RAHUL AGARWAL,KOLKATA vs. A.C.I.T.,CIRCLE-46, KOLKATA

1 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal आयकर अपील�य अधीकरण, �यायपीठ –“B” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “B BENCH: KOLKATA [Before Hon’ble Shri J.Sudhakar Reddy, AM and Hon’ble Shri A. T. Varkey, JM ITA No. 77/Kol/2020 Assessment Year: 2016-17

RAHUL AGARWAL Vs. A.C.I.T-Cir-46, Kolkata PAN: AFRPA4752P Appellant Respondent

Date of Hearing (Virtual) 14.09.2020 Date of Pronouncement 23 .09.2020 For the Appellant Shri S.M. Surana, Advocate, Ld. AR For the Respondent Smt. Ranu Biswas, Addl. CIT/Ld.DR

ORDER Shri A. T. Varkey, JM This is an appeal preferred by the assessee against the order of Ld. CIT(A), 14, Kolkata dated 04-12-2019 for the assessment year 2016-17.

2 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal year.

3 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal that it had received money/loan from bogus sham/shell company and submitted that even the assertion of the AO that Shri Nangalia (erstwhile director of M/s. GRREPL) had admitted that M/s. GRREPL is engaged in the business of providing in accommodation entries is wrong and it was informed by M/s. GRREPL that Mr. Nangalia has not given such statement. Even the assessee requested the AO to provide him such copy of admission, if any. It was again pointed out that Shri Nangalia, ex- director of M/s. GRREPL was way back removed from directorship from 24-08-2011. Thus according to assessee the receipt of loan from M/s. GRREPL cannot be disbelieved on a statement, which can be termed as mere hearsay. The assessee also brought to the notice of the AO that the assessee had taken a housing loan of Rs. 55 lakhs from M/s. GRREPL for which two (2) properties costing more than Rs. 1.59 crores have been given as securities. According to assessee, the loan amount of Rs. 55 lakhs was to be refunded in 55 quarterly instalments of Rs. 1 lakh/each plus interest @ 10% p.a. It was brought to the notice of the AO that the assessee continues to abide by these terms of the loan agreement and he is paying the installment regularly. It was also brought to the notice of the AO that M/s. GRREPL had given loan of Rs. 55 lakhs to assessee, which is NBFC company registered by the Reserve Bank of India and a certificate to this effect was produced before the AO. The assessee submitted that lender company, M/s. GRREPL has confirmed about this loan transaction to the AO, moreover, brought to the notice of the AO the source of Rs. 55 lakhs, which can be traced as the loan repayment to M/s. GRREPL from M/s. G.K Ispat Ltd, which refunded Rs. 34 lakhs and Rs. 21,04,200/- to M/s. GRREPL, which in turn was given to the assessee. However, this explanation of the assessee was not believed by the AO, who was of the opinion that even though Shri Nangalia, erstwhile director of the company, M/s. GRREPL was removed from the directorship from 24-08-2011, however, the status of the lender, M/s. GRREPL has not changed as capital structure in the balance sheet, remains the same. According to the AO, shareholders may have changed and even if new directors have come, still the source of fund have not changed. According to the AO, the money has been given as loan from the mixed capital and correlating the same with a particular receipt/s, which is not acceptable and, therefore, according to him, the genuineness of loan of Rs. 55 lakhs has not been proved and,

4 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal therefore, he added back the same to the total income of the assessee. Aggrieved by the aforesaid action, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to confirm the same and dismissed the appeal of the assessee. Aggrieved, the assessee is before us.

5 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal 94,08,607/- and had shown profit before tax Rs. 50,13,255/- and paid income tax of Rs. 14,50,450/- and has disbursed advance against property of Rs. 10,49,79,327/- (refer page- 31 of P.B). The Ld. AR also drew our attention to page-52, which is a copy of loan confirmation of accounts given/issued by M/s. GRREPL in respect of said loan which has been given to the assessee to the tune of Rs. 55 lakhs on 26-02-2016. Copy of bank statement (Axis Bank) of M/s. GRREPL is also placed at page-53 of the P.B. From which, it is noted that on 26-02-2016 by way of RTGS M/s. GRREPL received two credit entries of Rs. 21,04,200/- and Rs. 34,00,000/- on 26-02-2016 from M/s. G.K Ispat Ltd and thereafter, the assessee was disbursed by cheque no. 334408 of Rs. 55 lakhs. Page-56 of the P.B is the copy of Schedule of repayment of home loan (principal + interest @ 10% p.a) by the assessee to M/s. GRREPL, which is corroborated by bank statement of the assessee, showing the repayment of home loan to Standard & Chartered Bank, found placed at page 57 of the P.B. Page-58 reveals that the assessee has been sanctioned home loan from Standard & Chartered Bank to the tune of Rs. 28.81 lakhs on 30-07-2013. The sale deed for purchase of house is seen from pages 64-75 of the P.B. Pages 76-80 of the P.B are the copies of loan agreement with M/s. GRREPL. Another Paper book pages at 81-111, which are the copies of audited P & L account, Balance sheet of M/s. G.K. Ispat Ltd., ( source of source). From the aforesaid documents, it reveals that the assessee had taken loan of Rs. 55 lakhs from M/s. GRREPL, (which is a NBFC-non-banking finance company) recognised by the Reserve Bank of India, is found to be an income-tax assessee and has paid income-tax more than Rs. 14.50 lakhs in this year. It also owns immovable properties of Rs. 6.75 crores (page-31 of the paper book) it continues to do business by providing loans to several persons. Before the AO, the assessee filed bank statement, confirmation from lender, M/s. GRREPL, source of source to M/s. GRREPL . i.e Rs. 55 lakhs of loan from M/s. G. K Ispat Ltd., etc. However, we find that the AO has not brought out any infirmities in the said documents, which were filed before the AO. The AO erred in brushing aside all the aforesaid documents without controverting the veracity of it. Rather, the AO got carried away by the un-substantiated so called statement of Shri Nangalia, who remitted office from M/s. GRREPL as early as on 24.08.2011, a copy of the statement despite asked by the assessee was not given to him. In any case, if

6 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal the statement, if any, of Shri Nangalia was intended to be used against the assessee, then in all fairness, a copy of the same should have been served upon the assessee, which the AO did not do and even the statement if any recorded behind the back of assessee cannot be relied upon by the AO to draw adverse inference against the assessee unless the same is tested on the touch-stone of cross-examination, which action was also not done, so the AO erred in relying on the so called statement of ex-director and therefore the AO’s action is un-tenable. We find that since the assessee has discharged his onus by providing the lender’s (M/s. GRREPL) identity, credit worthiness and genuineness of the transaction as well as source of source as required under section 68 of the Act, the impugned addition cannot be sustained against the assessee. For coming to such a conclusion, let us discuss section 68 of the Act and some case laws:

"68. 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 sum so credited may be charged to income­tax as the income of the assessee of that previous year. " The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this case the legislative mandate is not in terms of the words ‘shall’ be charged to income-tax as the income of the assessee of that previous year". The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word "may" and not "shall". Thus the un-satisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 ITR 570. We note that against the said decision of Hon'ble Gujarat High Court the special leave petition filed by the Revenue has also been dismissed by the Hon'ble Apex Court.

7 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal and the Hon'ble Gujarat High Court, in the case of Dy. CIT v. Rohini Builders [2002] 256 ITR 360 /[2003] 127 Taxman 523 , has held that onus of the assessee (in whose books of account credit appears) stands fully discharged if the identity of the creditor is established and actual receipt of money from such creditor is proved. In case, the Assessing Officer is dissatisfied about the source of cash deposited in the bank accounts of the creditors, the proper course would be to assess such credit in the hands of the creditor (after making due enquiries from such creditor). In arriving at this conclusion, the Hon'ble Court has further stressed the presence of word "may" in section 68. Relevant observations at pages 369 and 370 of this report are reproduced hereunder:-

"Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee from those creditors as non­genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue's case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non­compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw and adverse inference against the assessee. in the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by' treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69. 7. In the case of Nemi Chand Kothari 136 Taxman 213, (supra), 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 in his knowledge. The Hon'ble Court in the said case held that, once it is found that an assessee has actually taken money from depositor/lender who has been fully identified, the assessee/borrower cannot be called upon to explain, much less prove the affairs of such third party, which he is not even supposed to know or about which he cannot be held to be accredited with any knowledge. In this view, the Hon'ble Court has laid down that section 68 of Income-tax Act, should be read along with section 106 of Evidence Act. The relevant observations at page 260 to 262, 264 and 265

8 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal of the report are reproduced herein below:-

"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 sub­creditor. 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 and his creditor, but that the same may be extended to the transactions, which have taken place between the creditor and his sub­creditor. Thus, while the Assessing Officer is under section 68, free to look into the source(s) of the creditor and/or of the sub­ creditor, the burden on the assessee under section 68 is definitely limited. This limit has been imposed by section 106 of the Evidence Act which reads as follows: "Burden of proving fact especially within knowledge.­When any fact is especially within the knowledge of any person, the burden) of proving that fact is upon him. " ******** What, thus, transpires from the above discussion is that white 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 (creditor's) sub­creditors 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 sub­creditors, 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 the source(s) of the sub­creditors. If section 106 and section 68 are to stand together, which they must, then, the interpretation of section 68 are to stand together, which they must, then the interpretation of section 68 has to be in such a way that it does not make section 106 redundant. Hence, the harmonious construction of section 106 of the Evidence Act and section 68 of the Income­ tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor, the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub­creditors nor is it the burden of the assessee to prove that the sub­creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been. eventually, received by the assessee. It, therefore, further logically

9 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal follows that the creditor's creditworthiness has to be Judged vis­a­vis the transactions, which have taken place between the assessee and the creditor, and it is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transactions, which took between the creditor and sub­ creditor and/or creditworthiness of the sub­ creditors, for, these aspects may not be within the special knowledge of the assessee. " **********

" ... If a creditor has, by any undisclosed source, a particular amount of money in the bank, there is no limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case, if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep the same in the bank, the said amount cannot be treated as income of the assessee from undisclosed source. In other words, the genuineness as well as the creditworthiness of a creditor have to be adjudged vis­a­vis the transactions, which he has with the assessee. The reason why we have formed the opinion that it is not the business of the assessee to find out the actual source or sources from where the creditor has accumulated the amount, which he advances, as loan, to the assessee is that so far as an assessee is concerned, he has to prove the genuineness of the transaction and the creditworthiness of the creditor vis­a­vis the transactions which had taken place between the assessee and the creditor and not between the creditor and the sub­ creditors, for, it is not even required under the law for the assessee to try to find out as to what sources from where the creditor had received the amount, his special knowledge under section 106 of the Evidence Act may very well remain confined only to the transactions, which he had' with the creditor and he may not know what transaction(s) had taken place between his creditor and the sub­creditor… " **********

"In other words, though under section 68 an Assessing Officer is free to show, with the help of the inquiry conducted by him into the transactions, which have taken place between the creditor and the sub­creditor, that the transaction between the two were not genuine and that the sub­creditor had no creditworthiness, it will not necessarily mean that the loan advanced by the sub­creditor to the creditor was income of the assessee from undisclosed source unless there is evidence, direct or circumstantial, to show that the amount which has been advanced by the sub­ creditor to the creditor, had actually been received by the sub­creditor from the assessee …." **********

"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

10 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal 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 sub­creditors 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 been, under the law, treated as the income from the undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. Viewed from this angle, we have no hesitation in holding that in the case at hand, the Assessing Officer had failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub­creditors, had actually been received by the sub­creditors from the assessee. In the absence of any such evidence on record, the Assessing Officer could not have treated the said amounts as income derived by the appellant from undisclosed sources. The learned Tribunal seriously fell into error in treating the said amounts as income derived by the appellant from. undisclosed sources merely on the failure of the sub­creditors to prove their creditworthiness.” 8. Further, in the case of CIT v. S. Kamaljeet Singh [2005] 147 Taxman 18(All.) their lordships, 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 as under:-

"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 (i) confirmation letters of the cash creditors; (ii) their affidavits; (iii) 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 finding, we find that the Tribunal was right in reversing the order of the AA C, setting aside the assessment order.” 9. We also take note of the decision of the Hon'ble High Court, Calcutta in the case of S.K. Bothra & Sons, HUF v. Income-tax Officer, Ward- 46(3), Kolkata 347 ITR 347 wherein the Court held as follows:

“15. It is now a settled law that while considering the question whether the alleged loan taken by the assessee was a genuine transaction, the initial onus is always upon the assessee and if no explanation is given or the explanation given by the appellant is not satisfactory, the Assessing Officer can disbelieve the alleged transaction of loan. But the law is equally settled that if the initial burden is discharged by the assessee by producing sufficient materials in support of the loan transaction, the onus shifts upon the Assessing Officer and after verification, he can call for further explanation from the assessee and in the process, the onus may again shift from the Assessing Officer to assessee. 16. In the case before us, the appellant by producing the loan­confirmation­certificates signed by the creditors, disclosing their permanent account numbers and address and further indicating that the loan was taken by account payee cheques, no doubt, prima facie, discharged the initial burden and those materials disclosed by the assessee prompted the

11 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal Assessing Officer to enquire through the Inspector to verify the statements.” 10. In a case where the issue was whether the assessee availed cash credit as against future sale of product, the AO issued summons to the creditors who did not turn up before him, so AO disbelieved the existence of creditors and saddled the addition, which was overturned by Ld. CIT(A). However, the Tribunal reversed the decision of the Ld. CIT(A) and upheld the AO’s decision, which action of Tribunal was challenged by the Hon'ble High Court, Calcutta in the case of Crystal Networks (P.) Ltd. v. Commissioner of Income-tax 353 ITR 171 wherein the Tribunal’s decision was overturned and decision of Ld. CIT(A) upheld and the Hon’ble High Court has held that when the basic evidences are on record the mere failure of the creditor to appear cannot be basis to make addition. The court held as follows:

12 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal not. When it was found by the Commissioner of Income­tax (Appeals) on facts having examined the documents that the advance given by the creditors have been established the Tribunal should not have ignored this ­fact finding. Indeed the Tribunal did not really touch the aforesaid fact finding of the Commissioner of Income­tax (Appeals) as rightly pointed out by the learned counsel. The Supreme Court has already stated as to what should be the duty of the learned Tribunal to decide in this situation. In the said judgment noted by us at page 464, the Supreme Court has observed as follows: "The Income­tax Appellate Tribunal performs a judicial function under the Indian Income­tax Act; it is invested with authority to determine finally all questions of fact. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its finding on all the contentions raised by the assessee and the Commissioner, in the light of the evidence and the relevant law. " 11. The Tribunal must, in deciding an appeal, consider with due care all the material facts and record its finding on all contentions raised by the assessee and the Commissioner, in the light of the evidence and the relevant law. It is also ruled in the said judgment at page 465 that if the Tribunal does not discharge the duty in the manner as above then it shall be assumed the judgment of the Tribunal suffers from manifest infirmity. 12. Taking inspiration from the Supreme Court observations we are constrained to hold in this matter that the Tribunal has not adjudicated upon the case of the assessee in the light of the evidence as found by the Commissioner of Income­tax (Appeals). We also found no single word has been spared to up set the fact finding of the Commissioner of Income­tax (Appeals) that there are materials to show the cash credit was received from various persons and supply as against cash credit also made. 13. Hence, the judgment and order of the Tribunal is not sustainable. Accordingly, the same is set aside. We restore the judgment and order of the Commissioner of Income­tax (Appeals). The appeal is allowed. 11. When a question as to the creditworthiness of a creditor is to be adjudicated and if the creditor is an Income Tax assessee, it is now well settled by the decision of the Calcutta High Court that the creditworthiness of the creditor cannot be disputed by the AO of the assessee but the AO of the creditor. In this regards our attention was drawn to the decision of the Hon'ble High Court, Calcutta in the COMMISSIONER OF INCOME TAX, KOLKA TA-Ill Versus DATAWARE PRIVATE LIMITED ITAT No. 263 of 2011 Date: 21st September, 2011 wherein the Court held as follows:

“In our opinion, in such circumstances, the Assessing officer of the assessee cannot take the burden of assessing the profit and loss account of the creditor when admittedly the creditor himself is an income tax assessee. After getting the PAN number and getting the information that the creditor is assessed under the Act, the Assessing officer should enquire from the Assessing Officer of the creditor as to the genuineness" of the transaction and whether such transaction has been accepted by the Assessing officer of the creditor but instead of adopting such course, the Assessing officer himself could not enter into the return of the creditor and brand the same as unworthy of credence. So long it is not established that the return submitted by the creditor has been rejected by its

13 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal Assessing Officer, the Assessing officer of the assessee is bound to accept the same as genuine when the identity of the creditor and the genuineness" of transaction through account payee cheque has been established. We find that both the Commissioner of Income Tax (Appeal) and the Tribunal below followed the well­accepted principle which are required to be followed in considering the effect of Section 68 of the Act and we thus find no reason to interfere with the concurrent findings of fact recorded by both the authorities.” 12. In this case on hand, the assessee had discharged its onus to prove the identity, creditworthiness and genuineness of the lender, thereafter the onus shifted to AO to disprove the documents furnished by assessee and it cannot be brushed aside by the AO to draw adverse view which omission on the part of AO cannot be countenanced. In the absence of any investigation, much less gathering of evidence by the Assessing Officer, we hold that addition cannot be sustained merely based on inferences drawn by statement of ex director as discussed supra at para 4. Applying the propositions laid down in these case laws to the facts of this case, we are inclined to allow the appeal of assessee

14 ITA No.77/Kol/2020 AY 2016-17 Rahul Agarwal

Order is pronounced in the open court on 23 September 2020

Sd/- Sd/- ( J. Sudhakar Reddy) (Aby. T. Varkey) Accountant Member Judicial Member Dated : 23 September 2020

**PP(Sr.P.S.) Copy of the order forwarded to: Appellant –Shri Rahul Agarwal 2 N.C Dutta Sarani, Sagar Estate, 4th Fl., 1. Unit No. 3, Kolkata-1. 2 Respondent – The Asstt. Commissioner of Income-tax, Cir-46, 3 Govt Place, Kolkata-1. 3. CIT(A)-, Kolkata (sent through e-mail)