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January 11, 2023

Receiving money through a banking channel does not make a transaction legitimate

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Receiving money through a banking channel does not make a transaction legitimate

Fact and Issue of the case

The CIT(appeals) erred in law and on fact in confirming action of the Ld.AO in treating the unsecured loans received from the depositors (i) Akshar Trading Co. of Rs.2,33,85,000/- (ii) Rs.36,00,000/- from Ashok Khurana and (iii) Rs.1,16,50,000/- from M.S Carting Contractor aggregating Rs.3,86,35,000/- as unexplained Cash credit U/s.68 of the Income Tax Act. 2. Your appellant most humbly reserves the right to add, amend, alter or substitute the ground in this appeal on or before the time of hearing. 3. The only issue raised by the assessee is that the learned CIT-A erred in deleting the addition of Rs. 3,86,35,000/- made by the AO on account of unexplained cash credit under section 68 of the Act. 4.

The assessee is an individual and engaged in the business of trading and manufacturing of machinery in the name and style of AR Chem Industries. During the course of assessment proceeding, the AO found that the assessee has shown unsecured loan from following parties:

1Ashok M KhuranaRs. 36,00,000/-
2Akshar TradingRs. 2,33,85,000/-
3M.S.Carting ContractorRs. 1,16,50,000/-
Total Rs. 3,86,35,000/-

The assessee in support of impugned loan transactions only furnished copy of confirmation letter from the loan parties. Thereafter, the AO issued notice under section 13 1(1) to the loan parties seeking necessary detail which were complied with by them. The AO from the reply furnished by the loan party namely Shri Ahsok M Khurana found that he has given loan of Rs. 50 lakh on 24-04-2011 to the assesse and same was received back by him dated 29-04-2013. However the assessee has shown loan credit of Rs. 36 lakh only from Shir Ahok M Khurana which has not been extended by him. Thus the assessee failed to explain the credit of Rs. 36 lakh.

The other two parties in their reply only furnished copy of bank statement and stated that they have incurred huge losses in their business, therefore no return was filed by them. Consequently, the AO issued summons under section 131(1) of the Act to the loan parties to appear in person for verification of credit worthiness.

The proprietor of M/s Akshar Trading namely Shri Sanjay Jashvantlal appeared before the AO dated 02-03-20 15. In the statement recorded under section 13 1(1) he stated that due to loss in business of sand trading, he closed his business and now working as supervisor in a company namely Saint Gobain Pvt. Ltd for last two years and drawing annual salary of Rs. 4 lakh. With regard to sources of providing interest free loan of Rs. 2,33,85,000/- to the appellant assessee, he stated that on the death of his father, he received an amount of 2.4 crore from his father bank as legal heir which utilized in making interest free loan to the assessee. The AO asked him to provide death certificate and bank statement of his father to which he stated that the same will be submitted on next day. However, Shri Sanjay Jashvantlal failed to furnish the same despite issuing several notices.

Likewise, the proprietor of MS Carting Contractor appeared dated 13-03-2015 and stated that due to loss in sand trading business, he closed down the same. Now, he is working in a company namely Crompton Graves and withdrawing annual salary of Rs. 4 lakh only. With regard to source of giving interest free loan to the assessee, he stated that same was provided out of amount credited in his bank on account of sale of materials.

The AO in view of the above was of the opinion that the credit worthiness and genuineness of loan parties namely M/s Akshar Trading and M.S. Carting Contractor were not established. Both these parties not filed return of income due to low income at relevant point of time. However, in subsequent year, the assessee has meager income from salary from which the parties can merely meet their day to day requirement. Therefore in such a situation giving such huge loan to the assessee that too without charging interest is highly improbable and not possible. Thus, the circumstantial evidence suggest that the assessee has utilized their bank account to channelize her own unaccounted money. In this regard the AO referred the judgment of Hon’ble Supreme court in case of Durga Prasad More reported in 82 ITR 540 where the Hon’ble court held that it is very easy for making self-serving document if assessee want to evade tax. Therefore, the taxing authority is required to look beyond the documentary evidence produced and entitled to look into surrounding circumstantial evidence to find out the reality. The AO further made reference to various judicial pronouncement with regard to onus to prove under section 68 of the Act. Accordingly, the AO held that the assessee failed to explain genuineness and creditworthiness of the lender creditor and made addition of Rs. 3,86,35,000/- to the total income of the assessee under section 68 of the Act. The aggrieved assessee preferred an appeal to the learned CIT(A).

The assessee before the learned CIT(A) with regard to addition of Rs. 36 lakh shown as outstanding loan from Mr. Ashok Khurana submitted that during the year she received an amount of Rs. 50 Lakh from M/s Ashka Construction Ltd. The fund was arranged on the instruction of Shri Ashok Khurana therefore inadvertently the same was credited in the ledger account of Shir Khurana instead of M/s Ashka Construction Ltd. Likewise a cheque of Rs. 14 lakh dated 31-03-2012 issued in the name of Smt. Kanaklata P Pandya but inadvertently the same was debited in the ledger of Shri Ashok Khurana. Subsequently, the cheque of Rs. 14 lakh issued in the name of Smt. Kanaklata P Pnadya got cancelled, hence the same is not reflecting in the bank statement. The assessee further claimed that mistakes as discussed above got rectified in the subsequent year which can be verified from the ledger account of all these parties i.e. Shri Ashok Khurana, M/s Ashka Construction Ltd and Smt. Kanaklata P Pandya. With regard to the loan of Rs. 2,33,85,000/- and Rs. 1,16,50,000/- from Akshar Trading (Prop- Shri Sanjay Parmar) and M.S. Carting Contractor (Prop. Shri Vasant Chowdhry) respectively, the assessee submitted that during the assessment proceeding, she has furnished copy of confirmation, PAN, Bank statement along bank statement of the parties and copy of ITR acknowledgment. The AO on the basis of the same issued notices under section 133(6) of the Act to both these parties and in reply they confirmed to have given loan through banking channel. Thereafter, summons under section 131 of the Act were issued and they appeared before the AO and got recorded their statement wherein the source of making loans and advances was duly explained. Therefore, the identity of the creditor, the genuineness of loan and the credit worthiness of the creditor was proved by the fact that the creditor, themselves appeared before the AO and confirmed the transaction which was duly carried out through the banking channel. The assessee further submitted that the provision of section 68 of the Act requires the assessee to explain the source of the credit in the books of assessee and not the sources of source. The requirement of section of section 68 of the Act has been duly discharged by her and onus shifted upon the AO to establish his allegation that the assessee routed her unaccounted income. The AO has not brought anything on record in this respect. Hence, the addition made by the treating the genuine loan transaction with above said parties namely Akhsar Trading Company and MS Carting Contractor as unexplained cash credit needs to be deleted.

The learned CIT(A) after considering the facts in totality rejected the contention made by the Assessee and confirmed the addition made by the AO. Addition u/s.68 amounting to Rs.3,86,35,000/- is upheld by CIT the sole ground is dismissed. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before ITAT

Observation of the Tribunal

The Tribunal has heard the rival contention of both the parties and perused the materials available on record. The fact of the case have been elaborated in the previous paragraphs. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. The provision of section 68 of the Act fastens the liability on the assessee to provide the identity of the lenders, establish the genuineness of the transactions and creditworthiness of the parties. These liabilities on the assessee were imposed to justify the cash credit entries under Section 68 of the Act by the Hon’ble Calcutta High Court in the case of CIT Vs. Precision Finance (P) Ltd. reported in 208 ITR 465 wherein it was held as under: “It was for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. On the facts of this case, the Tribunal did not take into account all these ingredients which had to be satisfied by the assessee. Mere furnishing of the particulars was not enough. “Now first we proceed to understand the identity of the party. The identity of the party refers existence of such party which can be proven based on evidences. As such the identity of a party can be established by furnishing the name, address and PAN detail, bank details, ITR etc.

The next stage comes to verify the genuineness of the transaction. Genuineness of transaction refers what has been asserted is true and authentic. A genuine transaction must be proved to be genuine in all respect not merely on a piece of a paper. The documentary evidences should not be a mask to cover the actual transaction or designed in way to present the transaction as true but same is not. Genuineness of transaction can be proved by submitting confirmation of the parties along the details of mode of transaction but merely showing transaction carried out through banking channel is not sufficient to prove the genuineness. As such the same should also be proved by circumstantial surrounding evidences as held by the Hon’ble Supreme court in the case of Shri Durga Prasad More reported in 82 ITR 540 and in case of Smt. Sumati Dayal reported in 214 ITR 801.

The last stage comes to verify the creditworthiness of the parties. The term creditworthiness as per Black Law Dictionary refers as: “creditworthy, adj. (1924) (Of a borrower) financially sound enough that a lender will extend credit in the belief default is unlikely; fiscally healthy-creditworthiness.” Similarly in The New Lexicon Webster’s Dictionary, the word “creditworthy” has been defined as under:- “creditworthy, adj. of one who is a good risk as a borrower.”

It the duty of the assessee to establish that creditor party has capacity to advance the loan and having requisite fund in its books of account and in banks. The capacity to advance loan can be established by showing sufficient income, capital and reserve or other fund in the hands of creditor. It is required by the AO to find out the financial strength of the creditor with judicious approach and in accordance with materials available on record but not in arbitrary and mechanical manner. 11.6 In the light of the above discussion, we proceed to adjudicate the issue on hand. From the preceding discussion we note that the addition under section 68 of the Act was made on account of unsecured loan from 3 different parties. The first party was namely Shri Ashok Khurana against which assessee has shown outstanding loans liability of Rs. 36 lakh treating the same as unexplained credit by the AO for the reason that AO on verification from the Shri Ashok Khurana found that there was no such loan extended by the such party to the assessee. However, during the appellate proceeding, the assessee explained that the loan amount of Rs. 50 Lakh dated 29th April 2011 was credited from M/s Aashka Construction Limited on the instruction of Shri Ashok Khurna. But by mistake entry was made in the ledger account of Shri Ashok Khurana. M/s Aashka Construction Ltd was subsequently merged with M/s Myraj Consultancy Ltd. vide order of Hon’ble Gujarat High Court dated 15th February 2013, thereafter it was renamed as M/s Madhav Infra Projects Ltd with effect from 12-06-20 13. The assessee before the learned CIT(A) claimed mistake committed in the books of account for the year under consideration was got rectified in the subsequent year. The assessee to substantiate her claim furnished ledger copy of Ashok Khurana for F.Y. 2011-12 and 12-13, ledger copy of M/s Aashka Construction Ltd for F.Y. 20 12-13 in her books of account. The assessee also furnished copy of bank statement of Aashka Construction Ltd for period 01-04-2011 to 30-06-2011 and her ledger in the books of M/s Madhav Infra Project Ltd for F.Y. 2012-13, merger order, name change certificates. All these details are available at page 45 to 73 of paper book. On perusal of bank statement of M/s Aashka Construction Ltd we find that there was transfer of an amount for Rs. 50 lakh in the name of the assessee proprietary concern namely AR Chem Industries dated 28-04-2011. However on perusal of ledger accounts we find certain ambiguity. On perusal of ledger account of M/s Aashka Construction Ltd. placed at page 69 of paper book we find that the assessee as on 1st April 2012 has credited the ledger account of M/s Aashka Construction Ltd by debiting the account of Shri Ashok Khurana. However on perusal ledger account of Shri Ashok Khurana for F.Y. 2012-12 placed at page 46 of paper book no such entry found though there was another ledger account of Shri Khurana placed at page 73 of paper book, the same entry found recorded. Likewise, in the ledger of M/s Aashka Construction another journal entry as on 1st April was made in which ledger account was set off by transferring the loan to the account of Madhav Infra Project Ltd. However, on perusal of ledger account of assessee, in the books of Madhav Infra Project Ltd we found that the Madhav Infra as on 1st April 2012 has debited the ledger of the assessee by the account of one Shri Mahendra Solanki. The link in all these adjustment entry was not properly explained. Further the provision of section 68 requires the assessee to establish the identity of creditor, genuineness of transaction and credit worthiness of the parties. Merely the fact that the amount received through banking channel does not make the transaction as genuine. The assessee needs to explain the transaction properly based on the documents within the parameters of section 68 of the Act.

Coming to the loan amount credited from other two parties namely Akshar Trading Co and M.S. Carting Contractor for Rs. 2,33,85,000/- and Rs. 1,16,50,000/- respectively. We note that the learned AR for the assessee before us filed a fresh evidences regarding repayment of loan to the above mentioned two parties. In our considered opinion the evidences of the repayment of the loans by the assessee is very crucial for deciding the genuineness of the loan entries. However, these fresh evidences were not available before the lower authorities and therefore, the same needs to be verified at the level of the AO. Therefore, considering the ambiguity in the evidences field by the assessee with regard to the addition of Rs. 36 lakh on account alleged loan from Shir Ashok Khurana and fresh material furnished with respect to other two parties, we hereby set aside the issue to file of the AO for de-novo assessment in the light of above discussion as per the provisions of law. The AO is directed to provide proper opportunity to the assessee to represent her case and needless to say the assessee will furnish required details and explanation necessary for deciding the issue. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.

Conclusion

The Tribunal allowed the appeal filed by the assessee.

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