DEPUTY COMMISSIONER OF INCOME TAX-4(2)(2), MUMBAI vs. M/S.JAMINI NIDUSTRIES PRIVATE LIMITED , MUMBAI

ORDER

PER N.K. PRADHAN, AM

2. The ground of appeal filed by the revenue reads as under:

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing relief to the assessee on account of bogus unsecured loans even though there was a conclusive finding that the loan creditors have not been found at the addresses given by the assessee.

Sr. No. Name and Address of the PAN Loan Amount Interest Amount company

10. Starlite Pharmaceutical Pvt. Ltd. AADCS4721L 80,00,000/- 1,05,041/- 68, Bentick Street Kolkata 11. TrishalaVyaparPvt .Ltd. 167/4, AABCT2465Q 0/- 3,24,000/- LenineSarini Kolkata Total 4,05,00,000/- 49,62,081/-

3 M/s Jamini Industries The DDIT has given a report to the AO stating that out of 11 companies, 9 are not found at the given address and the rest two companies i.e. M/s Onkarmal Consultancy Pvt. Ltd. (Director-Mr. Rajkumar Bajaj) and Cyndrella Tie-Up Pvt. Ltd. (Director-Mr. Amit Khemka) are just the entry provider as per the statement on oath given by Mr. Amit Khemka during the search. Thereafter, the AO provided to the assessee a copy of the commission report along with the show-cause notice dated 23.12.2016. In response to it, the assessee submitted a reply on 26.12.2016. The AO was not convinced with the said reply of the assessee for the reason that the loan parties could not be traced at the giving address and the assessee failed prove the primary onus i.e. is the existence of the parties. Further observing that 2 companies out of the said list of 11 companies had not received any interest on the loan given to the assessee, the AO held that the said companies were just entry providers.

Further, the AO verified and found that the loan parties have high reserve and surplus in their balance sheet but it was only because of share premium amount and not due to profit and loss during the year. In fact the said companies, whose financials had been submitted, had very low income in their P&L account. Thus the AO observed that it is beyond comprehension how such companies, with meagre income had given such huge loans to the assessee. The AO tabulated the financials of the said loan parties, which is as under:

Sr. Name of the companies Reserves and Share Premium Surplus (P/L statement) & (In Rs.) Surplus (In Rs.) Income for AY 2014-15. (In No. Rs.) 1. Aachman Marketing Pvt. Ltd. 5,51,88,108/- 5,51,39,600/- 48,508/- &9,370/-

2. Cyndrella Tie-Up Pvt. Ltd. 3,47,76,426/- 3,97,17,500/- (-) 49,41,074/- & 0/-

5. Meghna Saree Emporium Pvt. 3,24,72,274/- 3,25,05,000/- (-) 41,974/- & 4,290/- Ltd.

7. Oracle Marketing Pvt. Ltd. 3,26,14,166/- 3,15,00,000/- 8,73,792/- & 3,090/-

8. Samyak Sales Pvt. Ltd. 4,59,52,844/- 4,59,46,000/- 6,844/- & 9,320/-

Thus taking into account the above facts and the findings of the commission sent u/s 131, the AO made an addition of Rs.4,54,62,081/- which includes interest of Rs. 49,62,081/- u/s 68 of the Act.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). In the order dated 27.06.2017, the Ld. CIT(A) observed that (i) it is settled position that the source of source cannot be questioned and the AO has not verified the amount of paid-up capital of 5 M/s Jamini Industries (ii) the AO has also not verified the amount of investments of loan creditors in shares of the company held as stock-in-trade or investment, loans and advances given to various other parties other than assessee, (iii) the AO could also have got it verified for rebuttal of the company but this has not been done.

The Ld. CIT(A) concluded as under:

“ 5.3.16 Thus, it has to be said that the appellant has demonstrated that it has satisfied all the 3 ingredients required to prove the satisfactory nature of the loan transactions. On the basis of submissions made by the appellant it can be concluded that all the 3 ingredients having been satisfied, the impugned loans have to be treated as explained satisfactorily and the AO was not justified in having disregarded overwhelmingly supportive evidence. No cogent material was adduced by him to show that loans were unexplained. Therefore, keeping in view of the various judicial pronouncements as referred above, the impugned additions, made in the assessment order, has to fail on several counts such as reliance on evidence that is totally inadequate; failure to make available any incriminating material (reports, statements etc.) forming basis for action by the AO; failure to give due opportunity to the appellant to cross examine witnesses, whose statement might have been relied upon and failure to recognize the satisfactory nature of the explanation /evidence tendered by the appellant to explain identity of creditors, creditworthiness of the creditors and the genuineness of the loan transactions. It has rebutted the observations of AO by point to point. Accordingly, in view of the above facts of analysis of the facts and documents on record, as well as judicial pronouncements including the judgments of jurisdictional High Court of Bombay as well as ITAT, Mumbai, it will be difficult to sustain the 6 M/s Jamini Industries AO since 3 conditions prescribed for proving the cash credit were satisfied by the Appellant in the present case.”

Thus observing, the Ld. CIT(A) held that the assessee, during the course of assessment proceedings has proved identity of each loan creditor, genuineness of each loan and creditworthiness of each loan creditor. Therefore, the Ld. CIT(A) deleted the addition of Rs.4,05,00,000/- and the disallowance of interest on such loans of Rs.49,62,081/- made by the AO made u/s 68 of the Act.

It is submitted by him that as per the investigation report given by the DDIT, 9 out of 11 companies are not found at the given address and the balance 2 companies are just entry providers. Referring to the income of the said 11 companies, the Ld. DR submits that those companies were having very low income in their profit and loss account so as to justify having given such huge loans to the assessee.

Referring to the judgment of the Hon’ble Supreme Court in Pr. CIT v. NRA Iron & Steel (P.) Ltd. (2019) 103 taxmann.com 48 (SC), the Ld. DR submits that where assessee received share capital/premium, however, there was failure of assessee to establish creditworthiness of investor

7 M/s Jamini Industries AO was justified in passing assessment order making additions u/s 68 for share capital/premium received by the assessee- company. It is stated by him that in the above case, several investor companies were found to be non-existent and onus to establish identity of investor companies was not discharged by the assessee. It is further stated that merely because the assessee-company had filed all primary evidence, it could not be said that onus on assessee to establish creditworthiness of investor companies stood discharged. Therefore, it is argued that the AO in the present case is justified in making the addition of the loan amount and the interest u/s 68 of the Act.

6. Per contra, the Ld. counsel of the assessee submits that as per the AO, the DDIT report dated 13.12.2016 stated that 9 out of 11 companies are not found at the given address. It is stated by him that the assessee submitted the correct address of loan creditors which is at page 279 of the Paper Book (P/B). It is explained that the Ld. CIT(A) examined the correct addresses which were earlier submitted by the assessee to the AO. It is further argued that (i) the AO never considered issuing of notice u/s 133(6) and summons u/s 131 at the new address as submitted by the assessee and therefore, the primary onus was discharged by the assessee, (ii) the Inspector of Income Tax did not make the necessary efforts to trace present address from the department records, website of NBFC and/or Google Maps and/or other means and therefore, the Inspector report is prepared mechanically and without due diligence.

Regarding observation of the AO that filing of ITR does not prove genuineness, the Ld. counsel submits that the CIT(A) has examined not 8 M/s Jamini Industries ITR but also other evidences like net worth etc. It is further submitted that apart from this, the assessee had also filed balance sheet, bank statement etc. and the combined effect of evidence produced by the assessee established identity, genuineness and creditworthiness.

Regarding the observations of the AO in respect of Onkarmal Consultancy Pvt. Ltd. and Cyndrella that they are merely companies providing entries and no interest is paid to them, the Ld. counsel submits that (i) the CIT(A) has in his order stated that the statements recorded were in case of third parties and not of the assessee (ii) the CIT(A) has also further stated that the said Shri Arun Kumar Khemka was not even a director in the said two companies, which were mentioned in the report of DDIT and this was based on list of directorships held by Shri Khemka which was also provided by the DCIT to the assessee, and (iii) the CIT(A) also further stated that no addition can be made by the AO on the basis of statement of third parties and hence no addition is called for.

In respect of the above two parties, the Ld. counsel submits that the observation made by the AO is erroneous because although Mr. Raj Kumar Bajaj and Prabhat Goyl (Onkarmal) and Mr. Amit Khemka and Mr. Anurag Lakkar (Cyndrella) are directors in these companies, the statement recorded was of Mr. Arun Kumar Khemka who is a third party, having no concern with the company and moreover para no. 3.5 is contradicting para 3.1 so far as payment of interest to these two companies is concerned.

9 M/s Jamini Industries Regarding the observation of the AO in respect of analysis of ITR of loan creditors and that the net worth of the loan creditors were very high due to share premium, the Ld. counsel submits that (i) the CIT(A) has stated that the AO relied upon the commission sent to the ADIT the copy of which was not provided to the assessee and (ii) the CIT(A) has stated that the assessee cannot be called upon to explain the source of source of the said income in its hands.

Further, the Ld. counsel submits that (i) there is no bar of having net worth by way of share premium so far as loan creditors are concerned, (ii) in fact the AO has accepted that the loan creditors were having very huge net worth to advance loans to the assessee, (iii) as regards loan creditor no. 3 and 4 (page 5 of assessment order) the assessee had filed ITR, confirmation, audit account and bank statements of loan creditors and therefore this remark in the table is baseless and the order is passed by the AO with several contradictions.

Regarding the observation of the AO that mere statements/RTGS and confirmations are insufficient, the Ld. counsel submits that the CIT(A), after considering the bank statements, RTGS and confirmations along with other documents has concluded that the identity and genuineness of each and every creditor was established by the assessee. It is further stated by him that (i) confirmations and bank statements are the primary evidence establishing availability of funds with the assessee and (ii) combined effect of confirmations, bank statements and financials of the loan creditors clearly establishes the identity, genuineness and creditworthiness of the loan creditors.

10 M/s Jamini Industries Finally, it is submitted by him that the CIT(A) has stated that the assessee has demonstrated that it has satisfied all the ingredients required to prove satisfactorily and the AO was not justified in having disregarded overwhelmingly supportive evidence. Thus it is stated that (i) the AO has picked up only isolated aspect of the evidence and avoided total picture of the loan creditors, (ii) reply dated 26.12.2018 and 28.12.2018 contained exhaustive details of loan creditors like letter of loan creditor, proof of filing IT return by loan creditor, audited accounts, bank statements of loan creditor, sign board displayed at premises of loan creditors, (iii) the overall evidences in the P/B clearly prove the identity, genuineness and creditworthiness of the loan creditors, (iv) therefore, the conclusion of the AO was based on wrong interpretation of the replies as well as omission to verify details provided in reply to the show cause notice.

Thus the Ld. counsel submits that the order passes by the Ld. CIT(A) be confirmed.

It is well settled that in order to discharge the onus u/s 68 of the Act, the assessee must prove the following:

(i) the identity of the creditor, (ii) the capacity of the creditor to advance money; and (iii) the genuineness of transaction.

11 M/s Jamini Industries After the assessee has adduced evidence to establish prima facie the aforesaid, the onus shifts to the Department as held in Shankar Ind v. CIT 114 ITR 689; Prakash Textile v. CIT 121 ITR 890; CIT v. United 187 ITR 596; Rajshree v. CIT 256 ITR 331; Ashokpal v. CIT 220 ITR 452, 454; CIT v. Metachem 245 ITR 160; CIT v. Shree Gopal 204 ITR 285; MOD Creations P. Ltd. v. ITO 354 ITR 282.

In the instant case, in response to the show cause notice dated 23.12.2016, the AR of the assessee filed a written submission dated 26.12.2016 before the AO stating the following :

“With reference to the Report of DDIT (Inv.) Unit 1(2), Kolkata we have been directed by the assessee to inform you that the accountant of the assessee while preparing loan confirmation had not stated PIN Code no. of the loan creditors and in some case the name of building of the loan creditors were not stated and therefore the summons u/s 131 may not have been served on the assessee but to our surprise in many cases the address or building name is correct inspite of that the inspector of the department could not serve summons u/s 131 to the said loan creditors.

(a) With further reference to above and with reference to your enquiry regarding verifications of the loans we are enclosing herewith certified copies of following papers along with original loan confirmation and proof of the fact that said parties are carrying on business at the address given.”

Besides giving the full address of the parties, the AR of the assessee filed before the AO (i) letter of loan creditor dated 26.12.2016, (ii) photo of sign board affixed outside office premises, (iii) proof of filing income tax return for AY 2014-15, (iv) original loan confirmation

12 M/s Jamini Industries (v) certified copy of bank statements being proof of payment by cheque and (vi) certified audited account for FY 2013-14 The above is evident from page 279 of the P/B, which the Ld. counsel has also referred to. The above submission dated 26.12.2016 was received by the AO on 27.12.2016. The AO completed the assessment on 30.12.2016. There is no dispute on the above facts.

7.1 As mentioned earlier in the case of NRA Iron & Steel (P.) Ltd. (supra), the Hon’ble Supreme Court has held at para 13 that :

“13. The lower appellate authorities appear to have ignored the detailed findings of the AO from the field enquiry and investigations carried out by his office. The authorities below have erroneously held that merely because the respondent company - assessee had filed all the primary evidence, the onus on the assessee stood discharged.

The lower appellate authorities failed to appreciate that the investor companies which had filed income tax returns with a meagre or nil income had to explain how they had invested such huge sums of money in the assessee company-respondent. Clearly the onus to establish the credit worthiness of the investor companies was not discharged. The entire transaction seemed bogus, and lacked credibility.

The Court/Authorities below did not even advert to the field enquiry conducted by the AO which revealed that in several cases the investor companies were found to be non-existent, and the onus to establish the identity of the investor companies, was not discharged by the assessee.”

7.2 A proper hearing must always include a fair opportunity to those who are parties in the controversy for correcting or contradicting

13 M/s Jamini Industries anything prejudicial to their view. Cross-examination is allowed by procedural rules and evidently also by the rules of natural justice. Any witness who has been sworn on behalf of any party is liable to be cross- examined on behalf of the other party to the proceedings.

The Hon'ble Supreme Court in State of Kerala vs. K.T. Shaduli Grocery Dealer AIR 1977 SC 1627, recognised the importance of oral evidence by holding that the opportunity to prove the correctness or completeness of the return necessarily carry with it the right to examine witnesses and that includes equally the right to cross-examine witnesses. In ITO vs. M. Pirai Choodi (2012) 20 taxmann.com 733 (SC), the Hon'ble Supreme Court has held that “Order of assessment passed without granting an opportunity to assessee to cross-examine, should not have been set aside by High Court; at most, High Court should have directed Assessing Officer to grant an opportunity to assessee to cross- examine concerned witness.”

7.3 In the case of CIT v. Jansampark Advertising & Marketing (P.) Ltd. (2015) 56 taxmann.com 286 (Del.), the Hon’ble Delhi High Court, dealing with section 68 of the Act, has observed that “in case of unaccounted entries found in books of accounts of assessee, though it is obligation of Assessing Officer to conduct proper scrutiny of material, in event of Assessing Officer failing to discharge his functions properly, obligation to conduct proper inquiry shifts to the Commissioner (Appeals) and Tribunal and they cannot simply delete addition made by the Assessing Officer on ground of lack of inquiry”.

14 M/s Jamini Industries In the instant case, as mentioned earlier the assessee filed the details before the AO on 26.12.2016 which was received in the office of the AO on 27.12.2016. The AO completed the assessment on 30.12.2016. A perusal of the appellate order passed by the Ld. CIT(A) dated 27.06.2017 clearly indicates that reliance has been placed by him on the submissions by the assessee. The Ld. CIT(A) could have directed the AO u/s 250(4) of the Act to conduct proper inquiry of the details filed by the assessee. He has not done so.

Thus following the ratio laid down in NRA Iron & Steel (P.) Ltd. (supra) & Jansampark Advertising & Marketing (P.) Ltd. (supra), we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to make an order afresh, after allowing the assessee to cross- examine the aforesaid parties. We direct the assessee to file the relevant documents/evidence before the AO. Needless to say, the AO would give reasonable opportunity of being heard to the assessee before finalizing the order.