INCOME TAX OFFICER, WARD - 1(1)(4), SURAT vs. M/S. MANSI INDUSTRIES PVT. LTD., SURAT

Grounds of appeal

raised by the Revenue are as follows: “1. Whether on the fact and the circumstance of the case and in law, the Ld. CIT(A) was justified in deleting the addition made on account of unexplained unsecured loan amounting to Rs.5,90,90,000/- without appreciating the fact that, the assessee company failed to establish the creditworthiness of all lenders and identity of five lenders therefore genuineness of transaction remained unexplained ?

Succinct facts are that during the course of assessment proceedings, the assessing officer examined the details filed by the assessee and observed that assessee has obtained unsecured loans from many persons. During the proceedings the assessee has submitted documents in support of his claim of unsecured loan. The summary of unsecured loans obtained by the assessee is mentioned by the assessing officer at para No.4.10 of the assessment order, which is reproduced below:

However, assessing officer rejected these documents and evidences and held that there was no genuine need or business exigency to accept such loans, when credit facility was available with assessee from his Bank. Therefore, assessing officer made addition to the tune of Rs.5,95,00,000/-.

Aggrieved by the order of the Assessing Officer, the assesse carried the matter in appeal before the ld. CIT(A). During the appellate proceedings, the ld CIT(A) examined the details such as confirmation, Name and Address, PAN and other documentary evidences like copy of Return acknowledgement with computation, Bank Statement with Audited Financial Statement, Profit and Loss account with Balance Sheet, Capital account. Since, the assessee has furnished

Aggrieved by the order of ld CIT(A), the Revenue is in appeal before us.

Learned Departmental Representative (Ld. DR) for the Revenue submitted that assessee-company failed to establish the creditworthiness of all the Lenders and identity of five lenders therefore genuineness of transaction remained unexplained. The Ld DR further pointed out that Ld. CIT(A) has failed to appreciate the fact that onus has been cast on the assessee to prove the genuineness of the cash credit entry in its books of account. In the instant case, the assessee- company was asked to produce the Lender along with their books of accounts for examination but assessee failed to produce them. When summons were issued to them either the summons could not be served upon the depositors or depositors failed to attend in person before assessing officer. Even in remand report proceedings, assessee failed to produce the Lenders. Thus, assessee has failed to discharge its onus in proving the cash credits, as genuine, to the satisfaction of the Assessing Officer by not producing the so-called Lender of the assessee- company, therefore ld DR prays the Bench that addition made by the assessing officer may be sustained.

Shri Rasesh Shah, Learned Counsel for the assessee, submitted that during the course of assessment proceedings, the assessee furnished details such as confirmation, Name & Address, PAN and other documentary evidences like

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that assessing officer made addition solely on the reason that depositors, were not physically produced before him. The assessing officer has also raised issue about creditworthiness by citing insufficient capital and meager source of income of depositors. He has also raised doubts about source of money because he noticed that just before issue of cheques to the assessee, the said bank accounts of lenders were irrigated by crediting equivalent amount by transfer/Clearing on the same date. We note that during the appellate proceedings, the assessee has filed following "additional evidences", Viz: (i) Copies of assessment orders of depositors, (ii) Copies of relevant Bank Statements of assessee with Allahabad Bank and SBI for A.Y. 2012-13, (iii) Copy of confirmation of parties along with acknowledgment of Return of Income for A.Y. 2012-13 to prove source of source, (iv) Copy of confirmation of parties of unsecured loans for A.Y. 2014-15 (showing repayment of loan) with acknowledgement of Return and audited final accounts for A.Y.2014-15, and (v) Assessment orders of all the eight depositors. The ld CIT(A) observed that during remand proceedings, the assessing officer first asked the assessee to produce these lenders before him to which Ld. Counsel for 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. the assessee, expressed his inability to produce and requested for issuance of summons u/s131 of the Act. The Ld. assessing officer in his Remand Report (para 4.1) has stated that summons issued to Shri Maulikbhai B. Desai, Shri Rukhadbhai H. Katariya and Shri Arjanbhai K. Baldaniya returned "unserved". On being asked, the assessee provided the "new address" of Three parties on which fresh Summons u/s 131 of the Act were issued by the assessing officer. The assessing officer has admitted that in compliance none of the lenders appeared before him for examination but submitted copy of ID proof, copy of Ledger account [F.Y.2011-12], Bank Statement reflecting loan transactions through "Tapal (Post)."

The ld CIT(A) observed that assessing officer has concluded that no new evidences have been filed by the lenders (already filed before assessing officer) and without examination of depositors, all the three ingredient of section 68 of the Act i.e. identity, genuineness of transactions and creditworthiness of lenders remained unexplained. As far as additional evidences filed during appellate proceedings are concerned i.e. assessment orders passed in case of lenders, Bank statement of assessee - company to prove business exigency, confirmation with Return Acknowledgement of A.Y.2012-13 and confirmation of accounts for A.Y. 2014-15 with Return and Audit Report, then after the assessing officer has noted as under: (i) During appellate proceedings AR submitted copy of assessment orders passed by respective assessing officers in the case of lenders for A.Y. 2012-13. Mere passing of assessment orders in case of lenders do not prove the genuineness of transactions and creditworthiness of lenders.

Thereafter, Ld CIT(A), vide his order sheet dated 14.06.2017, the assessee was directed to produce the following depositors/lenders in person (from whom unsecured loan of in excess of Rs. 1 Crore was received by the assessee: Sr.No. Name Amount of Unsecured Loan (Rs.) 1 Shri Arjanbhai K. Baidaniya (Prop. Baidaniya 1 ,50,00,000/- Corporation) 2 Shri Dinesh Bhikhabhai Desai (Prop. Janvi 1,25,00,000/- Thread) 3 Shri Rukhadbhai h. Katariya (Prop. Gurukrupa 1 ,50,00,000/- Enterprise)

In order to make compliance of the above direction of ld CIT(A), the assessee produced these above persons on 30.06.2017 before ld CIT(A). That is, the assessee produced the above-named persons with their ID proofs in the presence of present assessing officer, Shri Mahesh Saini, ITO, Ward-1(1)(4), Surat. The assessing officer, then himself satisfied about their identity. These persons gave a self-declaration, duly signed by them about factum of loan, source of source of the amount and repayment of loan by way of grey cloth sale, leaving no amount outstanding towards assessee. These persons also confirmed about the details submitted in past during assessment proceedings and recently in compliance to Summons issued u/s 131 by the department. The assessing officer, attended the appellate hearings before ld CIT(A), when the above-named persons were produced before me, being satisfied about their explanation, chose not to 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. examine them u/s131 of the Act. In view of the fact that these persons attended before ld CIT(A), the requirement of assessing officer about production of depositors could be considered as fulfilled at least in respect of above three (3) major depositors. Therefore, on the basis of these facts, ld CIT(A) noted that Law is well-settled that primary onus of proving the nature and source of sum found deposited in books of accounts is on the assessee and where nature and source of receipt/deposit could not be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no burden lies on the revenue to show that the income is from any particular source [Roshan di Hatti Vs. CIT (1977) 107 ITR 938 (SC) / Kalekhan Mohd. Hanif Vs. CIT (1963) 50 ITR 1 (SC)]. It is settled law that if the initial burden is discharged by the assessee by producing sufficient evidences/materials in support of loan transaction, the onus gets shifted to the assessing officer who after verification/examination can further requisition evidence/details from the assessee. [SK Bothra & Sons HUF Vs. ITO (2011) 203 Taxman 436 (Kol)]. The law of shifting burden has been explained in the case of CIT Vs. Metachem Industries (2000) 245 ITR 160 (MP) that if person (creditor) owns the entry, then the burden of the assessee is discharged and it is open for the assessing officer to undertake further investigation with regard to that individual who has deposited the amount. In this legal background and factual matrix of this case, it can be safely concluded that assessee has successfully discharged its primary burden by submitting various details/ evidences during assessments proceedings and later on during appellate proceedings.

The ld CIT(A), then explained the provisions of section 68 of the Act, stating section 68 provides for fulfillment of three (3) basic conditions viz: (i) Identity of the depositor; (ii) Genuineness of the transaction; and (iii) Creditworthiness of the depositor. Further, the primary onus to prove the fulfillment of these three conditions lies on the assessee. In the present case, it is an undisputed fact that during the course of assessment proceedings, the assessee has furnished the complete details of the depositors like their name, address and PAN and also furnished documentary evidences, like confirmation,

About first condition of ‘Identity’ of the depositors, the ld CIT(A) noted that all the said depositors are having PAN and are also filing Income Tax Returns. Further, it is also a fact that the summons u/s 131 of the Act issued by the assessing officer to these depositors were duly served and three of depositors have also appeared personally before ld CIT(A) in appellate proceedings. All the depositors have responded to notices issued u/s 133(6) of the Act. Moreover, it is also seen that in case of all the depositor assessment orders were passed under scrutiny u/s 143(3) for the year under 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. consideration itself i.e. A.Y. 2012-13. Copies of respective assessment orders have been furnished by the assessee before ld CIT(A) which were forwarded to assessing officer for his comment. Therefore, considering all these facts, ld CIT(A) noted that ‘Identity’ of the depositors stands proved beyond doubt by the assessee and the same has not even been seriously challenged by the assessing officer. No adverse view can be taken for non-compliance of summons issued u/s 131 of the Act by the assessing officer because there could be numerous reasons for non-compliance of summons. This per se cannot give rise to doubt about 'identity' when department has assessed them under scrutiny and depositors have proper ID proofs (PAN and, Voter ID). Therefore, ld CIT(A) held that assessee has proved ‘identity’.

About second condition, that is, genuineness of transaction, the assessing officer has held that genuineness of transaction has not been proved by the assessee, because business expediency (assessing officer has used the word exigencies) of loans was not explained especially when credit facility from bank was available to the assessee. It has been also observed by assessing officer that just before issue of cheques to assessee, these depositors have either equivalent some deposits through Transfer/clearing or even by cash (but no instance given). On this basis, assessing officer held that these loans as bogus and even declared that these loans are nothing but his own unaccounted income generated by inflating expenses and bringing the same into the books of accounts in the guise of cash credits. As against this, the assessee has contended that the various documentary evidences submitted before the assessing officer clearly proves the genuineness of the transactions. We note that ld CIT(A) has considered all the documentary evidences which were even furnished before the assessing officer during the course of assessment proceedings. On verification of these documentary evidences, the ld CIT(A) observed the following facts: (i) First of all, if is seen that the Loan given by the depositors to the assessee are duly reflected in their respective Balance Sheet and the depositors have never

About the third condition regarding the creditworthiness of the depositors, the ld CIT(A) noted that assessing officer was mainly dissatisfied with regard to creditworthiness of the depositors quo their source of income and capital of the Lender. The assessing officer has treated the following unsecured loans as unexplained even though the assessee has submitted various documents to explain the creditworthiness of depositor along with “source of source". The details are as under:

We note that assessee has produced all the corroborative and direct and indirect evidences to prove the nature and source of deposits. The assessing officer has simply rested his conclusion on interpretation drawn by him based on incomplete enquiry and lack of cogent evidence. It is apparent that none of the creditors has denied that loan was not given by him/her and funds have been transferred from his/her account through baking channel. The documentary proof coupled with personal attendance of three depositors (major) is sufficient to prove identity. Regular assessment orders u/s 143(3) have been passed in case of all the depositors wherein their source of funds by way of income or loans have been examined by respective assessing officer. There is nothing on record to support the contention of the assessing officer that it was assessee's own money routed though unsecured loans. It is interesting to note that almost on similar kind of evidences, the assessing officer has accepted unsecured loan of Rs.25,00,000/- received from Smt. Sangitaben J. Bodra, as explained, but treated rest of unsecured loans unexplained. In this regard, reliance can be placed on the judgment of Hon`ble High Court of Gujarat in the case of Apex Therm Packaging (P.) Ltd, [2014] 42 taxmann.com 473 (Gujarat), wherein it was held as follows: “6. We are in complete agreement with the reasoning given by the CIT(A) as well as the ITAT. When full particulars, inclusive of the confirmation with name, address and PAN Number, copy of the Income Tax Returns, balance sheet, profit and loss accounts and computation of the total income in respect of all the creditors/lender were furnished and when it has been found that the loans were received through cheques and the loan account were duly reflected in the balance sheet, the Assessing Officer was not justified in making the addition of 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. Rs. 33,55,011/-. Under the circumstances, no question of law, much less substantial question of law arises in the present Tax Appeal. Accordingly, the present Tax Appeal deserves to be dismissed and is accordingly dismissed.”

We note that assessee has filed sufficient evidences to discharge his burden. We note that assessee has duly established the genuineness of transaction, as transactions were through banking channel. The assessee has proved identity, as parties were produced before ld CIT(A) as well as before assessing officer. The assessee has proved creditworthiness of transaction by filing return of income / balance sheet/source of source documents of the parties. In this regard, reliance can be placed on the judgment of Hon`ble High Court of Gujarat in the case of D & H Enterprises, [2016] 72 taxmann.com 91 (Gujarat) wherein it was held that “where all relevant details related to customers who gave booking advance to assessee-developer were available with Assessing Officer, he could have easily verified advance booking amounts paid to assessee- builder; if some of them did not appear, transactions could not be held to be non- genuine.”

We note that assessee even filed cross-confirmation and details with regard to repayment of loans which have been furnished before ld CIT(A) vide letter dated 20.01.2017. On verification of cross-confirmation Ledger accounts of depositors, it is proved that goods sold/given as repayment of loan by the 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. assessee have been shown by them as "purchases" and Loan A/cs have been squared up in F.Y. 2013-14 (A.Y.2014-15). Return of Income acknowledgement with Final accounts have also been filed reflecting goods purchased/sold in their Trading accounts. Hence, repayment of loan is proved by documentary evidences. Hon`ble High Court of Gujarat in the case of Ayachi Chandrashekhar Narsangji, [2014] 42 taxmann.com 251 (Gujarat) held that where department had accepted repayment of loan in subsequent year, no addition was to be made in current year on account of cash credit. The findings of the Hon`ble Court is reproduced below: “6. Having heard Shri Pranav Desai, learned Counsel appearing on behalf of the revenue and on perusal of the order passed by the CIT(A) confirmed by the ITAT, it appears that CIT(A) was satisfied with respect to the genuineness of the transaction and creditworthiness of Shri Ishwar Adwani and, therefore, deleted the addition of Rs.1,45,00,000/- made by the Assessing Officer. It is required to be noted that as such an amount of Rs.1,00,00,000/- vide cheque no. 102110 and an amount of Rs.60 lakh vide cheque no. 102111 was given to the assessee and out of the total loan of Rs.1.60 crore, Rs.15 lakh vide cheque no. 196107 was repaid and, therefore, an amount of Rs.1,45,00,000/- remained outstanding to be paid to Shri Ishwar Adwani. It has also come on record that the said loan amount s been repaid by the assessee to Shri Ishwar Adwani in the immediate next financial year and the Department has accepted the repayment of loan without probing into it. In the aforesaid facts and circumstances of the case, when the ITAT has held that the matter is not required to be remanded as no other view would be possible, we see no reason to interfere with the impugned order passed by the ITAT. No question of law, much less substantial question of law arises in the present Tax Appeal. Hence, the present Tax Appeal deserves to be dismissed and is accordingly dismissed.”

We note that on the basis of documents and details filed in respect of all nine (9) depositors, the assessing officer has accepted only one depositor as explained even though she was not produced before assessing officer. Hence we note that approach of assessing officer is arbitrary. We note that assessee furnished the copy of respective returns of income with final accounts of Lenders wherein transactions have been duly found reflected. Lenders have been regularly assessed to tax. In the case of all the lender; assessment u/s. 143(3) for AY.2012-13 have been completed in Surat I.T department. Thus, creditworthiness has been duly examined by the department under scrutiny.

We have heard both the parties and note that considering the nature of business, the assessing officer disallowed 5% of the expenses. Accordingly, an 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. amount of Rs.37,89,021/- being 5% of the expenses was added to the total income of the assessee. On appeal, ld CIT(A) deleted the addition partly. We note that assessing officer has broadly bifurcated the expenses in two broad categories, Viz: (a) Employee benefit expenses Rs. 6,12,06,068/- and (b) Other expenses Rs.1,45,74,344/- for the purpose of ease of analysis. In his remand report, assessing officer has observed that assessee produced original salary register where majority of salary was paid by CASH. The assessing officer has also stated that on verification of "Works Salary Register", the address of employees was not mentioned (only names were mentioned), therefore as per his opinion in absence of identity and address of employees, the genuineness of expenses could not be verified and mere production of salary register is not sufficient to prove the genuineness of claim and therefore AO held to sustain the disallowance @ 5%. However, during the appellate proceedings, the assesses has vehemently objected to the observations made by the assessing officer. The assessee has contended that the assessee produced all the registers (original) before assessing officer wherein no defect has been pointed out by the assessing officer except address of workers. It has been contended that law does not prohibit making payment by CASH to workers. The assessee has also pointed out that in the immediate preceding year, book results were duly accepted under scrutiny assessment. Further, during the year in spite of increase in turnover, the cost of employee benefit has reduced even in absolute terms.

Based on these facts, ld CIT(A) noted that arguments of assessee has a significant force. The assessing officer has simply made ad-hoc disallowance on mere conjectures & surmises for the reason that payments to workers: was done by cash and salary register was not containing details about address of workers. There is no allegation that claim of expense was bogus or not supported by evidence. The assessing officer has made disallowance @ 5% on ad-hoc and suspicion basis on the basis, that address of employees not given in Register and payment was made by CASH. It is true that there is no legal requirement as per IT Act for the assessee to keep a complete record of employees and also no restriction by making payment by CASH. Generally, workers do not have Bank 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. accounts, so employer has to make payment by CASH. Therefore, ld CIT(A) noted that such ad-hoc disallowance is not sustainable in the eyes of law, especially when no such disallowance was made in A.Y. 2011-12 under scrutiny assessment, therefore ld CIT(A) deleted the addition.

The Ld CIT(A) noted that another component of "Other Expenses" considered for disallowance comprises of numerous misc. & petty expenses. The assessing officer has provided the item-wise break up in para 5.2 of Remand Report. It has been mentioned by the assessing officer that except in respect of "Machinery maintenance Exp." & General Exp. etc. amounting to Rs.49,810/- for which neither Ledger account nor supporting evidences were furnished, other expenses were found in order. Similarly, in respect of certain expenses, like Kitchen Exp., Telephone Exp., Office Exp. Etc. (para 5.2.2. of remand report) the AO has observed that same were incurred partly in CASH, no supporting evidences were produced by the assessee. In view of this, assessing officer has recommended for disallowance out of expenses incurred by CASH. Besides this, assessing officer has further submitted that ROC fees of Rs.2,01,500/- incurred for increase in authorized capital need to be disallowed entirely being capital expenditure. In reply, the assessee has strongly contended that no disallowance should be made especially when expenses were incurred for purpose of business, it has been contended considering the nature of expenses and business exigencies, assessee required to incur certain expense by CASH only. The assessee has also contended that looking to total turnover of Rs.63.97 Crores, the expenses to the tune of Rs.21,66,218/- is quite justified which were incurred for the purpose of business only though partly by CASH (Rs.16,20,411). As far as ROC fee is concerned, the assessee has also contended that expense was incurred for increase in capital for revenue purpose. Considering these facts, ld CIT(A) noted that looking to nature of expenses incurred by CASH, the involvement of non-business purpose & personal purpose cannot be denied and also because expenses are not supported by vouchers/bills. Therefore, ld CIT(A) took a view that it reasonable & fair to both parties to sustain disallowance @ 5% of such expenses i.e. Rs.49,810 + Rs.16,20,411 = Rs.16,70,221/- which works out to 111/SRT/2017/AY.2012-13 M/s. Mansi Industries Pvt. Ltd. Rs.83,511/-. The Ld CIT(A) also noted that ‘ROC’ fee incurred for increase in Authorized Capital was of the capital field and hence deserve to be disallowed. Therefore, total disallowance worked out by ld CIT(A) was to the tune of Rs.2,85,011/- (Rs.2,01,500 + Rs.83,511). We do not find any infirmity in the conclusion reached by the ld CIT(A), hence we approve and confirm the findings of ld CIT(A).

In the result, ground No.2 raised by the Revenue is dismissed.

In combined Result, appeal filed by the Revenue is dismissed.