M/S CLASSIC PRODUCTS (P) LTD. V. CIT AND ANR.

ITA/420/2009

AI Insights

M/s Classic Products (P) Ltd. appealed against the order of the Income Tax Appellate Tribunal, which had upheld the addition of Rs. 57,00,000 to the company's income as unsecured loans under Section 68 of the Income Tax Act, 1961. The company argued that the loans were from its directors and were made through cheques, suggesting that the source of the funds was legitimate. However, the Assessing Officer and the Tribunal found that the directors did not have the financial capacity to provide such loans, and the funds were likely routed through undisclosed income of the company. The High Court agreed with this assessment, noting that the company failed to prove the creditworthiness of the directors or the genuineness of the transactions.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 746334 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 17-09-2013
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-Tax v. Metachem Industries, Deputy Commissioner of Income Tax v. Rohini Builders, Commissioner of Income-Tax v. Kulwant Singh and Co., Commissioner of Income Tax, Faridabad v. Laul Transport Corporation, Commissioner of Income-Tax v. Diamond Products Ltd., Power Drugs Limited v. Commissioner of Income-Tax and Another
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: ARUN SHARMA
• Assessee Lawyers: M R SHARMA
• Keywords: Assessment; Creditworthiness; Income Tax; Unsecured loans; Director's Loan
• Section: 143(3); 143(2); 143(1); 139(1); 68; 145(3); 260A

Judgement Text

"ITA No. 420 of 2009 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 420 of 2009 (O&M) Date of Decision: 17.9.2013 M/s Classic Products (P) Ltd. ....Appellant. Versus Commissioner of Income Tax and another ...Respondents. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE JASPAL SINGH. PRESENT: Mr. M.R. Sharma, Advocate for the appellant. Mr. Arun Sharma, Advocate for Mr. Tajender K. Joshi, Advocate for the respondents. AJAY KUMAR MITTAL, J. 1. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 27.3.2009 passed by the Income Tax Appellate Tribunal, Delhi Bench “B”, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 996(Del)/2007 relating to the assessment year 2002-03. 2. In this appeal, the assessee had claimed five substantial questions of law. This Court vide order dated October 30, 2009 had observed that questions (i) and (v) are in the nature of arguments, whereas questions (ii) and (iv) did not arise and admitted the appeal for consideration of question (iii) which is to the following effect:- “(iii). Whether the learned Income Tax Appellate Tribunal is correct in law in upholding the order of Assessing Officer as upheld by the Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -2- Commissioner of Income Tax (Appeals) making an addition of Rs.57,00,000/- being the amount of loans extended by the Directors of the company to the appellant company u/s 68 of the Income Tax Act, 1961?” 3. The relevant facts, in brief, necessary for adjudication of the present appeal as narrated therein are that the assessee is a Private Limited Company duly registered under the Companies Act, 1956. It was engaged in the business of manufacturing of tiles and undertaking job work. The assessee filed its return of income under Section 139(1) of the Act on 31.10.2002 declaring loss of ` 47,178/-. The assessment under Section 143(1) of the Act was completed vide order dated 28.2.2003 accepting the loss as returned. Subsequently, after issuance of notice under Section 143(2) of the Act, the assessment was completed under Section 143(3) of the Act by respondent No.2 vide order dated 28.3.2005 (Annexure P-2) assessing the income at ` 61,52,700/- and an addition of ` 3,50,000/- under Section 68 of the Act was made. Further addition of ` 57,00,000/- under Section 68 of the Act was made on account of unsecured loans. Respondent No.2 also assessed an income of ` 1,02,743/- @ 8% of the sales and job work undertaken by the assessee during the year under consideration at ` 12,84,299/- after rejecting the book of accounts under Section 145(3) of the Act. The rate of profit had been assessed @ 8% of the sales as well as the job receipt during the period from July 2001 to March 2002. During the year under consideration, the assessee derived income from the sale of manufactured tiles and job work to the tune of ` 2,31,440/- (on account of Sales) and ` 15,02,513/- (on account of Job Work). Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -3- Feeling aggrieved against the order dated 28.3.2005 passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”]. The CIT(A) vide order dated 30.1.2007 (Annexure P-3) dismissed the appeal. Still dissatisfied, the assessee approached the Tribunal, who vide order dated 27.3.2009 (Annexure P-1) upheld the findings recorded by the CIT (A) and dismissed the appeal. Hence, the instant appeal. 4. Learned counsel for the appellant-assessee submitted that the Assessing Officer, the CIT(A) and the Tribunal were in error in sustaining the addition of ` 57 lacs in the income of the assessee. According to the learned counsel, the Directors of the appellant- company had given loan by way of cheque and in such a situation, no addition in the hands of the company could be made where the source of funds in the hands of the Directors was not explained. In other words, it was urged that source of source cannot be gone into by the Assessing Officer and the addition could be in the hands of the Directors and not in the hands of the assessee-company. Reliance was placed upon the judgments in Commissioner of Income-Tax v. Metachem Industries, (2000) 245 ITR 160 (MP), Deputy Commissioner of Income Tax v. Rohini Builders (2002) 256 ITR 360 (Guj), Commissioner of Income- Tax v. Kulwant Singh and Co. (2008) 299 ITR 53 (P&H), Commissioner of Income Tax, Faridabad v. Laul Transport Corporation (2009) 180 Taxman 185 (P&H) and Commissioner of Income-Tax v. Diamond Products Ltd. (2009) 21 DTR (Del) 9. 5. On the other hand, learned counsel for the revenue supported the orders passed by the authorities below. 6. After hearing learned counsel for the parties, we do not find Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -4- any merit in the appeal. The CIT(A) has found that the assessee had claimed that there were 19 creditors who made the payment, out of which, 11 persons involving a sum of ` 24.70 lacs did not have any bank account with the concerned bank and regarding 8 creditors, they did not have the financial capacity to make the advance out of their accumulated funds. The CIT(A) had analyzed the veracity of each creditor and discussed the same in his order. It was noticed as under:- “It was noticed by the Assessing Officer from the Balance Sheet as on 31.3.2001 that the unsecured loan of Rs.2,38,000/- had gone up to Rs.59,23,800/- as on 31.3.2002. Therefore the assessee has raised fresh loans of Rs.57,00,000/- during the year. On being asked to prove the genuineness of these loans and details of the persons from whom the loans were raised, the assessee was unable to do so. The assessee stated that the loans were raised from the Directors Shri Joginder Singh Kataria and Shri Hari Singh Kataria introduced from their joint account with ICICI Bank, Sector-14, Gurgaon. It further stated that the deposits in the bank account represent the loan from different persons to the directors. On being asked to file the addresses of the creditors and source of investment for the same, the assessee filed information from which the following inferences were made regarding the 19 alleged creditors:- Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -5- Name and address Amount Name & Address of the Bank Remarks of the Assessing Officer Dipdeepa Green Park, New Delhi-42 490000 Canara Bank, New Delhi. A summon u/s 131 was issued to Canara Bank, calling for information. No reply has been received so far. It is inferred that there is no account in the name of Dipdeepa with the bank. Kul Raj 12, Biswa Gurgaon Vill. Gurgaon 150000/- 150000/- Bank of Baroda, Gurgaon Vijaya Bank, Gurgaon Bank of Baroda, Gurgaon, Branch Gurgaon has informed that the bank did not have any account in the name of Kul Raj. A copy of bank statement obtained from Vijaya Bank revealed that in the SB A/c No. 997 of Sh. Kul Raj, there was a cash deposit of Rs.1,00,000/- on 24.12.2001 which was subsequently transferred to Sh. Joginder Singh through cheque no. 677770 cleared on 27.12.2001. From the entries it is apparent that it was the assessee's unaccounted money, which was deposited in cash in the a/c of Sh. Kul Raj who acted as a conduit. Tilak Raj 12- Biswa Gurgaon, Gurgaon 250,000/- Vijaya Bank,Gurgaon A copy of bank statement obtained from Vijaya Bank revealed that in the SB A/c No. 996 of Sh. Tilak Raj, there was a cash deposit of Rs.250000/- on 24.12.01 which was subsequently transferred to Shri Joginder Singh vide cheque no. 666811 cleared on 27.12.01. From the entries it is apparent that it was the assessee's unaccounted money which was deposited in cash in the a/c of Sh. Tilak Raj who acted as a conduit. Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -6- Name and address Amount Name & Address of the Bank Remarks of the Assessing Officer Rohtash Vill- Shekhopua, Teh. Tavru, Gurgaon 750000/- Syndicate Bank, Tavru, Gurgaon A copy of the bank statement of Sh. Rohtash (SB A/c No. 1727) has been obtained from Syndicate Bank Tavru. In the said bank statement there was no credit/debit entries aggregating to Rs.750000/- by which the payments are claimed to have been made to Shri Joginder Singh during the period. Dilbag Vill- Shekhopua, Teh. Tavru, Gurgaon. 500000/- Syndicate Bank, Tavru, Gurgaon A copy of the bank statement of Sh. Dilbag (SB A/c No. 1729) has been obtained from Syndicate Bank Tavru. In the said bank statement there was no credit/debit entries aggregating to Rs.500000/- by which the payments are claimed to have been made to Shri Joginder Singh during the period. Dharambir Vill- Shekhopua, Teh. Tavru, Gurgaon. 750000/- Syndicate Bank, Tavru, Gurgaon No reply has been received from Syndicate Bank, Tavru. Sh. Dharambir belongs to the family which includes Rohtash, Dilbagh and Karamvir. Accordingly it is inferred that Dharambir has no funds to advance an amount aggregating to Rs.750000/- to Joginder Singh. Satish Kumar 12-Biswa Gurgaon, Vill- Gurgaon 250000/- Bank of Baroda, Gurgaon The Bank of Baroda has informed that there is no such a/c in the name of Satish Kumar with the bank. Surender 12 Biswa Gurgaon, Gurgaon 250000/- O.B.C. Gurgaon. The Oriental Bank of Commerce, Gurgaon, has informed that there is no such a/c in the name of Surender with the Bank. O.P. Kataria, Sector-4, Gurgaon 80000/- SBI, New Colony, Gurgaon. The SBI, New Colony has informed that the cheque book containing cheque no. 559591 was issued by the bank to Sh. Sudhir Kalra and not to Shri O.P. Kataria. Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -7- Name and address Amount Name & Address of the Bank Remarks of the Assessing Officer Rambir Singh, Vill-Dharmpur, P.O. Gurgaon, Gurgaon 100000/- Gurgaon Gramin Bank, Gurgaon. The Gurgaon Gramin Bank, Gurgaon has informed that there is neither any bank account in the name of Rambir Singh nor has it issued any cheque book containing cheque no. 22046. Jot Ram Vill- Dharmpur, P.O. Gurgaon, Gurgaon. 100000/- Gurgaon Gramin Bank, Gurgaon. The Gurgaon Gramin Bank, Gurgaon has informed that there is neither any bank account in the name of Jot Ramnor has it issued any cheque book containing cheque no. 264082. Randhir Singh Vill-Dharmpur, P.O. Gurgaon, Gurgaon 100000/- Union Bank of India, Gurgaon. No reply has been received from the Union Bank of India, Gurgaon. It is inferred that there is no such account with the bank. Karambir Vill- Shekhopua, Teh. Tavru, Gurgaon. 500000/- Syndicate Bank, Tavru, Gurgaon A copy of the bank statement of Sh. Karambir (SB A/c No. 1725) has been obtained from Syndicate Bank Tavru. In the said bank statement there was no credit/debit entries aggregating to Rs.500000/- by which the payments are claimed to have been made to Sh. Joginder Singh. Rohtash Vill- Rampur, P.O. Kundel, Teh. Kharkheda, Gurgaon 150000/- OBC Bank, Kharkheda. Saving Bank A/c No. 2442 was opened by Sh. Rohtash s/o Harnarainwith OBC, Kharkhoda (Sonepat). The concerned bank has informed that cheque no. 596061 for Rs.300000/- was issued by Sh. Rohtash and the same was cleared on 13.2.02. The ledger statement prepared manually has not been submitted by the bank due to non-availability of the old records. However, the bank has submitted computerized statement for the period 11.07.05 to 02.01.06 which clearly shows that there was no deposit in the said account and as such he has no financial capacity to advance loan of Rs.150000/-. Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -8- Name and address Amount Name & Address of the Bank Remarks of the Assessing Officer Sandeep Singh village-Firojpur P.O. Kundel, Sonipat 200000/- OBC Bank, Kharkheda. The bank has informed that there is no such a/c in the name of Sandeep Singh and the cheque book containing cheque no. 597947 was issued to Sh. Dilip Singh S/o Sh. Harphool and not to Sh. Sandeep Singh. Ratna Singh Vill-Firojpur, P.O. Kundel, Sonipat 250000/- OBC Bank, Kharkheda. Saving Bank A/c no. 133 was opened by Sh. Ratna Singh with OBC, Kharkheda (Sonepat). The concerned bank has informed that cheque no. 597941 for Rs.250000/- was issued by Sh. Ratna Singh and the same was cleared on 29.10.02. The ledger statement prepared manually has not been submitted by the bank due to non-availability of the old records. However, the bank has submitted computerized statement for the period 01.07.05 to 02.01.06 which clearly shows that there was no deposit in the said account and as such he did not have the financial capacity to advance loan of Rs.250000/-. Kuljeet Singh Vill-Shekhopua, Teh. Tavru, Gurgaon. 250000/- Gurgaon Gramin Bank, Kulwari. The Gurgaon Gramin Bank, Gurgaon has informed that there is neither any bank account in the name of Kuljeet Singh nor has it issued any cheque book containing cheque no. 184931. Rohtash Kumar, Vill-Rampur, P.O. Kundel, Teh. Kharkheda, Sonipat. 300000/- OBC Bank, Kharkheda. The OBC Kharrkheda, Sonepat has informed that there is neither any bank a/c in the name of Rohtak Kumar nor has it issued any cheque book containing cheque no. 596061. Rajeev, Vill- Rampur, P.O. Kundel, Teh. Kharkheda, Sonipat. 200000/- Central Bank of India, Kharkheda, Sonipat. The Central Bank of India, Kharrkheda, Sonepat has informed that there is neither any bank a/c in the name of Rajeev nor has it issued any cheque book containing cheque no. 282376. Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -9- It is seen from the above details that out of 19 creditors, 11 persons named at serial no's 1, 2, 7 to 12 and 15 to 19 involving a sum of Rs.24,70,000/- did have any bank accounts with the concerned banks as claimed by the assessee in his letter dated 3.5.2006 filed before this office. As far as the remaining 8 persons mentioned at Serial no's 2 to 6 and 13 to 16 involving a sum of Rs.33,50,000/- are concerned, they did not have the financial capacity to make the advance out of their accumulated funds to the Director Shri Joginder Singh. It is apparent from the entries in the bank account that it was the unaccounted money of the company which was routed through the cash deposit in the bank account of the said 9 persons and thereafter the cheques were issued in favour of Shri Joginder Singh. The transactions reflected in the bank statement cannot be relied upon. It is to be noted that mere furnishing of the particulars of the persons is not enough and making payments by A/c cheques cannot make non-genuine transactions genuine.” 7. The Tribunal had affirmed the aforesaid findings with the following observations:- “11. We have heard the rival submissions and perused the material available on record and have gone through the orders of the authorities below and Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -10- the judgments cited by both sides. Regarding this observation of the Assessing Officer that no proof regarding assessment of Directors has been furnished by the assessee company and the claim of the Ld AR of the assessee that Directors are duly assessed to income tax as per copy of the assessment order appearing on pages 35 to 40 of the paper book, we find that the observation of the Assessing Officer appears to be correct because in the copy of assessment orders Directors available on 35-40 of the paper book, we find that it is noted by the Assessing Officer in both these cases that the assessee has filed return of income on 26.12.2006 in response to notice issued under section 148 of the Act. It is also noted by the Assessing Officer in both cases that the assessee has not filed return of income and hence the fact is that till the assessment order was completed on 28.03.2005, both these Directors were not assessed to income tax. This factor alone, however, cannot be decisive factor for deciding the issue in question. 12. The claim of the assessee is that this amount of Rs.57 lakhs was received by the assessee company from its Directors and hence identity is established. Now, we have to see as to whether the creditworthiness of the Directors is also established. In this regard, now we find that nothing has been brought on record regarding financial status of these Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -11- Directors. As per the copy of the assessment order available for both these Directors on pages 35-40 of the paper book, it is noted by the Assessing Officer that as per return filed by both these Directors have shown income at Rs.48,745/- in each case and hence this also does not show that both these directors were capable of advancing loans of Rs.57 lakhs to the assessee company. 13. To explain the source of funds in the hands of Directors for advancing the loan in question to the assessee company, the assessee has submitted that both these Directors have obtained loans from 19 persons who are stated to be friends and relatives of these Directors. The claim of the assessee regarding this has been examined by the Assessing Officer and the remarks of the Assessing Officer are duly incorporated by the Ld. CIT(A) on pages 15-26 of his order. On page No.23 of his order, Ld. CIT(A) has summarized the remarks of the Assessing Officer that out of 19 persons, 11 persons involving a sum of Rs.24.70 lakhs did not have any bank account with the concerned bank as claimed by the assessee and for remaining 8 persons, involving a sum of Rs.33.50 lakhs, it is noted by the Assessing Officer that they did not have the financial capacity to made advances to the Directors. As per the affidavits of these persons appearing on pages 16 to 34, we find that in all these Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -12- affidavits it has been stated that the main source of income of these persons is agriculture and hence these persons are not income tax assessees. Nothing has been brought on record regarding quantum of their agricultural income. It is stated in all these affidavits that they have given interest free loans to Shri Jgoinder Singh Kataria and Shri Hari Singh Kataria. There is no mention in these affidavits regarding any friendship or relationship with the Directors and why they have advanced these loans to the Directors free of interest and without any security. Under these facts, we are in agreement with Ld. CIT (A) that the assessee was not able to prove the creditworthiness of the loan creditors i.e. Directors.” 8. The Tribunal came to the conclusion that the creditworthiness of the Directors was not established after considering various factors as noticed above. In such a situation, it could not be said that it was undisclosed income of the Directors and not that of the company. The Tribunal had further recorded that the funds in the hands of the Directors for advancing loans were in fact the undisclosed income of the assessee which was routed through deposits in the accounts of the alleged creditors who in turn had made the payment to the Directors through whom the amount was received by the company. In such circumstances, it cannot be said that the Assessing Officer, the CIT(A) and the Tribunal were in error in treating the amount to be undisclosed income of the assessee. 9. Examining the contention of learned counsel for the Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -13- assessee-appellant, it is observed that ordinarily, the source of source cannot be gone into by the Assessing Officer but in a given case where the source itself does not have the capacity, the Assessing Officer can enter into the domain of assessing the creditworthiness of the source itself as held by this Court in Power Drugs Limited v. Commissioner of Income-Tax and Another (2011) 245 CTR 623 wherein it was held as under:- “The assessee was unable to establish the identity, creditworthiness and the genuineness of the transaction so as to escape from the provisions of Section 68 of the Act. Whether an addition is to be made in the hands of the company or individual assessee in such circumstances depends upon the facts of each case. The primary onus lies upon the assessee to establish that the assessee is not liable for addition under Section 68 of the Act as the amount in fact belongs to the persons who had applied and submitted share application money. The assessee having failed to discharge such onus in the present case, the Tribunal had rightly upheld the additions in the hands of the company.” 10. Adverting to the judgments relied upon by learned counsel for the assessee, in all these cases, the assessee had discharged the initial onus placed upon it regarding the creditworthiness of the creditors who had given the loans. Thus, the judgments relied upon by the learned counsel for the assessee were on different facts and do not advance its case. Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No. 420 of 2009 -14- 11. Accordingly, the question reproduced above is answered against the assessee and in favour of the revenue. The appeal stands dismissed. (AJAY KUMAR MITTAL) JUDGE September 17, 2013 (JASPAL SINGH) gbs JUDGE Singh Gurbachan 2013.11.11 16:02 I attest to the accuracy and integrity of this document High Court Chandigarh "