ACIT, CIRCLE - 19(1), NEW DELHI vs. REDKITE CAPITAL P. LTD. , NEW DELHI

4. The AO had made an addition of Rs.30,88,500/- on the basis that the assessee had raised Rs.50 crores during the year by issue of debentures @ 10%. On the other side has given interest free loan to M/s Arambagh Hatcheries Ltd. of Rs.30,88,500/-. The AO examined the fact that the loans were given to three parties which included M/s Liz Investments Pvt. Ltd. and M/s Mangalam Vanijya Pvt. Ltd. who had paid interest, but, no interest was received from M/s Arambagh Hatcheries Ltd. Thus, the AO disallowed interest @ 10% u/s 36(1)(iii) of the Act on account of interest free loans @ 10% which has been deleted by CIT(A) having considered the evidences on record and making the following observations in paras 7.2 & 7.3:- “7.2. I have carefully considered the assessment order and written submission filed by the Ld. AR. During the course of its business, the appellant-company had acquired a non-performing asset of M/s Arambagh Hatcheries Ltd. from AXIS Bank Ltd. under distress sale for a sum of Rs.30,88,500/-. AXIS Bank Ltd. had given loans to M/s Arambagh Hatcheries Ltd., but on account of certain financial problems, the said M/s Arambagh Hatcheries Ltd. did not pay the interest to AXIS Bank Ltd. and as per the guidelines of Reserve Bank of India, the said loan of Arambagh Hatcheries Ltd. had become a non-performing asset. In order to mobilize its resources and maintain its liquidity, AXIS Bank Ltd. had sold such NPA of M/s Arambagh Hatcheries Ltd. to the appellant vide agreement dated 27.03.2012 - copy of agreement with Axis bank for assignment of its business assets was furnished. 7.3. It was submitted that the purpose of acquisition of NPA of Arambagh Hatcheries was a business investment and duly shown in the Balance sheet. By way of such acquisition, the appellant acquired the risk of loss as well as the gain, if any, materialized and as and when the amount would be recovered from Arambagh Hatcheries. The AO, while scrutinising the details of interest received by the appellant, found that the appellant had not shown any interest from Arambagh Hatcheries although from other parties to whom the advances had been given, the interest has been received and accordingly the AO disallowed the interest of Rs.30,88,500/- being the amount of Arambagh Hatcheries out of the interest paid u/s 36(1 )(iii) of the Act.”

5. The AO made an addition of Rs.4,35,00,000/- being unexplained cash credit u/s 68 of the Act on the basis of share capital raised by the assessee from four entities on the basis that the assessee had given loans and advances to three companies who had advanced loan to the assessee and the AO concluded that it is assessee’s own funds which are infused in the form of share capital. This was deleted by the CIT(A) with the following observations:- “8.6 The appellant submitted that such inference of the AO about the availability of funds in the hands of the respective subscriber is contrary to the actual facts without verifying the date-wise loans advanced by the appellant to Manglam Vanijya further submitted that whatever the amount had been received by the aforesaid companies from Manglam Vanijya was in fact return back of ICD loans which were advanced by the aforesaid: companies in earlier years and for this fact the appellant had filed copies of accounts of all;, the aforesaid companies in the books of Manglam Vanijya'. 8.7. The appellant also submitted that the loan advanced by the appellant to Manglam Vanijya was an independent transaction undertaken during the course of its NBFC business. In order to contradict the inference of the AO, the appellant had filed a date-wise cash flow chart of the receipt of funds from the aforesaid companies and the date-wise Advance to Manglam Vanijya by the appellant. By way of this chart, the appellant demonstrates that the advances made by the appellant to Manglam Vanijya generally after the date from receipt of funds from the aforesaid companies and not after the date of advances made by the appellant to Manglam Vanijya. 8.8. In order to substantiate his case, the appellant had moved an application under Rule 46A of the I. T. Rules, 1962 wherein the appellant had filed copies of account of the aforesaid four companies in the books of Manglam Vanijya for the FY 2011-12 as well as the copy of account of the appellant in the books of Manglam Vanijya in F. Y. 2011-12 and had also for filing of confirmation from Manglam Vanijya for receipt of interest on debentures sold. Copies of the application under Rule 46A as well as the appellant’s submissions as filed during the course of appeal were forwarded to the AO for the purpose of verification. 8.9. The AO submitted its remand report dated 07.04.2017, the copy whereof has been supplied to the appellant. In the remand report, the AO though had objected to the admission of additional evidence and reiterated the facts as stated in the assessment order by the original AO. In rejoinder to the remand report, the appellant vide letter dated 18.05.2017 objected to the observation of the AO. The appellant submitted that in the remand proceedings, the present AO had further 5

issued the notices u/s 133(6) of the Act to all the aforesaid companies who had subscribed the share capital as well as to Manglam Vanijya and required various information from them. 8.10. The appellant submits that in compliance to notice u/s 133(6) of the Act, Manglam Vanijya had furnished the date-wise investment made by the four companies in ICD which were made in earlier years and had also provided their copies of accounts in its books as well as the bank statement which clearly proved that the funds which were received back by the aforesaid companies from Manglam Vanijya were not the funds alleged by the AO. The appellant also filed copies of all the documents as were submitted by the aforesaid four companies as well as Manglam Vanijya in compliance to the notice u/s 133(6) of the four companies had made the investments in share capital prior to the date when the appellant company had made the investment with Manglam Vanijya. The investment with Manglam Vanijya was made by the appellant on interest which had been duly offered by the appellant and the TDS thereon had also been deducted. The receipt of share capital by the appellant from the aforesaid companies and the advancement of loan to Manglam Vanijya by the appellant are totally separate independent transactions. The appellant submitted that in the remand report the AO, without looking into documents and information in an objective manner, had made the report in a subjective manner. The appellant submitted that it is not the case of the AO that the source of investment made by the aforesaid four companies is unexplained but on contrary the appellant had explained the source though under the law no obligation is cast upon the appellant. The appellant relied on the following judgments: 205 ITR 98 (Del) (FB), CIT vs. Sophia Finance Ltd. 333 ITR 119 (Del), CIT vs. Oasis Hospitality (P) Ltd. 8.11. The appellant submitted that in the case of Oasis Hospitality (P) Ltd., the Jurisdictional high Court, after considering the various judgments as propounded by the Delhi high Court from time to time in relation to the share capital u/s 68 of the Act as well as the judgment of the Hon'ble supreme Court in the case of CIT vs. Lovely Exports (P) Ltd. In 319 ITR [Statutes] 5, held that there is no dispute that the initial burden is upon the assessee to explain the nature and the source of the share application money received by an assessee. In order to discharge this burden, the assessee is required to prove: (a) the identity of shareholder, (b) the genuineness of transaction, and (c) the creditworthiness of the shareholder.

8.12. The Hon'ble Delhi high Court further stated that if the creditor/subscriber is a company, then the details in the form of registered address or PAN etc. can be furnished to prove its identity. 8.13. As far as the genuineness of transaction is concerned, the Hon'ble Delhi high Court stated that it may be demonstrated by showing that the assessee had, in fact, received money from the said shareholder and it came from the coffers of that very shareholder and if the money is received by cheque and/or is transmitted through banking or other any indisputable source, the genuineness of transaction would be proved. 8.14. As far as the creditworthiness or financial strength of the creditor/subscriber is concerned, that can be proved by producing the bank statement of the creditor/subscriber showing that it had sufficient balance in its account to enable it to subscribe to the share capital and if all these documents are produced, the assessee would have specifically discharged the onus cast upon him. The Hon'ble Delhi high Court further stated that thereafter it is for the AO to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, then he can prove the matter further, but to discredit the documents produced by the assessee on the aforesaid aspects, there have to be some cogent reasons and materials for the AO and he cannot go into the realm of suspicion. 8.15. The appellant submitted that in the instant case, the appellant company had not only filed the confirmations, PAN numbers, ITRs, balance sheets, bank statements of all the aforesaid companies but had also confirmed and affirmed in compliance to notice u/s 133(6) of the Act. Over and above that, their authorised representative Mr. Nilesh Modi, Chartered Accountant had personally appeared. The appellant also brought to the notice another judgment dated 16.04.2015 of Delhi high Court in the case of CIT vs. Anshika Consultants (P) Ltd. In wherein the subscribed companies has made the investment out of realisation of their sundry debtors/realisation of their assets which were found sufficient by the Delhi high Court. 8.16. The appellant further submitted that the facts of the instant case are totally different from those in the judgments of Delhi high Court in the case of Nipun Builders in 214 Taxman 429 as well as N. R. Portfolio in 214 Taxman 408 as relied by the AO, and have been distinguished by the appellant in paragraphs 7.16 and 7.17 of the submissions dated 08.07.2016. The appellant submitted that when all the assessee are existing, identifiable and have creditworthiness and the transactions are genuine, the addition of Rs.4,35,00,000/- as made by the AO u/s of the Act deserves to be deleted. 8.17. In view of the above, the appellant has discharged its onus and no specific fact has been brought out by the AO challenging the identity, creditworthiness or genuineness of the transactions. The addition on this account is directed to be deleted.”

1. On the facts and under the circumstances of the case, theLd CIT (A) has erred in deleting the addition of Rs.17,808/- being the proportionate interest on investment in debenture of Rs.1.30 crore, ignoring the fact that the assessee company had claimed interest expenses proportionately for the Debentures issued but it had not shown the interest income proportionately on Debentures purchased in the Return of income filed.

2. On the facts and under the circumstances of the case, the Ld CIT (A) has erred, in allowing a sum of Rs.1,36,612/- out of interest expenses, ignoring the fact that the assessee company has erred in calculating the interest expenses payable. The assessee company should have claimed the interest expenses for 40 days instead of 41days.

3. On the facts and under the circumstances of the case, the Ld CIT (A) has erred, in allowing a sum of Rs.30,88,500/- U/s 36(l)(iii) of the Act, proportionate interest out of interest ignoring the fact that the assessee company has raised Rs. 50 crores during the year under consideration by way of issue of Debentures @ 10% and on other side given interest free loans to M/s Arambagh Hatcheries Ltd. amounting Rs.3,08,85,000/-. The assessee company was asked to furnish details of interest received and rate of interest charged on loans advances given to M /s Arambagh Hatcheries Ltd. but no such details provided by the Assessee company.

4. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred, in deleting the addition of Rs.4,35,00,000/- being the unexplained cash credit U/s 68 of the Act, ignoring the fact that the primary and main onus lies upon the assessee to establish the three essential ingredients i.e. identity of the creditor, credit worthiness of the creditor, and genuineness of the transaction and the assessee failed to discharge its onus cast upon by the Sec 68 of the IT Act.

5. The appellant craves to be allowed to add and alter any fresh ground(s), of appeal and delete or amend any ground(s) of appeal.”