ITO Vs Sai Everest Building & Developers (ITAT Mumbai)
In closely held companies/firm where unsecured loan is raised from close knit circles mostly known to partners/owners, onus required under section 68 is very heavy on such firms to prove identity as well as creditworthiness of lenders and genuineness of transaction; mere submission of name and address of creditor, income tax returns, Balance Sheet/statement of affairs of creditor and bank statement of creditor is not sufficient.
“Where lender companies immediately after receiving share capital with huge share premium from several entities in its bank account gave further huge amount of loans and advances to several companies with/without charging any interest and lender companies could not prove financial viabilities of their decisions, it could be said that lender companies are shell companies engaged in money laundering by providing bogus accommodation entries through a web of bank accounts, thus, addition under section68, in the hand of loan taker has to be justified.”
On perusal of the bank account of the lenders it is revealed that average bank balance maintained by lender in its aforesaid bank account is a very meagre amount. Thus average bank balance maintained by lenders in the aforesaid bank account are very meagre sum, while huge amounts of money suddenly comes into this bank accounts which immediately finds its exit into some other bank accounts, which is another peculiar feature of a shell company engaged in laundering money by providing bogus accommodation entries through a web of shell companies and bank accounts. The orders of the authorities below have been carefully gone through and the assessee is not able to discharge its onus as is casted under section 68 as the assessee could not prove genuineness of the unsecured loan taken and underneath sources for making these investments. The assessee no doubt has produced bank statement/confirmation of the entities from which the money found its place in the bank account of the assessee to be further used in its business but the genuineness of these transactions could not be proved as the assessee did not bring on record cogent evidences to substantiate the unsecured loans taken. Merely bringing confirmations and showing that the payments were made through banking channel is not sufficient.
As discussed above about the specifics of lender’s financials it can be reasonably concluded that out of three essential ingredients, i.e. Identity of Creditor, Genuineness of the Transaction and Creditworthiness of the lender, only Identity can be assumed to be established. Rest of the 2 essential elements, i.e. Genuineness and Creditworthiness not established. Hence Addition made by AO u/s. 68 of the Act upheld and order of Ld. CIT (A) is set-aside.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These four appeals by the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-34, Mumbai [hereinafter referred to as ‘the CIT (A)’] vide common order dated 11.07.2019 for the Assessment Years (AY) 2011-12, 2012-13, 2013-14 & 14-15 respectively. The Revenue has raised the common grounds in all the AYs except variation of amounts in figure. Facts and grounds being identical, we take appeal no. ITA No. 6489 / Mum / 2019 (A.Y. 2011-12) as lead case and ratio will be applied for all the years. The assessee has raised the following grounds of appeal in AY 2011-12:
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made on account of bogus unsecured loan of Rs. 1,74,00,000/- as the investigation wing of Kolkata establishes that the loan creditors are accommodation entry provider.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition made on account of bogus unsecured loan ignoring the facts brought out by AO in the assessment order.
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition relying upon the judgement of various courts which are distinguishable on facts, however has overlooked the judgement of Hon ‘ble Indore Bench of ITAT in case of Agrawal Coal Corporation (P) Ltd. vs Asst. CIT 63 DTR 201 and judgement of Delhi High Court in case of CIT vs N R Portfolio Pvt. Ltd (Delhi High Court) wherein the Hon’ble courts have held that merely because the companies were registered with ROC, were filing return of income , having PAN/Bank accounts etc. did not establish their identity as these companies might have been existing on papers or in real sense at the time of registration but were specifically found to be non-existent, and despite the submission of above details addition u/s 68 is valid —if the lender concerns do not respond summons.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) deleted the addition ignoring the report of DDIT (Inv.) Kolkata & Statements given by Shri Praveen Agarwal and Beni Prasad Lahoti that they had these paper concerns only for providing accommodation entry for commission.
5. on the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in, deleting the disallowance made by the AO on account of interest expenses of Rs. 20, 81,858/- claimed to have paid to the concerns which are accommodation entry providers, ignoring the findings of AO in the assessment order.
6. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in estimating the profit @10% of on money, when the assessee had already claimed its entire expenses in P&L account and on money is over and above what has been shown in the books of account.
7. The appellant prays that the order of Ld. CIT (A) on the above grounds be set-aside and that of the assessing officer be restored.
2. The assessee company is engaged in the business of real estate developers filed his return of income on 28.09.1011 declaring total income at Nil. The return of income was processed u/s 143(1) of the Income Tax Act, 1961 (‘the Act’). The case was selected for scrutiny after recording of reasons u/s 148 of the Act. On the issue of re-opening under section 148 of the Act, there is no grievance of the We are reproducing grounds of appeal for the year under consideration with their facts emanated from the records of the authorities below along with assessee’s submission. Ground No.1, 2, 3 & 4 are interlinked, hence discussed and disposed together.
3. The appellant is partnership firm engaged in the business of real estate development and construction activities. During impugned years, the appellant filed its return of income on disclosing the total income for AY: 2010-11 of Rs. Nil, Y 2011-12 of Rs. Nil, A.Y2012-13 of Rs. Nil and A.Y2015-16 of Rs.92,65,200/-. A Survey u/s.133A was conducted at the business premises of the appellant on 24/08/ 2015 wherein certain incriminating material were found and statements of the partners were also recorded. The documents found during course of survey revealed that various on-monies representing undisclosed consideration on sale of flats were received by the appellant and also the noting of bills, vouchers, etc relating to expenses were found during course of survey. The statement of the partners Mr. Ghanshyam Sompura and Mr. Govind Patel were recorded wherein such partners denied of having received any undisclosed on-money on sale of flats. During course of assessment, the AO issued the show cause notice on proposing to make the addition of the on-money representing undisclosed sale consideration on the flats sold by the appellant. The AO also observed that the appellant has received the unsecured loans from Kolkata based companies which had been held as non-genuine in the assessment order for A.Y-2013-14 and proposed to make the addition of the unsecured loans and consequential disallowance of interest on the loans. The appellant furnished the submissions and documentary evidences before the AO to dispute the allegations of the AO. However, AO was not satisfied with the reply of the appellant and accordingly made the addition of the unsecured loans received during the years and also made the disallowance of interest on such loans. The AO also made the addition u/s.69A of the on-money on sale of flats.
4. Ld. CIT (A) in his observation discussed the facts and various judicial decisions to support the case of the assessee, which is being reproduced as under:
“4.1 I have carefully considered the facts of the case, documents produced before me and submissions filed by the AR. I have also considered the case laws filed by AR of the appellant. I have also gone through the basis of additions and disallowances made by the AO in the assessment orders. As the issues involved in all appeals involve common issues and identical facts, accordingly the appeals are decided together in understated manner.
4.2 The Ground No.1.0 and 1.1 in the appeal for A.Y-2015-16 relate to the addition made u/s.68 of unsecured loans received of Rs.35,00,000/-. The AO had made the addition of unsecured loans received from the parties which had been held as non-genuine in the assessment order related to A.Y 2013-14. The AO had reproduced the report of DDIT (Inv.) Kolkata which stated that the lender parties are controlled by entry operators named Shri Praveen Agarwal and Shri Beni Prasad Lahoti and were not found in existence. On the other hand, the appellant had submitted the documentary evidences such as name address and PAN of lender parties, PAN card and AO details of the lenders, CIN master data (ROC) of lender companies, confirmation of account, I.T. acknowledgement receipts, Balance sheet, bank statement of the lenders and TDS certificates in form no.16A of interest payments. The AO had not pointed any fault in the above stated documentary evidences furnished by the appellant. The AR relied on the appeal orders passed by me in the appellant’s case related to assessment years 2013-14 and 2014-15 wherein the addition of the loans had been deleted. The AR also relied on several judicial decisions to support the case of the appellant.
4.3 I have carefully considered the facts of the case, contention of the AO and arguments of the AR. The similar issue had been decided by me in the appellant’s case in the appeal orders related to A.Ys 2013-14 and 2014-15. The relevant operating Para of the orders related to A. Ys 2013-14 and 2014-15 are as under:
“5.4 I have carefully considered the facts of the case, contention of AO and arguments advanced by Ld. AR. On perusing the documents filed on record, it is observed that the appellant had furnished the PAN, AO details, CIN master data (ROC) to prove the identity of the lenders. The appellant had filed the copies of ledger account, confirmation of account, TDS certificates and own bank statements to justify the genuineness of the loans. The appellant had filed the copies of I. T acknowledgement receipts, balance-sheets and bank statement of the lenders to prove the credit worthiness of the lenders. The appellant had also filed the copies of the TDS certificate issued u/s 194A to justify the interest paid on such loans. The tabular chart filed on record discloses the receipt of the loans through Banking channel and the appellant had even repaid such loans through banking channel along with interest payment after TDS u/s 194A deduction. The appellant had reasonably discharged its onus on furnishing the above stated documentary evidences, thereby proving the identity and credit-worthiness of the lenders and genuineness of the loans. The bank statement of the lenders does not disclose any cash deposits supporting to the loans advanced by such lenders to the appellant. It is observed that AO had not pointed any fault in the above stated documents filed by the appellant on record. The AO had not issued any notice u/s. 133(6) to the banker of the lenders to verify the source of their funds and had not brought any credible evidence to prove that the undisclosed funds belonging to the appellant had been routed to source the disputed loans. The AO had relied on the report of DDIT (Inv), Kolkata wherein the lenders are stated as belonging to an accommodation entry provider named Mr. Praveen Agarwal. However, in the judicial decisions relied by Ld. AR, it has been decided that the addition cannot be made relying on the statement of 3rd parties. It is a settled law that the addition cannot be made solely on the basis of the statements of 3rd parties in particularly when the appellant was not allowed an opportunity of cross examination. The AO and DDIT (Inv) had not pointed out any material to justify the allegation and had not brought any evidence to disprove the loans. There is also a force in the arguments of AR that the loans cannot be held as non-genuine only for the reason that the summon u/s 131 are not served to the lenders. The Ld. AR had furnished the copies of evidence of service of request letters dispatched by the appellant who had been served to certain lenders by postal department and documentary evidences furnished by the lenders. It is observed that AO had not rejected the books of account u/s 145(3) of the Act. The AO had not issued the notice u/s 133(6) to the banker of the lenders to verify the source of the lenders funds and had not pointed any defect in the documentary evidences furnished by the appellant. It is a settled law that the appellant is not required to explain the source of source of funds. As the appellant had discharged its onus on furnishing the PAN, AO details, CIN master data (ROC), ledger account, confirmation of account, TDS u/s 194A certificates, own bank statement, LT acknowledgement receipt of the lenders, Bank statement of the lenders and balance sheet of the lenders, which establishes the identity, credit-worthiness of lenders and genuineness of the loans, thus the addition made by the AO cannot be sustained and is hereby deleted.
The various case laws relied by the AR also supports the case of the appellant. The Hon’ble Jurisdictional High Court in the case of Pr. CIT v. Veedhata Tower Put Ltd (ITA no. 819 of 2015) and H. R Mehta (ITA no. 58 of 2001) had decided that the source of payer’s funds may not be proved. The operating Para of the Hon’ble Bombay High Court’s decision is reproduced as under:
“In our view in the light of the fact that the monies were advanced apparently by the account payee cheque and was repaid vide account payee cheque the least that the revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against assessee in arriving before passing the order of reassessment. This not having been done, the denial of such opportunity goes to root of the matter and strikes at the very foundation of the reassessment and therefore renders the orders passed by the CIT (A) and the Tribunal vulnerable. In our view the assessee was bound to be provided with the material used against him apart from being permitting him to cross-examine the deponents. Despite the request dated 15th February 1996 seeking an opportunity to cross examine the deponent and furnish the assessee with copies of statement and disclose material, these were denied to him. In this view of the matter we are inclined to allow the appeal on this very issue.”
Also, Hon’ble Apex Court in the case of Pr. CIT us, Vaishno devi Refoils & Sol vex reported in 96 Taxmann.com 469 had dismissed the SLP and affirmed the decision of Hon’ble Gujarat High Court on holding that the source of funds of the lender may not be proved by the assessee. The operating Para of Hon’ble Apex Court decision is reproduced as under:
“For relevant year, Assessing Officer made addition to income of assessee firm under section 68 on account of capital introduction by one partner of firm-He was of view that creditworthiness of partner who introduced capital had not been proved High Court in impugned order noted that amount received by assessee-firm had been duly reflected in books of account maintained by concerned partner and that assessee had furnished details with regard to source of capital introduced in firm and concerned partner had also confirmed such contribution then it is concluded that assessee had duly discharged onus cast upon it – Further, court noted that if Assessing Officer was not convinced about creditworthiness of partner who had made capital contribution, inquiry had to be made at end of partner and not against firm.” .
In the case of Pr. CIT vs. Hi-Tech Residency (P.) Ltd reported in 96 Taxmann.com 403, Hon’ble of Supreme Court decided that:
“Section 68 addition was made in hands of assessee on ground that assessee company was not able to produce any of director, shareholders or principal officer of companies to whom shares were allotted and lenders from whom unsecured loans was taken – High Court deleted said addition holding that assessee had discharged its onus of establishing identity, genuineness and creditworthiness of both investors as well as lenders – Whether, on facts, SLP against said order was to be dismissed — Held; yes.”
In the case of CIT vs. Jai Kumar Bakliwal reported in 366 ITR 217, Hon’ble High Court of Rajasthan decided that:
“It had been claimed by AO that in most of cases, though amount was received by account payee cheque and most of creditors were assessed to Income Tax Act and had even provided their permanent account number but on desire of AO of producing said parties, none of parties were able ‘to prove source of amount advanced to assessee Thus, AO made addition u/s 68 as income from undisclosed sources CIT(A) deleted addition holding that source of cash creditors was not required to be proved by assessee once identity, capacity and genuineness stands proved ITAT dismissed revenue’s appeal Held, all cash creditors had affirmed in their examination that they had advanced money to assessee from their own respective bank accounts Therefore, when there was categorical finding even by AO that money came from respective bank accounts of creditors, which did not flow in shape of money, then, such addition could not be sustained and had been rightly deleted by both two appellate authorities There was no clinching evidence in present case nor AO had been able to prove that money actually belonged to none but assessee himself Action of AO was based on mere suspicion.”
In the case of DCIT vs. Rohini Builders reported in 256 ITR 360, Hon’ble High Court of Gujarat decided that:
“Assessee furnished complete addresses of all the creditors along with GIR numbers/PAN as well as confirmations along with copies of assessment orders passed in the cases of individual creditors, wherever available, and copies of returns filed by the creditors in the remaining cases—All loans were received and repaid by assessee by account payee cheques along with interest—Tribunal deleted the addition.”
In the case of CIT v. Avant Grade Carpets Lid reported in 9OCCH 462, Hon’ble High court of Allahabad decided that:
“CIT (A) observed that balance sheet of lender as of 31 March 2009 had been placed on record—Assessee had placed all bank accounts of lender and confirmatory certificates in respect of borrowings made by lender Company—CIT (A) held that identity of lender, its creditworthiness and genuineness of transaction had been established—ITAT affirmed finding of CIT(A Held, On perusing records, it appeared that finding that Assessee was rerouting its own funds was based on surmise—CIT(A) had benefit of considering balance sheet of lender as well as confirmatory certificates in respect of advances which lender in turn had received. There was no material to establish that Assessee was engaged in transaction for routing its own funds—View which had been taken by Tribunal was possible view to take and no material on record for this Court to hold that view of Tribunal suffered from any perversity—Appeal would not give rise to any substantial question of law—Assessee’s Appeal disposed of.”
In the case of CIT v. Ranchhod Jivabhai Nakhava reported in 208 Taxman 35, Hon’ble High Court of Gujarat decided that:
“Once the AO got hold of the PAN of the lenders, it was his duty to ascertain from the AO of those lenders, whether in their respective return they had shown existence of such amount of money and had further shown that those amounts of money had been lent to the assessee. If before verifying of such fact from the AO of the lenders of the assessee, the AO decides to examine the lenders and asks the assessee to further prove the genuineness and creditworthiness of the transaction, then it was held that the AO did not follow the principle laid down under Section 68 of the Income Tax Act… It was further held that the Tribunal rightly set-aside the deletion made by the AO, based on erroneous approach by wrongly shifting the burden again upon the assessee without verifying the Income Tax return of the creditors. The position, however, would have been different if those creditors were not income tax assessee or if they had not disclosed those transactions in their income tax returns or if such returns were not accepted by their AOs.”
In the case of CIT vs. Varinder Rawlley reported in 366 ITR 232, Hon’ble High Court of Punjab & Haryana decided that:
It has come on record that the Assessee-respondent received the amount by way of an account payee cheque. The amount was returned by way of an account payee cheque. The transactions were reflected in the bank accounts of the Assessee as well as the creditor. It appears that no enquiry was made by the Assessing Authority. If the Assessing Officer had any doubts about the entry, instead of drawing any inference, the Assessing Officer could have summoned the proprietor of the firm. No attempt was made by the Assessing Officer to ascertain the factum of clearance of cheque from the bank and subsequent refund of the amount. Once It is so, in Court’s view the Assessee had sufficiently discharged the burden which lay upon it to explain the nature and source of the credit entry appearing in its accounts and the burden clearly shifted in the present case on to the department to prove to the contrary and hold that in spite of the Assessee’s explanation, the entries could still be held to represent the Assessee’s income. Tribunal had nightly concluded that it was sufficient to delete the addition.”
Thus, respectfully following the Judicial decisions cited supra and considering the fact the loans had been received through banking channel, repayment of such loans made through banking channel, interest payments made after TDS u/s 194A deduction and other documentary evidences such as PAN, AO details, CIN master data (ROC), ledger account, confirmation of account, TDS u/s 194A certificates, own bank statement, I.T acknowledgement receipt of the lenders, Bank statement of the lenders and balance sheet of the lenders which establishes the identity, credit-worthiness of lenders and genuineness of the loans and in absence of direct contrary evidence brought on record by the AO, I hold that the AO is not justified in treating such loan as non-genuine and thus the addition made u/s. 68 cannot be sustained and is hereby deleted. | direct the AO to delete the addition made in A.Y 2013-14 of Rs.2, 51, 50,000/-.
Accordingly, ground no. 1 & 1.1 for A. Y-2013-14 are hereby allowed.”
5. We have gone through the assessment order, order of the ld. CIT (A) and submissions made by the assessee both before the AO and ld. CIT (A). We have respectfully considered the judicial decisions of various Courts and Tribunal relied upon by the assessee.
6. It is noticed that from the documents relating to the lenders, as produced by the assessee, it was noticed that the amount advanced was not commensurate and consistent with their returned income, the company did not even have an office, whereas the lender companies (Essar (India) Limited) and (Sustha Distributors Pvt. Ltd.) had to press 7.57 crore and 14.76 Crores worth of investment and loans and advances, from the bank statement, the entries are only circulating in nature.
7. During the course of the assessment proceedings, it was observed from the balance-sheet that assessee has accepted unsecured loans from Kolkata parties on perusal of the ITR, Audit report, bank statement of the lender parties it was observed that all the entities are involved in similar activities of share trading and investments with negligible or zero/negative profit. As mentioned supra despite of having capital base of Rs. 7.57 cr. and 14.76 cr. there are no reserve and surplus arising out of operations of the entities. Whatever may be the reserves and surplus are there in the balance-sheet of lender entities, arisen out of share premium which amounts for 90% of the total capital base. This fact itself creates a serious doubt about the genuineness and creditworthiness of the lender company where they fetch huge premium along with equity share capital but of no use except deploying them into loans and advances. Out of these loans and advances there is no reasonable income in any form being generated by them? Looking at the facts and surrounding circumstances “A commission u/s 131 of the Act was issued to DDIT (Inv), Kolkata to enquire into the creditworthiness of the said concerns and genuineness of the transactions of unsecured loans advanced to the assessee.
4.4 The DDIT (inv), Kolkata vide a detailed report dated 14.12.2015 stated as follows:
“A COMMISSION U/S 131(1) (d) of the Income Tax Act, 1961 dated 14/10/2015 was received by this office to enquire about the genuineness and existence of 22 (twenty two) corporate entities as per the enclosure to your above mentioned letter in connection with the survey conducted u/s 133A in the case of Sai Everest Builders and Developers. Out of the 22 companies mentioned in the list, one company named Manmade Fibers Pvt Ltd. mentioned at S. No. 11 has its address in Mumbai and, therefore, does not fall under the jurisdiction of this charge.
The ITIs were deputed to serve the summons issued u/s 131 upon the Principal Officers of the rest 21 (Twenty One) companies asking them to produce the requisite documents in support of points of enquiry as referred by you. After visiting the spot and conducting elaborate local enquiries by the departmental inspectors it was found that the existence of all 21 companies was not there at the given address.
Thus the summons could not be served in case of the above companies as the Inspector Mr. Suniti Kumar Gayen and Jayanta Sarkar entrusted with the job could not trace any of the companies mentioned at the given address. They have submitted their report which has been placed on record.
However, it has been found on perusal of database of entry operators mentioned with the Investigation Wing, Kolkata that 15 companies out of the total 21 are identified paper/shell/bogus companies of known Accommodation Entry Operators who are engaged in providing accommodation entry in different forms in lieu of commission to various beneficiaries. The names of such entities along with the names of the entry operators who control them are given in the following table.
