Pavankumar M Sanghvi Vs ITO (ITAT Ahmedabad)
Income Tax Appellate Tribunal (ITAT), Ahmedabad, has dismissed an appeal filed by Pavankumar M Sanghvi, upholding the Assessing Officer’s (AO) decision to treat unsecured loans totaling Rs 20 lakhs as unexplained cash credits under Section 68 of the Income Tax Act. The AO had reopened the assessment after receiving information from the Directorate of Income Tax (Investigation) indicating that the lenders, Natasha Enterprises and Mohit International, were part of a network of shell entities managed by Praveen Kumar Jain (PKJ), allegedly involved in facilitating financial manipulations.
During the reassessment proceedings, Mr. Sanghvi provided loan confirmations and ledger copies towards the end, but failed to adequately address the AO’s specific queries regarding the genuineness of these transactions. The AO noted the assessee’s silence on the nature of his relationship with the lenders and concluded that mere submission of formal documents did not prove the transactions’ authenticity. Consequently, the Rs 20 lakh loan amount was added to Mr. Sanghvi’s income as unexplained credit, and the corresponding interest deduction of Rs 3,66,041 was also disallowed.
The assessee’s counsel argued before the ITAT that the addition was solely based on information from the Investigation Wing, specifically a statement by PKJ which was later retracted. It was contended that Mr. Sanghvi was not given an opportunity to cross-examine PKJ, violating principles of natural justice. Furthermore, affidavits from the proprietors of Natasha Enterprises and Mohit International were presented, confirming the loans, interest payments, and their subsequent repayment, with the interest income duly declared for tax. The counsel also highlighted that the loan transactions were conducted via cheques, supported by bank statements, loan confirmations, and audited accounts of the lenders. Reliance was placed on the Supreme Court’s judgment in Kishanchand Chelaram Vs CIT [(1980) 125 ITR 713 (SC)], which held that tax authorities cannot rely on statements not confronted to the assessee for cross-examination. The Bombay High Court’s ruling in H R Mehta Vs ACIT (unreported, dated 30th June 2016) was also cited, emphasizing that material from a person not allowed for cross-examination cannot be used against the assessee, and mere unavailability of a lender at a past address does not imply a non-genuine transaction.
However, the ITAT Member observed that Mr. Sanghvi did not raise objections against the reopening of the assessment at any stage and remained silent when informed about the alleged shell nature of the lenders. The plea for cross-examination of PKJ was also not raised during the assessment or the first appeal. The Tribunal found inconsistencies in the assessee’s approach, noting his awareness of PKJ’s retraction affidavit while feigning ignorance of the initial statement. The ITAT also highlighted the assessee’s ability to produce lenders’ financial documents but not their physical presence or current whereabouts, raising further doubts.
Ultimately, the ITAT upheld the additions and disallowance, emphasizing that the legal basis for the action was Mr. Sanghvi’s failure to satisfy the AO regarding the existence, financial capacity, and, most importantly, the genuineness of the loan transactions, as required under Section 68. The Tribunal cited the Calcutta High Court’s rulings in CIT Vs United Commercial and Industrial Co Pvt Ltd [(1991) 187 ITR 596 (Cal)] and CIT Vs Precision Finance Pvt Ltd [(1994) 208 ITR 465 (Cal)], which established the assessee’s onus to prove the identity, creditworthiness, and genuineness of creditors. The ITAT also referred to the Bombay High Court’s full bench decision in Ahmedabad Electricity Co Ltd Vs CIT [(1993) 199 ITR 351 (Bom FB)] and the Special Bench ruling in Tata Communications Ltd Vs JCIT [(2009) 121 ITD SB 384 (Mum)], stating that the Tribunal can examine any related aspect as long as the subject matter remains the same.
The ITAT Member analyzed the bank statements and financial details of Natasha Enterprises and Mohit International, noting unusual patterns of high-value transactions with minimal closing balances and disproportionately low expenses compared to their reported turnover, suggesting they were not genuine business entities. The Tribunal also considered the improbability of unrelated parties extending large unsecured loans at a low interest rate without any apparent security or close association. Citing the Supreme Court’s observations in CIT Vs Durga Prasad More [(1971) 82 ITR 540 (SC)] and Sumati Dayal Vs CIT [(1995) 214 ITR 801 (SC)], the ITAT emphasized the need to judge evidence based on human probabilities and surrounding circumstances, cautioning against a superficial examination of documents. The Tribunal concluded that, based on the peculiar facts and circumstances, the alleged loan transactions could not be considered genuine.
Also Read HC Judgment: Section 68 Addition Unjustified as Loan Genuineness, Lender Capacity & Transaction Proven: Gujarat HC
