2024 (11) TMI 1192 - AT - Income Tax

Bogus commodity loss - transaction of purchase and sale of shares effected between the two parties as a mere accommodation entry - capital gain returned by it on the transaction of the sale of land was a mere accommodation entry which it had provided to M/s. Ardor Overseas Pvt. Ltd. - statement of the Directors relied upon - HELD THAT - Revenue s investigation has revealed the entire modus-operandi of the transactions. And the unusual facts circumstances of the purchase and sale transaction coupled with the modus-operandi revealed which is corroborated by the entire money trail revealed from and back to M/s. Ardor Overseas Pvt. Ltd. through M/s. Matrix International, seals the case of the Revenue of the impugned transactions being the mere accommodation entry for M/s. Ardor Overseas Pvt. Ltd. and M/s. Nikshal Properties Pvt. Ltd. being only a conduit therein. M/s Ardor Overseas Pvt. Ltd. has made no attempt whatsoever to negate the admission by the directors of M/s Nikshal Properties Pvt. Ltd and the other parties involved in the transaction of the same being only an accommodation entry. The admission of the transaction being accommodation entry by the directors/ parties of M/s Nikshal Properties Pvt. Ltd. coupled with the revelation of the modus operandi adopted for this accommodation entry duly corroborated, sufficiently make out a case against M/s Ardor Overseas Ltd. and the onus shifted to them to prove otherwise of the transaction not being an accommodation entry. Mere filing of documents of purchase and sale of land, without controverting the factual averments of the modus operandi of the transaction or for that matter the admission by the directors/ parties of M/s Nikshal Overseas Pvt. Ltd. of the transaction being accommodation entry, we hold, does not discharge the onus of the assessee to prove the genuineness of the transaction. We concur with the Ld.CIT(A) in the case of M/s Ardor Overseas Pvt. Ltd. holding the transaction of purchase and sale of shares effected between the two parties before us as a mere accommodation entry for the benefit of M/s Ardor Oversea Ltd. Accordingly, we confirm the order of the ld. CIT(A) in the case of M/s Ardor Overseas Pvt. Ltd. reducing the cost of land acquired by M/s. Ardor Overseas Pvt. Ltd. by Rs.35 crores and treating it cost to be Rs.8.5 crores only.. Unexplained credit addition - addition made by the AO in the hands of AOPL of loan received from M/s Matrix International treating it as unexplained credit - The reason being the case of the Revenue itself is that M/s Matrix International is only a conduit of M/s AOPL for enabling purchase of land at many times its actual price. That M/s Matrix International is a proprietary concern of the director of AOPL who has transferred funds from M/s Matrix for purchasing land at inflated price and also taken the extra money back through the same route. Money in effect, for funding the bogus purchase transaction from Nikshal Properties, moved from and to M/s Matrix International. And from Matrix International to M/s AOPL as loan. This modus operandi was found to be true. We have agreed with the Revenue on this count while adjudicating the issue of genuineness of transaction of land sold/purchased between AOPL NPPL, above. There is no doubt of the source of money coming into AOPL from M/s Matrix International being genuine. CIT(A), we hold, has rightly deleted the addition made u/s 68 of the Act in the hands of AOPL. Interest disallowance relating to interest paid on unsecured loans from M/s. Matrix International - Since the amount introduced by way of unsecured loans from M/s. Matrix International, has been held to be genuine, we have no hesitation in deleting the disallowance of interest made u/s 36(1)(iii) of the Act. Disallowance u/s 14A - The fact on record is that no exempt income was earned by the assessee. It is settled law now that where no exempt income is earned, no disallowance u/s 14A is warranted. Therefore, the deletion of disallowance of expenses u/s 14A of the Act by the ld. CIT(A) in the case of M/s Ardor Overseas Ltd. is hereby confirmed by us.

Summary

Issues Involved:

1. Genuineness of the land sale transaction between the two assessees.
2. Treatment of capital gains and commodity losses in the case of M/s. Nikshal Properties Pvt. Ltd.
3. Reduction of the cost of land in the case of M/s. Ardor Overseas Pvt. Ltd.
4. Addition under Section 68 of the Income Tax Act for unexplained credits.
5. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
6. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Genuineness of the Land Sale Transaction:

The core issue revolves around the genuineness of a land sale transaction between M/s. Nikshal Properties Pvt. Ltd. (NPPL) and M/s. Ardor Overseas Pvt. Ltd. (AOPL). NPPL claimed the transaction was a mere accommodation entry, while AOPL asserted it was genuine. The Revenue authorities had contradictory findings: NPPL's transaction was accepted as genuine, leading to capital gains tax, whereas AOPL's transaction was deemed an accommodation entry. The Tribunal found that the transaction was indeed an accommodation entry. The directors of NPPL admitted on oath that the transaction was not genuine, and the entire modus operandi of inflating the land cost was revealed. The Tribunal upheld the finding that the transaction was a mere accommodation entry for AOPL.

2. Treatment of Capital Gains and Commodity Losses (NPPL):

NPPL had claimed capital gains from the land sale, which was set off against a commodity transaction loss. The Assessing Officer (AO) disallowed the commodity loss as bogus but taxed the capital gains. The Tribunal found that since the land sale was an accommodation entry, only the commission income from the transaction should be taxed. The AO was directed to tax the commission income at 2% of the financial transactions, rejecting the capital gains tax.

3. Reduction of Cost of Land (AOPL):

The AO of AOPL reduced the cost of land from Rs. 44 crores to Rs. 8 crores, based on the accommodation entry findings. The Tribunal upheld this reduction, confirming that the land's true purchase value was Rs. 8 crores, and the inflated cost was a result of the accommodation entry.

4. Addition under Section 68 (Unexplained Credits):

The AO added Rs. 8 crores as unexplained credits under Section 68, treating loans from Matrix International as unexplained. The Tribunal found that the funds were routed through Matrix International, a conduit for AOPL's director, and the source of the funds was genuine. The Tribunal upheld the CIT(A)'s deletion of the addition under Section 68.

5. Disallowance of Interest under Section 36(1)(iii):

Interest paid on loans from Matrix International was disallowed by the AO. Since the loans were found to be genuine, the Tribunal deleted the disallowance of interest under Section 36(1)(iii).

6. Disallowance under Section 14A:

The AO disallowed expenses under Section 14A, despite no exempt income being earned. The Tribunal confirmed the CIT(A)'s deletion of this disallowance, aligning with the settled law that no disallowance is warranted if no exempt income is earned.

Conclusion:

The Tribunal's order resulted in a partial allowance of AOPL's appeal, a full allowance of NPPL's appeal, and a dismissal of the Revenue's appeal against AOPL. The Tribunal's findings emphasized the importance of substantiating transactions with genuine evidence and the necessity of aligning tax treatments with the true nature of transactions.