Kanchan Plastics Private Limited, Cuttack V. Deputy Commissioner of Income Tax ASMNT Circle-2(1), Cuttack

ITA 198/CTK/2022

AI Insights

Kanchan Plastics Pvt Ltd. appealed against the order of the CIT(A), which confirmed the addition made by the Assessing Officer under section 68 of the Income Tax Act, 1961, treating loans taken by the assessee as unexplained cash credits. The loans, amounting to Rs.28,50,000, were taken from six lenders, including three individuals and three HUFs, who were relatives of the directors and also shareholders of the company. The Assessing Officer had initially accepted the documentation provided by the assessee but later rejected it based on the observation of cash deposits in the lenders' accounts prior to the loan disbursement. The Tribunal, after considering the submissions and evidence, including the financial capacity and the genuineness of the transactions, ruled in favor of the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300297 (ITAT-CUTTACK)
• Duration Of Justice: 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 21-03-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 08-12-2022
• Other Referred Cases: Blessing Construction vs ITO, Umesh Krishnani vs ITO, DCIT vs Rohini Builders, CIT vs Baishnab Charan Mohanty, CIT vs Orissa Corporation Pvt Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Unexplained investment; Question of law; TDS
• Section: 131; 68; 69; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BEFORE AND ARUN KHODPIA, ACCOUNTANT MEMBER Kanchan Plastics Pvt Ltd., 222, Banka Bazar, Cuttack PAN/GIR No. (Appellant Per Bench This is an appeal filed by the assessee against the order of the ld CIT(A), NFAC, Delhi, 22/1040539332(1) 2. Shri Mohit Sheth, ld AR assisted by and Ms Sibani Satpathy, assessee. Shri S.C.Mohanty, ld Sr. DR. assisted by Panda, intern IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE S/SHRI GEORGE MATHAN, JUDICIAL AND ARUN KHODPIA, ACCOUNTANT MEMBER ITA No.198/CTK/2022 Assessment Year : 2017-18 Kanchan Plastics Pvt Ltd., 222, Banka Bazar, Cuttack Vs. DCIT, ASMNT Circle Cuttack PAN/GIR No. (Appellant) .. ( Respondent Assessee by : Shri Mohit Sheth, AR Revenue by : Shri S.C.Mohanty, Sr. Date of Hearing : 22 /0 Date of Pronouncement : 22 /0 O R D E R This is an appeal filed by the assessee against the order of the ld , NFAC, Delhi, dated 10.3.2022 in Appeal No.ITBA/NFAC/S/250/2021 22/1040539332(1) for the assessment year 2017-18. Shri Mohit Sheth, ld AR assisted by Ms Ipsita Priyadarshani Dhal and Ms Sibani Satpathy, interns of ‘The Law College, CDA, Cuttack assessee. Shri S.C.Mohanty, ld Sr. DR. assisted by intern ‘The Law College, CDA, Cuttack’ for the revenue. Page1 | 12 IN THE INCOME TAX APPELLATE TRIBUNAL, JUDICIAL MEMBER AND ARUN KHODPIA, ACCOUNTANT MEMBER DCIT, ASMNT Circle-2(1), Respondent) Mohit Sheth, AR S.C.Mohanty, Sr. DR 03/2023 /03/2023 This is an appeal filed by the assessee against the order of the ld ITBA/NFAC/S/250/2021- Ipsita Priyadarshani Dhala of ‘The Law College, CDA, Cuttack’ for the assessee. Shri S.C.Mohanty, ld Sr. DR. assisted by Shri Chandra Sekhar ‘The Law College, CDA, Cuttack’ for the revenue. ITA No.198/CTK/2022 Assessment Year : 2017-18 Page2 | 12 3. It was submitted by ld AR that the assessee is a Private Limited Company, which is in the business of manufacture and sale of plastic items, such as, Mugs, Buckets, etc. It was the submission that during the relevant assessment year, the assessee had taken loans of Rs.28,50,000/- from six persons being three individuals and three HUFs, who are relatives of the Directors of the assessee company. It was the submission that the three individuals were also the shareholders of the assessee company. It was the submission that in the course of assessment, the Assessing Officer had invoked the provisions of section 68 of the Act and had treated the loans taken by the assessee as unexplained cash credit. It was the submission that in the course of assessment, the assessee had produced the copies of returns of income of the lenders alongwith their computation of total income, balance sheet, bank statements and confirmation of the lenders. It was the submission that the Assessing Officer had also issued notice u/s.133(6) of the Act to the lenders who had also confirmed the transactions directly to the Assessing Officer. It was the submission that the Assessing Officer, only on the ground that there were cash deposits in the bank accounts of the lenders before loans were granted to the assessee, had treated the loans transaction as bogus and had invoked the provisions of section 68 of the Act. It was the submission that the assessee had initially taken the loans as interest free but subsequently, as the assessee was unable to repay the loans immediately, the assessee had paid ITA No.198/CTK/2022 Assessment Year : 2017-18 Page3 | 12 interest on the same and had also deducted TDS on the interest payments and the lenders had also disclosed the same in their returns of income for the assessment year 2021-22 onwards. Ld AR also placed before us the copies of the bank accounts, returns of income, computation of total income, balance sheet of the loan creditors as also their ledger accounts for the assessment year 2021-22 onwards. It was the submission that the assessee having proved the identity, creditworthiness and genuineness of the transactions of taking the loan, the addition as made by the Assessing Officer and as confirmed by the ld CIT(A) is liable to be deleted. 4. In reply, ld Sr DR submitted that the genuineness of the transaction is in question insofar as cash has been deposited in the bank accounts of the lenders before the alleged loan have been given to the assessee. It was the submission that the assessee’s unaccounted amount has been deposited in the form of cash in the bank account of the lenders and same has been taken as loan by the assessee. Ld Sr DR relied upon the decision of the Hon’ble High Court of Gujarat in the case of Blessing Construction vs ITO (2013) 32 taxmann.com 366 (Guj), wherein, the Hon’ble High Court has held as follows: “. With respect to the legal contention that the Revenue cannot insist on assessee supplying the source of source is impeccable. However, the facts of the present case are vastly different. It is of-course true that some of the observations made by the Tribunal may suggest that the Tribunal did concern itself with the source of the source. However, such observations cannot be picked in isolation as to treat that as the conclusion of the Tribunal. When one reads the order of ITA No.198/CTK/2022 Assessment Year : 2017-18 Page4 | 12 the Assessing Officer, that of the Commissioned Appeals) and also of the Tribunal, inescapable conclusion one arrives at is that the Revenue authorities as well as the Tribunal found the entire transaction not genuine. There was sufficient evidence on record to suggest that in case of all the depositors, their bank accounts contained meager balance shortly before sizable amount of Rs. 1 lakh and upward were given to the assessee through such account. In such bank accounts, cash amounts were credited and immediately entire amounts were withdrawn through issuance of such cheques in favour of the assessee. It was noticed that such creditors did not maintain any books of account. Nowhere their capacity to raise such amount for drawing cheque of sizable amounts was established. In short therefore, the V very genuineness of the transaction was not established. This therefore, is not a case where the Revenue makes addition on the assessee failing to establish source of the source. All issues are essentially based on facts and appreciation of evidence on record. No question of law arises. Tax Appeal is dismissed. 5. Ld Sr DR also relied upon the decision of Hon’ble High Court of Gujarat in the case of Umesh Krishnani vs ITO (2013) 35 taxmann.com 598 (Guj), wherein, the principles laid down by the Hon’ble High Court of Gujarat in the case of Blessing Construction (supra) has been reiterated. Ld Sr DR further submitted that the ld CIT(A) has relied on various decisions to uphold the decision of the Assessing Officer in making the addition u/s.68 of the Act. It was the submission that the order of the Assessing Officer and that of the ld CIT(A) is liable to be upheld. 6. In reply, ld AR placed reliance on the decision of the Hon’ble High Court of Gujarat in the case of DCIT vs Rohini Builders, 256 ITR 360(Guj), wherein, the Hon’ble High Court has held as follows: ITA No.198/CTK/2022 Assessment Year : 2017-18 Page5 | 12 “ We have considered the rival submissions and have also gone through the order passed by the Assessing Officer, the relevant portion of which we have also extracted in para. 2 above. The Commissioner of Income-tax (Appeals) more or less confirmed the addition on the reasoning given by the Assessing Officer in the assessment order. A perusal of the chart given by us in para. 3 above indicates that out of 21 creditors the Assessing Officer has recorded the statements of only six creditors, viz., creditors at serial Nos. 1, 2, 3, 4, 6, and 7. However, in respect of all the 21 creditors the assessee has furnished their complete addresses along with GIR numbers/permanent account numbers as well as confirmations along with the copies of assessment orders passed in the cases of creditors at serial Nos. 1, 2, 4, 5, 6, 7, 9, 10, 11, 12 and 16. In the remaining cases where the assessment orders passed were not readily available, the assessee has furnished the copies of returns filed by the creditors with the Department along with their statement of income. All the loans were received by the assessee by account payee cheques and the repayments of loans have also been made by account payee cheques along with the interest in relation to those loans. It is rather strange that although the Assessing Officer has treated the cash credits as non-genuine, he has not made any addition on account of interest claimed/paid by the assessee in relation to those cash credits, which has been claimed as business expenditure and has been allowed by the Assessing Officer. It is also pertinent to note that in respect of some of the creditors the interest was credited to their accounts/paid to them after deduction of tax at source and information to this effect was given in the loan confirmation statements by those creditors filed by the assessee before the Assessing Officer. Thus it is clear that the assessee had discharged the initial onus which lays on it in terms of section 68 by proving the identity of the creditors by giving their complete addresses, GIR numbers/permanent accounts numbers and the copies of assessment orders wherever readily available. It has also proved the capacity of the creditors by showing that the amounts were received by the assessee by account payee cheques drawn from bank accounts of the creditors and the assessee is not expected to prove the genuineness of the cash deposited in the bank accounts of those creditors because under law the assessee can be asked to prove the source of the credits in its books of account but not the source of the source as held by the Bombay High Court in the case of Orient Trading Co. Ltd. v. CIT [1963] 49 ITR 723. 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. Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee -from those creditors as non-genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the ITA No.198/CTK/2022 Assessment Year : 2017-18 Page6 | 12 Revenue's case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw an adverse inference against the assessee. In the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69. 8. Further, we may point out that section 68 under which the addition has been made by the Assessing Officer reads as under : "68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." 9. The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this, case the legislative mandate is not in terms of the words "shall be charged to income-tax as the income of the assessee of that previous year". The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word "may" and not "shall". Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 ITR 570. 10. Thus taking into consideration the totality of the facts and circumstances of the case, and, in particular, the fact, that the Assessing Officer has not disallowed the interest claimed/paid in relation to these credits in the assessment year under consideration or even in the subsequent years, and tax deducted at source has been deducted out of the interest paid/credited to the creditors, we are of the opinion that the Departmental authorities were not justified in making the addition of Rs. 12,85,000 which is directed to be deleted.” ITA No.198/CTK/2022 Assessment Year : 2017-18 Page7 | 12 7. He further relied upon the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Baishnab Charan Mohanty, reported in 212 ITR 199(Ori), wherein, the Hon’ble Jurisdictional High Court has held as follows: “6. When a question arises as to whether a cash credit appearing in the books of account of an assessee has to be accepted or to be rejected and addition to be made in accordance with s. 68 of the Act, the assessee is required to establish the identity of his creditor, the capacity of the creditor to advance the money and the genuineness of the transaction. If the assessee establishes the aforesaid three pre-conditions, then it would be for the Department to disprove the same. In the present case, the first appellate authority as well as the Tribunal had accepted the identity of the persons who had entered into business with the assessee. The Tribunal further, relying upon the confirmation letters available in the paper book as well as all other relevant materials, recorded the finding that the transactions are genuine. The question posed for reference, therefore, requires an answer as to whether the Tribunal was justified in coming to the finding that the transactions are genuine and further directing deletion of the income from the income of the assessee. Under what circumstances the finding of a Tribunal on a question of fact could be interfered with by the superior Court came up for consideration before the Supreme Court in the case of CIT vs. S. R Jain 1972 CTR (SC) 443 : (1973) 87 ITR 370 (SC). After elaborate discussion of the law on the subject, their Lordships held (at page 381): " In our view, the High Court and this Court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached." ITA No.198/CTK/2022 Assessment Year : 2017-18 Page8 | 12 8. He also relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Orissa Corporation Pvt Ltd., 159 ITR 78 (SC), wherein, in para 13, it has been held as follows: “13. In this case, the assessee 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 s. 131 at the instance of the assessee, 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 or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do anything further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises.” 9. It was the submission that on perusal of the various decisions referred (supra) clearly shows that once the assessee has proved the identity, creditworthiness and genuineness of the transaction, no addition u/s.68 of the Act can be made in the hands of the assessee. It was the prayer that the addition as made by the AO and as confirmed by the ld CIT(A) is liable to be deleted. 10. We have considered the rival submissions. The facts in the present case clearly show that the allegation by the Assessing Officer and the ld CIT(A) is that there has been cash deposits in the bank account of the ITA No.198/CTK/2022 Assessment Year : 2017-18 Page9 | 12 creditors before granting of the loans and before deposit of cash, there was meager funds available in the bank accounts of the lenders. A perusal of the bank account of Suman Agarwal shows that admittedly, there is cash deposit of Rs.5,00,000/- on 8.4.2016 and the cheque has been issued to the assessee for an amount of Rs.5,00,000/- on 12.4.2016. The balance as available in the said bank account is Rs.86,893/- as opening balance and peak of the balance excluding the said cash deposit is Rs.3,25,971/-. Suman Agarwal has investment of nearly Rs.24,37,381/- disclosed in her balance sheet. She has disclosed an income of Rs.7,34,343/- in her return of income for the assessment year 2017-18. Coming to lender Ridhi Agarwal, a perusal of the bank account shows that there is deposit of Rs.5,00,000/- on 8.4.2016 and the loan has been given for an amount of Rs.5,00,000/- on 12.4.2016. The opening balance in the said account is Rs.62,025/- and the peak of the deposit excluding the said amount of Rs.5 lakhs in the bank account is Rs.7,32,000/-. She has shown investment of Rs.21,56,000/- in her balance sheet and an income of Rs.8,08,026/- in her return of income. In respect of Poonam Agarwal, similarly, there is cash deposit of Rs.5,00,000/- on 8.4.2016 and on 12.4.2017, Rs.5 lakhs has been given to the assessee. The opening balance in the bank account is Rs.85,257/- and the peak deposit excluding the cash deposit is Rs.3,90,000/-. She has investment of Rs.20,96,133/- in her balance sheet and she has disclosed income of Rs.7,11,415/- in her return of income. ITA No.198/CTK/2022 Assessment Year : 2017-18 Page10 | 12 Coming to Balkrishnan Agarwal (HUF), the loan given of Rs.2,75,000/- is on 17.10.2016 whereas the cash deposits are as early as 9.9.2016. The peak balance is Rs.3,46,172/-. The return of income shows an income of Rs.6,53,000/- and in the balance sheet Rs.2,65,897/- is investment. In respect of Aditya Agarwala (HUF) , the peak deposit is Rs.3,01,513/-, the loan is Rs.2,25,000/- and the income disclosed in the return of income is Rs.6,55,000/- and the investment disclosed is Rs.1,69,220/-. In respect of Deepak Agarwal(HUF), the peak deposit is Rs.3,18,000/-, loan given is Rs.2 lakhs, income disclosed is Rs.6,15,000/- and the investment is Rs.3,89,000/- . The investments are excluding the loans given to the assessee. Thus, clearly, the lenders had adequate funds, their identity is proved from filing of return of income showing substantial income. Their bank balances are not meager. A perusal of the returns of income filed by the lenders for the assessment year 2021-22 also show that they have disclosed interest received from the assessee and they have claimed the benefit of TDS and the returns have been accepted by the issuance of orders u/s.143(1)(a) of the Act. With these facts in perspective, if one is to see the principles laid down in various decisions, it becomes clear that the decision relied upon by the Revenue in the case of Blessing Construction (supra) would not apply insofar as in that case, the fact that has led to the said decision was that in respect of the creditors, their bank accounts contain meager balance before sizeable amounts were deposited and the loans given to the assessee. This ITA No.198/CTK/2022 Assessment Year : 2017-18 Page11 | 12 is not the fact in assessee’s case. A perusal of the decision of the Hon’ble High Court of Gujarat High Court in the case of Rohini Builders (supra) shows that under identical circumstances, the Hon’ble High Court has held that in case the AO was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by treating the cash deposits in their bank accounts as unexplained investments of those creditors u/s.68 of the Act. This view of the Hon’ble High Court has been reiterated and confirmed by the principles laid down by the Hon’ble Supreme Court in the case of Lovely Exports, reported in 216 CTR 1989 (SC), wherein, it has been categorically held that once the initial burden of the identity is proved, then the Assessing Officer is at liberty to proceed on the creditors in accordance with law but the same sum cannot be treated as unexplained credit of the assessee. This view has been reiterated again in the case of Steller Investment, 115 taxmann.com 99. In these circumstances, as it is noticed that the assessee has produced the details of the creditors before the Assessing Officer, the creditors have independently confirmed the transaction before the Assessing Officer and no evidence is found by the Assessing Officer to disprove the confirmation given by the creditors. The assessee has discharged its burden of proving the identity, creditworthiness and genuineness of the transaction in respect of the loan ITA No.198/CTK/2022 Assessment Year : 2017-18 Page12 | 12 from six creditors to the extent of Rs.28.50 lakhs. Consequently, the addition as made by the AO and confirmed by the ld CIT(A) stands deleted. 11. In the result, appeal filed by the assessee stands allowed. Order dictated and pronounced in the open court on 22/03/2023. Sd/- sd/- (Arun Khodpia) (George Mathan) ACCOUNTANT MEMBER JUDICIAL MEMBER Cuttack; Dated 22/03/2023 B.K.Parida, SPS (OS) Copy of the Order forwarded to : By order Sr.Pvt.secretary ITAT, Cuttack 1. The Appellant : Kanchan Plastics Pvt Ltd., 222, Banka Bazar, Cuttack 2. The Respondent: DCIT, ASMNT Circle-2(1), Cuttack 3. The CIT(A)-NFAC, Delhi 4. Pr.CIT-, Cuttack 5. DR, ITAT, Cuttack 6. Guard file. //True Copy//