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Facts
The assessee, B D Cotton Associates (an NBFC), filed a nil return for AY 2012-13. The assessment was reopened under Sections 147/148 based on information of suspicious transactions involving the assessee and Agrawal Enterprise. The Assessing Officer added Rs. 1,30,00,000 under Section 68 as unexplained credit, treating funds received by the assessee from M/s Omrim Securities Ltd. as non-genuine, as Omrim Securities allegedly sourced funds from an 'entry provider'. The CIT(A) confirmed this addition.
Held
The Tribunal found that the reasons for reopening the assessment differed from the grounds for making the addition. It observed that the AO failed to properly investigate the documentary evidence submitted by the assessee regarding the genuineness and creditworthiness of the loan from M/s Omrim Securities Ltd., and noted that the proviso to Section 68 regarding 'source of source' was introduced later and not applicable to the relevant assessment year. Consequently, the addition made by the AO under Section 68 was deemed unsustainable.
Key Issues
Whether the reopening of assessment and subsequent addition under Section 68 were valid given the discrepancy between the reasons for reopening and the actual addition, and whether the assessee had sufficiently proved the genuineness and creditworthiness of the impugned loan transactions, considering the 'source of source' argument.
Sections Cited
68, 147, 148, 132, 250
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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM &
(Assessment Year: 2012-13) B D Cotton Associates, ITO Ward-19(1)(1), 32, Ashiana, 25, Nepean sea Road, 32, Ashiana, 25, Nepean sea Road, Vs. Mumbai-400036. Mumbai-400036. PAN: AAATB1750G Appellant) : Respondent) Assessee / Appellant by : Shri Aseem Thakkar (Virtually Present), AR : Shri Leyaqat Ali Aafaqui, Sr. DR Revenue / Respondent by 07.10.2025 Date of Hearing : : 14.10.2025 Date of Pronouncement O R D E R
Per Padmavathy S, AM:
This appeal by the assessee is against the order of the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre (NFAC), Delhi [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 30.01.2024 for Assessment Years (AY) 2012-13. The assessee raised the following grounds of appeal:
“1. That the Honourable CIT(A) had erred both in fact and law and had upheld the addition made by Ld. AO amounting to Rs. 1,30,00,000/-u/s 68 of ITA as unexplained credit without appreciating or considering the B D Cotton Associates submission and justification given by the assessee which is contrary to the law. Entire such addition is liable to be deleted.
2. Your appellant craves leave to add, alter and/or to amend all or any of the grounds before the final hearing.”
The assessee raised the following additional ground of appeal:
“1. The Ld. Comm. of Income Tax (Appeals) has erred confirming the action of the Assessing Officer in issuing notice for reopening the assessment u/s. 148 of the Act which is illegal and bad in law. Hence the same should be quashed and consequential assessment so made requires to be cancelled..
2. The Ld. Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing officer in reopening the assessment only on doubts and suspicion for making additions in case of appellant on protective basis.”
The additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds.
The assessee is an Association of persons registered as Non-banking Financial Company (NBFC) with Reserve Bank of India (RBI). The assessee filed the return of income for AY 2012-13 on 24.07.2012 declaring nil income. The assessment was reopened u/s 147 by issue of notice u/s 148 dated 30.03.2019. The reason for reopening is reproduced as under:
“2 Later, Information was received from Dy. Director of Income Tax (Investigation), Unit 1(2), Mumbai that suspicious bank transaction has been made from the bank account of M/s. B D Cotton Associates, B D Cotton Associates 3 It is found that M/s. Agrawal Enterprise (PAN: AAUHS8000C) engaged in financial services, received credits from M/s BD Cotton Associates. Details of transactions are as under: Name of the entity PAN Date of transaction Amount M/s BD Cotton AAATB1750G 12.05.2011 21,00,000 Associates 12.05.2011 55,00,000 13.05.2011 54,00,000 Total Receipts 1,30,00,000 4. M/s. B D cotton Associates has filed return of income for F.Y 2011-12 at total income of Rs, NIL/-. Thus, it is clear that it does not have creditworthiness to provide loan or advance the amount of Rs. 1,30,00,000/- during F.Y. 2011-12. In order to ascertain immediate source of payment, bank account of M/s B D Cotton Associates was examined and it is found that the amount was received from another group entity viz. M/s. Omrim Securities Ltd. M/s. B D Cotton associates has received Rs. 76,00,000/- on 12.05.2011 and Rs. 53,55,000/-on 13.05.2011 totalling to Rs. 1,29,55,000/- from M/s. Omrim Securities Ltd.
On pursuance of M/s. Omrim Securities Ltd, it is found that it does not have creditworthiness to provide loan or advance the amount of Rs. 1,30,00,000/- during F.Y. 2011-12. Further, In order to ascertain immediate source of payment, bank account of M/s. Omnm Securities Ltd. was examined and it is found that the amount was received from M/s. Jalaram Finvest Ltd, M's, Arrow Corporation and M/s. Patel Jewellers and the same was later transferred to M/s, Agrawal Enterprise through M/s, BD Cotton Associates. Amount Received from M/s. Jalaram Finvest Ltd. Are as follows: Name of the entity Date of transaction Amount 11.05.2011 15,00,000 11.05.2011 20,00,000 11.05.2011 5,00,000 12.05.2011 25,00,000 Total 65,00,000
It is clear from the above that M/s, Jalaram Finvest Ltd. has transferred Rs. 65,00,000/- to M/s. Omrim Securities Ltd. which was immediately transferred to M/s. BD Cotton Associates and thereafter to M/s. Agrawal Enterprise. Verification of other two entities i.e. M/s Arrow Corporation and M/s. Patel Jewellers is pending.
7. In view of the above, it is clear that Rs. 65,00,000/- received by M/s. Agrawal Enterprises from M/s. B D Cotton Associates is non-genuine,
8. Addition of Rs. 65,00,000/- received from M/s Jala Ram Finvest Ltd. by M/s Omrim Securities Ltd. and subsequently transferred to M/s B.D. Cotton is also non -genuine and accordingly same is required to be added in the hands of M/s, B.D. Cotton Associated for A.Y.2012-13.
9. In view of the above and by reason of the failure on the part of the assessee to disclose fully & truly all material facts necessary thereto in his return of Income, I have reason to believe that the income to the extent of Rs. 65,00,000/- chargeable to tax in the hands of the assessee has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. A notice u/s 148 r.w.s 147 of the Act, is being proposed to be issued to assess such income and also any other income chargeable to tax which has escaped assessment, which comes to my notice subsequently in the course of assessment proceedings for A.Y. 2012-13.” 5. The assessee in response filed various details of M/s Omrim Securities Ltd such as the financial statements, copy of ITR, loan confirmation, bank statements along with other details of other parties from whom assessee has borrowed funds. The assessee submitted that M/s Omrim Securities Ltd is a NBFC registered with RBI and has received money from M/s.Jalaram Finvest Ltd., in the normal course of business. The AO did not accept the submissions of the assessee and held that in the statement recorded from Shri Dahyabhai Thakkar, director of M/s Jalaram Finvest Ltd. he has admitted that he provides accommodation entries to M/s Omrim Securities Ltd. The AO further held that M/s Omrim Security Ltd. has received money from M/s Jalaram Finvest Ltd. who is used to exchange cheque in lieu of cash as an accommodation entry provider. Accordingly AO was of the view that the source as explained by the assessee for payments made to M/s. Agrawal Enterprise cannot be accepted and proceeded to add a sum of Rs. 1,30,00,000/- as addition u/s 68 treating the amount received by the assessee from M/s Omrim Security Ltd. as non-genuine. On further appeal, the CIT(A) confirmed the addition on the ground that the assessee has not provided the documentary evidences in support of the impugned transactions. The assessee is in appeal before the Tribunal against the order of the CIT(A).
B D Cotton Associates 6. The ld. AR submitted that as per the reasons recorded the assessment was reopened for the reason that M/s Agarwal Enterprises has received credit from the assessee whereas while concluding the assessment the AO made addition towards amount received by the assessee from M/s Omrim Security Ltd. Accordingly the ld. AR argued that the reopening is done for a different reason and the addition made is completely different from the reasons recorded. The ld. AR further submitted that the assessment was reopened wholly on the basis of statement recorded u/s 132 of Shri Dayabhai Thakkar, director of M/s Jalaram Finvest Ltd. who is held as alleged entry provider whereas nothing in the statement recorded affirms anything suspicious against the assessee. The ld. AR argued that there is no independent verification by the AO in this regard. The ld. AR further argued that the credits received by M/s Agarwal Enterprises are towards the loan repayment and that in the year when the loan was taken, the revenue has accepted the said loan was genuine. Therefore it was argued that the AO has reopened the assessment based on misunderstood facts and therefore the reopening is not valid. The ld. AR drew our attention to the order of the CIT(A) in the case of M/s Omrim Security Ltd. where the substantive addition made towards the loan taken from M/s Jalaram Finvest Ltd. is deleted by the CIT(A) (page 137 to 160 of PB). On merits the ld. AR submitted that the assessee is an NBFC and has a running A/c with M/s Omrim Security Ltd. and in this regard our attention was drawn to the ledger a/c in page 65 to 67 of PB. The ld. AR submitted that the assessee substantiated the loan taken from M/s Omrim Security Ltd. with all supporting evidences such as loan confirmation, bank statements reflecting the impugned transactions, financial statements of M/s Omrim Security Ltd. etc. and that the lower authorities have not considered any of these documents and have held that M/s Omrim Security Ltd. does not have creditworthiness merely based on the income declared in the return. The ld. AR also submitted that the assessee is not B D Cotton Associates obligated to explain the source of source for the year under consideration and accordingly the addition u/s 68 cannot be sustained for the reason that the loan borrowed by M/s Omrim Security Ltd. from M/s Jalaram Finvest Ltd. was alleged to be a bogus.
The ld. DR on the other hand submitted that the assessee failed to provide evidences with regard to the source for payment to M/s Agarwal Enterprise and therefore the AO had rightly reopened the assessment. The ld. DR further submitted that the assessee cannot contend the reopening for the first time before the Tribunal after participating in the proceedings before the lower authorities. The ld. DR in this regard relied on various judicial precedents. The ld. DR on the main grounds submitted that the assessee has not proved the identity, creditworthiness and genuineness of the transaction since the AO has established the chain of transactions carried out to the entry operators. The ld. DR also submitted that when the immediate source of the loan taken from M/s Omrim Security Ltd. is not properly substantiated then the AO is correct in penetrating the veil to ascertain the genuineness of the transaction. Accordingly, the ld. DR relied on the orders of the lower authorities.
We heard the parties and perused the material on record. During the assessment proceedings, the AO based on the information received with regard to the chain of transactions originating from an alleged entry provider and accordingly held the loan received by the assessee from its sister concern M/s Omrim Security Ltd. as non-genuine. In this regard it is relevant to note that the AO in the reasons recorded has stated that the credits received by M/s Agarwal Enterprise from the assessee which is found to be non-genuine for the reason that the source for such credits is the loan from M/s Omrim Security Ltd. is not B D Cotton Associates properly substantiated. The AO held that M/s Omrim Security Ltd. has borrowed from three entities namely M/s Jalaram Finvest Ltd., M/s Arrow Corporation & M/s Patel Jewellers and M/s Jalaram Finvest Ltd. is admitted by the director of the said company to be operated as the entry provider. In other words the AO has treated the loan taken by the assessee from M/s Omrim Security Ltd. as non- genuine for the reason that the lender has borrowed from another entity which is found to be an alleged entry provider i.e. source of source is not genuine. We notice from the perusal of the ledger account of M/s Omrim Security Ltd (page 65 to 67 of paper book), we notice that the assessee is having a running account with M/s Omrim Security Ltd and that the amount borrowed by the assessee from M/s Omrim Security Ltd has been repaid. The AO while making addition under section 68 has not considered these facts. As already stated the reason for treating the amount borrowed by the assessee from M/s Omrim Security Ltd as non-genuine is that M/s Omrim Security Ltd has sourced the fund from entry providers. While doing so, the AO has not recorded any findings with regard to various documentary evidences pertaining to M/s Omrim Security Ltd but has merely held that the assessee's submissions are not acceptable. The AO has however has recorded a finding that the credit worthiness of M/s Omrim Security Ltd has not been established since the income returned is not supporting the credit worthiness. In this regard we notice from the perusal of the financial statements of M/s Omrim Security Ltd that advances being a NBFC, the advances from customers have been utilised for lending money and hence the contention regarding credit worthiness is not tenable. Proviso to section 68 to explain source of source was inserted from Finance Act 2022 w.e.f. 01.04.2023 and therefore there is merit in the contention of the ld AR that the transaction between the assessee and M/s Omrim Security Ltd cannot be held as non genuine for the reason that M/s Omrim Security Ltd has sourced funds from alleged entry provider. Further, in the reasons recorded as B D Cotton Associates extracted in the earlier part of this order the AO has stated that information is received from DDIT(Inv) regarding suspicious transactions entered into by M/s.Agrawal Enterprises and since assessee being a party who made payments, there is a reason to believe that the income has escaped assessment. However, the assessee proceeded to make an addition towards the payments received by the assessee from M/s Omrim Security Ltd based on information available regarding an alleged entry provider Shri Dahyabhai Thakkar. From the perusal of the order of the AO, we notice that the amount of alleged bogus borrowing by M/s Omrim Security Ltd from M/s Jalaram Finvest Ltd is stated to be Rs.65,00,000 whereas the AO has added Rs.1,30,00,000 as addition under section 68 of the Act. Accordingly there is also merit in the argument that the reasons recorded for reopening and the ground for making the addition are different and that the addition is merely based on information without proper enquiry. In view of these discussions we are of the considered view that the addition made by the AO under section 68 is not sustainable and we direct the AO to delete the same. Accordingly the assessee succeeds the grounds raised including additional grounds.
In result, appeal of the assessee is allowed.