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Income Tax Appellate Tribunal, MUMBAI BENCHES “D”, MUMBAI
Before: Shri SANDEEP GOSAIN & Shri G. MANJUNATHA,
आदेश / O R D E R Per G. Manjunatha (Accountant Member) This appeal filed by the assessee is directed against order of the Ld. CIT(A)-34, Mumbai, dated 29/11/2018 and it pertains to AY. 2009-10. The assessee has raised following grounds of appeal:-
1. Addition of Rs. 4,50,00,000/- u/s. 68:
1.1 The Learned Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs. 4,50,00,0007- made by the learned Assessing Officer u/s, 68 of the Income-tax Act, 1961. 1.2 The Learned Commissioner of Income Tax (Appeal) erred in holding that the transactions of loan taken by the Appellant are not genuine in spite of the fact that the documents including the material independently collected by the learned Assessing Officer clearly established the identity, capacity and the genuineness of the loans taken. 1.3 The Learned Commissioner of Income Tax (Appeal) failed to appreciate that the Appellant's sister concern M/s. M. L. Builders itself had repaid its loans of Rs. 10,75,00,OOO/- to the creditors in the relevant year i.e. A. Y. 2009-10 and out of this Rs. 6,40,00,OOO/- was repaid immediately before the payment of loans by the creditors to the Appellant which is more than sufficient to explain the source of source. 1.4 The learned Commissioner of Income Tax (Appeal) failed to appreciate that the addition of Rs. 4,50,00,OOO/- u/s. 68 of the Act is clearly perverse, illegal and invalid.
Notice u/s. 148 dated 31/03/2016 is illegal and invalid:
2.1 The learned Commissioner of Income Tax (Appeal) erred in not considering the grounds of validity of the notice u/s. 148 dated 31/03/2016 and in dismissing the grounds erroneously relying on section 292BB of the Act. 2.2 The learned Commissioner of Income Tax (Appeal) failed to appreciate that the provisions of section 292BB are not applicable in the instant case since the Appellant had raised the objection of non-service of notice in the course of the assessment proceedings and at the earliest opportunity. 2.3 The learned Commissioner of Income Tax (Appeal) erred in holding that the grounds of invalidity of the notice u/s. 148 dated 31/03/2016 are not required to be considered in view of section 292BB of the Act. 2.4 The learned Commissioner of Income Tax (Appeal) failed to appreciate that there was no valid service of a valid notice u/s. 148 as required u/s. 148(1) of the Act. 2.5 The learned Commissioner of Income Tax (Appeal) failed to appreciate that there was no income chargeable to tax which had escaped assessment. 2.6 The learned Commissioner of Income Tax (Appeal) failed to appreciate that there was no valid reason to believe that the income chargeable to tax had escaped assessment. 2.7 The learned Commissioner of Income Tax (Appeal) failed to appreciate that there was no valid material to support any valid reasons
M/s M. L. Realty to believe that any income chargeable to tax in the relevant year has escaped assessment. 2.8 The learned Commissioner of Income Tax (Appeal) failed to appreciate that at the time of issuing notice u/s. 148 dated 31/03/2016 the learned Assessing Officer did not have any information as regards any loan having been received in the relevant year and such information was received from the Appellant for the first time in the course of the assessment proceedings in November 2016 as is confirmed in the assessment order. 2.9 The learned Commissioner of Income Tax (Appeal) failed to appreciate that there was no valid recording of valid reasons for reopening as required in section 148(2) of the Act. 3 Assessment order dated 28/12/2016 is illegal and invalid: 3.1 The learned Commissioner of Income Tax (Appeal) failed to appreciate that the assessment order dated 28/12/2016 is illegal and invalid being passed pursuant to notice u/s. 148 dated 31/03/2016 which is illegal and invalid. 3.2 The learned Commissioner of Income Tax (Appeal) erred in not considering the ground of invalidity of the assessment order dated 28/12/2016 2. The brief, facts of the case are that the assessee is a partnership firm, engaged in the business of builders and contractors, filed its return of income for AY 2009-10 on 23/09/2016, declaring total income at Rs. NIL. Subsequently, the case has been reopened u/s 147 of the Act, for the reasons recorded, as per which income chargeable to tax had been escaped assessment within the meaning of section 147 of the Act ,on account of huge unsecured loans taken from various companies as per report of DGIT(Inv.) Unit 2(1), Mumbai. Therefore, a notice u/s 148 of the Act, was stated to be issued on 31/03/2016. Thereafter, the case has been selected for scrutiny and notice u/s 142(1) dated 10/06/2016 was served on the assessee stating that notice u/s 148 was issued on 31/03/2016. Thereafter, notice u/s 143(2) of the Act, was sent on 18/11/2016 which was served to the AR of the assessee. In response to notice, the assessee vide
M/s M. L. Realty its letter dated 07/11/2016 filed objection for reopening on various grounds, including on the ground that there was no valid service of notice u/s 148 of the Act. Thereafter, the assessee through its authorized representative filed various details as called for by the AO, including necessary evidence to prove identity, genuineness of transactions and creditworthiness of the loan creditors in order to prove unsecured loan taken from six parties.
The AO after considering relevant submissions of the assessee rejected objections filed by the assessee for reopening of assessment on various grounds vide its letter dated 08/11/2016 and observed that there is no merit in the objections of the assessee for non-service of notice, because the notice required to be issued u/s 148 of the Act, has been sent to assessee vide e-mail dated 04/11/2016 on the email address given by the assessee in the return of income filed for AY 2014-15. The AO further observed that in so far as loans taken from various parties, the assessee has failed to prove the identity, creditworthiness and genuineness of transactions in order to come out the provisions of sections 68 of the Act. Although, the assessee filed numerous evidences along with financial statement of the loan creditors but, when the assessee was called upon to produce the parties in person for verification, the assessee has failed to produce the parties. In facts, 133(6) notices were served on the loan creditors, but, no response was received, therefore, he opined that mere furnishing of confirmations along with financial statement would not sufficient enough to prove identity, genuineness of transactions and creditworthiness of the parties. Accordingly, he opined that loan taken from the above parties are not genuine, therefore, he made the addition u/s 68 of the Act, for Rs.4,50,00,000/- taken from six parties. Similarly, the AO has made additions towards interest paid on such loans on the ground that once loan taken from parties are considered to be non-genuine, then any interest payment on such loans also needs to be considered as unexplained and hence, made additions of Rs.10,43,670/- towards interest paid on unsecured loans. Relevant observations of the AO are as under:-
Show-cause notice Issued and assessee's response: On 7/12/2016 a show-cause notice was issued to M L Realty, in which specific questions were asked as to certain deposits immediately preceding the withdrawal of funds for loan to M L Realty, in the bank account statement extract provided of the six concerns by the assesses earlier. The questions asked and the assessee's response as produced in a submission on 13.11.2016 is reproduced below; SR Name of Date loan Corresponding Explanation No, Concern given Fund inflow
1 BLOOMDALE 19.01,200 On 19.01,2009, Cannot explain the same FIKVEST 9 RTGS RTD*
2 DIVYADHWAN 19.01.200 On 16,01.2009: Rs.95 Lakhs loan repaid I 9 AND from M L Builders : by M L Builders to INVESTMENT 20.01.200 95 lakhs, on Divyadhani, Rs.30 lakhs PVTLTD 9 17.01.2009, from amount transferred from 10136291'(301akhs Bloomdale Finvest, Rs.5 ) and lakhs amount transferred '101/36287'(5lakhs) from Tinal , Pharmaceuticals As ‘28159'(65lakhs)an Regards 65 Lakhs and d ‘28159'(50 lakns) 50 lakhs the same cannot be explained
3 Jaihind 17,20,22,2 On 16.01.2009, Rs.70kkhs amount repaid Mercantile 7' * 701akhs from M L by M L Builders, Pvt Ltd (Two Builders, On 19.01, Rs.60Iakhs amount separate 4503/101/36425* transferred from amounts) 60 lakhs; on 21.01 Divyadhwani Investment, Jan 2009 arid 22.01, from Rs,201akhs amount '36298% 'NAYAN', transferred from Nayan 20 lakhs and 10 trade, Rs.10lakhs amount lakhs respectively transferred from Lalita Exports
4 Lalita Exports 17.01.200 15.01.2009, and Rs.80 lakhs amount of Pvt Ltd 9 17.01.2009, from loan repaid by M L 'RTGS: ML Builders and amount Builders' of80 lakhs transferred from and'36291 Bloomdale Investment
5 Piumetti 19.01.200 15.01.2009:O/WCL Rs. 18 lakh cannot Exports Pvt Ltd 9 G; explain, Rs.2.55 lakh 352393 and transferred from 16.01.2009; Divyadhwani Investment, 10156425 and Rs. 29,50 lakh 10136298-amounts transferred from Lalita of 18 lakh, Exports 2.55 lakh and 29.5 lakh respectively Tinal 19.01.200 15.01.2009: RTGS: Loan repaid by M L 6 Pharmaceutical 9 M L Builders Builders, Rs.32 lakh s and 19.01.2009: transferred from 32 lakhs from Divyadhari Investment '4503/101/36425'
A clear pattern is established. There is a routing of funds from one company in which Mr. Parekh is director to another (the company names in which he is director have been italicised above), and there are some fund inflows which the assessee has been unable to explain, and Mr.Parekh, by his unwillingness to respond to statutory notices, has also been unable to explain. 8,1 As for producing Mr.Parekh before the undersigned, the assessee submitted in his showcause notice that they had forwarded a copy of showcause notice to the broker through whom the loan was arranged and had also requested Mr. Parekh to appear before the undersigned, and stated that the broker had assured that Mr. Parekh would appear before the undersigned by 17.12.2016; however, Mr.Parekh did not appear. 9 Full returns of income sought from jurisdictional AOs:
The: full returns of income were sought from the respective companies' jurisdictional AOs. From the full ITRs given as a response the following has been observed (i)The directors of these six companies are Mr.Naynesh Parekh and Jasmina K Parekh (ii)None of the six companies have sufficient income to advance these loans and hardly any assets other than advances made, (iii)Their sources of funds are mainly share application money as can be seen from their balance sheets in their returns of income but since Mr.Parekh did not respond to any of the notices issued to him, the source of this money is unclear. In particular their liabilities are as follows:
Name of Concern Share Capital Loan funds
Authorised Issued, Share subscribed application and paid tip money
1 bloomdale 9000000 2272500 131973888 0 FINVEST 2 DIVYADHWANI 100000 100000 168555000 0 INVESTMENT PVT LTD 3 Jaihind Mercantile Pvt 9000000 3884900 120826744 O Ltd 4 Lalita Exports Pvt ttd 500000 101000 250863200 0
5 Plumetti Exports Pvt 100000 100000 74051507 0 Ltd
(iv)None of these companies have entered anything under the head 'Nature of business or profession'; it can only be assumed that as their turnover is zero, and their only income is Interest', that they must be in the business of advancing loans out of their own capital. However the source of this capital has not been explained. 9.1 The inspector of the undersigned has submitted an 'Inspector's report kept on file on how when he went to serve the notice u/s 131 at the registered address of the six companies, he found it to be a residential 2 BHK flat in a residential area. And yet these companies claim expenses of 'Power and Fuel',, 'Rents', 'Repairs to machinery', Salaries and wages' in their profit and loss account. This lends weight to the fact that these are, in fact, paper companies.
9.2 As can be seen from the asaessee's response lo showcause notice, funds are being transferred from one company controlled by Mr.Parekh to the other. There seems to be a routing of funds from one company lo the other, with no reason having been given as to why this is happening.
10, The assessee was asked time and again, in the course of hearings, through a formal showcause nonce, in the course of statement recording u/s 131 to explain the creditworthiness of these loan creditors, which the asses sat has not been able to .explain. The source of the funds of these concerns have not been explained at all. Their returned income does not indicate that they have the capacity to advance these loans. Lastly, the assessee was unable to produce these parties before the undersigned despite being given several opportunities and sufficient time, and Mr'.Naynesh Parekh has simply evaded the- responsibility of replying to statutory notices. Mr. Sheth stated in. his statement that he is not concerned about the creditworthiness of those who give him loan but as was already pointed out lo him, as a businessman he may not need to be concerned, but as un assessee, he needs to prove the genuineness of his loans as appearing in his balance sheet on being confronted with the apparent lack of creditworthiness of the loan creditors. The fact that these happened through banking channels is not a sufficient indicator of creditworthiness as held by various court decisions. The fact that TDS was deducted on interest paid is also an insufficient indicator of the genuineness of these loans, as it is seen that each of these companies are claiming large refunds because of TDS deducted. Lastly, a full bank statement would have been required of these companies to show inflows of funds throughout the year, but this has not been provided either by the assessee or the loan creditor. Given these facts and the inability of the assessee to prove the creditworthiness of loan creditors. I am satisfied that an amount of Rs 4,50,00,000 and the interest paid of Rs .10,43,670/- is to be considered as bogus loans and interest paid and is to be added u/s.. 68 as ‘Income from Other Sources’ as an unexplained sum found credited in assessee’s books of accounts. Penalty proceedings u/s 271(1)(c) are initiated separately for furnishing, inaccurate particulars. (Addition: 4,60,43,670)
4. Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has challenged reopening of assessment on various ground including non-service of notice u/s 148 of the Act, within the prescribed time limit provided under the Act. The assessee has challenged the additions made towards unsecured loans along with interest paid on such loans on the ground that when sufficient evidences has been filed to prove the identity, genuineness of transactions and creditworthiness of the parties, no reason for the AO to doubt genuineness of transactions and creditworthiness of the parties merely for the reason
M/s M. L. Realty that the loan creditors did not appear before the AO in response to 133(6) notices. The assessee at best could file whatever documents available with it, but cannot enforce the parties to appear before the AO in response to 133(6) notices. In fact, the parties have failed necessary details in response of 133(6) notices. The assessee has also filed similar documents including confirmations from parties. Loans have been taken through proper banking channel and interest has been paid after deducting applicable TDS.
Under these facts, making additions towards unsecured loans on the sole basis of non- appearance of the parties before the AO in response to 133(6) notices is highly incorrect.
The assessee has made elaborate written submissions along with certain judicial precedence. The written submissions of the assessee has been reproduced at para 3 of pages 4 to 20 of Ld. CIT(A)’s order.
The ld. CIT(A) after considering the written submissions of the assessee and also relied upon various judicial precedence, rejected legal ground taken by the assessee challenging validity of reopening of the assessment on the ground of non-service of notices u/s 148 of the Act. The Ld. CIT(A) held that the assessee has participated in the reassessment proceedings and cooperated with filing of requisite details and documents.
Once, the assessee has participated in reassessment proceedings, then the assessee loses its right to challenge the validity of service of notice or non-service of notice including improper service of notice, unless, the assessee has filed its objections of non- service of notice before the AO. Therefore, he opined that there is no merit in the legal
M/s M. L. Realty ground taken by the assessee and accordingly. rejected legal ground challenging validity of reopening of the assessment. The relevant findings of the Ld. CIT(A) are as under:-
4.4 Ground No.4:- This ground relates with the servicing of notice u/s 148 of the Act. During the appellate proceedings the AR of the appellant contended that the notice u/s 148 was not served upon the appellant as the notice was sent to wrong email-id by the A.O.. I have noted that the appellant had participated in re-assessment proceedings and co-operated with filing of requisite details and documents. These kind of issues are dealt by the section 292BB which says : "Section 292BB: Where an assesses has appeared in any proceedings or cooperated in any inquiry relating to an assessment or re-assessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assesses shall be precluded from taking any objection in any proceedings or inquiry under this act that the notice was a) not served upon him: or b) not served upon him in time: or c) served upon him in an improper manner: Provided that nothing contained in this section shall apply where the assesses has raised such objection before the completion of such assessment or re-assessment In view of the above I hold that the appellant had appeared in re-assessment proceedings and co-operated, thus the notice u/s 148 of the Act deemed to be served upon the appellant. Thus, this ground is dismissed 6. In so far as, the issue involved in appeal regarding addition made towards unsecured loans taken from six parties along with interest, the Ld. CIT(A) held that although the assessee has filed various details including confirmations from the parties but fail to prove the genuineness of transaction and also creditworthiness of the parties, which is evident from the fact that the AO has brought out various facts in light of M/s M. L. Realty documents filed by the assessee to prove that none of the creditors have enough source of income to explain loans given to the assessee. The Ld. CIT(A) further observed that mere furnishing confirmations and other documents is not sufficient enough to prove nature and source of credit in order to come out of provisions of section 68 of the Act.
The expression ‘nature and source’ appearing in section 68 has to be understood as requirement of identification of source and its genuineness. It is also a settled legal position that the onus of the assessee of explaining nature and source of credit does not get discharged merely by filing confirmation letters or demonstrating that the transactions have done through banking channels or even by filing the income tax assessment particulars. Therefore, he opined that the assessee has failed to prove three ingredients provided u/s 68 of the Act, in order to explain nature and source of unsecured loans taken from six parties and accordingly, the AO was right in making additions towards unsecured loans as unexplained credit u/s 68 of the Act.
7. In so far as, interest paid on such loans, the Ld. CIT(A) deleted the additions made by the AO on the ground that the assessee has filed necessary documents to prove that it has not claimed interest as expenditure in its profit & loss account, hence, disallowance of expenditure which is not even claimed as deduction by the assessee cannot be justified. Accordingly, deleted additions made towards disallowance of interest.
The relevant observations of the Ld. CIT(A) are as under:-
1. I have carefully considered the arguments and submissions flied during the appellate proceedings by the AR of the appellant. I have also gone through the basis of addition made by the A.O. in the Assessment. I have considered all the case laws relied upon by the AR of the appellant and also the relevant case laws. 4.2 The main issued involved in the instant case is the addition of unexplained credit u/s 68 of the IT Act, 1961 and servicing of notice u/s148 of the Act. 4.3. Ground No.1 & 2:- This ground relates to the addition of unsecured loans u/s 68 of the IT Act, 1961. 4.3.1 The A.O had pointed out that the Appellant took unsecured loan from following 6 private limited companies:- Sl Company Name Total Loan No. Income Advanced
1 Bloomade Finvest 9991356 5000000 2 Diyadhwani Investment Pvt 972275 11000000 Ltd 3 Jaihind Mercantile 920128 14000000 Private Limited 4 Lalita Exports Pvt Ltd 938021 5000000 5 Plumetti Exports Pvt Ltd 108311 5000000 6 Tinal Pharmaceuticals Pvt 956883 5000000 Ltd
The A.O conducted a detailed enquiry in respect of the above 6 companies and found that all the 6 companies were having same address i.e. B-208, Shantiran II, Raheja Township, Malad East, Mumbai 400097 and same directors i.e. Shri Nayesh T. Parekh and Jasmina Naynesh Parekh. The A.O deputed his inspector to verify the above mentioned address. The inspector of the A.0 in his report stated that this address belongs to a residential 2 BHK flat in a residential area. Even though these companies were claiming expenses of "Power and Fuel", "Rent" , Repairs to machinery, Salaries and wages in their Profit and Loss account. In view of the above the A.0 was in the opinion of that these companies were only paper companies and did not have any business to run and this was also strengthened by the fact that none of the above mentioned companies have shown nature of business. In view of the above, it can be easily concluded that the above mentioned companies are paper companies/ shell entities which do not have any significant trading, manufacturing or service activity. After considering above facts and circumstances the A.0 doubted identity, genuineness and creditworthiness of the unsecured Loans as claimed by the appellant. 4.3.2. During reassessment proceedings, the A.0 issued notice U/s 133(6) asking for the ledger account of the appellant for the period from 01.04.2008 to 31.03.2011, copy of acknowledgement of income tax return filed for A.Y 2009-10 to A.Y 2011-12, copy of profit and loss account, copy of Bank statement of the years from A.Y 2009- 10 to 2011-12. However no response was received from the director to whom notice u/s 133(6) was received. Thereafter the A.0 issued summon u/s 131 to appear in the office of the A.0 but again neither anybody appeared nor any response received. By providing another opportunity the A.0 issued another summon u/s 131 to the director of the above mentioned companies but again no response was received to the A.O. Later on , the AR of the appellant submitted copy of IT acknowledgement, loan confirmations, copy of extract of bank statement. The A.0 pointed out that all the companies were showing meager income compared to loan given of all 6 companies have been shown above in tabular foini. 4.3.3. Divyadhwani Investment Private Limited had given Loan of Rs. 11000000 which is 11 times of its total income, Jai Hind Mercantile Pvt Ltd had given loan of Rs. 14000000 which is 15 times of its total income, Lalita exports Pvt Ltd had given loan of Rs. 5000000 which is 5 times of its total income, Plumetti Exports Pvt Ltd had given loan of Rs. 5000000 which is 46 times of total income and Tinal Pharmaceutical Pvt Ltd had given loan of Rs. 5000000 which is 5 times of its total income. Most of the loan parties provided the loan which was beyond their capacity. During the appellate proceedings, the AR of the appellant contended that these loans were advanced out of capital and the share application money (Rs. 975812587) which itself was much more than sufficient for the loans given to the Appellant. Share Capital of the above mentioned companies are quoted below for ready reference- Sr.No. Name of Concern Share Capital Loan Funds
Authorize Issued, Share d subscribe Application d and Money paid up 1 Bloomdale Fin vest 9000000 2272500 131973888 0 2 Divyadhwani 100000 100000 168555000 0 Investment Pvt.Ltd
3. Jaihind 9000000 3884900 120826744 0 Mercantile Pvt.Ltd.
4. Lalita Exports 500000 101000 250863200 0 Pvt.Ltd
5 Plumetti 100000 100000 74051507 0 Exports Pvt.Ltd
6 Tinal 9000000 2272500 229542248 0 Pharmaceuticals
4.3.4. On perusal of the above provided share capital, it was found that each and every company received huge sum of money in the form of share application money. Being private companies, it can lot easily concluded that these companies would have received that share application money from few relative and friends as no normal public is interested in private Limited companies. However, no details of these people who applied for the shares of company and paid such handsome amount of money as share application money were furnished neither during assessment proceedings nor during appellate proceedings. Activities of the companies are very suspicious as no nature of business was declared, all the companies are having same address which is a residential flat and their income is very low compared with the loans advanced and it was contended that loans were advanced out of share application money. Moreover, all the companies were having dormant status before 23.04.2016. The status of these companies was changed from 'Dormant' to 'Active' on 23.04.2016. And no details were furnished by the AR of the appellant whether these companies were active on not during A.Y 2008-09. As the nature of business of all the companies was un- explained and no record was brought in my notice to explain the business activities of the above mentioned companies, even though all these companies received such handsome share application money from entities which are best known to these companies. It is pertinent to note that under normal circumstances, shares are issued within four to eight weeks and the share application money is converted into equity capital. But in the present case the share capital of all these companies is unchanged till today's date. Thus, it can be concluded that the shares were not allotted to the share applicants and refund would have been made to those share applicants. Due date for payment was not defined under the companies Act, 1956 but now it has been expressly defined under the company Act, 2013 and as per the provisions of the new act, the share application money shall be refunded within 15 days from the expiry of 60 days from the date of receipt of application money.
4.3.5. The date of latest balance sheet of Bloomdale Pinvest, Divyadhwani investment, Lalita Exports, Plumetti Exports is 31.03.2014 and no date of latest balance sheet of Jaihind Mercantile and Tinal pharmaceuticals is specified. On perusal of available latest balance sheet of companies, it was found that there is no change in Authorised and issued subscribed and paid up capital. It means the shares were not allotted to any of the unknown applicants which itself is very dubious. Nothing was brought in my notice whether the payment was made to applicants or not. If application money had been converted into capital and shares issued share reduction would have been the only way to reverse such a transaction. But the process is complicated and needs court approval. Again nothing was explained in regard with above issue whether shares were allotted them or not allotted then whether share reduction took place or not. 4.3.6. Under normal circumstances it is self proven fact that share money was larger than issued capital means the intention was never to convert into shares but to route money and the same thing also happened in the present case, no share allotment, as evident from records took place even after receiving such handsome amount of money, this was done only to route money. In the absence of any details of share applicants furnished in this office, I am in the view of that these companies never intended to increase their share capital the share application money was used only to route the money. Now the question arises which factors lead to share applicants to pay such a huge sum of money as share application money? This question can easily be answered by the Director of all these companies. However, despite of providing multiple opportunities the director did not come forward to explain all the issue and to prove the identity and genuineness of the transaction.
4.3.7 In my considered view, so far as the legal foundation of the impugned additions is concerned, it consists of appellant's inability to satisfy the A.O. about all the three ingredients of a credit entry in the books of accounts-existence of the lender, ability of the lender to advance funds in question , and, above all, genuineness of the transaction. There is no dispute about the basic legal position about section 68 which provides that where any sum is found credited in the books of accounts 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 income tax as income of the asseessee of that previous year. The expression 'nature and source' appearing in section 68 has to be understood as a requirement of identification of source and its genuineness. it is also a settled legal position that the onus of the assessee of explaining nature and source of credit, does not get discharged merely by filing confirmatory letters, or demonstrating that the transactions are done through the banking channels or even by filing the income tax assessment particulars. In the case o CIT v United Commercial and industrial Co(P.) Ltd.[1991] ITR 596/56 Taxman 304 (Cal.), Hon'ble Calcutta High Court has held that" It was necessary for the assessee to prove prima facie the identity of creditors, the capacity of such creditors and lastly the genuineness of the transactions." Similarly, in the case of CIT v Precision Finance (F) Ltd.[1994]208 ITR 465/[1995] 82 Taxman 31(CaL), it was observed that “it is for the assessee to prove the identity of creditors their creditworthiness and genuineness of transactions". There is thus no escape from proving genuineness of a transaction. 4.3.8 As I proceed to deal with genuineness aspect, it is important to bear in mind the fact that what is genuine and what is not genuine is a matter of perception based on facts of the case vis-à-vis the grounds realities. The facts of the case cannot be considered in isolation with the grounds realties. It will, therefore, be useful to understand as to how the shell entities, which the loan creditors are alleged to be, typically function, and then compare these characteristics with the facts of the case and in the light of well settled legal principles. A shell entity is generally and entity without any significant trading, manufacturing or service activity, or with high volume low margin transactions- to give it color of a normal business entity, used as a vehicle for various financial manoeuvres. A shell entity, by itself, is not an illegal entity but is is their act of abatement of, and being part of, financial manoeuvring to legitimize illicit monies and evade taxes, that takes it actions beyond what is legally permissible. These entities hae every semblance of a genuine business- its legal ownership by persons in existence, statutory documentation as necessary for a legitimate business and a documentation trail as a legitimate transaction would nolinally follow. The only thing which sets is apart from a genuine business entity is lack of genuineness in its actual operations. The operations carried out by these entities, are only to facilitate financial manoeuvring for the benefit of its clients, or ,with that predominanat underlying objective, to give the color of genuineness of these entities. These shell entities, which are routinely used to launder unaccounted monies, are a fact of life, and as much a part of the underbelly of the financial world, as many other evils. 4.3.9. I have noted that the appellant had received an amount of Rs.50,00,000/- from Bloomdale Finvest Pvt.Ltd. on 19/01/2009 and as a plain look at the Union Bank of India Statement of the lender, would show, there is a credit entry of Rs.50,00,000/- just before the payment was made to the appellant. Before these two transactions and after these two transactions, the lender was having debit balance in his bank account. And similar pattern was noted in the bank statement of lender. There is credit entry just before the payment was made. No payment was made from the surplus money but prior to the transfer a credit entry took place in its bank account. This kind of state of bank account does not inspire any faith in the proposition that the entity in question is a genuine business concern. As regards other lenders, the story is no different. The bank statements of other lenders also have the same theme of having a credit entry just before the payment was made to the appellant. The numbers do not add up and the details filed in respect of these lenders do not convince me that lenders are routine businesses. Given this background the appellant's inability to produce the related persons or even give their whereabouts makes the story of genuine transaction even more unbelievable. It is also interesting to note that appellant has so much of an access to these lenders that he is able to produce their bank accounts, their end financial statements, confirmation of accounts and income tax particulars and yet he is not in a position to produce the parties or even know their current whereabouts. It is also important to note that lending such huge amount without any loan agreement and without and without any security is not something which people do for rank outsiders. There has to be some close association to get such a kind of unsecured credit. When I consider this case, coupled with the fact that the appellant has not been able to produce these lenders for verification and reasonably explain the complete circumstances in which these lenders who were not even routinely engaged in the business of giving loans advances gave him unsecured loans of such huge amount which essentially is possible in situation of close relationship and trust.
In view of the Honble Supreme Court's observation in the case of CIT vs Durga Prasad More [1971] 828 ITR 540 to the effect that" Science has not yet invented any instrument to test the reliability of the evidence placed before a court or tribunal. Therefore, the courts and tribunals have to judge the evidence before them by applying the test of human probabilities." Similarly in a later decision in the case of Sumati Dayal V CIT [1995] 214 ITR 801/80 Taxman 89 (SC), Hon'ble Supreme court rejected the theory that it is for alleged to prove that the apparent and not real, and observed that, this in our opinion, is a superficial approach to the problem. The matter has to be considered in the light of Human probabilities. Similarly the observation that if it is a alleged that these tickets were obtained through fraudulent means, it is upon the alleger to prove that it is so, ignores the reality. The transaction about purchase of winning ticket taks place in secret and direct evidence about such purchase would be rarely available. In our opinion, the majority opinion after considering surrounding circumstances and applying the test of human probabilities has rightly concluded that the appellant's claim about the amount being her winning from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably". I will be superficial in my approach in case I do not examine the claim of the appellant on the basis of documents and affidavits filed by the appellant and overlook clear the unusual pattern in the documents filed by the appellant and pretend to be oblivious of the ground realities. As Hon'ble Supreme Court has observed, in the case of Durga Prasad More(Supra) it is true that an apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not real. The taxing authorities were not required to put on blinkers while lookingat the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents."
4.3.10. I view of the above, I hold that this instant case should be decided not only in/1 the light of the face value of the documents sighted before me but also in the light of all surrounding circumstances, preponderance of human probabilities and ground realities. Genuineness of transaction is to be examined in the light of prevailing ground realities and that is precisely what I have done in this order. In my considered view, and for detailed analysis set out earlier in this order, the alleged loan transactions of the appellant can not be held to be genuine on the peculiar facts and circumstances of this case. As the genuineness of transaction stands rejected, it is not really necessary to deal with other aspects of the matter. Taus, this ground is dismissed. 4.4 Ground No.3:- This ground relates to the disallowance of interest on loans Rs. 10,43,670/-. During the appellate proceedings the AR of the appellant contended that the appellant did not claim the interest paid to the lenders against the profit. Thus there is no ground to make addition on this ground During the appellate proceedings, the AR of the M/s M. L. Realty appellant submitted income tax particulars, profit& loss account and balance sheet. On perusal of above mentioned documents, the contention of the AR of the appellant is found to be correct as the appellant had not claimed interest paid as expenditure in his profit & loss account. Hence the disallowance of expenditure which is not even claimed by the appellant, cannot be justified. Thus, this ground is allowed.
8. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.
The first issue that came up for our consideration from assessee’s appeal is that validity of reopening of assessment on various grounds, including non-service of valid notice u/s 148 of the Act. Although, the assessee has challenged reopening on the ground that there is no valid reason to believe that income chargeable to tax has been escaped assessment but, the focus of the assessee is mainly on non-service of notice required to be served u/s 148 of the Act, within the prescribed time limit provided under the Act. The Ld. AR for the assessee referring to letter of the Assessing Officer dated 08/11/2016 rejecting objections filed by the assessee for reopening of assessment submitted that as per the admission of the AO itself, the notice was not served either by post or in person to the assessee to the address given in the return of income within the time limit allowed under the Act. The Ld. AR further submitted that the AO stated in the said letter that the notice required to be served u/s 148 was served through e-mail ID given in the return of income filed for AY 2014-15 and 2015-16 and said e-mail has been delivered. But, fact remains that the AO has sent notice to incorrect e-mail address which is neither belonging to the assessee nor mentioned in the return of income filed for relevant assessment year. Although, the assessee has changed its e-mail ID while filing return of income for AY 2014-15 and 2015-16, but such e-mail was correctly mentioned
M/s M. L. Realty in the return of income, however, the AO while sending 148 notice typed incorrect e-mail ID address by changing the e-mail ID from shethmilan@hotmail.com to shethmailan@hotmail.com. Therefore, it is highly incorrect on the part of the AO to say that the notice has been sent through e-mail which was duly served to the assessee. The Ld. AR further submitted that when the assessee have given e-mail address in its return of income for AY 2009-10 sending notice through different e-mail ID address cannot be considered as valid service of notice. The Ld. AR for the assessee further submitted that the AO could able to send 142(1) notice to the address given in the return of income for AY 2009-10, but how the AO could not service notice u/s 148 of the Act, to the same address within the time allowed under the Act is not understandable. Therefore, from the above, it is very clear that the AO failed to serve notice required to be served u/s 148 of the Act, within the time allowed under the Act. In order to cover up the lapses on the part of the AO for non-service of notice within the time allowed under the Act, the AO has sent an email to the assessee that too after lapse of time provided under the Act to incorrect e-mail ID which might have bounced back. Therefore, it is very clear from the above that notice u/s 148 was not served on the assessee within the time prescribed under the Act, consequently, the whole reassessment proceedings becomes invalid and liable to be quashed.
The Ld. DR, on the other hand, strongly supported the order of the Ld. CIT(A) and submitted that the AO has rejected arguments of the assessee that no notice was served
M/s M. L. Realty u/s 148 of the Act, by a written order where he has explained the steps taken by the Department to serve notice to the assessee in the address mentioned in the return of income filed for relevant year but, when the department could not serve the notice through post, he had sent 148 notice through e-mail ID provided in the return of income filed for AY 2014-15. Therefore, it is a valid service of notice. The Ld. DR further submitted that the assessee through his AR participated in assessment proceedings and also filed necessary details, therefore, there is no reason for the assessee to challenge non-service of notice because no injustice is caused to the assessee by non-service of notice u/s 148 and accordingly, as per the provisions of section 292BB, it is very clear that once, the assessee has participated in assessment proceedings without protesting before the AO, then the assessee losses its right to challenge non-service or improper service of notice in appellate proceedings. The Ld. CIT(A), after considering relevant facts has rightly held that there is no merit in the legal ground taken by the assessee challenging the validity of assessment and accordingly, ground taken by the assessee may be dismissed.
We have heard both parties, perused the material available on record and gone through the orders of the authorities below. The assessee has challenged validity of reopening of assessment on various grounds, including non-service of notice required to be served u/s 148 of the Act. The provision of section 148, deals with the issue of notice and such notice shall be issued within the time prescribed under the provisions of section M/s M. L. Realty 149 of the Act. As per the provision of section 149, no notice u/s 148 shall be issued for the relevant assessment year if four years elapsed from end of the relevant assessment year, unless the case falls under clause (b) or clause (c). As per sub-clause (b) of section 149(1), assessment year, unless notice required to be served u/s 148 of the Act is served within the time allowed under the Act, then the whole proceeding including reassessment order passed by the AO u/s 147 of the Act consequent to non-service of notice or improper service of notice becomes void ab-initio and liable to be quashed. In the above legal background, if you examine the facts of the present case, the main arguments of the assessee that notice required to be served u/s 148 was not served to the assessee within the prescribed time under the Act. Therefore, re-assessment order passed by the AO consequent to non-service of notice is bad in law and liable to be quashed is correct or not has to be examined. In the instant case, admittedly, the AO has not served notice u/s 148 of the Act, to the assessee by post or by personal delivery at the address given in the return of income filed for the year. Although, the AO claims to have issued notice u/s 148 on 31/03/2016 but, there is no iota of evidences in the assessment order for service of such notice within the time allowed under the Act. The assessee has filed its objections vide letter dated 21/07/2016 in response to notice u/s 142(1) issued by the AO and stated that no notice u/s 148 was served on the assessee. In response to assessee’s objection, the AO issued one more notice u/s 142(1) dated 21/07/2016 and stated that notice u/s 148 was sent through e-mail on 31/03/2016 for which copy of the e- mail was attached to the letter. On perusal of notice issued by the AO on 21/07/2016
M/s M. L. Realty along with copy of e-mail letter, the notice u/s 148 was sent to e-mail ID “shethmailan@hotmail.com”. The assessee had pointed out to the AO that e-mail on which notice u/s 148 was sent is incorrect, because whatever e-mail is mentioned in return of income for AY 2009-10 is different from that of the e-mail ID used by the AO to serve notice u/s 148 of the Act and the correct e-mail ID is mentioned in return of income filed for AY 2009-10 is bhutta@hathway.com. The assessee further contended that even assuming for a moment that the assessee has changed its e-mail ID for AY 2014-15 and 2015-16 but, the correct e-mail mentioned in the return of income is shethmilan@hotmail.com but, while typing e-mail ID address at the time of sending e- mail the AO has taken wrong or incorrect mail ID because of that notice issued u/s 148 is not delivered and may be bounced back. Therefore, sending notice u/s 148 to incorrect e-mail ID cannot be considered as valid service of notice as required u/s 282(1) of the Act.
The provision of section 282(1) deals with service of notice or any order. As per the said provision, notice is to be served in person named therein either by post or as it was summons issued by a court under the Code of Civil Procedure, 1908 (V of 1908).
The relevant provisions for affecting of service by different modes are contained in rules 17, 19, 20 of order V of CPC. Rules 17, 19 and 20 of order V of CPC laid down the procedure for service of summons/notice and therefore, the procedure laid down therein cannot be surpassed, because the intention of the legislature behind this provision is that M/s M. L. Realty strict compliance of the procedure laid down therein has to be made. The expression after using or due and reasonable diligence appearing in Rule 17 has been considered in many cases and it has been held that unless a real and substantial effort has been made to find the dependent after proper enquiries, the service cannot be deemed to have expressed and due diligence. In this case, on perusal of details available on record, we find that although the AO rejected objections filed by the assessee for non-service of notice vide his letter dated 08/11/2016 on the ground that notice required to be served u/s 148 of the Act, has already been served by sending mail, but failed to justify his action with necessary evidences to prove that he had made an attempt to serve notice by post or by personal delivery to the address of the assessee given in the return filed for relevant assessment year. Further, the claim of the AO that notice has been sent to proper e-mail ID is also incorrect, because while sending mail, the AO has typed incorrect mail ID address because of that the notice sent by mail is not delivered to the assessee. Once the AO has not able to prove that notice has been sent to the assessee and such notice has been served within time allowed under the Act, then the whole assessment proceedings carried out in pursuance of non-service/improper service of notice becomes invalid and liable to be quashed, because, service of notice within time allowed under the Act, is not a procedural defect but which goes to the root of assuming jurisdiction by the AO before taking up any proceeding under the Act. Unless, the AO has affected proper service of notice to the assessee, he cannot take up further proceedings under the law. In this case, it is abundantly proved that the AO has not served notice
M/s M. L. Realty required to be served u/s 148 of the Act, within the time allowed under the Act. When the assessee has filed objections for non-service of notice u/s 148 of the Act, in reply to 142(1) notice issued by the AO, then the AO came out with arguments that notice was sent through e-mail ID of the assessee after failed attempt to serve notice by post. This argument of the AO goes without any evidences, because when the AO is able to serve notice u/s 142(1) of the Act, to the assessee it is surprise for us how he could not serve notice u/s 148 of the Act, within the time allowed under the Act to the same address of the assessee, when 142(1) notice was properly served. From the above, it is abundantly clear that the notice required to be served u/s 148, was not served to the assessee within the time allowed under the Act. However, when the assessee has objected for non- service of notice, the AO has come out with explanation that notice was served through e-mail without any evidences as to whether such notice has been served to the assessee and e-mail sent to the assessee is delivered or not. Therefore, we are of the considered view that there is merit in the arguments of the assessee that notice required to be served u/s 148 was not served within the time allowed under the Act, even, though the revenue argued that such notice was served by e-mail, but failed to prove with necessary evidences that mail sent to the assessee was delivered. On the other hand, the assessee has made out a case of notice through an improper or incorrect e-mail address by mistakenly taking the e-mail given by the assessee in the return of income filed for AY 2015-16. Therefore, we are of the considered view that as per provisions of the Act, reasonable and proper service of notice should have been sent to the assessee to the M/s M. L. Realty address given in the return by post or by personal delivery. In this case, this has not been done. Further, the AO failed to ascertain whether mail was delivered or not. In fact, the AO could have sent mail to correct mail ID provided by the assessee in the return of income filed for relevant assessment year. The AO has failed to do so, therefore, we are of the considered view that notice u/s 148 was not served within the time prescribed under the Act.
Coming to the observations of the Ld. CIT(A). The Ld. CIT(A) has rejected the arguments of the assessee in light of provisions of section 292BB of the Act. The provisions of section 292BB comes in rescue of revenue only when the assessee has not filed its objections for non-service of notice before the AO at the time of assessment proceedings. In this case, on perusal of facts, we find that the assessee has filed its objections for non-service of notice vide its letter dated 07/07/2016 and such letter was filed before the AO on 21/07/2016 and the AO has disposed of such objections by an order dated 08/11/2016. When the assessee has objected for non-service of notice at the time of assessment proceedings, then the proviso to section 292BB would come in operation, but not main provision of section 292BB of the Act. As per proviso provided to section 292BB, nothing contained in this section shall apply where the assessee has raised such objections before completion of such assessment or re-assessment. In this case, there is no dispute with regard to the fact that the assessee has filed its objection for non-service of notice before completion of assessment. Therefore, we are of the M/s M. L. Realty considered view that the ld. CIT(A) was incorrect in considering the provisions of section 292BB to reject ground taken by the assessee challenging the non-service of notice u/s 148 of the Act.
Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Hon’ble Kerala High Court in the case of P. N. Sasikumar vs CIT (1988) 170 ITR 80(Kerala). We find that the Hon’ble Kerala High Court, in light of invalid notice has held that the issue of a notice u/s 148 of the Act, is a condition precedent to the validity of any assessment order passed u/s 147 of the Act is also settled law that if no such notices is issued or if the notice is invalid or is not in accordance with law or is not served on the proper person in accordance with law, the assessment would be illegal and without jurisdiction. This legal proposition is further strengthened by the decision of Hon’ble Allahabad High Court in the case of Lalal Madan Lal Agarwal vs CIT (1983) 144 ITR 745), where it was held that the notice contemplated by section 148 is jurisdictional notice for initiating proceedings for making assessment under section 147 and that any defect in that notice cannot be cured by anything done by the income-tax authorities subsequently. A vague notice or invalid notice or non-service of notice cannot be removed by any reference to the other documents on the record. It is for the revenue to prove with necessary evidences that notice required to be served under the act, has been served on the assessee in accordance with law.
M/s M. L. Realty 15. In this view of the matter and considering the facts and circumstances of this case, we are of the considered view that notice required to be issued u/s 148 of the Act, as prescribed under provisions of section 149 has not been complied with by the AO before taking up re-assessment proceedings. Non-service of notice u/s 148 is a serious mistakes, because unless the notice required to be served u/s 148 is served on the assessee as per the provisions of the Act, then the AO cannot take up further proceedings under the Act, including re-assessment order u/s 147 of the Act. Therefore, we are of the considered view that there is merit in the legal ground taken by the assessee challenging non-service of notice u/s 148 of the Act, hence, we quashed re- assessment order passed by the AO u/s 147 r.w.s 143(3) of the Act, consequent to non- service/improper service of notice u/s 148 of the Act.
16. The assessee has taken up other grounds challenging the issue involved on merits regarding additions made by the AO towards unexplained cash credit u/s 68 of the Act. Although, there is a merit in the ground taken by the assessee in respect of additions made towards cash credit u/s 68 of the Act, in view of various facts and arguments advanced by the assessee in light of numerous evidences filed during the course of hearing to prove the identity, genuineness of transaction and creditworthiness of the parties but because of the fact that the assessment order passed by the AO u/s 147 r.w.s. 143(3) has been held null and void, other ground taken by the assessee challenging additions made towards cash credits u/s 68 of the Act, becomes academic in M/s M. L. Realty nature and does not require specific adjudication at this point of time. Accordingly, other grounds taken by the assessee are not specifically adjudicated.
In the result, appeal filed by the assessee is allowed.