AVIRAL INDUSTRIES LIMITED,KANPUR vs. INCOME TAX OFFICER -1(1), INDORE

Brief facts of the case ad culled out from the records are that the assessee is a limited company incorporated on 02.04.1997 and is engaged in the business of share trading. Return of income for A.Y. 2014-15 e-filed on 30.11.2014 declaring income of Rs. 1,05,580/-. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) and 142(1) of the Act. During the assessment proceedings ld. Assessing Officer (in short Ld. AO) firstly observed that the assessee company is mainly dealing in purchase and sale of equity shares of M/s Sulabh Engineers & Services Ltd. and further alleged that the assessee is engaged in providing accommodation entries in the forum of bogus capital gain/capital loss. Thereafter Ld. AO examined the unsecured loans which were taken during the year for the purpose of trading in equity shares.

In response, the Appellant submitted the following to the learned AO: • Name and complete address of the lenders/creditors, along with PAN numbers. • Audited financials of company lenders/creditors. • Bank statement of individual lenders showing loan amount given to the Appellant. • Confirmation from lenders/creditors, which shows that the credits were taken from the creditors, and the same was taken during the relevant assessment year. The same was in consonance with the audited financials of the Appellant which were submitted along with the income tax return filed for the relevant year.

Accordingly Ld. AO applied the provision of section 68 of the Act are application and accordingly made addition for unexplained

The Appellant maintains proper documentation of all transactions, and all of the aforesaid items, amounting to an aggregate sum of Rs. 8,52,09,975 /-, have been duly recorded in its regular books of account. Annexed to this submission is a table showing a complete documentation of all the transactions between the Appellant and its lenders/creditors for the assessment year in question. The table provides complete clarity regarding the flow of funds from the lenders/creditors to the Appellant and vice-versa.

Furthermore in the instant case, the addition has been made by the AO by invoking the provisions of section 68 of the Act which Aviral Industries automatically proves that credit entries in respect of such receipts were duly made by the appellant in its regular books of account.

The appellant company had furnished its original return of income under Section 139(1) of the Income-Tax Act, 1961 on 30.11.2014. Being a company, the Appellant is also obligated to file its financials in a prescribed form, hence the facts as regard to the receipt of loan amount and as regard the increase in creditors was clearly discernible from the returns it filed in compliance with requirements of various statutes.

Further, during the course of the relevant assessment year, parts of the above credits were reduced on account of repayment by the Appellant. The following table summarizes the re-payment of loan and payment made to creditors:

It is evident based on above table that not only were all credits properly documented, but credits in the books of the Appellant were discharged in a timely manner. The fact that the Appellant has in a timely and systematic fashion discharged its liabilities proves the authenticity of the Appellant's claim without an iota of a doubt.

Ld. counsel for the assessee also referred to following documents filed in the paper book dated 27.09.2021 containing 139 pages:

Further ld. counsel for the assessee referred to various judgments mentioned in the assessee’s submission before the ld. CIT(A) and contended that the assessee has explained all the three limbs of section 68 of the Act so as to prove the identity and creditworthiness of the cash creditors and the genuineness of the transaction which were carried out in the normal course of business of share trading for which funds were required and genuineness is further approved that the alleged cash loans have mostly being repaid during the year of receiving the alleged loans and therefore there cannot be any intention of the assesse to convert its unaccounted income in the form of unsecured loan.

Per contra, Ld. DR vehemently argued and heavily relied on the detailed finding of Ld. CIT(A) as well as observation of the Ld. AO.

We have heard rival contentions and perused the records placed before us and carefully gone through decision referred by Ld. counsel for the assessee. As far as ground no. 1 & 2 raised by the assessee are concerned challenging the validity of notice u/s 143(2) of the Act, we fail to find any merit in the contention made by the Ld. counsel for the assessee, since the appellant 9

As far as remaining ground no.3 to 7 are concerned which are on merits of the case we find that the issue relates to addition for unexplained cash credit u/s 68 of the Act received from following parties:- i.Adinath share & commodities P. Ltd. Rs.2,29,80,000/- ii. Bansal Suppliers P. Ltd. Rs. 5,23,95,000/- iii. Jitendra Kumar Agnihotri Rs.5,00,000/- iv. Samt. Kavita Agarwal Rs.5,00,000/- v. Success Vyapar Ltd. Rs.17,12,000/- vi. Vasundhara Capital & Securities ltd. Rs.71,22,975/- Total Rs.8,52,09,975/-

To examine the issue raised in the grounds we will first like the provisions of section 68 of the Act which read as follows:

On a plain reading of the provisions of section 68 of the Act, it becomes abundantly clear that the provisions of the section can be put into operation only if either an assessee offers no explanation about the nature and source of any credit entry found credited in the books of the assessee maintained for any previous year or the explanation offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory. Admittedly, section 68 places a burden of proof on the assessee to explain the nature and the source of any credit found in the books but at the same time it has to kept in the mind that the burden casted upon the assessee is only an initial burden. It has consistently been laid down that when an assessee claims that he had borrowed money from a third party the Aviral Industries (a) the identity of the third party; (b) the ability of the third party to advance money; and (c) prima-facie that the loan is genuine one. If the assessee establishes the aforesaid three pre-conditions, the burden gets shifted to the Department and then it would be for the Department to disprove the same. [CIT vs. Baishnab Charan Mohanti (1995) 212 ITR 199 (Ori)]. In the instant case, the nature of impugned credits are that of loans taken from certain parties and increase in creditors as shown in its books of account. As per the settled law, the appellant company was required to establish identity and creditworthiness of the lenders and creditors and the genuineness of the transactions.

During the relevant previous year, the appellant company took certain sums of money as loan amounting to Rs 7,63,75,000/- from various companies and individuals as per the details given supra (table-1). Apart from this, there has been an increase in creditors to the tune of Rs. 88,34,975/- as per details given supra (table-2). The appellant company furnished the following documents for establishing the identity of the lenders and creditors:

The allotment of Permanent Account Number by the Income- Tax Department further proves the existence of lender and creditor companies, as also the existence of lender individuals. The Returns of Income furnished by the lender and creditor companies and lender individuals further speak in volume for the very existence of alleged cash creditor. It is an undisputed fact that any entity, whether having physical existence or not, can have its accounts opened with any bank only after satisfying with the bank regarding its physical and/or legal existence by furnishing the necessary documents prescribed by the Reserve Bank of India on this behalf. The same holds true for the individual lenders, Mr. Jeetendra Agnihotri and Ms. Kavita Agarwal. It is submitted that the Appellant has duly submitted the lender’s PAN number and complete postal address, which proves the identity of the lender without doubt. Further the genuineness and veracity of the 13 Aviral Industries AO/CIT(A) have not been doubted at any stage by any of the authorities. In view of the aforementioned documentary evidences appellant has been able to establish the statutory identity of the alleged cash creditor beyond all doubts.

In the following judicial pronouncements, it has been held that once the permanent account number of the lender/creditor is provided and the transaction has taken place through banking channel, the identity of the lender/creditor gets established: a) CIT vs. Rock fort Metal & Mineral 198 Taxman 497 (Del.) b) CIT vs. Winstral Petrochemicals Pvt. Ltd. 330 ITR 603 (Del.) c) CIT vs. Oasis Hospitalities Pvt. Ltd. 333 ITR 119 (Del.) d) CIT vs. Gangour Investment Ltd. 335 ITR 359 (Del.) e) CIT vs. Tulip Finance Ltd. 015 DTR 185 (Del.) 26. ld. AO as well as the CIT(A) has leveled a charge against the appellant that the lender/creditor companies are merely paper companies and these companies do not have any physical existence. To rebut such finding of the authorities below. It is submitted by Ld. counsel for the assessee that during the course of the assessment proceedings, the Appellant had submitted the bank account statements of its lenders and creditors, being companies registered under the Companies Act, 1956 in order to proves the existence of the same as before opening any bank account it is compulsorily required to ensure about the existence and identity of its customers. We find force in the contention of Ld. counsel for the assessee the financials of the companies, duly audited by statutory auditors, again proves the physical and statutory existence of the Aviral Industries lender/creditor companies. Even a cursory reading of the audited financials will divulge particulars such as the directors of the company. The record of every director in an Indian company is easily available by a simple Google search, and details such as his DIN (Director Identification Number) and the companies he is director in are available for any interested party’s perusal. It is a well-known fact that a person cannot become director in a company without a DIN and at the time of applying for DIN, complete particulars like PAN number and Aadhar number also need to be furnished. This proves the identity of the directors of the company without any doubt. It is a fact that a company and the directors of a company have separate legal existence; hence the identity of the former has already been proved separately without a doubt and the identity of the latter can be easily proved if required. So, not just the statutory and physical existence of the lender/creditor companies, but the identity of the directors of the companies is also unquestionable.

Furthermore, the Ld. AO has cast aspersions on the authenticity of the lender and creditor companies due to the fact that the companies are not listed on any recognized stock exchange. We observe that this is an irrational parameter which the AO has chosen to verify the identity and existence of the lender/creditor company. Of all the registered companies operating in India, only a small proportion are listed on a recognized stock exchange. The AO has erroneously assumed that an unlisted company is not as authentic as a listed one. This is an absurd assumption and cannot be a ground for doubting the identity and Aviral Industries existence of a company. Since the appellant has provided complete address in respect of the lenders and creditors, the PAN numbers of all the lenders and creditors, and the audited financials of the lender/creditor companies, all these documents are sufficient to prove the identity and existence of the lenders and creditors.

In the instant case, the Appellant company had taken the loan amount from the companies which are duly registered under the Companies Act, 1956. The Appellant had accepted the entire loan amount through account payee cheques/drafts/RTGS or other banking channels. Further, the loan transactions are getting reflected in the bank accounts of both the parties to the transactions. With regard to increase in creditors, the Appellant has already submitted audited financials which prove that the creditor companies have engaged in trade in regular with assessee during the course of business, which has led to increase in the creditors. It is submitted that not a single penny was taken by the appellant company in form of cash towards the loan amount and the entire credits were duly remitted to the bank accounts of the appellant, while increase in creditors is the result of commercial transaction and in such circumstances, there cannot remain any room for casting any doubt on the genuineness of the transactions.

In the audited financial statements of such companies, the investment by them in the appellant / group companies, is getting clearly reflected. Such fact also establishes the genuineness of the transaction. With regard to the individual lenders, we have submitted the bank account statements in which the concerned 16

As regard Creditworthiness of the lenders and creditors we observe that as per the balance-sheet of the alleged companies, the net worth and creditworthiness of the share applicant companies can be adjudged, but in many of the cases, even the genuineness of 17

To prove the genuineness of Appellant's claims, a further point of merit which has already been listed earlier is that the Appellant has in due course of time discharged his liabilities of repaying most of the alleged loans and following table makes it clear:

Above table summarizes the re payment of loan and payment made to creditors. The submission of the assessee has merit that it is open to a business person to run his business as he deems fit. Business decisions are taken keeping in mind the best economic outcomes, and a business person is at liberty to take such decisions as are in the best interest of his establishment. In the instant case, we notice that Ld. AO has made assumptions about the manner in which re payment of loan has been done. The Ld. AO has resorted to fault finding in each transaction that the Appellant has undertaken, resultantly the learned AO has interpreted in a manner which clearly shows a biased mindset.

It has been held by various courts of law, that where the identity of loan providers and creditors, their creditworthiness and the genuineness of transaction has been proven, there remains no ground to make addition of credits to the income of the assessee. The Appellant relied on the judgment of the honorable Allahabad High Court in the case of CIT v. Anurag Agarwal [2015] 229 Taxman 532 where the Hon'ble Court ruled in favour of assessee and propounded “that in respect of credit entries, where the assessee established identity of all creditors by providing PANs and Aviral Industries addresses beyond reasonable doubts, the credits in books are genuine.”

Further, the Hon'ble Madras High Court deleted the addition made on account of unsecured loans in the case of CIT v. Mark Hospitals (P.) Ltd. [2015] 232 Taxman 197/58 taxmann.com 226, where it was found that loans were made through proper banking channels and all creditors had confirmed that they had advanced loans, and on these facts, the Hon'ble Court deleted the additions under Section 68.

In the case of Commissioner of Income-tax-15 v. Haresh D. Mehta [2017] 86 taxmann.com 22 (Bombay), the Hon'ble Bombay High Court held that where assessee proved loan transactions from various parties by producing details like copy of PAN card, copy of return of income, balance sheet and copy of bank accounts of creditors, Tribunal was justified in deleting addition made by AO under section 68 in respect of said transactions.The specifics of the case are as follows:

In the case of Gaurav Triyugi Singh v. Income Tax Officer 24(3)(1), Mumbai HIGH COURT OF BOMBAY [2020] 121 taxmann.com 86 (Bombay) facts were that assessee received unsecured loan of certain amount from an individual. Since loan amount was received by assessee through cheque and there was no dispute as to identity of creditor and genuineness of transaction, additionally, revenue could not prove or bring any material to impeach source of credit, no addition under section 68 could be made on account of this loan amount Held : Whether in order to Aviral Industries establish receipt of credit in cash, as per requirement of section68, assessee has to explain three conditions, namely, identity of creditor; genuineness of transaction; and credit worthiness of creditor - Held, yes - Assessee individual had taken unsecured loan of certain amount from one ST - Assessing Officer observed that ST had given said loan amount from its bank account and prior to which this amount was credited to her bank account as gift from two persons, namely, RBS and SST who were her relatives - He was of view that sources RBS and SST were suspected - Consequently, he treated loan amount received by assessee from ST as unexplained cash credit and made additions under section68 - It was noted that loan amount was given to assessee through cheque by ST - There was no dispute as to identity of creditor ST - There was also no dispute about genuineness of transaction - That apart, creditor had explained as to how credit was given to assessee as amount was received by it from RBS and ST - Further, revenue could not prove or bring any material to impeach source of credit - Whether, on facts, assessee had discharged its onus as per requirement of section68 and it was not required for assessee to explain sources of source i.e. genuineness of receipt of amount by ST from RBS and SST - Held, yes - Whether, therefore, impugned addition under section 68 made to income of assessee was to be deleted - Held, yes [Paras 13 to 16] [In favour of assessee]

We, therefore, under the given facts and circumstances of the case and respectfully following the ratio laid down in the above referred judgments, are of the considered view that at firstly the assessee has successfully proved the identity of the alleged cash creditors by way of filing sufficient documentary evidences, secondly creditworthiness of the cash creditors is proved with the audited financial statement, accumulated reserves transactions through banking channels, thirdly genuineness is proved with the fact that in regular course of business assessee took unsecured loans from new and existing cash creditors and after the use of the funds, repayment of loans has mostly taken place during the year and in the immediately succeeding year which brushes aside the finding of both lower authorities that the assessee has converted its unaccounted income through unsecured loan, fourthly, not even a single documents filed by the assessee has been found to be untrue/incorrect by the revenue authorities by placing any contrary material on record to disprove the claim of the appellant and lastly once the burden of proof has been fully discharged by the assessee by proving the identity, genuineness and creditworthiness of the cash creditors, no further efforts were made by the ld. AO calling information from various sources to examine the correctness of the claim made by the assessee in the form of bank statements, PAN no., income tax returns, financial statements confirmation and other relevant material filed by the Aviral Industries assessee. This shows that the alleged addition have been made by Ld. AO merely on conjectures and surmises. Therefore, the finding of Ld. CIT(A) is set aside and the addition made by the Ld. AO u/s 68 of the Act at Rs. 8,52,09,975/- is deleted. Accordingly grounds no. 3 to 7 raised by the assessee are allowed. Ground no.8 is general in nature which needs no adjudication. 43. In the result, Assessee’s appeal ITANo.419/Ind/2018 for A.Y. 2014-15 is partly allowed.