THE ACIT-24(1), MUMBAI vs. MUMBAI SHELTER HOUSING DEVELOPMENT, MUMBAI

PER PRASHANT MAHARISHI, AM:

The total Income for the year under consideration was assessed at Rs. 77,94,14,435/-.

The assessee has failed to establish the business i. exigency for introduction of major capital by one partner and withdrawal made by the other partner of the firm thus apparently giving undue benefit to the partner making the withdrawal. The assessee has failed to prove the genuineness ii. of transaction in the capital account of the partners of the firm, during the assessment proceeding iii. For introduction of capital or any major investment in another entity, a company is required to pass a special resolution and also there are ROC compliances in this respect however, no such compliances have been met by the partner company M/s J P lnfra (Mumbai) Ltd, being the major contributor towards the so called capital account, thereby failing to prove genuineness of the transaction in the capital account, during the assessment proceeding. As per partnership deed, the partner is liable to iv. receive interest @ 12% on the excess capital

All the ingredients of section 68 of the Act viz. i. identity of the partner company, genuineness of the transaction and creditworthiness of the partner company have been duly established by furnishing relevant documentary evidences in the form of ledger confirmation, ITR, Bank Statement, Audited Financials, Board Resolution of JP Mumbai, Bank statements of assessee firm, assessment orders of partner company for the

“.5.3 During the course of appellate proceedings, further Notice dated 05.08.2022 was issued and served upon the appellant. Vide this Notice, appellant was requested to submit the copy of Draft Assessment Order, copy of partnership deed of the firm, show cause notice issued by the AO and all the submissions filed before AO during the assessment proceedings. The A.R. of the appellant filed the details vide its submission dated 10.08.2022.

5.5 In the instant case, appellant is a partnership firm engaged in the business of Construction of real estate projects. It had undertaken a project of reconstruction of old premise in Mumbai and had bullt a 22 storey tower. The appellant filed its return of income for A.Y. 2018-19 on 24.10.2018 declaring total loss of Rs.32,81,400/-. The assessment order u/s. 143(3) r.w.s. 260 r.w.s. 144B of the Act dated 16.03.2022 for A.Y. 2018-19 was passed by the AO under 'Faceless Assessment Scheme'. During the course of assessment proceedings, the AO observed that during A.Y. 2018-19, the appellant firm was in receipt of large capital introduction of Rs.74,60,68,166/- from its partner company -M/s. J.P. (Mumbai) Pvt. Ltd. In this regard, AO asked for various details & documents in support of the said capital introduction vide notices s. 142(1) in reply to which the appellant filed submissions from time to time. Thereafter, the appellant was in receipt of the Show cause notice /Draft Assessment order dated 26.02.2021 proposing addition to the income of appellant of above capital received from M/s. J.P. Infra (Mumbai) Pvt. Ltd. amounting to ₹ 74,60,68,166 u/s. 68 of the Act by treating it as unexplained credits and asking the appellant to show cause

5.5.1 During the year under consideration, funds have been received by the appellant, from its partners, from time to time and subsequently funds have been withdrawn by the partners on certain occasions. During the course of assessment proceedings for A.Y. 2018-19, AO made an observation that the appellant was in receipt of huge amount of Rs.74,60,68,166/- (gross amount without netting off withdrawals) from its partner company namely M/s. J.P. Infra (Mumbai) Pvt. Ltd. and this fund has been withdrawn from time to time especially by the other partner, Shri Vijay Omprakash Jain at the cost of M/s. JP Infra (Mumbai) Pvt. Ltd. thereby taking it as the income of the appellant. Further, AO observed that no evidence of business exigencies or purpose has been furnished by the appellant for capital introduced and withdrawn by its partners multiple times throughout the year. Assessing Officer further observed that

5.5.2 AO has also observed in the assessment order that financial statement of Ms. JP Infra (Mumbai) Pvt. Ltd. depicts a profits of Rs.3,36,47,326/- only whereas capital introduced was to the tune of Rs.74,60,68,166/-.

5.5.2.1 Appellant has contended that it would give a very short- sighted picture if only the income for the year is considered vis-à-vis the capital introduction made by the partner. Net worth of the partner company is Rs.71.11 crores and funds were available on account of sales turnover of Rs.256.54 crores, capital withdrawals from the partnership firm, repayment of loans by borrowers, loans taken during the year, sale proceeds of mutual funds & shares, business advances received, etc. These sources of funds also need to be considered. Appellant has also submitted complete details of source of each capital contribution made by the partner company in the appellant firm. Therefore, appellant has submitted that the creditworthiness of the partner company was proved beyond any doubt.

5.5.3.1 Appellant has argued that amount invested by M/s. J.P. Infra (Mumbai) Pvt. Ltd. in the appellant firm represents equity owned by such partners and therefore, the same is in the nature of capital contribution. There is no requirement under any law that there has to be only occasional contribution of capital by the partners and not frequent contributions. If the firm is in need of funds for its business, then it would understandably accept the funds from its partners instead of outsiders and there is no restriction under any law in this regard. Both the appellant and Ms. J.P. Infra (Mumbai) Pvt. Ltd. have treated the above contribution its books of accounts as 'Capital contribution in firm'. No contrary view has been taken by the auditors regarding the nature of contributions made by M/S.P. Infra (Mumbai) Pvt. Ltd. Even the Board Resolution passed by M/s. JP Infra (Mumbai) Pvt. Ltd. suggests that the funds were intended to be invested as capital contribution. Revenue authorities cannot put itself in the armchair of the assessee to decide what is capital contribution and is not.

5.5.4 AO has given a finding that Capital Contribution and Withdrawal do not confirm to Profit sharing ratio. These transactions clearly point towards extending undue benefit to one partner at the cost of funds siphoned from the partner company.

5.5.4.1 Appellant has argued that there is no law necessitating that the contribution and withdrawal has to

5.5.5 AO has held that the persons connected with the appellant and partner company are within the ambit of the related parties.

5.5.5.1 Appellant states that M/s. J.P. Infra (Mumbai) Pvt. Ltd. has suo moto reported the above transactions in the Financial Statements under Related Party disclosures. It was clearly stated in earlier submission that M/s. J.P. Infra (Mumbai) Pvt. Ltd. being the flagship company of the assessee group is a part of assessee group and therefore it is quite natural that the persons connected with the partner company & assessee firm happens to be related to each other. Analysis made by the AO establishing the related party connection is not striking piece of information unearthed by AO and hence, cannot be viewed adversely against the assessee so as to stamp a genuine transaction as that of unexplained nature.

5.5.6 AO held that there is violation of the provision of related party transactions as no special resolution passed u/s. 185 of the Companies Act.

5.5.7 AO has observed that funds have been credited and withdrawn by the partner company from time to time without any business exigency.

5.5.7.1 Appellant states that Capital was introduced in the appellant to meet the funding requirement of the project. Surplus capital was withdrawn for mainly meeting the funding requirement of the projects in other real estate entities of assessee group. In a real estate business, there are several approvals and No Objection Certificates to be obtained at regular interval from government or local authorities which entails considerable time and effort. This time factor is very crucial to manage the business affairs cost- wise as well as commitment-wise. Revenue cannot put itself in arm-chair of a businessman to decide a particular issue. In view of the above, the business exigency of capital introduction and withdrawal was duly established and therefore, no adverse inference could be drawn.

5.5.8.1 Appellant contends that although there is no mandate u/s. 68 to prove source of source in respect of capital contribution received from partner (which was also supported by various judicial precedents), the assessee still furnished the complete details of source of each capital contribution made.

5.6 I have considered the positions put forward by appellant in its submission as well as by AO in assessment order. I have duly examined the facts of the case, written submissions of the appellant including various case laws relied upon and the material placed on record. The issue in hand is regarding the amount infused by the partner in the appellant firm to be tested in the context of the provisions of sec 68 of the Act.

5.6.1 Section 68 of the Act of 1961 says that where any sum is found credited in the books 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 Income-tax Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year. Therefore, according to section 68, the first burden is on the appellant to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the appellant is satisfactory, then that entry cannot be charged as the income of the previous year of the appellant. In case the explanation offered by the appellant is not satisfactory or the source offered by

5.6.2 With this background, now I shall proceed to examine the appellant's case under consideration, whether appellant has discharged its onus to prove, prima facie, the identity, creditworthiness and genuineness of the capital received by it from the partner company M/s. JP Infra (Mumbai) Pvt. Ltd. During the course of assessment proceedings, appellant has submitted various details, documents and explanation in respect of capital introduced by the partner company M/s. J.P. Infra (Mumbai) Pvt. Ltd. such as

5.6.3 Further, explaining the business credentials and past history of the partner company, appellant submitted before the Assessing Officer that M/s. JP Infra Mumbai is the

5.6.4 From these documentary evidences, credential of the partner company, assessment orders passed in the case of the partner company and detailed rebuttal against observations made by the Assessing Officer, appellant has prima facie discharged its onus of proving the identity and creditworthiness of the partner company and also the genuineness of the transaction, being the three essential ingredients u/s. 68 of the Act. In fact, the Assessing Officer has found merit in the submission of the appellant and has mentioned at first para of page no. 19 of the assessment order that creditworthiness of the partner company has never been in question which indicates that the Assessing Officer has himself accepted the creditworthiness of the partner company which is one of the most important

5.6.5 I have carefully analyzed the adverse observations made by the Assessing Officer and the rebuttal filed by the appellant against the same. The Assessing Officer has made the addition mainly citing the reason that the funds have been credited and withdrawn by the partner company from time to time without any business exigency and that the appellant has not provided any documentary evidence of any agreement as regards the huge withdrawals or any evidence which could indicate any business need. In the event, the Assessing Officer has doubted the genuineness of the transaction. In this regard, the appellant had submitted that the group comprises of various entities undertaking various real estate projects and that during the year under consideration, the partners have withdrawn surplus capital from the appellant firm for mainly meeting the funding requirement of the projects in other real estate entities. As and when there is a requirement of funds in other projects, the partners withdraw its capital from the appellant firm and utilize the same towards the other projects. This is backed by the Partnership Deed wherein it is provided that the partners shall withdraw such sum as may be agreed by the partners from time to time. The submission of the appellant is found to be acceptable as assisting various group companies financially which are in the same line of business of Real Estate is essentially out of commercial expediency and therefore, the Assessing Officer is not correct to state that there is no business exigency. In this regard, reference is made to the decision of Hon'ble

5.6.6 Further, the Assessing Officer has observed that the appellant firm has been just used to route money siphoned off from the partner company. In this regard, the appellant has pointed out that the Fund Flow Statement for FY 2017- 18 submitted vide letter dated 04.03.2022 clearly reveals that the net capital introduced by the partner JP Infra Mumbai is Rs. 36.43 crores only as there have been withdrawals of Rs. 36.55 crores as well by JP Infra Mumbai. Rs. 39.51 crores have been utilized towards business

5.6.7 The Assessing Officer's observation of income of JP Infra Mumbai being less than the capital contribution is not at all relevant as the Assessing Officer has already accepted the creditworthiness of JP Infra Mumbai. Further, as regard to Assessing Officer's claim that exact source of capital introduced by the partner company is not established, it is noted that the appellant has submitted complete details of source of each capital contribution made by JP Infra Mumbai in the appellant firm. As per the said details submitted by the appellant, it is seen that the source of capital introduced by JP Infra Mumbai was collection from debtors, capital withdrawals from the partnership firm, repayment of loans by borrowers, loans taken during the year, sale proceeds of mutual funds & shares, business advances received, etc. The appellant had also furnished the copy of bank statement of partner company JP Infra Mumbai which reflects that adequate funds were lying in the bank account of the partner company before introducing capital into the appellant firm. It is not even a case where any cash deposits are found in the bank statement of the partner company JP Infra Mumbai before lending the funds to the appellant firm.

5.6.9 Further, the Assessing Officer has alleged that the capital account of the appellant is not in conformity with its own Partnership Deed as interest has not been charged as per Partnership Deed. However, perusal of the Partnership Deed of the appellant shows that Clause no. 6 of the Partnership Deed provides that the interest rate may be decided as per mutual agreement between the partners which can be NIL. Even otherwise, for the purpose of applying the provisions of section 68, such a contention of the Assessing Officer has no relevance.

5.6.10 The Assessing Officer has pointed out in Assessment order that there has been a violation of the provision of related party transactions u/s. 185 of the Companies Act, 2013 which envisages requirement of special resolution whereas the copy of resolution furnished by the appellant is

5.6.11 The adverse inferences drawn by the Assessing Officer is misplaced as the expectations from the appellant has travelled beyond the ingredients of onus as prescribed by section 68 of the Act. In any case, the issues raised by Assessing Officer are just arguments without any cogent substance which have also been negated and duly countered by the appellant along with the necessary documentary evidence. In my considered view, it does not have any relevance in rejecting the genuineness of the transaction in view of the documentary evidences filed by the appellant. Hence, there is no merit in the conclusions by the Assessing Officer with regard to lack of genuineness.

5.7 In the case of CIT v. Nemi Chand Kothari [2004] 136 Taxman 213/264 ITR 254 (Gauhati), the Hon'ble Guahati High Court has thrown light on another aspect touching the issue of onus on assessee under section 68, by holding that the same should be decided by taking into consideration the provision of section 106 of the Evidence Act which says that a person can be required to prove only such facts which are

“While interpreting the meaning and scope of section 68, one has to bear in mind that normally, interpretation of a statute shall be general, in nature, subject only to such exceptions as may be logically permitted by the statute itself or by some other law connected therewith or relevant thereto. Keeping in view these fundamentals of interpretation of statutes, when we read carefully the provisions of section 68, we notice nothing in section 68 to show that the scope of the inquiry under section 68 by the Revenue Department shall remain confined to the transactions, which have taken place between the assessee and the creditor nor does the wording of section 68 indicate that section 68 does not authorize the Revenue Department to make inquiry into the source(s) of the credit and/or sub- creditor. The language employed by section 68 cannot be read to impose such limitations on the powers of the Assessing Officer. The logical conclusion, therefore, has to be, and we hold that an inquiry under section 68 need not necessarily be kept confined by the Assessing Officer within the transactions, which took place between the assessee

"Burden of proving fact especially within knowledge. - When any fact is especially within the knowledge of any person, the burden) of proving that that fact upon him.

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What, thus, transpires from the above discussion is that while section 106 of the Evidence Act limits the onus of the assessee to the extent of his proving the source from which he has received the cash credit, section 68 gives ample freedom to the Assessing Officer to make inquiry not only into the source(s) of the creditor but also of his (creditors) sub-creditors and prove, as a result, of such inquiry, that the money received by the assessee, in the form of loan from the creditor, though routed through the sub- creditors, actually belongs to, or was of, the assessee himself. In other words, while section 68 gives the liberty to the Assessing Officer to enquire into the source/source from where the creditor has received the money, section 106 makes the assessee liable to disclose only the source(s) from where he has himself received the credit and it is not the burden of the assessee to prove the creditworthiness of

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"In other words, though under section 68 an Assessing Officer is free to show, with the help of the inquiry

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"Keeping in view the above position of law, when we turn to the factual matrix of the present case, we find that so far as the appellant is concerned, he has established the identity of the creditors, namely, Nemichand Nahata and Sons (HUF) and Pawan Kumar Agarwalla. The appellant had also shown, in accordance with the burden, which rested on him under section 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors aforementioned. In fact the fact that the assessee had received the said amounts by way of cheques was not in dispute. Once the assessee had established that he had received the said amounts from the creditors aforementioned by way of cheques, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans. Thereafter the burden had shifted to the Assessing Officer to prove the contrary. On mere failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, such failure as a corollary could not have been and ought not to have

5.8 Further, in the case of CIT v. S. Kamaljeet Singh [2005] 147 Taxman 18 (All.) Hon'ble Allahabad High Court, on the issue of discharge of assessee's onus in relation to a cash credit appearing in his books of account, has observed and held that

"4. The Tribunal has recorded a finding that the assessee has discharged the onus which was on him to explain the nature and source of cash credit in question. The assessee discharged the onus by placing (0) confirmation letters of the cash creditors; ()) their affidavits: (i) their full addresses and GIR numbers and permanent account numbers. It has found that the assessee’s burden stood discharged and so, no addition to his total income on account of cash credit was called for. In view of this

5.9 Hon'ble Calcutta High Court in the case of S.K. Bothra & Sons, HUF v. ITO [2011] 15 taxmann.com 298/203 Taxman 436/[2012] 347 ITR 347, held that

5.10 In view of the above cogent explanation & rebuttal of the issues raised by the AO in assessment order and vital

5.11 I have called for the draft assessment order and submission of the appellant. Explanations furnished by the appellant in reply to Draft Assessment order have not been adequately dealt with as can be seen on comparison of the Draft Assessment order and Final Assessment order. They are almost the same. Further, as rightly pointed out by the appellant, addition u/s. 68 of partner's contribution cannot be made in the hands of partnership firm. In this connection, the appellant has placed reliance on the decision of: jurisdictional Bombay High Court in the case of Narayandas Kedarnath v. Commissioner of Income-tax [1952] 22 ITR 18 (BOM.).It has been held that

"During relevant accounting years, partners of assessee-firm brought in certain amounts by means of bank drafts.

In fact, the case of the appellant firm is on a much better footing wherein the Assessing Officer has not even doubted the creditworthiness of the partner company JP Infra Mumbai and hence, in absence of any adverse material against the appellant, the view taken by the Assessing Officer to treat the amount received by the appellant firm to represent undisclosed profits or income of the appellant is not acceptable.

5.12 I have carefully considered both the positions. From the observations of the AO in the assessment order as also the submissions of the AR, I find that more than sufficient evidence has been furnished to explain the source of the funds introduced by Partner Company into the appellant firm during the year under consideration. During the assessment proceedings, appellant has furnished ledger confirmation, ITR, Bank Statement, Audited Financials, Board Resolution of M/s. JP Infra (Mumbai) Pvt. Ltd. and Bank Statements of the appellant firm. M/s, JP Infra

5.13 Considering the above, it is clear that the appellant has substantially proved the three essential Ingredients in relation to the capital introduction by the partner company during the assessment proceedings which is as under

It is clear that the appellant had furnished necessary supporting evidences to establish all the three ingredients of identity and creditworthiness of the Partner Company and genuineness of the transaction in respect of capital

5.14 Further, AO has stated in the assessment order that appellant did not buttress its objection with any tenable reason. However, having perused the submission filed by the appellant before the AO, it is clear that appellant has provided detailed reply against each and every adverse observation raised along with necessary supporting documents. In this regard, A.O. has not pointed out any defect in the documentary evidences furnished by the appellant against the show cause notice.

5.15 In light of above discussions, I am of the opinion that addition of Rs.74,60,68,166/- made by AO u/s 68 deserves to be deleted. Appellant succeeds in Ground of appeal no 2.”

Order pronounced in the open court on 31.03. 2023.

Sd/- Sd/- (KAVITHA RAJAGOPAL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 31.03.2023 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent

Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai