ITO 1(3), AYKAR BHAWAN ANNEX, INDORE vs. M/S. FAIRDEAL ENGINEERING & BODY BUILDING CO. (P) LTD. , KOLKATA

आदेश/ O R D E R

Per B.M. BIYANI, AM:

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 2 of 13

“1.Whether on the facts and in the circumstances of the case, the ld. CIT(A) was justified in deleting the addition of Rs.24,75,642/- made by the AO by calculating the profits @8% without appreciating the factual position of the issue? 2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in deleting the addition of Rs.1,29,60,000/- made by the AO u/s 68 which was shown as unsecured loan from a company whose creditworthiness has not been established and genuineness of transaction was not proved?

3. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in deleting the addition of Rs.13,86,067/- made by the AO u/s 68 which was shown as sundry creditors without any verification thereof? 4. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in deleting the addition of Rs.13,86,067/- relying on remand report while no such finding for giving relief was given in the remand report of assessing officer.” 2. When the case was called, none appeared on behalf of assessee nor any adjournment application filed. However, the Ld. DR representing the case was ready to argue and further submitted that the case can be decided on the basis of material held on record and after hearing him. Accordingly, the hearing was proceeded.

Ground No. 1:

“7. Ground Nos. 3 &4:-Both the grounds of appeal have been raised against the action of the AO in making an addition of Rs.24,75,642/- in the appellant's income by estimati.ng net profit of the appellant @ 8% of the sales. The AO has discussed the issue at page no. 2 of the assessment order. It has been brought out by the AO that since during the course of assessment proceedings, the appellant could not produce its books of account, bills vouchers etc., the book results shown by the appellant could not be verified. Thus, the AO held that the income shown by the appellant is not acceptable. Finally, the AO made an addition of Rs.24,75,642/- in the appellant's income by estimating the net profit of the appellant @8% of the sales of Rs.3,09,45,520/- as shown by the appellant. 7.1 I have gone through the assessment order, the written submissions filed by the appellant, the documentary evidences placed on record, the remand report of the AO on the issue and the counter comments filed by the appellant. 7.2 It has been noticed that the addition of Rs.24,75,642/- has been made by the AO in an assessment passed ex-parte under the provisions of s.144 of the Act. The AO, vide his letter dated 14/11/2017, has submitted his remand report on the subject issue wherein the AO has stated to have 'verified the books of account of the appellant company along with the bills, vouchers etc. during the course of the remand

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 4 of 13 proceedings. The AO in his remand report, has given his detailed observations as regard to examination of the sales register, ledgers, purchase, purchase bills, stock register etc. The AO has finally arrived at a conclusion that the books of account are duly maintained by the appellant and the profit &loss account and balance sheet are based on such books of account only. For the sake of ready reference, the relevant part of the remand report of the AO dated 14/11/2017 is being reproduced as under: "In light of the contention of the assessee and your above referred letter an opportunity was afforded for production of books of accounts and vouchers. In compliance Shri Jayant Lodha, CA and Shri Rahul Gaulecha, Account Manager of the company attended on 17-09-2016. The books as maintained on the computer in Tally and printouts of the same were produced for examination. The books and vouchers produced were test checked. The observations of the verification: • As per the audited accounts the profit and loss account shows revenue from operations of Rs.30945520/-, examination of the sales register produced shows gross sales of Rs. 36221944/-,examination of the Ledger shows that this figure includes excise duty paid, education cesson excise, cesson excise duty and output VAT. • Under the head of other income the assessee has shown discount receipt of Rs. 11508/-. This is claimed to be the discount received from HPCL on purchase of lubricant oil. The same has been passed on to the assessee through credit notes at the end of the year. • Another head in which the assessee has received as freight charges received of Rs. 604270/- it is submitted that the assesseeis reimbursed the cost of transportation of material to the Railways and this is reflected under this head Ledger of the same has been submitted. These expenses are not billed separately by the assessee but as part of the bill and reimbursed at a fixed rate as per their rate contractor with the Railways. • As the profit and loss account there are purchases of Rs.24921012/-. As per the Ledger submitted that there are a raw material purchased of Rs.22907787/- and consumables purchased of Rs. 2013225/-. Bills of purchase have been produced for examination. • For valuation of inventory of opening stock and closing stock quantitative details chart has been submitted which shows the raw material details and finish. goods details. As per the same

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 5 of 13 the assessee had a raw material closing stock of 170208kgs, finished goods of 41513nos. and scrap of 746 kgs. In light of these facts the books of accounts are maintained by the assessee and the profit and loss account and balance sheet submitted are based on these documents.” 7.3 In these circumstances, since the AO has duly verified and admitted the book results shown by the appellant in its audited financial statements, there is no ground to sustain the estimation of net profit by the AO in the impugned assessment order. Thus, the addition of Rs.24,75,642/- so made by the AO in the appellant's income is hereby deleted, Accordingly, both the grounds of appeal are allowed.

7. Before us, Ld. DR dutifully supported the assessment-order and prayed to uphold the action of Ld. AO. But, on a careful consideration of the order of Ld. CIT(A) as reproduced above, we note that the Ld. AO has himself conceded in the remand-report that he has verified the books of account of assessee and the profit declared by assessee was based on those verified books of account. Considering such clear admission by Ld. AO, the Ld. CIT(A) has deleted the addition. The Ld. DR could not contradict this aspect. Hence, we find no infirmity in the action of Ld. CIT(A) in deleting the addition which is very much based on the acceptance given by Ld. AO himself in remand-report. Being so, we find the ground raised by revenue as meritless and dismiss the same.

Ground No. 2:

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 6 of 13

“9. Ground Nos. 6(a) &6(b):- Both the grounds of appeal have been raised by the appellant against the action of the AO in making an addition of Rs.1,29,60,000/- in the appellant's income by invoking the provisions of section 68 of the Income-Tax Act, 1961 on account of unsecured loan claimed to have received by the appellant from a company namely M/s Drastic Forging Pvt. Ltd. The AO has given his findings on this issue at first para on page no. 3 of the assessment order. It has been brought out by the AO that since during the course of assessment proceedings, the appellant has not furnished the necessary documentary evidences in support of the subject loan, the source of such credit has remained to be established. Finally, the AO made an addition of Rs.1,29,60,000/- in the appellant's income under section 68 of the Income-Tax Act, 1961. 9.1 I have gone through the assessment order, the written submissions filed by the appellant, the documentary evidences placed on record, the remand reports of the AO on the issue and the counter comments filed by the appellant. It has been found that the addition has been made by the AO for the reason that the appellant could not furnish the necessary documentary evidences to establish the identity and creditworthiness of the loan creditor and the genuineness of the loan transaction. During the course of the appeal proceedings, the appellant has furnished various documentary evidences such as loan confirmation-letter of the loan creditor, copy of audited financial statements of the lender, copy of acknowledgment of income-tax return of lender, copy of bank statement of the lender for the relevant period, copy of the PAN card of the lender and copy of Certificate of Incorporation of the lender company. Since the documents were furnished by the appellant for the first time during the course of appeal proceedings, the same were forwarded to the Assessing Officer for necessary verification. However, it has been noticed that the AO, in his remand report dated 14-11-2017, had not made any comment on the documentary evidences furnished by the appellant on the issue under consideration. In such circumstances, through this office letter dated 08/03/2019, the AO was issued directions under the provisions of section 250(4) of the Income Tax Act,1961 for making necessary enquiry on the aforesaid issue and submit his specific report on the identity, genuineness of transaction and creditworthiness of the loan creditor. Accordingly, in compliance to the directions so issued, the AO, vide his letter dated 31/07/2019, submitted his remand report incorporating his specific comments on the addition of Rs.1,29,60,000/- The remand report has also been reproduced in the proceeding paras. 9.2 The AO, for the purpose of enquiring identity of the lender company, has issued letters under section 133(6) of the Income Tax Act, 1961 and alsoissued summons under Section 131 of the Income Tax Act, 1961 to the directors of the creditor company. The AO, in his remand report, has admitted that in response to the letters and summons so issued, the lender company has furnished the necessary documents so called for and the directors of such company had also made their personal

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 7 of 13 appearance and their statements were recorded by the AO. Thus, in these Circumstances, the identity of the lender company stands proved beyond all doubts. 9.3 As regard the genuineness of the loan transaction, the AO, in his remand report, has stated that the funds were transferred to the appellant through banking channels and both the parties had affirmed to have entered into the transaction. The AO also reported that before giving loan to the appellant, the lender company had received an equivalent amount from its group concern. However, the AO without bringing any positive material on record has alleged that there was apparent layering of funds before it finally came to the books of the appellant company. The AO had enquired into the source of the loan given to the appellant company and from such inquiry the AO could not extract any adverse cogent evidence against the lender company before giving the loan to the appellant. I find sufficient force in the contention of the appellant that the AO has made a unproved allegation without bringing on record any adverse cogent material to disprove the genuineness of the loan transaction. In my view, the lender company has duly furnished the entire documentary evidences required by the AO and has also proved the sources of funds in its hands before giving the loan to the appellant company. Further, the directors of the lender company have made their personal appearance before the AO and have explained the sources of funds before the AO. Thus, the receipt of funds in the hands of lender company was only from its group concern which cannot be doubted. In such eventuality, the genuineness of the loan transaction is duly established. 9.4 As regard the creditworthiness of the lender company, the AO, in his remand report, has doubted the financial health of the lender company and has challenged its creditworthiness. The AO stated that the lender company has shown operational revenue of Rs.2,95,978/- only and the free reserves &fixed assets of the lender company have declined during the relevant previous year. The AO further stated that there was no significant development or any marked improvement in the economic activity of the lender company to advance such large amount to the appellant. In contrast, the appellant, in its counter comments, has rebutted each and every observation of the AO. The appellant brought to my notice that the decline in reserves &, surplus of the lender company was marginal which was due to the net loss of Rs.23,597/- suffered during the relevant previous year. Further, the appellant also demonstrated that the decline in fixed assets was due to charging of depreciation by a sum of Rs.72,619/ -. Thus, it is found that there is no merit in the observation of the AO. Further, the appellant has also demonstrated that the lender company was having free reserves to the tune of Rs.2,89,48,885/- as on the first day of the relevant previous year before giving the subject loan to the appellant which is also clearly evident from the audited balance sheet of the lender company placed on record. In view of the above facts I agree with the contention of the appellant that the creditworthiness of a person cannot be adjudged merely

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 8 of 13 on the basis of the income shown by him during the relevant previous year but, the same can be adjudged on various other parameters. One of the parameters to understand the financial capacity is the net worth of the lender. It is noticed that the lender company was having sufficient owned funds aggregating to a sum of Rs. 2,89,48,885/ - for advancing a loan of Rs.1,29,60,000/ - to the appellant company. Besides, there was a direct nexus of funds given to the appellant company with the funds received by the lender company from its group concern. Thus, I am of the considered opinion that the appellant had duly established the creditworthiness of the lender company beyond all doubts. 9.S Finally, it can be concluded that the appellant has duly established the identity and creditworthiness of the lender company and also, the genuineness of the loan transaction as contemplated under the provisions of section 68 of the Income-Tax Act, 1961. In such circumstances, the AO was not justified in making the addition of Rs.1,29,60,000/ - in the appellant's income and is hereby deleted. Accordingly, the grounds of appeal are allowed.”

11. Ld. DR strongly supported the action of Ld. AO and argued that it is the assessee who did not make any submission during the course of assessment- proceeding with regard to the impugned loan and thereby failed to prove the ingredients of section 68, as a result of which the Ld. AO has rightly made addition. Ld. DR further contested that even during remand-proceeding, the Ld. AO has raised serious dissatisfactions over the genuineness of transaction as well as creditworthiness of the lender; but the Ld. CIT(A) has not considered them properly. Therefore, according to Ld. AR, the relief given by Ld. CIT(A) is not valid and must be reversed.

12. We have considered the submissions of Ld. DR peacefully and perused the order of Ld. CIT(A) carefully in the light of remand-report submitted by Ld. AO which is re-produced verbatim in Para No. 4.3 of the order of Ld. CIT(A). After a careful consideration, we observe that during remand-proceeding, in response to the notice / summon issued by Ld. AO u/s 133(6) and 131, the director of the lender-company M/s Drastic Forging Pvt. Ltd. appeared in person and the documentary evidences such as copy of latest ITR of the lender-company for AY 2018-19, copy of ITR of AY 2012-13 and copy of audit report of AY 2012-13 were filed. Thus, the first limb of section 68 i.e. identity of M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 9 of 13 the lender is established and even the Ld. AO has not raised any question qua the identity. Regarding genuineness of transaction, a copy of the bank- statement was filed from which the Ld. AO clearly observed that the loan was given to assessee through banking channel. Ld. AO has, however, observed that before giving loan to the assessee, the lender-company received an equivalent loan from another company of the same group and thereby concluded that “there is apparent layering of funds before it finally came into the books of the assessee company”. Ld. CIT(A) has tested this conclusion arrived at by Ld. AO and found the same as an “unproved allegation”. We certainly agree with Ld. CIT(A) for the simple reason that the Ld. AO has not found any adverse document to justify his allegation. Thus, second limb of section 68 i.e. genuineness is also proved and the Ld. AO has no basis to upset the same. Regarding creditworthiness of the lender-company, the Ld. AO has observed that the operational revenue was less; the reserve & surplus and fixed assets have declined during the relevant previous year. On such basis, the Ld. AO inferred that the lender-company did not have creditworthiness. But, however, the Ld. CIT(A) has tested these observations of Ld. AO and categorically found that the during the year the lender had suffered a loss and that was the only reason for decline in reserve & surplus. Similarly, the fixed assets got reduced because of charging depreciation. Ld. CIT(A) further observed that the lender had reserves & surplus to the tune of Rs. 2,89,48,885/- as on the first day of the previous year which itself shows soundness / creditworthiness. With these findings, Ld. CIT(A) did not agree with the conclusion taken by Ld. AO. On a careful consideration, we are inclined to countenance the conclusion taken by Ld. CIT(A) as the same is well- identified and well-reasoned. That brings us to conclude that all three ingredients of section 68 stand duly satisfied by assessee. Being so, we find no infirmity in the action of Ld. CIT(A) in deleting the addition made by Ld. CIT(A) and therefore uphold his action. This ground is, hence, dismissed.

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 10 of 13 Ground No. 3 and 4:

“10. Ground No. 7:-This ground of appeal has been raised against the action of the AO in making an addition of Rs.13,86,067/- in the appellants income by invoking the provisions of section 68 of the Income-Tax Act, 1961 on account of liabilities shown by the appellant in its audited financial statements. The AO has discussed the issue at second para on page no. 3 of the impugned order. It has been brought out by the AO that during the course of assessment proceedings, the appellant has not furnished the necessary documentary evidences in support of the liabilities shown in the audited financial statements. Thus, the AO made an addition of Rs.13,86,067/- in the appellant's income under section 68 of the Income Tax Act, 1961. 10.1 I have gone through the assessment order, the written submissions filed by the appellant, the documentary evidences placed on record, the remand report of the AO on the issue and the counter comments filed by the appellant. It has been noticed that the appellant has shown sundry creditors of Rs.6,97,003/- and sundry creditors for others at Rs.6,89,065/- thereby aggregating to a sum of Rs.13,86,067/- under schedule - 2.04 of Other Current Liabilities in its audited Balance-Sheet. In support of the details of the aforesaid creditors, the appellant furnished separate statements containing various details such as names, addresses, amounts etc. It was also submitted by the appellant that the trade liabilities of the appellant company have duly been paid-off in the succeeding previous years

M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 11 of 13 through banking channels. The AO, vide his letter dated 14-11-2017, has submitted his remand report wherein the AO has not made any adverse comment on the issue of sundry creditors. The AO, in his remand report, has slated to have verified the books of account of the appellant company along with the bills, vouchers etc. during the course of the remand proceedings. The AO has given his detailed observations as regard to examination of the sales register, ledgers, purchases, purchase bills, stock register, etc. The AO has finally arrived at a conclusion that the books of account are duly maintained by the appellant and the profit &loss account and balance sheet are based on such books of account only, 10.2 In view of above discussed facts, since the AO has duly verified and admitted the book results shown by the appellant in its audited financial statements, there is no ground to sustain the addition of Rs.13,86,067/ - so made by the AO in the impugned assessment order. Therefore, the addition of Rs. 13,86,067/ - so made by the AO in the appellant's income is hereby deleted. Accordingly, this ground of appeal is allowed.”

16. Now the case of revenue before us is that the assessee did not file ledger accounts / confirmations of sundry creditors during assessment-proceeding. It is further being contested that even in the remand-report, the Ld. AO has not given any finding which could prompt the Ld. CIT(A) to delete the addition. Therefore, the Ld. CIT(A) has erred in deleting the addition made by Ld. AO.

17. On a careful consideration of the order of Ld. CIT(A), we observe that the assessee is a company which has maintained statutory books of account and also subjected to statutory audit in terms of Companies Act. The assessee has show sundry creditors of Rs. 6,97,003/- and creditors for other liabilities of Rs. 6,89,065/-, aggregating to Rs. 13,86,067/-, in its audited Balance-Sheet. The assessee has also filed complete details consisting of names, addresses, amounts of those creditors during remand-proceeding which is clearly mentioned in the submission of assessee reproduced in the order of Ld. CIT(A) on Page No. 8 and also accepted by Ld. CIT(A) in his operative part. Regarding AO’s comments in remand-report, even if the AO has not reported for granting of relief, the AO has not pointed out anything adverse also. Further, the Ld. CIT(A) is quite justified in basing his decision on the footing that during remand-proceeding, the Ld. AO has verified books of account of assessee with M/s Fairdeal Engineering & Body Building Co. P. Ltd. ITANo.920/Ind/2019, A.Y. 2012-13 Page 12 of 13 vouchers, etc. and the Ld. AO has accepted sales, purchase, ledger accounts, etc. and also accepted “In light of these facts, the books of account are maintained by the assessee and the profit and loss account and balance-sheet submitted are based on these documents”. In our considered view, when the Ld. AO has accepted the books of account as well as Balance-Sheet drawn from those books of account, there is no reason to reject the liabilities appearing therein. Being so, we find merit in the conclusion derived by Ld. CIT(A) that there is no ground to sustain the addition. Accordingly, we dismiss these grounds too.

Order pronounced as per Rule 34 of ITAT Rules, 1963 on 24/01/2023.