MAHENDRA SINGH DASANA,KANDIVALI vs. COMMISSIONER OF INCOME TAX (APPEAL)-NFAC, DELHI

1. The present appeal has been filed by the assessee challenging the impugned order dt. 28.11.2024 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre (NFAC) / CIT(A) for the assessment year 2017-18.

We have heard the counsels for both the parties and perused the material placed on record, judgments cited before us and also the orders passed by the revenue authorities. The only ground for adjudicating before us is challenging the additions made by AO u/s 69C of the Act, in this regard after evaluating the entire facts of the present case we noticed that the assessee is an individual and engaged in the business of financing short term mortgage loans against the security of gold ornaments. The nature of his business involves facilitating credit to customers who pledge their ornaments for a fixed period, against which the assessee provides funds out of loans taken by mortgaging those same ornaments with a scheduled bank.

After appreciating the facts of the present case, we noticed that assessee neither trades in gold, nor operates as a dealer in financial instruments, instead, his business model revolves around sourcing funds through gold backed bank loans and deploying those funds to customers at a ‘higher interest rate’ to earn a spread.

Further during the financial year relevant to the assessment year, the assessee advanced multiple gold backed loans to customers on an interest basis. And the working business model of the assessee starts by taking Gold ornaments from various customers who sought financial assistance. Then these ornaments were then pledged with Federal Bank, which sanctioned individual gold loans to the appellant. Upon disbursement of the loan amount by the bank, the appellant would withdraw cash from his bank account and use the same to advance loans to the original gold owners or other borrowers. In this way the appellant earned income in the form of interest margin the difference between the rate charged to customers and the interest paid to the bank.

The above business model of the assessee has been reflected by him in the financial records including interest income, bank statements, gold loan accounts and receipts from borrowers. In order to substantiate his arguments, the assessee has taken our attention to the documentation maintained by him in the form of borrower ledgers, bank statements and gold loan account statements and after evaluating the same we noticed that the income generated from this activity consisted “solely of the net interest margin” i.e the difference between the interest earned from customers and the interest paid to the bank on the gold loans.

Although, the assessee was maintaining two bank accounts and out of these two accounts one of the bank account of Federal bearing No. 16220100025697 was solely operated by the assessee and another bank account bearing No. 16220200003420 jointly held with his father Mr. Mohansingh Dasana which was operated and recorded in the books of the father. From the records we also noticed that the cash withdrawals from the account operated by the assessee account approximately Rs. 89,12,916/- which according to assessee were withdrawals of sanctioned gold loans from the bank, intended to be passed on to customers against gold mortgage. We also noticed that assessee had filed his return of income declaring income of Rs. 4,91,010/- which comprised of net interest income from the above financing activity which computed as under:

In our view, even the business conducted by the appellant does not violate Section 269SS or Section 269T of the Act, as the funds borrowed were from a bank via formal gold loan products, and repayments were also being made through banking channels and there were no cash loans taken or repaid to the individuals in violation of the said sections.

Therefore we are of the view that the addition u/s 69C of the Act is unsustainable both on facts and in law, as the source of the cash withdrawals (i.e., sanctioned gold loans from Federal Bank) and the utilization of the same (advancing loans against gold to customers) is clearly identifiable, supported by documents, and properly reflected in the appellant's books of account and tax return. Therefore, the addition on account of unexplained expenditure is liable to be deleted. In our view the AO had made a grossly erroneous assessment thereby treating all bank withdrawals as ‘unexplained expenses’ u/s 69C of the Act, without correlating them to the actual business cycle of mortgage-based lending and despite availability of supporting documents.

We are of the view that Ld. CIT(A), while confirming the addition, has failed to acknowledge The business model in place. That sufficient documentation was provided during the appellate stage, including gold loan statements and customer receipts. That Section 69C cannot be applied to cash withdrawals that have an established business purpose and are supported by bank entries and matching customer loan records.

The above table of documentary evidences clearly demonstrates that the appellant's business activities were legitimate, well-documented, and properly accounted for. Each document submitted during the course of proceeding supports a specific aspect of the appellant's lending business-ranging from sanctioned gold loans, bank transactions, and loan disbursements to interest income and customer confirmations. The segregation of bank accounts, cash flow records, and transaction-level details in the paper book establishes the nexus between funds withdrawn from the bank and their onward lending against gold security. Therefore comprehensive documentation effectively rebuts the presumption of unexplained expenditure u/s 69C and affirms that the appellant’s operated a structured mortgage loan business, with proper compliance and record-keeping.

While reaching to this conclusion, we draw strength from the decision of the Coordinate Bench of ITAT in the case of Abhishek Bipinbhai Naik Vs. ITO in wherein the operative portion of the said order is reproduced herein below:

We are further of the view that mere cash withdrawals from the bank account cannot be treated as income in the hands of the assessee unless the AO establishes that such withdrawals represent unexplained or unaccounted income. As per the facts of the present case, the appellant has withdrawn cash from his own disclosed bank account with Federal Bank (A/c No. 16220100025697), and these withdrawals are fully recorded in the appellant's regular books of account. We are also of the view that there is no provisio under the Income-tax Act, 1961, that authorizes the addition of cash withdrawals as income unless it is proved that such withdrawals represent ‘unexplained expenditure’ under section 69C or unrecorded receipts u/s 68 or 69 of the Act.

Further, it is a settled principle of law that cash withdrawal by itself does not constitute income, as it is merely a movement of funds from a disclosed asset (bank balance) to another (cash in hand). The amount withdrawn was sourced from sanctioned gold loans from the bank, and such source of funds is not in dispute. The AO has not proved that the cash withdrawn was used for any expenditure not recorded in the books or that it represents suppressed turnover or unaccounted receipts. Therefore, in our view invoking of Section 69C of the Act in the absence of any evidence of ‘unexplained expenditure’ is incorrect and contrary to settled judicial precedents.

Moreover the AO also erred in adding the withdrawals as credit entries should also be considered for adding debit entries. Debit entries cannot be looked into in isolation ignoring credit entries.

We noticed that in the appellant's case, the withdrawals were used for advancing loans to customers against the security of gold ornaments, as part of a regular business activity. All supporting documents including loan ledgers, cash books, gold loan statements, and receipts from borrowers have been submitted. Therefore, considering the totality of the facts and circumstances of the present case, we are of the view that addition of cash withdrawals as income is factually incorrect, legally untenable and are therefore directed to be deleted.

In the result the appeal filed by the assessee stands allowed.