NIDHI RANI,PANIPAT vs. INCOME TAX OFFICE, WARD-1, PANIPAT, PANIPAT

Against the said order, assessee preferred an appeal before Ld. CIT(A) who vide impugned order dated 30.10.2023 dismissed the appeal of the assessee, therefore, assessee is in appeal before the Tribunal by taking following grounds of appeal:-

“That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making addition of Rs.1.57,59,722/- on account of unsecured loan received from M's Tejas Handloom u/s 68 and that too by recording incorrect facts and findings and without providing the opportunity of being heard and without observing the principles of natural justice. 2. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. AO in making addition of Rs.1,57,59,722/- on account of unsecured loan received from M/s Tejas Handloom u/s 68, is bad in law and against the facts and circumstances of the case and the same is not sustainable on various legal and factual grounds. 3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. A.O in making addition of Rs.3,37,97,251/- on account of estimation of profit and has further erred in rejecting the books of accounts of the assessee and impugned order has been passed by recording incorrect facts and findings and without observing the principles of natural justice. 4. That in any case and in any view of the matter, action of Ld. CIT(A) in confirming the action of Ld. A.O in making addition of Rs.3,37,97,251/- on account of estimation of profit, is bad in law and against the facts and circumstances of the case. 5. That having regard to the facts and circumstances of the case, the assumption of juri iction is bad in law, illegal and void ab-initio inter alia for the reason that the impugned assessment order has been passed without following the provisions of section 143(3A) & 143(3B) of Income Tax Act, 1961. 6. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234A, 234B and 234C of Income Tax Act, 1961. 7. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

Ground of appeal Nos. 1 & 2 raised by the assessee are in relation to the addition of INR 1,57,97,722/- made towards unsecured loans taken from Tejas Handloom u/s 68 of the Act by holding the same as unexplained.

Before us, Ld. AR submits that M/s Tejas Handloom is a proprietorship firm of M/s Ashish Mittal HUF who’s Karta is assessee’s husband. Ld. AR submits that before AO, assessee submits the confirmed copy of ledger account, copy of income tax return and other assessment particulars of M/s Tejas Handloom. Ld. AR submits that during the year under appeal, total amount received was of INR 1,57,59,722/- and together with the opening balance of INR 1,13,42,888/-, total outstanding loan was repaid and there was NIL balance at the end of the previous year. Ld. AR submits that the allegation of the AO that M/s Tejas Handloom has no creditworthiness to grant loan of this amount to the assessee is contrary to the fact> he submits that AO as well as Ld. CIT(A) has failed to appreciate that assessee is making regular transactions with M/s Tejas Handloom, where funds were received as well repaid on regular interval and thus the immediate source of funds is the repayment made by the assessee.

Ld. AR submits that for examining the creditworthiness, the AO should consider the peak credit balance. For this, assessee filed peak working chart wherein all the receipts and payments related to the year under appeal were taken and peak of INR 20,30,000/- (credit) is worked out on 15.07.2017. Ld.AR submits that such peak balance was submitted as an alternate to the AO to establish that M/s Tejas Handloom gave the funds to the assessee out of the funds repaid by her and the highest balance (peak balance) i.e. maximum funds involved by M/s Tejas Handloom was of INR 24,30,000/- during the year for which its creditworthiness was proved. Ld. AR submits that AO has rejected this theory solely for the reason that opening balance has not been added to the peak balance and failed to appreciate the fact that position of funds in the hands of M/s Tejas Handloom needs to be examined for the previous year only. He further submits that in any of the previous year, the AO has not doubted the loan received by the assessee, therefore, opening balance was not taken into consideration in the peak balance.

Ld. AR further submits that looking to the financial statements of M/s Tejas Handloom and its bank statement as filed, it could be seen that M/s Tejas Handloom has sufficient funds available in its hand whenever funds were given to the assessee. Ld. AR further submits that entire amount was repaid during the previous year itself which has not been doubted by the AO thus sources to such extent should stand explained. He, therefore, submits that the assessee has been able to establish the creditworthiness of M/s Tejas Handloom and thus, no addition is required to be made.

Ld. AR for the assessee further submits that AO has doubted the ‘source of source’ in the hands of the lender however, examination of the ‘source of source’ has been inserted by Finance Act, 2022 and made applicable from AY 2023-24 and onwards. Therefore, burden on the assessee to prove the source of source of the loan creditor is not applicable. Ld. AR further submits that in the present case, if the AO has any doubts in his mind with regard to the creditworthiness of the loan creditor, summons u/s 131/133(6) of the Act could be issued since particulars of the lender were filed. However, AO has failed to make any enquiry by issue summon u/s 133(6) of the Act nor any filed enquiry was made by deputing ward inspector and made the addition of unsecured loan received by holding the same as unexplained money. For this, he placed reliance on the judgment of Hon’ble Supreme Court in the case of Orissa Corporation reported in [1986] 159 ITR 78 (SC). He therefore, requested that the addition made deserves to be deleted. The ld. AR for the assessee also placed reliance on the following judgments:-

On the other hand, Ld. Sr. DR vehemently supported the orders of the lower authorities and submits that it was the claim of the assessee that there is a regular business transaction between two parties however, from the perusal of the ledger account, it could be seen that except transfer of funds, there is no business transactions between them nor any evidences were filed to establish that transactions were under business exigencies. Ld. Sr. DR further submits that merely filing the bank statements and copy of ITR, it is not absolved the assessee from the onus to establish the creditworthiness of the lender. He thus prayed that the addition made deserves to be uphold. Regarding peak credit theory, Ld. Sr. DR submits that working of the peak credit submitted by the assessee suffers deficiency opening balance was not included in the same, therefore, the peak balance of INR 24,30,000/- is incorrect. He prayed accordingly.

Heard the contentions of both parties and perused the material available on record. In the instant case, the sole allegation of the AO is regarding failure on the part of the assessee to prove the creditworthiness/capacity of lender M/s Tejas Handloom to provide funds to the assessee. The AO observed that M/s Tejas Handloom shown income of INR 10,67,933/- and its capital was only INR 19,61,924/- therefore, sufficient funds were not available with it to extend loan to the tune of INR 1,57,59,722/- to the assessee during the year under appeal.

The provisions as contained in u/s 68 of the Act reads as under:-

As per section 68, onus is on the assessee to establish the three ingredients i.e. (i) identity of the creditors; (ii) genuineness of the transactions; and (iii) creditworthiness of the lender.

In the instant case, assessee had filed copy of Aadhar of Karta of lender HUF, its PAN and ITR thus, the identity has been established which was also not doubted. Since all the transactions were caried out through banking channel, therefore, genuineness also established.

Now coming to the creditworthiness of the lender, from the perusal of ledger account of lender M/s Tejas Handloom as available in Paper Book at page 247 to 249 filed before us, it is seen that there was an opening balance (credit) of INR 1,13,42,888/- and thereafter, there are entries of debit and credit i.e. receipt and payment on regular basis. During the course of assessment proceedings, assessee prepared peak balance chart which is available at pages 314 to 315 of the Paper Book, wherein funds received from M/s Tejas Handloom were taken as “source” and funds repaid were taken as “application” and daily peak balance is worked to find out the maximum funds landed to the assessee at any time during the previous year relevant to assessment year under appeal. As per the said working peak balance arrived at INR 24,30,000/- on 15.07.2017. This balance was computed out after considering the funds received and repaid to M/s Tejas Handloom, therefore, at any point of time, maximum fresh funds applied by M/s Tejas Handloom as loan to assessee during the year under appeal was of INR 24,30,000/- which looking to the capital balance and income declared by M/s Tejas Handloom could not be hold as excessive or unreasonable. It is further seen that Tejas Handloom has declared turnover of INR 3.98 crores meaning thereby, there were sufficient and reasonable amount of transactions carried out in its bank account which is also evident from the copy of bank statements produced before the lower authorities and as filed in pages 308 to 313 of the paper book. From the perusal of the same, it is further seen that there were sufficient balances available in the bank account of M/s Tejas Handloom as and when funds were transferred to the assessee. Therefore, the capacity to grant fresh loan to the assessee during the year under appeal by M/s Tejas Handloom cannot be doubted.

It is also relevant to state that amendment in section 68 was made vide Finance Act, 2022 wherein second proviso was inserted, so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or entry provider. This amendment has taken effect from 1st April, 2023 and accordingly applies in relation to the assessment year 2023-24 and all subsequent assessment years. The year before us is AY 2018-19 thus this amendment is not applicable in the present case.

The coordinate Bench of Delhi bench of Tribunal in the case of ACIT v Smt. Prem Anand in ITA No. 3514/Del/2014 vide order dated 13.04.2017 held that amendment made in section 68 of the Act w.e.f. 01.04.2013 empowers the A.O. to examine source of source in case of share application money / share capital / share premium and thus this amendment does not give power to the A.O. to examine source of source of non-share capital cases.

The Hon’ble Allahabad High Court in the case of PCIT vs. Anshika Consultants (P.) Ltd. reported in [2024] 162 taxmann.com 792 (Allahabad) held as under:-

In the case of DCIT vs. Paswara Papers Ltd. reported in [2024] 159 taxmann.com 604 (Allahabad), the Hon’ble High Court held as under:

The Hon’ble Delhi High Court in the case of CIT vs Vrindavan Farms Pvt. Ltd. in ITA No.71 of 2015 dated 12.08.2015 has held as under:- "The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. lt was observed by the ITAT that the Assessing Officer had not undertaken any investigation of the veracity of the documents submitted by the assessee, the departmental appeal was dismissed by the Hon’ble High court.”

The Hon'ble Delhi High Court in the case of PCIT vs. Agson Global Pvt. Ltd reported in [2022]134 Taxmann.com 256 (Delhi) while allowing the appeal in favour of the assessee towards the additions made u/s 68 of the Act has held as under:

It was further observed by the Hon’ble Court as under:

“With this material on record in our view as far as the Assessee was concerned, it had discharged initial onus placed on it. In the event the revenue still had a doubt with regard to the genuineness of the transactions in issue, or as regards the creditworthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assertion by the Assessing Officer that the credits were a circular route adopted by the Assessee to plough back its own undisclosed income into its accounts, can be of no avail. The revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation. The ITAT, in our view, without adverting to the aforementioned principle laid stress on the fact that despite opportunities, the Assessee and/or the creditors had not proved the genuineness of the transaction. Based on this the ITAT construed the intentions of the Assessee as being mala Ride. In our view the ITAT ought to have analyzed the material rather than be burdened by the fact that some of the creditors had chosen not to make a personal appearance before the A.O. If the A.0. had any doubt about the material placed on record, which was largely bank statements or the creditors and their income tax returns, it could gather the necessary information from the sources to which the said information was attributable to. No such exercise had been conducted by the A.O. In any event what both the A.O. and the ITAT lost track of was that it was dealing with the assessment of the company, i.e., the recipient of the loan and not that its directors and shareholders or that of the sub- creditors. If it had any doubts with regard to their credit worthiness, the revenue could always bring it to tax in the hands of the creditors and/or sub-creditors.”

One more aspect needs to be considered is that the entire loan was repaid during the year itself which includes the opening outstanding balance and the same stands accepted by the AO. Eventually, such repayment of funds by the assessee became the source of funds in the hands of M/s Tejas Handloom for making fresh loan to the assessee. This fact is further established from the funds flow statement prepared for peak balance, as discussed above.

The Hon'ble Gujarat High Court in the cases of PCIT vs Ojas Tarmake (P).Ltd. [2023] 156 taxmann.com 75, CIT Vs. Ayachi Karaj Singh (2011) 15 Taxmann.com 70 (P&H).

In view of the above discussion and considering the fact that the assessee has been able to demonstrate that funds given by M/s Tejas Handloom are majorly sourced out of the loan repaid by the assessee herself which payment has not been doubted and, therefore, no addition could be made u/s 68 of the Act. Accordingly, we hereby direct the AO to delete the addition of INR 1,56,59,722/- made u/s 68 of the Act. Grounds of appeal Nos. 1 & 2 raised by the assessee are thus allowed.

Now coming to Grounds of appeal Nos.3 & 4 raised by the assessee against the application of G.P. rate of 1.22 % on the gross turnover of the assessee.

Before us, Ld. AR of the assessee submits that AO has doubted the books of accounts for two reasons:-

On the other hand, Ld. Sr. DR for the Revenue vehemently supported the orders of lower authorities and submits that assessee has failed to controvert the findings of AO before Ld. CIT(A) or at this stage before us. He submits that AO has worked out the monthly position of stock based on the figures supplied by the assessee and therefore, he requested to confirm the additions so made.

Heard the contentions of both parties and perused the material available on record. In the instant case, allegation of the Revenue is that assessee is not maintaining proper stock records and as per the AO, there was negative stock in two months whereas claim of the assessee is that day to day stock register was maintained and submitted before the lower authorities for verification however, the same was ignored while rejecting the books of accounts and profits were estimated. 31. On perusal of the facts and circumstances of the case and stock records filed in the paper book, we find that assessee was maintaining day to day stock register containing inward and outward of goods on daily basis and the AO has failed to point out any specific defect in any of the entries contained therein. From the perusal of chart as provided at page 8 of the assessment order where the AO has worked out the deficiency of stock in two months, we find that AO has calculated the stock position in terms of value and has failed to point out any error in the quantitative tally submitted by the assessee. The value of each item traded may differ and cannot be taken as basis for computing the stock position more particularly when the quantitative details are available. Further value of each item depends upon the G.P. rate of each individual item however, it would not impact the day to day quantity traded by the assessee which fact has been ignored by the assessee. From the perusal of the stock inventory available in the paper book filed by the assessee, we find that there was no deficiency in quantitative terms therefore, we are not in agreement with the observations of the AO that the books of accounts of the assessee does not depict true & fair view of the transaction carried out by the assessee.

The Hon’ble Kerala High Court in the case St. Teresa’s Oil Mills vs State of Kerala [1970] 76 ITR 365 has held as under:-

It is further seen that assessee has traded in different type of products which are more than 92 products and it is settled proposition that the G.P. rate cannot remain static for different item. This fact is also ignored by the AO while doubting the trading results. When the assessee has successfully demonstrated that it had no negative stock on daily basis in terms of the quantity, allegation of the AO of deficiency in stock cannot be accepted. Besides this, the AO has not identified any specific instance defect in the books of accounts maintained by the assessee nor in the stock records. Therefore, we do not find any reason to disbelieve the books of accounts maintained by the assessee in regular course which are duly audited by the statutory Auditors. Therefore, we hold that the books of accounts of the assessee cannot be rejected by invoking the provision of section 145(3) of the Act.

With respect to the application of G.P. rate of 1.22%, we find that the AO has applied G.P. rate of immediately preceding year where the turnover of the assessee was of INR 40.87 crores as compared to INR 308.94 crores in the year under appeal. It is the settled principle of business that higher turnover could be achieved by lowering the profit margins. In the instant case, turnover of the assessee increased multi-fold which fact cannot be ignored by estimating the income.

Looking to the entirety of the facts and circumstances of the case and further considering that we have already held that provisions of section 145(3) cannot be invoked in the present case, G.P. rate declared by the assessee cannot be disturbed. Accordingly, the addition made by applying G.P rate of 1.22% is hereby, deleted. Grounds of appeal No. 3 & 4 raised by the assessee are allowed.

In the result, appeal of the assessee is allowed.