DCIT, CIRCLE-3(1), NEW DELHI vs. ARTEX KNITTING INDS. P.LTD, NEW DELHI

During the first appellate proceedings, the assessee filed additional evidence containing confirmation letters from Mr. Fakir Chand Sarawagi, Mr. Bikash Sarawagi and Cubaties Tax Fab Pvt. Ltd. along with copies of ITRs of both individuals; Mr. Fakir Chand Sarawagi and Mr. Bikash Sarawagi. As per Rule 46A of the Income Tax Rules, the CIT(A) sent additional evidence to the AO, on 09.08.2019, for examining the same and submitting a report thereon. In response, the AO submitted the remand report stating his inability to conduct any inquiry on the reasoning (The said remand report is extracted in para 6 of the appellate order) extracted below:-

This case was scheduled 7 times for hearing. However, none from the respondent/assessee side attended ever except seeking adjournment once. We heard the Senior Departmental Representative (In short, the ‘Sr. DR’) at length. Due to consistent non-prosecution from the respondent/assessee side, we have no option except to decide this case after hearing the Sr. DR. Accordingly, we proceeded with.

The Ld. Sr. DR contended that the CIT(A) had not provided reasonable time to the AO for investigating the additional evidence in faceless environment particularly when the Faceless System had not stabilized for smooth functioning. The Ld. Sr. DR further submitted that the Faceless E-assessment Scheme, 2019 notified on 12.09.2019 vide SO 3264 and 3265 was having teething problem in initial stage, which was not appreciated by the CIT(A) even after categorical mentioning of the same by the AO. It was further contended by the Ld. Sr. DR that the CIT(A) having all powers of the AO had also failed to Page 4 of 11 carry out the requisite investigations to ascertain the creditworthiness of lenders and the genuineness of the loan transactions. The Ld. Sr. DR; highlighting and emphasizing on the technical problems faced by the AO in carrying out the routine work in new Faceless Environment, contended that the appeal should have not been decided in haste particularly when the respondent/assessee adopted tactical non- compliance, before the AO, to avoid investigations. In such facts and circumstances, the role of the CIT(A) became more crucial and the CIT(A) was duty bound to get the issue properly examined/investigated before concluding the appellate proceedings. However, the CIT(A) failed to do so and the AO was not able to do the needful. Accordingly, he prayed for remitting the matter back to the AO for ascertaining the creditworthiness of lenders after doing requisite enquiries/examinations/ investigations.

Heard the Ld. Sr. DR at length and perused the case record and the above case laws. The sole issue for our consideration here is the Page 6 of 11 taxability of the cash credit. We find force in the argument of the Ld. Sr. DR that the issue under dispute here not properly examined/investigated due to tactical non-compliance of the respondent/assessee before the AO and partial compliance before the CIT(A) vis-à-vis teething problem faced by the AO during the remand proceedings in Faceless System.

According to the Section 68 of the Act, where any sum is found credited in the books of assessee, the assessee offers no explanation about the nature and source of the same or explanation offered by him is not found satisfactorily in the opinion of the AO, the sum credited may be charged to tax as the income of the assessee of the relevant year. The identity, creditworthiness and genuineness of transactions have to be explained by the assessee if in his books of account that sum is found credited. The identity, creditworthiness/ financial strength of the lenders and genuineness of such loans have to be proved/established by the respondent/assessee. The burden of proof of these is on the respondent/assessee.

Here, in this case, we are of the opinion that the identity of lenders had been proved before the CIT(A). However, the other two limbs of Section 68 of the Act had not been explained properly by the respondent/assessee. After submitting the requisite documents to Page 7 of 11 prove the identity, creditworthiness/financial strength of the lenders and genuineness of such loans, the burden of proof shifts to the AO. The respondent/assessee had not produced the bank account of persons along with the explanations of credits therein before advancing the loans. The creditworthiness of these persons for advancing loans had not been demonstrated beyond doubt as the details submitted by the respondent/assessee during the appellate proceedings to explain the creditworthiness of the lenders were neither investigated, as envisaged u/s 68 of the Act, during the remand proceedings by the AO nor by the CIT(A) during the appellate proceedings. The Hon’ble Delhi High Court, in similar facts and circumstances, in the case of Siddharth Export 112 taxmann.com 193 has held that where assessee received unsecured loan from a person outside India but failed to produce relevant documents to prove identity and creditworthiness of creditor and genuineness of transaction either before AO or before the CIT(A), certain documents produced by the assessee during instant appeal before High Court under section 260A could not be accepted and, therefore, impugned addition made under section 68 in respect of said loan was justified. The Hon’ble Supreme Court in the case of N. R. Iron and Steel Pvt. Ltd. SlP No. 29855 of 2018, referring the decision of Hon’ble Delhi High Court in the case of Oasis Hospitalities Pvt. Ltd. 333 ITR 119 (Del.) observed that merely proving the identity of the investor Page 8 of 11 does not discharge the onus of the taxable in the capacity or creditworthiness has not been established.

In the present case, the AO did not make any independent inquiry as no such details were made available by the assessee however the CIT(A) before whom certain details were furnished did neither carry out investigation nor allowed the AO to do so by providing reasonable & sufficient opportunity to the AO to carry out the investigation for verifying the creditworthiness of the parties, the source of funds and the genuineness of transaction. This view was further held in the case of Nemi Chand Kothari 264 ITR 254 (Gau.) wherein it was held that it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Once the assessee has proved the identity of his creditors the genuineness of the transactions, and the creditworthiness of his creditors vis-à-vis the transactions which he had with the creditors, his burden stands discharged and the burden then shifts to the revenue to show that though covered by cheques, the amounts in question, actually belonged to, or was owned by the assessee himself. Similar findings have been given by the Hon’ble Delhi High Court in case of N. R. Portfolio Pvt. Ltd. (Supra).

In view of the above and in the interest of justice, we are of the considered opinion that the details/documents filed by the respondent/ Page 9 of 11 assessee to discharge its primary onus of explaining the loans of Rs.1,93,50,000/- before the CIT(A) have not subjected to the requisite enquiry/examination/investigation. Thus, the respondent/assessee deserves reasonable opportunity of being heard to make shortcomings or non-compliances. In view thereof, without offering any comment on merit of the case, we deem it fit to set aside the impugned order and remit the matter back to the file of the AO for de-novo consideration. The respondent/assessee should ensure compliances during the set- aside proceeding before the AO. The AO is also required to provide reasonable opportunities of being heard before deciding the case on merit.