DCIT- 27(2), MUMBAI, VASHI, NAVI MUMBAI vs. NAYAN BUILDERS, GHATKOPAR EAST, MUMBAI

O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the revenue against the order dated 11.09.2023 of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the “CIT(A)”], passed u/s 250 of the Act, wherein the addition made by the AO u/s 68 of the Act we deleted. Page | 1 Nayan Builders 2. The brief facts of the case as culled out from the proceedings of authorities below are that the assessee filed the return of income o 08.09.2018 declaring loss of Rs. 3,66,11,749/-. During the F.Y. 2017-18 relevant to A.Y. 2018-19, the assessee is a builder engaged in the business of real estate and has shown income from business or profession and income from other sources. The case was selected for limited scrutiny through CASS under faceless assessment scheme (FAS) to verify i) Income from Real Estate Business, ii) Unsecured Loans and iii) Business Expenses. Regarding the unsecured loan, assessee was asked to explain the details of unsecured loan taken/accepted and repayment made during the financial year 2017-18 with mode of loan taken, confirmation of Account, Bank statement of the person from whom loan has been taken highlighting the transaction along with copy of ITR of the person from whom loan has been taken for the assessment year 2018-19. The assessee in his reply submitted the details of loan taken and details of repayment of loan made along with confirmation of account, copy of ITR, bank statement and other documents as under:-

SI Name of Person (other) Amount Remarks No. 1 Bhavna Jitendra Dedhia 85,00,000 Same day deposit and transferred 2 Dhawani Deepak Dedhia 1,20,00,000 Same day deposit and transferred Page | 2 3 Jay Jitendra Dedhia 40,00,000 Same day deposit and transferred 4 Juhi Deepak Dedhia 1,65,00,000 Same day deposit and transferred 5 Keserben Walla B 90,00,000 Same day deposit and transferred Family 6 Chandrakant Dami Shah 38,00,000 Same day deposit and transferred 7 Jagruti Viral Shah 20,00,000 Same day deposit and transferred 8 Pushpa Chandrakant Shah 30,00,000 Same day deposit and transferred 9 Ratilal Damji Shah 1,10,00,000 Same day deposit and transferred 10 Ratilal Damji Shah HUF 23,00,000 Bank statement not available 11 Vasantlal Damji Shah 1,11,00,000 Same day deposit and transferred 12 Viral C. Shah HUF 50,00,000 Same day deposit and transferred 13 Viral Chandrakant Shah 57,50,000 Same day deposit and transferred Total 9,39,50,000

3. After analysing the correctness of each of the parties mentioned above, the Ld. AO concluded that the assessee has manipulated the amount in the creditors account and transferred the same to its own account and as such the transaction of unsecured loan amount and creditworthiness of loan creditor were not genuine. Ld. AO further found that the amount shown in the return of income of some of the parties was less than loan amount and the bank balance before transaction of loan is too less. Therefore, Ld. AO made inference that the lender has borrowed money and transferred the same in the account of the assessee through banking channel either on the same day or within few days which according to AO makes the said loan transaction as sham transaction and as such the Nayan Builders assessee has failed to show the creditworthiness of the unsecured loan given to it. Accordingly, the AO made the addition of Rs. 9,39,50,000/- and treated the same as unexplained income and the tax computed u/s 115BBE of the Act. Penalty proceedings were also initiated.

“Ground1.Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the entire Unsecured Loans ignoring the fact that the assessee failed to satisfactorily prove the creditworthiness of the lenders.

2.Whether on the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the entire Unsecured Loans ignoring the fact that the disclosed return income of the lenders do not commensurate with amount of loan given and thus, creditworthiness of lenders was not proved. Page | 4 Nayan Builders 3.The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

8. Ld. AR referred para 5.3.3 to 5.3.7 of the impugned order of Ld. CIT(A) with respect to creditworthiness of unrelated parties. Ld. AR further submitted that the finance statement of unrelated parties has been shown in page 35 of the paper book and the confirmation by creditors has been filed at pages 33 and 34 of the paper book where the financial of the each party has been clearly explained. Ld. AR further referred page 33, 38 and 39 of the paper book, showing the confirmation by the creditors and further stated that the financial statements of the parties has been filed and the same are never asked by the AO. Hence, it is submitted that the assessee in this case has satisfied all the three ingredients i.e. i) identity of the party, ii) creditworthiness of the party and iii) genuineness of the transaction. Thus, Ld. AR submitted that Ld. CIT(A) has rightly deleted the addition made by the AO. In support of his arguments, Ld. AR filed the legal paper book 1 containing pages 1 to 38 and relied various case laws as under:- i) Gaurav Triyugi Singh Vs. ITO (2020) 121 taxmann.com 86 (Bom HC)

13. Section 68 of the Act has received considerable attention of the courts. It has been held that it is necessary for an assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof would include proof of identity of the creditor, capacity of such creditor to advance the money and lastly, genuineness of the transaction. Thus, in order to establish receipt of credit in cash, as per requirement of section 68, the assessee has to explain or satisfy three conditions, namely : (i) identity of the creditor; (ii) genuineness of the transaction; and (iii) credit-worthiness of the creditor.

14. In Pr. CIT v. Veedhata Towers (P.) Ltd. [2018] 403 ITR 415 (Bom), this court has held that assessee is only required to explain the source of the credit. There is no requirement under the law to explain the source of the source. In the instant case, there is no dispute as to the identity of the creditor. There is also no dispute about the genuineness of the transaction. That apart, the creditor has explained as to how the credit was given to the assessee. Thus assessee had discharged the onus which was on him as per the requirement of section 68 of the Act. What the Assessing Officer held was that sources of the source were suspect i.e., he suspected the two sources Shri Rajendra Bahadur Singh and Smt. Sarojini Thakur of the source Smt. Savitri Thakur.

15. In view of discharge of burden by the assessee, burden shifted to the revenue; but revenue could not prove or bring any material to impeach the source of the credit. Though Mr. Walve, learned standing counsel, has pointed out that the creditor had no regular source of income to justify the advancement of the credit to the assessee, we are of the view that the assessee Page | 7 had discharged the onus which was on him to explain the three requirements, as noted above. It was not required for the assessee to explain the sources of the source. In other words, he was not required to explain the sources of the money provided by the creditor Smt. Savitri Thakur i.e. Shri Rajendra Bahadur Singh and Smt. Sarojini Thakur. ii) Adhoi Vyapar (P) Ltd. vs. ITO (2022) 134 taxmann.com 95 (Mum Trib)

6.3 On the basis of all these documentary evidences, it could be concluded that the assessee had duly discharged the onus of proving the identity of the investor entities, their respective creditworthiness and the genuineness of the transactions. One of the reasons to doubt these transactions is the observation of Ld. AO that notices issued u/s 133(6) as well as summons issued u/s 131 were not responded to by the share-applicants. However, the assessee does not have any legal power to enforce the attendance of the share-applicants. Another noteworthy point that this is the first year of operation of the assessee-company and therefore, it is difficult to presume that the assessee generated unaccounted money in the first year of operation itself and routed the same in the garb of share-application money. 6.4 On the basis of above facts, it could be concluded that the assessee had discharged the initial onus of proving these transactions in terms of the requirements of Sec.68. Therefore, the onus had shifted on Ld. AO to dislodge the assessee's documentary evidences and bring on record cogent material to establish that the assessee generated unaccounted money and routed the same through banking channels in the garb of share-application money. Unless such an investigation is shown to have been carried out, the additions would not be sustainable in law since it is trite law that no addition could be made on the basis of mere suspicion, conjectures and surmises. Nothing adverse could be Page | 8 borne out of the fact that most of the share-applicants had bank accounts in common bank/branch and the directors of corporate entities were running various other concerns. It could be seen that few of the investors belonged to common family and therefore, it would not be uncommon to operate the bank from same Bank and Branch. 6.5 We find that as per the provisions of Section 68 of the Income-tax Act, 1961, where any sum is found credited in the assessee's books and assessee offers no explanation about the nature and source thereof or the explanation furnished is found to be unsatisfactory, the sum so credited may be charged to Income-Tax as the income of the assessee of that previous year. A proviso has been inserted to the said section by Finance Act, 2012 w.e.f. 1-4-2013 to provide that where the assessee is a company and the sum so credited consists of share application money, share capital, share premium etc., the explanation furnished by the assessee shall be deemed to be not satisfactory unless the person in whose name such credit is recorded also offers an explanation about nature and source of sum so credited and such explanation is found to be satisfactory. However, this proviso is applicable only from AY 2013-14 and the same is not retrospective in nature as held by Hon'ble Bombay High Court in the case of Gagandeep Infrastructure (P.) Ltd. (supra). The said position has also been reiterated by Hon'ble Bombay High Court in its recent decision tilted as Gaurav Triyugi Singh v. ITO [2020] 121 taxmann.com 86/423 ITR 531 which also consider its earlier decision of Pr. CIT v. Veedhata Towers (P.) Ltd. [2018] 403 ITR 415 (Bom.). Therefore, the assessee was not even otherwise obligated to prove the source of source of share application money in this year. 6.6 The Hon'ble Supreme Court in the case of CIT v. Lovely Exports (P.) Ltd. [2009] 319 ITR 5, dismissing revenue's appeal, observed as under : — "2. Can the amount of share money be regarded as undisclosed income under section 68 of IT Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to Page | 9 the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.

iii) ITO vs. Sh. Balwan Singh (ITA No. 2869/Del/2019) order dated 07.08.2023.

7.1 However, in the case in hand the material evidence produced by the assessee has been duly examined by Ld. CIT(A) and there is no dispute with regard to identity of the parties, the amounts were paid by them through banking channels. They themselves did not receive any amount cash in the immediate vicinity of the transactions.

7.2 The 2022 amendment in Section 68 of the Act takes effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years. The amendment is the illustration of application of „Mischief Rule‟ in interpretation of statutes. Memorandum explaining the amendment makes it crystal clear that amendment is proposed to remove doubts created by certain judicial rulings about the onus of proof of source of source. The principle may have been there in certain judgments in favor of Revenue, but now once this amendment has specifically made applicable the principles with effect from AY 2023-24, the Bench cannot apply retrospectively.

10. On the other hand, ld. DR relied upon the observation and finding of the ld. AO and ld. CIT (A) and submitted that assessee has to prove the source from where the Directors have received the loan and should have provided the details to examine the source in their hands. Thus, this was the onus cast upon the assessee only.

11. On the perusal of the material facts brought on record it is seen that although in case of one of the Directors ld. CIT (A) had deleted the addition on the ground that Shri Karunakar Menka Shetty had declared net profit of more than Rs.6.94 Crores and he had huge funds in his balance sheet apart from loan. However, in respect of other two persons despite noting the fact that they were regular assessees showing their income and also filed balance sheets, Page | 13 statement of total income and bank statements, however, the source of loan given to the assessee company was out of source from unsecured loans shown by them, which he has confirmed. It is an admitted fact that two Directors namely, Shri Shaikh Sajid Aziz and Shri Rajesh Chintaman Wade have declared the source of the funds in the balance sheet from where they have given the loan the details of such funds. Shri Rajesh Chintaman Wade has shown unsecured loan of Rs.1,75,57,000/- apart from net profit of Rs.38.61 lakhs. In his balance sheet he has duly disclosed the loan given to the assessee company. Thus, the source of the funds has been duly explained in the balance sheet and in income tax returns filed by him. There is no requirement that onus is on the assessee to prove the source of the source that is from where Directors have taken the loan. If ld. AO had any doubt, he could have issued a notice u/s. 133(6) and asked for the details of the unsecured loans, when these persons have given the entire details of the persons alongwith documentary evidence who have provide loan to the Directors. Similarly, in the case of Shri Shaikh Sajid Aziz, he declared income from other sources of Rs.34,59,734/- and income from business and profession at Rs.3,97,702/-. He has duly disclosed the loans given to the assessee and has filed the confirmation and bank statement before the ld. AO and ld. CIT (A). One very important fact here in this case which proves the genuineness of the loan is that, these are not direct loan given to the assessee company but payment was made to various persons on behalf of the company in respect of the property to be purchased in the name of the company. These details of payments made to 169 people were filed alongwith their confirmations. Thus, it is not a case of direct loan been given to the assessee company, albeit all the Directors have made payment to various persons for the purchase of the property to start the project of the company and the company has shown this as liability in the balance sheet in the name of the Directors. Accordingly, it cannot be said that the onus cast upon the assessee has not been discharged. Once all these facts have been brought on record, then simply because these Directors have taken unsecured loan for making payments to various parties for purchase of land in the name of the Page | 14 Nayan Builders company cannot be added u/s.68 once all these documents have been furnished. Accordingly, addition made by the ld. AO and as confirmed by the ld. CIT (A) is deleted.

12. Once we have deleted the addition on merits, the validity of reopening u/s.148 is treated as academic.

9. On the other hand, Ld. DR on behalf of the revenue /appellant filed written arguments in support of his oral arguments and submitted that firstly, the assessee has failed to prove creditworthiness of the lenders u/s 68 of the Act which primarily onus lies upon the assessee and secondly, assessee has failed to establish their creditworthiness and genuineness of the transaction because the Ld. AO has observed after thorough examination of the bank statements and income tax returns (ITRs) of the lenders during the scrutiny process that there was a consistent pattern where large sums were deposited into the lender’s accounts just before the loans were advanced to the assessee and these funds were immediately transferred. Ld. AO concluded that the said pattern strongly suggests that the transactions were accommodation entries designed to introduce unaccounted money into the assessee's books. It was further submitted that Ld. CIT(A) erred in accepting the assessee's documentation (confirmation letters, PAN cards, and bank statements) without scrutinizing the substance of these transactions, Page | 15 Nayan Builders which lack commercial rationale. Ld. DR pointed out that these observations of AO were particularly in respect of 3 parties namely; i) Keserben Wall B, who had a pre-transaction bank balance of Rs. 14,10,171/- but advanced Rs. 90,00,000 after receiving a deposit from Universal Developers. ii) Chandrakant Dami Shah who had a post-transaction balance of Rs. 26,721.26 after transferring Rs. 58,09,220, with funds deposited on the same day. iii) Vasantlal Damji Shah who had a pre-transaction balance of Rs. 51,153.69/- but advanced multiple sums totalling over Rs. 2,00,00,000.

14. Section 68 of the Act has received considerable judicial attention through various pronouncements of the Courts. It is now well settled that under Section 68 of the Act, the assessee is required to prove identity of the creditor; genuineness of the transaction; and credit worthiness of the creditor. In fact, in NRA Iron & Steel (P) Ltd (supra), Supreme Court surveyed the relevant judgments and culled out the following principles:-

"11. The principles which emerge where sums of money are credited as Share Capital/Premium are : i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit- worthiness of the creditor / subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the inquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established.

In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act." Page | 20 Nayan Builders 15. It is also a settled proposition that assessee is not required to prove source of source. In fact, this position has been clarified by us in the recent decision in Gaurav Triyugi Singh Vs. Income Tax Officer-24(3)(1)2

In response to the show cause notice, the assessee submitted his online reply on 15.03.2021 (after due date) along with copy of ITR and bank statement in respect of other than family loans and ledger of expenses along with some bills/vouchers. The submission of the assessee has been verified and found not satisfactory which is mentioned in both lenders brief note in respect of family and other than family lender. Bank statement of lenders are not for complete financial year i.e 01.04.2017 to 31.03.2018 and maximum unsecured loan amount credited in their account and same day same amount transferred to the assessee account. As per bank statement and return income of the lenders submitted by the assessee they do not have the capacity to give unsecured loan in huge amount.

It transpires from the above discussions that most of the fund contributed by the lenders comes from M/s Damji shamji Realty Pvt. Ltd and Universe Developer. And in turn it goes to the assessee .Bank statement submitted by the assessee are not for the complete financial year i.e 01.04.2017 to 31.03.2018. The submission has been verified with material available on record. In view of the same the loans are treated to be a sham transaction and the garb of loan the assessee has introduced the sum of money as discussed above. Thus, the loan is treated as an un-explained income to the tune of Rs. 9,39,50,000/- . The tax to be computed U/s 115BBE of the I.T. Act 1961.