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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: Ms. MADHUMITA ROY & SHRI BHAGIRATH MAL BIYANI
PER Ms. MADHUMITA ROY - JM:
The bunch of appeals filed by the Revenue are directed against the common order dated 25.08.2021 passed by the Ld. CIT(A)-3, Bhopal (M.P.) (hereinafter referred to as ‘Ld. CIT(A)’) arising out of the order passed on 29.03.2016, 27.12.2016 & 16.12.2019; respectively, by ACIT, Central-2, Indore under Section 143(3) of the Income-Tax Act, 1961 (hereinafter referred to as ‘the Act’) for A.Ys. 2013-14, 2014-15 & 2017-18.
2 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. A.Y. 2013-14 2. Ground No.1: On the facts and circumstances of the case, according to Revenue, the Ld. CIT(A) was not justified in law in deleting the addition of Rs.14,50,421/- in A.Y. 2013-14 on account of unreasonable and excess interest paid to related parties under Section 40A(2)(a) of the Act.
The assessee, a company, following mercantile system of accounting in the business of construction and sale of commercial and residential building etc. filed its return of income on 30.09.2013 through electronic media declaring current year loss at Rs.86,93,937/-. The case was selected for scrutiny through CASS and a notice whereupon under Section 143(2) of the Act dated 04.09.2014 was issued by the ACIT-1(2), Indore. The case was centralized to the said office under Section 127 of the Act by the CIT, Central, Bhopal and the case records were received on 11.09.2015 from old jurisdiction. Due to change of incumbent, a fresh notice under Section 143(2) of the Act dated 15.01.2016 and further notice under Section 142(1) of the Act alongwith a detailed questionnaire were issued on 15.01.2016. In response thereof, written submission alongwith the copy of computation of income, audit reports and other details as sought for, were duly filed by the representative of the assessee before the Ld. AO. The books of accounts, ledgers, bills & vouchers produced by the assessee were randomly test checked.
It was found that the assessee paid interest to the parties from whom the assessee company took secured and unsecured loans during the year under consideration and the interest expenses to the tune of Rs.1,25,92,446/- was claimed on such loans. The details of expenses incurred towards those parties as alleged to have been covered under Section 40A(2)(b) of the Act were asked for and further
3 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. perusal of the same it was found by the Ld. AO that the assessee paid interest to four of those parties @ 18% whereas paid interest to other parties @12% only. The details of interest paid to those four parties are as follows:
Sl. No. Name of Party Interest Amount % of interest paid 1. Shri Brij Kishore Goyal 34,06,911/- 18 2. Shri Gopal Goyal 1,68,732/- 18 3. Shri Utpal Goyal 1,31,868/- 18 4. Shri Narendra Barta 8,58,336/- 16 Total 45,65,847/-
According to the Ld. AO, such excess interest to the persons covered under Section 40A(2)(b) of the Act was not available in terms of the provisions of the said Section and thus restricted the rate of interest of 12%. The balance interest of Rs.14,50,421/- was disallowed under Section 40A(2) of the Act and added to the total income of assessee which stood deleted by the Ld. CIT(A) in appeal. Hence, the instant appeal before us.
We have heard the rival submissions made by the respective parties and perused the materials available on record.
Before the First Appellate Authority, the assessee submitted as follows:
“2. AS REGARDS TO GROUND NO 1 – INVOKING THE PROVISIONS OF SECTION 40A (2)(b). 2.1 The Learned AO erred in disallowing a sum of Rs. 14,50,421/- under section 404(2) on account of interest paid to related parties and added the same to the income of the appellant during the year under consideration. The relevant discussion is in para 4 to 4.2 on page 2 of the order. 2.2 The appellant has undertaken a project of construction of a township in the name of "BRG Shangri-La". For the purpose of development of the project the appellant has 4 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. taken loan from banks and other parties on which it has paid interest of Rs. 1,25,92,446/- during the year under consideration. That this amount of expenditure was considered in the cost of the project as development expenditure and carried forward as the cost of WIP. 2.3 During the course of assessment proceedings, it was explained to the Learned AO that the appellant has claimed the interest expenditure as revenue expenditure in the immediately preceding year ie. AY 2012-2013 and in the current year the appellant has capitalized the finance cost as a part of project cost under work in progress. Copy of 2nd written submission is enclosed at page no. 28 to 35 of the paper book. The details of work in progress are enclosed at page no. 48 and the fact that the finance cost and interest were included in work in progress is also evident from this working of WIP. From the profit and loss account enclosed at page no. 12 it is evident that the company has claimed cost of purchase only Rs. 12.27.133/-, Rs.14,23,91,726/- minus Rs.14,11.64,593/-) out of the total cost of purchase which include material, labour, development and so many other expenses as per the details of work in progress given on page no 48 Therefore, the interest incurred by the assessee during the year was not claimed as expenditure bud was debited to work in progress. 2.4 However, ignoring the treatment of the impugned item in the books of accounts of the appellant, the Ld. AO elevated a thought of attracting the provisions of section 40A(2)(b) in respect of interest paid on loan taken from some related parties. In fact, the Ld AO observed that there are four parties which belong to the promoter group of the appellant company who has advanced money in the appellant for working capital purpose on which the appellants has paid interest @ 16% to 18% which is higher than the rate of interest paid so the other parties. 2.5 In the matter it was explained that the advances received from promoter group and relatives also have cost and different characteristics from the other borrowings such as:
1. 1. The funds borrowed from the promoters/relatives have no time stipulation Some time it is returned in a very short time to them, whereas there may be may not be any avenue for them to reinvest or refund the funds at their end. 2 Funds are made available by the promoters/relatives immediately on short notice and that too without any security being offered by the appellant For which there are possibilities of opportunity loss for the party too.
3. That the borrowing from the promoters/relatives has allied cost of borrowing to the appellant such as finance broker's commission processing fees, stamp duty and bank charges, prepayment penalties etc. as applicable in the case of bunk borrowings. That all these cost are being directly saved in the case of personal borrowing from the promoters/relatives.
5 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. 2.6 With respect to the loan taken from related parties, it was also submitted that the appellant has paid interest to loan parties after deducting TDS and the same interest has been offered by the parties as their income in the return of income filed for the year under consideration. 2.7 It was also submitted before the Ld AO that the appellant is engaged in real estate business and the financing in this type of business it very critical due to the stringent government policies and immaturity of market That considering the future prospect and current slack in the real estate sector, the hanks and financial institutions were not extending fresh loams easily. In such haphazard situation, it becomes necessary to tale borrowings from related parties. The funds from the related parties are raised immediately whenever the need arises. 2.8 It is further submitted that the real estate is a capital intensive sector and the developers need external rapport to finance their projects and to meet the requirements of the funds. The appellant has taken loans from various parties which are being repaid whenever there was availability of funds. The loan has been taken for the short term working capital needs the appellant that since banks and market borrowings. 2.9 That because immediate requirements of funds the interest charged parties is rate interest paid banks financial institutions. It is submitted that all these transactions with these parties are executed at the most competitive rates looking to the circumstances prevailing at time of the transaction. 2.10 The rate of payment interest varies from person to person and on the terms and conditions associated with the borrowing made. The business man is the best judge of his affairs and knows best way to run his business. It is a settled position in law that the AO cannot step into shoes and guide the assessee about the expenditure and the commercial expediency, reasonableness and justifiability of the expenditure has to be judged from the point of view of the businessman. 2.11 The appellant places reliance on the following judicialpronouncements which support the contention of the appellant company as under: a) Hon'ble Jurisdictional High Court of Madhya Pradesh in the case of Birla Gwalior (P) Ltd. Vs. CIT-(1962) 44 ITR 847 has stated that "it is for the assessee to judge as to what rate is reasonable. It is further stated when the income tax authorities have found that the borrowing transactions are not illusory or colorable and the capital is borrowed by the assessee for purpose of business and the amount of interest is paid. They have no jurisdiction to determine whether the rate interest to pay is reasonable or not and to disallow a portion of interest which has been paid.” b) Hon'ble ITAT, Rajkot Bench in the case of AC-3, Jamnagar vs. Sirish Magan Ravani (2013) 143 ITD 0025 held that "interest @ 18% in AY 2008-09 on unsecured loans of family cannot be said to be excessive or unreasonable u/s 40A(2)(b) of the Income Tax Act, 1961.”
6 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. c) Hon'ble Allahabad High Court in the case of Abbas Wazir (P) Ltd. Vs. CIT 265 ITR 77 has held that "even while invoking the provisions of section 40A(2) of the Act, the reasonableness of expenditure the purpose of business be judged the point of view of a businessman that of the revenue. The reasonableness must be looked into from businessman point of view.” d) Hon'ble Ahmedabad Tribunal in the case of Omkarmal Gaurishanker Vs. ITO (1991) 39 TTJ 0223 held that the interest paid to the relatives at the rate of 24% is be reasonable. e) Hon'ble ITAT, Ahmedabad in the case of Vipul Y. Mehta-vs-ACIT in ITA No. 869/Ahd/2010 wherein it was held that loan taken from the relatives cannot be compared with bank loan because loan from the relatives are without security, while loan from the bank is secured. f) Hon'ble Delhi Tribunal in the case of Ajanta Handtex P. Ltd. Meerut vs ITO ITA No.4573/Del/2015 for AY 2010-11 wherein it was held that ld. CIT (A) was not right in confirming the disallowance made by the AO on account of interest paid to the persons us 40A(2)(b) by holding it unreasonable and excessive and also restricting the interest payment to them @12%. 2.12 Further, the Learned AO failed to appreciate an important fact that the said interest was not claimed as deduction as the same was carried forward to subsequent year as part of cost of work in progress. The addition made is wrong for this reason as well. 2.13 Also, in the appellant con case in the immediately preceding year re AY 2012-13 in the order passed under section 1433) dated 27.03.2015 the Learned AO held that when all the cost are carried forward and deferred in work in progress then the finance cost on the same basis should also be deferred as it qualifies as the cost of the project and cannot be allowed as revenue expenditure. In view of the above facts and various judicial pronouncements. It is submitted that the provisions of section 40A(2)(b) are not attracted as the interest paid is not excessive and unreasonable, moreover the provisions are not at all applicable in the instant case as the said expenditure is capitalized in the project cost and not claimed as revenue expenditure. Therefore the addition of Rs. 14,50,421/- is wrong and one to be deleted.”
Considering the fact of the matter, the Ld. CIT(A) deleted the addition with the following observations:
“Through this ground of appeal, the appellant has challenged the addition of Rs.14,50,421/- made by the AO out of interest expenditure by invoking the provisions section 40A(2)(b). observed that the appellant has interest related @ 18% whereas to other parties 12% accordingly allowed the paid related parties 12% and disallowed the 7 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. remaining interest. The appellant submitted had borrowed funds from banks and parties purpose of development its township project on which total interest pad of 1,2592,446 was debited cost project development expenditure and cared forward as WIP and was not debited the profit and loss account. The appellant has filed the details of work in progress to substantiate that interest was included in work in progress and was not charged to the profit and loss account. The appellant further submitted that since the said interest expenditure was capitalized to work in progress and was not debited to the profit and loss account, the disallowance made by the AO was wrong and unwarranted. The appellant also submitted that funds are borrowed from related parties to fulfil immediate requirements necessitated out of business exigencies as bank borrowings and other market borrowings have their own limitation such as providing security, long drawn formalities and paper work and also restriction of loan amount based on the eligibility criteria as against private loans from related parties which are made available on demand without security and without any other formalities, where the interest payment is also the yearend unlike bank borrowings where the interest outflow is on monthly basis. Therefore, both the categories of loans are not comparable. 4.1.1 I have considered the facts of the case, plea raised by the appellant and finding of the AO. The appellant before AO as well as before me has taken a plea that the interest paid during the year was capitalized to work in progress and was not debited to the profit and loss account. On perusal of the profit and loss account filed by the appellant it is seen that no interest expenditure is debited to the profit and loss account and only a nominal amount on account of finance cost ie. bank charges of Rs. 63,094/- has been debited to the profit and loss account. Therefore apparently no disallowance of such interest, which has not been claimed by the appellant, ought to have been made by the AO. Further, there is also sufficient merit in the other contentions of the appellant that the two types of loan are not comparable. It is seen that the AO has also rot provided specific instances where the rate of interest paid by the appellant is lower. It is also seen that the appellant has filed the copies of income tax returns and computation of income of the related parties during the assessment proceedings to show that such parties have duly offered the said interest in their returns and have paid the taxes, whereas the appellant has incurred losses during the year under consideration. Therefore, payment of interest even if at all considered as excessive by the appellant cannot be viewed adversely. On these facts and circumstances, the addition made by the AO amounting to Rs. 14.50,421/- is Deleted. Therefore, the appeal on this ground is Allowed.”
The case of the assessee before us is this that the assessee claimed the interest expenditure as revenue expenditure in the immediate preceding year i.e. A.Y. 2012-13 and in the year under consideration has capitalized the finance cost as a part of the project cost under the work in progress which is evident from the working of the WIP as placed before the Ld. CIT(A) and before us as well, the same was not debited in the P&L account of the assessee.
8 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd.
Moreso, borrowings from bank have their own limitation, such as, providing security, long drawn formalities and paper work and also restriction of loan amounts based on eligibility criteria as against private loans from related parties which are made available on demand without any security and without any other formalities. Moreso, the interest payment is also at the year end to the related parties unlike bank borrowings where interest outflow is on monthly basis. The Ld. AO has not provided any specific instances where the rate of interest paid by the assessee is lower. On the other hand, the interests paid to those parties were also offered to tax by them. Relevant fact is this that the assessee has incurred losses during the year under consideration. The explanation rendered by the assessee as narrated hereinbelow seems to be acceptable, particularly, keeping in view of the aspect of commercial expediency, reasonableness and justifiability of expenditure incurred by a businessman for the business purposes. We find that the Ld. CIT(A) also took into consideration this entire aspect of the matter and found it justified in deleting the addition made by the Ld. AO, which, in our considered opinion, is just and proper so as to warrant interference. Thus, this ground of appeal filed by the Revenue is, thus, found to be devoid of any merit and hence dismissed.
11. Ground No.2: The deletion of addition amounting to Rs.12,39,574/- on account of disallowance of 5% of various expenses claimed by the assessee is under challenge before us.
We have heard the rival submissions made by the respective parties and perused the materials available on record.
9 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. 13. During the course of assessment proceeding, it was found from the trading and P&L account that the assessee has debited various expenses under different heads. The details whereof is as follows:
Sl. No. Particulars Amount (in INR) Under ‘Development Expenses’ head 1. Site-Other expenses 1,27,02,954/- 2. Direct-Indirect expenses (Ashirwad) 3,05,183/- 3. Development expenses 89,21,133/- Under ‘Work in progress’ head 4. Garden development expenses 12,57,512/- Under ‘Operating and other expenses’ head 5. Business promotion expenses 16,04,708/- Total 2,47,91,490/- 14. Upon verification of the books of account of the assessee on text check basis, it was found that some of the vouchers were handmade and bill was not raised in regard to some amounts. Certain expenses were not properly vouched in the books of account, neither vouchers were available. In the absence of valid documentation according to the AO, the cross verifications were not possible and 5% of the said expenses to the tune of Rs.12,39,574/- was disallowed by the Ld. AO, which was, in turn, deleted by the Ld. CIT(A) in appeal. Hence, the instant appeal before us.
Before the First Appellate Authority, the assessee submitted that there was three items mainly development expenses, work in progress and operating and other expenses incurred by the assessee out of which development expenses and garden development expenses were forming part of work in progress and were not claimed as deduction out of the income of the current year. It was further placed on record that the P&L account establishing the fact of claiming cost of purchase to the tune of Rs.12,27,133/- out of the total cost of purchase including material,
10 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. labour, development and other expenses as per the details of work in progress submitted by the assessee. The expenses considered by the Ld. AO under the head development expenses and under the head work in progress were never claimed as deduction but the same was capitalized in the work in progress by the assessee company. In that view of the matter, the disallowance has been claimed to be wrong. Apart from that it was contended by the assessee that the business promotion expenses of Rs.16,04,708/- debited to the P&L account included in operating and other expenses. The relevant books of accounts alongwith bills and vouchers were duly produced before the Ld. AO, during the course of assessment proceeding which was subjected to test check. It was further explained before the Ld. AO that the said expenses were properly incurred and also accounted for. Further that considering the nature and business of the assessee, the said expense has been claimed to be justified. Those expenses were incurred upon prior approval of the management. Further, the case made out before the First Appellate Authority is this that while disallowing the expenses, the Ld. AO has not specified defect in the claim neither discovered nor discussed any inappropriate claim. As the expenses were wholly and exclusively for the business purposes, the disallowance of the said expenses on estimated basis ignoring the explanation made by the assessee is not sustainable, particularly when, the expenses debited under the head ‘development expenses’ and under the head ‘garden development expenses’ were carried forward as cost of project and classified as work-in- progress and the same were not claimed as revenue expenditure in the P&L account. Series of judgment in support of assessee’s case were cited before the First Appellate Authority. Those are as follows: i. Lavrids Knudsen Maskinfabrik (India) Ltd. Vs. ACIT, reported in (2006) 102 TTJ 0882)
11 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. ii. Sonic Biochem Extraction P. Ltd. Vs. ITO in ITA Nos. 8136, 8138 & 8137/Mum/2011. iii. Sanghi Brothers (India) P. Ltd. vs. Department of Income Tax in ITA No. 286/Ind/2011 iv. J. J. Enterprises vs. CIT, reported in 254 ITR 216 (SC) v. Friends Clearing Agency P. Ltd. v. CIT, reported in 332 ITR 269
Considering the entire aspect of the matter, the Ld. CIT(A) deleted the addition with the following observation: “4.2.1 I have considered the facts of the case, plea raised by the appellant and findings of the AO. On perusal of the profit and loss account filed by the appellant it is seen that the appellant has claimed cost of purchases only of Rs. 12,27,133 (Rs. 14.23,91,726/- minus Rs. 14,11,64,593/-). The appellant has also debited operating and other expenses, the details of which have also been filed by the appellant wherein an amount of Rs 16,04,708/- is debited as business promotion expenses. Apart from this, no other expenses as tabulated by the AO in Para 5 on page 3 of the assessment order, is debited to the profit and loss account. The disallowance contemplated by the AO cannot be made in respect of items which are not debited to the profit and loss account. Further it is also seen that the AO has made general remarks while making the adhoc disallowance of 5% and has not given any specific instance of improper vouchers or missing supporting bills. Therefore, the AO was not justified in making adhoc disallowance and thus, addition made by the AO amounting to Rs. 12,39,574/- Deleted. Therefore, the appeal on this ground is Allowed.”
The crux of the case is this that the assessee has claimed the cost of purchase tune of Rs.12,27,133/- in the P&L account including material, labour, development and many other expenses. Out of the total expenses of Rs.2,47,91,490/- as reflecting in the order passed by the Ld. AO only an amount of Rs.16,04,708/- was debited to the P&L account as business promotion expenses. The development expenses and garden development expenses formed part of work-in-progress which is evident from the paper book filed before us, which was also considered by the First Appellate Authority and the same was not claimed as deduction out of income of the current year. It is a fact that the disallowance cannot be made in respect of 12 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. item which is not debited in the P&L account. Moreso, in the absence of any specific instance of the defects pointed out by the Ld. AO, the adhoc disallowance of 5% by making general remarks cannot be said to be justified as has been rightly pointed out by the Ld. CIT(A) while deleting addition without any ambiguity so as to warrant interference. This ground of appeal is, therefore, found to be devoid of any merit and thus dismissed.
18. Ground No.3: Deletion of addition of Rs.5,29,80,021/- on account of unexplained unsecured loan and interest paid thereon is the issue before us.
We have heard the rival submissions made by the respective parties and perused the materials available on record.
The Ld. AO made addition of Rs.5,29,80,021/- on account of unexplained unsecured loan and interest paid thereon. The brief facts leading to this case is this that the appellant had obtained unsecured loan during the year under consideration from the parties namely M/s. Konica Gems (Prop. Mr. Amit Sand) and M/s. Dhankuber Exports Pvt. Ltd. The details whereof is as follows:
Name Party’s address PAN Loan Interest paid Closing Received & TDS Balance M/s. Konica Kohli House, BHBPS1401E 80,00,000 Interest 84,31,062 Gems (Prop. Ground Floor, shop Rs.4,78,958/- Mr. Amit No. 03, 32/36, (-) TDS Sand) Benham Hall Lane, 47,896/- Mumbai M/s. 537, Commodity AADCD3215G 4,20,00,000 Interest 4,42,50,957 Dhankuber Exchange Building, Rs.2501063/- Exports Pvt. APMC Market, Sec. (-) TDS Ltd. – 19, Vaashi, Navi 2,50,106/- Mumbai 13 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd.
The copies of loan confirmation, balance sheet, acknowledgement, Income Tax Return of these parties for the year under consideration, the bank accounts reflecting loan transactions extended to the appellant and corresponding loan account details, books of accounts of the appellant were duly furnished before the Ld. AO in response to the enquiries made under Section 133(6) of the Act in order to establish the identity, creditworthiness of the loan creditors and genuineness of the transaction. As the service to the notice in respect of two parties issued under Section 133(6) of the Act returned unserved, the Principal Officer of both the cases were directed to be produced by the assessee. Subsequently, replies were sent by those two parties. In fact, the details of speed post tracking numbers were also provided by the parties, tracking of which establishes the fact of delivery of post on 28.03.2016 at the Office of Ld. AO. The further fact placed by the assessee is this that when the parties went to submit their replies on the appointed date on 28.03.2016, they were informed that the Ld. AO was busy in other search assessment matters and the same were submitted and accepted by the Ld. AO on 29.03.2016 but no order sheet entry was made to that effect. It was the fact that the parties were not been produced by the assessee due to unwillingness expressed by them to come down to Indore, but the Ld. AO also did not take any further action in this regard. Relevant to mention that all documents were placed on record which remained uncontroverted. The identity and creditworthiness stood established from the relevant documents so placed by the assessee, particularly, the Income Tax Returns accompanying annual accounts. The transactions stood confirmed by the lender parties and the source of loan transaction by filing the bank statement of the lender parties were duly approved by the assessee as the case made out by the assessee before the First Appellate Authority. The assessee further submitted following before the First Appellate Authority:
14 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. 4.15 The lenders had independently confirmed the transactions, which are through normal banking channels. From the bank accounts of these lenders filed, it was evident that there are no cash deposits in these accounts. The bank account operation is substantial in these cases. These all facts not only establish the creditworthiness of the investors but also genuineness of the transactions. 4.16 With regard to the learned AO's observation that on the copy of return of income of M/s Dhankuber Exports Pvt. Ltd. the address is found of Surat whereas in the details furnished by the appellant the address if found of APMC Market, Vashi, Navi Mumbai. It is submitted that M/s Dhankuber Exports Pvt. Lid is a company registered under the Companies Act having a separate and distinct Company Identification number (CIN) as reflected in the company master data. The address of the registered office of the company was also reflected in the company master data at MCA site. It is further submitted that the company is an assessee's with the Income Tax Department and having a valid PAN no. issued by the department to the company. The company has filed their return income as evident from the E-filing acknowledgments. These returns were signed by the directors, whose PAN was reflecting on these E-filing acknowledgements. 4.17 Further, in the concluding para of the assessment order, it is stated that the appellant could not prove the creditworthiness of M's Konica Gems (Prop Amit Sand) It is submitted that the ITR of Shri Amit Sand have already been filed before the Learned 40 by the appellant company as well as by the lender from which a reasonable opinion can be formed that Shri Amit Sand having reasonable wealth to extend loom to the appellant Further, the lender is an assessee's with the Income Tax Department and regularly filing income tax department 4.18 That the appellant has discharged his liability and then that upon the appellant. That of the loan creditor are identified and it is established that they have given loun, then the amount received by the appellant would he regarded as capital receipt however if the appellant offers no explanation whatsoever or the explanation offered is not satisfactory then only provisions of section 68 may be invoked which is not the case here at all 4.19 With due respect, it is submitted that the allegation that the appellant has infused its own money in the grab of unsecured loon is without any basis and not correct and merely on the basis of conjecture or surmises. It is also undisputed fact that the real estate project of the assessee was under construction phase during the your under consideration and there were very nominal sales as also evident from the profit and loss account. Therefore there was no occasion for the company to have generated any unaccounted money which could have been infused in the grab of unsecured loans as alleged by the AO. 4.20 The appellant submits that it has obtained genuine unsecured loan from these lenders. The appellant has also paid the interest @ 12% on hock the loan accounts and applicable TDS have been deducted and paid to the credit of the reverse act Interest on loan account has been credited an the yearend in the account of loan parties and 15 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. payments were made to both the parties immediately in the subsequent month on 17.04.2013 which further substantiate the genuineness of the transaction. 4.21 The Learned AO at page 4 of the assessment order stated that from the copy of bank account statement furnished by the loom creditors, it is seen that the day when sum of money was transferred to the account of assesses that either an identical sum of money or near about money that sum of money is received in the bank accounts of the loan creditors. It is submitted that both the lender creditor having substantial business activity during the year under consideration and there are no cash deposits in these accounts. The bank account operation is substantial in these cases. These all facts not only establish the creditworthiness of the investors but also genuineness of the transactions. The appellant company produced all the relevant documents to prove the genuineness of the transactions and the primary onus on the appellant company is discharged. 422 The Learned AO further stated that from the perusal of audit report of M/s. Dhankuber Exports Pvt. Ltd. it is noticed that the share capital of this company is only Rs. 1,00,000/- and reserve and surplus is Rs. 3.58.14 While the turnover of the company is Rs. 2,78,02,59,789/- and the total purchase of Rs 2,26,96,66,261/- but the company has shown its net profit of Rs. 2,71,946/- only which comes to 0.009% only despite the facts that this company is showing its business as trading of polished diamonds, rough diamonds etc. it is submitted that the said lender has substantial business activity and the lender party is regularly filing its income tax return with the income tax department. A perusal of the financial affairs will show that the company is engaged in the business of gold jewellery, polished and rough diamonds and color stone and was also currying huge inventories of such items. Also, the appellant company produced all the relevant documents to prove the genuineness of the transactions and discharge its burden. Therefore even if the Learned AO is having any doubt that the fender party is showing low profit then, at best the 40 could have referred the matter to the AO of the lender party. 4.23 It is submitted that undue emphasis has been laid by the AO as to how both these lenders came into contact with the assessee. At the outset it is submitted that no such requirement was ever communicated to the appellant. In this respect it is submitted that both the lenders are closely connected to each other, which fact is evident not only from the nature of business carried on by them which is dealing in Gems and Jewellries, but is also evident from their respective bank accounts wherein there are frequent transactions between both the lenders. This fact is categorically coming out from the bank statement of Mix Konica Gems which are enclosed at page no 104 to 105 Further one of the director of the assessee company Mr. Omprakash Agrawal alias Mr. Omprakash Goyal was very well known to Mr. Amit Sand proprietor of M's Konica Gems through whom these loans were arranged from Mix Konica Gems and also from Mix Dhankuber Exports Pvt. Ltd. 4.24 The appellant also wishes to place on record some of the other crucial fact that Mix Dhankuber Exports Pvt. Ltd has also shown the interest earned by it from the appellant as its income and has also claimed the TDS thereon which fact is evident from 16 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. the copy of computation enclosed at page no. 57 to 57 wherein the TDS deducted by the appellant company and the interest paid by it are also reflecting. Further this company has earned huge interest income of Rs. 2,14,89,722/- as evident from the schedule of other income enclosed at page no. 81. 4.25 The AO has also stated that the financial of Mr. Amit Sand proprietor of M's Konica Gems were not filed by the appellant. It is submitted that the appellant was informed by Mr. Sand that he has already complied with the enquires made u/s. 133(6) by the AO. A copy of the financial of Mr. Amit Sand for FY 2013-14 are enclosed at page no. 104 to 110, which were also filed by the appellant during the subsequent assessment proceedings of AY 2014-15 before the AO A perusal of these financial will reveal that Mr. Amit Sand was also engaged in the similar business of trading in cut and polished diamonds and color stones and has a huge turnover of above 400 Lacs under these circumstances his creditworthiness also stands substantiated 4.26 It is further submitted that the appellant company has properly explained the transaction of loans received during the year, it has established the identity which is not disputed by the Learned AO and above all the appellant also established the creditworthiness of both the lenders as well as the genuineness of impugned transactions. However, without pointing out any defect in the documents filed by the appellant for substantiating the creditworthiness and establishing the genuineness of the transaction, without discussing the merits of the case and without pointing out as to what additional information or details was required to be done, the Learned AO made addition according to his own wisdom, by stating that the loan received from M/s Dhankuber Exports Pvt. and Konica Gems is not a genuine transactions. It is pertinent to mention that the Learned AO has failed to explain as to how the appellant company could not establish the genuineness of the transaction without pointing out any defects in the submission made and documents furnished during the assessment proceedings. Not only the source was explained but also source of source was very well established beyond any doubt.”
The assessee relied upon the following judgments:
i. Orissa Corporation (P.) Limited, reported in 159 ITR 78 (SC) ii. CIT vs. Metachem Industries, reported in 245 ITR 160 (MP) iii. CIT vs. Peoples General Hospital Ltd., reported in (2013) 356 ITR 65 (MP) iv. Ashokpal Daga (HUF) vs. CIT, reported in 220 ITR 452 (MP) v. CIT vs. Barjatiya Children Trust, reported in 225 ITR 640 (MP) vi. ACIT vs. M/s. Ariba Foods Pvt. Ltd. in vii. CIT vs. Ranchod Jivabhai Nakhava, reported in (2012) 208 Taxman 35 (Guj)
17 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. viii. DCIT vs. Rohini Builders, reported in (2003) 182 CTR 373 (Guj) ix. Aseem Singh vs. ACIT, reported in (2012) 19 TTJ 52 (ITAT, Indore) x. Umesh Electricals vs. ACIT, reported in (2011) 131 ITD 127 xi. Saraogi Credit Corporation vs. CIT, reported in (1976) 103 ITR 0344 (Patna HC) xii. Addl.CIT vs. Bahari Brothers, reported in 154 ITR 244 (Patna HC) xiii. Nemichand Kothari vs. CIT, reported in 264 ITR 254 (Gauhati HC) xiv. DCIT vs. Smt. Namita Patwa, reported in (2018) 32 ITJ 123 (ITAT, Indore)
The Ld. CIT(A) while dealing with this issue categorically analysed the observation made by the Ld. AO in the following manner:
“4.3.2 The appellant further submitted that the detailed discussion of the financial documents of the lender in the assessment order by the AO itself substantiate its creditworthiness. With regard to M/s Konica Gers Proprietor Mr. Amit Sand, the appellant submitted that the income tax return of Mr. Amit Sand along with his balance sheet and bank statement were filed by the appellant, which documents substantially establish the identity as well as creditworthiness of the lender. Further, both the lenders have also confirmed their transactions. The amounts were borrowed by the appellant for the purpose of his business on which interest has been paid and TDS has been deducted. Further, the transactions are through normal banking channels and the bank account of the lenders it can be seen that there are no cash deposits in these accounts and the banking operations are also substantial in these cases. The appellant has also submitted that there are also repayments of the part of these loans in subsequent years. All these facts substantiate the genuineness of the loan transactions. The appellant has placed reliance on various decisions and submitted that it has sufficiently discharged its onus and has established the identity and creditworthiness of the lenders and also the genuineness of the transactions, therefore, addition made by the AO u/s 68 of the loan amount and the disallowance of interest is wrong. 4.3.3 The appellant has further submitted that the AO has placed undue emphasis as to how both these lenders came into contract with the assessee, however no such requirement was ever communicated by the AO to the appellant during the assessment proceedings. It is further stated that both the lenders ie. Ms Konica Gems and M/s Dhankuber Exports Pvt. Ltd. are in the business of trading of Gems and jewelleries and are closely connected to each other. Referring to the ITR of M/s Dhankuber Exports Pvt. Ltd. the appellant submitted that interest earned by it from the appellant has been shown as its income and has also claimed the TDS thereon
18 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. With regard to the observation of the AO that the financial of Mr. Amit Sand proprietor of Konica Gems were not filed by the appellant, the appellant submitted that it was informed by Mr. Sand that he has already complied with the enquiries made u/s 133(6), however, his financials were also filed by the appellant during the subsequent assessment proceedings of AY 2014-15 before the AO and have also been discussed by the AO in the assessment order of AY 2014-15. It is also the case if the appellant that the exhaustive requirement regarding the loan creditor was communicated to it at the fag end of the assessment proceedings on 23.03.2016 fixing the date of compliance on 28.03.2016, in reply the appellant filed written submission. 4.3.4 I have carefully taken into consideration the observations made by the AO in the assessment order and also the written submissions of the appellant as well as the documentary evidences on record. It is seen that the appellant has taken loan of Rs. 420 Lacs from M/s Dhankuber Exports Pvt. Ltd. and Rs. 80 Lacs from M/s Konica Gems Proprietor Mr. Amit. Sand. The AO required the assessee to substantiate the transactions and also issued notice u/s 133(6) to both the parties at multiple addresses available with the AO. Notices issued at one of the addresses of both the parties returned unserved, however, notice issued at the other addresses was served and both the lenders also filed the documents including loan confirmations through speed post which were received by the AO in Dak on 28.03.2016. This fact is also acknowledged by the AO on page 4 of the assessment order. The appellant has also filed the loan confirmations of both the parties and copy of ITR, audited balance sheet, profit and loss account and accompanying documents, which fact is also stated by the AO on page 4 of the assessment order 4.3.5 The AO has discussed the audit report of M/s Dhankuber Exports Pvt. Lid at length in the assessment order and the turnover of this entity in stated to be 278.02 crores and the total purchase is stated to be 226.97 crores. The AO has also noted that the company is showing the business of trading of polish diamonds and rough diamonds and it has trade payables of Rs. 158.34 crores and trade receivables of Rs. 95.95 crores Further the said company has no loan liability but has advanced loans of Rs. 60.10 crores. It has also shown other income of Rs 2.15 crores anal the net profit shown is Rs 2.72 Lacs. From the ITR of Ma Dhankuter Exports it is seen from the details of tax deduction at source of the sand company that it has offered interest income of Rs 25,01,063/- received from the appellant and also claimed TDS of Rs. 250,106 It is also sen that trial interest received of this company are to the tune of Rs. 206,67 Lacs and TDS thereon is Rs. 20.67 Lacs From the tax audit report and the annual accounts of this company it is evident that the company is engaged in the business of trading of polished diamonds, rough diamonds, gold jewellery and color stone having substantial turnover and other income. There are substantial transactions in its bank account with other diamond and jewellery concerns. 4.3.6 I find that the AO has also carried out online verification of the party through internet from where the address of this entity was found as Kohli House, Ground Floor, Shop No. 3, 32/36, Benham Hall Lane Mumbai The AO further noted that as per the confirmation of Konica Gems this is the address of Konica Gem which is a proprietary concern of one Shri Amit Sand. With respect to the observation of the AO that the acknowledgement of return of income, confirmation letter and copy of 19 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. relevant part of bank account statement of these two persons were received in Dak on 28.03.2016 and the envelopes in which these information were received were prepared by the same person and have posted from same place though the address of these two person are different, it is seen that both these parties are related to each other. This is evident from the observations of the AO himself, wherein it is stated by the AO that while searching from the internet the address of Dhankuber Export Pvt. Ltd. is the same address as that of Konica Gems mentioned on the confirmation letter of Konica Gems. Further from perusal of the bank statements of both these entities filed in the paper book it is seen that there are frequent transaction between both these lenders. Therefore, apparently both these lenders are closely connected and the observations of the AO in this regard are too farfetched 43.7 On perusal of written submissions filed by the appellant during the assessment proceedings it is seen that notice us 142(1) was issued on 11.03 2016 and served on 17.03.2016 fixing the date of compliance on 17.03.2016. The appellant filed a letter on 18.03.2016 wherein the details of loans taken by the appellant along with confirmation letter, copy of ITR and copy of bank statement of M/s Konica Gems having PAN: PHPBS1401E were filed. The appellant has also placed on record the financial of Mr. Amit Sand proprietor of Konica Gems for the year ended for March 2013 and also March 2014, which were also filed before the AO in the assessment proceedings of AY 2014-15. It is seen that he is also dealing in the trading business of diamonds and stones and is having substantial business turnover. It is seen that Konica Gems is a proprietary concern of Mr. Amit Sand and as per his balance sheet for FY 2013-14 the sales of diamond is 399.33 Lacs and purchases are Rs. 445.96 Lacs. He has also shown interest income of Rs. 10.91 Lacs on loans and advances and a net profit of Rs. 6.45 Lacs. Sundry debtors are shown Rs. 207.51 Lacs and loans given are Rs. 224.15 Lacs. I find that the financial of M/s Konica Gems have also been discussed by the AO in the assessment order of AY 2014-15. There are substantial transactions in his bank account and there are no cash deposits made before advancing loans to the appellant. It is also seen that the AO has referred to the bank account statement of both the lenders on page 4 of the assessment order and there is no mention of any cash deposits in these accounts. However, it is stated by the AO that unless the source of credits in the bank account of the lenders is verified, the transactions by these persons with the appellant cannot be said genuine. On perusal of the bark statements of both the lenders it is evident there are substantial transactions, majority of which are from other persons engaged in the similar business of diamond jewellery and gems as evident from the names of such parties appearing in the bank statements. Further, when the AO was in possession of the other relevant details of the lenders such as their PAN, copies of their ITRs, bank account details etc and in case the AO had any doubts regarding the lenders or their transactions, the same could have been get verified from the respective AOs of the lenders. There appears no valid ground to treat the transactions as non-genuine only for this mason more so when there is no other adverse material regarding the lenders or on record.”
We have carefully considered the order passed by the Ld. AO and the Ld. CIT(A) as well. We have also took into consideration the different steps taken by 20 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. the assessee in order to justify the identity of the lenders, creditworthiness of the lenders and the genuineness of the transaction. From the detailed discussion made hereinabove, it can be gathered that the entire set of documents in respect of these lenders were duly filed by the lenders in response to the notice issued to them under Section 133(6) of the Act. The lenders confirmed their transactions. It appears from the documents that the amounts were borrowed by the appellant for business purposes and interest was paid and TDS was further deducted. Moreso, the transactions were made through normal banking channels. Further that, the financial statements furnished by those lenders establishing the substantial turnover and other income earned by them and substantial transaction in its bank account in the business of polished diamonds, rough diamonds and other jewellery concerns. As the assessee furnished all the details in relation to the identity and creditworthiness of the lenders and genuineness of the transaction, the prima facie liability cast upon the assessee to prove the genuineness of the transaction and to establish the identity and creditworthiness of the lenders stood discharged. Apart from that, when the lenders are found to be regular tax assessee and loan was given through account payee cheques and further confirmed the transaction in other way round when the assessee has discharged the liability of explaining the genuineness of the transaction mainly on suspicion, addition is not justified specially when loans were repaid, the details whereof has also reflecting at page No. 33 of the order passed by the Ld. CIT(A). At the cost of repetition, we note that the lenders have furnished the loan confirmation, copy of bank account and proof of filing of return in order to establish their identity of such creditors. Once, the loan has been taken through banking channel by cheque and such loans were subsequently repaid by the assessee evident from loan confirmation letter and ledger statement of lender company duly accompanied by bank statement and the appellant had further paid interest to the lender companies on the loans borrowed, the genuineness of the 21 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. transactions need not to be questioned. The financial statement of the creditors also does not clarify anything against those lenders. Relevant to mention that the company had not only given loans to the assessee but to other parties also. Thus, the creditworthiness is also found to be in favour of the lenders in granting loan to the assessee. In that view of the matter, the deletion of addition made by the Ld. CIT(A) is found to be justified and thus, the same is hereby confirmed. The ground of appeal preferred by the Revenue is found to be devoid of merit and thus dismissed.
for A.Y. 2014-15 25. Ground No.1 for A.Y. 2014-15 is identical to the Ground No.1 for A.Y. 2013-14 and in the absence of any changed circumstances the same shall apply mutatis mutandis. Thus, Ground No.1 of Revenue’s appeal for A.Y. 2014-15 is also dismissed.
Ground No.2 & Ground No.3 for A.Y. 2014-15 are inter connected and issues are identical to that of Ground No.3 of Revenue’s appeal for A.Y. 2013-14 and in the absence of any changed circumstances the same shall apply mutatis mutandis. Thus, Ground Nos.2 & 3 of Revenue’s appeal for A.Y. 2014-15 are also dismissed. for A.Y. 2017-18 27. The deletion of addition of Rs.69,64,144/- on account of unexplained interest expenditure is the issue before us.
During the assessment proceedings, it was found that the assessee took unsecured loans and interest paid thereon to the parties, namely, M/s. Dhankuber Exports Pvt. Ltd., M/s. Konica Gems and Moxa Diamond Pvt. Ltd. While dealing with the issue, it is found that the Ld. AO took into consideration the addition made to the assessee in respect of the unsecured loans taken from these parties for A.Y. 2014-15, wherein the interest paid to those companies were also disallowed on account of wrong claim of expenditure and was added to the total income of the assessee under Section 68 of the Act. As the assessee was treated by the Ld. AO in earlier years as bogus concern for the year under consideration solely relying upon this particular fact that the interest paid to this concern was also disallowed and added to the total income of the assessee to the tune of Rs.69,64,144/- under Section 69C of the Act on account of unexplained expenditure. The same was further charged to tax under Section 115BBE of the Act.
In appeal, the same was deleted by the First Appellate Authority. Hence, the instant appeal before us.
The case of the assessee before us is this that Section 69C of the Act is applicable only when there is some expenditure incurred by the assessee and the source whereof is not disclosed or explained. In the event, such expenditure is recorded in the books of account, the invocation of provision of Section 69C of the Act is not permissible. The Ld. AO did not raise any question to explain the source of interest expenditure paid to the loan parties and solely on the fact that the addition on account of unsecured loans taken from these parties were taxed under 23 to 230/Ind/2021 (ACIT vs. Sarthak Innovation (P) Ltd. Section 68 of the Act in the earlier years, the interest paid for the year under consideration to this concerns has been disallowed. The Ld. AO has not fulfilled the pre-condition invoked in the provision of Section 69C of the Act so as to ask the assessee company to explain the source of said interest expenditure. The addition under Section 69C of the Act is wrong and bad in law and thus liable to be quashed. He has relied upon the judgment passed by Mumbai ITAT in case of Fancy Wear vs. ITO in ITA No. 1596 & 1597/Mum/2016 dated 20.09.2017.
So far as the addition made under Section 68 of the Act for A.Ys. 2013-14 & 2014-15 is concerned, it is the case of the assessee that substantial amount of loan has been repaid during the year and the disallowance of interest made in this particular year in question is purely consequential.
Upon perusal of the entire set of documents, it appears that the interest expenditure has been recorded in the books of account. Further that, from the details filed by the assessee, it further appears that amount of Rs.2,20,00,000/-, Rs.25,00,000/- and Rs.25,81,006/- have been repaid to M/s. Dhankuber Exports Pvt. Ltd., M/s. Konica Gems and Moxa Diamond Pvt. Ltd. Moreso, the addition made under Section 68 of the Act for A.Y. 2013-14 & 2014-15 on account of loans received from these parties and the consequential disallowance of interest paid to those parties for A.Y. 2013-14, 2014-15 & 2015-16 had already been deleted by the Ld. CIT(A) in the case of the assessee. Therefore, as the addition made under Section 68 of the Act in respect of loans on which interest was disallowed and also similar disallowance of interest stood deleted in earlier years, the disallowance made by the Ld. AO in the year under consideration which is purely consequential in nature, rightly found liable to be deleted by the Ld. CIT(A) without any ambiguity so as to warrant interference. The order of deletion of addition is,
In the combined result, appeals filed by the Revenue in all three years are dismissed.
This Order pronounced on 30/03/2023
Sd/- Sd/- (BHAGIRATH MAL BIYANI) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Indore; Dated 30/03/2023 S. K. Sinha, Sr. PS True Copy आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT 4. आयकर आयु�(अपील) / The CIT(A)- 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Indore 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,
(Sr.PS) ITAT, Indore