ACIT-4(1)(1), MUMBAI, MUMBAI vs. BUILDING TECHNOLOGIES INDIA PVT. LTD., MUMBAI

Briefly stated, the facts borne out from the record are that the assessee company filed its return of income for the impugned assessment year on 15.10.2018 declaring Nil income after claiming current year loss of Rs.1,23,394/-. The return was processed under section 143(1) and thereafter the case was selected for complete scrutiny under CASS. During the course of assessment proceedings, notices under sections 143(2) and 142(1) were issued from time to time. While examining the balance sheet of the assessee company, the Assessing Officer observed that the assessee had shown “other long term liabilities” aggregating to Rs.15,13,75,900/- payable to various parties in relation to sale of land/project and financing of the project activities. Upon verification of the movement in these liabilities, the Assessing Officer noticed that substantial credits had been introduced during the year mainly in the names of Shri Madan Gopal Gupta, Shri Mehul Sanghvi, M/s Vijay Victory Realtors and M/s Prashanti Land Developers Pvt. Ltd. The aggregate fresh credits pertaining to these parties amounted to Rs.8,32,57,000/-.

The Assessing Officer called upon the assessee to establish the nature and source of these credits and to furnish

The Assessing Officer further observed that though the assessee had furnished confirmations and certain bank statements, the assessee had not furnished complete capital accounts and had not satisfactorily explained the source and financial capacity of the lenders to advance such substantial sums. Accordingly, after referring to the notices issued under

Aggrieved by the aforesaid addition, the assessee carried the matter before the learned CIT(A) and filed detailed written submissions along with voluminous documentary evidences. Before the learned CIT(A), the assessee explained the complete background of the transactions and submitted that the assessee company was originally engaged in an SRA redevelopment project, however, due to acute financial constraints, the erstwhile promoters/directors were unable to complete the project. In view thereof, the company was effectively taken over by Shri Madan Gupta and Shri Mehul Sanghvi, who infused funds into the company so as to revive the project and repay earlier liabilities of the previous promoters/directors, namely Shri Naman Baldawala, Smt. Rashna Baldawala, Shri Yogesh Z. Bhatena and Smt. Jasmine Z. Bhatena. It was further submitted that Shri

The assessee further submitted that complete primary documents and evidences had been furnished during assessment proceedings as well as appellate/remand proceedings. It was specifically pointed out that all necessary documents such as confirmations, PAN details, acknowledgements of return of income, audited financial statements, bank statements, capital accounts and supporting documents explaining even the source from which Shri Madan Gupta and Shri Mehul Sanghvi had arranged the funds, had been placed on record. In support of loan received from Shri Madan Gupta, the assessee furnished loan confirmation, ITR acknowledgement, bank statements, balance sheet and capital account, audited balance sheet of proprietary concern M/s Gupta Fruit Co., confirmations and ITR acknowledgements relating to M/s Shreeji Construction, Gopal Gupta HUF, Madan Gupta HUF, Ramashish Gupta HUF and Rita Gupta. Likewise, in respect of Shri Mehul Sanghvi, the assessee furnished loan confirmation, bank

The learned CIT(A), after considering the additional evidences and the circumstances prevailing during the pandemic period, admitted the additional evidences observing that the assessee was required to collect various documents such as capital accounts, confirmations and financial statements from third parties during the Covid pandemic and therefore there existed reasonable cause for inability to furnish certain documents at the assessment stage. The learned CIT(A) further observed that the additions had mainly been made because certain capital accounts and supporting documents were not available before the Assessing Officer during assessment proceedings. Accordingly, all the additional evidences and documents were forwarded to the Assessing Officer for verification and remand report.

During the remand proceedings, the Assessing Officer issued notices under section 133(6) directly to all the four

In the remand report, the Assessing Officer, however, raised certain objections primarily regarding the “source of source” and the financial availability in the hands of persons from whom the lenders themselves had arranged funds. In the case of Shri Madan Gopal Gupta, the Assessing Officer observed that although bank transactions reflecting loan payments were found, one entry of Rs.3,43,669/- mentioned in ledger confirmation did not exactly tally with the bank statement. The assessee explained in rejoinder that the amount represented demand draft payment issued directly on

Likewise, in the case of Shri Mehul Sanghvi, the Assessing Officer observed that the source of investments made by him was from various parties and the availability of funds in their hands was not substantiated. In response, the assessee reiterated that it had taken loan from Shri Mehul Sanghvi at the first level and had further furnished complete details of persons from whom Shri Mehul Sanghvi had arranged funds, including their names, addresses, PANs, ITR copies and confirmations. It was submitted that the Assessing Officer was proceeding beyond the statutory requirement by insisting upon explanation of source of source of source.

In respect of M/s Vijay Victory Realtors, the Assessing Officer verified the bank statements and noted that payments

In respect of M/s Prashanti Land Developers Pvt. Ltd., the Assessing Officer referred to the assessment order passed in the case of the said concern under section 143(3) read with

The assessee further explained before the learned CIT(A) that, on perusal of the assessment order of Prashanti Land Developers, it was found that the addition had been made mainly on account of difference in sales as per Form 26AS and on account of total credits appearing in bank account after reducing the sales figure therefrom. Thus, according to the assessee, the addition in the hands of Prashanti Land Developers did not conclusively establish that the loans

The learned CIT(A), after considering the assessment order, remand report, rejoinder filed by the assessee and all the documentary evidences placed on record, observed that the basic test under section 68 was confined to examination of identity of the creditor, genuineness of the transaction and creditworthiness of the creditor. The learned CIT(A) further observed that the proviso to section 68 applicable to share capital/share premium cases had no applicability because the impugned amounts represented loans and liabilities and not share capital or share premium. The learned CIT(A) specifically noted that the additions had primarily been made because certain documents such as capital accounts and confirmations of Prashanti Land Developers were not

The learned CIT(A) ultimately held that the assessee had duly established all the three ingredients required under section 68, namely identity of the creditors, genuineness of the transactions and creditworthiness of the creditors. It was also observed that the Assessing Officer, in substance, was attempting to examine source of source and even third level source, which travelled beyond the scope of section 68 in the facts of the present case. Accordingly, after considering the entire material placed on record, the learned CIT(A) deleted the addition of Rs.8,32,57,000/- made under section 68 of the Act.

Before us, the learned Departmental Representative strongly relied upon the assessment order and submitted that the assessee had failed to prove the actual financial capacity of the creditors at the assessment stage. He submitted that the returned income of the concerned parties was meagre as

Per contra, the learned counsel for the assessee reiterated the submissions made before the lower authorities and strongly relied upon the findings recorded by the learned CIT(A). He submitted that the present case was not a case of accommodation entries routed through unknown entities. All the parties were identifiable persons/entities who had duly responded to notices issued under section 133(6), furnished confirmations, bank statements, return acknowledgements and financial statements. He submitted that Shri Madan Gupta and Shri Mehul Sanghvi were persons who had subsequently taken over the project and became directors/shareholders of the assessee company, thereby demonstrating complete commercial nexus and business rationale behind the transactions. He further submitted that once all the primary evidences establishing identity, genuineness and creditworthiness were placed on record and independently verified by the Assessing Officer during remand proceedings, no adverse inference could be drawn merely

We have heard the rival submissions at length, perused the orders of the lower authorities and carefully gone through the entire material placed before us including the assessment order, remand report, rejoinder filed by the assessee and the documentary evidences furnished in the paper book. Upon a careful consideration of the entire conspectus of facts and the material available on record, we find that the solitary controversy involved before us relates to the addition of Rs.8,32,57,000/- made under section 68 of the Act in respect of loans/long term liabilities shown from four parties, namely Shri Madan Gopal Gupta, Shri Mehul Sanghvi, M/s Vijay Victory Realtors and M/s Prashanti Land Developers Pvt. Ltd. The case of the Revenue is essentially founded upon the premise that the assessee failed to establish the creditworthiness of the parties and source of the funds advanced by them. Whereas, the consistent stand of the assessee right from the appellate proceedings is that all the primary evidences required under law to discharge the onus cast under section 68 had duly been furnished and, in fact,

At the outset, it would be apposite to observe that the law under section 68 is now fairly well settled. The assessee is required to establish the identity of the creditor, genuineness of the transaction and creditworthiness of the creditor. Once these three ingredients are established by cogent documentary evidences, the primary onus cast upon the assessee stands discharged. Thereafter, if the Revenue seeks to dislodge such evidences, it must bring some cogent material on record to rebut the same. Suspicion, however grave, cannot substitute evidence; nor can an addition under section 68 survive merely on surmises arising from perceived inadequacy of income shown by the creditor, especially where the transactions are through banking channels and are supported by independent documentary evidences.

In the present case, we find that the identity of all the four creditors stands conclusively established from the record itself. The assessee has furnished confirmations, PAN details, acknowledgements of return of income, audited financial statements and bank statements of all the parties. Not only this, during the course of remand proceedings, notices under section 133(6) were issued independently by the Assessing Officer to all the concerned parties and each one of them

Likewise, the genuineness of the transactions also stands clearly demonstrated from the material available on record. The loans were advanced through normal banking channels and corresponding entries are duly reflected in the bank statements of the lenders as well as in the books of account of the assessee company. The ledger confirmations, bank statements and financial statements were furnished at every stage of the proceedings. In the case of Shri Madan Gopal Gupta, complete bank statements of UCO Bank were furnished reflecting the loan transactions. Even the alleged discrepancy of Rs.3,43,669/- pointed out by the Assessing Officer during remand proceedings was duly explained by the assessee by demonstrating that the payment had been made through demand draft directly on behalf of the assessee and the minor variation was merely attributable to bank charges deducted while issuing the demand draft. Similarly, in the case of Vijay Victory Realtors, the Assessing Officer himself

Coming to the issue of creditworthiness, we find that the assessee had not merely furnished confirmations and bank statements, but had gone much further and placed complete financial details and even the source from which the creditors themselves had arranged the monies. In the case of Shri Madan Gopal Gupta, the assessee furnished not only his return acknowledgement, bank statement, balance sheet and capital account, but also the audited financial statements of M/s Gupta Fruit Co. and supporting confirmations and ITR details relating to M/s Shreeji Construction, Gopal Gupta HUF, Madan Gupta HUF, Ramashish Gupta HUF and Rita Gupta, from whom Shri Madan Gupta had arranged funds. Likewise, in the case of Shri Mehul Sanghvi, the assessee furnished his financial statements, bank statements, return acknowledgements and even details of persons/entities from whom he had arranged monies, including confirmations and supporting records relating to Shreeji Construction,

The objection of the Assessing Officer throughout the remand proceedings appears to be that the assessee had not satisfactorily explained the “availability of funds” in the hands of persons from whom Shri Madan Gupta and Shri Mehul Sanghvi themselves had arranged funds. In other words, the enquiry of the Assessing Officer had travelled to the third layer or source of source of source. In our considered opinion, such an approach clearly travels beyond the legitimate scope of enquiry under section 68 in the facts of the present case. The assessee had taken loans from identified parties and had furnished all supporting evidences establishing their identity, bank trail, confirmations, financial statements and tax particulars. Once the assessee had even disclosed the immediate source from which the lenders arranged funds, the statutory burden stood fully discharged. The law does not contemplate an endless inquiry into every subsequent layer of source in the absence of any incriminating material or evidence showing that the transactions are sham or accommodation entries.

We further find considerable force in the explanation of the assessee regarding the surrounding commercial circumstances of the transactions. The assessee company was engaged in an SRA redevelopment project and the earlier promoters were unable to complete the same for want of finances. Shri Madan Gupta and Shri Mehul Sanghvi thereafter stepped in, infused funds and subsequently became directors/shareholders of the assessee company from the succeeding year onwards. Thus, the transactions are not bereft of commercial rationale or business context. The infusion of funds by persons who subsequently assumed management and ownership interest in the assessee company lends substantial credibility to the explanation of the assessee. These are not random financial entries appearing in

Insofar as the objection regarding cash deposit of Rs.9,00,000/- in the account of Vijay Victory Realtors is concerned, we find that the assessee had duly explained that the said deposit emanated from opening cash balance reflected in the audited financial statements for the earlier year. The audited balance sheet and ITR records of Vijay Victory Realtors were already on record. More importantly, the Assessing Officer has not brought any material to demonstrate that the said explanation was false or fabricated. Once the opening cash balance stood reflected in audited books and corresponding records were available before the authorities, no adverse inference could have been drawn merely because the Assessing Officer desired further explanation regarding the origin of such opening cash balance.

Similarly, in respect of M/s Prashanti Land Developers Pvt. Ltd., we find that the entire adverse inference sought to be drawn by the Revenue is based upon an assessment order passed in the case of the said concern wherein additions under section 69A were made. However, on a careful perusal of the facts brought on record, it emerges that the said assessment order was ex parte in nature and the additions

Another important facet which cannot be ignored is that despite extensive remand proceedings and independent verification through section 133(6) notices, the Assessing Officer has nowhere recorded any finding that the documents furnished by the creditors were false or fabricated. No inquiry has been brought on record to show that the monies routed through bank accounts actually belonged to the assessee itself. No material has been unearthed suggesting that the transactions were accommodation entries or that cash emanating from the coffers of the assessee had returned in the garb of loans. In the absence of any such incriminating

We also find merit in the contention of the assessee that once all the parties independently responded before the Assessing Officer and furnished their documents, including bank statements, returns and confirmations, the burden substantially shifted upon the Revenue. At that stage, if the Revenue still entertained doubts regarding the veracity of the creditors, it was incumbent upon the Assessing Officer to carry out further investigation and bring cogent adverse material on record. The addition cannot be sustained merely because the Assessing Officer was not subjectively satisfied with the magnitude of returned income vis-à-vis the amount advanced. Creditworthiness cannot be judged merely from returned income alone, particularly when capital accounts, balance sheets, withdrawals from partnership concerns, financial statements and banking records demonstrating movement of funds are already available on record.

The learned CIT(A), in our considered opinion, has appreciated the entire controversy in a correct legal perspective. He has carefully examined the assessment order, additional evidences, remand report and rejoinder of the

Thus, considering the entire factual matrix, the documentary evidences placed on record, the independent compliance made by all the creditors before the Assessing Officer during remand proceedings, the explanations furnished regarding the source of funds and the settled legal position governing section 68, we are of the considered opinion that the assessee had duly discharged the onus cast upon it under law. The Assessing Officer, instead of confining the inquiry to the legally permissible parameters, proceeded to examine successive layers of source without there being any foundational material suggesting accommodation entries or fictitious transactions. Such an approach, in the peculiar facts of the present case, cannot be sustained in law.

In view of the aforesaid discussion, factual analysis and the documentary evidences brought on record, we find

We further find that the entire edifice of the Assessing Officer’s objection ultimately revolves around probing into successive layers of source of source, which, in the facts and circumstances of the present case, travels beyond the statutory requirement contemplated under section 68 of the Act. Once the assessee had discharged the primary burden cast upon it by producing all foundational evidences establishing identity, genuineness and creditworthiness, no addition could have been sustained merely on the basis of

Accordingly, finding no infirmity in the order of the learned CIT(A), we uphold the same and dismiss the grounds raised by the Revenue. Consequently, the appeal filed by the Revenue stands dismissed.

In the result, appeal of the Revenue stands dismissed.