Deputy Commissioner Of Income Tax vs Sita Niwas Private Ltd.

“22.

Heard both the parties and perused the material available on record. From the perusal of the order of Ld. CIT(A), it is observed that Ld. CIT(A) after considering the fact that the loan was repaid in the year itself and further by following the judicial pronouncements relied upon, deleted the additions made by the AO towards unsecured loan however, the share capital received from the same company is upheld.

23.

The assessee received total amount of 1,04,00,000/- from M/s Vagmi Financial Pvt. Ltd. out which Rs. 49,50,000/- received towards share capital and Rs. 54,50,000/- were received as unsecured loan. The AO observed that the company M/s Vagmi Financial Pvt. Ltd. is Shell company managed and controlled by Shri Parveen Agarwal and Mahendra Setia (alleged as entry operator) however, ld. CIT(A) has accepted the loan as genuine. It is surprising that when the creditworthiness of lender company is doubted and allegation has been made with respect to the lender company as Shell company as to what prevent the ld. CIT(A) to hold that the entire funds received were accommodation entry. It is also relevant to state that during the year itself, loan was repaid which fact was ignored by the AO however, ld. CIT(A) appreciated this fact while deleting the addition towards unsecured loan.

24.

Before AO, the assessee submitted detailed reply to the show cause notice issued and further filed all the plausible documentary evidences to support that the loans taken were genuine which are placed in the paper book at pages 120-187. At this juncture, we first refer to the provision of section 68 of the Act.

Cash credits.

68.

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :

Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,—

(a)

the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and

(b)

such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a)

the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b)

such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided also that nothing contained in the first proviso or second proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”

25.

That a bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessee offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessee in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The expression "the assessee offer no explanation" means where the assessee offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. It is true that the opinion of the Assessing Officer for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.

26.

Coming to the facts of the present case in the line of the above proposition of law, from the perusal of details filed by the assessee during the course of assessment proceedings as available in Paper Book at page 120 to 187, it is observed that the assessee has filed the following documentary evidences:-

(i)

Confirmed Copy of account statement;

(ii)

Bank statement of the lender companies;

(iii)

Audited financial statement of the lender companies;

(iv)

Copy of ITR acknowledgement of the lender companies; and

(v)

Copy of share allotment return filed before the ROC

27.

It is further seen that the assessee not only prove the source in the hands of the loan creditors but further prove the source of source of the funds advanced to the assessee company by filing the assessment particulars of the year when the lender/investor company has received share capital i.e.in AY 2016-17.

28.

It is also relevant to state that an amendment is made vide Finance Act, 2022 wherein second proviso to section 68 is added so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or loan provider. However, this additional onus to prove satisfactorily the source in the hands of the creditor, would not apply if the creditor is a well-regulated entity, i.e., it is a Venture Capital Fund, Venture Capital Company registered with SEBI. This amendment has taken effect from 1stApril, 2023 and accordingly applies in relation to the assessment year 2023- 24 and subsequent assessment years. The year before us is AY 2017-18 thus this amendment is not applicable, yet the assessee has been able to establish the same as stated above. Since onus to establish the source of source in the case of share capital is on the assessee, therefore, the assessee has discharged the burden by filing the details of the availability of the funds in the hands of the subscriber company.

29.

It is clear that the assessee has furnished source of source and if the AO has any doubts with respect to the source of source in the hands of the subscriber company, it could have made further enquiries which has not been carried out in the instant case and has relied upon the retracted statements of the so called entry operators.

30.

As observed above, no incriminating material was brought on record pertaining to the year under appeal from which it could be held that the funds received by the assessee are not genuine. The Hon’ble Supreme Court in the case of CIT-III, Pune vs Singhad Education Society in Civil Appeal No.11080/2017 arising out of SLP (C) No.25257/2015 wherein the Hon’ble Apex Court has held as under:-

“The seized incriminating material have to pertain to the AY in question and have co-relation, document-wise, with the AY. This requirement u/s 153C is essential and becomes a jurisdictional fact. It is an essential condition precedent that any money, bullion or jewellery or other valuable articles or thing or books of accounts or documents seized or requisitioned should belong to a person other than the person referred to in S.153A.”

31.

Hon’ble Supreme Court in the case of Pr. CIT v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxman.com 399 (SC) has also held that “no addition could be made dehorse the incriminating material”.

32.

The Assessing Officer has not brought anything on record to establish that the source in the hands of subscriber company is non-genuine. Merely because some person accepted that they managed and controlled the lender / subscriber company which statements were retracted later, the funds received cannot be held to be accommodation entries. It is well-settled position of law that no matter how strong suspicion is, it cannot take place of the evidence. Therefore, in the absence of any evidence showing that in fact, appellant has given cash in lieu of funds received in the shape of share capital and unsecured loan, merely on the basis of suspicion, no addition can be made for which reliance is placed on decision of Hon'ble Supreme court in the case of Daulatram Rawatmull, (1964) 53 ITR 574.

33.

Further on the issue of discharging of onus, the Hon'ble Jurisdictional High Court in the case of Mod. Creations (P.) Ltd. v. ITO reported in [2013] 354 ITR 282, has been held as under:

"It will have to be kept in mind that Section 68 of the I.T. Act only sets up a presumption against the Assessee whenever unexplained credits are found in the books of accounts of the Assessee. It cannot but be gainsaid that the presumption is rebuttable. In refuting the presumption raised, the initial burden is on the Assessee. This burden, which is placed on the Assessee, shifts as soon as the Assessee establishes the authenticity of transactions as executed between the Assessee and its creditors. It is no part of the Assessee's burden to prove either the genuineness of the transactions executed between the creditors and the sub-creditors nor is it the burden of the Assessee to prove the creditworthiness of the sub-creditors.

34.

It was further observed by the Hon’ble court as under:

14.

With this material on record in our view as far as the Assessee was concerned, it had discharged initial onus placed on it. In the event the revenue still had a doubt with regard to the genuineness of the transactions in issue, or as regards the creditworthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assertion by the ASSESSING OFFICER that the credits were a circular route adopted by the Assessee to plough back its own undisclosed income into its accounts, can be of no avail. The revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation. The ITAT, in our view, without adverting to the aforementioned principle laid stress on the fact that despite opportunities, the Assessee and/or the creditors had not proved the genuineness of the transaction. Based on this the ITAT construed the intentions of the Assessee as being mala Ride. In our view the ITAT ought to have analyzed the material rather than be burdened by the fact that some of the creditors had chosen not to make a personal appearance before the A.O. If the A.0. had any doubt about the material placed on record, which was largely bank statements or the creditors and their income tax returns, it could gather the necessary information from the sources to which the said information was attributable to. No such exercise had been conducted by the A.O. In any event what both the A.O. and the ITAT lost track of was that it was dealing with the assessment of the company, i.e., the recipient of the loan and not that its directors and shareholders or that of the sub-creditors. If it had any doubts with regard to their credit worthiness, the revenue could always bring it to tax in the hands of the creditors and/or sub-creditors. [See CIT v. Divine Leasing & Finance Etd (20092-229-178.268 (Delhi) and CIT v. Lovely Exports (P.) Ltd. 2006) 215 CTR 495 (SC).*

35.

The Hon'ble Delhi High Court in the case of CIT vs. Vrindavan Farms Pvt. Ltd. etc. in ITA. No.71 of 2015 dated 12th August, 2015 held as under :

"The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. lt was observed by the ITAT that the Assessing Officer 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.”

36.

Regarding the additions made u/s 68 of the Act towards the unsecured loans though they were repaid subsequently, the Hon’ble Gujarat High Court in the case of PCIT vs Ojas Tarmake 150 taxmann.com 75 has observed as under:

“where the appellant showed unsecured loans received during the relevant AY and AO made addition on the ground that appellant failed to discharge onus of liability as laid down u/s 68 of the Act since amount of loan received by the appellant was returned to the loan period during the year itself and all the transactions were carried out through banking channel, impugned addition was to be deleted.”

37.

In view of above facts and the circumstances of the case, we are of the considered view that the decision of the Ld. CIT(A) deleting the additions made for the unsecured loans is based on the appreciation of fact that all the relevant documentary evidences were produced by the Assessee to establish the identity and creditworthiness of the lender company and genuineness of the transactions. Further based on the legal precedents and the fact that the loan was received and repaid through banking channel had deleted the additions under consideration. We further observed that that Hon'ble Jurisdictional High Court in various cases has dealt with the fact that where assessee has discharged its burden by filing all the necessary evidences to prove the loans, provisions of section 68 cannot be invoked. Further Hon’ble Gujarat High Court in the case of PCIT Vs. Ojas Tarmake Pvt. Ltd. (supra) has held that where major portion of the credit has been repaid and also looking to the fact that in the instant case the AO had accepted the debit entries as genuine, the Hon'ble Court on the said facts ultimately affirmed the decision of the Tribunal in deleting the addition. Therefore we find no error in deleting the addition on account of unsecured loan of Rs. 54,50,5000/-. At the same time based on the same information, the addition made towards the share capital received from the same company is confirmed. This dual approach is not acceptable on same set of facts.

38.

One more argument of the assessee was with regard to not providing the opportunity of cross examine the persons whose statements are relied upon the by Ao and ld. CIT(A) for confirming the addition towards share capital received. In case of Andaman Timber Industries Vs. CCE (SC) reported in 281 CTR 241(SC), the hon’ble Apex Court held that the Adjudicating Authority had not granted an opportunity to the assessee to cross examine the witnesses and the tribunal merely observed that the cross examination of the dealers in that case, could not have brought out any material which would not otherwise be in possession of the appellant-assessee. The Supreme Court set aside the impugned order and observed that it was not for the Adjudicating Authority to presuppose as to what could be the subject matter of the cross examination and make the remarks such as was done in that case.

39.

Thus, the denial of opportunity to cross examine which goes to the root of the matter and strikes at the very foundation of the assessment and, therefore, renders the assessment order passed by the AO not sustainable. Thus, the additions made by the AO on the basis of such statement without any tangible material is not sustainable in law and liable to be deleted.

40.

In view of the above discussion and further looking to the fact that when all the relevant details and documentary evidences produced by the assessee to establish the identity, creditworthiness and genuineness of the transactions, the said evidences cannot be rejected solely based on the retracted statements without any contrary documentary evidence. It is seen that transactions have been done through banking channels and when the funds were provided to the assessee, sufficient balance was available in the accounts of the company, which proves the creditworthiness and genuineness of the transactions. Further it is not case where cash was deposited in the bank account at the time of issuing cheques/RTGS in favour of the Assessee. Therefore, Appellant has duly discharged the burden casted upon it u/s 68 of the Act.

41.

It is trite law that suspicion, howsoever strong, cannot take the place of proof as held in Umacharan Shaw & Bros. vs. CIT (1959) 37 ITR 271 (SC). The Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd v. Commissioner of Income Tax (1954) 26 ITR 775 (SC) has observed that powers given to the Revenue authority, howsoever, wide, do not entitle him to make the assessment on pure guess without reference to any evidence or material. The assessment cannot be framed only on bare suspicion. The assessment should rest on principles of law and one should avoid presumption of evasion in every matter. The assessee, in the instant case, has sufficiently demonstrated the genuineness of transaction and creditworthiness of the subscriber company. On a broader reckoning, the apprehension raised by the Revenue authorities militates against the tangible material and is thus extraneous. Accordingly, delete the addition of Rs. 49,50,000/-made and confirmed towards he share capital alleged as accommodation entry. Further the order of ld. CIT(A) deleting the addition made u/s 68 towards unsecured loan of Rs. 54,50,000/-received from the same company is hereby confirmed. Accordingly, all the grounds of appeal of the revenue are dismissed and grounds of appeal No. 4 to 6 and additional grounds of appeal No. 1 to 4 taken by the assessee are allowed.

42.

In the result, appeal of the assessee in ITA No. 7604/Del/2025 is allowed and appeal of the Revenue in ITA No. 8880/Del/2025 is dismissed.”