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Facts
The assessee, engaged in real estate development, filed returns claiming losses. A search action revealed the assessee had taken accommodation entries in the form of loans from various parties. The Assessing Officer (AO) added back a significant loan amount and disallowed interest, citing lack of genuineness and creditworthiness.
Held
The Tribunal held that the loans, including from Dotch Sales Private Limited, were genuine. This was supported by the Settlement Commission's findings, extensive documentation provided by the assessee, and the creditworthiness of the lenders. Consequently, the additions and disallowances made by the AO were deleted.
Key Issues
Whether loans taken by the assessee were genuine and supported by creditworthiness, and if interest paid on such loans was allowable. Also, whether disallowance under Section 14A was justified when there was no exempt income.
Sections Cited
143(3), 154, 68, 14A, 8D, 115BBE
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Income Tax Appellate Tribunal, ‘D’ BENCH
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the assessee against separate impugned order dated 27/11/2024 for the Rajesh Real Estate Developers Pvt. Ltd., quantum of assessment passed/s.143(3) for the A.Y.2017-18; order dated 28/11/2024 u/s.154 for the A.Y.2017-18 and order dated 27/11/2024 for the quantum of assessment passed u/s.143(3) for the A.Y. 2018-19 by ld. CIT(A)-54, Mumbai. 2. We take up the appeal for the A.Y.2017-18 in ITA No.502/Mum/2025. 3. In various grounds of appeal
1. assessee has challenged- Firstly, addition of Rs.1,30,00,000/- u/s.68 on account of loan received from M/s. Dotch Sales Private Limited; Secondly, disallowance of interest of Rs.1,42,28,127/- incurred on loan taken from five parties in the earlier years stating that loans were genuine. Thirdly, disallowance of expenses under 14A r.w.r. 8D of Rs.38,82,962/-; and Lastly, Ld. CIT (A) erred in considering the loss incurred in the previous year in the partnership firm of Rs.71,04,282/- as income of the assessee.
4. The brief facts qua the issue are that the assessee is engaged in the business of real estate development. It has filed return of income on 01/11/2017 claiming loss of Rs.5,08,36,642/-. Earlier a search action was conducted in the case of Rajesh Lifespaces Group on 10/03/2016. During the course of search, it was found that assessee has taken accommodation entries in the form of loan from various parties and name of four such parties were Calmo Estates Private Limited, Dotch Sales Private Limited, Rajesh Real Estate Developers Pvt. Ltd., Penguin Trading & Agencies Limited and Seagold Mercantiles Private Limited had also cropped up. The opening balance of such loans from the above mentioned parties aggregated to Rs.7,56,88,000/-. The ld. AO found that during the year assessee has taken loan amounting to Rs.1,30,00,000/- from Dutch Sales Pvt. Ltd.
5. Apart from that assessee has claimed interest paid to these four parties on account of loan taken in the earlier year for Rs.1,42,28,127/-. In response to the show-cause notice, assessee had submitted that there were no bogus loans and has provided all the details with regard to these parties, however, ld. AO simply relied upon the findings given during the course of search, especially, the statement of Shri Rajesh Patel, wherein, he has admitted that assessee has taken unsecured loans from various concerns and held that retraction of his statement later on has no evidential value. Thus, he held that assessee failed to prove genuineness and creditworthiness of these parties and added an amount of loan of Rs.1,30,00,000/- taken from Dotch Sales Private Limited and also disallowed the interest. Even on the disallowance of interest, ld. AO has invoked Section 68 and applied tax rate of 60% u/s.115BBE.
The ld. AO noted that assessee has made investments in partnership firm income from which will be exempt in the hands of the assessee. Accordingly, he made disallowance u/s.14A on although assessee had incurred loss from partnership firm and accordingly, he proceeded to invoke Section 14A by taking 1% of Rajesh Real Estate Developers Pvt. Ltd., annual average of opening and closing balance of the value of investment and computed disallowance u/s.14A at Rs.38,82,964/-.
Before the ld. CIT(A) it was contended that assessee after the search had gone before the Income Tax Settlement Commission, wherein all these loans have been examined, specifically with regard to these four parties which were found to be genuine and it was on account of other unsecured loans taken from different parties which was admitted and offered for income, however, with regard to these four parties, it was stated that they were genuine parties. Hon’ble Settlement Commission after seeking report from the AO has accepted these parties to be genuine. Thus, these loans have been found to be genuine. However, the ld. CIT (A) has confirmed the additions holding that assessee has not provided entire copy of order of ITSE u/s. 245D(4).
Before us ld. Counsel for the assessee submitted that after the search upto A.Y.2016-17, assessee has gone to Settlement Commission and the entire issue have been settled including the loans taken from these four parties. He drew our attention to the order of the Settlement Commission wherein he pointed out that the total loan admitted was Rs.53,28,50,000/- out of which only 12,98,50,000/- were admitted to be in the nature of of accommodation entries and other loans were held to be genuine. Apart from that, the assessee before the ld. AO had filed ledger confirmation of the parties including that of Dotch Sales Private Limited from 01/04/2015 to 31/03/2017, bank statement, Rajesh Real Estate Developers Pvt. Ltd., audited financial statement of the parties and acknowledgement of income tax returns. He pointed out that Dotch Sales had huge funds and creditworthiness was proved beyond doubt and pointed out that the Revenue disclosed in the audited accounts were Rs.135.71 Crores and the profit during the year was Rs.6.64 Crores. Apart from that he submitted that the loans given to the assessee in the earlier year as well as in this year have been duly disclosed by the lender companies’ alongwith income tax returns, bank statements etc., Thus, the genuineness and creditworthiness stands duly discharged before the ld. AO as well as ld. CIT (A). He submitted that the ld. AO has mixed up the loan taken from some other parties which assessee has admitted before the Settlement Commission, however, qua these parties, the Settlement Commission has found that these loans were genuine after calling for the report from the ld. AO. In so far as disallowance of interest from other parties, he submitted that firstly, these loans were taken in the earlier years and additions proposed by the ld. AO were deleted by ITSC, therefore, there is no reason to disallow the interest. Even otherwise also, assessee has filed all these documents including ledger confirmation, bank statement, audited financial statement and acknowledgement of return to show their genuineness as well as creditworthiness of these parties. Thus, no disallowance can be made. Lastly, on the issue of disallowance u/s.14A, he submitted that once there is no exempt income from the partnership firm then there is no question of any disallowance u/s.14A.
Rajesh Real Estate Developers Pvt. Ltd., 9. On the other hand, ld. DR strongly relied upon the order of the ld. AO and ld. CIT (A).
We have heard both the parties and also perused the relevant finding given in the impugned order. In so far as fresh loan taken from M/s. Dotch Sales Private Limited, it is seen that assessee has taken loan in F.Y.2015-16 as well as in F.Y. 2016- 17 ON which assessee has been paying interest and deducting TDS. The ledger account of the loan taken from M/s. Dotch Sales Private Limited shows that there was an opening balance of Rs.2,25,00,000/- out of which assessee has paid amount of Rs.1,30,00,000/- and again received loan of Rs.1,30,00,000/-. There appears to be a running account between the parties. Further, from the perusal of audited financial statements of M/s. Dotch Sales Private Limited, it is seen that the revenue declared by the lender company is more than Rs.135.7 Crores and reserves and surplus funds were more than Rs.35.51 Crores. During the year itself, the profit declared is 6.64 Crores. Thus, there cannot be any doubt of the creditworthiness of the said party. Apart from that, it has been regularly assessed to tax and continues to declare huge income year after year. Similarly, in the case of other parties also assessee has furnished similar documents from whom assessee has taken loan in the earlier years and only interest has been paid. As noted above, this issue has been dealt in detail by the Income Tax Settlement Commission with regard to various loans taken by the assessee and other group concerns. This matter has been dealt by the Settlement Commission in the following manner:-
Rajesh Real Estate Developers Pvt. Ltd., “17.5 The fifth issue is regarding bogus unsecured loans. During the course of 7.5 search. Shri Rajesh Patel in his statement has admitted that loans taken of Rs.53,28,50,000/-in the various group concerns are in the nature of accommodation entries and he agreed the same as undisclosed income of the group which was included in the total disclosure made u/s 132(4) of the Act of Rs. 202,10,27,143/-However, in application before Commission, loans only to the extent of Rs. 12,98,50,000/- were admitted in the nature of accommodation entries and that too representing application of part of income of Rs. 17,33,12,782/- admitted in the Settlement applications. The Department in Rule 9 report however, submitted that entire unsecured loans as admitted during the course of search as non-genuine, ought to have been offered by the applicant. It is further submitted by the Department in Rule 9 Report that survey was authorized in the case of four so called creditors but except in the case of M/s. Fossil Tradelinks Pvt. Ltd., in other three cases survey authorization could not be executed as the entities were not found at the addresses mentioned in the return of income. Shri Pankaj Vora, Director of M/s. Fossil Tradelinks Pvt. Ltd in his statement, recorded u/s. 131 of the Act, has admitted that he had provided accommodation entries to M/s Rajesh Estate and Nirman Pvt. Ltd. Further based on the financials of the companies providing loans. Pr CIT in his report has observed that based on the circumstantial evidences it can be said that these entities don't have any creditworthiness Further, it is also observed in Rule 9 report that applicants have failed to co- relate the earning of income to the extent offered in the petition with the investment in the form of bogus unsecured loans admitted and therefore the amount of bogus loan to the extent so admitted should have been offered as additional income separately 17.5.1. The applicants in its rejoinder on the other hand had submitted that out of retraction of Rs. 40,30,00,000/-, an amount of Rs. 1,95,00,000/- pertains to repayment which was wrongly taken as unsecured loans. Therefore it is loan of only Rs.38,35,00,000/- which needs to be established as genuine. The Pr. CIT agrees to the contention of the applicants to that extent. These loans are appearing in the books of M/s. Rajesh Real Estate Developers Pvt. Ltd. (Rs.7,45,00,000/-), M/s. Rajesh Estate and Nirman Pvt. Ltd (Rs.23,40,00,000/-) and M/s. Rajesh Investments (Rs.7,50,00,000/-) The loan creditors shown are Rajesh Real Estate Developers Pvt. Ltd., (1) Seagold Mercantile Pvt. Ltd. (Rs.85,00,000/-), (ii) M/s. Dotch Sales Pvt. Ltd. (Rs.9,65,00,000/-), (iii) M/s Panguine Trading & Agencies Ltd. (Rs.6,00,00,000/-), (iv) M/s. Calmo Estate Pvt. Ltd. (Rs.35,00,000/-), (v) M/s. Timeless Commosales Pvt. Ltd (Rs.2,90,00,000/-), (vi) M/s. Fossils Trade Link Pvt. Ltd. (Rs 11,10,00,000/-); (vii) M/s Faithful Vanijya Pvt. Ltd. (Rs.3,00,00,000/-), (viii) M/s. Highrank Commodities Pvt. Ltd. (Rs.3,00,00,000/-), (ix) M/s. Sigma Commodities Pvt. Ltd. (Rs.50,00,000/-) and (x) M/s. Adinath Diamonds Pvt. Ltd (Rs.1,00,00,000/-) 17.5.2. As mentioned in para 15.1 above, the applicant was directed to produce the major parties from whom the unsecured loans are shown before AO for examination as on the addresses given in the return of income except M/s Fossils Trade Link Pvt. Ltd., nobody was found. The applicant could establish that 5persons viz (1) Shri Uttamchand Jain, (ii) Shri Soumen Karmakar(iii) Shri Rajesh Padiyar, (iv) Shri Surya Sharma and (v) Shri Pankaj Vora for (a) M/s Aadinath Diamonds Pvt. Ltd., (b) M/s. Calmo Estate Pvt. Ltd. and M/s. Penguine Trading & Agencies Ltd., (c) M/s Dotch Sales Pvt. Ltd., (d) M/s Faithful Vanijya Pvt. Ltd. and (e) M/s. Fossil Tradelinks Pvt. Ltd. respectively appeared before AO (whereas Shri Soumen Karmakar appeared on 20.03.2019 others appeared on 22.03.3019) This fact was admitted by the Ld CIT(DR) as well as by the AO also present during the hearing but they did not examine or record the statements of these persons on the ground that they had not brought with them the required details. It is however not clarified as to which further details were required especially when copy of bank account, PAN and financials of most of them is already with the Department. Thus the applicants have discharged not only primary onus of proving genuineness of the loans by submitting confirmation, PAN, bank accounts of the parties and financials of such companies/creditors but also produced most of them in whose names in total more than Rs 35 crore unsecured loan is reflected Even Shri Pankaj Vora, Director of M/s Fossil Tradelinks Pvt. Ltd. also appeared before the AO who has initially admitted the loan as non-genuine and subsequently retracted from this statement on the ground that it was taken under pressure and duress. But AO has failed to examine him also for the reasons best known to him. The benefit of doubt thus flows to the Rajesh Real Estate Developers Pvt. Ltd., applicants and therefore we are inclined to accept the contention of the applicant that loans from these parties are genuine. Even otherwise it is fact that except statement of Shri Rajesh Patel recorded during the course of search in which he has admitted entire unsecured loan of Rs. 53 28,50,000/- as non genuine, which admittedly was not found to be correct fully even as per Department as an amount of Rs. 1,95,00,000/- was included therein which is not loan but repayment of loan, no evidence whatsoever was found indicating the loans being non-genuine. It is also claimed during the hearing that most of such loans in respective years have been accepted as genuine and no addition has been made in regular assessment proceedings. It is also fact that except in the case of M/s. Fossil Tradelink Pvt. Ltd., in no case Department conducted any further enquiry before the applicants' petition was admitted in the Commission, to gather any evidence indicating the unsecured loans from such parties as non-genuine. When opportunity given by the Commission then they did not examine six parties who appeared before AO. No adverse comment has been offered about the entries in bank account of all such persons from where the loan has come through proper banking channel. Therefore, if statement is not supported by any corroborating material and evidence and subsequently statement is retracted and Department could not prove that the reasons advanced for retraction are not true the benefit of doubt has to flow to the applicant This is more so when these loans have been accepted as genuine in regular assessment proceedings as claimed by the applicant. We are therefore inclined to accept the claim of the applicant that these creditors cannot be treated as non genuine.”
Thus, all these parties form whom assessee has taken loan have been duly examined and it is evident that ld. AO was also given an opportunity to examine these parties. After all these verification and the report of the ld. AO, the Settlement Commission has found that the loan taken from the aforesaid four parties namely, Calmo Estates Private Limited, Dotch Sales Rajesh Real Estate Developers Pvt. Ltd., Private Limited, Penguin Trading & Agencies Limited and Seagold Mercantiles Private Limited are genuine. Once these loans have been found to be genuine in the earlier years, then there is no question of any disallowance of interest in this year. Even in the case of Dotch Sales Private Limited, apart from the fact that Settlement Commission has held the loan taken from Dotch Sales Private Limited to be genuine, we find that documents furnished before us clearly prove the identity, genuineness and creditworthiness of the parties and without any enquiry by the ld. AO, loan taken from such parties cannot be held to be non- genuine. Accordingly, the addition of Rs.1,30,00,000/- on account of loan and addition of Rs.1,42,28,127/- on account of interest is deleted.
In so far as the disallowance of Section 14A under Rule 8D of Rs. 38,82,962/- which has been made by the ld. AO on gain of investment made in the partnership firm. It is seen that there was a loss incurred in the previous year from the partnership firm of Rs.23,04,282/-. Once the assessee has not earned any exempt income during the year, then there is no question of any disallowance of 14A. Accordingly, disallowance made u/s.14A on r.w.r 8D is deleted. In the result, appeal of the assessee is allowed.
In so far as appeal filed u/s.154 for the A.Y. 2017-18, it has been admitted by both the parties that if the disallowance of interest has been held to be genuine, then there is no question of applying rate of 60% u/s.115BBE on disallowance of interest.
Rajesh Real Estate Developers Pvt. Ltd., Accordingly, once the loan has been accepted to be genuine and interest has been allowed by us, this appeal becomes infructuous. Accordingly, appeal of the assessee is dismissed as infructuous.
Coming to the appeal for the A.Y.2018-19 in the assessee has challenged the addition of Rs.2,25,00,000/- u/s.68 from the loan taken from Dotch Sales Private Limited. In this year also assessee has furnished all these details as was filed in A.Y.2017-18, wherein we have found that lender party found has creditworthiness and moreover these parties have been held to be genuine by the Income Tax Settlement Commission in the earlier years. Therefore, the loan of Rs.2,25,00,000/- during the year is held to be genuine and the addition made by the ld.AO is deleted.
Similarly, the disallowance of interest of Rs.1,14,05,833/- is also deleted once the loan has been held to be genuine. No disallowance of interest can be made.
In the result, appeal in & is dismissed as infructuous. Order pronounced on 30th April, 2025.