Income Tax Act - Unexplained cash credit u/s 68 - disallowance of proportionate interest - The assessee is a private limited company and engaged in business of processing of man-made fabrics (MMF) on job work basis – whether CIT(A) is justified in deleting the addition made by the AO on account of unexplained cash credit u/s 68 of the Act – the disallowance of proportionate interest on account of interest free advances made to a sister concern - HELD - during the appellate proceedings CIT(A) has observed that share applicant company is holding more than 50% of shares of Assessee-company - CIT(A) held that the assessee has discharged its onus by furnishing contra confirmation, source of funds and the nexus between the share applicant and the company – In order to examine three ingredients of section 68, namely identity, creditworthiness and genuineness, the assessee need to submit basic documents before the AO such as bank statement, return of income, PAN and ROC details etc of the share applicant company as well as assessee-company - In addition to this, the assessee should explain, with help of these evidences about the genuineness, identity and creditworthiness, of the share applicant-company, which the assessee has failed to do so – Therefore, the three ingredients of section 68 have not been satisfied by the assessee - one more opportunity should be given to the assessee to furnish basic documents as required by AO - the order of CIT(A) is set aside and matter remitted to the file of the AO - As regards the disallowance of proportionate interest on account of interest free advances made to a sister concern, it is settled principle of law that when the assessee has adequate interest free funds to make interest free advances to sister concerns, then no disallowance of interest expenses can be made – the assessee was having sufficient interest free funds available with him to lend interest free advances, the CIT(A) was justified in deleting disallowance of interest in relation to such interest free advances – appeal is partly allowed


 

2022-VIL-923-ITAT-SRT

 

IN THE INCOME TAX APPELLATE TRIBUNAL

SURAT BENCH, SURAT

 

DATE OF HEARING: 25.05.2022

DATE OF PRONOUNCEMENT: 25.07.2022

 

ITA NOS.113 & 114/SRT/2020

ASSESSMENT YEARS: 2012-13 &2013-14

 

DEPUTY COMMISSIONER OF INCOME TAX

 

Vs

 

BINDAL SILK MILLS PVT. LTD.

 

ASSESSEE BY: SHRI SAMIR SHAR, CA.

RESPONDENT BY: SHRI VINOD KUMAR– SR. DR

 

BEFORE

SHRI PAWAN SINGH, JM

DR. A.L. SAINI, AM

 

O R D E R

 

PER DR. A. L. SAINI, ACCOUNTANT MEMBER:

 

Captioned two appeals filed by the Revenue pertaining to assessment year(s) (AY) 2012-13 and 2013-14, are directed against the separate orders passed by the Learned Commissioner of Income Tax(Appeals)-1, Surat [for short ‘CIT(A)’], which in turn arise out of separate assessment orders passed by the Assessing Officer u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

 

2. First, we shall take Revenue’s appeal in ITA No.113/SRT/2020 for Assessment Year 2012-13, wherein the grounds of appeal raised by the Revenue are as follows: -

 

“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in deleting the addition of Rs.1,83,81,000/- made by the AO on account of unexplained cash credit u/s 68 of the Act as the assessee has failed to prove bona fide of the transaction within the meaning of Section 68 of the I.T. Act, 1961.

 

2. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.

 

3. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing officer may be restored to the above extent.”

 

3. Briefly stated, the relevant material facts are as follows. The assessee before is a private limited company and engaged in business of processing of man-made fabrics (MMF) on job work basis. During the course of scrutiny assessment proceedings, it was observed that assessee company had received substantial amount of share application money during the year under consideration towards share capital and share premium. The following table depicts a bird's eye view of the receipts by the assessee towards share capital and share premium.

 

Name of Investor

Address of Investor

No. of Shares

Face value per share

Premium Per Share

Total face value

Total Share Premium

Total Amount paid

JAY BHARAT FINSTOCK PVT. LTD.

270, BINDAL HOUSE, SURAT KADODARA ROAD, KUMBHARIYA, SURAT.

1671

1000

10000

1671000

16710000

18381000

 

Therefore, assessing officer issued notice dated 07.11.2014 u/s 142(1) of the IT Act. The assessee was required to furnish details and supporting material to establish the identity, genuineness of source and creditworthiness in respect of addition to share capital and receipt of share premium during the year. The concerned questions put in the questionnaire are as follows.

 

“Please furnish details and supporting material to establish the genuineness of source and creditworthiness in respect of addition to share capital during the year.

 

Please furnish details and supporting material to establish the genuineness of source and creditworthiness in respect of receipt and refund of Share Application Money during the year.

 

Please furnish details and supporting material to establish the genuineness of source and creditworthiness in respect of share premium receipt during the year.

 

Please justify the receipt of share premium and please explain the reasons duly supported by adequate evidence on account of which the assesses company commanded the huge share premium on its shares.”

 

4. However, there was no specific compliance in this regard. Therefore, assessing officer issued another specific notice under section 142(1) devoted entirely to the issue of share capital and share premium. Vide this notice the assessee was required to submit various precise information in respect of the receipt of share application money, share capital and share premium. The contents of the relevant portion of the said notice are reproduced as under for ready reference:

 

“Details, Documents and Explanations to be furnished:

 

You are requested to furnish the following information for the A.Y. 2012-13 in respect of introduction of share capital including share premium, share pending allotment /allotted.

 

Sr. No.

Name of the allottee / applicant

Address

No. of shares

Amount of share capital received

Amount of premium, if any, received.

(1)

(2)

(3)

(4)

(5)

(6)

 

 

 

 

 

 

 

 

 

 

Total share capital

Total share premium

Date in which received in Bank account of the assessee

Relation with the investing party, if any.

AO of the investor

(7)

(8)

(9)

 

Please provide copy of your Bank A/c. from 01.04.201.1 to 31.03.2012. You are further requested to give the copy of bank book for 10 days before and after receipt of money (towards share capital and share premium)

 

You are further requested to attach the folio-wing documents in respect of investors who have introduced their capital (Please refer to Sr. No.(i) above):

 

(i) Copy of return of income,

 

(ii) Copy of Audit Report,

 

(iii) Copy of balance sheet,

 

(iv) Copy of Bank account details of the investors, marking out the money received by you, Please furnish –

 

(a) Proof of Board meeting in which receipt/allotment of share application money finalized.

 

(b) The valuation report, if any, on the basis of which premium was decided.

 

(c) Copies of all share application received, along with details.

 

(d) copies of all communications entered with all prospective investors including calling for investment, applications, installment of money called, received, decision of premium, round of negotiation, dispatch of share certificate, correspondence about dividend or any other matter etc., along with mode of communication and proof of dispatch etc.

 

Please State as to how the money raised has been utilized".

 

5. The assessing officer also issued notice u/s 133(6) of the Act dated 30.01.2015 to the investors. In the said notices u/s 133(6) the investors were required to furnish the following details / documents / explanations / clarifications, etc. The relevant portion of the notice u/s 133(6) is as under:

 

"During the course of scrutiny proceedings in the case of above named assessee company for A. Y. 2012-13, it is observed that you have invested a sum of Rs. (Amount invested) towards share capital and premium of the above company. You are, therefore, requested to furnish the following:-

 

(i) Copy of return of income along with enclosures, audit report and balance sheet for A.Y. 2011-12 & 2012-13.

 

(ii) Copy of Bank statement for F.Y. 2011-12.

 

(iii) Please submit a copy of your Bank book for the period one week before and one week after the transaction relating to investment in the above mentioned company with details of sources of funds,

 

(iv) Copy of share certificate received by you.

 

Notices u/s 133(6) of the IT Act was issued to all the above stated investors".

 

6. Assessing officer noted in assessment order that notice u/s 133(6) was issued to the investor who had paid share application money to the assessee company towards share capital and share premium. However, the investor did not file details before the assessing officer. Therefore, assessing officer noted that the assessee has received large amount of share capital and share premium from one of its sister concerns i.e. Jay Bharat Finstock Pvt. Ltd. amounting to Rs.1,83,81,000/-. The AO observed that assessee- company is not a listed company and then even has received huge amount of Share application and share premium amounts. It can be inferred that these amounts could have been utilized by the sister concern for expansion and operations also and it is totally indiscernible why the sister company applied and received share capital and share premium of such huge amount. Moreover, on the perusal of the return of income of Jay Bharat Finstock Pvt., Ltd. it is noticed that company lacks creditworthiness as it has filed the return of income showing a very meager income. In view of the same and after taking into consideration all the above facts and evidences brought on record that go on to conclusively prove that explanation of the assessee with regards to the sources of the funds credited in the guise of share capital and premium is nothing but a colourable device, the explanation of the assessee over the nature and source of the funds is held to be grossly unsatisfactory and untenable in the eyes of law. Thus, the sister concern i.e. Jay Bharat Finstock Pvt., Ltd lacks creditworthiness and therefore the same needs to be disallowed. Therefore, the total amount of Rs.1,83,81,000/- was added back to the total income of the assessee- company under section 68 of the Act.

 

7. Aggrieved by the order of Assessing Officer, the assessee carried the matter before the Ld. CIT(A) who has deleted the addition made by the Assessing Officer.

 

8. Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us.

 

9. Learned Senior DR for the Revenue argued that assessee has failed to produce relevant documents and evidences. During the assessment stage, following details and documents were required by the assessing officer, which are as follows:

 

“(i) Copy of return of income,

 

(ii) Copy of Audit Report,

 

(iii) Copy of balance sheet,

 

(iv) Copy of Bank account details of the investors, marking out the money received by you, Please furnish –

 

(a) Proof of Board meeting in which receipt/allotment of share application money finalized.

 

(b) The valuation report, if any, on the basis of which premium was decided.

 

(c) Copies of all share application received, along with details.

 

(d) copies of all communications entered with all prospective investors including calling for investment, applications, installment of money called, received, decision of premium, round of negotiation, dispatch of share certificate, correspondence about dividend or any other matter etc., along with mode of communication and proof of dispatch etc.”

 

The ld DR pointed out that none of the details and documents were filed by the assessee before the AO. During the appellate proceedings, ld CIT(A) also did not ask the assessee to furnish these documents. Therefore, assessee failed to satisfy three ingredients of section 68, namely identity, creditworthiness and genuineness. Further, ld DR stated that decision of Ld. CIT(A) is not acceptable on merit on account of the following reasons:

 

(i) The Ld CIT(A) failed to appreciate that the assessee has failed to establish the creditworthiness of the share applicant as the applicant company is showing megre return of income of Rs. 96,624/- for A.Y.2012-13 and Rs.2,32,384/- for A.Y 2011- 12, which is insufficient to introduce such huge capital in the assessee company.

 

(ii) The Ld CIT(A) failed to appreciate that during the course of assessment proceedings, the assessee was unable to justify whether the investment made in the form of share in the assessee- company is from its own source of funds or from the funds on which no interest payment is made by the applicant- company. Therefore, the evidences brought on record and the explanation of the assessee- company regarding source of funds is not at all satisfactory and tenable in the eyes of law.

 

(iii) The Ld CIT(A) failed to appreciate that the ultimate beneficiary of the share application money received from Jay Bharat Fin stock Pvt. Ltd is the assessee company M/s Bindal Silk Mills Pvt. Ltd and therefore the addition u/s 68 of the Act was made by the A.O. This way, ld DR submitted before the Bench that order passed by the AO may be upheld.

 

10. On the other hand, Ld. Counsel for the assessee reiterated the findings of ld CIT(A) and defended the order passed by Ld. CIT(A) and prayed before the Bench to confirm the findings of ld CIT(A).

 

11. We have given our thoughtful consideration to rival contention. We have perused case file as well as paper books furnished by assessee. We note that during the appellate proceedings Ld. CIT(A) has observed that share applicant company "Jay Bharat Fin stock (P) Ltd" is holding more than 50% of shares of appellant company. The financial statements of the share applicant company was also scrutinized by the department for the A.Y 2012-13 in separate assessment proceedings and no adverse inference has been drawn by the A.O. Based on these facts Ld CIT(A) held that the assessee has discharged its onus by furnishing contra confirmation, source of funds and the nexus between the share applicant and the company. We do not agree with the approach adopted by ld CIT(A) to delete the addition. In order to examine three ingredients of section 68, namely identity, creditworthiness and genuineness, the assessee need to submit basic documents before the assessing officer such as bank statement, return of income, PAN and ROC details etc of the share applicant company as well as assessee-company. In addition to this, the assessee should explain, with help of these evidences, before the assessing officer, about the genuineness, identity and creditworthiness, of the share applicant- company, which the assessee has failed to do so.

 

12. During the appellate proceedings, the ld CIT(A) accepted Valuation report of Chartered Accountant and the said valuation report has not been sent by ld CIT(A) to the assessing officer for his examination. The relevant findings of ld CIT(A) is reproduced below:

 

“………….With regard to the adequacy of share premium attached to the share capital at which the subscription amount was paid by the share applicant company, the appellant company submitted valuation report, of the Chartered Accountant justifying the net asset value basis of the share of the appellant company. Even otherwise, provisions of section 56(2)(viib), introduced by Finance Act, 2012 was made applicable with effect from 1-4-2013 i.e. A.Y. 2013- 14, and hence, statutorily there was no restriction on acceptance of share capital and premium beyond the market value of shares of the company. The appellant's case is found covered by the, following binding judgments of higher judicial authorities.”

 

13. Thus, it is clear that assessing officer did not get opportunity to examine the Valuation report of Chartered Accountant, hence it is violation of Rule 46A of the Rules.

 

14. During the assessment stage assessing officer issued notice dated 07.11.2014 u/s 142(1) of the IT Act. The assessee was required to furnish details and supporting material to establish the identity, genuineness of source and creditworthiness in respect of addition to share capital and receipt of share premium during the year. The concerned questions put in the questionnaire are as follows.

 

“Please furnish details and supporting material to establish the genuineness of source and creditworthiness in respect of addition to share capital during the year.

 

Please furnish details and supporting material to establish the genuineness of source and creditworthiness in respect of receipt and refund of Share Application Money during the year.

 

Please furnish details and supporting material to establish the genuineness of source and creditworthiness in respect of share premium receipt during the year.

 

Please justify the receipt of share premium and please explain the reasons duly supported by adequate evidence on account of which the assesses company commanded the huge share premium on its shares.”

 

15. However, there was no compliance in this regard by assessee.

 

16. Therefore, assessing officer issued another specific notice under section 142(1) devoted entirely to the issue of share capital and share premium. As per this notice, the assessee was required to submit various precise information in respect of the receipt of share application money, share capital and share premium. The contents of the relevant portion of the said notice are reproduced as under for ready reference:

 

“Details, Documents and Explanations to be furnished:

 

You are requested to furnish the following information for the A.Y. 2012-13 in respect of introduction of share capital including share premium, share pending allotment /allotted.

 

Sr. No.

Name of the allottee / applicant

Address

No. of shares

Amount of share capital received

Amount of premium, if any, received.

(1)

(2)

(3)

(4)

(5)

(6)

 

 

 

 

 

 

 

 

 

 

Total share capital

Total share premium

Date in which received in Bank account of the assessee

Relation with the investing party, if any.

AO of the investor

(7)

(8)

(9)

 

Please provide copy of your Bank A/c. from 01.04.201.1 to 31.03.2012. You are further requested to give the copy of bank book for 10 days before and after receipt of money (towards share capital and share premium)

 

You are further requested to attach the folio-wing documents in respect of investors who have introduced their capital (Please refer to Sr. No.(i) above):

 

(i) Copy of return of income,

 

(ii) Copy of Audit Report,

 

(iii) Copy of balance sheet,

 

(iv) Copy of Bank account details of the investors, marking out the money received by you, Please furnish –

 

(a) Proof of Board meeting in which receipt/allotment of share application money finalized.

 

(b) The valuation report, if any, on the basis of which premium was decided.

 

(c) Copies of all share application received, along with details.

 

(d) copies of all communications entered with all prospective investors including calling for investment, applications, installment of money called, received, decision of premium, round of negotiation, dispatch of share certificate, correspondence about dividend or any other matter etc., along with mode of communication and proof of dispatch etc.

 

Please State as to how the money raised has been utilized".

 

17. We note that there was no compliance of this notice also by the assessee. Then the assessing officer issued notice u/s 133(6) of the Act, to the investor who had paid share application money to the assessee company towards share capital and share premium. However, the investor did not file details before the assessing officer. Therefore, we note that three ingredients of section 68, namely identity, creditworthiness and genuineness, have not been satisfied by the assessee. Hence, we are of the view that one more opportunity should be given to the assessee to furnish basic documents, as required by assessing officer, which is mentioned in para 16 of this order, before the assessing officer. Therefore, we set aside the order of ld CIT(A) and remit this issue back to the file of the assessing officer for de novo adjudication in accordance with law.

 

18. In the result, appeal filed by the Revenue is allowed for statistical purposes.

 

19. Now we shall take Revenue’s appeal in ITA No.114/SRT/2020 for assessment year 2013-14, wherein the grounds of appeal raised by Revenue are as follows:

 

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition made by the AO on account Of disallowance of interest expenses to the tune of Rs.80,02,302/- @ 12% on interest free advances given to its sister concern M/s Jay Bharat Fin stock Private Limited, when interest was incurred at the same rate by the assessee on its borrowed funds?

 

2. Whether On the facts and circumstances of the case, the Ld. CIT(A) is justified in deleting the entire addition of Rs.80,02,302/- made on account of disallowance of interest expenses, ignoring the facts that the assessee has failed to prove the nexus between the own surplus funds and interest free funds which were claimed to have been advanced to its sister concern?

 

3. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.

 

4. It is therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing officer may be restored to the above extent.”

 

20. In this Revenue`s appeal only addition in question is disallowance of proportionate interest on account of interest free advances made to a sister concern. Succinct facts are that assessee -company has made short term interest free advances during the year to its sister concern, namely, M/s Jay Bharat Finstock Ltd. The assessee - company in turn has long term Borrowing of Rs.8,58,27,000/- and short term borrowing (working capital credit) of Rs.12,72,1700/-. The assessee- company is paying interest at Rs.2,37,08,000/-. The advances made to sister concern are short term and during year, the amount outstanding varies from time to time over the year. The maximum outstanding during year is at Rs.6,66,85,856/-. The Ld. AO calculated interest @ 12% on that amount for entire year, and disallowed Rs. 80,02,302/-.

 

21. On appeal, ld CIT(A) deleted the addition. Aggrieved by the order of Ld. CIT(A) the Revenue is in appeal before us. Learned DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel defended the order passed by ld CIT(A).

 

22. We have heard both the parties and observe that interest calculated on actual daily balances of outstanding advances @ 12% works out, to Rs.33,21,343/-, by the assessee however AO did not consider the same. The ld CIT(A) deleted the addition based on the facts that assessee- companies balance sheet shows that it has interest free funds (own funds) of Rs.16,57,45,693/-,which is about 2.5 times the maximum outstanding advance to M/s Jay Bharat Finstock Ltd. The assessee submitted during the appellate proceedings that assessee company has not used any borrowed funds to make advances to the sister concern. He further furnished copies of bank statement and books of accounts to show that the immediate of advances are the realization of sale proceeds by the assessee company. The ld CIT(A) observed that AO has not brought on record any contrary finding from examination of books of accounts, bank statement etc. Based on these facts, ld CIT(A) deleted the addition.

 

23. It is settled principle of law that when the assessee has adequate interest free funds to make interest free advances to sister concerns, then no disallowance of interest expenses can be made. For this, reliance can be placed on the judgment of Hon`ble Gujarat High Court in the case of Commissioner of Income-tax, Gandhinagar vs. Rajendra Brothers [2014] 52 taxmann.com 334 (Gujarat), wherein it was held as follows:

 

“Both the Commissioner (Appeals) as well as the Tribunal have recorded concurrent findings of fact to the effect that the assessee was also running a sarafi business and the funds obtained from the bank had got merged with the funds of other businesses. Having regard to the total funds available from the safari business, the Tribunal has found no reason to believe that bank funds have been diverted as interest free/lower, interest advances. Moreover, no material has been brought on record by the revenue; either to demonstrate that the small business was bogus or to establish diversion of interest bearing funds as low/interest free advances.

 

The revenue is not in a position to point out any material to the contrary so as to dislodge the concurrent findings of fact recorder by the Commissioner (Appeals) and the Appellate Tribunal. From the facts noted hereinabove, it is apparent that the Tribunal has based its conclusion on the concurrent findings of facts recorded by it upon appreciation of the evidence on record. It is not the case of the revenue that the Tribunal, while appreciating the evidence on record has taken into consideration any irrelevant material, or that any relevant material has been ignored.”

 

24. Therefore, we note that where the assessee was having sufficient interest free funds available with him to lend interest free advances, the ld CIT(A) was justified in deleting disallowance of interest in relation to such interest free advances.

 

25. In the combine result, Appeal of Revenue in ITA No. 113/SRT/2020 for AY 2012-13 is allowed for statistical purposes, whereas Revenue`s appeal in ITA No.114/SRT/2020 for AY 2013-14 is dismissed.

 

A copy of the instant common order be placed in the respective case file(s).

 

Order pronounced on 25/07/2022 by placing the result on the notice board.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that publisher is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.