PASWARA IMPEX LTD,NEW DELHI vs. DCIT, CIRCLE-2, MEERUT

The instant appeal preferred by the assessee is directed against the order dated 08.12.2022 passed by the Ld. National Faceless Appeal Centre (NFAC), Delhi, arising out of the Assessment Order dated 29.12.2017, passed by DCIT, Circle-2, Meerut, under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the Assessment Year 2015-16.

2. The appellant has raised following grounds:

“1.1 That the Ld. A.O. has erred in Law and facts by adding Rs.2 Cr. a notional income on the basis of book entry in the hands of the assessee under section 68 of the Income Tax Act, 1961.

1.2 That the Ld. A.O. has not appreciated the correct facts of the case and has erred in law and facts that only a real income can be taxed and not a notional income.

1.3 That the Ld.A.O. has wrongly narrated or trying to treat different circumstances to the assessee facts of the case.

2. That the Ld. A.O. has erred in Law and facts of the case is not considering the various details, pleadings and written submissions made from time to time during the course of assessment proceedings.

3. That the Interest charges under section 234A, 234B, 234C, 234Dof the Income Tax Act, 1961 by the Ld Assessing Officer is very excessive and not tenable, unjustified and ought to be deleted.

4. That the demand of Rs.87, 82,930/- created pursuant to this assessment, which is a disputed demand, be kindly stayed till the disposal of appeal.

5. That the several observation as made and inference as drawn are untenable, incorrect, unwarranted and uncalled for.

6. That the appellant may take any other Ground or Grounds at the time of hearing of Appeal with the kind permission of the Learned Commissioner of Income Tax - Appeals, Meerut.

3. Statement of fact:

3. The assessee has received a loan of Rs.2 crores from M/s Nishyam Hotells Pvt. Ltd. which has treated as unexplained cash credit and added back to income under Section 68 of the Act.

1. That on 30th March 2015, the assessee has received a cheque of Rs.2 Crore from Nishyam Hotels Pvt. Ltd. which was booked in the assessee books of account by following proper mercantile system of accounts.

2. That this cheque was not encashed and the entry was reversed on 2.4.2015.

3. That this is not a real income and the Ld. A.O. has added this notional income in the hands of the assessee.

4. Accordingly the addition may be deleted.

4. Decision; The Assessing Officer in the assessment order stated inter-alia:

Assessee is engaged in trading of Petroleum Products. Books of accounts of the assessee is liable to be audited u/s 44AB. Audit report and other documents filed be the a. assessee are placed on record.

During the assessment proceedings it was noticed that the assessee has received unsecured loans to the tune of Rs.3,61,95,000/- from four persons. The details of unsecured loans received during the year is reproduced below :-

Sr. NO. NAME AY Unsecured loan 1. Shri Arvind Kumar 2015-16 68,35,000 2 Shri vinod Kumar 2015-16 34,20,000 3 Shri Kapil Kumar 2015-16 59,40,000 4 Ms/ Nishyam Hotels 2015-16 2,00,00,000 Pvt. Ltd.

The three individuals in above table are the family member of Paswara Group and they are the directors of different companies of Paswara Group. The assessee was required to submitted the documents such as /TR, Bank Statement etc. of the persons from whom the assessee has taken unsecured loans so that the genuineness and creditworthy of these entities can be examined and verified.The assessee through reply dated 18.08.2017 submitted the details of the persons from whom assessee accepted unsecured loans.

On perusal of the documents submitted it was noticed that there was huge cash deposit in the bank accounts of the individuals who provided unsecured loans to the assessee. Therefore the assessee was required to explain the source of these cash deposit. In reply, the assessee submitted that these cash deposit are out of the agriculture income of the family members of the Paswara Group.

In support of his claim, the assessee submitted that this agriculture income is regularly being declared in the income tax return of these persons and also submitted some documents such as land holding details, expenditure details and assessment orders of different previous years in which the agriculture income of the assessee was assessed and accepted by the department. Therefore, assessee submitted that on this issue no adverse inference may be drawn.

To further examine the unsecured loan taken by the assessee from M/s Nishyam Hotels Pvt. Ltd. The audit report, bank statement and ITR of M/s Nishyam Hotels Pvt. Ltd was perused. On perusal of the same it was found that M/s Nishyam Hotels Pvt. Ltd has filed an ITR of Rs. 14,036/- only, So the creditworthiness M/s Vishyam Hotels Pvt. Ltd remained unsatisfactory. Assessee was required to file confirmation from lenders but no confirmation in respect of Mis Nishyam Hotels Pvt. Ltd. was filed by the assessee Further, assessee submitted that cheque received from M/s Nishyam Hotels Pyti Ltd. On account of unsecured was not encashed and the same was returned and reverse entries was Later vide order sheet entry dated 18.12.2017, the assessee was required to submit the bank statement of M/s Nishyam hotels. The assessee has submitted the bank statement on 19.12.2017. On Perusal of the Bank statement it was found that the available balance in the account was only Rs.38,948,66. on the date of issue of cheque amounting to Rs- 2,90,00,000/- on account of unsecured loan to the assessee, therefore, he was not creditworthy to provide the loan to the assessee.

Bank reconciliation statement of the assessee was also examined. In the copy of bank reconciliation statement filed, the assessee had categorized the above mentioned cheque in the company books as "cheque deposited in bank but not yet cleared". Therefore, if the cheque had been presented then there was no reason why they would not have been cleared in the bank account of the assessee.

The net effect of this "adjustment entries" as they been terms by the assessee, is to increase the liability of the assessee company by Rs,2,00,00,000/-. Despite the fact that the money actually not came into the account of the company, the entry has been passed with a view to make certain adjustments in the balance sheet of the assessee company with certain other entries which have been made, such as advance to suppliers.

Thereafter, assessee vide order sheet entry dated 20.12.2017 was given a show cause as to why unsecured loan received from M/s Nishyam Hotels Pvt. Ltd. should not treated as cash credit in his books and added back to the income of the assessee u/s 68 of the Act.

In response, assessee submitted his reply vide submission dated 26.12.2017. Salient points of the submission of the assessee are summarized as under:-

Your honour will find that the assessee has neither increase any liability nor hidden any fact and strictly followed the mercantile system of double entry which is mandatory to follow for the assessee and it does not harm any revenue not disclosure in accounting principle.

There is no possibility of any other entry in this regard nor your goodself can suggest any different way to record this entry in the books of accounts under mercantile system of accounting.

As far as the case of M/s Vimal Organics Ltd is concerned, the acts of the case are very much, different from the facts of the assessee's case. • In this case, assessee has filed an appeal before the Hon'ble Supreme Court and the decision of which is pending • The entries being notional involving no funds involvement cannot be regarded as unexplained cash credit and, therefore the addition as proposed by the ld. A.O. deserves to be ignored. • Only real income and not notional income can be taxed. • Assessee also placed reliance upon authorities various Judgements of higher judicial Submission of the assessee has been examined in detail but found devoid of merit and not convincing. In this case, assessee has not disputed receipt of cheque for Rs.2,00,00,000/- from M/s Nishyam Hotels Pvt. Ltd, New Delhi and the same was duly accounted for by the assessee in his books of accounts. Further, assessee has submitted that he has proved all three ingredients of section 68 i.e. identity, genuineness of transaction and creditworthiness of the creditor.

However, on going through material available on record, it has been found though assessee has proved identity of the lender, but genuineness of transaction and creditworthiness of the lender remain doubtful as during the A.Y. 2015-16 maximum balance available with the bank account of M/s Nishyam Hotels Pvt. Ltd. was Rs.27,59, 168/- and at the time of issuance of cheque to the assessee, the balance was Rs.38,948/- only. Thus, on the date of issue of cheque, M/s Nishyam Hotels Pvt. Ltd. had no capacity to advance loan to the assessee. Hence, genuineness of transaction and creditworthiness of lender i.e. M/s Nishyam Hotels Pvt. Ltd., New Delhi was not proved to the satisfaction of the undersigned.

The assessee has also tried to prove the creditworthiness of the creditor by furnishing the copy of valuation report dated 24.12.2017 in respect of a commercial building owned by the creditor. However, it does not prove the creditworthiness as it is just afterthought and there was no sufficient liquid money with the creditor at or around the time of issuing the cheque to the assessee.

Further, assessee contented that the provisions of section 68 are not applicable to the assessee case since there is no other entry in the mercantile system of accounting are is no increase of any kind of fake liability in the books by the assess. The provisions of section 68 of the Act will not be attracted to the assessee's case, is not acceptable as section 68 uses the term "sum is found credited in the books of accounts of the assessee". It does not make any distinction between any cas sh transaction between any cash or cheque transaction.

The sum found credited in the books of accounts of the assessee includes within its fold, the entry either by way cash or by cheque irrespective of the encashment of the cheque. In the instant case, entry of unsecured loan from M/s Nishyam Hotelts Pvt. Ltd. for amounting to Rs. 2,00,00,000/-has found in books of accounts of the assessee.

In the case of M/s Virnal Organics Ltd. Vs CIT, Ghaziabad (2017) 82 taxrnann.com 427, substantial question of arises before Hon'ble High Court of Judicature at Allahabad was as under- "When cheques received by the assessee admittedly were not presented for collection in Bank, can it be said that amount mentioned in the cheques is found credited in the books of assessee attracting section 68 of IT Act, 1961."

In this case, Hon'ble Jurisdictional High Court, Allahabad after taking into consideration and discussing the judgement of Hon'ble Supreme Court in the case of CIT vs Excel Industries Ltd. (2013) 358 ITR 295 (SC) regarding taxation of hypothetical income holding that "the decision of the Supreme Court in the case of C/T vs Excel Industries Ltd. (2013) 358 /TR 295 (SC) is of no help to the assessee inasmuch as the question of law referred therein was totally in a different context and was distinct from the legal question involved here in this appeal and held that "section 68 applicable cheques received by assessee from various creditors were not presented for collection in banks, still amount mentioned in those cheques were found credited in assessee's books of accounts.

After following judicial discipline and taking into consideration, material available on record, discussion held with the AR of the assessee and after following judgement of Hon'ble High Court, Allahabad in the case of M/s Vimal Organics Ltd. vs CIT, Ghaziabad (2017) 82 taxmann.com 427, I am constrained to hold that assessee remain failed in provina the genuineness of transaction and creditworthiness of the lender i.e. M/s Nishyam Hotelts Pvt. Ltd. Accordingly, Rs.2,00,00,000/- received from M/s Nishyam Hotelts Pvt. Ltd. is hereby treated as unexplained cash credit in the books of accounts of the assessee and added back to the income of the assessee u/s 68 of the Act.

Section 68 of the Act reads as under:-

"Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income- tax as the income of the assessee of that previous year.

[Provided that] where the assessee is a company (not being a company in which the public are substantially interested), an and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:"

The aforesaid provision lays-down that where sum is credited in the books of accounts and the assessee fails to offer a satisfactory explanation regarding the said entries, the sum so credited may be charged to income tax as the income of the assessee. Therefore, for applying Section 68 of the Act for treating the sum credited in the books of accounts to be income of the assessee chargeable to tax, two conditions are necessary to be satisfied:

1. There has to be an entry credited in the books of accounts of the assesseee, and 2. Secondly, either there is no explanation regarding the said entries by the assessee or the explanation, if any, is not found to be satisfactory by the Assessing Officer.

In the case at hand, there is no dispute that the assessee had received cheque for a sum of Rs.2,00,000/- and entries in this regard were made in his books of accounts having received the said amount by way of unsecured loans. The assessee has also offered an explanation regarding the above entries but the explanation was not round to be satisfactory by the Assessing Assessing Officer.

In this case, Identity of the loan creditor has been furnished however the other two aspects- genuineness and creditworthiness has not been proved to the satisfaction of the AO as under:

3. In the copy of bank reconciliation statement filed, the assessee had categorized the above mentioned cheque in the company books as "cheque deposited in bank but not yet cleared.

In the course of appellate proceedings also, the appellant has not been able to controvert the findings of the AO. The appellant has merely proved the Identity of the loan creditor. With regard to the genuineness and creditworthiness of the creditor it has not been established with supporting evidences as to:

1. Necessity for taking loan from M /s Nishyam Hotels Pvt. Ltd.

2. The balance available with M/s Nishyam Hotels Pvt. Ltd.was at the time of issuance of cheque to the appellant was only Rs.38,948/-. Thus, on the date of issue of cheque, M/s Nishyam Hotels Pvt. Ltd. had no capacity to advance loan to the assessee.

5. The ld. CIT(A) has further highlighted:

Reference is invited to the decision of the High Court of Allahabad in the case of Vimal Organics Ltd. v. Commissioner of Income-tax, Ghaziabad [2017] 82 taxmann.com 427 (Allahabad) wherein it has been held that: Section 68 of the Act reads as under :-

"Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfaction tax as the income of the assessee of that previous year:

Provided that where the assessee is a company (not being a company in which the public are substantially interested)rand the sum so credited consists of share application money, share capital share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- a. the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and b. such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of Section 10.”

7. The submission is that the entry of credit in the books of accounts may be relevant only when there is a cash transaction and not where the payment is through the cheques unless the cheques are cleared and encashed 8. Section 68 of the Act is clear enough as it uses the term "sum is found credited in the in the books of account of the assessee. It does not make any distinction accounts of the assessee includes within its fold, the entry either by way of cash or by cheque irrespective of the encashment of the cheques.

6. There has been no representation by the assessee before us, neither any adjournment application was filed. The water tight order of the CIT(A) confirming the addition is upheld. Since he has elaborately discussed the issue in thread bare details and no infirmity can be ascribed thereto Appeal of the assessee is dismissed.