SHREE SACHDHANAND DEVELOPERS,THANE vs. ADDL CIT RG 3, THANE

Brief facts of the case are that the assessee a Developer filed e-return on 29.9.2009 declaring a total income of Rs.2,52,25,076/-. The case of the assessee was selected for scrutiny and the statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO observed from the balance sheet of the assessee that the assessee has shown unsecured loans of Rs.1,80,00,000/- out of which a loans by 31 creditors were not genuine and the creditors have no creditworthiness. The AO on the basis of information filed by the assessee qua the names and addresses of the creditors, copies of bank accounts, income tax returns, observed that there were cash deposits and cheques transfer entries in the bank accounts of the lenders and only thereafter issued cheques in favour of the assessee and also all these creditors were having income below the taxable limits, though, these creditors were filing income tax return and thus these loans were nothing but manipulations only. The AO made independent inquiries and also recorded the statements of the few lenders who were found to be labourers in the payroll of the sub-contractors working under the assessee developers. The said labourers/loan creditors confirmed to have opened the bank accounts on the advice of their employer and money was deposited by the 3 said employer out of their savings as confirmed in the statements given to the AO by six lenders. The persons, who were examined, denied to have any independent source except the labour earnings and the money was transferred on the advice of their employer. The AO discussed the issue of unsecured loans of Rs.1,28,00,000/- from 31 parties in paras 4 to 35 of the assessment order and finally came to the conclusion that the said loans were not be genuine as the assessee failed to prove the genuineness of the transactions, creditworthiness and identity of the creditors and hence added the same to the total income of the assessee by framing assessment u/s 143(3) of the Act vide order dated 28.12.2011 assessing the total income of the assessee at Rs.3,80,25,080/-.

Aggrieved by the order of the AO, the assessee preferred an appeal before the ld.CIT(A). During the appellate proceedings before the ld.CIT(A), the remand report was called for from the AO which was submitted vide letter dated 3.1.2013. While calling upon the remand report, the FAA forwarded certain additional evidences like, confirmation letters along with the IT returns etc and also directed to examine the remaining 25 loan creditors on the same lines as was done during the assessment proceedings in respect of 6 loan creditors. During the appellate proceedings, the ld.AR submitted before the FAA that the AO has not bothered to examine details submitted before the AO in the assessment proceedings, despite the fact 4 that all the 25 creditors were assessed to tax in the same Range. Finally, the FAA after considering the submission of the appellant as reproduced in paras 6 and 7 of the appeal order dismissed the appeal of the assessee by observing and holding as under : “8.1 I have carefully considered the submissions of the appellant, the observations of the AO in the assessment order, case laws relied upon and the facts of the case. Therefore, I proceed to decide the appeal of the appellant. i) The unexplained cash credit u/s.68 of the Act can take place only when the appellant failed to prove the following: a) Identity b) Genuineness c) Creditworthiness ii) The AO has conducted inquiries in the cases of 6 loan creditors and found that they were not in a capacity to lend money, therefore, their creditworthiness have not been proved. It was also observed that cheques were deposited and cash were withdrawn subsequently from the bank accounts. These six (6) loan creditors statements were recorded u/s.131 of the Act and in the course of this proceedings u/s.131 It was established that these 6 parties are basically giving accommodation. In the remaining 25 loan creditors also, the AO deputed the Inspector and carried out the investigation from the Banks and observed these loan creditors also have no creditworthiness. The brief details of these six(6) parties including remaining 25 parties are discussed below: Amount(Rs.) Sr. Name of Remarks No. loan creditors 1 Ambalal 4,00,000 Cash were deposited before loan was advanced. Arjan Patel Statement recorded u/s.131, proves that he was a labour supervisor at the site of appellant; source of loan advanced not explained. He was earning a meager salary of Rs.15,OOO 2 Vinod 3,00,000 R/I of Rs.1,62,030/filed.Cash were deposited Karmshi before loan was advanced,. Statement recorded Dholul u/s.131, proves that he was a labour supervisor at the site of appellant; source of loan advanced not explained. He was earning a meager salary of Rs.15,OOO 5 3 Nitin I. 6,25,000 R/I of Rs.l,47,911 and Rs.l,48,848/- filed by Nitil Makani and 5,00,000 I Makani and Nitin I, Makani (HUF) respectively. Nitin Makani Cash were deposited before loan was advanced. (HUF) Statement recorded u/s.131, proves that he was a petty labour contractor at the site of appellant; source of loan advanced not explained. 4 Dinesh Poker 7,00,000 R/I of Rs.1,48,990/-filed.Cash were deposited (HUF) before loan was advanced,. Statement recorded u/s.131, proves that he was a labour supervisor at the site of appellant; source of loan advanced not explained. He was earning a meager salary of Rs.12,OOO 5 Amrutlal 3,75,000 He was earning a meager salary of Rs.12,OOO/-. Pethabhai Statement recorded u/s.131, shows that he was Patel (HUF) not aware of the entire transactions.. source of loan advanced not explained.

6. Saroj Vasant 4,00,000 Cash were deposited before loan was advanced. Bhimani Statement recorded u/s.131, shows that she was a cook earning only Rs.3,000/- PM. Source of loan advanced not explained. 7 Prakash M 3,00,000 R/I of Rs.1,42,866/- filed. Cash were deposited Dholu before loan was advanced. In this case, the cash were deposited in the third party accounts and cheques issued through P.M.Dholu. Loan transaction is not genuine. 8 Amrutlal S R/I of Rs.1,41,108/- filed, Cash were deposited Patel before loan was advanced. In this case, the cash were deposited in the third party accounts and cheques issued through A. S. Patel 9 N.S. 5,00,000 R/I of Rs.1,44,587/- filed. Cash were deposited Chhabhaiya before loan was advanced. In this case, the cash (HUF) were deposited in the third party accounts and cheques issued through N.S. Chhabhaiya (HUF) 10. Maganlal D 2,50,000 R/I of Rs.1,48,250/- filed. Cash were deposited Patel before loan was advanced. In this case, the cash were deposited in the third party accounts and cheques issued through M D Patel 11 Reena 2,50,000 R/I of Rs.1,77,269/- filed. Cash were deposited Kamlesh before loan was advanced. In this case, the cash Patel were deposited in the third party accounts and cheques issued through M D Patel 12. Bharat 5,00,000 R/I of Rs.1,44,433/- filed. Cash were deposited Mangal Patel before loan was advanced. In this case, the cash were deposited in the third party accounts and cheques issued through M D Patel 13. Lakhamshi K 2,50,000 R/I of Rs.1,46,604/-. Cash were deposited before Parasiya loan was advanced. (HUF) 14 Ashvin Patel 5,00,000 R/I of Rs.1,41,521/- filed. Cash were deposited (HUF) before loan was advanced. In this case, the cash were deposited in the third party accounts and cheques issued through A K Patel(HUF) 15. Vinod K 4,00,000 R/I of Rs.1,1,05,693/-. Cash were deposited Chauhan before loan were deposited by the third party accounts and cheques issued through V K 6 Chauhan 16 Ashok 5,00,000 R/I of Rs.1,45,951/- filed. Cash were deposited Chhabhaiya before loan was advanced. In this case the cash (HUF) were deposited by the third party accounts and cheques issued through A K Chhabhaiya(HUF) 17. Vishanji B 5,00,000 R/I of Rs.l,31,254/-filed. Cash were deposited Patel before loan was advanced. In this case, the cash were deposited by third party and cheques issued through Vishanji B. Patei 18. Amrutlal N 5,00,000 R/I of Rs.1,55,458 filed/-: Cash were deposited Patel before loan was advanced. In this case, the cash were deposited by third party and cheques issued through Amrutlal N Patel 19 Jayanti 3,00,000 R/I of Rs.1,39,542/- filed. Cash were deposited Bhimani before loan was advanced. In this case, the cash were deposited in the third party accounts and cheques issued through Jayanti Bhimani 20. Nirmala M 2,50,000 R/I of Rs.1,68,818/- filed. Cash were deposited Limbani before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Nirmala M Limbani 21. Ketan J 4,00,000 R/I of Rs.1,34,890/- filed. Cash were deposited Bhagat before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Ketan J Bhagat 22 Damyanti M 6,00,000 R/I of Rs.1,76,160/- filed. Cash were deposited Pahuja before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Damyanti M Pahuja 23 Himmatlal 2,00,000 R/I of Rs.1,37,271/- filed. Cash were deposited Joshi (HUF) before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Himmatlal Joshi (HUF) 24 Dayalal G 5,00,000 R/I of Rs.1,34,462/- filed. Cash were deposited Patel before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Dayalal G Patel 25. Praful D 4,00,000 R/I of Rs.1,33,643/- filed. Cash were deposited Pokar before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Damyanti M Pahuja to Praful D Pokar to appellant 26. Kirit Devji 5,00,000 R/I of Rs.1,61,504/- filed. Cash were deposited Thakkar before loan was advanced. In this case, the cash (HUF) were deposited by the third party and cheques issued through Kirit Devji Thakkar (HUF) to appellant 27. Dimple 2,50,000 R/I of Rs.1,05,176/- filed. Cash were deposited Kantilal before loan was advanced. In this case, the cash Chhadwa were deposited by the third party and cheques issued through Kirit Devji Thakkar (HUF) to Domple Kantilal Chhadwa to appellant 28 Sohanlal P 5,25,000 R/I of Rs.1,47,610/-- filed. Cash were deposited Jain (HUF) before loan was advanced. In this case, the cash were deposited by the third party and cheques 7 issued through Kirit Devji Thakkar (HUF) to Sohanlal P Jain to appellant 29 Shivubha M 2,50,000 R/I of Rs.1,48,558/-- filed. Cash were deposited Jadeja before loan was advanced. In this case, the cash were deposited by the third party and cheques issued through Shivubha M Jadeja to appellant 30 Shital 4,50,000 R/I of Rs.1,78,790/- filed. Cash were deposited Jitendra before loan was advanced. In this case, the cash Patel were deposited by the third party and cheques issued through Shital Jitendra Patel to appellant. AO has carried out a complete investigation and has proved that these loan creditors do not have any creditworthiness and further established that, these loan creditors were providing accommodation entries, routing unaccounted money of the appellant. In view of the above stated facts, the addition made by the AO of Rs.1,28,OO,OOO/- as unexplained cash credit u/s.68 of the IT.Act, is confirmed and the appeal of the appellant is rejected.

The ld.AR vehemently submitted before us that the order of the ld. CIT(A) is wrong and against the facts on record. The ld.AR argued that the assessee has borrowed money from 31 parties who happened to be employees of the assessee’s sub-contractor who were having PAN, filing income tax returns, have bank accounts etc which were filed before the AO and the AO found that none of the information given by the assessee was either false or fabricated. The ld AR submitted that it was customary in the business of developers that the labour charges were either paid when these labourers go to their native places. But in the case of the assessee these labourers were hired through sub-contractors and were paid accordingly. So when the assessee was in need of funds the money used to be borrowed from these labourers which used to be arranged by the subcontractors. The 8 ld AR submitted that the AO doubted and added the entire amount of loans on the basis of examination of only six parties/creditors. The ld. AR further submitted that the assessee also paid interest on the unsecured loans right from the assessment year 2009-10 and also in the subsequent years which has been allowed by the revenue in the assessment years 2010-11 and 2011-12. So much so that the income tax authorities have also allowed the interest paid on these unsecured loans during the assessment year 2009-10 thereby accepting the facts that the assessee has incurred expenditure by way of interest on borrowings made from these 31 parties. It was also submitted before us by the ld.AR that the investigations carried out by the Inspector was not confronted to the assessee before making the addition qua these loans and therefore the said evidences were used against the assessee without allowing cross-examination of the creditors who gave advances to the assessee which was in gross violation of the principle of natural justice. It was argued that how could the additions for the money borrowed from various parties could be made when the AO allowed the interest paid to the said parties in the current year and also in the subsequent years even in the assessment made under section 143(3) of the Act.

On the other hand, the ld. DR strongly relied on the orders of authorities below and argued that the bank accounts of the lenders were 9 opened few days prior to the lending of the money to the assessee and nexus was clearly established as 3 to 4 times cash were besides cheque clearings and thereafter the entire money was given as advanced to the assessee as unsecured loans. The ld. DR submitted that mere acceptance of payment of interest on these loans by the revenue authorities would not automatically proved the existence of three ingredients i.e. identity , creditworthiness and genuineness of the transactions and therefore the addition as made by the AO and confirmed by the FAA should be upheld by dismissing the appeal of the assessee.

We have carefully considered the rival submissions of the parties, perused the material placed before us and also gone through the orders of authorities below and various case laws relied upon by the assessee. We find from the record that the money has been borrowed by the assessee during the year under consideration from 31 parties who were employed with the sub-contractor engaged by the assessee. It is also undisputed fact that the all these persons were assessed to income tax and filing income tax return every year which were available before the AO. However, the AO examined six persons only and accordingly made addition by forming the opinion that the loans taken by the assessee were non-genuine and bogus. It is also undisputed fact that the AO has allowed interest on these borrowings amounting to Rs.7,78,282/- during the year. While making the addition of 10 money borrowed from these parties as being bogus and non-genuine. Similar deduction in respect of interest on these unsecured loans was also allowed in the subsequent years. Now it is very strange that how the AO has accepted the transaction in part by allowing the interest on these loans while making the addition for the amount of loans by treating the same as non- genuine and bogus under section 68 of the Act. Moreover, these loans were repaid by account payee cheques in the subsequent years and no more outstanding in the books of account of the assessee. We also note that the AO deputed income tax inspector to carry out further investigation and verification of these loan creditors and recorded the statements of six out of 31 parties but did not confront the statements of these six parties to the assessee nor was the cross-examination offered to the assessee of these six parties thereby violating the principle of natural justice as the addition u/s 68 was made by the AO while relying on the impugned material without putting the same before the assessee for rebuttal. The confirmation of these creditors, PAN, IT returns, addresses were also filed before the AO. The AO also failed to prove that the money passed on from the assessee into the bank account of these creditors. From the facts hereinabove it is clear that the identity of the creditors have not been doubted whereas the creditworthiness of the creditors and genuineness of the lenders seems to be doubted which becomes meaningless and absurd in the present case as the AO has allowed interest on the borrowed funds in the current years and also 11 in the subsequent years and therefore the order of the ld.CIT(A) confirming the addition u/s 68 in respect of 31 creditors is not correct and cannot be sustained. We have therefore left no option but to set aside the order of ld.CIT(A) and direct the AO to delete the addition.