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Income Tax Appellate Tribunal, Conducted through E-Court, Rajkot
Before: Ms. SUCHITRA KAMBLE & SHRI WASEEM AHMED,
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax (Appeals), Jamnagar, dated 28/03/2017 arising in the matter of assessment order passed under s. 143(3) r.w.s 144 of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2012-13.
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The Revenue has raised the following grounds of appeal: 1. The Ld.CIT(A) erred on facts and in law in restricting the addition made u/s.68 of the Act at Rs.5,00,000/- as against rs.11,74,50,000/- made by the AO ignoring the judgement of Hon.ITAT, Ahmedabad in the case of Nakoda Fashions Pvt. Ltd.(ITA No.1716/Ahd/2012) wherein it has been held that the assessee had been able to just prove the identity of the creditors but was unable to prove the genuineness and creditworthiness of the parties as well as the genuineness of the transaction. 2. The Ld.CIT(A) erred on facts and in law in restricting the disallowance made for want of verification of purchase details at Rs.1,00,000/- as against Rs.9,56,33,843/- made by the AO. 3. On the basis of the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing officer. 4. That the revenue craves leave to add, amend, alter or withdraw any ground of appeal. 5. It is therefore prayed that the order of the CIT(A), Jamnagar may kindly be set aside and that of the Assessing Officer be restored.
The first issue raised by the Revenue is that the learned CIT (A) erred in restricting the addition made by the AO on account of unexplained loan to the extent of Rs. 5 lakh only instead of confirming the full addition of Rs. 11,74,50,000/- only. The facts in brief are that the assessee is an individual and engaged in the business of trading in grains and food items in the name and style of M/s Rohit Trading Co. The assessee for the year under consideration declared an income of Rs. 7,05,650 only in the return of income. Thereafter, the return of income of the assessee was selected for regular scrutiny. Several notices were issued to the assessee but no reply or submission was received from the assessee. Therefore, the AO proceeded to frame the assessment under section 144 r.w.s. 143(3) of the Act.
The AO in the assessment proceeding found that the assessee during the year has taken unsecured loan of Rs. 11,74,50,000/- only. The AO, in the absence of any explanation, treated the same as unexplained cash credit under section 68 of the Act and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT(A).
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The assessee before the learned CIT-A submitted that during the assessment proceedings most of the instances, he personally attended the office of the AO or contacted through telephone. However, the requisite details were not furnished for the reason that the computer data was crashed due to virus. The same was informed to the AO and requested to adjourn the hearing which was not granted. The assessee further submitted that unsecured loans were availed from different parties for purpose of acquiring lands/ properties which were duly shown in books of accounts. The amount of unsecured were received through proper banking channel. He has paid interest on loan amount at predetermined rate of interest and same was paid after deducting tax u/s 194A of the Act. There were also repayment of loans through banking channel in the subsequent years. Accordingly, the assesse contended that the transaction of unsecured is genuine and addition made by the AO needs to be deleted. The assessee in support of its contention submitted copy of ledger account, confirmation letter, bank statement and PAN, ITR acknowledgement of the loan parties.
6.1 The submission of the assessee was forwarded to the AO for remand report which was submitted by the AO vide letter dated 01-01-2017. The AO in the remand report submitted that the assessee filed only details of unsecured loan along with confirmation letter and PAN. But the same is not sufficient enough to prove the identity, genuineness and credit worthiness of the loan parties.
The learned CIT(A) after considering the facts in totality confirmed the addition in part to the extent of Rs. 5 lakh by observing as under:
The AO has just made entire creditors appearing in the Balance as at the end of the accounting year as also received during the year. In the / course of remand proceedings the appellant had explained the nature of f each of the credit entry appearing in the balance sheet as also in the •' audit report before me as well as before the AO as confirmed by him vide para 3 of the remand report as also finally in his report dated 14.03.2017. It is seen from the remand report as well evidences placed on record that except the unsecured loans of Rs.50,000/- and Rs.4,50,000/- received and repaid in the cases of Shri Kiritkumar Somchand and Shri Mohanlal Morarji respectively, the appellant failed to discharge the onus lies on him by proving the identity, genuineness of transactions and the creditworthiness of the depositors and as such the same stand unexplained. In respect of
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balance the appellant has furnished satisfactory evidences the same has been verified by the AO as such stand deleted. The appellant gets relief accordingly.
Being aggrieved by the order of the learned CIT(A) the Revenue is in appeal before us.
The learned DR before us submitted that the assessee has failed to furnish the necessary evidences to justify the creditworthiness and the genuineness of transaction. According to the learned DR, the assessee does not get discharged from his obligation imposed under the provisions of section 68 of the Act merely upon furnishing the bank statements and the ITR of the lenders.
On the other hand, the learned AR before us filed a paper book running from pages 1 to 279 and contended that all the details of the loan parties were duly furnished during the remand proceedings. It was also contended that the assessee is not supposed to justify the source of source in the hands of the lenders. The learned AR further submitted that there was no disallowance made by the AO with respect to the interest expenses which was having direct nexuses with the loan. Thus, it is implied that AO on one hand has accepted the genuineness of the interest expenses but having doubt on the amount of loan on which the interest was paid. According to the learned AR, the AO has taken contradictory decision with respect to the amount of interest viz a viz the loan on which the interest was paid.
Both the learned DR and the AR vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The fact of the case have been elaborated in the previous paragraphs. Therefore, for the sake of brevity, we are not inclined to repeat the same. The provision of Section 68 of the Act fastens the liability on the assessee to provide the identity of the lenders, establish the genuineness of the transactions and creditworthiness of the parties. These conditions on the assessee were imposed
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to justify the cash credit entries under Section 68 of the Act by the Hon’ble Calcutta High Court in the case of CIT Vs. Precision Finance (P) Ltd. reported in 208 ITR 465 wherein it was held as under: “It was for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. On the facts of this case, the Tribunal did not take into account all these ingredients which had to be satisfied by the assessee. Mere furnishing of the particulars was not enough. “
12.1 Now first we proceed to understand the identity of the party. The identity of the party refers existence of such party which can be proven based on evidences. As such the identity of a party can be established by furnishing the name, address and PAN detail, bank details, ITR etc.
12.2 The next stage comes to verify the genuineness of the transaction. Genuineness of transaction refers what has been asserted is true and authentic. A genuine transaction must be proved to be genuine in all respect not merely on a piece of a paper. The documentary evidences should not be a mask to cover the actual transaction or designed in way to present the transaction as true but same is not. Genuineness of transaction can be proved by submitting confirmation of the parties along the details of mode of transaction but merely showing transaction carried out through banking channel is not sufficient to prove the genuineness. As such, the same should also be proved by circumstantial surrounding evidences as held by the Hon’ble Supreme court in the case of Shri Durga Prasad More reported in 82 ITR 540 and in case of Smt. Sumati Dayal reported in 214 ITR 801.
12.3 The last stage comes to verify the creditworthiness of the parties. The term creditworthiness as per Black Law Dictionary refers as: "creditworthy, adj. (1924) (Of a borrower) financially sound enough that a lender will extend credit in the belief default is unlikely; fiscally healthy-creditworthiness.” 12.4 Similarly in The New Lexicon Webster's Dictionary, the word "creditworthy" has been defined as under:- "creditworthy, adj. of one who is a good risk as a borrower."
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12.5 It the duty of the assessee to establish that creditor party has capacity to advance the loan and having requisite fund in its books of account and in banks. The capacity to advance loan can be established by showing sufficient income, capital and reserve or other fund in the hands of creditor. It is required by the AO to find out the financial strength of the creditor with judicious approach and in accordance with materials available on record but not in arbitrary and mechanical manner.
12.6 In the light of the above discussion, we proceed to adjudicate the issue on hand. We find that during the remand proceedings, the details such copy PAN, ledger account and confirmation and other detail such as bank statement, audited books were made available before the AO. However, the AO without considering and pointing any deficiency in the above primary document held that the assessee failed to prove the identity of the creditor, explain the genuineness of transaction and establish the credit worthiness of the creditor.
12.7 Be that as it may be, the undisputed fact that the loan were received through banking channel and loan has been repaid by the assessee in the subsequent year through banking channel. It is also undisputed that the assessee has also paid interest on such loan after deducting eligible tax at source as per the provision of section 194A of the Act. Therefore, in our considered view once the amount of loan received through banking channel and repayment of the same along with interest also made through banking channel then the genuineness cannot be doubted. In this respect we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of the CIT Vs. Rohini builders reported in 256 ITR 360 wherein it was held as under: “The genuineness of the transaction is proved by the fact that the payment to the assessee as well as repayment of the loan by the assessee to the depositors is made by account payee cheques and the interest is also paid by the assessee to the creditors by account payee cheques.”
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12.8 We also feel pertinent to refer the judgment of the Hon’ble Gujarat High Court in case CIT vs. Ayachi Chandrashekhar Narsangji reported in 42 taxmann.com 251 where it was held as under: It is required to note that as such an amount of Rs. 1,00,00,000 vide cheque No. 102110 and an amount of Rs. 60 lakhs vide cheque No. 102111 was given to the assessee and out of the total loan of Rs. 1.60 crores, Rs. 15 lakhs vide cheque no. 196107 was repaid and therefore, an amount of Rs. 1,45,00,000 remained outstanding to be paid to IA. It has also come on record that the said loan amount has been repaid by the assessee to 'IA' in the immediately next year and the Department had accepted the repayment of loan without probing into it. In the aforesaid facts and circumstances of the case, when the Tribunal has held that the matter is not required to be remanded as no other view would be possible, there was no reason to interfere with the impugned order passed by the Tribunal. [Para 6]
12.9 In view of the above elaborated discussion and after considering facts in totality we hereby held that the assessee discharged the onus cast under section 68 of the Act. Hence, we do not find any reason to interfere in the finding of the learned CIT(A). Thus, the ground of appeal of the Revenue on merit is hereby dismissed.
The next issue raised by the Revenue is that the learned CIT(A) erred in reducing the addition of unexplained purchases to the extent of Rs. 1 lakh only instead of confirming the full addition of Rs. 9,56,33,843/- only.
The AO during the assessment proceeding found that the assessee has shown purchases of Rs. 19,12,67,685/- only. The AO in absence of necessary details and supporting evidences disallowed 50% of purchases i.e. Rs. 9,56,33,843/- and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A) and submitted it made purchases of jiggery tin, other commodities from the farmers, traders and sugar mills and also in the open auction held by APMC marketing yard. All the purchases were supported by the bill/invoices and VAT returns. The books of accounts were audited by the auditor and all the bills and voucher were presented before the auditor. The auditor has not pointed out any deficiency in the purchases made by him. The assessee also furnished the details of cash and credit purchases made during the year.
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The AO in the remand report submitted that the assessee furnished ledger copies of the parties from whom purchases were made. However, the complete addresses of parties from whom cash purchases were made were not provided. Likewise, the assessee being wholesale trader and considering business scale was required to maintain quantitative details of sales/ purchases and inventory but not such quantitative detail was furnished. Therefore, the addition needs to be sustained.
The assessee in rejoinder to the remand report submitted that during remand proceedings complete detail of purchases along with the name and address of the seller parties, nature of purchases and the details of mode of payment were furnished. However, the AO still persisted with disallowances of 50% of the purchases but failed to consider the subsequent sales made against the purchases.
The learned CIT(A) after considering the facts in totality deleted the addition to the extent of Rs. 9,55,33,843/- and sustained part addition of Rs. 1 lakh only by observing as under:
As stated supra, it is a high pitched assessment wherein the AO has disallowed 50 % of purchases without correspondingly making any variation to the sales. The AO did not put on record the extra ordinary circumstances where 50 % of purchases are disallowed. The sales have been accepted as such. The copy of the audit report u/s 44 AB of the Act was available to the AO. The AO did not find any defects in the audit report nor is the audit report qualified. The best course available to the AO was to refer the past records of the appellant and come to conclusion as to whether it is a fit case for any addition. He had one more option available to refer any comparable case. Considering the volume of purchases in the course of remand proceedings the appellant had made available the details/evidences in the form of 7/12 ectract of purchases from the farmers as directed by the AO on test check basis and the AO in his report dated 14.03,2017 found it to be in order and covered by Rule 6DD of I.T. Rules 1962. As stated, the book result of the appellant show increase in gross profit ration [4.03 % against 3.20 % in immediate preceding year] during the year, there seems no reason to disturb the book result. However, looking to the turnover of the business and the commodity being the jaggary which are produced by the farmers locally from the sugar cane juice, a lump-sum disallowance of Rs.1,00,000/- on estimation would cover the leakages if any. The addition therefore modified accordingly. The appellant gets relief of Rs. 9,55,33,843/-. Thus this ground of appeal is allowed in part.
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Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned DR and the learned AR before us vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the AO during the assessment proceedings in the absence of detail and supporting evidences disallowed 50% of the gross purchases amounting to Rs. 9,56,33,843/- only. The AO further in the remand report stated there were certain cash purchases which were not verifiable in the absence of complete address, therefore, the addition needs to be sustained. However, the learned CIT-A found that the books of accounts of the assessee were duly audited, the sales were not doubted, furthermore profitability of the assessee was better than the earlier years. The learned CIT(A) further found that the assessee as directed by the AO furnished extract of 7/12 form of the farmers from whom purchases were made. Thus the learned CIT (A) was kind enough to allow the appeal of the assessee except confirming the part addition of Rs. 1 lakh on adhoc basis. Undeniably, the sales cannot be effected without the purchases. In other words the transactions of purchase and sale are contemporary to each other. In the event, if the purchases are doubted then the corresponding sale cannot be assumed to correct which is arising against the purchases.
21.1 In addition to the above, we also note that the gross profit ratio and the net profit ratio of the assessee was improved in comparison to the earlier years. In other words, the revenue in the earlier years was pleased to accept the profitability of the assessee declared by it in the income tax return. Likewise the facts of the year in dispute as well as of the earlier assessment years are identical and no major difference has been pointed out by the AO. Thus, if we disallow the purchases by the amount of Rs. 9,56,33,843/- i.e. 50% of total purchases which will eventually result better profitability but the same will not be acceptable as the gross profit ratio
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and GP ratio will increase manifold despite the fact that there was no change in the facts and circumstances for the year under consideration as well as in the earlier year.
21.2 It is also important to note that the assessee has furnished the details of the suppliers and extract 7/12 form of the farmers from whom the purchases of the materials were made. Thus to our mind, the AO before pointing out any defect in the address of supplier furnished by the assessee should have issued at least notices on sample basis in order to verify the veracity of the transactions. But we note that no such power has been exercise by the AO during the remand proceeding. In view of the above and after considering the facts in totality, we do not find any infirmity in the order of the learned CIT(A). Accordingly, we uphold the same. Hence the ground of appeal of the revenue is hereby dismissed.
In the result, the appeal of the Revenue is hereby dismissed.
Order pronounced in the Court on 16/11/2022 at Ahmedabad.
Sd/- Sd/- (SUCHITRA KAMBLE) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy)
Ahmedabad; Dated 16/11/2022 Manish