2019 (6) TMI 1253 - AT - Income Tax

Addition of unexplained credit u/s 68 - loans was taken long before the start of any activities by assessee - assessee submitted complete details such as income tax return, Annual report , bank account, confirmation of the above lender lender has net worth of ₹ 8.18 cores as share capital and reserves and surpluses - onus of proof - applicability of 68 on charitable institution - HELD THAT - It is very strange that assessee could not produce the party for examination before ld AO, made no attempt to produce them before CIT (A), but found it convenient to make repayment of the loan by account payee cheque after passing of the assessment order but before the appeal disposed off by the ld CIT (A). The lender is a private limited company and is an artificial juridical entity; it functions through its directors. The directors whereabouts are not known, the company s address shows that it never existed at that address. Mere filing of the paper does not establish even the identity of the lender company. The depositors is a private limited company which has existed and carried out the activities therefore, its directors who are not found at the given address and further even they did not respond to the summons. The assessee could not produce them before the lower authorities and in case of some other assessee also it itself proves that the lender is nonexistent shell company. The lenders which has an asset base of ₹ 8.18 crores has earned a meager income of ₹ 37000/- and the income tax payable for Assessment Year 2009-10 is a meager sum of ₹ 108/- and ₹ 11739/- for the current year. Further this company does not have a fixed asset of single rupee. Further, the balance sheet produced before the lower authorities was also not accompanied with the schedules and the profit and loss account but a stray paper giving the list of various loans and advances etc was given . Further the bank account of the lender which is given for 9/1/2009 to 12/1/2009 to the AO does not show the name of the bank to which it pertains to similarly bank statement for repayment period was also 18/2/2010 to 05/3/2010 has the similar story to tell. The above conduct and the balance sheet of the lender clearly shows that the lender alleged to have deployed funds are non income producing funds, it does not result into any revenue to that company. The lender clearly is a paper company and nothing more than that. The lower authorities have correctly appreciated the whole transaction and confirmed the addition. In the present case the assessee failed to discharge its initial onus as cast upon it u/s 68 of the Act. The assessee was asked to produce the director which was found to be not traceable at the given address and further the assessee has also not produced the complete balance sheet. In the present case, the addition has been made correctly u/s 68 and same also applies to the AOP to whom the provisions of section 11 and 12 applies, if the impugned some was not credited to the income and expenditure account but is shown as a liability. The issue before us is also squarely covered by the Decision of Honourable Supreme court in case of Pr. CIT V NRA iron Steel Co Ltd 2019 (3) TMI 323 - SUPREME COURT and Honourable Delhi High court in Pr. CIT V v. NDR PROMOTERS PVT. LTD. 2019 (1) TMI 1089 - DELHI HIGH COURT . - appeal of the assessee is dismissed

Issues Involved:
1. Sustaining the addition of ?30 lakhs as unexplained credit under Section 68 of the Income Tax Act.
2. Failure of the CIT(A) to appreciate the evidence provided by the assessee.
3. Applicability of Section 68 to loans taken before the start of activities.
4. Applicability of Section 68 to charitable trusts and the provisions of Sections 11 and 12.

Detailed Analysis:

1. Sustaining the Addition of ?30 Lakhs as Unexplained Credit Under Section 68
The assessee, a charitable trust, filed its return of income showing nil income. During assessment, it was found that the assessee obtained an unsecured loan of ?30 lakhs from M/s Atoll Vyapaar Pvt. Ltd. The Assessing Officer (AO) found discrepancies in the lender's financials, noting heavy debits and credits in the bank account despite a low reported income. The AO also found that the lender did not exist at the provided address and could not produce its directors. Consequently, the AO added ?30 lakhs to the assessee's income under Section 68, as the assessee failed to prove the identity, creditworthiness, and genuineness of the lender.

2. Failure of the CIT(A) to Appreciate the Evidence Provided by the Assessee
The CIT(A) upheld the AO's addition, noting that the lender, M/s Atoll Vyapaar Pvt. Ltd., was a paper company with no real business activities. The CIT(A) emphasized that the lender's financials did not support the availability of funds for the loan, and the assessee failed to produce the directors for verification. The CIT(A) relied on judicial precedents that mere submission of documents like PAN and bank statements does not establish the genuineness and creditworthiness of transactions if the lender is a paper company.

3. Applicability of Section 68 to Loans Taken Before the Start of Activities
The assessee argued that the loan was taken before the start of its activities, hence Section 68 should not apply. However, the CIT(A) noted that the trust had already commenced activities, including purchasing land and constructing a building. The CIT(A) and the Tribunal referred to judicial precedents, including the Supreme Court's decision in CIT vs. Orissa Corporation Pvt. Ltd., which held that Section 68 applies even if the business has not started, as long as the sum is credited in the books of accounts.

4. Applicability of Section 68 to Charitable Trusts and the Provisions of Sections 11 and 12
The assessee contended that even if the loan is added as income under Section 68, it should be eligible for exemption under Sections 11 and 12 as it was applied for charitable purposes. However, the CIT(A) noted that the assessee was not registered under Section 12A during the relevant year, making this argument irrelevant. The Tribunal upheld this view, stating that the unexplained loans were not part of the income and expenditure account and thus could not be treated as income derived from property held for charitable purposes.

Conclusion:
The Tribunal dismissed the appeal, confirming the addition of ?30 lakhs under Section 68. The assessee failed to prove the identity, creditworthiness, and genuineness of the lender. The Tribunal also clarified that Section 68 applies irrespective of whether the business has started and that the provisions of Sections 11 and 12 do not apply as the assessee was not registered under Section 12A during the relevant year.

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