INCOME TAX OFFICER-2, RAIGARH vs. SHRI VINOD KUMAR JAIN, JASHPUR

O R D E R

Per Arun Khodpia, AM :

1. Whether in the facts and circumstance and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 6,43,00,000/- made by the AO u/s 68 of the Act?

2. Whether on the facts and circumstances of the case and on the points of the law Ld. CIT(A) was justified in deleting the addition of Rs. 6,43,00,000/- made by the AO by ignoring the facts as brought on record by the AO that the assessee failed to prove the identity of the creditor, genuineness of the transaction and creditworthiness of the investor as per the parameters of the legal provisions u/s 68 of the Act?

3. Whether in the facts and circumstances and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 6,43,00,000/- made by the AO u/s 68 of the Act by ignoring the decisions in the following lead cases:- (i) Mcdowell and Company Ltd Vs Commercial Tax Officer (1985) 22 Taxman 11 (SC). (ii) M/s Raj Mandir Estates Pvt Ltd Vs PCIT-III, Kolkata (SLP No. 22566-22567) dated 09.01.2017. (iii) CIT Vs Precision Finance Pvt Ltd., 208 ITR 465(CAL).

4. Whether on the facts and circumstances of the case and on the points of the law Ld. CIT(A) is justified in deleting the addition of Rs. 7,82,161/- made by the AO being interest claimed on the unsecured loan of Rs. 6,43,00,000/-? 5. Whether on the facts and circumstances of the case on the points of the law Ld CIT(A) is justified in deleting the additions of Rs. 6,43,00,000/- and Rs 7,82,161/- though there is no nexus between the conclusion of facts and primary facts upon which conclusion is based? 6. The order of the Ld CIT(A) is erroneous both in law and on facts. 7. The appellant craves permission to raise the additional ground or grounds at the ^me of/hearing of the appeal. 2. Brief facts of the case are that the assessee an individual, has filed its return of income electronically on 23/05/2015, declaring a total income of Rs. 7,90,170/- and Agricultural Income of Rs. 3,48,775/-. Subsequently, the case was selected for scrutiny under the guidelines of compulsory scrutiny selection. Assessment proceedings conducted and necessary submissions were made by the assessee, however, explanations of the assessee on some queries raised by the AO were not found favour with the Ld AO. Thereafter, assessment order u/s 143(3) of the Income Tax Act 1961 was passed on 30/12/2016, with certain additions on account of bogus unsecured loan and interest expenses thereon claimed for Rs. 6,43,00,000/- and Rs. 7,82,161/-, respectively, consequently, total taxable income of the assessee was determined at Rs. 6,58,72,331/- apart from agricultural income of Rs. 3,47,775/-. 3. Aggrieved by the aforesaid additions by the Ld AO, assessee preferred an appeal before the first appellate authority i.e. Ld CIT(A)-1, Jabalpur. Ld CIT(A) has adjudicated the appeal and deleted the additions AO, therefore, now the department is in appeal before us against the findings of the Ld CIT(A).

4. Before us, while starting the arguments on all the 6 grounds collectively, challenging the issue regarding deleting the Bogus Unsecured Loan and interest thereon, Ld CIT-DR drew our attention to the assessment order wherein Ld AO has doubted on an unsecured loan extended by M/s Kamna Housing Pvt. Ltd., a Kolkata based company to the assessee,. For Verification of genuineness, creditworthiness and identity of the said company, an ITI was deputed to visit Kolkata and submit a report on these aspects about the said company. The ITI in due course has submitted a report wherein it is commented that the M/s Kamna Housing Pvt. Ltd. was not found at the address as provided by the assessee. Further, a letter was also issued to Principle DIT(Inv) Kolkata to enquire and provide the whereabouts of the loan creditor company, same response that the company was not found at the address given was received from the Pr DIT(Inv) too, thus ld AO reached on a conclusion that the identity of the company from whom the loan has been taken is in a state of jeopardize. Concerning, other condition of the loan transaction i.e. credit worthiness of the loan creditor, required documents were called for and the same were submitted by the assessee. On examination of the said documents Ld AO has found that the lender company is having a meager income, which does not commensurate with the towering figures of the capital account. Company was formed few years back but having very low profit & loss figures, indicates that since incorporation no real business activities were done. Thus, the Ld AO framed an opinion that the company is a shell company. Such companies are exists for one big reason to help its customers to convert their unaccounted money into white and vise versa. The report of investigation wing from Kolkata on 29/12/2016 has also raised question regarding creditworthiness of the company. It is also submitted that the assessee’s explanation on these issues submitted on 26/12/2016 was considered as misleading and not satisfactory by the Ld AO. AO relied upon decision of Hon’ble Kolkata High Court in the case of CIT Vs Precision Finance Pvt. Ltd. reported in 208 ITR 465, wherein it held that burden of proving identity creditworthiness and genuineness of transaction is on assessee. In the case of Mcdowell & Co. Ltd. Vs Commercial Tax Officer (1985) 22 Taxman 11 (SC), Hon’ble Apex Court has held that “Colourable devices cannot be a part of the tax planning……… No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.” Ld AO observed that the identity and creditworthiness both are in question of M/s Kamna Housing Pvt. Ltd., the unsecured loan creditor, which the assessee was failed to explain properly, thus, the loan taken for Rs. 6,43,00,000/- found to be bogus, hence added back to income of the assessee u/s 68 of the Income Tax Act as income from undisclosed sources and also the interest paid thereon for Rs. 7,82,161/- was treated as unexplained and added back to the income of the assessee.

5. Ld CIT-DR further submitted that the findings of the Ld AO on this issue were reversed by the Ld CIT(A) by observing that the notice dated 21-12-2016 issued by AO to the assessee has a mention about M/s Kamna Housing Pvt. Ltd. that “though the identity and genuineness of the transaction from the above party is proved but the creditworthiness of the said company is not proved.”, however on page 5 of the assessment order the AO has stated that the company was not found at the given address. In addition, CIT(A) has observed that that the Ld AO had relied on the report of the Investigation wing Kolkatta but the same was not confronted to the assessee by ld AO before making the assessment. In this regard Ld CITDR has placed its reliance on a judgment in the case of I.C.D.S. Ltd. v. Commissioner of Income Tax, reported in 117 taxmann.com 723, wherein Hon’ble Apex Court has held that: “It was alleged that opportunity was not extended to appellant to cross-examine witnesses relied upon by Assessing Officer - Whether entire matter would be considered by First Appellate Authority afresh by giving fair opportunity to both sides to espouse their claim in remanded appeal(s) - Held, yes”, 6. In view of the aforesaid said judgment of the Apex Court, Ld CITDR has alleged that, if the assessee was not confronted by the AO on the report of Investigation wing then the CIT(A) who is having all the powers equal to an assessing officer to conduct such proceedings, should have confronted the assessee on such documents which during the assessment proceedings the AO has missed to do so., but in the present case Ld CIT(A) has not deemed it necessary to initiate such proceedings and as such no discussion with either side was made, no comment from Investigation wing neither any argument if was raised by the assessee have ever been directed to the AO to controvert, the issue was decided by Ld CIT(A) on his own wisdom without appreciating the facts of the issue correctly. It is further submitted that the evidences produced before the CIT(A) by the assessee as per para (ix) on page 49 of 51 appears to be fresh evidences allowed by the Ld CIT(A), without following the procedure laid down under 46A is a clear violation of the Law. In view of these submissions Ld CITDR prayed that the findings of the Ld CIT(A) shall be considered as erroneous and unjustified, thus the same shall be annulled.

7. On the contrary, Ld AR of the assessee, has supported the order of the Ld CIT(A). Ld AR submitted that the issues in the appeal were not properly appreciated by the Ld AO, in fact the submission and explanations of the assessee were considered by the Ld AO under the shadow of the report of Investigation Wing Kolkata. If the same would have confronted with the assessee, the asseesee would have clarified the doubts then and there itself, but the Ld AO with a prejudiced mind has concluded the assessment without bringing in any cogent evidence to justify that the transaction was bogus. Ld AR further submitted that the onus of the assessee to provide necessary information to the Ld AO were fully discharged while the assessee had provided all the relevant and necessary documents pertaining to M/s Kamna Housing Pvt. Ltd. to prove its identity, creditworthiness and genuineness of transaction. In support of genuineness of transaction Ld AR has submitted that the repayment of the impugned unsecured loan was started by the assessee way before the assessment proceedings were started i.e. on 16-03-2015 and fully paid by 14-03-2017, where as the scrutiny assessment was started on 16- 09-2015 and order issue on 30-12-2016, this clearly shows that the transaction was genuine and cannot be treated as bogus. It is submitted that the issues in the present appeal are very judiciously dealt with by the Ld CIT(A) and thus the findings of the CIT(A) were based on facts of the case and in respectful obedience of the legal principles laid down by various Hon’ble Judicial Authorities, was justified and deserves to be upheld. Ld AR relied on various judicial pronouncements as under :-. (i) It has been held by the Hon'ble Supreme Court in the case of Kishanchand Chellaram Vs. CIT (1980) 125 1TR 713 that the assesseee has to be confronted with the material relied by the AO. The relevant portion from the report is as under:- "!t was true that proceedings under the income-tax law were not governed by the strict rules of evidence, and, therefore, it might be said that even without calling the manager of the bank in evidence to prove the letter dated February 18,1955, it could be taken into account as evidence. But before the income-tax authorities could rely upon it, they were bound to produce it before the assessee so that the assessee could controvert the statements contained in it by asking for an opportunity to cross-examine the manager of the bank with reference to the statements made by him. Norwas there any explanation regarding what happened when the manager appeared in obedience to the summons referred to in the letter dated March 9,1957, and what statement he had made." (ii) In the case of CIT v. Orissa Corporation P. Ltd. [1986] 159 ITR 78 (SC), it has been held as under:- "Held, that in the case the respondent had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131 at the instance of the respondent, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the respondent could not do anything further. In the premises, if the Tribunal came to the conclusion that the respondent had discharged the burden that lay on it, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which a conclusion could be arrived at, no question of law as such arose. The High Court was right in refusing to state a case." (iii) In the case of CIT vs. Metachem Industries 245 ITR 107, the Hon'ble M.P.High Court has held as under: - "Once it is established that the amount has been invested by a particular person be he a partner or an individual, then the responsibility of the assessee firm is over. The assessee firm cannot ask that person who makes investments whether the money invested is properly taxed or not. The assessee is only to explain that this investment has been made by a particular individual and it is the responsibility of that individual to account for the investment made by him. If that person owns that entry then the burden of the assessee firm is discharged. It is open to the Assessing Officer to undertake further investigation with regard to that individual who has deposited this amount. So far as the responsibility of the assessee is concerned, it is satisfactorily discharged. Whether that person is an Income Tax payee or not or from where he has brought this money Is not the responsibility of the firm." (iv) In the case of CIT vs.Nevendram Ahuja [2007] 290 ITR 453, the Hon'ble M.P.High Court has relied on the following observations of the Bombay High Court's decision in the case of Orient Trading Co. Ltd., vs. CIT (1963) 49 ITR 723:- "When however in a case where the entry stands in the name of the third party, the assessee satisfies the Income Tax Officer as to the identity of the third party and also supplies such other evidence which will show, prima facie, that the entry is not fictitious, the initial burden which lies on him can be said to have been discharged by him. It will not, thereafter, be for the assessee to explain further how or in what circumstances the third party obtained money and how or why he came to make a deposit with the assessee. The burden will then shift on to the department to show why the assessee's case cannot be accepted and why it must be held that the entry, though purporting to be in the name of a third party, still represents the income of the assessee from a suppressed source. In order to arrive at such a conclusion, however, the department has to be in possession of sufficient and adequate material." (v) In the case of DCIT v Rohini Builders [2002] 256 ITR 361 the hon'ble Guj'rat High Court has held as under :- "APPEAL TO HIGH COURT- CASH CREDITS- IDENTITY OF CREDITORS PROVED- AMOUNTS RECEIVED BY ACCOUNT PAYEE CHEQUES- INITIAL BURDEN OF PROVING CREDITS DISCHARGED- SOURCE OF CREDITS NEED NOT BE PROVED- FACT THAT EXPLANATION WAS NOT SATISFACTORY WOULD NOT AUTOMATICALLY RESULT IN DEEMING AMOUNTS AS INCOME OF ASSESSEE - TRIBUNAL HOLDING AMOUNT REPRESENTING CASH CREDITS NOT INCLUDIBLE IN TOTAL INCOME OF ASSESSEE- JUSTIFIED - NO SUBSTANTIAL QUESTION OF LAW- INCOME TAX ACT, 1961 ss. 68 260A"

Section 69B of the Income-tax Act, 1961 - Undisclosed investments -Assessment year 1946-47 - Respondent firm obtained overdraft upon security of fixed deposit receipt issued in name of son of partner -Authorities held that amount of fixed deposits was concealed income of respondent firm - Whether when department could not prove that respondent was owner of amount, despite fact that receipt was in name of son of partner, amount in question could not be treated as concealed income of respondent-firm - Held, yes When a court of fact acts on material partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at its finding. Such, a finding is vitiated because of the use of inadmissible material and thereby an issue of law arises. Likewise, it the court of fact bases its decision partly on conjectures, surmises and suspicions and partly on evidence, in such a situation an issue of law arises. The onus to prove that the apparent is not the real is on the party who claims it to be so. As it was the department which claimed that the amount of fixed deposit receipt belonged to the respondent firm even though the receipt had been issued in the name of B, theburden laid on the department to prove that the respondent was the owner of the amount despite the fact that the receipt was in the name of B. A simple way of discharging the onus and resolving the controversy was to trace the source and origin of the amount and find out its ultimate destination. So far as the source was concerned, there was no material on the record to show that the amount came from the coffers of the respondent-firm or that it was tendered in B Calcutta branch of the Central Bank, on behalf of the respondent. As regards the destination of the amount, there was nothing to show that it went to the coffers of the respondent. On the contrary, there was positive evidence that the amount was received by B. It would thus follow that both as regards the source as well as the destination of the amount, the material on the record gave no support to the claim of the department. The decision of the High Court was therefore affirmed. The case was decided against the department.