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Facts
The assessee, engaged in finance and investment, filed its return for AY 2017-18. The AO disallowed interest on unsecured loans, treating them as bogus based on a retracted statement and a Settlement Commission order. The assessee argued that the loans were genuine and interest was already disallowed for one party.
Held
The Tribunal held that the CIT(A) erred in confirming the addition. It noted that the Tribunal had previously set aside similar orders for a group concern, and the Settlement Commission had accepted some loans as genuine. The Tribunal found no justification for the disallowance.
Key Issues
Whether the disallowance of interest on unsecured loans alleged to be bogus, based on a retracted statement and a Settlement Commission order, is justified when similar additions were deleted in prior appeals?
Sections Cited
254(1), 234B, 270A, 132(4), 245D(4)
AI-generated summary — verify with the full judgment below
PER PAWAN SINGH, JUDICIAL MEMBER;
These two appeals by assessee are directed against the separate orders of ld. CIT(A) / NFAC both dated 27.11.2024 for A.Y. 2017-18 and 2018-19.
Certain facts in both the appeals are common, the assessee has raised certain common ground of appeal, therefore, with the consent of parties both the appeals were clubbed, heard together and are decided by common order to avoid the conflicting decision. For appreciation of fact, facts in A.Y. 2017-18 in is treated as lead case. The assessee has raised following grounds of appeal:
1.a) On the facts and in the circumstances of the case and in law, the id. CIT(A) erred in confirming the addition of 42,10,000/- made by the AO to the income of the Appellant by way of disallowing interest on certain unsecured loans alleged to have been bogus. b) The Id. CIT(A) erred in upholding the view of the AO that the loans on which interest expenditure has been disallowed, treating as bogus, when the same were accepted as being genuine by the Hon'ble Income Tax Settlement Commission. c) The Id. CIT(A) erred in not appreciating the fact that interest of 4,80,000/- paid to M/s. Manmohak Exports Pvt Ltd has already been disallowed by the Appellant in its return of income and as such resulted to double addition of the same item. d) In reaching to the conclusion and confirming such addition, the Id. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.
2. The Id. CIT(A) erred in holding that levy of interest u/s. 234B of the Income Tax Act, 1961 is mandatory. The Appellant denies its liability for such interest.
The Id. CIT(A) erred in holding that the ground raised disputing initiation of penalty proceedings u/s.270A is premature. The Appellant denies its liability for such penalty.”
Brief facts of the case are that assessee is engaged in the business of finance and investment filed its return of income for A.Y. 2017-18 on 26.10.2017 declaring income at Rs. 5,70,480/-. The case was selected for scrutiny. During the assessment, the assessing officer noted that a search action was carried out in case of Rajesh Lifespaces Group on 10.03.2016, the assessee is one of the group entity of Rajesh Lifespaces Group, thus, it was also covered. During search action, statement of Rajesh Patel, a key persons of the group was recorded. In the statement, he has accepted of accommodation entries of loans from various parties. The name of such loan provider was also disclosed. The assessing officer recorded that opening balance of parties was at Rs. 2.70 crores. On perusal of profit and loss account, the assessing officer recorded that assessee has claimed interest of Rs. 42,10,000/- paid on such loans. The assessing officer was of the view that said loans were bogus, therefore, the interest is not allowable on such loans. The assessing officer issued show cause notice narrating the claim of interest to Sigma Commodities Private Limited, Dotch Sales Private Limited, Adinath Diamond Private Limited and Manmohak Export Private Limited aggregating of Rs. 42,10,000/-. In response to such show cause notice, the assessee filed its reply. The contents of reply of assesse is recorded in para 3.4 of assessment order. In reply, the assessee stated that in the show cause notice, the assessing officer relied upon the statement of Rajesh Patel recorded under section 132(4) which has been retracted.
The retracted statement has no evidentiary value. It was further stated that subsequently the group has filed application before Income Tax Settlement Commission and have accepted certain loans as bogus, which has been considered by Settlement Commission. All loans have been repaid before 31.03.2016 except loans from Manmohak Exports Private Limited of Rs. 42.00 lakh on which interest of Rs. 4.80 lakh is claimed. Some other loans were decided as genuine. Their genuineness, creditworthiness and identity of such loans were proved on the basis of such submission, the Income Tax Settlement Commission accepted of such loans as genuine.
Department has not acted in defiance of the said order till date. With regard to the Manmohak Exports Private Limited, the assessee stated that the person through loan was received, has expired so corroborative evidence to prove identity, creditworthiness and genuineness could not prove before settlement commission. The loan received from Manmohak Exports Private Limited is genuine. In order to avoid the litigation loan from Manmohak Exports Private Limited was accepted as bogus and the interest claimed against such loan is disallowed in the computation of income. The assessee, thus, submitted that assessee has claimed interest expenses of Rs. 37.00 lakh and not of Rs. 42.10 lakh. The reply of assessee was not accepted by assessing officer. The assessing officer reiterated that Rajesh Patel in his statement admitted and agreed that assessee has taken unsecured loans from various persons including four parties identified by him. The contention of assessee that the statement was retracted cannot be accepted. Before settlement commission loan from Manmohak Exports Private Limited was accepted as non-genuine. Thus, the assessee is now stopped from raising such plea. The assessee failed to furnish the financial statement with details to prove the creditworthiness of all the lenders. The assessing officer held that assessee has not provided that interest expenses of Rs. 42.10 lakh have already been included in its interest and finance brokerage in the computation of income and disallowed Rs. 42,10,000/- and added back to the income of assessee.
3. Aggrieved by the additions in the assessment, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee stated similar statement of fact and submission as contended before assessing officer. The assessee in addition thereto submitted that before Settlement Commission, the assessee furnished evidence in support of genuineness of unsecured loan availed from Sigma Commodities Private Limited, Dotch Sales Private Limited, Adinath Diamond Private Limited. Affidavit of lenders confirming loan transaction, confirmation of accounts with address and PAN, bank statement. All such evidences were again furnished. It was reiterated that loan from Manmohak Exports Private Limited was accepted as non- genuine. All evidences were accepted by Income Tax Settlement Commission. Copy of order under section 245D(4) of Income Tax Settlement Commission was furnished. The assessee also relied on certain case law.
The ld. CIT(A) on considering the submission of assessee upheld the action of assessing officer. While affirming the addition in the assessment order, the ld. CIT(A) relied on the decision of ld. CIT(A) – 54, Mumbai dated 27.11.2024 in case of Rajesh Real Estate Developers Private Limited. The contents of such order of ld. CIT(A) was also extracted from page no. 12 to 30 of impugned order. The ld. CIT(A) held that there is no material difference on the interest of bogus loan in case of assessee for A.Y. 2017- 18 and in case of Rajesh Real Estate Developers for A.Y. 2017-18. Further aggrieved, the assessee has filed present appeal before Tribunal.
I have heard the submissions of learned authorised representative (ld. AR) of the assessee and the learned senior departmental representative (ld. Sr.
DR) for the revenue. The ld. AR of the assessee submits that a search action was carried out on assessee group on 10.03.2016. The group of assessee approached Income Tax Settlement Commission and settled another issue including loans taken from all four parties. The ld. AR invited our attention on the order of Income Tax Settlement Commission about various loans and the loans which were accepted as accommodation. The ld. AR further submits that surprising fact is that only interest disallowance is made and no addition on account of principle is made. In fact, the principle amount of loan in respect of 3 parties have been accepted as genuine by Income Tax Settlement Commission and in respect of four parties that is Manmohak Exports Private Limited, the assessee has already disallowed such interest expenses in its computation of income. The ld. CIT(A) followed the order of his predecessor in Rajesh Real Estate Developers dated 27.11.2024. The order of ld. CIT(A) in case of Rajesh Real Estate Developers Private Limited were challenged before Tribunal wherein of similar additions were deleted in appeal for A.Y. 2017-18 and to 503/M/2025 in order dated 30.04.2025. Once the order which is made basis for confirming the addition has been set aside, the impugned order has no leg to stand. Even on merit, the ld. AR from the order of Income Tax Settlement Commission explained all the facts about various loans received by assessee group. The assessee group received loan of 53.28 crores out of which loan to the extent of 12.98 crores was accepted as accommodation entry. The assessee has also explained nature of loans received from all three other lenders and genuineness thereof, which has been accepted by settlement commission as genuine.
On the other hand, ld. Sr. DR for the revenue supported the order of lower authorities.
I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I have also gone through the contents of order of settlement commission in case of assessee for A.Y. 2013-14 to 2016-17 dated 30.04.2019. The basis for making addition has already been recorded by us in para 2 above. I find that before ld. CIT(A), the assessee filed very details written submission and also furnished copy of order of Income Tax Settlement Commission dated 30.04.2019. I find that despite explaining all the facts, the ld. CIT(A) simply relied upon the order of his predecessor in case of Rajesh Real Estate Developers Private Limited (group concern) for A.Y. 2017-18 and upheld the order of assessing officer. I find that order of Rajesh Real Estate Developers Pvt. Ltd. has been set aside by Tribunal in to 503/M/2025 dated 30.04.2025 by passing details and reasoned order. I also find that once loans have been found genuine in earlier years there is no question of interest disallowance in the year under consideration, as far as first three lenders are concerned. For fourth lenders Manmohak Exports Private Limited, the assessee has not claimed interest expenses. Such fact was brought in the notice of ld. AO as well as ld. CIT(A), despite recording such fact, no separate or independent finding was given to disregard such fact, therefore, I do not find any justification for making addition of such interest disallowance. In the result, the grounds of appeal raised by assessee are allowed.
In the result, appeal for A.Y. 2017-18 is allowed.
ITA No. 398/M/2025 (A.Y. 2018-19)
Consider the fact that I have allowed appeal for A.Y. 2017-18, facts in appeal for A.Y. 2018-19 are common, therefore, following the principle of consistency, the appeal for A.Y. 2018-19 is also allowed with similar direction.
In the result, both the appeals of the assessee are allowed.