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Income Tax Appellate Tribunal, Mumbai “SMC” Bench, Mumbai.
Before: Shri B.R. Baskaran (AM) & Shri Narender Kumar Choudhry (JM)
Both the appeals filed by the assessee are directed against the orders passed by the learned CIT(A), National Faceless Appeal Centre, Delhi and they relate to A.Y. 2013-14 & 2014-15. Both the appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience.
In both the years, the assessee is contesting the disallowance of interest expenditure and addition made under section 14A of the I.T. Act. In A.Y. 2013-14, the assessee is also contesting addition of Rs. 20 lakhs made under section 68 of the Act.
The facts relating to the case are stated in brief. The assessee is engaged in the business of manufacturing of pencils, pens and stationary products. The Department carried out search and seizure action under section 132 of 2 IWI Stationary Pvt. Ltd.
the Act in the hands of the Shri Vipul Vidur Bhat and his group concerns. During the course of search, it was noticed that the Shri Vipul Vidur Bhat and his associate concerns are providing bogus accommodation entries in the form of unsecured loans to various beneficiaries for commission. It was noticed that the assessee has obtained unsecured loan of Rs. 20 lakhs from M/s. Shyam Alcohol & Chemicals Ltd., a company controlled by Vipul Vidur Bhat. Hence, the Assessing Officer reopened the assessment of AY 2013-14 and 2014-15 by issuing notice under section 148 of the Act.
We shall take up the appeal filed by the assessee for AY 2013-14. The assessee filed its return of income for this year declaring a total loss of Rs.13.89 lakhs and the same was processed under section 143(1) of the Act. In this year, the assessee has taken loan of Rs.20.00 lakhs from M/s. Shyam Alcohol & Chemicals Limited (referred above). In the re-opened assessment, the Assessing Officer asked the assessee to prove the loan taken by it from the above said company. The assessee furnished documents relating to the above said company, viz., copy of return of income, annual accounts, copy of bank statement, ledger account copy of the assessee in books of above said company, which was confirmed by it. The Assessing Officer, however, did not accept various documents furnished by the assessee on the reasoning that Mr. Vipul Vidur Bhat has admitted on oath that he and his group of companies were providing only accommodation entries. Accordingly the Assessing Officer treated the loan of Rs. 20 lakhs received by the assessee from M/s. Shyam Alcohol & Chemicals Ltd. as unexplained cash credit and accordingly assessed the same under section 68 of the Act. Consequent thereto, the Assessing Officer also disallowed interest expenditure of Rs.1,78,082/- claimed on the above said loan.
The Assessing Officer further noticed that the assessee has received dividend income of Rs. 10,000/- in the year relevant to AY 2013-14 and claimed the same as exempt. He noticed that the assessee worked out the 3 IWI Stationary Pvt. Ltd.
disallowance under section 14A at Rs. 10,000/-. The Assessing Officer took the view that the disallowance should have been computed as per the provisions of rule 8D of the Income tax rules. Accordingly, the Assessing Officer computed the disallowance as per rule 8D at Rs. 36,025/- and disallowed the balance amount of Rs. 26,025/-. All the three additions were confirmed by the learned CIT(A) and hence the assessee filed this appeal before the Tribunal.
The first issue relates to the addition of Rs.20.00 lakhs relating to unsecured loan taken by the assessee from M/s. Shyam Alcohol & Chemicals Limited treating the same as unexplained cash credit u/s 68 of the Act.
We heard rival contentions on this issue and perused the record. In the instant case, the loan taken by the assessee has been added u/s 68 of the Act. Sec. 68 enables assessment of such types of cash credits, if the assessee fails to prove the nature and source of cash credits. “Nature of cash credit” would mean that the assessee is required to show that it is not of revenue nature. In order to prove the source, the assessee should discharge initial burden to prove the cash credits placed upon his shoulders of the assessee u/s 68 of the Act, i.e., the assessee is required to prove three main ingredients, viz., the identity of the creditor, the genuineness of the transactions and the credit worthiness of the creditor. If the assessee discharges the initial burden, then the burden would shift to the shoulders of the assessing officer, i.e., it is the responsibility of the AO to disprove the claim of the assessee by bringing evidences on record.
We shall now examine the facts prevailing in the instant case. It is noticed that it is not the case of the AO that the assessee did not discharge the initial burden placed upon it with regard to the loan taken by it. We notice that the assessee has furnished all the details relating to the loan in order to discharge the burden placed upon it u/s 68 of the Act. However, the 4 IWI Stationary Pvt. Ltd.
AO has refused to accept those details, only for the reason that the above said company has been categorized by the investigation wing as accommodation entry provider.
We noticed from the record that the assessee has filed following documents in order to discharge the burden placed upon it under section 68 of the Act :- a) Annual audited account of lender company. b) Bank statements showing receipt of money. c) Copy of income tax return filed by lender company.
d) Confirmation of ledger account by the lender company.
Through these documents, the assessee has proved the identity, credit worthiness and genuineness of transactions. Thus, in our view the assessee has discharged initial burden placed upon it under section 68 of the Act by furnishing above said documents.
The question as to whether the Assessing Officer could have made addition under section 68 of the Act by relying upon the statement given by an accommodation entry provider was examined by the Coordinate Bench in the case of M/s. Moraj Realty Pvt. Ltd. (ITA No.708 & 709/Mum/2019 dated 08-12-2020). It was held as under :- “17. Moreover, except for relying on the statement of VVB the Assessing Officer has not done any inquiry himself except for referring to a notice issued under section 133(6) in A.Y. 2009-10 only. The learned counsel of the assessee has challenged the very veracity of this observation. He has submitted that assessee has asked for the copy of the said notice issued under RTI Act. In response it was replied that copies thereof are not available. Hence, this shows that even the so called inquiry by the Assessing Officer was done in case of only one party for A.Y. 2009-10 and the veracity of which is itself in doubt. 18. We find ourselves in agreement with the submissions of the assessee’s counsel. We note that except for the statement of the entry operator which was also retracted the addition made by the authorities below is devoid of cogent material. In this regard we note that in similar circumstances honourable Bombay High Court in the case of CIT Vs.
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Orchid Industries Pvt. Ltd. (ITA No. 1433 of 2014 dated 5.7.2017) held as under :- “The Assessing Officer added Rs.95 lakhs as income under Section 68 of the Income Tax Act only on the ground that the parties to whom the share certificates were issued and who had paid the share money had not appeared before the Assessing Officer and the summons could not be served on the addresses given as they were not traced and in respect of some of the parties who had appeared, it was observed that just before issuance of cheques, the amount was deposited in their account. The Tribunal has considered that the Assessee has produced on record the documents to establish the genuineness of the party such as PAN of all the creditors along with the confirmation, their bank statements showing payment of share application money. It was also observed by the Tribunal that the Assessee has also produced the entire record regarding issuance of shares i.e. allotment of shares to these parties, their share application forms, allotment letters and share certificates, so also the books of account. The balance sheet and profit and loss account of these persons discloses that these persons had sufficient funds in their accounts for investing in the shares of the Assessee. In view of these voluminous documentary evidence, only because those persons had not appeared before the Assessing Officer would not negate the case of the Assessee. The judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be applicable in the facts and circumstances of the present case.”
In our view, the above said decision rendered by the co-ordinate bench supports the case of the assessee. Accordingly, following the above said decision, we hold that the addition made by the Assessing Officer under section 68 of the Act, in the facts and circumstances of the case, was not justified. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the AO to delete the addition of Rs.20.00 lakhs made under section 68 of the Act.
The next issue contested in AY 2013-14 relates to the disallowance of interest expenses of Rs.1,78,082/- paid on the loan taken from M/s Shyam Alcohol & Chemicals Ltd. The AO has disallowed interest expenses, since he had assessed the loan taken from the above said company as unexplained cash credit u/s 68 of the Act. In earlier paragraph we have held that the loan of Rs.20.00 lakhs taken by the assessee cannot be added under section 68 of 6 IWI Stationary Pvt. Ltd.
the Act. Accordingly, the disallowance of above said interest expenditure is not called for. Accordingly, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete the disallowance of Rs. 1,78,082/- made out of interest expenses.
The last issue contested in AY 2013-14 relates to the addition made u/s 14A of the Act. We noticed earlier that the assessee had earned exempt income of Rs.10,000/- and accordingly computed disallowance u/s 14A @ Rs.10,000/-, i.e., equivalent to the exempt income. We notice that the Hon’ble Bombay High Court has held in the case of Nirved Traders (P) Ltd (ITA No.149 of 2017 dated 23-04-2019) has held that the disallowance u/s 14A cannot be more than the exempt income. Since disallowance made by the assessee is equivalent to the exempt income, we are of the view that the AO was not justified in enhancing the said disallowance. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to the amount of exempt income.
We shall now take up the appeal filed for A.Y. 2014-15. In this year, the assessee is contesting the disallowance of interest expenditure of Rs.2,02,678/- on the loan taken from M/s. Shyam Alcohol & Chemicals Limited and the disallowance made u/s 14A of the Act.
The AO made interest disallowance since he had assessed the loan taken from M/s Shyam Alcohol & Chemicals Ltd, as unexplained cash credit u/s 68 of the Act. While adjudicating the appeal of the assessee for Asst. Year 2013-14 in earlier paragraphs, we have held that the loan of Rs.20.00 lakhs taken by the assessee cannot be added under section 68 of the Act. Accordingly, the disallowance of above said interest expenditure is not called for. Accordingly, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to delete the disallowance of Rs.2,02,678/- made out of interest expenses.
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Next issue relates to the disallowance made under section 14A of the Act. In this year also, the assessee has received dividend income of Rs.10,000/- and it disallowed the very same amount of Rs. 14A of the Act. As done in the last year, the Assessing Officer computed the disallowance under rule 8D at Rs. 33,219/-. Accordingly he disallowed the difference amount of Rs. 23,219/-. We notice that the Hon’ble Bombay High Court has held in the case of Nirved Traders (P) Ltd (ITA No.149 of 2017 dated 23-04- 2019) has held that the disallowance u/s 14A cannot be more than the exempt income. Since disallowance made by the assessee is equivalent to the exempt income, we are of the view that the AO was not justified in enhancing the said disallowance. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to the amount of exempt income.
The assessee has raised a legal issue challenging the validity of reopening of the assessment in both the years. Since we have granted relief to the assessee on merits, the legal contention raised by the assessee shall become academic in nature. Accordingly we do not find it necessary to address the same and leave it open.
In the result, both the appeals filed by the assessee are allowed.
Pronounced in the open court on 20.7.2023.