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Facts
The assessee, a public company, received unsecured loans and share application money with premium. The Assessing Officer (AO) treated these as unexplained credits under Section 68 of the Income Tax Act, 1961, based on investigation reports suggesting the lenders were shell companies used for routing unaccounted money. The assessee contended that they provided confirmations, bank statements, and paid interest, fulfilling the conditions under Section 68.
Held
The Tribunal held that the assessee had discharged the onus by providing identity, creditworthiness, and genuineness of the loan creditors and investors. The repayment of loans and the long-standing shareholding of investors, along with evidence of transactions through banking channels and TDS on interest, were considered sufficient. The Tribunal noted a contradiction in the AO's stand of treating loans as unexplained while accepting the genuineness of interest paid.
Key Issues
Whether the unsecured loans and share application money received by the assessee constitute unexplained credits under Section 68 of the Income Tax Act, 1961, despite the assessee providing evidence of genuineness and creditworthiness of the parties.
Sections Cited
68, 132, 153A, 139(1), 133(6)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
PER WASEEM AHMED, ACCOUNTANT MEMBER:
These appeals are filed by the assessee against the order of the CIT(A) – 11, Bengaluru vide order dated 23/08/2024 for the assessment years 2013-14 and 2014-15.
The assessee in the memo of appeal has raised as many as 9 grounds of appeal. The Ground Nos. 6 & 7 pertain to issue raised on the Page 2 of 14 merit. We first proceed to adjudicate the issue raised by the assessee on the merit of the addition.
3. The issue raised by the assessee through Ground No. 6 & 7 are that the learned CIT(A) erred in confirming the addition of Rs. 1.35 crore being unsecured loan and Rs. 20 crores being share application money along with premium by treating them as unexplained credit u/s 68 of the Act.
The relevant facts are that the assessee is a public company and engaged in the business of manufacturing of HDPE Bags. The assessee company was subject to search proceedings under section 132 of the Act as on 12th June 2014. Inconsequence to the search, a notice under section 153A of the Act was issued on 3rd December 2014, in response to which, the assessee filed return of income declaring total income at Rs. 1,44,15,010/- which was the same as income declared in original return filed u/s 139(1) of the Act.
The AO during the assessment proceedings notices that the assessee has unsecured loan from certain parties and the differences between the opening outstanding balance and closing balance are detailed asunder: 1. Akansha Vayapar Pvt Ltd. Rs. 1,12,03,775/- 2. Bhavatarini Promoters Pvt Ltd Rs. 6,34,433/- 3. Manikaran Commodities Pvt Ltd Rs. 5,00,000/- 4. Excellent Fintrade Pvt Ltd Rs. 8,01,990/- 5. S. L. Investors & Traders Pvt Ltd. Rs. 4,43,537/- .
Page 3 of 14 5.1 It was also noted that the assessee also received share application money and share premium of Rs. 10 crores (1 cr share + 9 cr premium) from each party namely M/s Akansha Vayapar Pvt Ltd and Manikaran Commodities Pvt Ltd.
5.2 The AO observed that all these companies are run and controlled by the family members of the Klene Paks group (assessee group) and have common directors. The first three companies are registered at same address being “Marshal House 33/1, Netaji Subhash Road, Kolkata” and remaining 2 were based in Bangalore. The AO further observed that there were thousands of companies registered at the above-mentioned Kolkata address. On the impugned address, besides above mentioned 3 companies, there were other companies also registered being run and controlled by the assessee group which includes M/s Paramite Retailer Pvt Ltd. 5.3 The AO from the income tax returns of Kolkata based companies which have advanced loan and paid share application money & premium does not have income in commensurate with the amount being advanced as loan and invested in share capital premium. Furthermore, in case of remaining 2 companies registered at Bangalore address, it was found that these companies have received funds from Kolkata based companies M/s Akansha Vayapar Pvt Ltd and M/s Paramite Retailer Pvt Ltd before making advanced to the assessee company.
5.4 To verify the genuineness of those companies, commission was issued to DDIT (Inv.) unit-1(3), Kolkata. The DDIT (Inv.) in its report .
Page 4 of 14 has submitted that these companies are not existing at the given address neither their name & existent are known by the local persons. Therefore, these companies appear shell or paper companies. In case of M/s Paramite Retailer Pvt. Ltd,, a statement of Shri Amit Aggarwal (director from Nov-1997 till January 2010) who is further director in more than 30 companies was recorded in which he admitted he was mere a dummy director. Further statement of one shri Manohar Lal Nangalia was also recorded in which he admitted these companies were shell companies managed by him through dummy directors used for the purpose of accommodation entries.
5.5 The AO also referred to the report of SIT being formed by Government of India on black money headed by Justice M.B. Shah (retired). The AO specially referred to the third report of the impugned SIT on dealing with “shell companies & beneficial ownership”. Where in the SIT has emphasised on the bulk of the companies registered at single address and director having directorship in multiple numbers of companies.
5.6 Based on the above observation, the AO issued show cause notice proposing to treat the loan amount, share application money along with premium received during the year as unexplained credit under section 68 of the Act.
In response, the assessee contended that the names, current address, PAN, ledger copy, mode of transaction, copy of ITR acknowledgment of the parties etc. were already filed through earlier .
Page 5 of 14 submission. The parties were regular filer of income tax return. Therefore, the creditworthiness of the parties has been established by the fact that they were income tax assessee. The transactions were carried out through banking channel as demonstrated in the ledger account. Hence, the genuineness has also been established. The genuineness of the transaction further establishes by the fact that the impugned parties have confirmed the same by furnishing response to the notices issued under section 133(6) of the Act. The assessee further relying on the various case law contended the assessee is not required to explain the sources of source.
Regarding the report of the DDIT(Inv), the assessee submitted that reports are not correct and are based only on suspicion without conclusive proof. It was explained that the concerned companies had, in fact, sought adjournment before the DDIT vide letter dated 21.11.2016, requesting rescheduling of the hearing to any date after 05.12.2016, which was verbally agreed to. Despite this, the DDIT submitted his report on 25.11.2016 even before the adjourned date. On 01.12.2016, when the authorized representatives appeared with all the required details, the same were not accepted and had to be subsequently sent by speed post on 03.12.2016. The assessee also pointed out that the remark that these companies did not exist at their present addresses is factually incorrect, since notices issued under section 133(6) of the Act were duly served and response along with ledger copies were received from the said companies. It was further emphasized that the report of the DDIT(Inv) is general in nature and does not establish any specific instance of accommodation entries between the assessee and these .
Page 6 of 14 entities. In other words, there is no evidence that the unsecured loans taken from these parties represent the assessee’s own income routed back through them, and therefore the report cannot be relied upon to make any adverse inference.
7.1 The assessee further submitted that no unsecured loan was taken from M/s Paramite Retailer Pvt. Ltd. during the relevant financial year, and therefore drawing any inference from the facts relating to this company and extending it to other parties is unjust and unsustainable. It was argued that the assessee has no connection with the dealings of M/s Paramite Retailer Pvt. Ltd., nor with the statements of Shri Amit Agarwal or Shri Manohar Lal Nangalial, which are general in nature and is not specifically linked to the assessee’s case. The assessee emphasized that mere suspicion cannot take the place of evidence, and unless there is conclusive material to prove that the unsecured loans represent the assessee’s own income, no addition under section 68 can be made. The assessee has already discharged the onus by proving the identity, creditworthiness, and genuineness of the loan creditors through confirmations, responses to notices issued under section 133(6) of the Act, and production of ledger accounts. The transactions have been fully accounted for and carried out through banking channels, and interest has also been paid on such loans after deducting tax at source and issuing TDS certificates. In support, reliance was placed on judicial precedents such as the decision of the Hon’ble Gujarat High Court in DCIT v. Rohini Builders 256 ITR 360 (Guj), which held that once the assessee proves receipt of amounts by account-payee cheques, the initial burden stands discharged. Accordingly, the assessee argued that .
Page 7 of 14 the proposed addition of ₹1,35,83,735 in respect of five parties based on the facts relating to M/s Paramite Retailer Pvt. Ltd. is baseless, unfair, and contrary to law.
However, the AO noted that the investigation conducted by the DDIT (Inv.), Kolkata clearly revealed that the lenders in question were merely paper/shell entities engaged in providing accommodation entries. The sworn statements of entry operators such as Shri Amit Agarwal and Shri Manohar Lal Nangalia established that these concerns were controlled and managed by them and were only used to route unaccounted money. The AO observed that the assessee failed to prove the creditworthiness of these parties or the genuineness of the loan transactions. Mere furnishing of PAN, addresses, ledger copies, confirmations, or filing of ITRs was held insufficient to discharge the onus under section 68 of the Act, as these documents did not establish the real source of funds or the financial capacity of the creditors to advance loans and investments of such magnitude. The AO further emphasized that banking channel transactions by themselves do not prove genuineness, since accommodation entries can also be routed through banks. It was also highlighted that many of the entities were not traceable at their registered addresses, as revealed during spot verifications. Considering the modus operandi admitted by the entry operators, the AO held that the unsecured loans claimed by the assessee amounting to ₹1,35,83,735/- and share application money aling with premium of Rs. 20 crores were unexplained cash credits within the meaning of provisions of section 68 of the Act, and accordingly, the same was added to the assessee’s income.
The aggrieved assessee preferred an appeal before the learned CIT(A). However, the learned CIT(A) concurred with view taken by the AO and confirmed the addition made. The detailed findings of the learned CIT(A) are available at pages 26 to 44 of his order.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 420, compilation of case law etc. and argued that the assessee had submitted confirmations of accounts, income-tax returns, incorporation documents, AGM notices, audit reports, and financial statements of all the loan creditors. These clearly show that the lenders had sufficient funds to provide loans, and all transactions were carried out through proper banking channels. The assessee has also paid interest on these loans and deducted TDS wherever applicable, which proves the genuineness of the transactions.
11.1 The ld. AR further submitted that three of the creditors had already filed these details before the DDIT (Investigation), Kolkata, and their responses are part of the record. It was pointed out that all the creditors were group companies of the assessee, and the loans were genuine business transactions. However, the AO ignored all the evidence and relied only on third-party statements without allowing cross- examination, which is against the principles of natural justice. The ld. AR emphasized that a lender’s capacity cannot be judged only by the income shown in its return, as funds can also come from equity or .
Page 9 of 14 borrowings. Judicial precedents such as S.A. Builders Ltd. v. CIT and MRF Ltd. v. DCIT were relied upon to support the view that business decisions and financial arrangements of the assessee cannot be questioned by the Department.
11.2 The ld. AR also highlighted that the loans in question were duly repaid in subsequent years, as shown in the ledger extracts, which further proves that they were genuine borrowings and not accommodation entries. Therefore, the addition made by the AO under section 68 is baseless and unsustainable in law, and the same deserves to be deleted.
11.3 With respect to share capital and share premium of ₹1,00,00,000 and ₹9,00,00,000 each received from Akansha Vyapaar Pvt. Ltd. and Manikaran Commodities Pvt. Ltd. (also included in the loan parties), the ld. AR submitted that the investors continue to reflect these investments in their audited financial statements even in later years, which shows that the investments were genuine. Merely because the investor companies had shown low returned income does not mean that they lacked capacity, since funds could be available from share capital or borrowings as well. The ld. AR relied on the judgments of the Hon’ble Supreme Court and various High Courts, including CIT v. Lovely Exports (P) Ltd. and CIT v. Steller Investment Ltd., to argue that once the assessee proves the identity of the investor companies and the fact that money was received through banking channels, no addition can be made in the hands of the assessee.
On the contrary, the learned DR reiterated the findings contained in the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the AO has treated the difference in loan balances (opening and closing) and credit of share application money along with premium as unexplained credit which has been confirmed by the learned CIT(A).
13.1 We first proceed to decide the issue of credit of loan amount. On examination of the material placed before us, it is clear that the assessee maintained running accounts with all the loan parties. The AO has made addition of the amount of difference in opening balance and closing balance. The accounts show that amounts were received as well as repaid during the year, in earlier years, and in later years also. From the material placed on record, it is clear that in subsequent years the loans were either fully repaid or converted into advance receivable. This conduct is inconsistent with accommodation entries or sham loans. Further, it is admitted fact that the assessee has produced confirmations, PAN details, bank statements, and financial records of the lenders. The payments and repayments were routed through banking channels, and interest was paid after deduction of tax at source. These facts establish the identity of the lenders, the genuineness of the transactions, and the creditworthiness of the parties. Once these primary conditions under section 68 are fulfilled, the addition cannot be sustained merely on suspicion or on general investigation reports which .
Page 11 of 14 are not specific to the assessee. The law is well settled that suspicion cannot replace proof. Therefore, in our considered view, the addition made on account of unsecured loans deserves to be deleted. At this stage it also pertinent to refer the judgment of Hon’ble Gujarat High Court in the case of PCIT vs. Ojas Tarmake Pvt Ltd reported in 156 taxmann.com 75 where it was held as under: What is evident is that the Tribunal found on facts that the amount of loan received by the assessee was returned to the loan party during the year itself and all transactions were carried out through banking channel. The Tribunal on the decision of Dy. CIT v. Rohini Builders [2003] 127 Taxman 523/[2002] 256 ITR 360 (Guj.), held in favour of the assessee. [Para 3] 13.2 Furthermore, as observed earlier the assessee has maintained running account with the loan parties and has received as well as repaid during the year, in earlier years, and in later years also. Meaning thereby the assessee has received loan from those parties in earlier also. The amount received in earlier year has not been disturbed from the very same party and accepted. Therefore, in our considered opinion and applying the principle of consistency the receipt of fresh loan from the same party in the year under consideration cannot held unexplained. It is also important to note that the assessee has paid interest on outstanding loan amount from those parties on which relevant tax at sources also deducted. We find that the AO has accepted the genuineness of payment of interest on the impugned loan. Thus, the AO is taking contradictory stand. On one hand, the AO is treating the loan amount as unexplained credit but at the same time admitted the genuineness of payment of interest on the same loan credit. Therefore, the action of the Ao is not justified in the given facts and circumstances. As regards to the credit of share capital and share premium received from Akansha Vyapaar Pvt. Ltd. and Manikaran Commodities Pvt. Ltd. is .
Page 12 of 14 concern, we note that these very parties were also lenders to the assessee, and their loan transactions have already been held to be genuine in the preceding paragraphs of this order. The assessee has furnished complete evidence in support of these investments including confirmations, PAN, ITRs, and bank statements. More importantly, the investor companies continue to be reflected as shareholders in the assessee company even after more than ten years. This long-standing shareholding itself is strong evidence of the genuineness of the investment, since accommodation entries are generally short-lived and not sustained for such a long period. The fact that the investments are shown in the audited balance sheets of the investor companies in subsequent years further supports the assessee’s claim. In view of the settled legal position that once the assessee proves the identity of the shareholders and the receipt of money through banking channels, no addition can be made in the hands of the company, we hold that the addition made on account of share capital and premium is not justified. Accordingly, considering the entire facts and circumstances, we hold that both the loan credits and share capital with premium are genuine. Therefore, the additions sustained by the lower authorities are hereby directed to be deleted. Hence the grounds of appeal raised by the assessee on merit are hereby allowed.
14. Coming to the legal ground raised by the assessee through ground Nos. 2 to 5 of the appeal. As the assessee has been provided relief on the merit of the case, we are not inclined to adjudicate the legal grounds. Hence the legal ground raised by the assessee are hereby dismissed as infructuous.
Coming to issue raised by assessee in ground Nos. 1, 8 and 9, we note that issues raised therein are either general or consequential in nature and do not require any separate adjudication. Hence, the same are hereby dismissed as infructuous.
In the result, the appeal of the assessee is hereby partly allowed. an appeal by the assessee for A.Y. 2014-15
At the outset, we note that the issues raised by the assessee in its grounds of appeal
for the AY 2014-15 are identical to the issue raised by the assessee in 2013-
14. Therefore, the findings given in shall also be applicable for the assessment years 2014-15. The appeal of the assessee for the A.Y. 2013-14 has been decided by us vide paragraph No.23 to 23.2 of this order wherein we have allowed the grounds of appeal of the assessee on merits whereas dismissed the legal and other grounds as infructuous. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2013-14 shall also be applied for the assessment year 2014-15. Hence, the ground of appeal filed by the assessee on merit is hereby allowed whereas other grounds being legal ground and the ground which are general or consequential in nature are hereby dismissed as infructuous.
In the result appeal of the assessee is hereby partly allowed.
In the combined result, both the appeals of the assessee are hereby partly allowed.