RADIUS INDUSTRIES,NEW DELHI vs. ACIT, CIRCLE-28(1), NEW DELHI

O R D E R PER H.S. SIDHU, JM

These are the cross appeals filed by the Assessee and Revenue emanate out of the Order of the Ld. Commissioner of Income Tax (Appeals)- 10, New Delhi dated 09.01.2018 pertaining to assessment year 2015-16. Since the issues involved in these appeals are common and identical, hence, 1 the appeals were heard together and are being consolidated by this common order for the sake of convenience, by first dealing with Assessee’s Appeal No. 7280/Del/2018 (AY 2015-16) wherein the Assessee has raised the following grounds:-

“1. That the Ld. CIT(A) has erred both in law and on facts in upholding addition of Rs. 62,50,000/- representing alleged unexplained unsecured loans raised by the assessee from the following parties brought to tax under section 68 of the Act:- S.No. Name of parties Amount (Rs.) i) M/s Multi Brand Trading 27,50,000/- Corporation ii) GST Corporation Ltd. 30,00,000/- iii) Prem Dua 5,00,000/- Total 62,50,000/- 1.1 That while upholding the addition, the learned Commissioner of Income Tax (Appeals) has failed to appreciate that once the assessee had placed on record confirmation alongwith income tax particulars and, the loans had been raised by account payee cheques and interest thereon had already been duly credited to the account of the payees, the initial burden of the assessee stood discharged and therefore, addition sustained on the ground that the assessee has not been able to prove creditworthiness of the above party or they had not complied with notice under section 133(6) of the Act is not based on correct appreciation of the facts and circumstances of the case of the assessee and statutory provisions of law and hence untenable.

2. That the learned Commissioner of Income Tax (Appeals) has further erred both in law and on facts in sustaining disallowance of Rs. 18,00,000/- representing the alleged excess partners' remuneration paid to the partner by invoking clause (v) of section 40(b) of the Act. 2.1 That the finding of the learned Commissioner of Income Tax (Appeals) that "the partnership deed mentions the maximum amount payable under section 40(b)(v) but not the amount that has been mutually agreed to be paid as remuneration. The quantum of remuneration to be paid to the individual partners is left undecided, unstipulated and left to the discretion of the two partners to be decided at a future pint in time" is factually and legally misconceived and untenable. 2.2 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the remuneration paid to the partners was in terms of the deed of partnership dated 01.04.2013 which had been allowed consistently in preceding and succeeding assessment years in assessments framed under section 143(3) of the Act and therefore, disallowance made is illegal, invalid and untenable. 3 That the learned Commissioner of Income Tax (Appeals) 31, New Delhi has erred both in law and on facts in upholding a disallowance of a sum of Rs. 7,69,097/- representing interest paid by the assessee by invoking section 40(a)(ia) of the Act. 3.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that, provisions uls 40(a)(ia) of the Act read with section 194A of the Act were inapplicable and as such, disallowance so made is not in accordance with law. 3.2 That in any case since the payee had paid the taxes on the interest paid by the assessee, no disallowance was warranted in view of second proviso to section 40(a)(ia) of the Act. 4 That the learned Commissioner of Income Tax (Appeals) has also erred in failing to appreciate that the learned Assistant Commissioner of Income Tax while framing the assessment had acted in excess of jurisdiction and made additions which are beyond the scope of assessment in as much as additions had to be restricted to the issues under the computerized aided selection of scrutiny cases and, as the additions made beyond the said matrix were without jurisdiction. It is therefore, prayed that addition/disallowances made by the learned Assessing Officer and sustained by the learned Commissioner of Income Tax (Appeals) may kindly be deleted and appeal of the assessee be allowed.”

2. Brief facts of the case are that the assessee filed e-return for the assessment year 2015-16 on 26.09.2015 declaring an income of Rs. 1,13,43,620/-. The Assessing Officer processed the return u/s. 143(1) of the Income Tax Act, 1961 (in short “Act”) electronically at returned income and case was selected for Limited Scrutiny through CASS. The case was selected for Compulsory scrutiny through CPC as per guidelines / procedure for selection of cases for scrutiny. Accordingly, statutory notice under section 143(2) of the Act was issued on 19.9.2016. Subsequently, AO issued notice u/s. 142(1) of the Act and in response to the same the AR for the Assessee appeared from time to time and submitted various details/ information called for and examined the same. During the year under consideration, the assessee has derived its income under the heads Income from Business & Profession only. As per details filed in Form 3CD, the firm has two partners, namely, Sh. Maninder Jit Singh Bindra and Sh. Inderpreet Singh Bindra. The partners have a profit share ratio of 60% and 40% respectively. The list of 15 persons from whom unsecured loans of Rs. 10,25,00,362/- have been taken during the year is mentioned at page no. 2 of the assessment order. The AR for the assessee vide notice u/s. 142(1) dated 23.8.2017 was asked to file the confirmations of all persons from whom unsecured loan were taken and justify their creditworthiness to advance loan but the AR of the Assessee failed to produce any information within time. Therefore, penalty u/s. 271(1)(b) was imposed on 24.10.2017. Thereafter, the AR of the assessee filed reply dated 08.11.2017 whereby ITRs are attached with the confirmations of the parties except few. The AR of the assessee vide notice u/s. 142(1) dated 10.11.2017 was again specifically asked to file copy of ITR of parties whose ITR have not been filed. In response to the same, the AR of the assessee filed reply vide letter dated 16.11.2017 wherein the AR of the assessee asked for some more time 4 to file the required details. In the meantime, notices u/s. 133(6) all dated 10.11.2017 were issued to all the parties from whom unsecured loans have been taken. Some notices have been received back as unserved. Only two parties namely GST Corporation Ltd. And Mudit Jain confirmed the transactions made with assessee but refused to accept that they provided any unsecured loan to the assessee. There was no response from remaining parties for the notices u/s. 133(6) issued to them. In the meantime, the AR of the assessee produced the ITR of most of the parties as asked in the notice dated 10.11.2017. The ITRs of the parties were perused and the creditworthiness of the parties was not found to be lacking as their returned income was not sufficient to finance such huge amount of loans. There were four remaining parties in whose return not furnished by the assessee either. Like other parties (except two mentioned above), they also did not responds to the notice issued u/s. 133(6). Further, the confirmations from either of these parties were never produced till the fag end of the year. Finally, the assessee vide notice dated 06.12.2017 was show caused as to why the unsecured loans amounting to Rs. 8,22,70,000/- taken during the year from 08 parties mentioned at page no.3 of the assessment order should not be disallowed u/s. 68 of the I.T. Act as the creditworthiness of the parties is not established. In response to the same, the AR of the assessee did not offer any explanation. Assessee was given several opportunities in this regard earlier too, vide note sheet entry dated 24.10.2017, notice u/s. 142(1) dated 1.11.2017 and final show cause notice dated 06.12.2017. AO observed that Assessee never bothered to explain and justify the creditworthiness and completely overlooked statutory notices in this regard. AO further observed that assessee has nothing more to say about such transactions. As per AO, Assessee clearly failed to justify the genuineness and creditworthiness of the unsecured loan taken from the parties. The AR of the assessee neither filed the copy of ITR nor filed the bank statement of the parties. None of the parties except two (which also refused that any unsecured loan being given) as mentioned above, replied to the notice u/s. 133(6). Hence, the AR of the assessee has not only failed to furnish the desired details but also failed to establish the creditworthiness and genuineness of the said unsecured loans. Therefore, Rs. 8,22,70,000/- was added to the income of the assessee u/s. 68 of the Act. Further, the AO observed that assessee has debited remuneration amounting to Rs. 18,00,000/- to the P&L account and the same is not admissible for deduction as per the provisions of section 40(b)(ii) of the Income Tax Act, 1961. Therefore, expenditure of Rs. 18,00,000/- on account of remuneration was disallowed as per the provisions of section 40(b)(ii) of the Income Tax Act, 1961 and added to the total income of the assessee. Further, the AO observed that in terms of provisions of Section 40(a)(ia) of the Act, the TDS was not deducted in respect of payment of Rs. 25,63,657/- and 30% of the said amount which comes to Rs. 7,69,097/- was disallowed u/s. 40(a)(ia) of the Act. Accordingly, the assessment was completed by the AO at Rs. 9,61,82,720/- u/s. 143(3) of the Act vide order dated 23.12.2017. Against the assessment order, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 24.09.2018 has partly allowed the appeal of the assessee by confirming some additions. Aggrieved with the impugned order dated 24.9.2018, assessee is in appeal before the Tribunal.

3. Ld. Counsel for the assessee submitted that Ld. CIT(A) has erred in upholding addition of Rs. 62,50,000/- representing alleged unexplained unsecured loans raised by the assessee from the following parties brought to tax under section 68 of the Act:-

S.No. Name of parties Amount (Rs.) i) M/s Multi Brand Trading 27,50,000/- Corporation ii) GST Corporation Ltd. 30,00,000/- iii) Prem Dua 5,00,000/- 6

Total 62,50,000/- 3.1 Ld. Counsel for the assessee further submitted that learned Commissioner of Income Tax (Appeals) has failed to appreciate that once the assessee had placed on record confirmation alongwith income tax particulars and, the loans had been raised by account payee cheques and interest thereon had already been duly credited to the account of the payees, the initial burden of the assessee stood discharged and therefore, addition sustained on the ground that the assessee has not been able to prove creditworthiness of the above party or they had not complied with notice under section 133(6) of the Act is not based on correct appreciation of the facts and circumstances of the case of the assessee and statutory provisions of law and hence untenable and needs to be deleted. He further submitted that learned Commissioner of Income Tax (Appeals) has further erred in sustaining disallowance of Rs. 18,00,000/- representing the alleged excess partners' remuneration paid to the partner by invoking clause (v) of section 40(b) of the Act. It was further submitted that learned Commissioner of Income Tax (Appeals) further erred in holding that "the partnership deed mentions the maximum amount payable under section 40(b)(v) but not the amount that has been mutually agreed to be paid as remuneration. The quantum of remuneration to be paid to the individual partners is left undecided, unstipulated and left to the discretion of the two partners to be decided at a future pint in time" is factually and legally misconceived and untenable. He further submitted that the remuneration paid to the partners was in terms of the deed of partnership dated 01.04.2013 which had been allowed consistently in preceding and succeeding assessment years in assessments framed under section 143(3) of the Act and therefore, disallowance made is illegal, invalid and untenable and needs to be deleted. He further submitted that the learned Commissioner of Income Tax (Appeals) has erred in upholding a disallowance of a sum of Rs. 7,69,097/- representing interest paid by the assessee by invoking section 40(a)(ia) of the Act. It was submitted that provisions uls 40(a)(ia) of the Act read with section 194A of the Act were inapplicable and as such, disallowance so made is not in accordance with law. That in any case since the payee had paid the taxes on the interest paid by the assessee, no disallowance was warranted in view of second proviso to section 40(a)(ia) of the Act. It was further submitted that the additions which are beyond the scope of assessment in as much as additions had to be restricted to the issues under the computerized aided selection of scrutiny cases and, as the additions made beyond the said matrix were without jurisdiction, hence, the same may be deleted. In support of his contention, he filed a copy of Synopsis containing pages 1-48 and relied upon the various case laws cited therein. He further filed a Paper Book-II which are the copies of various decisions on the issue of burden of assessee stood discharged as entire evidence stood furnished; that once part interest has been allowed as deduction, credits cannot be added u/s. 68 of the Act; that revenue has accepted the transactions of interest payment and repayment of principal amount to lenders in subsequent years and, thus in such circumstances no addition is permissible and alleged excess remuneration paid to the partners and disallowed by invoking clause (v) of Section 40(b) of the Act.

5. We have heard both the parties and perused the records, especially the impugned order; Synopsis; Paper Book filed by the Assessee’s counsel and case laws relied by both the parties. As regards sustaining of addition of Rs. 62,50,000/- on account of sums received as unsecured loan is concerned, we find that the AO has made sum of Rs. 8,22,70,000/- on account of sum received from 08 parties as mentioned in the assessment order at page no. 3 and in appeal Ld. CIT(A) has partially deleted the addition and sustained the addition of Rs. 62,50,000/-. We note that the unsecured loan received by the assessee has been fully substantiated not by substantial documentary evidence including copy of audited financial statement, acknowledgement of return of income, confirmation from lender, bank statement of lender, therefore such sum could not in law or on fact be held to be unexplained cash credit u/s. 68 of the Act. It is noted that no material has been led by the AO to even allege that such amount representing unsecured loan are emanating from the coffers of the assessee company. It is further noted that the lenders are corporate entities duly assessed to tax and, have made unsecured loans through banking channels, which fact has neither been denied and, nor rebutted in the assessment order, which is also duly confirmed by each of the lender. In view of above, we are of the considered view that assessee has furnished complete details and evidences to discharge the burden in respect of unsecured loan reflecting in the financial statement of the assessee company. This view is supported by the Hon’ble Supreme Court of India decision in the case of Earthmetal Electrical (P) Ltd. In Civil Appeal No. 618 of 2010 dated 30.7.2010 wherein the assessee’s SLP was allowed by holding that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the department is free to proceed to reopen their individual assessment in accordance with law, but it cannot be regarded as undisclosed income of the assessee company. Further in the decision of the Hon’ble Supreme Court of India in the case of Orissa Cement Corporation vs. CIT reported in 159 ITR 78 it has been held that it is for the department to pursue a creditor particularly once the assessee had duly furnished the complete particulars of the person from whom monies have been received by the assessee. In absence of such a burden having been discharged, the AO could not have mechanically proceeded to make impugned addition in the instant case. It is a settled law that non-compliance of notice issued u/s. 133(6) of the Act to all the entities giving unsecured loan cannot be a basis to make the addition u/s. 68 of the Act. The nature of income and source of income can be examined only by the AO of the lenders and not by the AO of the assessee. In this case there is lack of enquiry by the AO to rebut the burden discharged by the assessee as no enquiries were made either from corporate entity providing unsecured loan or enquiry from AO of such corporate entity or its banker or Registrar of Companies by issuing notice u/s. 131 of the Act. We further note that The judicial decisions relied upon by the Ld. DR have been duly considered. In our considered view, we do not find any parity in the facts of the decisions relied upon with the peculiar facts of the case in hand. In view of above, we delete the addition of Rs. 62,50,000/- on account of sums received as unsecured loan and erroneously held as unexplained cash credit under section 68 of the Act, which was confirmed by the Ld. CIT(A) and accordingly, we allow the ground no. 1 to 1.1 raised by the assessee.

5.1 Apropos ground no. 2 to 2.2 relating to confirmation of addition of Rs. 18,00,000/- on account of alleged excess remuneration paid to the partners and disallowed by invoking clause (v) of section 40(b) of the Act is concerned, we find that this amount was disallowed by holding that, the partnership deed does not specify the amount of the remuneration payable to the partners and as such, the same is not allowable in view of the section 40(b)(v) of the Act. The AO was of the view that the expenditure incurred cannot be allowed as deduction unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration and similarly, Ld. CIT(A) in appeal has sustained this disallowance. We note that in the instant case, remuneration to the working partners are duly authorized by the Partnership deed dated 1.4.2013 (page 1-12 of the Paper Book) and such payment has been made as per clause 7 and 8 of the deed of partnership, ‘working partners’ and the amount of remuneration payable and the manner of quantifying such remuneration is to be decided mutually between them from time to time. We further note that this disallowance is contrary to the principle of consistency as no disallowance made in the preceding years i.e. from assessment year 2010-11 to 2014-15 and only from the instant assessment year i.e. AY 2015-16 the addition was made which action is not tenable. This view is fortified by the decision of the Hon’ble Supreme Court of India in the case of CIT vs. Excel Industries Ltd. 358 ITR 295 (SC). Respectfully, following the aforesaid precedent, the addition confirmed by the Ld. CIT(A) is hereby deleted and accordingly, the ground no. 2 to 2.2 raised by the assessee are allowed.

5.2 Apropos ground no. 3 to 3.2 relating to confirmation of addition of Rs. 7,69,097/- by invoking section 40(a)(ia) of the Act is concerned, we note that since assessee is not liable to deduct TDS on in interest payment on borrowed loan and the second proviso to section 40(a)(ia) of the Act is retrospective, therefore, the provisions u/s 40(a)(ia) of the Act read with section 194A of the Act were inapplicable and as such, disallowance so made is not in accordance with law. In any case since the payee had paid the taxes on the interest paid by the assessee, no disallowance was warranted in view of second proviso to section 40(a)(ia) of the Act. Accordingly, the addition confirmed by the Ld. CIT(A) is hereby deleted and accordingly, the ground no. 3 to 3.2 raised by the assessee are allowed. Accordingly, the appeal filed by the Assessee is allowed.

REVENUE’S CROSS APPEAL 6. The Revenue has raised the following grounds:-

1. On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting addition of Rs. 7,60,20,000/-. All these parties did not respond to the notice issued u/s. 133(6). It needs to be that genuineness, creditworthiness and identity of lender/ creditors are deeper and obstructive than mere completion of paperwork or documentation.

2. On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that during the course of assessment proceedings two parties namely GST Corporation Ltd. And Mudit Jain did not confirm the transaction and denied that any unsecured loan was given to the assessee which was also confirmed during the appellate proceedings affirms that assessee furnished inaccurate particulars of income. 3. The assessee craves leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal.

Ms. Preetinder Kaur Bindra - The assessee has shown unsecured loan of Rs.1,41,00,000/- taken during the year from Ms. Preetinder Kaur Bindra and the closing balance as on 31.03.2015 has been shown at RS.2,78,12,418/-. It was noted that she was the erstwhile partner in the assessee firm and has shown returned income of Rs.41 ,05,429/-. She is covered as a related party u/s 40A(2)(b) of the Act in the tax audit report. Further, interest of Rs.28,61,325/- paid to her has been allowed by the AO. On perusal of her computation of income for A.Y. 2015-16, it is noticed that she has shown interest from Radius Industries at Rs.28,61,325/-. On perusal of her balance sheet, it was noted that total of her assets amounted to RS.15,71,52,466/- which included loans and advances of Rs.13,74,54,992/-. In the list of loans and advances, the loan of Rs.2,78,12,418/- (closing balance as on 31.03.2015) given to Radius Industries is appearing. The assessee has also submitted her bank statement reflecting the loan given to the assessee. The assesee has also submitted copy of ledger account of the above creditor in the books of the assessee. It appears that the AO made addition u/s 68 of the Act in respect of the above loan only because the said creditor did not respond to 133(6) notice. Considering the facts mentioned above, we find that Ld. CIT(A) has rightly observed that the assessee has been able to explain the identity, genuineness of the transaction and the creditworthiness of the creditor and therefore addition of RS.1,41,00,000/- was deleted, which does not need any interference on our part.

The assessee has shown unsecured loan of RS.1,55,00,000/- taken during the year from M.S. Bindra & Company (HUF) and the closing balance as on 15 31.03.2015 has been shown at Rs.4,84,39,657/-. It was noted that Sh. M.S. Bindra, Karta of M.S. Bindra & Company (HUF), is the partner in the assessee firm and has shown returned income of RS.31,83,161/-. He is covered as a related party uls 40A(2)(b) of the Act in the tax audit report. Further, interest of RS.31 ,76,786/- paid to HUF has been allowed by the AO. On perusal of computation of income of HUF for AY. 2015-16, it is noticed that HUF has shown interest from Radius Industries at RS.31 ,76,786/-. On perusal of balance sheet as on 31.03.2015, it was noted that total of assets of HUF amounted to RS.10,52,31,554/- which included loans and advances of Rs.4,84,39,657/- (closing balance as on 31.03.2015) given to Radius Industries. The assessee has also submitted bank statement of HUF reflecting the loan given to the assessee. The assessee has also submitted copy of ledger account of the above creditor in the books of the assessee. It appears that the AO made addition uls 68 of the Act in respect of the above loan only because the said creditor did not respond to 133(6) notice. Considering the facts mentioned above, we find that Ld. CIT(A) has rightly observed that assessee has been able to explain the identity, genuineness of the transaction and the creditworthiness of the creditor and therefore addition of RS.1,55,00,000/- was deleted, which does not need any interference on our part.

4. Amrik Singh Chawla The assessee has shown unsecured loan of RS.1,45,00,000/- taken during the year from Amrik Singh Chawla and the closing balance as on 31.03.2015 has been shown at RS.55,00,000/-. It is noted that Sh. Amrik Singh Chawla has shown returned income of RS.80,82,860/-. Further, interest of Rs.17,17,396/- paid to him has been allowed by the AO. On perusal of his computation of income for AY. 2015-16, it was noticed that he has shown interest from Radius Industries at Rs.17,17,396/-. The assessee has also submitted his bank statement reflecting the loan given to the assessee. The assessee has also submitted copy of ledger account of the above creditor in the books of the assessee. It appears that the AO made addition u/s 68 of the Act in respect of the above loan only because the said creditor did not respond to 133(6) notice. Considering the facts mentioned above, we find that Ld. CIT(A) has rightly observed that assessee has been able to explain the identity, genuineness of the transaction and creditworthiness of the 17 creditor and therefore addition of RS.1,45,00,000/- was deleted, which does not need any interference on our part.

10.1 Keeping in view of the aforesaid discussions, we do not find any infirmity in the order of the Ld. CIT(A) on the issues in dispute, hence, we uphold the same and accordingly, reject the grounds raised by the Revenue.

Order pronounced on 17/09/2019.