R.D.ENTERPRISES,MUMBAI V. DCIT, CIRCLE 17(3), MUMBAI

ITA 2980/MUM/2025

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R.D. Enterprises, a partnership firm engaged in share trading and investments, appealed against the order of the National Faceless Appeal Centre (NFAC) which confirmed disallowances and additions made by the assessing officer under sections 14A and 68 of the Income Tax Act for the assessment year 2017-18. The main issues were the disallowance of expenses related to earning exempt income and the addition of unsecured loans as unexplained cash credits. The Tribunal examined the submissions and evidence provided during the remand proceedings and found that the additions were not justified based on the provided evidence and the legal provisions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 707197 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2017-2018
• Appeal Filed On: 29-04-2025
• Other Referred Cases: Maxopp Investment Ltd. Vs CIT 402 ITR 640
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANNAVARAMKOSURI
• Assessee Lawyers: PARESH SHAPARIA
• Keywords: Unexplained cash credit; Principle of natural justice; Source of fund; Earning of tax free income; Rule 8D
• Section: 68; 14A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER & SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER ITA No. 2980/MUM/2025 (AY : 2017-18) (Physical hearing) R.D. Enterprises C-65, Mittal Court, Nariman Point, Mumbai – 400001. [PAN No. AAAFR1977R] Vs DCIT, Circle – 17(3), Mumbai. Kautilya Bhavan, G Block, Bandra (East), Mumbai – 400051. Appellant / Assessee Respondent / Revenue Assessee by Shri Paresh Shaparia, CA Revenue by Shri Annavaram Kosuri, Sr. DR Date of hearing 26.06.2025 Date of pronouncement 09.07.2025 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of National Faceless Appeal Centre (NFAC) / Ld. CIT(A), Mumbai dated 07.03.2025 for assessment year (AY) 2017-18. The assessee has raised following grounds of appeal: 1. Non-consideration of appellant’s written submissions, remand proceedings and remand report thereby violating the principle of natural justice. 2. Confirmation of disallowance u/s 14A r.w.r. 8D of the IT Act of Rs. 17,60,725/-. 3. Addition of Rs. 8,95,72,000/- as unexplained cash credit u/s 68 rws 115BBE of the IT Act for unsecured loans taken from M/s. Kantilal Sanghvi & Co. (Prop. Mr. Dhairesh Sanghvi (one of the partner of the appellant firm) 4. Addition of Rs. 20,30,724/- as unexplained cash credit u/s 68 rws 115BBE of the IT Act for unsecured loans taken from Jeeken Kharwala. 2. Brief facts of the case are that assessee is a partnership firm engaged in the business of share trading, derivatives and investment in share and securities. The assessee filed its return of income for A.Y. 2017-18 on 22.08.2017 ITA No. 2980/Mum/2025 R.D. Enterprises 2 declaring Nill income. In the computation of income, the assessee set off brought forward losses of Rs. 5.20 crore. Case was selected for scrutiny on the issue of huge loan was squared up during the year, low income comparison to high income shown in the balance sheet and expenses debited for earning exempt income is significantly lower as compared to investment. During the assessment, the assessing officer has noted that assessee has earned dividend income of Rs. 2,21,900/-. The assessing officer asked to show working of suo moto disallowance under section 14A r.w. Rule 8D. In response to such show cause notice, the assessee filed reply on 18.06.2019. The assessee explained that aggregate administrative expenses incurred during the year are only Rs. 52,594/- which includes Rs. 23,000/- audit fees for statutory compliances and Rs. 10,000/- and legal fees. No expenses were incurred for earning dividend income. Even if expenses are attributable to the same, the same cannot exceed Rs. 197/- on proportionate basis. The explanation / submission of assessee was not accepted by assessing officer. The assessing officer invoked the provisions of section 14A r.w. Rule 8D and worked out disallowance @1.00% of average investment and made addition of Rs. 17,60,725/-. 3. The assessing officer further noted that assessee has shown unsecured received loan of Rs. 9.16 crore. The assessee was asked to furnish confirmation, return of income and bank statement of lenders. The assessing officer recorded that in response to show cause notice, the assessee filed confirmation but failed to furnish copy of bank statement and ITRs of lendres. The assessing officer on his observation that assessee failed to ITA No. 2980/Mum/2025 R.D. Enterprises 3 furnish such details, despite show cause notice treated the amount of loan as unexplained credit under section 68 and taxed the same under section 115BBE while passing assessment order on 15.12.2019 under section 153(3). 4. Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A). Before ld. CIT(A), the assessee filed detailed written submission. On the submission of assessee, remand report was called from assessing officer. The assessing officer initiated remand proceeding. During the remand proceeding, the assessee provided required details. The ld. CIT(A) after considering the material before him upheld the addition under section 14A, the ld. CIT(A) held that assessing officer made addition on the basis of lack of evidence. The assessee earned dividend income of Rs. 2,21,900/- which is exempt. The assessing officer rejected the assessee’s contention that no expenses were incurred for earning such income; the assessing officer computed the disallowance @ 1.00% of average value of investment. The ld. CIT(A) held that as per decision of Maxopp Investment Ltd. Vs CIT 402 ITR 640, even indirect expenses must be allocated. On the addition of section 68, the ld. CIT(A) held that assessee received loan of Rs. 9.16 crore but failed to furnish ITR of creditors to establish their financial standing (creditworthiness). Mere bank statement is not sufficient to establish the genuineness of loan and confirmed the addition. Further, aggrieved the assessee has filed present appeal before Tribunal. 5. We have heard the submissions of learned Authorised Representative (ld. AR) of the assessee and learned Senior Departmental Representative (ld. Sr. DR) for the revenue and have gone through the orders of lower authorities ITA No. 2980/Mum/2025 R.D. Enterprises 4 carefully. Ground no. 2 relates to disallowance under section 14A. The ld. AR of the assessee submits that present appeal relates to A.Y. 2017-18. The procedure for disallowance under section 14A is prescribed in Rule 8D. The ld. AR of the assessee read out the provisions of Rule 8D and by referring clause (i) & (ii) of sub-rule 2 of rule 8D would submit that as per Proviso attached thereto, the amount referred in clause (i) & (ii) shall not exceed total expenditure claimed by the assessee. During the year, the total expenditure incurred by assessee is only Rs. 52,964/- which consists of audit fees, legal fees, membership fees and other various expenses including D- mat charges and sundry expenses. The assessing officer while computing / calculating disallowance as per Rule 8D disregarded the Proviso attached with Rule 8D. The ld. AR of the assessee submits that out of total administrative expenses of Rs. 52,954/-, the bench may reasonably or proportionately disallowed the same; otherwise no expenses were incurred by the assessee for earning exempt income. On Ground No. 1 ,3 & 4 which relates to addition of section 68, the ld. AR of the assessee submits that not only during assessment but during first appellate stage, the assessee file complete details to substantiate the facts about identity, creditworthy and genuineness of the transaction of loan. On the submissions of the assessee, the ld CIT(A) called remand report from assessing officer. During remand proceedings, the assessing officer issued a notice to the assessee on 10.06.2024 to substantiate the loan of Rs. 9.16 crore. The assessing officer also issued notice to related parties, Dhairesh Kantilal Sanghvi and Jeeken Jayantibhai Kharawala to verify the genuineness of loan transaction. The ITA No. 2980/Mum/2025 R.D. Enterprises 5 reply was given by assessee and furnished complete details of lenders. Reply was also filed by lenders namely Dhairesh Kantilal Sanghvi and Jayantibhai Kharawala. Both the lenders furnished loan confirmation, bank statement, and return of income of relevant period. However, copy of remand report was not provided to the assessee. The assessing officer was fully satisfied about the genuineness of transaction and creditworthiness of lenders. There was no dispute of identity of the lenders. The lenders were related parties and were having sufficient creditworthiness. Dhairesh Kantilal Sanghvi has given loan of Rs. 8.95 Crore, who is having net worth of more than 80 crore. He is one of the partners in the assessee-firm and proprietor of Kantial Sanghvi & Co. Copies of notices issued by assessing officer during remand report and various reply furnished by lenders are placed on record. The assessing officer was fully satisfied about the genuineness of transaction and creditworthiness of lenders. After verification of all the documents, the assessing officer prepared his remand report and furnished to ld CIT(A), however, copy of remand report was not provided to the assessee. 6. The ld. AR of assessee finally submits that the ld. CIT(A) has not disclosed about the report furnished by assessing officer, however, he has managed the copy of remand report dated 11.07.2024, wherein the assessing officer has accepted that the claim of loan transaction is verified and found in order. The ld. CIT(A) has not referred such remand report in his order. The ld. AR submits that assessee has proved identity, creditworthiness and genuineness of the loan transaction. Once the assessing officer has accepted the transaction, the ld. CIT(A) was not justified in making the addition. On our ITA No. 2980/Mum/2025 R.D. Enterprises 6 directions copy of remand report was filed on record. The ld. AR of the assessee prayed for deleting the entire addition of under section 68. 7. On the other hand, learned Senior Departmental Representative (ld. Sr. DR) for the revenue supported the order of lower authorities. On disallowance under section 14A, he supported the action of Assessing Officer/CIT(A). On the addition under section 68, the ld. Sr. DR for the revenue submits that assessing officer made addition for the want of proper evidence in support of claim of loan. Again in the order of ld. CIT(A), there is no reference about the fact that any remand report was called. Rather, the ld. CIT(A) recorded that assessee failed to provide sufficient documentary evidence to prove the creditworthiness of lenders. On confronting the fact of issuance of notices by assessing officer in remand proceeding, the ld. Sr. DR for the revenue submits that matter may be restored back to the file of assessing officer for fresh verification of fact. 8. At the time of hearing, the ld. Sr. DR for the revenue was confronted with the show cause notice issued by assessing officer during remand proceedings including dated 10.06.2024 and remand report prepared and allegedly submitted through proper channel bearing date 11.07.2024 and proper DIN. At the conclusion of hearing, the ld. Sr. DR for revenue was directed to give his comment within a week on the remand report failing which it was made clear that in such event we will pass the order. Till date 09.07.2024, no response was received from office of ld. Sr. DR for revenue. Therefore, we proceeded to decide the matter on the basis of material filed before us including remand report of assessing officer. ITA No. 2980/Mum/2025 R.D. Enterprises 7 9. We have considered the submissions of both the parties and have gone through the orders of lower authorities carefully. Ground no. 2 relates to disallowance under section 14A. We find that during the assessment, the assessing officer recorded that assessee has shown dividend income of Rs. 2,21,900/-. The assessing officer issued show cause notice for making disallowance under section 14A r.w. Rule 8D. The assessee in its reply contended that aggregate administrative expenses are only Rs. 52,954/-. Such fact is recorded in para 4 of assessment order. The assessing officer disregarded the submission of assessee and computed disallowance of Rs. 17,60,725/- being 1.00% of average value of investment made for earning exempt income. The ld. CIT(A) confirmed the action of assessing officer. We find that total exempt income is only of Rs. 2,21,900/-. The disallowance as per settled position of law, under section 14A should not exceed the exempt income. Moreover, as per Proviso to Rule 8D(2), the disallowance should not be in excess of total expenses. Total expenses claimed by assessee is only Rs. 52,964/-. Such administrative expenses were not disputed by assessing officer. Considering the peculiar facts of the case, the ad hock disallowance of Rs. 10,000/- is made under section 14A. In the result, ground no. 2 of the appeal is partly allowed. 10. Ground no. 1, 2 & 3 relates to unexplained credit under section 68 of unsecured loan of Rs. 9.16 crore. We find that during the relevant financial year, the assessee has shown unsecured loan of Rs. 8.95 crore from Kantilal Sanghvi & Co. of Rs. 20,00,000/- from Jeeken Kharawala. Kantilal Sanghvi & Co is a proprietary concern of Dhairesh K Sanghvi, who is also a major ITA No. 2980/Mum/2025 R.D. Enterprises 8 partner in Assessee Company. The assessee has also shown Rs. 20.30 lacs from Jeeken Kharawala. The assessing officer made addition by taking view that assessee has merely filed confirmation and failed to furnish bank statement and income tax return. Before ld. CIT(A), the assessee furnished complete details of lender including of their financial statement consisting of loan confirmation, computation of income, return of income, balance sheet and bank statement, source of fund of Kantilal Sanghvi was also furnished. Similarly, for loan from Jeeken Kharawala furnished loan confirmation, PAN Card, bank statement. On the submission of assessee, the ld. CIT(A) called remand report from assessing officer. The assessing officer initiated remand proceeding and called bank statement, profit and loss account, balance sheet and return of income of lender. In response to such notices, the lenders furnished their details. On furnishing such details, the assessing officer prepared his remand report dated 11.07.2024 and allegedly submitted through proper channel. 11. In the remand report the assessing officer noted that “In reply Mr. Dhairesh K Sanghvi & Mr. Jeeken Jayantibhai Kharawala have furnished loan confirmations, bank statements showing the transactions & ROI for the relevant period i.e. A.Y. 2017-18. On perusal of details and reply furnished by the parties related with loan transaction, it can be said that the above loan transactions of Mr. Dhairesh K Sanghvi & Mr. Jeeken Jayantibhai Kharawala with M/s. R. D. Enterprises amounting to Rs. 9,16,02,724/- are genuine transaction. In view of the above, it is submitted that the assessee has provided all the relevant documents like loan confirmations, bank statements, ITA No. 2980/Mum/2025 R.D. Enterprises 9 ROIs to claim its transactions as genuine transactions. The same are verified and found in order and all the relevant documents are also attached for your kind reference.” The scanned copy of remand report is reproduced below. ITA No. 2980/Mum/2025 R.D. Enterprises 10 12. We find that ld. CIT(A) in his order neither mentioned about seeking remand report nor about furnishing such remand report by assessing officer. The approach of ld. CIT(A) is not correct. On considering the remand report, we find that assessing officer has accepted about creditworthiness and genuineness of transaction. Once the assessing officer has accepted the ITA No. 2980/Mum/2025 R.D. Enterprises 11 creditworthiness of lenders and genuineness of transactions, the ld. CIT(A) was not justified in sustaining the addition. Even otherwise, we have independently examined the fact and find that majority of loan was received by assessee from its partner who is having worth of more than Rs. 80 crore during the year. Both the lenders are having sufficient source of income.The both the loans were received through banking channel. Thus, we do not find any justification of confirming the addition by ld. CIT(A). In the result, ground no. 1, 2 & 3 of the appeal are allowed. 13. In the result, the appeal of assessee is partly allowed. Order pronounced in the open Court on 09/07/2025. Sd/- PRABHASH SHANKAR ACCOUNTANT MEMBER Sd/- PAWAN SINGH JUDICIAL MEMBER MUMBAI, Dated:09/07/2025 Biswajit Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai "