DCIT, Circle 10(1) vs M/s Ghaziabad Organics Limited

“1.

Whether on facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of Rs.3,08,55,000/- made u/s 68 of the Income Tax Act, 1961 on the ground that the assesse company had not discharged its onus during the assessment proceeding and failed to prove identity creditworthiness and genuineness of the transaction.

2.

Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the addition of Rs.16,28,012/- made by the AO u/s 41(1) of the Income Tax Act, 1961 in respect of static creditors ignoring the fact that the creditors have not claimed the dues from last three years.

3.

The appellant craves leave to add, amend, modify, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”

“6.1 Ground Number 1: Addition of Rs.3,08,55,000/- on account of unsecured loans received from various parties.

6.1.1

I have considered the facts and circumstances of the case and the finding of the AO. The addition amounting to Rs. 3,08,55,000/- has been made under Section 68 of the Act for unexplained cash credit. As per the AO the assessee has received unsecured loan from four parties and was not able to substantiate the identity and creditworthiness of the parties and the genuineness of the transaction.

6.1.2

Before me, the assessee company vehemently submitted that all the documents as requisitioned by the AO were submitted on record which substantiates the identity and creditworthiness of the parties and the genuineness of the transaction. Before me also the assessee submitted all the documents which were submitted before the AO. I have considered all the documents furnished on record and my finding on each of the party is as under:

6.1.3 Unsecured Loan of Rs. 5,15,000/- from Anshuman Rawat

6.1.3.1

From the documents submitted on record, it is noted that Mr. Anshuman Rawat is the director of the assessee company. To establish the identity, genuineness and creditworthiness, the assessee has furnished the copy of confirmation of accounts, bank statement, IT with Computation of Income and Affidavit of Mr. Anshuman Rawat.

6.1.3.2

From the perusal of the documents submitted on record, the identity of the party is established from the fact that he is filing the income tax return and he is also the shareholder in the assessee company and is drawing salary thereof.

6.1.3.3

Furthermore, on perusal of the confirmation of accounts, it is noted that at first place company paid him Rs. 6,75,000/- on June 3, 2014 and subsequently the company received Rs. 11,90,000/- from him on 24.02.2015 resulting in closing balance of Rs. 5,15,000/-.

6.1.3.4

I find that the said amounts are duly correlated from the bank statement of Mr. Anshuman Rawat furnished on record. From the perusal of the bank statement of Mr. Rawat, it is also not seen if any cash is deposited just before lending of the said amount to the company.

6.1.3.5

Thus, the genuineness of the said transaction can also not be doubted, in view of the fact that the transactions are through banking channel and there is no cash deposit just before the lending of the money.

6.1.3.6

Now with respect to the creditworthiness, it is noted that Mr. Rawat is filing his tax return and has reported Rs.12,84,150/- as income for AY 2015-16. In such a scenario, where the lender has an income of RS. 12,84,150/- it cannot be considered that he does not have creditworthiness to grant a loan of Rs. 5,15,000/-. In view of this, his creditworthiness is also established.

6.1.3.7

I have also considered the finding of the AO. As per the AO, since no reply was furnished under Section 133(6) and since the assessee was unable to produce Mr. Rawat before the assessee, he doubted the identity, creditworthiness and genuineness of the transaction.

6.1.3.8

In this regard, it is noted, that as per the principles as decided by the Hon'ble Courts and Tribunal from time to time, the onus is on the assessee at the first place to substantiate the identity, creditworthiness and genuineness, which the assessee in the present case has done by submitting all the necessary documents on record. Thereafter the onus shifts on the revenue to rebut the documents. Just because the assessee was unable to produce the lender cannot be the basis to treat the amount received as unexplained. Assessee has discharged his onus, if the AO was still doubtful he was free to serve notice under Section 131 of the Act or could have conducted further enquiries. Burden cannot be cast on the assessee to produce the lender, where the assessee has submitted everything on record, to justify his stand.

6.1.3.9

From the perusal of the documents, and the finding of the AO, it is clearly discernible that the addition is totally unjustified and without appreciating and considering the documents on record.

6.1.3.10

Thus, no addition of the aforesaid amount of Rs. 5,15,000/- can be made under Section 68 of the Act.

6.1.4 MR DD Developers

6.1.4.1

An amount of Rs. 10,00,000/- has been shown as received from this lender. Before me to substantiate the identity, genuineness, and creditworthiness, the assessee has furnished the Audited Balance Sheet, Audit Report, Confirmation of Accounts, Affidavit and bank statement of MR DD Developers.

6.1.4.2

From the perusal of the said documents, it is noted that in the lender firm has duly reported the said Rs. 10,00,000 as loans and advances in its balance sheet. Further the affidavit and tax audit report submitted on record, substantiates the identity of the lender.

6.1.4.3

The creditworthiness of the transaction is substantiated from the fact that the lender firm has net worth (capital) of Rs. 13,46,62,695/- which is far more than the loan given to the appellant company being Rs. 10,00,000/-. Thus in such case, creditworthiness cannot be doubted.

6.1.4.4

Furthermore, with respect to genuineness of the transaction, the affidavit of the partner of the lender firm is furnished on record along with bank statement. The said documents substantiate that the transaction has been taken through banking channel and there is no cash deposit before the said transaction.

6.1.4.5

I have also considered the finding of the AO. As per the AO, since no reply was furnished under Section 133(6) and since the assessee was unable to produce partner of the lender firm before the assessee, he doubted the identity, creditworthiness and genuineness of the transaction.

6.1.4.6

As discussed in preceding para 6.1.3.8, burden cannot be cast on the assessee to produce the lender, where the assessee has submitted everything on record, to justify his stand.

6.1.4.7

From the perusal of the documents it is clearly discernible that the addition is totally unjustified and without appreciating and considering the documents on record.

6.1.4.8

Thus, no addition of the aforesaid amount of Rs. 10,00,000/- can be made under Section 68 of the Act.

6.1.5 MR Dream Works

6.1.5.1

The assessee has received Rs. 100,00,000/- of unsecured loan from MR Dream Works during the year under consideration.

6.1.5.2

To substantiate the identity, genuineness, and creditworthiness, the assessee has furnished the Confirmation of Accounts, ITR, bank statement and Affidavit of MR Dream Works.

6.1.5.3

I have perused the documents furnished on record and the submission of the assessee and the finding of the AO. As per the confirmation of accounts, the assessee already had outstanding loan of Rs. 1,00,00,000 from MR Dream Works and also received another Rs. 1,00,00,000/- during the year under consideration.

6.1.5.4

The PAN and ITR of the lender is furnished, so it can be considered that the identity of the lender is established.

6.1.5.5

With regard to the genuineness and creditworthiness of MR Dream Works, the AO has doubted the same on account of the fact that the same amount before giving to the appellant was received by the lender from some third party. The AO requisitioned the details of that party, which the appellant failed to furnish and therefore the addition was made under Section 68 of the Act.

6.1.5.6

I have considered the finding of the AO. As per the finding of the AO, he has requisitioned the source of source and in the absence of which he has doubted the genuineness and creditworthiness.

6.1.5.7

In my view it is a settled position of law, that the assessee is not required to substantiate the source of source in case the unsecured loans are received through banking channels. Onus cannot be cast upon the assessee to substantiate the source of the source just because exactly same amount was received by the lender from some third party. In the case of unsecured loan, it would be practically impossible for the assessee to seek the information from its lender about his source of giving such loan. Courts have widely held that there is no onus on the assessee to establish source of source in the case of unsecured loan.

6.1.5.8

If the AO had doubts, he should have further made proper enquiry and should have summoned the lender. However, the AO did not take any such steps. No cogent adverse finding based on evidence form the basis of addition under section 68 of the Act.

6.1.5.9

Thus, in view of the totality of facts and the position of law, the addition made by the AO is deleted.

6.1.6 M.R. Proview Real Tech (P) Ltd.

6.1.6.1

During the year under consideration, the assessee has received Rs. 1,93,40,000/- from the lender company. To substantiate the identity, genuineness and creditworthiness, the assessee has furnished the copy of ITR, Computation, Balance Sheet, Confirmation of Accounts, Bank Statement and Affidavit.

6.1.6.2

I have perused the documents on record. As per the Confirmation of Accounts, the company has a running account with M.R. Proview Real Tech (P) Ltd. There is an opening outstanding balance of Rs. 5,65,50,000/- and closing balance of Rs. 7,58,90,000/-. Funds were received and were also paid back during the year.

6.1.6.3

Further, 1 have perused the copy of the bank statements, which shows that the amount has been paid through banking channels. The name of the assessee company is duly appearing in the narration in the bank statements of the lender company.

6.1.6.4

The aforesaid findings duly establish the genuineness of the transaction.

6.1.6.5

Furthermore, the identity of lender is established from the income tax return and pan number furnished on record. Further the affidavit filed on record also substantiates the identity of the lender.

6.1.6.6

Now, with respect to creditworthiness of the lender company, I took note of the income tax return and balance sheet and profit and loss of the company. From the perusal of the said records, it is noted that the company has reported an income of Rs.4,33,78,257/- and reported a turnover of Rs.83,66,16,356/-. Further, the company has share capital and reserve and surplus of Rs. 21,15,43,620/. From the same, it is discernible that the lender company has enough available funds and creditworthiness to lend an amount of Rs. 1,93,40,000/-. Thus, the creditworthiness is also established.

6.1.6.7

I have also considered the finding of the AO. As per the AO, since no reply was furnished under Section 133(6) and since the assessee was unable to produce the concerned person of the lender company before the assessee, he doubted the identity, creditworthiness and genuineness of the transaction.

6.1.6.8

As discussed above in this order, without any concrete adverse finding, addition cannot be made merely on the ground that assessee has failed to produce the lender in person particularly when the assessee has submitted documents on record to discharge onus placed on it under section 68 of the Act.

6.1.6.9

From the perusal of the documents and the finding of the AO, it is obvious to me that the addition is totally unjustified and without appreciating and considering the documents on record.

6.1.6.10

Thus, no addition of the aforesaid amount of Rs. 1,93,40,000/- can be made under Section 68 of the Act.

6.1.7

Thus, in view of the aforesaid finding, the total addition of Rs. 3,08,55,000-made under section 68 of the Act is hereby deleted. Thus, this ground of appeal is allowed.

6.2 Ground Number 2: Addition amounting to Rs. 16,28,012/- on account of remission of liability under Section 41(1) of the Act.

6.2.1

By way of facts, during the assessment proceedings, the AO called for the details of the creditors outstanding at the end of the financial year under consideration. As per the AO the amount of Rs.16,28,012/- pertaining to 27 creditors were outstanding for last three years. He held it as a case of cessation of liability and added Rs.16,28,012/- under section 41(1) of the Act.

6.2.2

Before me it was argued that all these sundry creditors are actual, genuine and represent the legitimate liability of the assessee company and merely because the same are static over three years, the same cannot be treated as income of the assessee. Furthermore, the appellant also relied upon few judicial precedents, wherein, the Hon'ble Courts have held that the remission of liability has to be by the creditor. Hon'ble Courts in plethora of judgments have also held that cessation of the liability may occur either by reason of the operation of law i.e on the liability becoming unenforceable at law or by contract between the parties or by discharge of the debt.

6.2.3

1 have considered the submission of the appellant, the documents placed on record and the case laws relied. It is a settled position of law that no addition could be made on account of remission of liability if the assessee acknowledges his liability and it is not established that the assessee has already obtained benefit. in respect of such liability.

6.2.5

The liability doesn't get wiped out because it is static for few years. The appellant has been treating the said amount of Rs.16,28,012/- as its outstanding liability duly reflected in its balance sheet. In this connection, it would be relevant to reproduce the following extract from the judgement of Hon'ble Delhi High Court in the case of CIT Vs. Vardhaman Overseas Ltd. in ITA No. 774/2009:-

"If the argument of the Revenue is accepted, it would also introduce an element of uncertainty or subjectiveness in ascertaining as to what would be the lapse of time and would be necessary to render a liability to pay the creditors ineffective, which would result in an alleged benefit to the assessee. Moreover, if after the taxing of the amount u/s 28(iv) on the ground that considerable time has elapsed from the date of the debt during which the assessee had the benefit of the monies in his business, it is found that in another later year the creditor has recovered the money from the assessee, there is no provision in the Act to allow deduction for such payment. The section cannot be made subject to such vagaries or subjectiveness in its applicability. It is a well settled rule of interpretation of statutes that a construction that reduces one of the two provisions in a statute to a useless lumber or a dead letter would not amount to a harmonious construction and that a familiar approach in such cases is to find out which one of the two provisions is a special provision made to govern a certain situation and to exclude that situation from the applicability of the general provision. While section 28(iv) " would apply generally to all benefits or perquisites which arise to the assessee from the business carried in by him, the benefit which he obtains by way of remission or cessation of a trading liability in a later year, in respect of which he ahs obtained a deduction in an earlier year in computing the business income, should be governed by Section 41(1) which is the specific provision governing the factual situation and not by Section 28(iv). The judgment is only on the applicability of Clause (a) of subsection (1) of Section 41 and as to what would constitute remission or cessation of a trading liability. The assessee has not unilaterally written back the accounts of the sundry creditors in its profit and loss account. Hence addition cannot be made."

6.2.6

Thus in view of the facts of the case and the clear position of law as held by various courts from time to time, since the appellant company has recognised its liability and the same was not discharged nor the same was remitted either legally or as per any contract between the parties concerned the said addition made by the AO is not at all justified and legal.

6.2.7

In view of the above discussion, I find that the addition of Rs.16,28,012/- on account of cessation of liability in the given factual matrix of the case is not sustainable as during the year under consideration, the said credit was alive as the same was not written off in the books of account and the appellant has been acknowledging the liability in its books of account. Accordingly, addition of Rs.16,28,012/- is deleted and ground of appeal in this regard is treated as allowed.

6.3 Ground Number 3: Addition of Rs.2,49,823/- (Rs.2,44,823 + Rs.5,000) on account of payment made against sales tax and central excise under section 37(1) of the Act.

6.3.1

The AO disallowed the aforesaid amount under Section 37 of the Act after giving a finding that the amount of Rs. 2,49,823 is the penalty paid by the assessee company towards sales tax and excise default.

6.3.2

Before me the appellant company submitted that out of the amount of Rs. 2,49,823/-amount of Rs. 2,44,823/- is paid to sales tax department on account of tax and interest and not on account of penalty. The assessee submitted the copy of the sales tax order dated 28.03.2014 on record. The assessee before me submitted that the amount of Rs. 2,44,823/- is on account of payment of additional sales tax, CST and interest as per the order.

6.3.3

1 have perused the sales tax orders placed on record. As per these two orders dated 28/03/2014, the appellant was asked to pay total demand of Rs.1,67,877/- which was to be paid along with interest. I have examined the details furnished to find that the appellant has paid Rs.1,67,877/- plus interest of Rs.52,709/-to meet the demands of sales tax and entry tax. The payment totaling to Rs.2,43,423/- (out of Rs.2,44,823/-) is allowable expenditure and the balance amount of Rs.1,400/- is not allowable in absence of clear nature of payment. The claim of the appellant is found justified to the extent of Rs.2,43,423/- on account of payment of sales tax and entry tax along with interest thereon.

6.3.4

However, with respect to addition of Rs. 5000/-, the assessee has itself submitted voucher on record suggesting the same to be on account of penalty. Thus, the said amount of disallowance is upheld.

6.3.5

Thus, out of the total amount of disallowance amounting to Rs.2,49,823/-, only Rs.6,400/-(5000+1400) is disallowed. The appellant gets relief amounting to Rs.2,43,423/-. The ground of appeal is partly allowed.”