ltd. respectively.

3. That the Ld. CIT (A) has failed to take cognizance of the bank statements of the lenders, which are available on the record and thus has grossly erred in upholding the addition u/s 68 simply for the reason that the bank statements of the lenders were not provided to her.

4. That in any case and in view of the matter, order of Ld. CIT (A) in confirming the impugned addition u/s 68 is bad in law and unjustified as the identity of lenders, genuineness of transactions and creditworthiness of the lenders have been duly proved.”

2. We have heard the Learned Representative of both the parties through video-conferencing and perused the material available on record.

3. Briefly the facts of the case are that the assessee-company has filed its return of income on 30.10.2007 declaring income of Rs.27,78,790/- in the computation of income. The assessee-company is engaged in the business of Investment and Trading in Shares. The A.O. noted that assessee-company has taken loan from 11 parties in assessment year under appeal. The A.O. issued notices under section 133(6) of the Income Tax Act to all the parties requiring them to furnish copy of the bank statements, PAN etc., The A.O. noted that notices could not be served upon M/s. Alter Investment Pvt. Ltd., [Rs.36,19,25,209/-] and M/s. Ilac Investment Pvt. Ltd., [Rs.12,29,99,000/-hereinafter mentioned as creditors]. The assessee-company submitted copy of the ledger account, confirmations by the parties along with their ITR and other details before A.O. The A.O. without making further enquiry considered them as unexplained credits and made the addition in respect of both the creditors.

3.1. The assessee-company challenged the additions before the Ld. CIT(A) who has decided the appeal of assessee-company vide Order Dated 09.06.2011 by deleting the addition. The Ld. CIT(A) noted that assessee-company has submitted copy of the ledger account of these two parties along with their ITR, PAN along with confirmations. Therefore, initial burden upon the assessee-company to prove genuineness of the credits and creditworthiness of the creditors have been proved.

3.2. The Revenue preferred an appeal before the Delhi B-Bench, New Delhi of ITAT in ITA.No.3959/Del./2011 which was decided by the Tribunal vide Order Dated 09.05.2014 by partly allowing the Departmental Appeal. On this ground, the Tribunal noted in its finding that assessee-company has filed ledger of the creditors, their PAN, confirmations. The A.O. had not shown the envelope to the assessee and what was the report of non-service of notice under section 133(6) of the I .T. Act, 1961. The audited copies of the accounts of both the creditors were also available on record and they were having sufficient capital with them. In these circumstances and evidences on record, the Departmental Appeal were dismissed on this ground.

3.3. The Revenue further preferred an appeal before the Hon’ble Delhi High Court in Income Tax Appeal No.3 of 2015 which was decided vide Judgment Dated 20.04.2015 and the matter has been remanded to the Ld. CIT(A) with a direction to the Ld. CIT(A) that he should enquire into the matter placed on record and should consider them. The additional documents produced by the assessee-company were directed to be taken on record and shall be duly considered. The findings of the Hon’ble Delhi High Court are reproduced as under :

“Counsel for the assessee relied upon the findings of the CIT (A) and the ITAT and stated that relevant details in the form of the ITRs as well as proven identity of the parties were on the record. Highlighting that the credits in respect of the parties were added from the same ledger which was accepted in the case of the eight other creditors, learned counsel relied upon the findings of the CIT(A) to say that when the accounts were accepted in respect of overwhelming number of creditors, there was no occasion to reject the credits of two parties. He also submitted that as a matter of fact, relevant details in the form of balance sheets, profit and loss statements, bank accounts etc were part of the record which was sought to be produced under Rule 46 (A).

This Court has considered the submissions. From the materials which appear to have been considered, facially, it appears that the Revenue’s grievance is that there was nothing to support the creditworthiness of the parties and the genuineness of the transactions. However, that is not the end of the matter. It is an established matter of record that in appellate proceedings before the CIT (A), the assessee had produced copies of the balance sheets, profit and loss statements and bank accounts pertaining to the concerned parties, i.e., M/s Alter Investments Pvt. Ltd.& M/s Iliac Investments Pvt. Ltd. This was in addition to the extracts of its own ledger records to say that there was regularity in the transaction between those parties and consequently all these credits were through normal banking transactions. In these circumstances, we are of the opinion that the CIT(A) could not have proceeded to adjudicate on the rights of the parties and return the findings that he did on the basis of the materials which existed. Whilst, the assessee may be within its rights in saying that additions under Section 68 were not sustainable, at least, the CIT (A) should have enquired into the materials placed on the record and should have duly considered them.

In the light of the above findings, the impugned order of the ITAT and CIT (A) are set aside. Additional documents produced by the assessee are directed to be taken on the record and duly considered. All rights of the parties to urge all the contentions available to them in this regard are reserved.

The appeal is allowed in the above terms.”

3.4. The Ld. CIT(A) in view of the above directions of the Hon’ble Delhi High Court has re-fixed the appeal for hearing. The Ld. CIT(A), however, confirmed the addition vide impugned order mainly on the reasons that assessee-company has not produced the copy of the bank statements of both the creditors, therefore, the source of the funds available to them could not be verified. The findings of the Ld. CIT(A) in paras 5.1 and 5.2 of the impugned order are reproduced as under :

5.1. In compliance of the above directions of the Hon’ble jurisdictional High Court, the appeal was fixed for hearing vide notice dated 15.07.2015 and subsequent notices. The AR of the appellant has filed a paper book running into 96 pages, along with his submissions and copies of ledger accounts of M/s. Ilac Investment Pvt. Ltd. and M/s. Altar Investment Pvt. Ltd. in the books of the appellant for A.Ys. 2005-06 to 2010-11. Perusal of the ledger accounts for the assessment year under appeal i.e. for F.Y. 2006-07 reveals that M/s. Ilac Investment Pvt. Ltd. made payments aggregating to Rs.15,67,00,000/- to the appellant during the year and after taking into account the opening debit balance of 20.45 lacs and payments made by the appellant to the aforementioned party, it remained a creditor of the appellant for an amount of Rs.12,29,99,000/- at the end of the year. In the paper book filed by the appellant before me, there is copy of acknowledgment of ITR for A.Y. 2007-08 of M/s. Ilac Investment Pvt. Ltd., as per which it was having total income of Rs.12,56,696/- only. Perusal of the copy of the final accounts of M/s. Ilac Investment Pvt. Ltd. for the year ended 31st March, 2007 shows total receipts of Rs.1,66,06,895/- in the profit and loss account from profit on sale of shares, dividend and hire charges, besides other income of Rs.1,13,605/-. There is no interest income but interest and financial charges to the tune of Rs.67,05,271/- have been debited to the profit and loss account. As on 31.03.2007, the company had paid up capital of Rs.5.28 crores, reserves and surplus of Rs.5.21 crores and sundry creditors had gone up from Rs.95.99 lacs in the immediately preceding year to Rs.6.64 crores. Advances recoverable by the company stood at Rs.21.02 crores as on 31.03.2007 in which the amount recoverable of Rs.12.29 crores from the appellant is claimed to be included. It is beyond one’s comprehension why a company which had to pay interest/financial charges of Rs.67,05,271/-did not charge a penny of interest from the appellant or from any other party from whom large amounts were due to it. The purpose and nature of the transactions between M/s. Ilac Investment Pvt. Ltd. and the appellant have also not been explained. The paper book available in the record of the undersigned does not contain the bank statement of M/s. Ilac Investment Pvt. Ltd. and therefore, the source of funds with the company out of which it advanced money to the appellant could not be ascertained. It is seen from the figures of the preceding year, as given in the final accounts for A.Y. 2007­08, that cash and bank balances of M/s. Ilac Investment Pvt. Ltd. stood at Rs.1,61,191/-only. This means that transactions of M/s. Ilac Investment Pvt. Ltd. to the tune of Rs.15,67,00,000/- with the appellant company were effected out of funds received during the year. The sources of these funds and whether they were received in cash or otherwise remain unclear, in the absence of bank statement of the party. As already discussed above, the nature/purpose of the transactions and why interest was not charged by M/s. Ilac Investment Pvt. Ltd. from the appellant company when M/s. Ilac Investment Pvt. Ltd. itself paid interest/financial charges of Rs.67,05,271/-has not been explained. Therefore, I am of the view that even after consideration of the documentary evidence furnished by the appellant before the CIT (A), the creditworthiness of M/s. Ilac Investment Pvt. Ltd. and the genuineness of the transactions remains unproved.

5.2. Coming to the evidences filed in respect of M/s. Altar Investment Pvt. Ltd.,. it is observed that the company was a creditor of the appellant at the beginning of the F.Y. 2006- 07 to the tune of Rs.15,70,000/- and made payments worth Rs.44,86,50,000/- to the appellant during the year and after taking into account some payments made by the appellant to the company, it was a creditor of the appellant company to the tune of Rs.36,19,25,209/- as on 31.03.2007. Perusal of the final accounts of the company reveals that it had share capital of Rs.4.90 crores, reserves and surplus of Rs.2.48 crores and current liabilities and provision to the tune of Rs.39.55 crores (which went up steeply from Rs.34.36 lacs in the preceding year). Against this, the appellant company stood as its debtor for the amount of Rs.36.19 crores. Income returned by M/s. Altar Investment Pvt. Ltd. for A.Y. 2007-08 is nil as per its ITR acknowledgment. No interest is shown to have been received during the year by M/s. Altar Investment Pvt. Ltd. and nominal interest/financial charges of Rs.7,028/- have been claimed in the P & L account. Investment in shares/units as on 31.03.2007 stood at Rs.78.01 lacs (at cost) and Rs.90,88,300/- (at face value), on which dividend income of Rs.67.12 lacs has been received during the year. As in the case of M/s. Ilac Investment Pvt. Ltd., there was only receipt of huge amount of funds by the appellant from M/s. Altar Investment Pvt. Ltd. during the year and part repayment to it, resulting in M/s. Altar Investment Pvt. Ltd. being a creditor of the appellant at the end of the year during appeal to the tune of Rs.36.19 crores. Once again, the bank statement of M/s. Altar Investment Pvt. Ltd. has not been produced by the appellant so that the source of heavy infusion of funds into the appellant company during the year (aggregating to Rs.45.02 crores) is not known. Thus the creditworthiness of the company, which filed a return of nil income during the year, remains un-established. Further, both in the case of M/s. Ilac Investment Pvt. Ltd. & M/s. Altar Investment Pvt. Ltd., the nature of their transactions with the appellant company is not clear. Year after year, there is inflow of funds from and outflow of funds to them (without charging of any interest), with the result that at the end of a given year, the appellant is either a debtor or creditor of these parties. Clearly, these are mere accommodation entries taken as per the requirement of the appellant. Hence, in addition to the creditworthiness of M/s. Ilac Investment Pvt. Ltd. & M/s. Altar Investment Pvt. Ltd. not being proved (as per discussion supra), the genuineness of the transactions is also in doubt. Therefore, with two of the three ingredients of section 68 not being satisfied in the case of the two parties, M/s. Ilac Investment Pvt. Ltd. & M/s. Altar Investment Pvt. Ltd., the additions made by the A.O. by treating credits from these parties as unexplained cash credits u/s 68 are upheld.”

4. The Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that the assessee-company has filed paper book containing 96 pages before the Ld. CIT(A), copy of which is also placed on record, which specifically shows that assessee company filed copy of the bank statements of both the creditors before the authorities below, copies of the same are also available in the paper book of 96 pages filed before the Ld. CIT(A) as well. Learned Counsel for the Assessee also referred to copies of the confirmations, ledger accounts, PAN, balance-sheets and bank statements of both the creditors to show that both the creditors are having sufficient means to give loan to the assessee-company who are interconnected parties with the assessee-company and these were inter-corporate loans for making further investments. He has submitted that since all the transactions were carried-out through banking channel, therefore, assessee-company has proved the creditworthiness of the creditors and genuineness of the transaction in the matter. He has submitted that assessment of the assessee-company for A.Ys. 2005-2006 to 2012-2013 except for A.Y. 2010-2011 were completed under section 143(3), but, no addition on account of amount outstanding in the names of these creditors was ever made except for the year under consideration. He has referred to assessment order of the assessee-company for the A.Y. 2008-2009 specifically [PB-168] and assessment orders of both the creditors for A.Y. 2008-2009 under section 143(3) of the Income Tax Act, 1961, copies of which are filed in the paper book to show that these creditors were dealing with the assessee-company in subsequent assessment year as well and on the same pattern of taking loan by the assessee-company from both these creditors. The A.O. did not take any adverse inference against the assessee-company in the order under section 143(3) of the Income Tax Act, 1961. Accordingly, Learned Counsel for the Assessee was directed to file copy of the audited accounts of the assessee-company for subsequent A.Y. 2008 2009 which is placed on record. Learned Counsel for the Assessee, therefore, submitted that initial burden upon the assessee to prove creditworthiness of the creditors and genuineness of the transaction have been discharged. Learned Counsel for the Assessee in support of the above contention relied upon the following decisions in the paper book.

6. On the other hand, Ld. D.R. relied upon others of the authorities below and submitted that assessee did not prove creditworthiness and genuineness of the transaction in the matter.

7. We have considered the rival submissions and perused the material on record. The above matter have been remanded by the Hon’ble Delhi High Court to the Ld. CIT(A) to decide the issue by enquiring into the material place on record and should consider them. The Order of the Hon’ble Delhi High Court is reproduced above. The impugned order of the Ld. CIT(A) is also reproduced above. The Ld. CIT(A) confirmed the addition mainly on the reason that assessee-company did not place on record the copy of the bank statements of both the creditors, therefore, the source of the funds with the assessee-company out of which it advanced money to the assessee-company could not be ascertained and that why the assessee-company has debited the interest on financial charges to the profit and loss account. The reason given by the Ld. CIT(A) are wholly incorrect and without any basis. The findings of the Hon’ble Delhi High Court is reproduced above, in which submissions of the Learned Counsel for the Assessee have been recorded that relevant details in the form of balance-sheet, profit and loss statement, bank statements etc., are part of the record which was sought to be produced under Rule 46A of the Income-Tax Rules. The Hon’ble Delhi High Court in its finding have specifically mentioned that assessee-company has produced copy of the balance-sheet, profit and loss statement and bank statement pertaining to both the creditors before the Ld. CIT(A). The Ld. CIT(A), therefore, directed to look into these additional evidences on record and enquire into the same and dispose of the matter. The Ld. CIT(A) has also mentioned in his findings that assessee-company has filed paper book running into 96 pages, copy of which is produced before us also, which contain bank statements of both the creditors. Therefore, the whole premise of the findings given by the Ld. CIT(A) is wholly incorrect and baseless and it appears that the Ld. CIT(A) without any justification has ignored the copy of the bank statements of both the creditors already on record before her. Thus, the finding of the Ld. CIT(A) cannot be sustained in Law. Why the interest have been debited to the profit and loss account has no concern whatsoever with the ingredients of Section 68 of the Income Tax Act, 1961. Thus, on this reason itself the Order of the Ld. CIT(A) is liable to be set aside. However, we also consider the material and evidences on record to consider the creditworthiness of the creditors and genuineness of the transaction in the matter. It is an undisputed fact that assessee-company has filed copy of the conformations of the creditors along with their ledger accounts, their ITRs, balance-sheets, PAN and bank statements before the authorities below. Copy of the same are also produced in the paper book. The Ld. CIT(A) in his findings have specifically noted from the perusal of the ledger account of M/s. Ilac Investment Pvt. Ltd., show that this party has made payments aggregating to Rs.15.67 crores [PB-62] to the assessee-company during the assessment year under appeal and after taking into the debit balance of Rs.20.45 lakhs and the payments made by the assessee-company to the aforesaid creditor, it remained a creditor of the assessee-company for an amount of Rs.12,29,99,9000/- at the end of the year. As per the ITR, the creditor has shown net income of Rs.12,56,696/-. The perusal of the balance-sheet of this creditor shows that the creditor had paid-up capital of Rs.5.28 Crores, Reserve and Surplus of Rs.5.21 crores and Secured Loans of Rs.14,69,11,570/-. Thus, the total funds available to this creditor were in a sum of Rs.25,18,91,314/-[PB-55]. The name of the assessee-company is appearing in their books of accounts against advance recovered in cash or kind [PB- 61]. Similarly, in case of M/s. Alter Investment Pvt. Ltd., [PB-37] the ledger account shows that it is a running account and at the beginning of the year, the debit balance was of Rs.15.70 lakhs and this creditor made payments worth Rs.44,86,50,000/- to the assessee-company in assessment year under appeal and after taking some payments made by the assessee-company to this creditor, it was a creditor of the assessee-company to the tune of Rs.36,19,25,209/- as on 31.03.2007 [PB-37]. The balance-sheet of this creditor shows it has share capital of Rs.4.90 crores, Reserve and Surplus of Rs.2.48 crores and current liabilities and provisions to the tune of Rs.39.55 Crores [PB-39]. The name of the assessee-company is appearing in their books of account [PB-46]. PB-36 is reply of the assessee-company before the Ld. CIT(A) in which assessee-company has specifically explained that assessments of the assessee-company have been completed under section 143(3) for the A.Ys. 2005-2006 to A.Y. 2012-2013 except for the A.Y. 2010-2011, but, no additions have been made on account of amount outstanding in the names of these two creditors and no addition was made except in assessment year under appeal. The submissions of the assessee-company have not been contradicted by the Ld. CIT(A) through any evidence on record. The Learned Counsel for the Assessee has also filed copy of the assessment orders for subsequent A.Y. 2008-2009 of assessee-company as well as both the creditors in the paper book under section 143(3) of the I.T. Act. The assessee-company was also directed to file copy of the balance-sheet for subsequent A.Y. 2007-2008 which is placed on record, which shows that even in subsequent assessment year assessee-company has been dealing with both these creditors and payments and loans have been received and repayment have been made by the assessee-company. In the case of M/s. Alter Investment Pvt. Ltd., ending on 31.03.2008 there is a debit balance of Rs.40,00,80,209.30ps and in case of M/s. Ilac Investment Pvt. Ltd., through-out the year there are transactions with this creditor and from opening credit balance of Rs.12,29,99,000/- at the year end on 31.03.2008 there is a debit balance of Rs.37,55,93,917.73ps. These facts would clearly show that both the creditors have transactions with the assessee-company in subsequent A.Y. 2008-2009 of the identical nature and the A.O. accepted the creditworthiness of the creditors and genuineness of the transaction of higher amounts of credits and no additions have been made under section 143(3) in respect of the same creditors in A.Y. 2008-2009. Thus, the assessee-company has been able to prove that both the creditors have availability of sufficient funds to give loan to the assessee-company in assessment year under appeal. Merely because income was low declared by both the creditors, is no ground to make the impugned addition against the assessee-company.

7.1. The Hon’ble jurisdictional Delhi High Court in the case of CIT vs. Vrindavan Farms Pvt. Ltd., etc. ITA.No.71 of 2015 dated 12th August, 2015 (Del.), in which it was held as under :

“The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. It was observed by the ITAT that the AO had not undertaken any investigation of the veracity of the documents submitted by the assessee, the departmental appeal was dismissed by the Hon’ble High Court.

7.2. The Ld. CIT(A) has further gone to the extent and observing that since copy of the bank statements of the creditors is not produced, therefore, the source of the funds given to the assessee-company could not have been verified. Though the observation of the Ld. CIT(A) is incorrect as noted above because copies of the bank statements are part of the record before her, moreover, it is well settled Law that assessee need not be asked to prove source of the source. We rely upon the Judgment of the Hon’ble Delhi High Court in the case of Dwarakadhish Investment P. Ltd., [2011] 330 ITR 298 (Del.), Judgment of Hon’ble Gujarat High Court in the case of Rohini Builders 256 ITR 360 (Guj.) and Judgment of Hon’ble Allahabad High Court in the case of Zafar Ahmed & Co., 30 taxmann.com 269 (Alld.).

7.3. Considering the totality of the facts and circumstances of the case, it is clear that in the ledger account of both the creditors there are loans given to the assessee-company as well as assessee paid back the amounts to them. The debit of financial charges to the profit and loss account is not a relevant criteria to consider under section 68 of the Income Tax Act, 1961. Bank statements are part of the record which also did not show if any cash have been deposited in the bank accounts of the creditors for giving loan to the assessee-company. Their bank accounts clearly show that both the creditors have sufficient funds in their bank account and all the transactions are carried-out through banking channel only. Thus, the initial burden upon the assessee-company to prove the creditworthiness of the creditors and genuineness of the transaction have been established in the matter and burden upon assessee-company have been discharged. It may also be noted that A.O/CIT(A) did not do anything on the documentary evidences produced on record and no further enquiry have been made into the matter. Since the A.O. accepted the creditworthiness and genuineness of the transaction with the same creditors in subsequent assessment year as well, it’s stand proved on record that there were no justification for the authorities below to make any addition against the assessee-company. In view of the above discussion, we set aside the orders of the authorities below and delete the entire addition. Accordingly, appeal of the Assessee is allowed.

8.  In the result appeal of Assessee allowed. Order pronounced in the open Court.