BAZIGAR TRADING PRIVATE LIMITED,MUMBAI vs. DCIT CC - 3(1), MUMBAI

The Department has raised the following grounds of appeal:

Ground No. 1 raised by the Revenue relates to challenging the order of the Ld. CIT(A) in deleting the addition of Rs. 5,61,65,591/- made by the AO on account of unexplained unsecured loans.

In this regard, we have heard counsel for both the parties and perused the material placed on record, the judgments cited before us, and also the orders passed by the Revenue Authorities. From the records, we noticed that during the course of assessment proceedings, the AO observed that the assessee had availed unsecured loans which had increased substantially from Rs. 9,95,38,245/- as on 31.03.2010 to Rs. 15,92,03,936/- as on 31.03.2011. Thus, the AO was of the view that the assessee was required to furnish complete details along with confirmations in respect of the loans obtained during the year under consideration.

Although the assessee submitted basic loan details, confirmations from the respective lenders were not submitted. Consequently, the AO held that the assessee failed to discharge the primary onus cast upon it of establishing the identity, creditworthiness, and genuineness of the transactions, and accordingly made the additions.

Whereas, on the contrary, the Ld. AR appearing on behalf of the assessee categorically submitted that at no stage of the assessment proceedings had the AO specifically called for loan confirmations. Thus, according to the Ld. AR, the AO adopted a shortcut method and, by violating the principles of natural justice, made the additions. It was also submitted that during the course of appellate proceedings, the assessee furnished additional evidence including confirmations, bank statements, and ITR acknowledgements of the loan creditors. Therefore, on the basis of these documents, the additions made by the AO were deleted.

We also noticed that when, for the first time, the assessee furnished additional evidence in the shape of loan confirmations, etc., the Ld. CIT(A) called for a remand report from the concerned AO. During the remand proceedings, notices under Section 133(6) of the Act were issued by the AO to the loan parties. Although the parties responded to the notices issued by the AO, the AO was of the view that the replies furnished by the respective parties were unsatisfactory and insufficient to establish the creditworthiness of certain lenders.

We noticed that the assessee had placed on record and proved all the details relating to the unsecured loans during the assessment proceedings itself. Moreover, other necessary documents in the shape of confirmations, PAN, bank statements, ITRs, etc. of the loan creditors were also filed as additional evidence under Rule 46A of the Income Tax Rules, 1962 before the Ld. CIT(A). After appreciating the documents, the Ld. CIT(A) concluded that the assessee had taken loans from eight parties and had submitted confirmations, ITRs, financial statements, and bank statements.

Although, in the remand report, the AO questioned the credibility of three lenders, namely, M/s. Straight Curve Ideas Pvt. Ltd., M/s. MKJ Entertainment Ltd., and M/s. Kanrich Security Solutions Pvt. Ltd., on account of low returned income, no adverse finding was raised in respect of Muniraj Commercial Pvt. Ltd., Bengal Exim Scrip Pvt. Ltd., Ensearch Petroleum Pvt. Ltd., and A.B. Corp Ltd.

The Ld. CIT(A), after appreciating all the required documents, also recorded a finding to the effect that low income alone cannot negate the creditworthiness of the lenders, particularly when the financial statements and bank records substantiate the transactions. Since it was found by the Ld. CIT(A) that the loans were advanced through banking channels and the same were also repaid, and interest was paid after deduction of TDS, no other evidence was found to doubt the genuineness of the said transactions.

We also found that the assessee had proved on record all the documentary evidences to show that the transactions were genuine. Since the assessee had discharged its initial onus, the AO failed to rebut the documentary evidences relied upon by the assessee, except to the extent of Rs. 35 lakhs relating to Bengal Exim Pvt. Ltd. Therefore, the other additions were rightly deleted by the Ld. CIT(A).

Before us, no new facts, circumstances, or documents have been placed on record by the Ld. DR in order to controvert or rebut the lawful findings so recorded by the Ld. CIT(A). Therefore, we see no reason to interfere with or deviate from the findings recorded by the Ld. CIT(A). Hence, we dismiss the grounds raised by the Revenue and uphold the order of the Ld. CIT(A).

Ground No. 2 raised by the Revenue relates to challenging the order of the Ld. CIT(A) in deleting the addition of Rs. 10,92,239/- made under Section 68 of the Act.

We have heard the counsels for both parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that the disallowance arising in the present case is a natural and direct consequence of the addition of Rs. 5,61,65,591/- made by the AO under Section 68 of the Act on account of unexplained unsecured loans.

We noticed that, in the instant case, the AO had observed during the assessment proceedings and through the initial inquiries carried out during the remand proceedings that the lenders, namely, M/s. Straight Curve Ideas Pvt. Ltd., M/s. MKJ Entertainment Ltd., and M/s. Kanrich Security Solutions Pvt. Ltd., had either nil or negligible income and thus lacked creditworthiness, thereby rendering the loan transactions as non-genuine. The AO relied upon the decisions in CIT vs. P. Mohanakala (2007) 291 ITR 278 (SC) and NRA Iron & Steel Pvt. Ltd. 412 ITR 161 (SC), holding that once the primary transaction is held to be unexplained, any incidental claim such as interest paid thereon must also fail.

From the records, we further noticed that the assessee had claimed interest expenditure of Rs. 29,14,385/-, and the AO disallowed Rs. 10,92,239/- on a proportionate basis corresponding to the unproved portion of the loans. Whereas, on the contrary, the assessee contended that the loans were genuine and obtained through proper banking channels, and therefore the corresponding interest expenditure was allowable under Section 36(1)(iii) of the Act. It was submitted that the interest was paid or credited to the loan creditors and TDS had also been deducted thereon.

After meticulously going through the entire facts of the present case, we find that the AO computed the disallowance based on the ratio of unproved loans to total unsecured loans. However, it was noticed that no interest was paid to M/s. Bengal Exim Scrip Pvt. Ltd., being the only lender in respect of whom the addition was sustained by the Ld. CIT(A). In respect of the remaining Rs. 5.61 crores, the loans were held to be genuine as the primary additions made under Section 68 of the Act were deleted. Thus, the consequential disallowance was found to be unwarranted and liable to be deleted. Accordingly, the same was rightly deleted by the Ld. CIT(A) by passing a well-reasoned order.

Before us, no new facts, circumstances, or documents have been placed on record by the Ld. DR in order to controvert or rebut the lawful findings recorded by the Ld. CIT(A). Therefore, we see no reason to interfere with or deviate from the findings recorded by the Ld. CIT(A).

Ground No. 3 raised by the Revenue relates to challenging the order of the Ld. CIT(A) deleting the addition of Rs. 4,97,83,000/- towards unproved sundry creditors. We have heard the counsels for both parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that the Revenue has contended that the Ld. CIT(A) erred in deleting the additions made under Section 68 of the Act on account of sundry creditors without adequately appreciating the AO’s detailed and fact-based findings recorded both in the assessment order and during the remand proceedings.

We noticed that during the assessment proceedings, the assessee was specifically asked to furnish details and confirmations of sundry creditors whose balances had increased significantly from Rs. 19.25 crores to Rs. 27.67 crores as on 31.03.2011. However, the assessee failed to submit confirmations or supporting documentation. The AO also observed that a significant portion of the sundry creditors related to loan creditors and, in the absence of confirmations, the amount was rightly brought to tax under Section 68 as unexplained cash credits.

We further noticed from the records that during the appellate proceedings, a remand report was sought. During the remand proceedings, the AO issued notices under Section 133(6) of the Act to the following creditors, namely, Alpha Delcom Pvt. Ltd., Jash Housing Pvt. Ltd., and KJV Estates Pvt. Ltd. It was noticed that while responses were received, the AO still noted that all these parties had declared nil income or incurred only nominal or no business expenditure during the year. No credible explanation or financial substance was provided to demonstrate the ability of these entities to extend such loans. It was further held that merely because the transactions were routed through banking channels, the same would not ipso facto establish the genuineness of the transactions.

It was submitted that since the creditors lacked the financial capacity to advance the stated sums and the assessee failed to discharge the burden of proving the genuineness of the transactions and the creditworthiness of the creditors, the additions ought to have been upheld by the Ld. CIT(A) and reliance is being placed upon the decision of :

After having meticulously gone through the facts of the present case, we noticed that the sundry creditors reflected in the books of accounts were genuine trade creditors and, as submitted, additional evidence including confirmations, ITRs, and financial details were submitted at the appellate stage. Since all the transactions were through regular business channels and duly recorded in the books of accounts, the Ld. CIT(A) noted that the AO had added the closing balance of sundry creditors amounting to Rs. 4,97,83,000/- comprising the following parties, namely, Hanuman Mai Tater, Alpha Delcom Pvt. Ltd., Jash Housing Pvt. Ltd., and KJV Estates Pvt. Ltd.

Since during the appellate proceedings the assessee had furnished additional evidence including confirmations, ITRs, bank statements, and audited financial statements of the creditors, these documents were duly examined by the AO during the remand proceedings. Although the AO expressed doubts over the creditworthiness of these parties due to their meagre income, the Ld. CIT(A) rightly held that returned income alone is not a determinative factor for assessing creditworthiness, as loans may also originate from accumulated savings and investments. Since the creditors in the present case were identifiable, had filed their returns, and the transactions were reflected in their financial statements and bank accounts, we are also of the view that the assessee had discharged its initial onus under Section 68 of the Act.

Once the assessee had discharged its initial onus, the onus shifted upon the Revenue to rebut the evidence placed on record by the assessee.

Before us, no new facts, circumstances, or documents have been placed on record by the Ld. DR in order to controvert or rebut the lawful findings recorded by the Ld. CIT(A). Therefore, we see no reason to interfere with or deviate from the findings recorded by the Ld. CIT(A). Hence, we dismiss the grounds raised by the Revenue and uphold the order of the Ld. CIT(A).

Ground No. 4 raised by the Revenue relates to challenging the order of the Ld. CIT(A) in restricting the disallowance made under Section 14A of the Act to the extent of exempt income earned by the assessee.

We have heard the counsel for both the parties and perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that the AO, based on a reasoned analysis of the assessee’s financial statements, observed that the assessee had made substantial investments in equity shares and mutual funds, with opening and closing balances of Rs. 53.95 crores and Rs. 55.16 crores respectively. During the year under consideration, the assessee had earned exempt dividend income of Rs. 7,13,625 and had claimed suo motu disallowance of Rs. 1,36,400 under Section 14A of the Act. It was noticed that the assessee had incurred Rs.

We noticed that the assessee had specifically submitted that it had earned exempt income of Rs. 7,13,625 and had suo motu made disallowance of Rs. 1,36,400 under Section 14A of the Act in the return of income, and that no further disallowance was warranted under Rule 8D as the disallowance could not exceed the quantum of exempt income earned during the year under consideration. Thus, after appreciating the facts and circumstances of the case and the factual position, and while relying upon judicial precedents including the decision of the Madras High Court in the case of Chettinad Logistics (95 taxmann.com 250), the Bombay High Court in Nirved Traders Pvt. Ltd., and the Delhi High Court in Cheminvest Ltd., which held that disallowance under Section 14A cannot exceed the exempt income earned, it was held that Rule 8D cannot override the scope of Section 14A, and the disallowance must have a reasonable nexus with the actual exempt income.

While acknowledging the Explanation inserted by the Finance Act, 2022, the CIT(A) noted that various courts, including the Delhi High Court in Era Infrastructure (2022) 141 taxmann.com 289 and the ITAT Mumbai in Bajaj Capital Ventures Pvt. Ltd., have held that the amendment is prospective. In light of these judgments, the CIT(A) directed that no further disallowance under Section 14A could be made beyond the amount already disallowed by the assessee and accordingly deleted the addition of Rs. 13,64,000/-. The ground was partly allowed.

Thus, in light of these judgments, the Ld. CIT(A) rightly directed that no further disallowance under Section 14A of the Act could be made beyond the amount already disallowed by the assessee and accordingly deleted the addition.

Before us, no new facts, circumstances, or documents have been placed on record by the Ld. DR in order to controvert or rebut the lawful findings recorded by the Ld. CIT(A). Therefore, we see no reason to interfere with or deviate from the findings recorded by the Ld. CIT(A). Hence, we dismiss the grounds raised by the Revenue and uphold the order of the Ld. CIT(A) on these grounds.

The solitary ground raised by the assessee relates to challenging the order of the Ld. CIT(A) in upholding the addition made by the AO of Rs. 35,00,000/- under Section 68 of the Act.

We have heard the counsel for both the parties and perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. From the records, we noticed that during the appellate proceedings as well as the assessment proceedings, it was specifically brought to the notice of the Authorities that Bengal Exim Scrip Pvt. Ltd. was under liquidation and that its books and records were in the custody and control of the Official Liquidator, and consequently the company was not in a position to respond to the notices issued by the AO.

We notice that the assessee had placed on record all the necessary documents which were within its power and possession, including confirmation of the creditor, ledger account, PAN details, transactions reflected in the bank statements, and financial statements, thereby establishing the identity, creditworthiness, and genuineness of the transaction. Accordingly, the assessee had discharged the onus cast upon it under Section 68 of the Act, and thereafter the onus shifted upon the Department to disprove the same or bring on record any contrary material. However, neither the AO nor the Ld. CIT(A) brought anything on record to rebut the evidence furnished by the assessee.

After having gone through the orders passed by the Revenue Authorities, we find that no specific or adverse finding has been recorded against Bengal Exim Scrip Pvt. Ltd., nor has it been established that the evidence submitted by the assessee was false. Thus, in the absence of any such finding, in our view, the addition could not have been sustained merely on suspicion. We are conscious of the fact that suspicion, however strong, cannot take the place of evidence. Since, in our view, the assessee had discharged the burden cast upon it under Section 68, the addition of Rs. 35,00,000/- sustained by the Ld. CIT(A) in respect of Bengal Exim Scrip Pvt. Ltd. is unsustainable.

We further notice that the Ld. CIT(A) had granted other reliefs after due verification and examination of the evidence submitted, and the Revenue could not bring any material on record to controvert the findings of the Ld. CIT(A). Consequently, we allow the ground of appeal raised by the assessee.

In the result, appeal filed by the Department is dismissed and the appeal filed by the assessee is allowed.