ILOVE DIAMONDS PVT. LTD.,CHENNAI vs. ACIT, CC-2,, CHENNAI

Delete the disallowance of Rs. 2,50,000/- made on account of bad debts.

Direct the Assessing Officer to allow the set-off of current year losses and brought forward losses.

Quash the initiation of penalty proceedings under Section 271(1)(c) of the Act.

Grant any other relief(s) as deemed fit and proper in the facts and circumstances of the case.”

The assessee is a private limited company and is engaged in the business of online trading of light weight diamond jewellery. The assessee filed a return of income for AY 2016-17 on 12.10.2016 admitting a loss of Rs.4,46,07,511/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The A.O noticed that the assessee has received share capital and premium to the tune of Rs. 10,92,00,000/- during the year under consideration. The A.O further noticed that investment to the tune of Rs. 1,65,00,000/- by one of the shareholders Shri Anil Jain's was immediately preceded by a credit entry from the assessee company itself. Accordingly, the A.O called on further details pertaining to amount invested by Shri Anil Jain. The A.O also summoned Shri Anil Jain and recorded his statements. After considering details submitted and the statement recorded, the A.O concluded that the amount invested by Shri Anil Jain trails back to chain of movement of funds across various entities and therefore, not genuine.

The Ld. Authorized Representative (AR), at the outset, submitted that the finding of the A.O stating that Shri Anil Jain is a Director in assessee company is factually incorrect. The Ld. AR further submitted that the transaction of Rs. 1.65 Crores which is doubted by the A.O at the initial point of enquiry was a transaction of loan borrowed and returned by the assessee immediately since Shri Anil Jain agreed to invest through purchase of shares. The Ld. AR also submitted that the assessee has explained the source of Shri Anil Jain which is in the form of loan taken from M/s. Sherisha Technologies and from M/s. Reflects Industries Ltd. The Ld. AR further submitted that the assessee has also submitted the financial statements of the above two companies to substantiate the source of source. The Ld. AR argued that the A.O has made the addition in the hands of the assessee by trailing the financial statements of M/s. Sherisha Technologies and M/s. Reflects Industries Ltd to hold that the source for these companies to lend money to Mr.Anil Jain was not properly substantiated. The ld AR also submitted that it is not the onus of the assessee to substantiate the source of source of source and that the assessee has discharged the onus of proving the source. Accordingly it was argued that the addition made in the hands of the assessee cannot be sustained.

The Ld. Departmental Representative (DR), on the other hand, argued that the amount reflected as investment in the books of Shri Anil Jain does not I Love Diamonds Pvt. Ltd. :- 5 -:

We have heard the parties and perused the materials available on record. During the year under consideration, the assessee received money towards share capital and share premium and the AO called on the assessee to furnish details pertaining to the same. Based on the details furnished by the assessee, the AO traced the chain of alleged bogus transaction and accordingly held that the amount received by the assessee from Shri Anil Jain as non-genuine to make an addition u/s.68 of the Act. The contention of the assessee is that the assessee has discharged the onus of proving the identity, credit worthiness and the genuineness of the transaction and therefore no addition can be made u/s.68 of the Act. The revenue's argument is that the AO has clearly established that the funds are rotated through chain of non-genuine transactions and therefore the genuineness of the receipts in the hands of the assessee is rightly questioned. We notice from the perusal of the AO's order that the assessee has furnished the details pertaining to share capital/premium receipt before the AO which included the impugned receipts from Shri Anil Jain. We further notice that the assessee has furnished the details pertaining to Shri Anil Jain such as his ITR, PAN, bank statements, confirmation etc. We also notice that the AO has summoned Shri Anil Jain and in the statement recorded the details of source of funds in the hands of Shri Anil Jain was questioned and explained. In other words, the details of source for the money received in the hands of the assessee i.e. from Shri Anil Jain was explained I Love Diamonds Pvt. Ltd. :- 6 -: and also the source of source i.e. source in the hands of Shri Anil Jain was also substantiated. The AO it is noticed that has gone step further to examine the source of the parties who have given the loan to Shri Anil Jain and has recorded a finding that the 2nd and 3rd layer of the transaction chain was not properly explained by the assessee (refer para 7.3 page 24 of AO's order). The ld AR during the course of hearing drew our attention to the financial statements of M/s. Sherisha Technologies to submit that the amount loaned to Shri Anil Jain is reflecting in the financial statements and argued that the assessee has explained the source of source of source even when the law requires only source of source to explained. We further notice from the perusal of the order of the AO that all the findings pertain to tracing the various layers of the transaction. The AO has not recorded anything adverse against the assessee except that Shri Anil Jain who has invested in Assessee Company is allegedly involved in providing accommodation entry. Then, the proper course would be to take action against Shri Anil Jain. We also notice that in the statement recorded from Shri Anil Jain, he has not said anything against the assessee and has explained the source of funds using which he has invested in the assessee company. It is noticed that the source in the hands of Shri Anil Jain is explained to be from the sale of shares to the tune of Rs.10.19 crores and the gain on the said transaction was offered to tax as stated in the AO's order. The reason as stated in AO's order is that the assessee has layered the fund flow through shell companies and that the assessee could not furnish any explanation with regard to the financial status/strength of the said shell companies. From the facts and circumstances as stated herein above it is clear the ground on which the AO has made the addition is that the assessee has not been able to substantiate the flow of funds in the entire chain of alleged layered transactions. However it is noticed that I Love Diamonds Pvt. Ltd. :- 7 -: the allegation that it is the assessee that has used its own funds for layering is not supported by any material / evidences and that the AO has not brought anything on record in this regard. In our considered view, the assessee has discharged the burden cast on it by proving the nature and source of share capital premium by providing the relevant details with regard to the receipt of share capital / share premium and has also submitted the relevant documentary evidences in this connection which has not been rebutted. No infirmity has been pointed out by the A.O to discard it. Therefore impugned addition u/s.68 cannot be sustained. Accordingly we direct the AO to delete the addition made in this regard. Ground No.2 & 3 are allowed.

Ground No.3 pertains to disallowance of bad debts. During the course of hearing, both the parties did not present any arguments in this regard. Therefore the said ground is dismissed.

Ground No.4 pertains to set off of current year and brought forward losses. In this regard we direct the AO to examine the claim of the assessee and allow the same in accordance with law. Needless to say that the assessee be given an opportunity of being heard. It is ordered accordingly.

In result the appeal of the assessee is partly allowed. Order pronounced on 09th day of March, 2026 at Chennai.