MSG Electric System Private Limited vs DCIT/ACIT, Circle 11(1)

PER ANUBHAV SHARMA, JM:

These cross appeals preferred by the Assesseeand the revenue against the order of the Ld. National Faceless Appeal Centre (NFAC) (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in DIN & Order No : ITBA/NFAC/S/250/2025-26/1078121697(1)arising out of the assessment order dated 17.12.2019 u/s143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the ACIT,Circle-11(1) for AY: 2017-18.

The assessee has claimed to be engaged in the business of trading and manufacturing of inverter and automotive batteries. The report was filed on 05.08.2017 declaring income at Rs.1,10,420/-. The case of assessee was selected for scrutiny assessment to examine the question of genuineness of share capital and unsecured loans received during the year. The assessing officer had made addition of Rs.4,71,00,000/- on account of share capital received from 12 persons and addition of Rs.17,00,000/- was made on account of loans received from 4 persons. The disallowance of Rs.84,822/-was made on account of alleged bogus interest expenses to 4 persons from whom unsecured loan taken. The addition of Rs.95,25,000/- on account of share capital received during the year was sustained by ld. CIT(A) for which assessee is in appeal while addition u/s 68 of Rs.17,00,000/- on account of unsecured loan received during the year and addition of Rs.3,75,00,000/- on account of share capital received during the year was deleted by the ld. CIT(A) for which revenue is in appeal.

The ld. Counsel has submitted that assessee had filed evidences with regard to identity, genuineness and creditworthiness of the third parties and that no addition can be made on the ground that notice u/s 133(6) of the Act were not replied or complied.

In regard to ground No. 1 & 3 of the appeal of the Revenue and 3 & 4 of the appeal of the assessee we are require to examine as to how identity, genuineness and creditworthiness of the lender/shareholders was established by the assessee. Admittedly, the documentary evidences in the form of confirmations, bank statements, reflected in share capital transactions, ledger account, ITR acknowledgment of the lender/shareholder were filed before ld. tax authorities and copies of which are also provided before us at page No. 83-180 of the paper book.

As with regard to loan from 4 parties it comes up that assessee also received share capital from same parties in regard to Komal Vats loan of Rs.2,50,000/- and share capital received of Rs.7,50,000/- has been obtained by the assessee for which all relevant documents indicating establishing identity and confirmation letter have been filed. In case of Komal Vats the necessary evidences of creditworthiness of Pawan Kumar &Garimaare filed from whom Komal Vats had allegedly received funds.

In case of Madhu Rani from whom loan of Rs.5,00,000/- and share capital of Rs.5,00,000/- has been obtained basic documents like PAN confirmations letter and ITR were filed of Madhu Rani & confirmation from Kulwinder Kumar & Sons (HUF) along with ledger & ITR were filed to establish source of source.

In regard to Bhaskar Bhardwaj loan of Rs.2,50,000/- and share capital of Rs.12,50,000/- has been obtained by the assessee and assessee had filed basic documents like Aadhar, PAN confirmations ITR acknowledgment etc. and also establishing source of source confirmations and ITR acknowledgment of RK Bhardwaj, BajrangLalSanwar, Garima&Charu were filed.

In regard to loan Rs.7,00,000/- and share capital of Rs.5,00,000/-received by the assessee from Usha Rani copy of here Aadhar, PAN confirmation were filed and also to establish source of source confirmation letter, ledger and ITR of Kulwinder Kumar & Sons (HUF) were filed. Then with regard to Dimple Chaudhary, NeelamKumariInsan and other persons also assessee had filed basic documents.

The only contention of ld. counsel of the assessee is that assessing officer has not pointed out any defect/inconsistency or any material in the findings furnished nor has by any fresh inquiry brought on record to disprove the evidences.

As with regard to ground No. 4 & 5 in appeal of the assessee ld. Counsel has also relied decision of Hon’ble Supreme Court in the case of Orissa Corporation Pvt. Ltd. Vs. CIT, (1986) 159 ITR 78 (SC) to contend that non-response of third parties cannot lead to a disallowance.

After taking into consideration the facts and circumstances we find substance in the contention of ld. Assessing Officer that 4 parties confirmed the transactions and confirmed the loan transactions from other parties for buying of shares of assessee company. The contention of the assessing officer was that assessee company was layering the transactions to introduce its own money in the form of share capital. Similar is the allegation with regard to loan transactions.

Ld. CIT(A) while benefitting the assessee has accepted the basic documents which were furnished to establish identity, creditworthiness and genuineness of the transaction but ld. CIT(A) has completely failed to appreciate the contentions of assessing officer that given financials of the assessee, if at all, these investments by individuals taking loan from persons, who are common lenders, assessee was justified to give loan or invest ins hares, when the only revenue the assessee has disclosed is in the form of ‘other incomes’as reflected in the profit and loss account statement for the year ending 31.03.2017, available at page No. 21 of paper book. The assesse has shown its share holding to extent of 75% in the hands of Gurmit Ram Rahim Insan. At page 73 of PB assesse has provided copy of reply filed before AO, where in reply to the query no. 25, assesse has shown that an advance of Rs. 25 lacs is made to DeraSachaSauda allegedly against security for building on rent. On perusal of ITR returns of investors, lenders or the persons who had advanced money to these investors or lenders, show that in ROI, the income returned is generally salary and income ranges between 3-4 lacs. Same in no manner justify the source lenders to give loans for further lending or investment in assesse company in the initial years of operations itself.

Ld. CIT(A) seems to has been over generous to accept formal documents which when we take into account indicate that same are pretentious and in such circumstances non response to notices u/s 133(6) of the Act was material but ld. CIT(A) has failed to appreciate this and benefitted assesse, and same deserves to be set aside.

We are thus inclined to sustain the grounds raised in appeal of department and reject the grounds no. 3-5, as only argued on merits, in appeal of assesse.

At the same time with regard to ground no. 6, being legal one, we sustain same as in the light of Hon’ble Madras High Court decision in S.M.I.L.E Microfinance Ltd. vs. The Assistant Commissioner of Income Tax (W.P. (MD) No. 2078 of 2020) vide order dated 19/11/2024 it is now settled that additions u/s 68 r.w.s 115BBE is liable to be taxed @ 30% for AY 2017-18, instead of 60% as levied by AO.

As a result of aforesaid discussion the appeal of department is allowed and of assesse is allowed partly with regard to ground no. 6 only.