INCOME TAX OFFICER-WARD-6(3)(1), MUMBAI vs. KOHINOOR PLANET CONSTRUCTIONS PVT. LTD., MUMBAI

Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 31.03.2024 had partly allowed the appeal filed by the assessee on various grounds. , 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd.

Both the assessee as well as revenue are in appeal before us, against the impugned order of the ld. CIT(A).

It is observed that the learned Assessing Officer (ld. A.O. for short) has show caused the assessee during the assessment proceeding pertaining to the unsecured loan of Rs. 39,68,79,637/- and why the same should not be added u/s. 68 of the Act. The assessee contended that during the year under consideration the unsecured loan of Rs. 25,00,000/- was taken from Sri Water Front Health Farms Pvt Ltd. The ld. AO made an addition on the said amount holding that the assessee has failed to prove the genuineness and creditworthiness of the parties and added the same u/s. 68 of the Act to the total income of the assessee. The first appellate authority upheld the addition on the ground that the amended provision of Section 68 which is applicable from A.Y. 2013-14 mandates that even the creditors should establish the nature and source of the l oans given to the assessee. The ld. CIT(A) further held that the creditor has only earned a meager profit during the year under consideration and that its P & L account shows that there is not much of regular activities of the company, thereby the creditworthiness of the company has not been substantiated.

The learned Authorised Representative (ld. AR for short) during the appellate proceeding contended that the said loan was received through banking channel and that the assessee had filed confirmation from the lender along with other documentary , 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. evidences such as audited balance sheet and P & L account of the lender to show the identity and creditworthiness of the party. The ld. AR further stated that the proviso to Section 68 is with effect from 01.04.2023 and the same would be applicable only for A.Y. 2023-24 onwards. The ld. AR reiterated that the source of source should not be seen for the impugned year which is prior to the insertion of the proviso to Section 68 of the Act by the Finance Act, 2022. The ld. AR contended that the assessee has proved the three ingredients of Section 68 which is the identity and creditworthiness of the party and the genuineness of the transaction. The ld. AR relied on the catena of decision for the same which are mentioned as below: a. Decision of Hon’ble Bombay High Court in the case of Gagandeep Infrastructure (P.) Ltd. (394 ITR 680) b. Decision of Hon’ble Bombay High Court in the case of Veedhata Tower Pvt. Ltd. (403 ITR 415) c. Decision of Hon’ble Bombay High Court in the case of ITO vs. Gaurav Triyugi Singh (121 taxmann.com 86) d. Decision of Hon’ble Bombay High Court in the case of CIT vs. Green Infra Ltd. (78 taxmann.com 340) 9. The learned Departmental Representative (ld. DR for short) on the other hand controverted the said fact and stated that the assessee has failed to discharge the primary onus casted upon it to prove the identity, genuineness and creditworthiness of the parties. The ld. DR further stated that source of source should be established by the assessee, where the assessee has failed to substantiate the creditworthiness of its , 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. creditor viz. Sri Water Front Health Farms Pvt Ltd. The ld. DR further stated that the decisions relied upon by the ld. AR are prior to the Finance Act, 2012 and that subsequent to the amendment to the proviso to Section 68, the assessee is entitled to establish the creditworthiness of the creditors which is the source of source of the assessee. The ld. DR relied on the order of the lower authorities.

We have heard the rival submissions and perused the materials available on record. The issue pertinent to the addition u/s. 68 of the Act was that the lower authorities had failed to consider the assessee’s submission that it had discharged the primary onus of proving the identity and creditworthiness of the party and the genuineness of the transaction for the reason that the assessee has failed to prove the source of the source, herein in this case Sri Water Front Health Farms Pvt Ltd. which the lower authorities have alleged that it does not have sufficient creditworthiness to extend the loan of Rs. 25 lacs to the assessee. The ld. CIT(A) further held that the amended provision of Section 68 was applicable from A.Y. 2013-14 which requires that even the creditors’ nature and source of the loan given by them to the assessee had to be established to the satisfaction of the ld. AO. It is also held that the P & L account of the said company shows that it only operates as a conduit for providing accommodation entries for beneficiaries and as the assessee has failed to prove the source of the source, the impugned addition was made by the ld. AO and upheld by the ld. CIT(A). The assessee on the other hand contended that it had discharged the primary onus casted upon it by furnishing the confirmation from the party, along with the audited balance sheet and P & L account. The assessee also contends that the said transaction was through banking channels and the same was , 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. recorded in the books of accounts of the assessee as well as the creditor. The ld. AR extensively relied on the proviso to Section 68 and stated that the source of source is to be proved only in case of A.Y. 2022-23 onwards as per the amended provision by Finance Act, 2022. For the sake of clarity, we hereby deem it fit to extract the relevant provisions of the Act as amended by Finance Act, 2012 and Finance Act, 2022 herein under: Income-Tax Act, 1961 - As Amended by Finance Act 2012 Cash credits. 7668. 77Where any sum is found credited in the books78 of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the 79[Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year : The following provisos shall be inserted in section 68 by the Finance Act, 2012, w.e.f. 1- 4-2013 : Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

In view of glaring illegality, we are not inclined to relegate the petitioner to avail alternative remedy. The assessment order is set aside. The competent authority shall re- hear the petitioner and decide the matter afresh in accordance with law. It is made clear that this Court has not expressed any opinion on merits.

In the result, the Writ Petition is disposed of with the above direction. No order as to costs. As a sequel, miscellaneous applications pending in this petition, if any shall stand closed.”

We therefore are of the considered opinion that this issue shall be remanded back to the ld. AO for verification of the source of the creditor in terms of the proviso to Section 68, where the assessee is directed to furnish all details required by the ld. AO for adjudication of the issue and the ld. AO is directed to decide the same on the merits by giving a detail finding based on the submission of the assessee and in accordance with law. For the above reasons, we deem it fit to remand this issue back to the file of the ld. AO for verifying the said transaction. We therefore allow the grounds of appeal

The ld. DR on the other hand controverted the said fact and relied on the decision of the ld. AO.

Upon perusal of the rival contentions, it is observed that the assessee’s interest free funds consist of its own fund of Rs. 489.69 crores which is its reserves and surplus and along with borrowed interest free fund of Rs. 66.79 crore was very much higher than the investment made in M/s. Pallai Developers Private Limited, vide an agreement for Rs. 22 crore against the rights in property developed by the assessee company. The revenue has not brought anything on record to controvert the said fact. In the absence of any contradictory statement that the borrowed funds of the assessee was much higher than the own funds, we deem it fit to decide this issue on the proposition laid down by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd. (supra) which held that when own funds are more than the interest free advance then the presumption would be that the interest free advances made by the assessee is out of the own funds of the assessee and not the interest bearing borrowed funds. On these observations, we find no infirmity in the order of the ld. CIT(A) and therefore ground no. 1 of the revenue is hereby dismissed.

Ground no. 2 pertains to the disallowance made by the ld. AO u/s. 37 of the Act amounting to Rs.50 crores being diminution in the value of preference shares which was added by the ld. AO and deleted by the ld. CIT(A). It is observed that in 2008, the assessee has subscribed the preference share capital of Kohinoor CTNL Infrastructure , 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. Private Limited amounting to Rs. 250 crores which was claimed to be for the purpose of business. As KCTNL was undergoing insolvency proceeding before the Hon’ble NCLT which is pending, the assessee had written off Rs. 15 crores to the profit and loss account and had claimed the same as deduction u/s. 37 of the Act as revenue expenditure. The claim of diminution in value of investment made by the assessee in KCTNL was rejected by the ld. AO as not being allowable expenditure either u/s. 36(2) or u/s. 37 of the Act, for the reason that the said investment was given from the capital fund of the assessee and any loss arising out of the non-recovery of the same will only amount to a capital loss and not as business loss. The ld. AO further stated that deduction u/s. 36(2) is termed as bad debt only when the same has been declared as income in any of the earlier years or the same amounted to a loan given in the ordinary course of a banking or money lending business. The ld. AO further held that the investment in preference share of KCTNL cannot be allowed u/s. 37 for the reason that it amounts to loss of capital which cannot be allowed under the head ‘business’ neither as income from ‘capital gain’ as the same will not come under the purview of Section 44 of the Act as there has been no ‘transfer’ in such transaction. The ld. AO made an addition of Rs. 50 crores to the total income of the assessee. In an appeal preferred before the ld. CIT(A), the same was held to be a business loss by relying on the various decisions of the Hon'ble Jurisdictional High Court viz. in the case of CIT vs. Colgate Palmolive (India) Ltd. [2015] 370 ITR 728 (Bom) and Hon'ble Karnataka High Court decision in the case of ACE Designers Ltd. vs. Additional Commissioner of Income Tax [2020] 120 taxmann.com 321 (Karnataka).

Aggrieved the revenue is in appeal before us challenging the said ground.

The ld. DR for the revenue contended that the investment made by the assessee in M/s. KCTNL was not for business expediency and the same cannot be a business loss on non-recovery of the same. The ld. DR further stated that it cannot be allowed neither u/s. 36(2) nor u/s. 37 of the Act, as the same amounts to loss of capital and not a business loss. The ld. DR relied on the order of the ld. AO.

The ld. AR on the other hand controverted the said fact and stated that the issue was clearly covered by the decision of the Hon'ble Jurisdictional High Court in the case of Colgate Palmolive (India) Ltd. (supra) and the Karnataka High Court in the case of ACE Designers Ltd. (supra). The ld. AR relied on the order of the ld. CIT(A).

Having heard the rival submissions and perused the material available on record, it is observed that the assessee has made investment in its subsidiary company M/s. KCTNL which was also engaged in the business of construction, by way of preference shares amounting to Rs. 250 crores in F.Y. 2008-09. Out of the said investment, M/s. KCTNL has purchased a plot from National Textile Corporation by availing loan of Rs. 936 crores from a consortium of banks led by State Bank of India (SBI) and had also taken additional loan to the tune of Rs. 295 crores in September, 2014. It is stated that M/s. KCTNL has commenced the project of multi storied Public Parking Lot (“PPL”) after due approval from the Municipal Corporation of Greater Mumbai, where the said project was stalled for 3 to 4 years due to change in government policies and was also facing litigations due to the same. This issue reached up to the Hon'ble Apex Court and after the consent terms dated 25.07.2013, the project commenced. Due to the delay in , 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. contesting the litigation M/s. KCTNL faced financial crunches and its account became NPA. The consortium of banks then transferred assets of M/s. KCTNL to Edelweiss ARC which had filed petition under IBC for recovery and the same was pending before the Hon'ble NCLT, which vide order dated 21.02.2018 accepted the resolution plan. For the above-mentioned reason, the assessee also had to face the hardship caused due to this. The assessee’s contentions is that the said investment is for strategic business purpose and the write off of the investment arised due to peculiar facts and circumstances which was incidental to the business and the same amounted to loss due to commercial expediency and business necessity. The assessee has placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Colgate Palmolive (India) Ltd. (supra) which on identical facts has held that the loss on write off of investment made in subsidiary company is business loss which was for the purpose of the extension of business activity and does not entitle for creating capital asset by holding shares. It was also held that there was no acquisition of capital asset neither was the expenditure incurred for enduring benefits and further there is no relinquishment or transfer of capital asset to any third party. The relevant extract of the decision in the case of ACE Designers Ltd. (supra) which has dealt with the decision of the Hon’ble Jurisdictional High Court in the case of Colgate Palmolive (India) Ltd. (supra) is cited herein under for ease of reference: - “8. Thus, from perusal of the aforesaid facts, it is evident that the issue involved in this appeal is covered by decision of Bombay High Court in Colgate Palm Olive (India) Ltd. (supra), which has been upheld by the Supreme Court. The ratio of aforesaid decision is where the assessee makes investment in its 100% subsidiary for business purpose, loss or sale of investment has to be treated as business loss of the assessee. In the instant case, the assessee made investment in the shares of WOS for the business purpose i.e., for the enhancement of business activity of the assessee in global market which primarily related to business operation of the assessee. The WOS suffered losses and 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. therefore the assessee wrote off the assessment of Rs. 3,41,23,200/- as business loss. The investment was made for the purpose of extension of business activity and not with a view to creating capital asset in the form of holding shares. It is also pertinent to note that the assessee never acquired any capital asset or expenditure of enduring benefits to WOS and there is no relinquishment or transfer of capital asset to any third party. In view of preceding analysis, the first substantial question of law is answered in the negative and in favour of the assessee. It is not necessary for us to answer the remaining substantial questions of law in view of our answer to the first substantial question of law. In the result, the order of the Tribunal dated 14-12-2012 to the extent of the findings contained against the assessee is quashed. Accordingly, the appeal is allowed.”

From the above decision, it is observed that the investment made by the assessee in its subsidiary company was for its commercial expediency and for promoting business operations. Non-recovery of the said amount tantamount to a business loss where the subsidiary company was unable to complete its project due to reasons beyond its control. The assessee had to write off the said loss as revenue expenditure, for the reason that there was no capital asset introduced out of such investment. The revenue has also failed to establish that the investment was in view of creating capital asset by way of holding preference shares in the said company and also whether the investment was incurred for the enduring benefit. In the absence of the same, we find no infirmity in the order of the ld. CIT(A) in allowing the said claim of the assessee. The ground no. 2 raised by the revenue is hereby dismissed.

In the result, the appeal filed by the revenue is hereby dismissed.

During the assessment proceeding, the assessee has furnished loan confirmation from these parties along with details of the ITR, balance sheet and bank statement of the said parties. The ld. AO observed that in the case of Good View Engineering Pvt. Ltd which is based in Kolkata, the total income was Nil and going through the balance sheet, it was observed that the said company had no assets and liabilities and the bank statement reflected transfer of money from other entities which was routed to the assessee subsequently. The ld. AO observed that these companies had very thin capital which were entities in Kolkata, having high debt equity inspite of not being into any business operation. Out of these three companies, notice u/s. 133(6) of the Act was replied along with details of P & L account, balance sheet and bank statement except in the case of Sri Water Front Health Farms Pvt. Ltd. which did not respond to the said notice. The assessee claimed the same to be Inter Corporate Deposits which was not to the satisfaction of the ld. AO who then proceeded to make addition u/s. 68 of the Act for the reason that the assessee has failed to prove the creditworthiness of the party and genuineness of the transaction.

The ld. CIT(A) in an appeal filed by the assessee upheld the addition made by the ld. AO on the ground that the assessee has failed to substantiate the source of the creditors, where the first two creditors mentioned above had a meager profit during the year under 1493 & 1495/Mum/2024 (A.Y. 2016-17 & 2017-18) Kohinoor Planet Constructions Pvt. Ltd. consideration and with regard to Sri Water Front Health Farms Pvt. Ltd, the said company had not responded to the notice u/s. 133(6) of the Act issued by the ld. AO. Though the assessee has filed the confirmation, the return of income and bank statement of the said creditor, on perusal of the same, it is observed that Sri Water Front Health Farms Pvt Ltd had declared total income of Rs. 46,50,200/- but the P & L account showed no regular business operation. The ld. CIT(A) upheld the addition made u/s. 68 of the Act by the ld. AO on the ground that the source of source has not been proved.

Aggrieved the assessee is in appeal before us, challenging the impugned order.

It is observed that on identical facts in for A.Y. 2017-18, the assessee is said to have taken unsecured loan from the same party i.e., Sri Water Front Farms Pvt. Ltd., where the assessee has failed to prove the source of source as per proviso to Section 68 of the Act. As the facts are identical on this ground for both the years, the finding given in will apply mutatis mutandis to this appeal also. We therefore remand this issue back to the file of ld. AO as per the observation given by us for A.Y. 2017-18.

Therefore, the grounds of appeal