2016 (11) TMI 325 - AT - Income Tax

Addition u/s 68 - AO treated the transactions of loan by the assessee as sham transactions for the two reasons i.e. non establishment of the genuineness of transactions and secondly for not proving the creditworthiness of the creditors - Held that - The parties have responded to the summons issued under section 133 of the Act by the AO, their PAN number and copy of income tax returns have also been submitted. The amount advanced to the assessee has also been reflected in their books. The more peculiar fact is that there was no cash deposited in the accounts of the creditors. The creditors have also explained their source. The assessee has also produced evidences regarding the amalgamation of the Ved Investments and Trading Company Pvt. and Niranwal Credit and Holding Pvt. into Wisdom Engineering Pvt. Ltd. and Flair Engineering Pvt. Ltd. respectively. The assessee therefore has explained the reasons for recording the name of creditors as Wisdom Engineering Pvt. Ltd. and Flair Engineering Pvt. Ltd. in its books of account. So far as creditworthiness of the of the creditor companies is concerned, it has been explained that the creditor companies are legal entities and are already assessed to income tax. The assessee has also explained the source of the creditors also. He has invited our attention to a table to show that an amount of ₹ 10 crores had been advanced by Niranwal Credit and Holding Pvt. to the assessee. The said Niranwal Credit and Holding Pvt. had amalgamated with Flair Engineering Pvt. Ltd. and further that the source of this ₹ 10 crores was the amount received from Sulabhya Engineering Pvt. Ltd. Similarly, an amount of ₹ 16.02 crores was advanced to the assessee by Ved Investments and Trading Company Pvt. which has amalgamated with Wisdom Engineering Pvt. Ltd. The assessee has also explained the source of credits in the account of Ved Investments. Additions made by the AO treating the loans as unexplained is not held to be justified. The same is accordingly ordered to be a deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of addition under Section 68 of the Income Tax Act.
2. Genuineness of the loan transactions.
3. Creditworthiness of the creditors.

Issue-wise Detailed Analysis:

1. Confirmation of Addition under Section 68 of the Income Tax Act:
The primary issue raised by the assessee was regarding the confirmation of an addition of ?26,02,00,000 made by the Assessing Officer (AO) under Section 68 of the Income Tax Act. The AO had added this amount as unexplained credits, suspecting that the assessee had introduced its own unaccounted funds through dubious entities. This addition was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], leading the assessee to appeal before the Tribunal.

2. Genuineness of the Loan Transactions:
The AO doubted the genuineness of the transactions, noting that the unsecured loans were shown in the names of Flair Engineering Pvt. Ltd. and Wisdom Engineering Pvt. Ltd., which were allegedly floated to rotate accommodation entries. The AO observed that the directors of these companies were men of meager means and that the addresses provided were dubious. The AO concluded that these companies were created to channelize black money and that the transactions were not genuine.

However, the assessee countered by providing substantial documentation, including bank statements, confirmations, PAN, and income tax returns of the creditors. The assessee explained the amalgamation of Ved Investments and Trading Company Pvt. Ltd. and Niranwal Credit and Holding Pvt. Ltd. into Wisdom Engineering Pvt. Ltd. and Flair Engineering Pvt. Ltd., respectively. The Tribunal noted that the funds were transferred through banking channels, confirmations were filed, and the parties responded to the summons under Section 133 of the Act. There was no cash deposit in the creditors' accounts, and the amalgamation was substantiated with evidence. Hence, the Tribunal found the transactions genuine.

3. Creditworthiness of the Creditors:
The AO also questioned the creditworthiness of the creditors, claiming that the companies were paper entities without any real business. The assessee argued that the creditor companies were legal entities assessed to income tax, and their assessments were completed under scrutiny. The Tribunal observed that the creditors had sufficient credits in their accounts, and the assessee had explained the source of the creditors' funds. The Tribunal noted that the AO could not establish a link that the money had traveled from the assessee to the creditors or their source companies. The Tribunal cited various case laws, including "Aravali Trading Company" and "Lovely Exports Pvt. Ltd.," to support the view that once the assessee has provided sufficient evidence of the creditors' identities and creditworthiness, the burden shifts to the AO to prove otherwise.

Conclusion:
The Tribunal concluded that the assessee had discharged its burden by providing sufficient evidence of the genuineness and creditworthiness of the loan transactions. The AO failed to establish a link between the assessee and the alleged bogus entities. Therefore, the Tribunal ordered the deletion of the addition made by the AO under Section 68 of the Income Tax Act, allowing the appeal of the assessee. The order was pronounced in the open court on 28.09.2016.