ITO 15 (2)(3), MUMBAI vs. MJD FINANCIAL SERVICES PVT. LTD., MUMBAI

This appeal has been filed by the revenue against the order dated 19.07.2018 passed by the Commissioner of Income Tax (for short ‘the (CIT (A) 24, Mumbai, for the assessment year 2012-13, whereby the Ld. CIT A) has partly allowed the appeal filed by the assessee against the assessment order passed u/s 143 (3) r.w.s. 147 of the Income Tax Act, 1961 (for short the ‘Act’).

Brief facts of the case are that the assessee company filed its return of income for the assessment year under consideration declaring total income of Rs. 6,33,150/- under the normal provisions of the Act and Rs. 7,53,865/- under section 115JB of the Act. Subsequently, on the basis of information received from the DGIT (Inv.), Mumbai to the effect that the assessee company had obtained bogus entries from M/s Shipra Fabrics Pvt. Ltd. amounting to Rs. 26,37,951/- and from M/s Victory Sales Pvt. Ltd. 2 Assessment Year: 2012-13 amounting to Rs. 51,82,213/-, the case was reopened after issuing notice u/s 148 of the Act. During the assessment proceedings, it was noticed that the assessee had received unsecured loans to the tune of Rs. 2,07,38,443/- from B.K. Dyeing and Printing Mills Pvt. Ltd., Dolex Commercial Pvt. Ltd., Hunger Real Estate Pvt. Ltd., Shipra Fabrics Pvt. Ltd. and Victory Sales Pvt. Ltd. Accordingly, the AO asked the assessee to establish the genuineness of transaction. In response thereof the authorized representative of the assessee submitted that the company had received the said loans for the purpose of business for a short term and the same has been repaid. The AR also furnished the confirmations to substantiate the claim of the assessee.

A search action was carried out in the case of M/s Shri Bipul Vidur Bhatt, M/s B.K. Dyeing and Printing Mills Pvt. Ltd., M/s Dolex Commercial Pvt. Ltd., M/s Hunger Real Estate Pvt. Ltd., M/s Shipra Fabrics Pvt. Ltd. and M/s Victory Sales Pvt. Ltd. On the basis of the documents seized from the premises of Shri Bipul Vidur Bhatt, it came to the light that Shri Bipul Vidur Bhatt managed and controlled the aforesaid companies and these companies used to give accommodation entries on commission basis and during the year relevant to the assessment year under consideration, the aforesaid companies owned and controlled by Sh. Bipul Vidur Bhatt provided accommodation entries in the form of unsecured loans amounting to Rs. 2,07,38,443/- to the assessee company. The AO rejecting the contention of the assessee, made addition of the said amount to the total income of the assessee and determined the total income of the assessee at Rs. 2,13,71,593/-. The assessee challenged the action of the AO before the Ld. CIT (A) on legal ground as well on merits. The Ld. CIT (A) after hearing the assessee deleted the addition made by the AO holding that the AO has not brought any fact on record that cash was introduced prior to advancing the loans to the assessee. There is no evidence on record to conclude that the assessee had paid cash to the loan creditors in lieu of loan received from them. Further, it is admitted that the unsecured loans under consideration have been repaid over a period of time and the assessee had paid interest 3 Assessment Year: 2012-13 and deducted TDS as per the provisions of Act. Accordingly, the Ld. CIT (A) deleted the addition. Aggrieved by the decision of the Ld. CIT (A), the revenue is in appeal before the Tribunal.

The revenue has challenged the order of the Ld. CIT (A) on the following effective grounds: “1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in directing the Assessing Officer to delete the entire disallowance of Rs. 2,07,38,443/- made on account of alleged bogus unsecured loan, without appreciating the fact that the said creditors/parties were found to be accommodation entry provider/bogus entity as per findings given by the Investigation Wing, Income Tax Department, Mumbai.

Before us, the Ld. Departmental Representative (DR) submitted that the loans amounting to Rs. 2,07,38,443/- was mere accommodation entry provided against cash receipt by the M/s B.K. Dyeing and Printing Mills Pvt. Ltd., M/s Dolex Commercial Pvt. Ltd., M/s Hunger Real Estate Pvt. Ltd., M/s Shipra Fabrics Pvt. Ltd. and M/s Victory Sales Pvt. Ltd. from the assessee company. Since, there is no entry in the books of account of the assessee with regard to the said transactions, the provisions of section 69A of the Act are attracted. Hence, the Ld. CIT (A) has wrongly deleted the addition made by the AO. The Ld. DR further submitted that search and seizure action revealed that Sh. Bipul Vidur Bhatt and his family members were engaged in 4 Assessment Year: 2012-13 the business of providing bogus entries against cash received from the concerned parties. During the search action Sh. Bipul Vidur Bhatt explained that his companies used to provide accommodation entries against cash of equal amount after taking commission in cash for facilitating these entries. Since, the assessee failed to establish the genuineness of the aforesaid transactions to the satisfaction of the AO, the AO has rightly made addition of the said amount to the income of the assessee. Hence, the decision of the Ld. CIT (A) is liable to be set aside.

On the other hand, the Ld. counsel for the assessee submitted that the AO had merely relied on the statement of Mr. Bipul Vidur Bhatt u/s 132(4) wherein he admitted that the aforesaid companies from whom, the assessee has taken loan were engaged in providing accommodation entries. The assessee has furnished loan confirmation, bank statements and further stated that these loans were taken for business purposes. The assessee has also filed return of income of the creditors for the relevant assessment years, copies of audited accounts of the creditors for the relevant assessment years and copies of bank statements to show that the transaction were carried out through banking channel. The Ld. counsel further pointed out that Sh. Bipul Vidur Bhatt has retracted his statement by filing an affidavit. The Ld. counsel further submitted that as per the settled law, no addition can be made solely on the basis of statement made u/s 132 (4), which is retracted. The Ld. counsel further placing reliance on the decisions of the Hon’ble Bombay High Court in the case of Pr. CIT vs. Skylark Build of 2016 dated 24.10.2018, wherein it has been held that when the amounts borrowed by the assessee which are alleged as unexplained cash credit to make addition by invoking section 68 of the Act, no addition can be made when such borrowings are repaid. 7. The Ld. counsel further submitted that this issue is covered by the decision of the Mumbai Bench of the Tribunal in group concern of assessee’s company M/s Manba Finance Ltd., ITA No. 1448, 1449 and 1467/Mum/2007, wherein the Tribunal has decided the identical issue in 5 Assessment Year: 2012-13 assessee’s favour and dismissed the revenue’s appeal. The Ld. counsel further relied on the decision of Mumbai Tribunal in the case of ACIT vs. H.R. Pujara Builders, DCIT vs. Chetan R. Shah (HUF) ITA No. 5781/Mum/2017, DCIT vs. Marathon Fiscal Pvt. Ltd. ITA No. 5783/Mum/2017, ITO vs. M/s Mayuresh Logistics Pvt. Ltd. (2019) TIOL 1421 ITAT, Mumbai and ITO vs. Celebrity Lifespace Pvt. Ltd. ITA No. 6301/Mum/2017 to substantiate his contention.

We have heard the rival submissions of the parties and perused the material on record including the cases relied upon by the parties. The Ld. CIT (A) has deleted the addition made by the AO holding that the AO has not brought any fact on record to established that cash was introduced prior to advancing the loan to the assessee and there is no evidence on record to show that the assessee had paid cash to the loan creditors in lieu of loan received from them. It is an admitted fact that the unsecured loans under consideration have been repaid over a period of time and the appellant has paid interest and deducted TDS thereon as per the provisions of the Act. Relying on the various decisions of the Courts and the Tribunal, the Ld. CIT (A) has held that the assessee has discharged its onus of proving genuineness of the transaction of furnishing the identity of the creditors and documents to prove the transactions. The Ld. CIT (A) has pointed out that no addition/disallowance can be made solely on the basis of statement made u/s 132 (4) of the Act without bringing any corroborative evidence on record. As pointed out by the Ld. counsel for the assessee, the “I” Bench of the Mumbai Tribunal has decided the identical issue in favour of the assessee in the case of DCIT vs. M/s Manba Finance Ltd. ITA Nos. 1448, 1449, 1467/Mum/2017 for the AY 2013-14, 2011-12 and 2010-11. In the said case, survey action u/s 133A of the Act was conducted by DGIT (Inv.) Mumbai. During the course of survey, the books of account of the assessee were examined which revealed that the assessee had received unsecured loan and share application money from the concerned companies operated and controlled by Sh. Pravin Kumar Jain to the tune of Rs. 7,75,00,000/-. A 6 Assessment Year: 2012-13 survey was also conducted in the case of Mr. Rakesh Doshi, Proprietor Rakesh Doshi Associates. As per the revenue, Shri Doshi was the broker who arranged the loans and share capital money from the concerned company controlled by Pravin Kumar Jain. During the course of survey Mr. Rakesh Doshi in his statement admitted that he was an accommodation entry facilitator and he had arranged accommodation entry from various other companies which were not the part of company controlled Pravin Kumar Jain. The assessee had shown unsecured loans from such parties amounting to Rs. 1,25,00,000/-.

During the course of assessment proceedings, the assessee was asked to show cause as to why unsecured loan taken from the party should not be treated as unexplained cash credit u/s 68 of the Act. The assessee contended that it has submitted all the documents to prove the genuineness of the transaction. The assessee further requested that cross examination of Pravin Jain may be allowed. The assessee further submitted that Pravin Kumar Jain has retracted his earlier statement. So far as the loan amounting to Rs. 1,25,00,000/- from the other companies is concerned, the assessee submitted balance sheet of all the company to show that the lending companies has enough reserves and share capital. The assessee further submitted that it has furnished the confirmation from the parties. However, the AO rejecting the contention of the assessee made addition of the said amount to the income of the assessee. In the first appeal, the Ld. CIT (A) deleted the addition on legal ground as well as on merits. The revenue challenged the action of the Ld. CIT (A) before the ITAT. The coordinate Bench of the Tribunal upheld the findings of the Ld. CIT (A) holding as under:- “33. We have carefully considered the submissions and perused the records. We find that the first issue in this case relates to the addition of unsecured loan taken from corporate entities u/s. 68 of the Act. In this regard, it is noted that it is the claim of the assessee which has been found correct by the ld. CIT(A) that the assessee has duly paid interest on 7 Assessment Year: 2012-13 these loans, deducted TDS, filed the TDS return. The ld. CIT(A) has also found that this loans have been duly repaid.

The addition in this case has been made on the ground that some of the corporate entities were found to have been controlled and operated by Shri Pravin Kumar Jain, who was one of the leading entry operator. For the other corporate entities, it was found that the assessee has obtained loan from these companies which was arranged by Shri Rakesh Doshi, who on survey had admitted to be arranging bogus accommodation entries. These findings have come out as a result of survey against the assessee’s premises.As regards Shri Pravin Kumar Jain, it was noted by the A.O. that in the Revenue’s action against Shri Pravin Kumar Jain, he has admitted to have been arranged bogus accommodation entries. The A.O. has noted in detail his modus operandi.As regards Shri Rakesh Doshi, it was noted that survey action u/s. 133A was conducted in his case and he was found to have arranged the accommodation entries. The assessee has claimed Shri Pravin Kumar Jain has duly retracted and the assessee had requested to cross examine him that the same has been denied by the A.O.

As regards the statement of Shri Rakesh Doshi, the assessee’s claim was that the assessee was never provided with the detail of statements given by Shri Rakesh Doshi despite request. On this issue of retraction of Shri Pravin Kumar Jain’s and request by the assessee for cross examination of Shri Pravin Kumar Jain and Shri Rakesh Doshi, the ld. CIT(A) observed that there is a clear violation of natural justice. He noted that the copy of the statement of Shri Pravin Kumar Jain as well as his cross examination was not provided to the assessee during the course of assessment proceedings, although the assessee has specifically asked for the same. He noted that the copy of statement of Shri Rakesh Doshi was provided to which the assessee has submitted its rebuttal. He noted that the A.O. has not provided cross examination of Shri Rakesh Doshi. The ld. CIT(A) has placed reliance upon the several case laws in this regard for the proposition that where oral evidence of any party is sought to be used against an assessee, it is necessary that information relating to such statement or the copy of deposition should be furnished to 8 Assessment Year: 2012-13 the assessee with opportunity to cross examine the deponent, if required by the assessee. In this regard, we note the submission that these amount to gross violation of natural justice and the assessment is vitiated as the assessment is bad in law and requires to be quashed in view of the following decisions:

The A.O. in this regard has doubted the creditworthiness of the corporate entities on the ground that they have taken loans and share capital and share premium from other corporate entities. In this regard, it is also noted that the A.O. has referred to the provision of section 68 of the Act. Section 68 and proviso thereto reads as under: Cash credits.

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 Assessing Officer, satisfactory, the 10 Assessment Year: 2012-13 sum so credited may be charged to income-tax as the income of the assessee of that previous year : 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.] 39. In this regard, we note that by giving the confirmation, return of income, the detail of PAN, copy of balance sheet and P & L account and copy of its bank statement, the assessee has duly discharged its onus. The A.O. has not found default in these documents. It is also not the case that cash has been deposited in the bank statement before granting of loans by these companies as pointed out by the ld. CIT(A). The A.O.’s grouse is that the assessee has not produced the directors of these companies, and these corporate entities have acquired resources by getting share capital and share premium from other corporate entities. First of all, we note that this is a case of unsecured loan and not share capital and share premium. Further, we find that the above said proviso to section 68 was inserted by Finance Income Tax Act, 1961, 2012 w.e.f. 01.04.2013. The Hon'ble jurisdictional High Court in the case of CIT vs. Gagandeep Infrastructure (P.) Ltd. [2017] 394 ITR 680 has held that the said proviso is prospective and cannot be applied to assessment years preceding the same. We may gainfully refer to the decision of Hon'ble jurisdictional High Court which is also relevant in this case: