D.C.I.T., CC-1(3), KOLKATA, KOLKATA vs. M/S. NAVIN CONSTRUCTION & CREDIT PVT. LTD., KOLKATA

O R D E R

PER DR. MANISH BORAD, ACCOUNTANT MEMBER :

2. Whether on the facts and circumstances of the case, the CIT(A) erred in law in holding that the AO did not made any independent inquiry whereas the AO issued notices u/s 133(6) and also financial (Statements were analysed by him which established that loan creditor's identity were not genuine and they had not creditworthiness and transactions were not genuine.

3. Whether on the facts and circumstances of the case, the CIT(A) erred in law in holding that the assessee had established the identity and creditworthiness of the loan creditors and genuineness of loan transaction which is contrary to observations of the Hon'ble Apex Court in case of NRA Iron & Steel P Ltd 103 Taxmann.com 48, as the inquiry and analysis made by the AO established the opposite,

4. Whether on the facts and circumstances of the case, the CIT(A) erred in law in deleting the addition of Rs. 63,00,000/- made as bogus donation as expenditure claimed u/s 35(l)(ii) of the I.T. Act, 1961, as on the same ground of similar nature of disallowance M/s Deesha Vinimay, Pvt. Ltd, (amalgamated with M/s. Navin Construction & Credit Pvt. Ltd.) accepted default by submitting petition under The Direct Tax Vivad Se Viswas Act, 2020 dated 01.03.2021.

5. Whether CIT(A) erred in law by ignoring the facts that CBDT vide notification dated 15.09.2016 and 06.09.2016 withdrew the recognition given to M/s. School of Human Genetic and Population Health, Kolkata and Matrivani Institute of Experimental Research & Education, Kolkata to grant approval u/s 35(l)(ii) of the Income Tax Act, 1961 as such the alleged donation is a fake one as the Donee has no authority to receive donation.

6. Whether on the facts and circumstances of the case, the ld. CIT(A) erred in law in restricting the addition by Rs.2,81,903/- from Rs.30,37,525/- u/s 14A of the I.T. Act. 1961 ignoring the facts that the A.O. has made the addition under the provision of Rule 8D of the Income Tax Rule, 1962.

7. That department carves leave to add, alter or modify any or all grounds of appeal either before or during course of Appellate Proceedings.” Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 3

2. For that on the facts and in the circumstances of the case, the Ld. CIT(A) ought to have held that the AO was unjustified in examining those issues which were beyond the scope of 'limited scrutiny' and in that view of the matter the additions aggregating to Rs.93,37,525/-made u/s 35(l)(ii) and 14A of the Act ought to have also been deleted for being legally unjustified.

3. For that on the facts and circumstances of the case, the appellant craves leave to submit additional grounds and/or amend or alter the grounds already taken either at the time of hearing of the appeal or before.”

4. The registry has informed that the cross-objection filed by the assessee is delayed by 301 (three hundred one) days. An application seeking condonation of delay has been filed. Reason for the said delay is that there were certain issues on which the ld. Assessing Officer has made the addition which were beyond the reasons for limited scrutiny and there are various judicial pronouncements in favour of the assessee. There was no malafide intention of the assessee to delay the filing of the cross-objection. Reliance has also been placed on the judgment of the Hon’ble Apex Court in the case of Improvement Trust vs. Ujagar Singh & Ors. (2010) 6 SCC 786 (SC) as well as in the case of Collector, Land Acquisition vs. Mst. Katiji (1987) 1987 taxmann.com 1072 (SC). Though the ld. D/R opposed the request of admitting the cross- Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 4 objection, we find merit in the contention of the ld. Counsel for the assessee and hence condone the delay and admit the cross-objection for adjudication.

by the assessee for the first time before this Tribunal. However, keeping in view the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. Commissioner of Income-tax [1998] 229 ITR 383 (SC), wherein it has been held that… “Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. There is no reason why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier”, admit the legal grounds for adjudication.

9. The grievance of the assessee is that the assessee’s case was selected for limited scrutiny to examine the unsecured loans but the ld. Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 6 Assessing Officer has exceeded its jurisdiction and without taking prior approval of the Pr. Commissioner of Income Tax (PCIT), had enlarged the scope of scrutiny which is bad in law and, therefore, the disallowance made u/s 35(1)(ii) of the Act and u/s 14A of the Act deserves to be deleted. 9.1. On the other hand, the ld. D/R, though opposed to the contentions made by the assessee but failed to controvert this fact that the ld. Assessing Officer has not taken prior approval from the concerned PCIT for enlarging the scope of limited scrutiny.

, as brought out in the assessment order and submissions made during appeal proceedings. The moot point for adjudication is whether the AO was justified in treating the unsecured loans of Rs. 10,07,00,000/-raised by the appellant company, and the amalgamating companies, from certain bodies corporate, as unexplained cash credits under section 68, in the light of evidence brought on record. I find that the appellant, in the course of assessment proceedings, has brought on record the particulars of loan creditor companies including name, complete address and PAN; the mode of receipt of each loan; the bank statement of the appellant company; supporting documents relating to each loan creditor company viz. respective ledger accounts, loan confirmations, explanation as to source of funds, ITR acknowledgement, audited financial statements, and banks statement of the loan creditors. On a careful perusal thereof, I find that the appellant has satisfactorily discharged the primary onus cast upon it to substantiate the unsecured loan transactions during the year, by furnishing all the relevant and material evidence. The identity of the loan creditor companies is established as these are having PAN, CIN and are regularly filing return of income. The creditworthiness of the loan creditors is established from the audited balance sheets and profit and loss accounts, which show that the lender companies have adequate own funds (share capital and reserves) and are also having substantial operating income during the relevant period, to advance the loans. The genuineness of the transaction is established from the fact that both the acceptance and repayment of loan has been through banking channel, as evidenced from the bank statements of the loan creditors and the appellant company, and interest has been paid by the appellant company (or the amalgamating company, as the case maybe) to the loan creditors, in respect of each of the loan transaction, for the relevant period, after duly deducting TDS thereon. 7.1 In the assessment proceedings, AO has merely doubted identity of the lenders as the notices had returned unserved. However, AO has also recorded in the assessment order that the notices were later complied with by the Authorised Representative of the loan creditors. AO has also doubted the creditworthiness of lenders, on the basis that "source of loans given" in the hands of loan creditor companies was not satisfactorily explained, and has brushed aside the plethora of documentary evidence furnished by the appellant. However, AO on his part has not made any independent enquiry from the loan creditors to verify the genuineness of loan transactions. AO has not reverted any factual finding in the assessment order that there are cash deposits reflected in the bank statements of the loan creditors AO has only made certain general observations regarding modus operandi of shell companies. However, in view of the specific, relevant and material evidence adduced by the appellant to Assessment Year: 2015

16. C.O. No. 17/Kol/2023 Assessment Year: 2015

16. M/s. Navin Constructions & Credit Pvt. Ltd. 12 substantiate the loan transaction, I am not inclined to agree with the adverse findings of the AO regarding genuineness of loan transactions. 7.2 I find considerable force in the plea taken by the appellant that the appellant could not be expected to have continued relationship with the lender companies, and have information about "source of source of funds" in the hands of lenders, or their present addresses, particularly so when the loans have already been repaid. In this context, it is pertinent to refer to the proviso to section 68, which provides that in cases where assessee is a closely held company, and any sum is found credited by way of share capital, share application money, share premium etc., the "source of source of such credits" is also required to be explained satisfactorily. It is noteworthy that this statutory obligation to explain not only the credit in the hands of the assessee, but also source of such credit in the hands of the creditor, is applicable only for credits in the nature of share capital, share application money etc., where it is reasonable to presume a continued relationship with the creditor; and not in respect of credits by way of loans. 7.3 It is well-established that the onus lies on the assessee to adduce necessary documentary evidence so as to prove all the three ingredients of section 68 viz. identity and creditworthiness of the creditor, and genuineness of the transaction, as the relevant facts are within the special knowledge of the assessee. It has also been held that the evidence adduced by the assessee have to be examined not superficially but in depth and having regard to the test of the human probabilities and normal course of human conduct. 7.4. Hon'ble ITAT, Mumbai Bench, Mumbai in case of ITO v. Anant Shelters Pvt Ltd (20. taxmann.com 153) (2012) (Mum) has enumerated certain legal principles regarding taxation of cash credits under section 68 as under :- "(i) Section 68 can be invoked when following three conditions are satisfied -(a) when there is credit of.amounts in the books maintained by the assessee, (b) such credit has to be a sum of money during the previous year, (c) either the assessee offers no explanation about the nature and source of such credits found in the books or the explanation offered by the assessee, in the opinion of the AO, is^not satisfactory. It is only then that the sum so credited may be charged to income-tax as the income of the assessee of that previous year. (ii) The expression the assessee offers no explanation means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. The opinion of the AO for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on the record. The opinion of the AO is required to be formed objectively with reference to the material on record file. Once the explanation of the assessee is Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 13 found unbelievable or false the AO is not required to bring positive evidence on record to treat amount in question as income of the assessee. While considering the explanation of the assessee, the AO has to act reasonably-application of mind is the sine qua non for forming the opinion. (iii) Phrase appearing in the section - nature and sources of such credits -should be understood in right perspective, so that genuineness of the transaction can be decided on merits and not on prejudices. Courts are of the firm view that the evidence produced by the assessee cannot be brushed aside in a causal manner. Assessee cannot be asked to prove impossible. Explanation about 'source of source' or 'origins of the origin' cannot and should not be called for while making inquiry under section. (iv)In the matters related to section 68, burden of proof cannot be discharged to the hilt -such matters are decided on the particular facts of the case as weil as on the basis of preponderance of probabilities. Credibility of the explanation, not the materiality of evidences, is the basis for deciding the cases falling under Section 68. (v) Confirmatory letters or A/c payee cheques do not prove that the amount in question is properly explained for the purpose of section 68. Assessee has to establish identity and creditworthiness of the creditor as well as the genuineness of the transaction. All the three ingredients are cumulative and not exclusive. ' (vi) In matters regarding cash credit the onus of proof is not a static one. As per the provisions of the section the initial burden of proof lies on the assessee. Amount appearing in the books of a/cs. of the assessee is considered a proof against him. He can prove the identity of the creditors by either furnishing their PANs or assessment orders. Similarly, genuineness of the transaction can be proved by showing that the money was received by an account payee cheque or by draft. Creditworthiness of the lender can be established by attending circumstances. Once the assessee produces evidences about identity, genuineness and credit worthiness of the lender onus of proof shifts to the Revenue.,; 7.5 In the light of the aforesaid legal principals, I find that in the instant ease the appellant has been able to discharge the primary onus placed on him under section 68 of the Act. The appellant has furnished name, address and PAN of loan creditors, loan confirmations duly signed, ledger accounts, copies of audited financial statements of lenders, relevant bank statements, etc. The loan transactions are duly reflected in the books of accounts and bank statements of the loan creditor companies. The appellant company is a registered NBFC and the Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 14 loans have been taken (and later repaid in some Gases) in regular course of business. The appellant company (or the amalgamating company, as the case may be) has paid interest on the loans raised to the loan creditors, after duly deducting TDS thereon. There is no ' finding that any sum by way of cash was deposited in the bank account of loan creditors immediately prior to the issue of cheques. In such circumstances, I find that the appellant had discharged the initial onus cast upon it to establish the identity and creditworthiness of the loan creditors as well as genuineness of the loan transactions. Thereafter, the onus shifted to the AO to bring facts on record, which could prove the contrary. If the AO was not satisfied, he had the option of taking inquiries from the loan creditors by summoning them. It is a fact that no independent verification has been carried out by the AO with loan creditors, by way of issue of summons under section 131, or in any other manner. AO has not recorded any statement of the lenders to verify the genuineness of loan transactions. There is no finding by the AO that the documentary evidences produced by the appellant were untrustworthy or lacked credibility. Thus, the appellant's contention that it had discharged onus of establishing the identity; and creditworthiness of the loan creditors and genuineness of the transactions with the help of relevant supporting evidences is found to be in order.

7.6 On similar facts, Hon'ble Bombay High Court in the case of Rushabh Enterprises Vs ACIT (60 taxmann.com 134) (2015) (Bombay) has held that loans taken in the regular course of business through account payee cheques were ordinarily to be treated as bonafide. Though the judgement has been rendered on validity of reassessment proceedings, Hon'ble High Court has observed at Para 8 of its judgment as under- "8. . On behalf of the revenue, Mrs. Bharucha submitted that all the four parties concerned had facilitated accommodation entries. They were not genuine and bona fide loans advanced to the Petitioner. She has supported the order of the Assessing Officer. The Commissioner of Income Tax while rejecting the objections on 19th December, 2012 once again reiterated that the Petitioner has routed unaccounted cash through bogus loans and has been found in the books of account of the Petitioner. According to her, the revenue has received information from the Director General of Income Tax (Inv) that the assessee has taken unsecured loans from the above parties by way of unaccounted cash/accommodation entries. We are unable to agree since the Petitioner has clearly stated that all the payments were made by account payee cheques which were encashed in the bank account of the Petitioner in the regular course of business. We find that the Petitioner has also paid interest on this loans after deduction of tax at source "and TDS returns are also accordingly filed. There is no dispute in Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 15 regard to the above. We find nothing to support the said contentions of the revenue. The revenue's contention in the affidavit in reply has no merit. On the other hand, the loans appear to be taken in the regular course of business and were found amongst the 45 members in respect of which all particulars have already been furnished by the assessee to the Assessing Officer. The fact remains that the Assessing Officer had power to reopen the assessment provided there was some tangible material on the basis of which he has reason to believe that income chargeable to tax had escaped assessment.

7.7 The Hon'ble Supreme Court in the case of CIT Vs Lovely Exports (216 CTR 195) (2008) (SC) has held that "If the share application money is received by the assessee company;from alleged bogus share holders who's name are given to the Assessing Officer then the department is free to proceed to reopen their individual assessments in accordance with law but it cannot be regarded as undisclosed income of assessee company".

7.8 On similar facts, Hon'ble Bombay High Court in the case of CIT Vs Creative World Telefilms Ltd (2011) (333 ITR 100.) (Bombay) has relied on the Apex Court decision in case of CIT Vs Lovely Exports (supra) and held as under:- "In the case in hand, it is not disputed that the assessee had given the details of name and address of the shareholder, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the Assessing Officer to make proper investigation and reach the shareholders. The Assessing Officer did nothing except issuing summons which were ultimately returned back with an endorsement "not traceable". In our considered view, the Assessing Officer ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the Assessing Officer. In the above circumstances, the view taken by the Tribunal cannot be faulted. No substantial question of law is involved in the appeal. In the result, the appeal is dismissed in limine with no order as to costs."

7.9 On similar facts, Hon'ble Bombay High Court in the case of CIT vs. Gagandeep Infrastructure Pvt. Ltd (394 ITR 680) (2018) (Bombay), has relied on the Apex Court decision in case of CIT Vs Lovely Exports (supra) and held as under,- “In any view of the matter the three essential tests while confirming the pre- proviso Section 68 of the Act laid down by the Courts namely the genuineness of Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 16 the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. The Apex Court in Lovely Exports (P.) Ltd. (supra) in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee's income as unexplained cash credit." 7.10 It is pertinent to mention that the facts of present case are completely distinguished from the facts in the case of NRA. Iron & Steel (P) Ltd (103 Taxmann.com 48) (2019) (SC). In that case, AO had issued summons and also conducted independent field enquiries with respect to the investor companies, which revealed that identity of the investor companies and genuineness of the transaction was clearly not established. In the instant case, however, no such enquiry has been conducted by the AO, to bring on record any fact which could controvert the facts .contained in the documentary evidence adduced by the appellant to substantiate the loan transaction. Therefore, the ratio of Supreme Court judgement in case of NRA Iron & Steel (P) Ltd (supra) is not applicable on the facts of present case. 7.11 In view of the facts and circumstances of the case, and the prevailing position of law applicable on such facts, I find that the appellant has, established the identity and creditworthiness of the loan creditors and genuineness of the loan transactions, in respect of the unsecured loans aggregating to Rs.10,07,00,000/-, received during the year, by the appellant company, together with the amalgamating companies. Thus, the appellant has satisfactorily explained the nature and source of the credits to the extent of Rs.10,07,00,000/- by way of unsecured loans. The Jurisdictional Assessing Officer (J.A.O) is directed to delete the addition of unexplained cash credits under section 68 of the Act to the extent of Rs. 10,07,00,000/-, representing the aggregate of unsecured loans received during the year by the appellant company, and the amalgamating companies, from various loan creditor companies. Accordingly, this ground of appeal is allowed.”

19. Further we notice that the ld. D/R apart from making general submissions about the jamakharchi/accommodation entry/paper/shell Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 17 company about the alleged companies could not place any other evidence to support its case. So far as the reliance of the Ld. D/R on the decision of the Hon’ble Supreme Court in the case of “PCIT v/s NRA Iron & Steel (P) Ltd.” (supra) is concerned, we note that the Hon’ble Supreme Court in the said case has taken note of the observations made by the Supreme Court in the “the land mark case of Kale Khan Mohammed Hanif v. CIT [1963] 50 ITR 1 (SC) and Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laying down the proposition that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit- worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68. If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the Revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source.” Thereafter the Hon’ble Supreme court summed up the principles, which emerged after deliberating upon various case laws, as under: “11. The principles which emerge where sums of money are credited as Share Capital/Premium are : i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 18 ii. The Assessing Officer is duty bound to investigate the credit- worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.”

The Hon’ble Supreme Court, thus, has held that once the 19.1. assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness of the subscribers, then the AO is duty bound conduct to conduct an independent enquiry to verify the same. However, as noted above, the Assessing Officer in this case has not made any independent enquiry to verify the genuineness of the transactions. The assessee having furnished all the details and documents before the Assessing Officer and the Assessing Officer has not pointed out any discrepancy or insufficiency in the said evidences and details furnished by the assessee before him. As observed above, the assessee having discharged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifted upon the Assessing Officer to examine the evidences furnished and even made independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the Assessment Year: 2015-16 C.O. No. 17/Kol/2023 Assessment Year: 2015-16 M/s. Navin Constructions & Credit Pvt. Ltd. 19 assessee and confronting with the same to the assessee. In view of this, even applying the ratio laid down by the Hon’ble Supreme Court in the case of PCIT vs. NRA Iron and Steel Pvt. Ltd. (supra), impugned additions are not warranted in this case.