M/S.RUNWAL COMMERCIAL ASSETS PVT LTD (NOW MERGED WITH WHEELABRATOR ALLOY CASTINGS LIMITED),MUMBAI vs. THE INCOME TAX OFFICER, WARD 15(3)(1), MUMBAI, MUMBAI

The assessee contended before the Assessing Officer that the amount of Rs. 85,90,00,000/- was raised through issuance of equity shares at face value to M/s. Wheelabrator Realty Pvt. Ltd. and subsequent advance to M/s. Wheelabrator Alloy Castings Ltd. was in the normal course of business. The assessee also contended that all transactions were duly recorded in the books of account and routed through banking channels and all inter- company transactions between group concerns are legitimate business transactions. The assessee also submitted that the identity of the subscriber, genuineness of the transaction and creditworthiness stood established and the interest free loan was given as a measure of commercial expediency. The assessee also furnished financial statements, bank statements and other supporting documents.

The Assessing Officer was not satisfied with the explanation furnished. He observed that the transactions amounted to routing of funds among related parties without commercial substance and the group entities had negligible or no operational income. The Assessing Officer also noted that mere movement of M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) funds through banking channels does not establish genuineness. The Assessing Officer held that the credit of Rs. 85,90,00,000/- represented unexplained cash credit within the meaning of section 68 and accordingly added the same to the total income. The addition was subjected to tax in accordance with section 115BBE.

Aggrieved, the assessee preferred an appeal before the learned CIT(A). During the appellate proceedings, the assessee reiterated its submissions made before the Assessing Officer and further contended that the initial burden under section 68 stood discharged. The Assessee also submitted that the Assessing Officer exceeded jurisdiction by questioning business prudence.

The learned CIT(A), after considering the assessment order and the submissions of the assessee, recorded that although the assessee contended that it had discharged the burden under section 68 by furnishing bank statements and other documents to establish identity, genuineness and creditworthiness, mere movement of funds through banking channels does not conclusively discharge the statutory onus. It was observed that submission of bank statements may establish the identity of the party, but unless supported by cogent documentary evidence demonstrating the financial capacity and source of funds of the investor or lender, the burden under section 68 remains unfulfilled.

It was also noted that the assessee had furnished no satisfactory explanation regarding the NIL turnover and absence of real commercial operations of the concerned entities. The learned CIT(A) further observed that in view of the amendments brought in by the Finance Act, 2022 with effect from 01.04.2023, the assessee was required to substantiate not only the identity but also the creditworthiness and source of funds of the investor. According to the learned CIT(A), no documentary evidence was produced to establish the creditworthiness and genuineness of M/s Wheelabrator Alloy Castings Ltd.

In view of the above findings, the learned CIT(A) concluded that the assessee had failed to discharge the onus cast upon it under section 68. Accordingly, he held that there was no reason to interfere with the assessment order and upheld the addition of Rs. 85,90,00,000/-. The appeal was therefore dismissed.

Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds of appeal:

The appellant craves leave to add, amend, alter or delete the said ground of appeal

The learned AR further submitted that the finding recorded by the learned CIT(A) to the effect that the loans were advanced free of interest and lacked commercial substance is factually incorrect. It was argued that the transactions were duly recorded in the audited financial statements and formed part of related party disclosures. The learned Authorised Representative emphasized that the movement of funds between the holding M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) company and the assessee was a documented corporate transaction and not an unexplained credit. It was contended that once the source of the share capital was established and confirmed by the holding company, and the Assessing Officer had verified the same by issuing notices under section 133(6), the addition under section 68 was unsustainable.

The learned Departmental Representative (DR) strongly supported the orders of the Assessing Officer as well as the learned CIT(A). It was submitted that both the lower authorities have examined the entire pattern of transactions and have recorded a categorical finding that the funds were circulated among related group entities without any demonstrable commercial purpose. According to the learned DR, there was no commercial expediency in advancing such substantial sums when the entities involved had no meaningful business operations or revenue activity, and therefore the transactions lacked economic substance.

The learned DR further contended that under section 68, the assessee is required not only to establish the identity of the creditor but also to prove the genuineness of the transaction and the creditworthiness of the creditor. It was submitted that in the present case, although the identity of the parties may not be in dispute, the genuineness of the transactions is doubtful in view of the round-tripping pattern and absence of commercial rationale. It was thus argued that the addition under section 68 was rightly M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) made and confirmed, and the appeal of the assessee deserves to be dismissed.

The learned AR, drawing our attention to the related party disclosures placed at page 17 of the paper book and the corresponding bank statements placed on record, submitted that the movement of funds is fully traceable and duly reflected in the audited financial statements. It was pointed out that the Optionally Convertible Debentures issued to the holding company, as appearing in Note 11 and Note 18 to the financial statements as on 31.03.2022, were subsequently converted into equity shares in terms of Note 9, as reflected at page 15 of the paper book. It was thus contended that what has been characterised as routing of funds was in fact a documented corporate restructuring transaction, duly recorded and disclosed in the financial statements.

The learned AR further submitted that the funds received from M/s SR Construction, which constituted the source of loans to M/s Wheelabrator Realty Pvt. Ltd., were credited in the current account of the partnership firm in which the assessee company was a partner. It was argued that the said partnership firm, in subsequent years, has declared profits and offered the same to tax, thereby establishing that the underlying transactions had genuine business character and were not accommodation entries.

It was therefore contended that the conversion of OCDs into equity shares was a commercially driven decision within the M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) framework of corporate finance and capital structuring. According to the learned AR, once the source of funds and the trail of transactions stand duly evidenced in the books and bank statements, the commercial expediency of such conversion cannot be questioned by the Revenue authorities.

We have carefully considered the rival submissions, perused the orders of the lower authorities and the material placed on record including the related party disclosures, notes to accounts and bank statements referred to before us.

The primary basis of the addition under section 68 is the allegation that the funds amounting to Rs. 85,90,00,000/- lacked commercial substance and represented routing or round-tripping among group entities. The learned CIT(A) has upheld the addition mainly on the premise that the transactions did not demonstrate commercial expediency and that mere banking channels are insufficient to discharge the onus under section 68.

At the outset, it is settled law that the scope of enquiry under section 68 extends to examining the identity of the creditor, the genuineness of the transaction and the creditworthiness of the creditor. In the present case, the identity of the holding company, namely M/s Wheelabrator Realty Pvt. Ltd., is not in dispute. The transaction of issuance of equity shares at face value has been duly recorded in the books of account and reflected in the audited financial statements. Notices issued under section 133(6) were responded to and confirmations M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) were furnished. The receipt of funds through banking channels has also been verified during assessment proceedings.

The allegation of the Revenue essentially rests on the absence of commercial expediency in the conversion of OCDs into equity and the subsequent inter-corporate movement of funds. In this context, the assessee had relied before the lower authorities on the principle laid down by the Hon’ble Supreme Court in S.A. Builders Ltd. v. CIT (288 ITR 1), wherein it has been held that commercial expediency must be viewed from the standpoint of the businessman and not from that of the Revenue authorities. The Court observed that the authorities cannot sit in the armchair of a businessman to decide how much expenditure or investment is reasonable. The said principle has been consistently followed in subsequent decisions wherein it was reiterated that once nexus with business purpose is established, the Revenue cannot question the wisdom of the assessee’s commercial decision. In CIT v. Dalmia Cement (Bharat) Ltd. (254 ITR 377) (Del), it was held that business expediency is to be judged from the perspective of the assessee and not the Revenue.

Applying the above principles to the present case, we find that the conversion of OCDs into equity shares and inter- corporate advances within a group structure are matters of capital structuring and corporate finance. The related party disclosures, notes to accounts and bank statements demonstrate that the transactions were duly recorded and formed part of M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) audited financial statements. There is no finding that the share capital was fictitious or that the holding company did not possess the legal existence or financial capability to subscribe to shares.

The mere fact that funds were moved within group entities does not ipso facto render the transaction non-genuine. Round- tripping as a concept must be supported by material evidence establishing that the funds originated from the assessee and were reintroduced in disguise. In the present case, the Revenue has not brought any cogent material on record to demonstrate that the source of funds in the hands of the holding company was unexplained or that the transaction was a sham. Suspicion, however strong, cannot substitute legal proof.

Further, the learned CIT(A) has proceeded on the premise that there was no commercial activity or turnover in certain entities. Absence of turnover in a particular year, by itself, cannot be the sole ground to conclude that the capital infusion lacks commercial substance, especially where the transaction is between legally existing corporate entities within a group and is reflected in audited accounts.

We are also conscious that under the amended provisions of section 68, the assessee is required to explain the source of source in specified circumstances. However, in the present case, confirmations were furnished, notices under section 133(6) were complied with, and the trail of funds has been demonstrated through bank statements. The Revenue has not recorded any M/s. Runwal Commercial Assets Pvt. Ltd. (Now merged with Wheelabrator Alloy Castings Limited) adverse finding with respect to the explanation offered by the holding company regarding its source of funds.

In view of the above discussion, we are of the considered opinion that the lower authorities have placed undue emphasis on perceived lack of commercial expediency without bringing on record any material to dislodge the documentary evidence furnished by the assessee. The enquiry under section 68 cannot extend to questioning the business wisdom of capital restructuring when the statutory ingredients of identity, genuineness and creditworthiness stand prima facie satisfied.

Accordingly, we hold that the addition of Rs. 85,90,00,000/- made under section 68 is not sustainable on the facts of the present case. The same is directed to be deleted.

In the result, the appeal of the assessee is allowed.