THE INCOME TAX OFFICER, WARD-1, , TUNI vs. KASIREDDY VENKATESWARA RAO, , TUNI

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER ITA No. 397/VIZ/2019 (Asst. Year : 2011-12) ITO, Ward-1, Tuni vs. Kasireddy Venkateswara Rao, Prop: Balaji Process, Tuni PAN No. ANVPK 6272 G (Appellant) (Respondent)

C.O.No. 131/VIZ/2019 (Arising out of ITA No. 397/VIZ/2019) (Asst. Year : 2011-12) Kasireddy Venkateswara Rao, vs. ITO, Ward-1, Tuni Prop: Balaji Process, Tuni PAN No. ANVPK 6272 G (Appellant) (Respondent) Assessee by : Shri G.V.N. Hari – Advocate. Department By : Smt. Mini Chandran – Sr.DR

Date of hearing : 19/11/2019. Date of pronouncement : 22/11/2019. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the Revenue and the cross objection by the assessee are directed against the order of Commissioner of Income Tax (Appeals)-2, Visakhapatnam, dated 18/02/2019 for the Assessment Year 2011-12.

2 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) 2. There is a delay of 28 days in filing this appeal. The Revenue has filed an affidavit for condonation of delay. We have gone through the affidavit and find that there is a sufficient cause to condone the delay. Accordingly, delay is condoned. 3. Facts of the case, in brief, are that the assessee is an individual engaged in the business of processing of manufacturing of cashew in the name and style of “Sri Balaji Process”, filed his return of income by admitting total income of Rs. 3,85,725/-. Subsequently, the case of the assessee was converted into scrutiny and after following due procedure, assessment was completed u/sec. 143(3) by making addition of Rs. 1,19,18,600/- and added the same to the total income of the assessee. During the course of assessment proceedings, the Assessing Officer has noted that the assessee has borrowed an amount of Rs.2,85,24,750/- from various people number in 1357. When the Assessing Officer asked to file the details, the assessee is only able to file details to the extent of Rs. 28,35,000/- pertains to 162 persons and confirmation letters were also filed to that extent. The Assessing Officer has considered the entire case and confirmations filed for 162 persons and came to a conclusion that there is no creditworthiness, the transactions are not genuine as the loans obtained from the farmers, milk suppliers and

3 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) commission agents and therefore the entire amount borrowed by the assessee is added to the total income of the assessee. 4. On appeal before the ld. CIT(A), the assessee has filed confirmation letters from all other creditors. The ld. CIT(A) by admitting the additional evidence in terms of Rule 46A of the I.T. Rules, 1962 referred the additional evidence to the Assessing Officer for his comments. The Assessing Officer has submitted his remand report which is extracted by the ld. CIT(A) as under:- “4) Out of 1275 loan creditors, 401 creditors amounting to R5.73,91,700 have been examined and sworn statements were recorded from them Out of the 401 creditors, repayment was made to 367 creditors amounting to Rs 67,70,700 of the 367 creditors to whom repayment was made, 173 creditors were repaid by cash mode amounting to Rs.31,58,000 and remaining 194 creditors were repaid through cheque amounting to Rs. 36,12,700. Still 34 creditors are yet to be repaid amounting to Rs. 6,21,000 at the time of recording statements. Further, none of the 401 loan creditors received any interest. The persons examined were mainly from rural areas such as K.O. Mallavaram, D.Polavaram and Gunipudi etc. Most of them are agriculturists, daily labours and persons working in unorganised sectors. 5) Preponderance of probability of bank account repayment to said to have made through cheque. In this case there is bank account the assessee fails to explain the necessity of taking loan in cash. So in the circumstances it is difficult to believe that the said loan transactions are genuine. 6) Since it is found that all the deponents are well tutored by the assessee in as mud as all of the persons who were examined gave stereo typed replies. It can be deduced that the exercise of examining the alleged loan creditors may not result illusory the truth. Hence the learnt CIT(A) is requested to appreciate the efforts taken and uphold the addition made in view of the overwhelming evidence that circumstance evidence points to the fact that the alleged loan creditor are all labour, men of no means who eke their lively hard on day to day earning basis most of the wagers. Further, it is a fact that while, the loan creditors are men of no mean, it shows that the alleged loans claimed to have been given by them were the assessee for inordinate amount oft/me. It is difficult to believe such daily earners would leave the assessee and not ask it in spite of the lapse

4 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) of many years." 5. The ld. CIT(A) by considering the remand report has observed that the assessee had discharged burden casted upon him, therefore addition cannot be survived. For the sake of convenience, the relevant portion of the order is extracted as under: “6.4 On a careful perusal of the remand report, it is noticed that all the creditors who have appeared before the assessing officer confirmed the loan transaction. Further, it is noticed from the loan confirmation letters that all the creditors have given a very clear account of the nature of their source of income, extent of income and the basis of income, the size of their family, the details of family expenses and savings etc. Further, they have submitted their proof of identity. The assessing officer did not point out any specific defect in the confirmation letters rather saying that the persons examined were mainly from rural areas such as K.O.Mallavaram, D. Polavaram and Gunipudi etc. Most of them are agriculturists, daily labours and persons working in unorganised sectors. Preponderance of probability of bank account repayment to said to have made through cheque. It was further stated that when the appellant is having bank account he failed to explain the necessity of taking loan in cash. The Assessing Officer stated that all the deponents are well tutored by the assessee in as much as all of the persons who were examined gave stereo typed replies. When the creditors appeared before the assessing officer, he could have questioned them to elicit the truth in case he considered the facts stated in the letters to be illusory and not genuine. No such efforts were made by the Assessing Officer in this regard. Under the circumstances, it is difficult to agree with the view taken by the assessing officer in saying that the creditors were tutored by the appellant. There is no cogent for this view formed by the assessing officer. The creditors have answered the questions posed by the assessing officer in the sworn statements and the questions put to them, so will be the answers. The assessing officer cannot disregard the results of his own enquiry. Further, it is noticed that the amount given by each loan creditor is very small amount. From the details of the sources explained by the creditors and the amount of annual savings, their creditworthiness to extend such a small amount of loan can be said to have been duly explained. Further, the appellant is new to business and the assessment year in question, is only second year of his business. The Authorised Representative stated that it would be difficult for him to avail a loan from

5 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) the bank. The appellant found it convenient to borrow small amount of loan from a large number of individuals whom the appellant either knew directly or indirectly. It was further stated that out of the 401 creditors from whom the appellant obtained a loan amount of Rs.73,91,700, as many as 367 creditors were repaid to the extent of Rs.67,70,700 and more than 50% of the amount repaid was by cheque. After careful consideration of all these facts, I am of view that the appellant fulfilled his basic obligation to prove the identity of the creditors, the creditworthiness of such creditors and genuineness of the transaction i.e., unsecured loans. Therefore, the addition made by the Assessing Officer on mere preponderances and probabilities cannot withstand and the assessing officer is hereby directed to delete the addition of Rs.2,85,24,750. The appeal made by the appellant on the above grounds stands allowed.”

6 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) 10. The assessee carrying small time cashew processing business. He has borrowed small amounts from local people who are milk vendors, ryotvaari coolies and commission agents to carry his business. In the assessment order, the Assessing Officer has found that assessee has borrowed money from 1357 persons, but he filed confirmation letters in respect of 162 persons. By examining the confirmation letters filed by the assessee, the Assessing Officer came to a conclusion that these people from whom the assessee borrowed funds, have no creditworthiness for the reason that they are small time milk vendors, ryotvaari coolies and commission agents. In our opinion, the Assessing Officer has committed a mistake in observing above for the reason that if at all he is having any doubt, he should have to issue summons to the parties and examine them, without doing that simply disbelieving the confirmation letters is not correct. On appeal before the ld. CIT(A) the assessee has filed the confirmation letters from all the remaining creditors. The ld. CIT(A) called the remand report from the Assessing Officer and in the remand report, the Assessing Officer has observed that most of the creditors are agriculturists, daily labours and persons working in unorganised sectors. He has also observed that payments should have been made through banking channel, but the assessee has

7 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) borrowed the funds by taking cash and repaid the same in cash. We find there is nothing wrong in borrowing funds from daily labourers, agriculturists and milk vendors, if at all Assessing Officer is having doubt, he should have called them by issuing summons and examine them. Simply on the basis of that they are not filing returns of income, therefore the amounts borrowed by the assessee cannot be considered as not genuine transaction, is not correct. The Assessing Officer himself observed that the assessee has already repaid Rs. 67,70,700/- to 367 people and 173 creditors were repaid by cash mode amounting to Rs. 31,58,000/- and remaining 194 creditors were repaid through cheque amounting to Rs. 36,12,700/-. Still 34 creditors are yet to be repaid amounting to Rs. 6,21,000/-. By considering the facts and circumstances of the case, we are of the opinion that the assessee has filed the confirmation letters from the loan creditors though small loan creditors who are agriculturists, milk vendors & commission agents. All the details are available with the Assessing Officer. Without issuing summons and without examining them, simply on the basis of assumptions and presumptions, confirmations given by the assessee cannot be discarded. We find that the assessee has discharged his burden casted upon him to prove that he has borrowed funds from

8 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) various people by giving all the details, if at all the Assessing Officer has any doubt, he should have to make enquiries and disprove the confirmation letters given by the assessee are not correct. In this case, the Assessing Officer has not discharged his burden and simply on the basis of conjectures and surmises, the addition is made. In view of the above, we find that ld. CIT(A) rightly deleted the addition made by the Assessing Officer. 11. The cross objection filed by the assessee is delayed by 03 days. No delay condonation application is filed. Therefore, the cross objection filed by the assessee is dismissed in limini. 12. In the result, appeal filed by the Revenue and the cross objection filed by the assessee are dismissed. Order Pronounced in open Court on this 22nd day of Nov., 2019.

Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated: 22nd November, 2019. vr/-

9 ITA No.397/VIZ/2019 C.O.No.131/VIZ/2019 (Kasireddy Venkateswara Rao) Copy to: 1. The Assessee – Kasireddy Venkateswara Rao, Prop: Balaji Process, Tuni, E.G. District. 2. The Revenue – ITO, Ward-1, Tuni. 3. The Pr.CIT-2, Visakhapatnam. 4. The CIT(A)-2, Visakhapatnam. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.