JASPALSINGH PREHLADSINGH CHANDOCK,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX- CC 1(2)(1), MUMBAI

The dispute in the present appeal is confined to addition of Rs.5,67,82,752/- under section 68 of the Income Tax Act, 1961 (in short, ‘the Act’).

Briefly the facts are, the assessee is a resident individual. For the assessment year under dispute, assessee filed his return of income declaring income of Rs.1,36,59,470/-. The return of income so filed was selected for scrutiny for the following reasons:

In course of assessment proceedings, the Assessing Officer noted that in the year under consideration, the assessee had availed the following unsecured loan:

Noticing the above, the Assessing Officer, along with notice issued under section 142(1) of the Act, issued a questionnaire calling upon the assessee to furnish various details to prove the genuineness of the loan transaction. In response to the queries raised, the assessee furnished detailed submission along with supporting documentary evidences to prove loan transactions.

After considering the submissions of the assessee in the context of facts and materials on record, he was of the view that the Assessing Officer accepted the loan transaction of Rs.9,50,000/- being unsecured loan availed from Balu Forge Private Limited. However, the other two loan transactions aggregating to Rs.5,67,82,752/- were not accepted by the Assessing Officer. He held that the assessee failed to establish the creditworthiness of the creditors and genuineness of the transactions. Accordingly, he treated the said loan amount as unexplained cash credit under section 68 of the Act and added back to the income of the assessee. The assessee contested the addition before learned first appellate authority. In course of proceedings before learned first appellate authority, not only the assessee furnished evidence to prove the loan transactions but also made detailed submission.

After considering the submissions of the assessee in the context of facts and materials on record, the first appellate authority, insofar as unsecured loan availed from Nitan Chhatwal, observed that in response to the notice under section 133(6) of the Act, the said lender had not only confirmed the loan transaction but furnished all requisite documentary evidence to establish his creditworthiness. Thus, based on the supporting evidence, the first appellate authority concluded that the creditworthiness of the lender stands established, there cannot be any question regarding the genuineness of the transaction. Accordingly, he deleted the addition of Rs.6,70,00,000/-.

Insofar as unsecured loan of Rs.5,67,82,752/- from Hotel Imperial Palace, the first appellate authority found deficiencies in the documentary evidence furnished by the assessee. Thus, he upheld the addition of Rs.5,67,81,752/-.

Before us, learned Authorized Representative of the assessee submitted that Hotel Imperial Palace is a partnership firm wherein the assessee is a partner. He submitted, essentially, the partnership firm has not advanced any loan. The assessee had withdrawn from its capital account. Proceeding further, he submitted that amount shown as loan availed by the assessee are various expenses incurred for and on behalf of the assessee and debited to his capital account. He submitted, in course of proceedings before the Departmental Authorities, the assessee had furnished all supporting documentary evidences to prove the transaction. He submitted, even the partnership firm i.e. Hotel Imperial Palace, has furnished a confirmation before the Assessing Officer explaining the source. Thus, he submitted, the addition made was totally unjustified.

Strongly relying upon the observations of the Assessing Officer and first appellate authority, learned Departmental Representative submitted, the assessee had a negative opening capital balance in the firm. Therefore, there is no justification for granting of further loan. He submitted, there are inconsistencies between the source explained by the assessee and the lender. Therefore, the loan cannot be accepted as genuine.

We have considered rival submissions and perused the material on record. Undisputedly, the alleged loan of Rs.5,67,81,752/- is a transaction between assessee and Hotel Imperial Palace a partnership firm, wherein the assessee is a partner. On perusal of confirmation of accounts issued by the partnership firm, it is to be noted that as on 31st March, 2023, there was negative capital balance of Rs.68,73,77,410/- in assessee’s capital account in the books of Hotel Imperial Palace. During the current financial year, various expenses aggregating to Rs.5,67,82,752/- has further been debited to the capital account of the assessee in the books of Hotel Imperial Palace. Thus, as is evident from the audited financial statements placed in the paper book. In course of proceedings before the Departmental Authorities, the assessee had furnished various documentary evidences relating to transactions between the assessee and the partnership firm, M/s Hotel Imperial Palace. In fact, in course of proceedings before the departmental authorities, M/s Hotel Imperial Palace made a submission, along with supporting evidence such as account of statement, acknowledgement of return of income, financial statements, loan confirmation certificate, etc. to emphasize that it had actually debited the amount to the capital account of the assessee from its available resources. In course of appellate proceedings, the assessee had submitted that during the year, the assessee had made capital withdrawals of Rs.1,47,36,074/-, whereas other payments aggregating to Rs.4,20,45,677/- was incurred by the partnership firm on behalf of the assessee. Alleging inconsistency between the statement of the assessee and the letter issued by Hotel Imperial Palace, the first appellate authority confirmed the addition of Rs.5,67,82,752/-.

On careful examination of facts and material on record, we did not find any such inconsistency. From stage of assessment proceedings itself, the assessee had consistently stated that the amount in dispute is nothing but withdrawals from his capital account in the firm and payment of various expenses incurred by the firm on behalf of the assessee. In the letter dated 19-03-2025 furnished by Hotel Imperial Palace before the Departmental Authorities, it has been clearly stated that the amount in dispute was given to the assessee out of tax-paid income and refund of advances given earlier to other related party, M/s Balu Forge Private Limited and Mr. Nitan Chhatwal. To establish such fact, even the bank statement of the partnership firm was furnished. On perusal of the bank statement of the partnership firm placed in the paper book, it is noticed that prior to each of the debit entries concerning assessee, there was sufficient balance in the bank account of the partnership firm.

On careful perusal of the said bank account, it cannot be said that it is assessee’s money which was ploughed back through the partnership firm. Except making general observation, the first appellate authority has not recorded any reasonable basis for discrediting the evidences furnished both by assessee and the partnership firm. Since the so-called loan transaction between the assessee and the M/s Hotel Imperial Palace is through banking channel and the bank account of M/s Hotel Imperial Palace and other documentary evidences clearly establish the creditworthiness of the partnership firm, we do not find any credible ground to sustain the addition of Rs.5,67,82,752/-, as in our view, the assessee has established not only the identity and creditworthiness of the lender but even the genuineness of the transaction. Hence, we direct the Assessing Officer to delete the addition made under section 68 of the Act.

Insofar as Departmental appeal, being ITA No.3720/MUM/2026 is concerned, the grievance of the Department is against deletion of addition of Rs.6,70,00,000/- made under section 68 of the Act, being loan availed from Mr. Nitin Chatwal. As discussed earlier, while completing the assessment, the Assessing Officer added the aforesaid amount representing loan availed from Nitin Chatwal, stating that the concerned person did not have creditworthiness to advance the loan. Whereas, learned first appellate authority reversed the decision of the Assessing Officer, stating that the documentary evidence brought on record clearly established the creditworthiness of Nitin Chatwal, the lender.

Having considered rival submissions and perused the materials on record, we find, in course of assessment proceedings, not only the assessee had furnished all supporting documentary evidence to prove the subject loan transaction, but even the lender, in response to a notice issued under section 133(6) of the Act, furnished his reply not only confirming the loan transaction but furnished all supporting evidences. The Assessing Officer has treated the loan advanced by Shri Nitin Chatwal as unexplained cash credit without pointing out any deficiency in the supporting evidences. Whereas, after proper evaluation and appreciation of evidences, learned first appellate authority has recorded a categorical finding of fact that not only the assessee had furnished supporting evidence, including the income tax return, loan confirmation, the bank statements and account statements of the lender, were filed, but the documentary evidences clearly demonstrated the creditworthiness of the lender. As observed by learned first appellate authority, the lender had following capital base in different financial year:

The aforesaid facts clearly reveal that the lender is not only a high-net worth person, but he had sufficient liquidity to advance the loan. In fact, the loan transaction was backed up by the bank statements furnished by the lender in course of proceedings before the Departmental Authorities. As observed by learned first appellate authority, the bank statement clearly demonstrated the availability of sufficient funds before grant of loan to the assessee. Since the department has failed to bring any cogent evidence to controvert the factual findings recorded by learned first appellate authority, we do not find any valid reason to interfere with the decision of learned first appellate authority. Accordingly, the ground is dismissed.

In the result, assessee’s appeal is allowed, whereas, Revenue’s appeal is dismissed.