COTTON NATION, MUMBAI V. JCIT-26(1), MUMBAI

ITA 4181/MUM/2019

AI Insights

The case involves appeals by M/s. Cotton Nation against the orders of the CIT(A)-38, Mumbai, concerning additions made under section 68 of the Income Tax Act, 1961, for the assessment years 2013-14 and 2014-15. The Assessing Officer (AO) had made additions totaling Rs.5.35 crores for AY 2013-14, alleging that the unsecured loans taken by the assessee were from non-genuine entities. The CIT(A) deleted most of these additions, except for Rs.30 lakhs, which was confirmed for both years. The Tribunal examined the evidences and arguments presented, including the financial statements and the responses from the lender companies, and found that the assessee had sufficiently proved the genuineness of the transactions for most of the loans, leading to the dismissal of the revenue's appeal and the allowance of the assessee's appeals.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 123954 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 08-01-2023
• Assessment Year: 2013-2014
• Appeal Filed On: 10-06-2019
• Other Referred Cases: Commissioner of Income Tax vs. Lovely Exports (P.) Ltd., PCIT vs. Paradise Inland Shipping Pvt Ltd, CIT vs. Orchid Industries Pvt. Ltd., CIT vs. Creative World Telefilms Ltd
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Source of fund; Accommodation entries; Set aside
• Section: 131; 68; 143(3); 133(6); 195; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI ‘C’ BENCH, MUMBAI. Before Shri B.R. Baskaran (AM) & Shri Rahul Chaudhary (JM) I.T.A. No. 4181/Mum/2019 (A.Y. 2013-14) I.T.A. No. 4182/Mum/2019 (A.Y. 2014-15) M/s. Cotton Nation 304, 3 r d Fl oor V TM Bui ldi n g Mehra Compoun d Saki naka Mu mbai- 400 072. PAN : A AHFC278 4N V s. JCIT-26(1) C-11, 7 th Floor Pratyakshakar Bhavan, Bandra Kurla Complex Bandra East Mumbai-400 051. (Appellant) (Respondent) I.T.A. No. 6198/Mum/2019 (A.Y. 2013-14) ACIT-26(1) Room No. 302, 3 rd Floor, Kautilya Bhavan Bandra Kurla Complex Bandra East Mumbai-400 051. V s. M/s. Cotton Nation 304, 3 r d Fl oor V TM Bui ldi n g Mehra Compoun d Saki naka Mu mbai- 400 072. PAN : A AHFC278 4N Assessee by Shri Prateek Jain Department by Smt. Shreekala Pardesi Da te of He ar ing 09.01.2023 Da te of P r onou nce me nt 28.02.2023 O R D E R Per B.R.Baskaran (AM) :- The cross appeals filed for AY 2013-14 and the appeal filed by the assessee for assessment year 2014-15 are directed against the orders passed by Ld CIT(A)-38, Mumbai. All the appeals were heard together and hence they are being disposed of by this common order, for the sake of convenience. M/s. Cotton Nation 2 2. The assessee is engaged in the business of manufacturing, trading and export of textile and readymade garments. In AY 2013-14, the AO made addition of Rs.5,35,00,000/- u/s 68 of the Act relating to the loans taken by the assessee. The AO also disallowed interest expenditure relating to the above said loans both in AY 2013-14 and 2014-15. The Ld CIT(A) deleted the addition made u/s 68 of the Act to the tune of Rs.5,05,00,000/- and confirmed the balance amount of addition of Rs.30,00,000/-. The Ld CIT(A) also granted proportionate relief in respect of interest expenditure disallowed in both the years. Aggrieved, both the parties are in appeal in AY 2013-14. The assessee has filed appeal in AY 2014-15. 3. The facts relating to the addition of Rs.5.35 crores made by the AO in AY 2013-14 have been narrated as under by Ld CIT(A) in the order passed by him for assessment year 2013-14:- “5.2 During the assessment proceedings from the perusal of the balance sheet, the AO noticed that the appellant has taken from various parties detailed below; SN PARTICULARS DIRECTOR LOCATION UNSECURED LOANS (RS) INTEREST 1. AnunayComrnosales Pvt Ltd Rahul Kolkata 1,55,00,000 1 1,22,017 2. Devesh Commosales Pvt Manish Kolkata 1,05,00,000 6,27,141 3. Kingfisher Properties Pvt Ltd Vishal Kolkata 20,00,000 9,469 4. Lity Star Constructions Ltd Umesh Kolkata 20,00,000 14,795 5. Pushpanjali Commo Trade Pvt Umeah Kolkata 10,00,000 7,101 6. Smart Pay Card Pvt. Ltd Tu-shar Kolkata 19, 00,000 7,309 7. Frank Mercantile Pvt Ltd Avinash Mumbai 31,00,000 2,27,508 8. Lena Mercantile Pvt Avinash Mumbai 1,40,00,000 4,51,528 M/s. Cotton Nation 3 Ltd 9. Virgo Mercantile Pvt Ltd Tushar Mumbai 35,00,000 58,882 5,35,00,000 25,25,841 Further, the AO noted that the findings in respect of unsecured loans from various companies based in Mumbai and Kolkata show that these parties are merely paper entities and are existing solely for providing various kinds of accommodation entries. The funds brought into these companies are not having any basis since the transactions done by these companies are bereft, of any business rationale and are only paper transaction, The AO has bifurcated the parties based on the address i.e. Mumbai & Kolkata. In respect of Mumbai parties namely Lona Mercantile Pvt. Ltd., Frank Mercantile Pvt. Ltd., Virgo Mercantile Pvt. Ltd., AO states that these companies do not have any business, operated from a very small room with only one employee, source-of funds is from share premium and there is no capacity to raise huge share premium. The Director, Shri Avinash Jajoo admitted that these are paper concerns. Further, in respect of Kolkatta Companies, AO stated Shri Tushar Sharma a director of M/s. Smart Pay Card Pvt. Ltd, was an employee of Shri Jajoo and is a director in numerous companies and this company does not have credit worthiness to lend huge unsecured loans to assessee. In respect of Kingfisher Properties Pvt. Ltd., Lity Construction Ltd. and Pushpanjali Commotrade Pvt. Ltd., AO stated that its director Shri Umesh Singh who has signed the confirmation letter has admitted that he is mere a peon of Shri Praveen Agarwal who has floated numerous jamakharchi companies to give accommodation entries. Shri Parveen Agarwal has also accepted that he used to provide accommodation entries. In respect of Arunay Commosale Pvt. Ltd. and Devesh Commosale Pvt. Ltd., AO has stated that these companies are having meager incomes which do not justify the huge share premium in their balance sheets and the directors are the directors in numerous companies. These companies are not having creditworthiness to lend huge sums as unsecured loans to assessee. Accordingly, AO held that assessee has not been able to discharge its onus casted as per section 68 of the Act and the credits of Rs.5,35,00,000/- remained unexplained. AO also disallowed the interest paid on the above loans amounting to Rs.25,25,841/-. 4. The AO has also summarized his conclusions with regard to the above said loans as under:- M/s. Cotton Nation 4 Sr. No. Name of company Paragraph for reference Finding in brief 01 Lona Mercantile Pvt. Ltd. 09 to 09.4 and 13 These companies do not have any business, operated from a very small room with only one employee, source of funds is from share premium and there is no capacity to raise huge share premium. The Director Shri Avinash Jajoo admitted that these are paper concerns. Shri Tushar Sharma, a director of M/s Smart Pay Card Pvt. Ltd. was an employee of Shri Jajoo and is a director in numerous companies and this company does not have creditworthiness to lend huge unsecured loans to assessee. 02 Frank Mercantile Pvt. Ltd. 03 Virgo Mercantile Pvt. Ltd. 04 Smart Pay Card Pvt. Ltd. 05 Kingfisher Properties Pvt. Ltd. Para 10 to 10.8 The Director, Shri Umesh Singh who has signed the confirmation letters has admitted that he is a mere peon of Shri Parveen Agarwal who has floated numerous jama Kharchi companies to give accommodation entries. Shri Parveen Agarwal has also accepted that these are his companies and he has used these companies to provide accommodation entries. 06 Lily Construction Ltd. 07 Pushpanjali Commotrade Pvt. Ltd. 08 Arunay Commosale Pvt. Ltd. 11 These companies are having meagre incomes which do not justify the huge share premium in their balance sheets and the directors are the directors in numerous companies. These companies are not having creditworthiness to lend huge sums as unsecured loans to assessee. | 09 Devesh Commosale Pvt. Ltd 12 5. After hearing the assessee and upon examination of records, the Ld CIT(A) has rendered his decision as under:- “7.4 I find on perusal of the documentary evidences furnished by the appellant that the identity of the lender companies are proved as seen from copy of 1TR-V, audited financial statements, and Form 16A. It is also seen that in the case of two leader companies, viz., M/s. Anunay Commosale Pvt. Ltd. and M/s. Devesh Commosale Pvt. Ltd. assessment has been made u/s, 143(3) for assessment year 2012-13 and no disallowance or addition has been made on account of non-genuine equity M/s. Cotton Nation 5 share capital in the assessment order. The balance sheet for the year ended on 31.03.013 shows that the following lender companies had sufficient funds as detailed below: SI. No. Name of the Company Equity Capital in Rs. Reserves (in Rs.) Loan Given in Rs. 1. M/s. Frank Mercantile Pvt. Ltd. 88,36,750 16,73,62,005 31,00,000 2. M/s. Lona Mercantile Pvt. Ltd. 79,53,750 14,99,67,895 1,40,00,000 3. M/s. Virgo Mercantile Pvt. Ltd. 94,72,750 17,99,93,355 35,00,000 4. M/s. Anunay Commosale Pvt. Ltd. 3,25,790 13,11,50,785 1,55,00,000 5. M/s. Devesh Commosale Pvt. Ltd. 2,09,300 10,92,00,813 10,500,000 6. M/s. Kingfisher Properties P. Ltd. 50,94,397 99,54,90,65 20,00,000 7. M/s. Smart Pay Card Pvt. Ltd. 48,64,200 9,07,56,601 19,00,0001 Total 5,05,00,000 7.4.1 The above demonstrates that the lender companies had the capacity to lend funds to the appellant. No discrepancy has been pointed out in the assessment order of the instant appellant by the AC in respect of the above documents submitted by the appellant during the assessment proceedings. As a matter of fact, the financial statements of the above lender companies are also available on the public domain of Ministry of Corporate Affairs, The appellant has received the borrowings from the aforesaid lender companies through banking channels as reflected-in the bank-account of the appellant. Further, it is observed that there is no direct evidence, which has been brought on record by the AO to point out that the said transactions arc accommodation entries. No nexus is established that the funds have been circulated or that cash was paid by the appellant company to the aforesaid lender-companies to obtain the cheques for unsecured loans. 7.4.2 Further, from the perusal of the ledger accounts and bank account statements of bank account of the appellant maintained with Bank of India, Mahalaxmi, Mumbai, I find that the aforesaid loan amounts along with interest has been repaid to the said companies in the financial years, 2013-14 and 2014-15 relevant to assessment year 2014-15 and 2015-16 respectively. The appellant has deducted tax on interest payments as apparent from Form 16A. 7.4.3 In the light of the above facts, I am of the opinion, the appellant has discharged the primary onus to prove the identity and credentials of the M/s. Cotton Nation 6 aforesaid seven lender companies and genuineness of the loan transactions. 7.4.4 In the assessment order, the AO has stressed upon the statement of Shri Avinash Jajoo in respect of the three Mumbai based entities namely M/s. Frank Mercantile Private Ltd., M/s. Lona Mercantile Private Ltd. and M/s. Virgo Mercantile Private Ltd, to hold that the same are not genuine. On perusal of the statement, it is observed that Shri Avinash Jajoo has nowhere accepted that the companies are engaged in providing accommodation entries. In fact, in answer to question no. 35 to 40, Shri Avinash Jajoo, explained that he knew the partner of the appellant firm since the last 8 years and has provided loans out of his own funds at interest rate ranging between 9 to 10%. Further, he has also explained the source of-funds out of which the loans have been advanced to the appellant. With regard to the non-service of notice issued to these parties u/s. 133(6) and Inspector's report that the office was found closed, Shri Avinash Jajoo has explained in answer to Q. 33 that the premise to which notice was issued was taken only for temporary purpose in the year, 2009, from where the office of the said companies shifted subsequently to Kalbadevi, Mumbai. An affidavit to this effect has also been filed before the AO. I find there is no material on record to contradict the above statements of Shri Avinash Jajoo recorded on oath u/s. 131. Therefore, the AO's contention that Shri Avinash Jajoo has admitted that the aforesaid three lender companies are not genuine is not well founded. 7.4.5 Further, in respect of loan of Ks.20 lakhs received from M/s, Kingfisher Properties Pvt. Ltd., it is seen from the break-up of capital and Reserves submitted by the appellant that only an amount of Rs.40 lakhs has been received from the companies i.e. M/s, Rashiamrit Projects Pvt. Ltd. and M/s. Speed Fast Developers Pvt. Ltd. in which Shri Umesh Singh was director out of reserves of Rs.99.5crs. Hence, the statement of the AO in the assessment order, that the entire Reserves of Rs.99.5Crs. is received from the aforesaid companies in which Shri Umesh Singh was director is misplaced. There is no material on record to pinpoint that the loans received by the appellant, from M/s. King Fisher Properties Pvt. Ltd. has been given from the funds received from the 'aforesaid two companies in which Shri Umesh Singh was director, Therefore, in view of the above facts, it cannot be concluded that the funds amounting to Rs.20 lakhs received from M/s.Kingfisher Properties Pvt. Ltd. are non-genuine. 7.4.6 Coming to the other two companies namely, M/s. Arm nay Commosale Pvt. Ltd. and M/s. Devesh Commosale Pvt. Ltd., I find that the AO formed the opinion that the aforesaid two lender companies are no I creditworthy and proceeded to make the addition u/s.68 solely on the basis of low income earned during the concerned year. In this respect, the fact remains that these lender companies had sufficient funds of their own to lend the loans to the appellant as can be observed from the balance sheet which is brought out in the above table. Further, the assessment order in these companies show that the AO of these lender companies has accepted the financial statements declared by the aforesaid lender M/s. Cotton Nation 7 companies in their Returns filed as genuine. Therefore, contention of the AO is not tenable. 7.4.7 With respect to M/s. Smart Pay Card Pvt. Ltd., it is found that there is no evidence on record to show that Shri Tushar Shanna was engaged in providing accommodation entries as mentioned by the AO in the assessment order, Therefore, contention of AO cannot be accepted, in this case too. 7.4.8 Further, with regard to non-service of notices issued by the ADI, it is observed that all the lender companies have replied to the Investigation Wing as well as the Assessing Officer and the documents called for have been submitted as evident from the copies of the replies submitted by the appellant. 7.4.9 In support of my above views, reference is made to the judicial precedents of the Hon'ble Courts in the following case laws. (i) The Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Lovely Exports (P.) Ltd. [2008] 216 CTR 195 has held as, "If the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the department is free to proceed, to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee company". (ii) Further, Jurisdictional High Court in the following judicial precedents has deleted the addition made u/s 68, once the assessee proves the Identity, genuineness and creditworthiness of the parties. (a) PCIT vs. Paradise Inland Shipping Pvt Ltd 84 Taxrnarin.com 58 (Bombay HC) "Where reassessment resorted to on ground that companies which had purchased shares of assessee-company were not in existence, once assessee had produced documentary evidence to establish existence of companies, burden would shift on to revenue to establish initiation of reassessment arid, thus, reassessment be set aside." (b) CIT vs. Orchid Industries Pvt. Ltd. 88 Taxmann.com 502 (Bombay HC): "Held that the assessee had produced on record the documents to establish the genuineness of the party such as PAN of all the creditors along with the confirmation, their bank statements showing payment of share application money. The assessee had also produced the entire record regarding issuance of shares, i.e., allotment of shares to these parties, their share application forms, allotment letters and share certificates, so also the books of account The balance sheet and profit and loss account of those persons disclosed that they had sufficient funds in their accounts for investing in the shares of the assessee, In view of these voluminous documentary evidence, only because those persons had not M/s. Cotton Nation 8 appeared before the Assessing Officer would not negate the case of the assessee. Therefore, the addition was liable to be deleted." (c) CIT vs. Creative World Telefilms Ltd 333 1TR 100 (Bombay HC): "In the case in hand, it was not disputed that the assessee had given the details of name and address of the shareholder, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the Assessing Officer to make proper investigation and rea.ch the shareholders. The Assessing Officer did nothing except issuing summons which were ultimately returned back with an endorsement 'not traceable'. The Assessing Officer ought to have found out their details through PAN cards, bank account details or from their' bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the Assessing Officer. In the above circumstances, the view taken by the Tribunal could not be faulted. No substantial question of law was involved in the appeal. In the result, the revenue's appeal was to be dismissed in limine. (para 2.)" 7.4.10 Accordingly, 1 hold that the unsecured loans from the seven aforesaid lender companies aggregating to Rs.5,05,00,000/-, as discussed above, cannot, be termed as unexplained. The AO is directed to delete the addition made u/s. 68 in respect of unsecured loans from the said lender companies. 7.5 With regard to two entities based in Kolkata namely M/s. Lity Star Construction Ltd. and M/s, Pushpanjali Commotrade Pvt. Ltd., AO has stressed upon the statement of Shri Umesh Singh and Shri Praveen Agarwal to show that the funds received from these lender companies arc bogus. On perusal of the statement of Shri Umesh Singh, it is observed that he has clearly stated with regard to the above two companies that he has indulged into providing accommodation entries and acted as a conduit to Shri Praveen Agarwal, This fact has also been confirmed by Shri Praveen Agarwal in his statement wherein he clearly admitted that, he has indulged into providing accommodation entries. The contention of the appellant that the statements recorded way back in 2014 in some other case cannot negate the evidentiary value of documents produced by the appellant, is not tenable in the wake of the above deposition of the Shri Umesh Singh and Shri Praveen Agarwal in so far as the above two companies are concerned. Also, the appellant has not been able to counter the said statements recorded with cogent material. Though the appellant has submitted documentary evidences, however, the admission of the so- called directors cannot be ignored in the given facts and circumstances. Accordingly, the unsecured loans received from M/s, Lity Star Construction Ltd. and M/s. Pushpanjali Co mm o trade Pvt. Ltd. aggregating to Rs.30,00,000/- are treated as unexplained cash credit u/s 68 and addition in respect of -these parties is confirmed.” M/s. Cotton Nation 9 The Ld CIT(A) deleted interest disallowance relating to Rs.5.05 crores and confirmed remaining amount of interest disallowance in both the years. 6. With regard to the relief of Rs.5.05 crores granted by Ld CIT(A), the ld D.R submitted that the AO had made the addition on sound reasoning and accordingly contended that the Ld CIT(A) was not justified in deleting the above said addition. The Ld A.R, on the contrary, submitted that the Ld CIT(A) has deleted the addition on noticing that the assessee has discharged the initial burden placed upon its shoulders. He further submitted that the Ld CIT(A) has duly addressed various other reasoning given by AO for making the addition. Accordingly, he submitted that there is no reason to interfere with the order passed by Ld CIT(A) in respect of addition of Rs.5.05 crores. 7. With regard to the addition of Rs.30 lakhs made by Ld CIT(A), the Ld A.R submitted that the assessee has taken above said amount as loans from M/s Lity Star Constructions Ltd (Rs.20.00 lakhs) and M/s Pushpanjali Commo Trade P Ltd (Rs.10.00 lakhs) and it has discharged initial burden placed upon it in respect of above said loan of Rs.30.00 lakhs by furnishing all the details relating thereto. He submitted that both the above said companies have duly responded to the notice issued by the AO u/s 133(6) of the Act. Both the companies have supplied necessary information in response to the summon issued u/s 131 of the Act also. Accordingly, he submitted that there is no reason to disbelieve the financial statements and other particulars furnished by these two companies. He further submitted that the Ld CIT(A) has confirmed the addition on the basis of some statement given by its directors in some other proceedings, which are not related to the assessee. He submitted that those statements could not have been relied upon, since the assessee was never implicated in those statements. Accordingly, he contended that the Ld CIT(A) was not justified in confirming the addition of Rs.30.00 lakhs in AY 2013-14 and related interest expenditure in AY 2013-14 and 2014-15. M/s. Cotton Nation 10 8. We heard the parties and perused the record. From the careful reading of the order passed by Ld CIT(A), we notice that the first appellate authority has made detailed analysis of the facts relating to the loans to the tune of Rs.5.05 crores taken by the assessee. He has noticed that those companies have enough resources proving their credit worthiness. He has also noticed that the assessee has furnished all the details to prove other two incredients, viz., identity and genuineness of transactions. With regard to the statements of certain persons relied upon by the AO, the Ld CIT(A) has noticed that those statements do not turn against the assessee at all. Under these set of facts, we do not find any reason to interfere with his decision in holding that there is no ground to make addition u/s 68 of the Act in respect of the loans aggregating to Rs.5.05 crores. Accordingly, we uphold the order passed by him on this issue. Consequently, the relief granted in respect of interest disallowance relatable to the above said amount of Rs.5.05 crores is also upheld. 9. With regard to the addition of Rs.30.00 lakhs confirmed by Ld CIT(A), we notice that the Ld CIT(A) as well as AO has placed reliance on a statement given by the director of two companies, viz., M/s Lity Star Constructions Ltd (Rs.20.00 lakhs) and M/s Pushpanjali Commo Trade P Ltd (Rs.10.00 lakhs) in some other proceeding before the investigation wing. Thus, the fact remains that the above said statements have not been taken during the course of present assessment proceedings of the assessee. Hence, we are of the view that the tax authorities are not justified in placing reliance on the statement given by the director in a third party proceeding without confronting the same with the assessee. On the contrary, the fact remains that both the above said companies have duly responded to the AO during the course of current assessment proceedings by furnishing replies to the notices issued u/s 133(6) of the Act and the summons issued u/s 131 of the Act. All the relevant financial statements have been filed before the AO in respect of above said two companies in order to prove the three main M/s. Cotton Nation 11 ingredients, viz., identity of the creditor, credit worthiness of the creditor and the genuineness of transactions. Accordingly, we are of the view that the Ld CIT(A) was not justified in sustaining addition of Rs.30 lakhs relating to the above said two companies. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition of Rs.30 lakhs relating to the above said two companies. Consequently, the interest disallowance made in AY 2013-14 and 2014-15 are directed to be deleted. 10. In the result, the appeal of the revenue is dismissed and both the appeals of the assessee are allowed. Pronounced in the open court on 28.2.2023. Sd/- Sd/- (RAHUL CHAUDHARY) (B.R. BASAKARAN) Judicial Member Accountant Member Mumbai; Dated : 28/02/2023 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard File. BY ORDER, //True Copy// (Assistant Registrar) PS ITAT, Mumbai