DY COMMISSIONER OF INCOME TAX CIRCLE 5 PUNE, PUNE vs. DIPTI NARENDRA LULLA, PUNE

Facts of the case, in brief, are that the assessee is an individual and engaged in wholesale business of IMFL and beer under the name and style of ‘Grace Enterprises’, a proprietary concern. The earlier proprietor of Grace Enterprises was Mr. Narendra M Lulla, husband of the assessee. Due to his unfortunate death on 14.04.2017 the business has been taken over by the assessee as legal heir of Mr. Narendra M Lulla w.e.f. 15.04.2017. She filed her return of income on 26.09.2018 declaring total income of Rs.2,81,03,870/-. The case of the assessee was selected for complete scrutiny through CASS on the following issues:

Accordingly statutory notices u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) were issued and served on the assessee in response to which the assessee filed the requisite details. During the course of assessment proceedings the Assessing Officer observed from the audited Balance Sheet and Profit & Loss Account filed by the assessee that the assessee has squared up substantial amount of unsecured loan during the year under consideration. He, therefore, asked the assessee to furnish the complete details of unsecured loans taken / squared up during the year under consideration with documentary evidence. The assessee in response to the same furnished the list / details of outstanding unsecured loans amounting to Rs.5,16,85,602/- as on 31.03.2018. The Assessing Officer noticed that the assessee has paid interest @ 15% on the said unsecured loans of Rs.5,16,85,602/- and in most of the cases, no TDS was deducted. He, therefore, asked the assessee as to why the interest should not be disallowed for non-deduction of TDS in most of the cases. The assessee in response to the same filed the details of unsecured loans with balance confirmation. It was submitted that the assessee has deducted TDS at the applicable rates and in some of the cases where the loan creditors have submitted Form 15G the assessee has not deducted TDS on the same. The assessee uploaded Form 15G in the e-filing portal.

However, the Assessing Officer was not satisfied with the arguments advanced by the assessee. He noted that the assessee has received an amount of Rs.12,81,47,150/- as unsecured loans during the year and also squared up of the loans of Rs.14,55,15,356/- during the year under consideration. The assessee has not furnished any written submission for the purpose of loan or any justification in spite of providing ample opportunities of being heard. Further the assessee has paid interest of Rs.87,01,674/- on unsecured loans during the year on which TDS was not deducted for some persons / parties. The assessee has not furnished the copy of Form 15G. Further, the assessee also could not substantiate with evidence to his satisfaction regarding the creditworthiness of persons / parties from whom such loans were taken. In view of the above, the Assessing Officer made addition of Rs.5,16,85,602/- to the total income of the assessee by observing as under:

Since he disallowed the unsecured loans, therefore, he disallowed the interest of Rs.87,01,674/- paid by the assessee. Further, the Assessing Officer in absence of any satisfactory explanation given by the assessee, made addition of Rs.14,55,15,356/- being the squared up of unsecured loans by observing as under:

Further, the Assessing Officer computed disallowance of interest of Rs.17,67,401/- but did not make any addition of the same by observing as under:

The Assessing Officer also made addition of Rs.3,62,267/- on account of expenses being personal in nature which was deleted by the Ld. CIT(A) / NFAC. However, since the Revenue is not in appeal on this issue, we are not concerned with the same. Thus, the Assessing Officer determined the total income of the assessee at Rs.23,43,68,770/- as against the returned income of Rs.2,81,03,870/-.

Before the Ld. CIT(A) / NFAC it was argued that the addition u/s 68 of the Act has been made by the Assessing Officer in an inappropriate manner without considering the submissions of the assessee. The assessee submitted that majority of the loans covered under the above referred addition of Rs.5.18 crores are carried over balances over the last many years and in any case from the erstwhile business of late Mr. Narendra Lulla. Further, scrutiny assessments have taken place for assessment years 2012-13, 2013-14, 2014-15 and 2016-17 wherein most of the creditors, which are appearing in the impugned assessment year, have been accepted. It was argued that while concluding the scrutiny assessment for the impugned assessment year the Assessing Officer did not carry out any proceedings u/s 133(6) of the Act to make any verification from his side. It was argued that once the assessee has discharged the onus cast on it, the Assessing Officer is supposed to make some enquiry from his side. It was accordingly argued to delete the additions.

Based on the arguments advanced by the assessee, the Ld. CIT(A) / NFAC deleted the addition of Rs.5,16,85,602/-, Rs.87,01,674/- and Rs.14,55,15,356/- respectively made by the Assessing Officer by observing as under:

Aggrieved with such order of the Ld. CIT(A) / NFAC, the Revenue is in appeal before the Tribunal by raising the following grounds:

The Ld. DR submitted that the Ld. CIT(A) / NFAC in a very cryptic order and by accepting certain additional evidences in violation of Rule 46A of I.T. Rules, deleted the additions made by the Assessing Officer. Referring to the decision of Hon’ble Delhi High Court in the case of CIT vs. Jansampark Advertising and Marketing P. Ltd. reported in (2015) 375 ITR 373 (Del), he submitted that the Ld. CIT(A) / NFAC should have made proper enquiries before deleting the addition. However, he has failed to do so as prescribed in section 250(4) of the Act. Therefore, the order of the Ld. CIT(A) / NFAC be reversed and that of the Assessing Officer be restored.

The Ld. Counsel for the assessee on the other hand filed the following chart:

He submitted that the Assessing Officer has passed the order u/s 143(3) for assessment years 2012-13, 2013-14, 2014-15 and 2016-17. Referring to the above table he submitted that all the creditors are continuing from assessment year 2012- 13, therefore, their identity cannot be doubted. Referring to letter dated 09.01.2020 addressed to the Assessing Officer in response to notice u/s 143(2) of the Act, copies of which are placed at pages 118 to 142 of the paper book, he submitted that the assessee has given the Ledger account and confirmations of 20 parties. Referring to letter dated 23.02.2021 addressed to the Assessing Officer in response to notice u/s 142(1) of the Act, copies of which are placed at pages 153 to 161 of the paper book, he submitted that the assessee has given the Ledger account and confirmations of six parties along with the details of interest paid. Referring to letter dated 20.05.2021 in response to the show cause notice issued by the Assessing Officer, he submitted that the assessee has given the details of unsecured loans, ledger account and confirmations of 10 parties along with bank statements for assessment year 2018-19. Referring to pages 215 to 240 of the paper book, he drew the attention of the Bench to Form 15G. Referring to various pages of the paper book, he submitted that the assessee has submitted all the details before the Assessing Officer to discharge the onus cast on the assessee. Under these circumstances, stating that the assessee has not filed any details before the Assessing Officer and has filed the additional evidences before the Ld. CIT(A) / NFAC is not correct. He submitted that since the Ld. CIT(A) / NFAC after considering the earlier assessment orders passed u/s 143(3) of the Act and the submissions before the Assessing Officer made by the assessee from time to time has deleted the addition, therefore, the same being in order and in accordance with law should be upheld and the grounds raised by the Revenue be dismissed.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case made addition of Rs.5,16,85,602/- u/s 68 r.w.s. 115BBE of the Act on the ground that the assessee failed to furnish the complete identity of the loan creditors along with their bank account statements and the trail of unsecured loans. Since he disallowed an amount of Rs.5,16,85,602/-, he disallowed the interest amounting to Rs.87,01,674/-. Further in absence of any satisfactory explanation regarding the details of squared up loan, the Assessing Officer made addition of Rs.14,55,15,356/- as unexplained investment u/s 69 of the Act. We find the Ld. CIT(A) / NFAC, deleted the above additions, the reasons of which has already been reproduced in the preceding paragraphs. It is the grievance of the Revenue that when the assessee failed to furnish the details of persons who have given the loans along with their creditworthiness, the Ld. CIT(A) / NFAC, without calling for a remand report from the Assessing Officer, deleted the addition which is a clear violation of Rule 46A. Further, the huge amount of squared up loan amounting to Rs.14,55,15,356/- has been deleted by the Ld. CIT(A) / NFAC in a very cryptic manner without conducting any enquiry or without giving any valid reason.

We find some force in the above arguments of the Ld. DR. A perusal of the assessment order shows that the Assessing Officer while making addition of Rs.5,16,85,602/- has mentioned as under:

Similarly, for addition of Rs.14,55,15,356/- the Assessing Officer at para 3.5 of the order has mentioned as under:

A perusal of the details furnished by the assessee in respect of addition of Rs.5,16,85,602/- on account of unsecured loans shows that although some of the amounts are carried forward loans, however, there are certain amounts which have been accepted by the assessee during the year under consideration. For example, in case of Girish Traders the assessee has accepted an amount of Rs.1,50,00,000/- as fresh loan during the impugned assessment year. Similarly, in case of Aparna N Lulla an amount of Rs.18 lakhs has been accepted by the assessee during the year as fresh loan. In case of Jethi Gulabrai Dasani, there is an increase in the loan from Rs.6,26,261/- as on 31.03.2017 to Rs.7,10,806/-. The assessee has accepted fresh loan of Rs.25 lakhs from Pushpa D Mulchandani who has never given any loan to the assessee in the past. Similarly, in the case of Siddhant N Lulla the outstanding loan as on 31.03.2018 was shown at Rs.70,69,738/- as against Rs.38,19,738/- in the preceding assessment year. In other words, the assessee has accepted an amount of Rs.32 lakhs as fresh loan during the year. Under these circumstances, simply mentioning that many of the creditors have given unsecured loans to the assessee in the preceding assessment years which were accepted cannot be a ground to delete the huge addition of Rs.5,16,85,602/- without verifying the creditworthiness of the loan creditors.

A perusal of the reasons given by the Ld. CIT(A) / NFAC for deleting the addition shows that there is clear non-application of mind by the Ld. CIT(A) / NFAC.

Similarly a perusal of the order of the Ld. CIT(A) / NFAC shows that while deleting the addition of Rs.14,55,15,356/- he has not given any reason and in a very cryptic manner deleted the addition on the basis of certain submissions made by the assessee which apparently were not before the Assessing Officer. Be that it may be, there is no clear-cut discussion about for what purpose the assessee has obtained the huge loan of Rs.14,55,15,356/- which was repaid during the year. The creditworthiness of all these persons who have never given such loans to the assessee has been deleted at the stroke of a pen by simply mentioning since the addition made by the Assessing Officer on account of unsecured loan has been deleted, therefore, no separate adjudication is required.

It is the settled proposition of law that for accepting any loan the three ingredients viz. identity and creditworthiness of the loan creditors and the genuineness of the transaction have to be proved by the assessee. The onus is always on the assessee to prove the above three ingredients. We find the assessee in the instant case has failed to do so before the Assessing Officer and the Ld. CIT(A) / NFAC in a very cryptic order has deleted the additions.

We find the Hon’ble Delhi High Court in the case of CIT vs. Jansampark Advertising and Marketing P. Ltd. (supra) has observed as under:

The provision of appeal, before the CIT (Appeals) and then before the ITAT, is made more as a check on the abuse of power and authority by the AO. Whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the two appellate authorities above are also forums for fact- finding, in the event of AO failing to discharge his functions properly, the obligation to conduct proper inquiry on facts would naturally shift to the door of the said appellate authority. For such purposes, we only need to point out one step in the procedure in appeal as prescribed in Section 250 of the Income Tax Act wherein, besides it being obligatory for the right of hearing to be afforded not only to the assessee but also the AO, the first appellate authority is given the liberty to make, or cause to be made, "further inquiry", in terms of sub-section (4) which reads as under:- “The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals)”.

The further inquiry envisaged under Section 250(4) quoted above is generally by calling what is known as "remand report". The purpose of this enabling clause is essentially to ensure that the matter of assessment reaches finality with all the requisite facts found. The assessment proceedings re- opened on the basis of preliminary satisfaction that some part of the income has escaped assessment, particularly when some unexplained credit entries have come to the notice (as in Section 68), cannot conclude, save and except by reaching satisfaction on the touchstone of the three tests mentioned earlier; viz. the identity of the third party making the payment, its creditworthiness and genuineness of the transaction. Whilst it is true that the assessee cannot be called upon to adduce conclusive proof on all these three questions, it is nonetheless legitimate expectation of the process that he would bring in some proof so as to discharge the initial burden placed on him. Since Section 68 itself declares that the credited sum would have to be included in the income of the assessee in the absence of explanation, or in the event of explanation being not satisfactory, it naturally follows that the material submitted by the assessee with his explanation must itself be wholesome or not untrue. It is only when the explanation and the material offered by the assessee at this stage passes this muster that the initial onus placed on him would shift leaving it to the AO to start inquiring into the affairs of the third party.

The CIT (Appeals), as also the ITAT, in the case at hand, in our view, unjustifiably criticized the AO for not having confronted the assessee with the facts regarding return of some of the summons under Section 131 or not having given opportunity for the identity of all the share applicants to be properly established. The order sheet entries taken note of in the order of CIT (Appeals) seem to indicate otherwise. The order of CIT (Appeals), which was confirmed by ITAT in the second appeal, does not demonstrate as to on the basis of which material it had been concluded that the genuineness of the transactions had been duly established. There is virtually no discussion in the said orders on such score, except for vague description of the material submitted by the assessee at the appellate stage. Whilst it does appear that the time given to the assessee for proving the identity of the third party was too short, and further that it is probably not always possible for the assessee placed in such situation to be able to enforce the physical attendance of such third party (who, in the case of share applicants vis-à-vis a company, would be individuals at large and may not be even in direct or personal contact), the curtains on such exercise at verification may not be drawn and adverse inferences reached only on the basis of returning undelivered of the summonses under Section 131. Conversely, with doubts as to the genuineness of some of the parties persisting on account of non-delivery of the processes, the initial burden on the assessee to adduce proof of identity cannot be treated as discharged.

We are inclined to agree with the CIT (Appeals), and consequently with ITAT, to the extent of their conclusion that the assessee herein had come up with some proof of identity of some of the entries in question. But, from this inference, or from the fact that the transactions were through banking channels, it does not necessarily follow that satisfaction as to the creditworthiness of the parties or the genuineness of the transactions in question would also have been established.

The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not have closed the chapter simply by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of ITAT, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the Revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under Section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a "further inquiry" in exercise of the power under Section 250(4). This approach not having been adopted, the impugned order of ITAT, and consequently that of CIT (Appeals), cannot be approved or upheld.”

In view of the above discussion and respectfully following the decision of Hon’ble Delhi High Court cited (supra), we deem it proper to restore the issue to the file of the Ld. CIT(A) / NFAC with a direction to pass a speaking order on the issue of additions u/s 68 and 69 of the Act made by the Assessing Officer. The Ld. CIT(A)/NFAC may call for a remand report from the Assessing Officer on the basis of additional evidences filed by the assessee, if any. Needless to say, the Ld. CIT(A) / NFAC shall decide the issue as per fact and law after providing due opportunity of being heard to the assessee. The grounds raised by the Revenue are accordingly allowed for statistical purposes.

In the result, the appeal filed by the Revenue is allowed for statistical purposes.