2017 (11) TMI 75 - AT - Income Tax

Unexplained cash credit in respect of loans - Held that - CIT(A) was not right in confirming the addition made by the Assessing Officer in respect of above said loan creditors. Therefore findings of the CIT(A) is hereby ordered to be set aside and the AO is directed to delete the above said addition of ₹ 573 lakhs in view of the foregoing discussions. Disallowance of interest expenditure relating to the above said loans - Held that - Since we have deleted the addition made u/s 68 consequently the interest expenditure claimed thereon is required to be allowed. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of interest. Accordingly, we decide issue No. 1&2 in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Inclusion of Rs. 573.00 lakhs as unexplained cash credit.
2. Disallowance of interest expenses of Rs. 38,37,603/-.

Detailed Analysis:

Issue 1: Inclusion of Rs. 573.00 lakhs as unexplained cash credit

Both appeals filed by the assessee are directed against the orders passed by the learned CIT(A)-2, Thane and they relate to A.Ys. 2010-11 & 2011-12. Since common issue is urged in both these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.

First we take up appeal numbered ITA No. 3767/Mum/2015 relating to assessment year 2010-11. The Grounds raised by the assessee read as under:-

1) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in sustaining the inclusion of a sum of Rs. 573.00 lakhs in total income by the Assessing Officer as unexplained cash credit in respect of loans from parties though all the necessary evidences and explanations and supporting were filed and if required any further supporting he should have specifically called for the same.

Brief facts of the case are that the assessee filed its return of income for A.Y. 2010-11 on 7.9.2010 declaring total income of ? 4,29,89,260/-. Thereafter the case was selected for scrutiny under CASS to “Examine taxability of income from sale of property as reported in ITS under AIR and examine the long term capital gain as regards sale consideration and indexed cost of acquisition.” In this case, survey action u/s. 133A was also carried out on 4.3.2010. Thereafter notice u/s. 143(2) dated 26.8.2011 was issued and served upon the assessee. The assessee firm is engaged in the business of builders and developers. The assessee-company had shown unsecured loan from various companies located in Kolkata, West Bengal. Therefore the commission u/s. 131(1)(d) of the I.T. Act, 1961 was sent to DDIT, Unit-III(3) of Investigation Wing of Kolkata vide letter dated 18.3.2013 to examine the genuineness and creditworthiness of those companies which have provided unsecured loan to the assessee company.

The Commissioner submitted a report dated 25.3.2013, wherein he stated that the above said companies were not found at the given address and companies were found to be jamakharchi/paper companies, which were used for providing accommodation entries in the form of share capital and loan in lieu of cash. Therefore the said loans aggregating to ? 573.00 lakhs was treated as unexplained cash credit in accordance with the provisions of section 68 of the Act and added to the income of the assessee u/s. 68 of the Act. Consequently interest paid to these companies to the tune of ? 38,37,603/- was also disallowed. Accordingly the total income of the assessee was assessed to the tune of ? 10,41,77,863/-. Thereafter the assessee filed appeal before the learned CIT(A)-2, who confirmed the order of the Assessing Officer and therefore the assessee has filed the present appeal before us.

Representative of the assessee argued that the assessee has taken unsecured loan from 12 parties totalling to ? 5.73 crores and transactions have duly been proved by the assessee by furnishing various evidences i.e. copy of loan confirmation both in the books of the companies and books of the assessee-firm, copy of bank statement of the assessee-firm, in which the assessee received loan from 12 parties and repaid the same, copy of return of income filed by these parties for A.Ys. 2010-11 & 2011-12, copy of audited financial statements of the aforesaid 12 parties for the year end on 31.3.2010 to 31.3.2011, Copy of intimation/order u/s. 143(1)/143(3) for A.Y. 2010-11 & 2011-12 of the 10 parties, out of the aforesaid 12 parties, copy of acknowledgment of filing of return of income filed for A.Ys. 2010-11 to 2015-16, copy of bank statement of 5 parties out of 12 parties from which they issued cheques in favour of the assessee and received repayment of loan etc. Therefore, it was contended that, under these circumstances, the order passed by the learned CIT(A) is not justifiable and is liable to be set aside. It is also argued that in view of the availability of PAN, copy of acknowledgment of returns, the identity of the parties is established. Since the assessee has received amounts through cheques and also repaid the amounts through cheques, the genuineness of the transactions also established. Further the assessee has also filed confirmation letters in this regard. It is also argued that the assessee has submitted audited accounts for the year ended on 31.3.2010 for all the 12 parties and a perusal of the same would show that they were possessing huge share capital and reserves & surplus amount. Therefore the creditworthiness of these parties was also established. Accordingly the Ld A.R contended that the assessee has discharged the initial burden of proof placed upon it u/s 68 of the Act and hence the Ld CIT(A) was not justified in confirming the addition. In support of these contentions, the learned AR placed reliance on the findings of Hon'ble Gujarat High Court given in the case of DCIT Vs. Rohini Builders (256 ITR 360); the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. M/s. Orchid Industries Pvt. Ltd. (ITA No. 1433 of 2014 dated 5.7.2017) and the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Orissa Corporation (159 ITR 78).

On the other hand learned Departmental Representative has refuted the said contentions and argued that the companies from whom the assessee took loans were jamakharchi/paper companies only and were providing accommodation entries and therefore unsecured loans were not properly explained and hence the same was justifiably added to the income of the assessee as per the provisions of section 68 of the Act.

We have heard the arguments of the parties and perused the record. The assessee company took unsecured loan from the above mentioned 12 companies to the tune of ? 5.73 crores. The Assessing Officer initiated inquiry and in view of the inquiry report dated 25.3.2013, companies from whom assessee took loan were reported as jamakharchi/paper companies. Hence, the Assessing Officer treated the above said loan amount as unexplained cash credit u/s. 68 of the Act and added the same to the income of the assessee. Before going further, we deem it necessary to advert report on the file, which is hereby reproduced below :-

“A commission u/s 131 (1)(d) is received from you in the case of M/s. Yash Developers, Thane to verify, the loan transactions of your assessee with Kolkata based 12 companies, who have given loan to your assessee company.

In response to the commission summons were issued to the companies in Kolkata who have given loan to assessed companies. An ITI was deputed o serve the summons but ITI in his report submitted that there a no such companies at the given address and no books of accounts are maintained over there of these companies Further from the earlier search and survey action conducted by Invest/gat/on Wing, Kolkata it is gathered that the addresses mentioned are mostly established janakharchi/paper companies addresses of Kolkata which are used for providing accommodation entry in the form of share capital and loan in 11ev of cash.

So it can be concluded from above facts that prima facie it appears that the companies who have given loan to your assessee company are jamakharchi/paper/sham companies of Kolkata and none of them are existing at their physical address as submitted in the report of ITI. The transactions are non-verifiable in this case and appear to be accommodation entry. This is for your kind perusal and necessary action.”

On perusal of the above mentioned report, we noticed that the summons were sent to these companies and no companies were found on the given address and information gathered by the official leads to a conclusion that these companies were jamakharchi/paper/sham companies. Based on this report, the claim of unsecured loan of the assessee company was rejected and the amount of ? 5.73 crores was added to the income of the assessee as unexplained cash credit u/s. 68 of the Act. Now, it is required to be seen what types of evidences were given by the assessee before the authorities in order to discharge the initial burden of proof placed upon it u/s 68 of the Act. The assessee has provided copies of loan confirmations as available both in the books of the companies and in the books of the assessee firm, which lie in Compilation-3 of the paper book. The assessee has also provided copies of bank statement of the assessee firm, wherein cheques given by the creditors were deposited and from where the repayments of the said loans were made, which also lie in Compilation-3 of the paper book. Copies of returns of income for the AYs. 2010-11 & 2011-12 of the loan creditors were also filed which lie at page No. 1497 & 1498 in connection with Echolac Vinimay Pvt. Ltd.; page No. 190 in connection with Kalimata Timber Pvt. Ltd.; page No. 209 in connection with Linkpoint Infrastructure Pvt. Ltd.; page No. 1501 in connection with Mangal Mayee Hirise Pvt. Ltd.; page No. 362 & 1404 in connection with MSV Fiscal Services P. Ltd.; page No. 1510 & 1511 in connection with Oleander Manufactures Pvt. Ltd.; page No. 1516 & 1517 in connection with Shubhrekha Vyapaar Pvt. Ltd.; page No. 1522 & 1523 in connection with Subh Suppliers Pvt. Ltd.; page No. 1528 & 1529 in connection with S.K. Stock Dealers Pvt. Ltd.; page No. 1534 & 1595 in connection with Tristar Agencies Pvt. Ltd.; page No. 1539 & 1600 in connection with Slow & Sound Electronics and page No. 1476 in connection with Klapp Vyapaar Pvt. Ltd. The assessee also filed acknowledgment of returns of income for A.Y. 2010-11 to 2015-16 of the said companies which lie in Compilation-2 of the paper book. The assessee also filed copies of the bank statements of 5 parties out of 12 parties, who issued cheques in favour of the assessee and also received repayment of loan from the assessee along with interest. The assessee has also furnished copies of annual accounts containing financial statements of the loan creditors and they are also placed in the paper book. We notice that these documents have not been considered/examined by the Assessing Officer as well as the learned CIT(A). A perusal of these documents would show that the identity of the creditors, genuineness of the transactions and the creditworthiness of the creditors have been proved by the assessee, i.e., the asses