2022 (6) TMI 446 - AT - Income Tax

Addition u/s 68 - Assignment of loan - unsecured loans obtained - Stephen financial services private limited advanced the loan to Dunlop India Ltd. who did not repay the same but assigned to the assessee - HELD THAT - Huge unsecured loans obtained by Dunlop Limited and Falcon tyres Ltd were assigned to the companies like assessee. In case of Dunlop and falcon Tyres Limited along with Mr pavan Kumar Ruia Suneel Bhansali, S. Ravi, Damodar Dani and Mohanlal Chauhan were found to be involved in violation of securities and exchange board of India regulations along with the assessee and several other companies wherein the above assignment of loan was used for preferential issue of shares in the above two companies. The whole transactions were orchestrated by Dunlop and Falcon to violate the provisions of minimum public shareholding criteria in those companies under SEBI Laws. The assessee was used as a conduit company along with other companies to do the same. Mr Ruia and Mr Bhansali were part of the Board of Directors of Dunlop and Falcon. The complete history of transaction is also mentioned in the order of SEBI dated 24 March 2021. Over and above this, the finding of the learned CIT - A also notes in paragraph number 7.5 that Enforcement Director has also found money-laundering traces in the books of Falcon and Dunlop. Both these above companies are controlled by Mr Pawan Kumar Ruia. Therefore, amounts credited in the books of accounts of assessee lack genuineness. In view of above facts, we do not find any infirmity in the orders of the lower authorities in confirming the addition u/s 68 of the Act. Accordingly, we confirm the orders of the lower authorities.- Decided against assessee.

Summary

Issues Involved:

1. Validity and enforceability of the Deed of Assignment.
2. Genuineness of the transactions and creditworthiness of the parties involved.
3. Applicability of Section 68 of the Income-tax Act, 1961.
4. Impact of SEBI and Enforcement Directorate findings on the case.

Detailed Analysis:

1. Validity and Enforceability of the Deed of Assignment:

The appellant argued that the Deed of Assignment constituted a "contract of novation" under the Indian Contract Act, 1872. The Tribunal examined the essential features of novation, which include a previous valid obligation, agreement of all parties, extinguishment of the old contract, and validity of the new one. The Tribunal found that the Deed of Assignment lacked lawful consideration and was not enforceable due to improper stamp duty payment, making it invalid under the Indian Stamp Act, 1899.

2. Genuineness of the Transactions and Creditworthiness of the Parties Involved:

The Tribunal scrutinized the financials of Manali Properties and Finance Pvt. Ltd. and Stephen Financial Services Pvt. Ltd., concluding that both entities lacked the financial capacity to extend such large loans. Manali had a meager share capital and significant losses, while Stephen's reserves were primarily share premium with minimal business activity. The Tribunal noted that these entities appeared to be merely entry providers for unsecured loans, thus questioning the genuineness of the transactions.

3. Applicability of Section 68 of the Income-tax Act, 1961:

The Tribunal upheld the Assessing Officer's addition under Section 68, which deals with unexplained cash credits. The Tribunal found that the appellant failed to prove the nature and source of the credited amounts satisfactorily. The appellant's reliance on journal/book adjustment entries without actual cash flow did not satisfy the requirements of Section 68. The Tribunal cited relevant case laws to support its position that the sum credited in the books must be satisfactorily explained, which the appellant failed to do.

4. Impact of SEBI and Enforcement Directorate Findings on the Case:

The Tribunal considered the findings of the Securities Exchange Board of India (SEBI) and the Enforcement Directorate (ED). SEBI's investigation revealed that the appellant had negative net worth and was involved in non-genuine transactions with bogus companies. The ED found money-laundering traces in the books of Falcon Tyres Ltd. and Dunlop India Ltd., both controlled by Pawan Kumar Ruia. The Tribunal noted that these findings further supported the conclusion that the transactions were not genuine and were part of a scheme to evade taxes and manipulate financial statements.

Conclusion:

The Tribunal dismissed the appeal, confirming the additions made by the Assessing Officer under Section 68. The Tribunal found that the Deed of Assignment was invalid, the transactions were not genuine, and the appellant failed to prove the creditworthiness of the parties involved. The findings of SEBI and the ED further corroborated the Tribunal's decision, leading to the dismissal of the appeal.