No Addition Permitted U/s 68 Once Taxpayer Establishes Genuineness & Creditworthiness Of Share Subscribers: Mumbai ITAT

The Bench of the ITAT comprising of Aby T. Varkey (Judicial Member) and B R Baskaran (Accountant Member) observed that “merely because the lenders did not appear before the AO, cannot be the sole reason for drawing adverse view against the assessee/transaction in question. Since the assessee filed the aforesaid relevant documents (supra) by the assessee, we find it had discharged the burden to prove the identity and creditworthiness of the lender parties and genuineness of the loan given to assessee.” (Para 9)

As per the brief facts of the case, the Assessee's case was reopened on receipt of information from DGIT (Investigation) that the assessee was one of the beneficiaries of accommodation entries given by entities in the guise of bogus unsecured loans and bogus share capital money. As per the information, in the relevant assessment year, the assessee had taken a loan of Rs.1,80,00,000/- the AO re-opened the case after recording reasons. And re-assessed the income and made an addition of Rs.2,65,20,000/- (Rs.1.80 cr unsecured loan as well as Rs.80 Lakhs share application u/s 68 and commission of Rs.5,20 Lakhs). Regarding the addition of Rs.1.80 cr which the assessee had received as an unsecured loan from nine entities, the assessee brought to the notice of the AO that it has received Rs.20 Lakh each from nine entities. To prove the nature and source of Rs.1.80 cr, the assessee brought to the notice of the AO that the nine entities are regular income tax assessee's. The assessee also filed confirmation from these parties.

However, the AO taking note of the search/survey action taken against the entry provider who had admitted to providing accommodation entries to beneficiaries in the form of bogus share capital/loan instead of cash, held that the nine companies from whom all assessee had taken an unsecured loan of Rs.20 Lakhs each was controlled by him. He treated the entire loan transaction as a bogus transaction and disbelieved the documents filed by the assessee to prove the genuineness of the loan transaction and made an addition of Rs.1.80 crore u/s 68. The CIT(A) relieves the assessee while deleting the addition made by the AO u/s 68.

The Bench noted that the assessee had filed the name of all the nine lenders, their respective PAN, and address, on which the AO had served notices on the lenders, as well as the copy of the ITR the lenders, which proves that they are filing tax returns before the department, PAN details and address of the corporate entities proves the identity of all the nine lenders.

The Bench observed that the assessee company by way of cheque repaid the loan to these lenders on Oct/Nov 2009. In such a scenario, merely because the lenders did not appear before the AO, cannot be the sole reason for drawing an adverse view against the assessee/transaction in question.

The Bench further observed that the AO had taken an adverse view only because during the search at the premises of the entity provider, he admitted to providing accommodation entries in the form of bogus loan/share capital for beneficiaries in place of commission/cash.

The Bench stated that the statement of the entity provider was recorded behind the assessee's back and no opportunity was given to the assessee to cross-examine hence, such a statement could not have been relied upon by AO for making an addition.

The bench observed while referring to the decision of the Supreme Court in the case of Andaman Timber Industries Vs. CCE reported in (2015) 281 CTR 241 (SC) that not providing cross-examination of the maker of the statement on which AO relies to take an adverse view against an assessee is a serious flaw that renders the action of AO a nullity.

The Bench further observed that the assessee has shown the nature of the receipt of Rs.1.80 cr as an unsecured loan, and has discharged the burden cast upon it u/s 68 by proving the creditworthiness of the share subscribers to invest in the assessee company and from perusal of the bank statement it reveals that loan was given and repaid through banking channel.

The Bench found that merely based on the information given by the Investigation Wing and the statement recorded by an entity provider the AO without applying the mind made an addition of Rs.80 Lakhs, even though the assessee has infused share capital of only Rs.50,000/-.

Therefore, on finding that the AO had erred in making an addition, ITAT dismissed the revenue's appeal.

Counsel for Appellant/Department: Dharan Gandhi

Counsel for Respondent/Taxpayer: Mahita Nair

Case Title: Income-tax Officer verses Design Deal Fashions Pvt. Ltd.

Case Number: I.T.A. No.7025/Mum/2019

Click here to read/ download the Order