THE COMMISSIONER OF INCOME TAX, AHMEDABAD - II vs. LABH LEASE & FINANCE LTD.

C/TAXAP/1243/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1243 of 2007

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE AKIL KURESHI

and HONOURABLE MR.JUSTICE B.N. KARIA

========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== THE COMMISSIONER OF INCOME TAX, AHMEDABAD - II Versus LABH LEASE & FINANCE LTD. ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 MR MANISH J SHAH(1320) for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE B.N. KARIA

Date : 10/05/2018

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Page 1 of 11

C/TAXAP/1243/2007 JUDGMENT

Following   question   of   law   was   framed   at   the   time   of admission of appeal : “Whether the Appellate Tribunal was right in law and on facts in confirming the order passed by the CIT(A) deleting the   addition   of   Rs.   7,97,888/­   made   in   respect   of discounting charges?”

This appeal and the question arising therein are offshoots of main Tax Appeal No.1242/2007 and the question arising in it. By a separate judgment, such appeal was disposed of as under : “2. Brief facts are as under : 2.1 The respondent­assessee M/s. Labh Lease & Finance Limited is a company registered under the Companies Act, 1956 and is a part of group concerns where M/s. Labh Construction   Limited   is   a   lead   company.   M/s.   Labh Construction Limited is engaged in construction related activities. During the course of assessment of the returns of the respondent­assessee for AY 1996­97, the Assessing Officer   noticed   deposit   of   a   sum   of   Rs.   1.30   Crores [rounded off] shown by way of unsecured loan from one M/s.   Miga   Gas   Private   Limited,   Bangalore   [“MGPL”   for short] and assessee had claimed an amount of Rs. 3.90 lakhs   [rounded off] as discounting charges towards the said transaction. When the Assessing Officer questioned the   assessee   about   such   deposit   in   its   accounts,   the assessee pointed out that Labh Construction Limited had purchased   2500   Gas   Cylinders   from   one   M/s.   M.M Industries,   Tamil   Nadu.   These   industrial   gas   cylinders were leased by Labh Construction to one M/s. Miga Gas Private Limited, Bangalore [for short “MGPL”]. As per the terms of the lease, MGPL had to pay monthly lease rent of Rs. 2.83 lakhs [rounded off] to Labh Construction over a span of five years of lease agreement. MGPL thus had to pay   total   Rs.   1.70   Crores   [rounded   off]   to   M/s.   Labh Construction by way  of lease rent. MGPL and assessee entered into an agreement under which MGPL paid a sum of Rs. 1.30 Crores [rounded off] to the assessee in lieu of Page 2 of 11

C/TAXAP/1243/2007 JUDGMENT the assessee taking over the liability of MGPL to pay the monthly lease rent to M/s. Labh Construction. According to the assessee, such amount was paid by MGPL through different drafts drawn on different dates. 2.2 The   Assessing   Officer   doubted   genuineness   of   the transaction   and   probed   the   issue   further.   From   the material produced by the assessee, he noticed that the gas cylinders   were   purchased   by   M/s.   Labh   Construction Limited from  M.M Industries of Madras for which, the bill of Rs. 1.53 Crores [rounded off]   for 2500 gas cylinders was raised. The delivery was shown at Madras, where no sufficient storage facility was not shown to be existing. The goods  were shown  to  have been delivered  at  a  godown situated at Hosur, which is altogether a different place. The delivery challan did not contain necessary details such as  truck   number,  address  at   which  delivery  was   to  be made, etc. The Assessing Officer therefore did not accept this element of delivery of goods at the declared address. He, therefore, inquired the issue further with the assessee, doubting   this   transaction   with   MGPL.   He   also   made inquiries   regarding   assessment   of   MGPL   from   the Assessing   Officer   of   MGPL   and   also   from   the   company itself. He noted that MGPL had not furnished copies of bank account to verify issuance of draft payments to the assessee. MGPL had also not provided audited statement of   P&L   Account   and   balance­sheet.   Even   the   query regarding delivery and use of the goods was not replied to. He, therefore, wrote in a FAX letter to MGPL on 24th March 1999 asking for certain further specific details which was not replied by MGPL. On the basis of such inquiries, he held that the entire transaction of leasing of gas cylinders to     MGPL   was   not   genuine.   He,   therefore,   discarded assessee’s version that the sum of Rs. 1.30 Crore credited in   the   account   was   received   from     MGPL   by   way   of unsecured loan. He treated such sum as the income of the assessee from undisclosed sources. Consequently, he also disallowed the claim of  assessee of discounting charges of Rs. 3,98,944/=. 3. The assessee carried the matter in appeal. Before CIT [A],   assessee   produced   further   documents   in   form   of paper­book.   Such   documents   were   sent   to   Assessing Officer for his comment. The response of the Assessing Officer   was   shared   with   the   assessee.   On   the   basis   of additional documents, the assessee contended before the Page 3 of 11

C/TAXAP/1243/2007 JUDGMENT CIT   [A]   that   the   entire   transaction   was   legitimate.   The payment   was   received   from     MGPL   for   discounting   the lease charges. Agreement between assessee and   MGPL was also produced. It was argued that the assessee had established necessary ingredients to dispel the Revenue’s objection   to   the   cash   credit.   The   genuineness   of   the transaction,  source  of  the receipt  and  credit­worthiness were   all   duly   established.   It   was   pointed   out   that necessary confirmation from MGPL was also produced. 4. CIT   [A]   noted   that   the   AO   in   response   to   the additional documents produced by the assessee, had sent a copy of the assessment order in the case of  MGPL for AY 1996­97   alongwith   copy   of   accounts,   annexures   for   AY 1996­97   and   1997­98   filed   by   MGPL   with   the   tax authorities at Bangalore. It was noted that the accounts of MGPL for AY 1996­97 disclosed loans and advances during the   year   amounting   to   Rs.17.45   lakhs   which   obviously would   not   include   the   sum   indicated   by   the   assessee, which being much larger. The CIT [A] on the basis of such materials considered the question whether the credit of Rs. 1.30   Crore   appearing   in   the   books   of   account   of   the assessee was a genuine credit. He examined this question in the context of Section 68 of the Income­tax Act, 1961. He   noted   that   though   the   assessee   had   produced documents of  MGPL confirming the transaction, when the Assessing  Officer had sought  for corroborating  evidence from MGPL, only skeleton information was supplied. The Assessing Officer had asked  MGPL to provide details such as   when   the   goods   purchased   by     Labh   Construction Limited were put to use by the assessee,  copy of delivery challan and other details showing how the cylinders were transferred from Tamil Nadu to Bangalore. Whether the amount of RS. 1.30 Crore was paid by  MGPL to assessee with supporting accounts and the details of bank cheques or   drafts   and   a   copy   of   the   bank   account   statement. MGPL   was   also   called   upon   to   supply   copy   of   audited accounts and balance sheet and to clarify whether the said sum of Rs. 1.30 Crore paid by  MGPL to the assessee was claimed as expenditure. In response to such queries, the MGPL had given a short confirmation of having taken the gas cylinders on lease and also having paid a sum of Rs. 1.30 Crore to the assessee towards discounted value of all future lease rentals payable in relation to the transaction. CIT   [A]   confirmed   the   view   of   the   Assessing   Officer Page 4 of 11

C/TAXAP/1243/2007 JUDGMENT observing that the reply of  MGPL did not reveal necessary details. In his opinion, MGPL, except for confirmation of having   paid   a   sum   of   Rs.   1.30   Crore   to   the   assessee, provided no further details. The details of bank cheques or draft through which such payment was made were not supplied. He noted that  MGPL, a corporate body claimed that three years after the end of financial year, as late as on 20th March 1999, the accounts were under completion. In the subsequent year ie., year ending 31st March 1997, which   was   relevant   to   AY   1997­98,   the   accounts   were audited   as far back as on 1st  September 1997. He was, therefore,   of   the   opinion   that     MGPL   had   purposedly withheld furnishing  copy of accounts in relation to  the assessee in its books as also bank statement. In totality of the   facts   and   circumstances,   he   concluded   that   the purported cash credit transaction was not  bona fide. By way of supporting material, he also referred to the audited accounts of  MGPL for AY 1997­98 in which there was no mention of a sum of Rs. 1.30 Crores having been given to the   assessee     ­   the   factor   which   the   counsel   for   the assessee   was   unable   to   explain.     It   was   observed   that merely establishing the identity of the creditor was not enough.   The   genuineness   of   the   transaction   was   also important. He concluded the discussion on the issue with the following remarks : “12. To conclude, therefore, in view of these discussion, I hold   that   in   the   instant   case   while   the   identity   of   the creditor may be taken as proved, their credit worthiness to advance a sum of Rs. 1,30,42,400/= is not established by the appellant. Similarly, in the absence of any entry in this regard in the books of the creditor, and also in the absence of any documentary evidence furnished by the creditor as called   for   by   the   assessing   officer,   ie.,   the   copy   of appellant’s account as appearing in their books and copy of bank statement to confirm the transaction, once again, the   appellant   has   not   proved   the   genuineness   of   this transaction. Therefore, the addition made by the assessing officer   of   this   amount   as   the   appellant’s   income   from undisclosed sources is confirmed. Following from this, the disallowance   is   discounting   charges   amounting   to   Rs. 3,98,944/= is also confirmed.” 5. The assessee carried matter in further appeal before the   Tribunal.   The   Tribunal,   by  impugned    judgment, Page 5 of 11

C/TAXAP/1243/2007 JUDGMENT reversed the decisions of revenue authorities. The Tribunal was of the opinion that in the present case, the validity of lease transaction between Labh Construction Limited and MGPL was not of much importance. What was vital was the question of genuineness of the transaction relating to receipt of Rs. 1.30 Crore by the assessee from MGPL. In the opinion of the Tribunal, the assessee had to establish only two things, namely, that it had stood as a guarantor of the amount in question so received from MGPL. The Tribunal proceeded on the basis that the Revenue had not disputed the correctness of the tripartite agreement dated 25th  May   1995   executed   between   Labh   Construction Limited, MGPL and the present assessee. This document records that the assessee would stand as a guarantor for MGPL in view of payment of discounted amount of Rs. 1.30 Crores. The Tribunal also noted that the payment of the said sum was confirmed by MGPL. In that view of the matter,   in   the   opinion   of   Tribunal,   the   assessee   had discharged   its   onus.   Reflection   of   such   amount   in   the accounts   of   MGPL   in   the   opinion   of   the   Tribunal   was irrelevant because on such basis, the transaction cannot be held to be non­genuine. Tribunal observed that the AO’s failure to proceed with further inquiry from MGPL cannot be a ground to penalize the assessee. 6. Appearing   for   the   Revenue,   learned   counsel   Shri Bhatt highlighted certain salient features of the evidence on record. His contention was that the assessee failed to establish the very first ingredient of the transaction being genuine. Once we come to such a conclusion, the question of applicability of Section 68 of the Act would immediately arise. He took us through the orders on record and the documents produced during the assessment proceedings and in appeal to highlight that the totality of facts and circumstances would lead to an irresistible conclusion that the entire transaction was non genuine. The sum of Rs. 1.30 Crore was nothing but the assessee’s cash credit from undisclosed source. 7. On the other hand, learned counsel Shri JP Shah for the assessee­ company pain shockingly   took us through the   documents   on   record   to   contend   that   the   Tribunal committed no error, as the entire transaction was a bona fide  transaction   duly   documented   between   the   three corporate entities in the form of tripartite agreement. The assessee had entered into a business transaction. It had Page 6 of 11

C/TAXAP/1243/2007 JUDGMENT received lump sum amount from MGPL for discharging the periodical rental liabilities of MGPL for the entire span of the lease period. Counsel contended that even if there was some flaw or laxity   on the part of MGPL to maintain its account, the same would not in any manner demonstrate that the transaction was not genuine. The assessee cannot be   penalized   for   laxity   of   the   MGPL   in   maintaining   its accounts. This would virtually amount to putting burden on   the   assessee   to   establish   source   of   the   source.   He pointed out that MGPL had confirmed the transaction, as also receipt of the goods. MGPL had also placed on record, certificate   of   Chartered   Accountant   and   Chartered Engineer establishing that the goods were actually received and put to use. In support of his contentions, counsel relied on the following judgments : 7.1 In   case   of  Commissioner   of   Income­tax­I   v. Chanakya   Developers,   reported   in   [2014]   43 taxmann.com   91   [Gujarat]   to   contend   that   once   the primary   burden   was   discharged   by   the   assessee,   the Revenue would not be justified in making addition under Section 68 of the Act. 7.2 In case of Commissioner of Income­tax, Orissa v. Orissa Corporation Private Limited, reported in [1986] 159   ITR   78   [SC]   in   which,   the   extent   of   assessee’s obligation to discharge burden of proving the transaction leading to the cash credit being genuine was discussed by the Supreme Court. 7.3 In the case of  Deputy Commissioner of Income­ tax v. Rohini Builders, reported in [2002] 256 ITR 360 [Guj] in which the Division Bench of this Court held that the identity of the creditors was proved. The amounts were received through account payee cheques and thus initial burden was discharged by the assessee. It was held that the assessee did not have the responsibility to establish source of the credit. 8. The summary of opinion of Assessing Officer, CIT [A] and the Tribunal would be that on one hand, the Revenue authorities were of the opinion that the entire transaction was non genuine. Their conclusions were based on several factors   to   which   we   would   refer   to   at   the   latter   stage. Tribunal, however, deferred from such view and held that the   Revenue   was   penalizing   assessee   for   MGPL   not maintaining   its   account   properly.   If   so,   the   Assessing Page 7 of 11

C/TAXAP/1243/2007 JUDGMENT Officer should have  questioned MGPL further, but at no rate, could have taxed the assessee. 9. In order to decide the correctness of the said views, we may refer to some of the documents and materials on record. According to the assessee, M/s. Lab Construction Limited had purchased 2500 industrial gas cylinders from one M/s. M.M Industries, Tamil Nadu for a sum of Rs. 1.53 Crores. These gas cylinders were leased out to MGPL, Bangalore on monthly lease rent which was fixed at Rs. 2.83 lakhs. The lease period was of five years. A copy of the said lease agreement dated 25th September 1995 is on record, as per which, the equipment in question, namely, 2500   numbers., 45 kilograms Co2 Seamless Industrial Gas Cylinders were leased by Labh Construction Limited for   a   period   of   sixty   months   commencing   from   25th September 1995 and ending on 24th September 2000 on a lease rent of Rs. 2,83,864/= per month for each completed month. 9.1 On the very same day, another tripartite agreement was   executed   between   M/s.   Labh   Construction   Limited [Lessor]; M/s. Miga Gas Private Limited, Bangalore [Lessee] and Labh Lease & Finance Limited [Guarantor]  ie., the present   assessee.   Under   such   agreement,   MGPL   –   the lessee requested the  assessee to accept and take over its entire financial obligations under the lease agreement, in lieu of payment of Rs. 1.30 Crore by MGPL to the assessee. In other words, as against the total payment of Rs. 1.70 Crore; spread over sixty months of duration of the lease period, MGPL had upfront paid a sum of Rs. 1.30 Crores to the assessee. The assessee in turn would discharge the liability of MGPL to M/s. Labh Construction of monthly rental of Rs. 2.83 lakhs. 9.2 We also have on record, the details of demand drafts through which such payment of Rs. 1.30 Crore was made. All the demand drafts were drawn on different banks, all situated   at   Ahmedabad   and   drawn   on   25th  September 1995 or 26th September 1995. 10. We   may   recall   that   the   Assessing   Officer   of   the present   assessee   called   upon   MGPL   to   confirm   the payment   and   give   necessary   details   with   documents. Principally, what MGPL did was to issue confirmation of payment   without   providing   any   further   details   such   as bank accounts from which such payments were made and the reflection of such amount in ts books of account, citing Page 8 of 11

C/TAXAP/1243/2007 JUDGMENT the reason of non completion of the audited accounts. 10.1 We   may   also   recall   that   for   the   immediate succeeding   financial   year,   the   accounts   of   MGPL   were completed well in advance duly audited and which did not contain any reflection of the unsecured loan of Rs. 1.30 Crore. 11. It is undoubtedly true that in the context of cash credit in the books of accounts, it is primarily liability of the assessee to establish the identity, genuineness of the transaction and the credit worthiness of the donor. Such liability  does   not  extend   any   further.   In   particular,   the Courts have emphasized that the assessee is not required to   establish   source   of   the   source.   Nevertheless,   in   the present case, we are concerned with the very genuineness of the transaction which needs to be tested from various facts and circumstances duly established on the record. The glaring facts which we have noticed are as follow : [i] Almost by way of simultaneous transaction, M/s. Labh Construction Limited, a lead company of a group to which  assessee is a part, claimed to have purchased 2500 industrial gas cylinders from an entity at Tamil Nadu and having given it on lease for a period of five years to MGPL at   Bangalore.   On   the   same   date,   a   separate   tripartite agreement is executed under which, the lessee transfers its liability to the assessee and the assessee undertakes to discharge such liability in lieu of lumpsum payment of Rs. 1.30  Crores.  The  purchase  cost   of  the  gas  cylinders  is shown to be Rs. 1.53 Crores. Over a span of five years, the lessee would have to pay rental charges of Rs. 1.70 Crores. As against this, the lessee paid upfront lumpsum payment of   Rs.   1.30   Crore   to   the   assessee   who   would   then discharge the rental liabilities. [ii] Entire payment of Rs. 1.30 Crore was made through bank   drafts   drawn   from   local   banks   at   Ahmedabad without   any   further   details   of   the   payments   being provided; either by the assessee or by MGPL, though called by the Assessing Officer. The accounts of the MGPL of the relevant   period   were   not   produced   citing   reason   of   the accounts being incomplete. Thus, it was not possible for the Assessing Officer to verify the same or the payment of the said sum of Rs. 1.30 Crore. [iii] MGPL even on persistent queries by the Assessing Officer failed to show that such payment was reflected in the books of account of the relevant year. CIT [A] correctly Page 9 of 11

C/TAXAP/1243/2007 JUDGMENT noted that the corporate tax payer had claimed that three years after the end of the relevant assessment year, its accounts were not compiled. Thus, giving an evasive reply to the Assessing Officer’s question on the reflection of the payments in its books of account. 11.1    CIT [A] also noted that the accounts of the very next year were compiled well in advance, in which there was no reflection of the unsecured loan of Rs. 1.30 Crores. 12. The   cumulative   effect   of   these   factors   in   our opinion would show that the Tribunal committed serious error in up­turning the findings and conclusions of the revenue   authorities.   No   single   factor   could   be   seen   in isolation as to establish or destroy the genuineness of the transaction.   In   a   case   like   this,   the   combined   effect   of several factors must be taken into consideration. 13. As noted, for the equipments which cost Rs. 1.53 Crore   to   M/s.   Labh   Construction   Limited,   MGPL   had agreed to pay lease rent which over five years of lease period would come to Rs. 1.70 Crore. In absence of any suggestion that the equipment in question was perishable, immediately a question would arise why would a business entity agree to pay a total sum by way of rental for a period of five years which is higher than the cost of equipment itself. Even going by the advance lumpsum payment of Rs. 1.30 Crore, it could be seen that MGPL paid virtually 80% of the cost of the equipment for taking it on rent.  Under normal   circumstances,   we   are   not   concerned   with   the fairness   of   the   terms   and   conditions   of   the   agreement between   two   parties.   In   business   dealings   and   such transactions, various considerations apply with which the Revenue would have no concern. Nevertheless, these facts only raise further questions. 14. Primarily, we are concerned with the fact that neither the assessee nor MGPL provided full details of  payments to the assessee. MGPL also avoided producing its books of account for the relevant assessment year citing reason of their   incompletion,   and   last   but   not   the   least,   the completed   accounts   of   later   year   had   no   reflection   of outstanding   unsecured   loan   of   Rs.   1.30   Crore.   The Tribunal,   therefore,   was   not   correct   in   interfering   with orders of the revenue authorities. 15. The questions are, therefore, answered in favour of the revenue. The judgment of the Tribunal is quashed. The orders of the Assessing Officer and CIT [A] are restored. Page 10 of 11

C/TAXAP/1243/2007 JUDGMENT Tax Appeal is disposed of accordingly.”

Tax Appeal is also allowed.  Question is answered in favour of the revenue. Tax appeal is disposed of. (AKIL KURESHI, J) (B.N. KARIA, J) raghu Page 11 of 11