INCOME TAX OFFICER, MUMBAI vs. NDW DEVELOPMENT CORPORATION LLP, MUMBAI

Briefly the facts of the case are that the assessee is a limited liability partnership firm, engaged in the business of real estate development. It filed its return of income declaring its total income as NIL. The case of the assessee was selected for scrutiny to verify the matter relating to high liabilities in Balance Sheet as compared to low income/receipts declared in the ITR and secondly, to examine the substantial amount of loans/advances/investments in shares on the asset side of the Balance Sheet as compared to total income as per the ITR, which is significantly low and notices u/s. 143(2) and 142(1) of the Income Tax Act, 1961 („the Act‟) were thereafter issued from time to time. However, except for one of the notices, there was no compliance on the part of the assessee and, thereafter, a show cause was issued on 29-01-2024 and again on 07-02- 2024, there was however, no compliance on the part of the assessee. The AO thereafter, proceeded and passed the order u/s. 143(3) r.w.s. 144B of the Act dt. 29-02-2024.

In the assessment order so passed by the AO, he has referred to the opening balance of unsecured loans as on 31-03-2021 at Rs. 62,29,75,941/- and closing balance of unsecured loans as on 31-03-2022 at Rs. 13,82,05,848/- and has held that the difference amounting to Rs. 48,47,70,093/- is the amount which has been repaid by the assessee during the financial year 2021-22 relevant to the impugned assessment year 2022-23. The AO further referred to the increase in advances given by the assessee from Rs. 54,22,97,579/- in the immediately preceding year to Rs. 58,94,80,592/- in the year under consideration and basis the same, held that the assessee cannot take the plea that the advances given by him in the preceding years was received back which have been used for repayment of unsecured loans. The AO accordingly held that on the perusal of the Balance Sheet, it shows that the repayment of loan has been made out of the books of accounts and an addition of Rs. 48,47,70,093/- was made by the AO towards the repayment of loan from undisclosed sources u/s. 69A of the Act.

It was further submitted that once the effect of regrouping is removed, the amount of loan receiving during the year comes to Rs. 9,91,15,000/- and repayment comes to Rs. 7,36,99,500/- and in this regard, the assessee again sought permission of the Ld.CIT(A) to submit additional evidences in terms of loan account confirmations, copy of income tax returns, audited financial statements and supporting ledgers for subsequent repayment and an application under Rule 46A was moved before him.

The additional evidences so sought to be submitted by the assessee were sent by the ld CIT(A) to the AO and a remand report was called by the ld CIT(A) from the AO, the AO carried out the verification of additional evidences and submitted his remand report and a copy thereof was made available to the assessee in response to which the assessee furnished its rejoinder.

Thereafter, taking into consideration the order passed by the AO, the submissions so filed by the assessee along with additional evidences, remand report submitted by the AO and the rejoinder submitted by the assessee, the Ld.CIT(A) has returned his findings on admission of additional evidences as well as on merits of the additions so made by the AO and we deem it appropriate to refer to the same in verbatim as under:

Against the aforesaid order so passed by the ld CIT(A) and the findings of the ld CIT(A), the Revenue is in appeal before us.

During the course of hearing, the ld CIT/DR submitted that the ld. CIT(A) has erred in deleting the addition of Rs 48.47 crores made under Section 69A of the Income Tax Act, 1961, without properly appreciating the factual findings recorded by the Assessing Officer in the assessment order and the remand report. It was submitted that the assessee repeatedly failed to comply with notices issued under Sections 143(2), 142(1), and 144, thereby denying the AO any opportunity to examine the alleged unsecured loans and repayments. It was submitted that upon detailed scrutiny of the financial statements, the AO noted that the unsecured loans reflected in the balance sheet had drastically fallen from Rs. 62.29 crore to Rs. 13.82 crore, and since the assessee maintained books on cash system of accounting with no corresponding declared inflows, the reduction was rightly treated as unexplained money under Section 69A.

It was further submitted by the ld CIT/DR that pursuant to additional evidence submitted by the assessee during the appellate proceedings before the ld CIT(A), the AO, during the remand proceedings, examined unsecured loan transactions aggregating to Rs 9.91 crore. As per the tabular data, out of these loans, loans amounting to Rs 9.38 crore were supported by PAN, ITR acknowledgments, confirmations, and bank statements, establishing their prima facie genuineness. However, for three lenders (i) Abdul Aziz Abdul (Rs. 23.15 lakh), (ii) Akbar Khan Rasul Khan (Rs. 19 lakh), and (iii) Immense Sales Pvt. Ltd. (Rs.11 lakh)-the assessee failed to furnish even basic documents such as PAN, ITR, or bank proof. Their creditworthiness and genuineness remained entirely unverifiable. Hence, the AO rightly treated the aggregate of Rs.53.15 lakh from these three parties as unexplained, a finding that was also accepted by the CIT(A) himself in the appellate order. It was submitted that this acknowledgement by the CIT(A) reinforces the correctness of the AO's broader conclusion that the entire loan transactions lacked complete evidentiary support.

It was further submitted that in relation to repayment of unsecured loan transactions totaling Rs 7.36 crore, the AO's findings in remand report shows that while some transactions were supported by confirmations and banking channels (e.g.. Castle Realtors Pvt. Ltd., Gopal Prajapat, and Vora Associates), several others were riddled with critical deficiencies. Many lenders such as Abdul Rehman Acres LLP, Bharathi Textiles, Khaleej Acres LLP, and Anmol Land Developers either lacked PAN, confirmations, or complete identity details, and in some cases, the assessee merely claimed adjustment of loans against sales without proof of such sales transactions. In one instance, cash dealings of Rs. 12 lakh (receipt) and Rs. 6 lakh (repayment) were detected by the AO in the case of Anmol Land Developers, further undermining the credibility of the transactions. Thus, the AO rightly concluded that the genuineness of repayments was only partly proved, and therefore, the corresponding addition was fully justified and needs to be confirmed.

It was further submitted that the assessee's claim that a portion of the loans was "regrouped" under another head "Other Payables" was examined by the AO in the remand proceedings. However, as evident from the record, the assessee had merely furnished the names and amounts of certain parties without producing corroborative documents such as confirmations, PAN, addresses, or evidence substantiating any accounting reclassification. The AO specifically observed that this regrouping explanation was raised for the first time before the CIT(A) and not during assessment proceedings, thus amounting to fresh evidence submitted without compliance with the conditions prescribed under Rule 46A. The AO categorically opined that such regrouping remained unverified and unsubstantiated, rendering the assessee's explanation untenable. Hence, the CIT(A)'s reliance on these unverified submissions and acceptance of the regrouping plea is legally unsustainable and contrary to the mandate of Rule 46A(3). In the light of the same, it was submitted that the additions needs to be confirmed.

It was accordingly submitted that the CIT(A) erred in accepting unverified regrouping explanations, and granting relief inconsistent with the AO's detailed findings. The addition made under Section 69A was founded on tangible discrepancies and absence of verifiable sources of repayment. Hence, the CIT(A)'s order warrants reversal, and the assessment order deserves to be restored in full, as the deletion of Rs 48.47 crore is contrary to both facts and law which may kindly be set aside to the extent of relief granted, and the assessment order passed under Section 143(3) r.w.s. 144 be restored.

In his submissions, the Ld. AR supported the order and findings of the Ld. CIT(A). It was submitted that the AO has simply taking the difference between the closing and opening balance of unsecured loans and has summarily made the addition holding that the difference represents the repayment of loans and which has been made out of books and has made the addition u/s 69A of the Act. It was submitted that the opening balance of unsecured loan as on the beginning of the year was Rs. 62,29,75,941/-, the assessee received fresh loans during the year amounting to Rs. 9,91,15,000/-, that the assessee repaid the loan during the financial year amounting to Rs. 7,36,99,500/- and an amount of Rs. 51,01,85,593/- was regrouped from “unsecured loans” to “other payables” and closing balance of unsecured loans as on 31-03-2022 was determined at Rs. 13,82,05,848/-. It was submitted that the detail break up of unsecured loan and regrouping thereof has been examined by the AO in the remand proceedings and are not in dispute. The ld AR objected to the ld CIT/DR submission that the assessee maintained its books on cash system of accounting and in this regard, our reference was drawn to the audited financial statements which have been maintained on accrual system of accounting and the assessment order where no such finding has been recorded by the AO as to assessee‟s maintaining books of accounts on cash basis of accounting.

As far as fresh loans taken by the assessee during the year under consideration amounting to Rs 9,91,15,000/- is concerned, it was submitted that the ld CIT(A) has rightly taken into consideration the documentation submitted by the assessee by way of additional evidences and after calling for the remand report from the AO, the ld CIT(A) has returned a clear finding that the assessee has substantiated the identity, creditworthiness and genuineness of the transactions in respect of transactions amounting to Rs 9,38,00,000/- out of Rs 9,91,15,000/-. It was submitted that in respect of remaining amount of Rs 53,15,000/- , the ld CIT(A) has confirmed the addition and the assessee is not in appeal against the said addition. The ld AR however objected to the ld CIT/DR submission that where the assessee couldn‟t submit the relevant documentation and the addition has been confirmed by the ld CIT(A) in respect of three loan transactions amounting to Rs 53,15,000/-, the same by default leads to raising a question mark on evidentiary value of documentation submitted and accepted by the ld CIT(A) in respect of rest all loan transactions amounting to Rs 9,38,00,000/-. It was submitted that the AO in the remand proceedings and thereafter, the ld CIT(A) has analysed the transaction documentation in respect of each of the loan transactions and thereafter, has accepted these transactions and therefore, the contention so advanced by the ld CIT/DR cannot be accepted.

As far as repayment of loan transactions during the year is concerned, it was submitted by the ld AR that unlike the findings of the AO in the assessment order where he has held an amount of Rs 48,47,70,093/- has been repaid during the year, only an amount of Rs. 7,36,99,500/- has actually been repaid during the year as duly demonstrated by the assessee during the remand proceedings which has been accepted by the AO as well as by the ld CIT(A). In this regard, it was further submitted that the assessee has duly demonstrated that in respect of Abdul Aziz Abdul and Akbar Khan Rasul Khan, the assessee has repaid the amount by way of adjustment against sales. As regards other repayments, the assessee has filed the necessary confirmation letters along with bank statements, highlighting all the repayments of the loan through the banking channel. It was submitted that the fact of submission of bank statement is duly acknowledged by the AO in his remand report and accordingly it was submitted that there is no dispute that the repayment has happened through banking channels and the source of the repayment can also be identified from the receipt entry immediately above the repayment entry in the bank statements. It was accordingly submitted that as the repayment of loan is clearly reflected in the books of accounts and the source of the said repayment has been duly disclosed, no addition is warranted u/s. 69A of the Act and the Ld. CIT(A) has rightly returned a finding to this effect. It was submitted that the case of the AO was that the assessee had repaid the loans outside the books of accounts which the assessee has duly demonstrated as factually incorrect as all repayments have been made through the banking channel and through the bank account maintained by the assessee and recorded in the books of account which have been prepared on double entry system of accounting where the respective loan amount has been credited and bank account has been debited with corresponding repayment amounts. It was submitted that the ld CIT/DR has also not raised any objections during the hearing that such repayments have happened from the assessee‟s bank account and duly reflected in the books of accounts. It was further submitted that in respect of cash transactions with Anmol Land Developers, the ld CIT(A) basis the AO remand report has already brought to tax a sum of Rs 12,00,000/- u/s 68 of the Act and the assessee is not in appeal against the said addition. It was submitted that the AO in the remand proceedings and thereafter, the ld CIT(A) has analysed the transaction documentation in respect of each of the loan transactions and thereafter, has accepted these transactions being repayment of loans during the year and therefore, the contention so advanced by the ld CIT/DR cannot be accepted.

As far as the reclassification of “unsecured loans” as “other payables” in the Books of Account, it was submitted that during the appellate proceedings, the assessee has submitted that the necessary details in terms of name of the parties, opening and closing balance of “unsecured loan”, and opening and closing balance of “other payables”. It was submitted that these are sufficient evidences to prove the regrouping of the liabilities as unsecured loans as on 31-03-2021 which were reclassified as “other payables” as on 31-03-2022 and in this regard, our reference was also drawn to the assessee‟s Paper Book wherein at Pgs. No. 155 – 156, party-wise details of opening and closing balance of unsecured loans and other payables for AY. 2021-22 and 2022-23 has been submitted and at Pgs. No. 157 -158, party-wise details of regrouping made in the financials in AY. 2022-23 has been submitted. It was submitted that the Ld. CIT(A) has rightly taken the same into consideration and has recorded a clear finding that the assessee has furnished complete details of the regrouping alongwith supporting evidences, which were duly verified by the AO in the remand report and it was accordingly submitted that there is no basis to challenge the said findings of the Ld.CIT(A), wherein the AO himself has verified the same in his remand report.

The ld AR accordingly supported the findings of the ld CIT(A) and submitted that the order so passed by the ld CIT(A) be sustained and the appeal of the Revenue be dismissed.

We have heard the rival contentions and perused the material available on record. During the course of assessment proceedings, the AO has referred to the opening balance of unsecured loans as on 31-03-2021 at Rs. 62,29,75,941/- and closing balance of unsecured loans as on 31- 03-2022 at Rs. 13,82,05,848/- and has held that the difference amounting to Rs. 48,47,70,093/- is the amount of repayment of loan which has been made out of the books of account and an addition of Rs. 48,47,70,093/- was made towards the repayment of loan from undisclosed sources u/s. 69A of the Act. Evidently, the AO has arrived at the aforesaid finding on mere perusal of the balance sheet as the assessee failed to respond to the notices and file necessary submissions/explanations. However, during the course of appellate proceedings, the assessee submitted a reconciliation statement whereby it was submitted that the opening balance of unsecured loan as on 31-03-2021 was Rs. 62,29,75,941/-, the assessee received fresh loans during the year amounting to Rs. 9,91,15,000/-, that the assessee repaid the loans during the financial year amounting to Rs. 7,36,99,500/- and an amount of Rs. 51,01,85,593/- was regrouped from “unsecured loans” to “other payables” and closing balance of unsecured loans as on 31-03-2022 was determined at Rs. 13,82,05,848/-. In other words, the difference between opening and closing balance of unsecured loans consisted of three broad set of transactions – the transactions in form of fresh loans taken by the assessee during the year, the existing loans which were repaid during the year and lastly, certain regrouping of existing loan transactions from “unsecured loans” to “other payables” in its books of accounts from purely an accounting standpoint without any movement of funds.

The broad nature of these transactions and corresponding figures are not disputed before us by the Revenue and these are as follows: a) Fresh loans taken during the year – Rs 9,91,15,000/- b) Existing loans repaid during the year – Rs 7,36,99,500/- c) Regrouping of loan transactions in books of accounts – Rs 51,01,85,593/-

In respect of fresh loans transactions during the year amounting to Rs 9,91,15,000/-, the relevant transaction documents in respect of each of these loan transactions as so submitted by the assessee by way of additional evidences have been examined by the AO during the remand proceedings as well as by the ld CIT(A) during the appellate proceedings. In respect of loan transactions amounting to Rs 9,38,00,000/-, the ld CIT(A) has returned a finding that the assessee has submitted the necessary documentation and discharged its onus in terms of identity, creditworthiness and genuineness of the transactions. During the course of hearing, the ld CIT/DR also submitted that loan transactions amounting to Rs 9,38,00,000/- were supported by PAN, ITR acknowledgments, confirmations, and bank statements, establishing their prima facie genuineness. Therefore, as far as fresh loan transactions amounting to Rs 9,38,00,000/- are concerned, there is nothing on record to rebut the findings of the ld CIT(A) which are based on appreciation and examination of the documentation placed on record by the assessee in respect of each of these loan transactions.

As far as three other loan transactions amounting to Rs 53,15,000/- is concerned, we find that the ld CIT(A) has held that the assessee has failed to submit the requisite documentation in respect of these transactions and thus, failed to the discharge the onus cast on it and the addition has been confirmed by the ld CIT(A). The Revenue is not in appeal against the said addition confirmed by the ld CIT(A) and the ld AR on behalf of the assessee has also stated that the assessee has not filed any cross-appeal against the addition so confirmed by the ld CIT(A). The fact that these three loan transactions have not been accepted by the ld CIT(A) and addition has been confirmed cannot by any stretch of imagination leads to challenging the evidentiary value of documentation submitted and accepted by the Ld.CIT(A) in respect of rest all loan transactions as it is an accepted principle that each transaction need to be tested on its own set of documentation. In the instant case, the Ld.CIT(A) has analysed the transaction documentation in respect of each of the loan transactions and thereafter, has arrived at his findings and therefore, the contention so advanced by the Ld.CIT-DR in this regard cannot be accepted.

Now, coming to repayment of outstanding loans during the year amounting to Rs 7,36,99,500/- and the source of such repayments during the year. In this regard, the documentation submitted by the assessee were again subject matter of examination by the AO during the remand proceedings and we find that the AO has stated in his remand report that the assessee has submitted the documentation in respect of each of the parties and also the fact that assessee has submitted copy of its bank statement highlighting the repayment through banking channel except in case of two parties where the repayments were by way of adjustment against the sales. No adverse finding has been recorded by the AO in terms of sales effected by the assessee and the credits in the assessee‟s bank account and availability of funds with the assessee at the relevant point in time which were used for repayment. Further, the Ld.CIT(A) has returned a finding that in the case of Abdul Rehman Acres LLP (Rs 56,34,750/-) and Khaleej Acres LLP (Rs 56,34,750/-), there was no actual outflow of funds but the amount outstanding was adjusted against sales made to them by the assessee and the assessee has submitted copy of the sales ledger wherein the sales have been effected and which has been duly offered to tax. In respect of other repayments, the Ld.CIT(A) has returned a finding that the assessee has submitted their confirmations, PAN details, addresses, and ITR acknowledgments as well as copy of assessee‟s bank statements to substantiate that the payments have been made through banking channel and the repayments have been adequately documented and verified, no addition is warranted in this regard. We therefore find that where in respect of existing outstanding loans reflected in the assessee‟s books of accounts, the assessee has demonstrated the repayment either through adjustment against the sales or against the actual payment through its bank account and where the credits in the assessee‟s bank account and availability of funds with the assessee at the relevant point in time are not under challenge, it cannot be held that the payments are made out of books and therefore should suffer any adverse tax consequences. We therefore don‟t find any infirminity in the findings of the ld CIT(A) and the same are hereby confirmed.

Now, coming to regrouping of loan transactions amounting to Rs 51,01,85,593/-, the ld CIT(A) has returned a finding that the assessee has furnished complete details of the regrouping alongwith supporting evidences, which were duly verified by the AO in the remand report and no addition is warranted on this account. The Ld.CIT-DR has contested the said findings and has submitted that the assessee had merely furnished the names and amounts of certain parties without producing corroborative documents such as confirmations, PAN, addresses, or evidence substantiating any accounting reclassification. In his submissions, the ld AR submitted that during the remand and appellate proceedings, the assessee has submitted the necessary details in terms of name of the parties, opening and closing balance of “unsecured loan”, and opening and closing balance of “other payables” and it was submitted that these are sufficient evidences to prove the regrouping of the liabilities as unsecured loans as on 31-03-2021 which were reclassified as “other payables” as on 31-03-2022 and in this regard, our reference was drawn to the assessee‟s Paper Book wherein at Pgs. No. 155 – 156, party-wise details of opening and closing balance of unsecured loans and other payables for AY. 2021- 22 and 2022-23 has been submitted and at Pgs. No. 157 -158, party-wise details of regrouping made in the financials in AY. 2022-23 has been submitted.

We have gone through the aforesaid material available on record and find that where the matter is limited to reclassification and regrouping of certain transactions from one head to another and in the instant case, from “unsecured loans” to “other payables”, what is essential is the identification of individual accounts which have been regrouped from one broad head to another head. Where the transactions are already reflected in the individual accounts as at the beginning of the year and there are no movement of funds either in terms of receipt or repayment during the year and where the assessee has duly provided the necessary particulars of these individual accounts which were outstanding at the beginning of the year and grouped under the head “unsecured loans” and which are later on regrouped under the head “other payables” at the end of the year, we find that the assessee has satisfactorily discharged its onus in terms of establishing the regrouping from purely an accounting and disclosure stand point. It is not even the case of the Revenue that these transactions were not reflected in audited financial statements for F.Y 2020-21 and these are cases where fresh loans transactions were undertaken during the year and therefore, insistence of producing any corroborative documentation in support of these transactions is not called for. We accordingly find that the Ld.CIT(A) has rightly returned a finding that these are merely regrouping of loan transactions from one head to another in the assessee‟s books of accounts and has deleted the addition. We donot find any factual or legal infirmity in said findings of the Ld.CIT(A) and the same are hereby confirmed.

In the result, the appeal of the Revenue is dismissed.