Unreported Decisions – December 2019

By Ajay R. Singh, Advocate

1. S. 68 : Cash credits – Unsecured loans received – The AO without using the statutory powers vested in him u/s. 133(6) or u/s. 131 of the Act cannot simply make an addition towards the unsecured loans.

The assessee is an individual and had filed his ROI comprising of income from house property, business & profession and other sources. The Id AO observed that the assessee had shown unsecured loan of ₹ 1,18,00,000/- from four parties as Arabian Sea Food – ₹ 78,00,000/- Shatrunjaya Estate Pvt. Ltd. – ₹ 20,00,000/- Nikita M. Sagar – ₹ 10,00,000/- Usha J. Chauhan ₹ 10,00,000/-

The assessee furnished a copy of acknowledgement of return of income and confirmation of said parties etc. The AO concluded that the assessee had failed to prove the genuineness and hence rejected the evidence produced as not having any evidentiary value. The Id AO added the loan as unexplained cash credit u/s. 68 of the Act in the assessment.

The assessee had submitted following documents before A.O. like: a) Name and address of the lenders together with their PAN. b) Copy of loan confirmation duly signed by the assessee as well as the concerned lender from whom the loan has been taken. c) Copy of return of income of the parties from whom loan has been taken. d) Bank pass book of two parties highlighting the relevant loan transactions. e) PAN card copy of lenders. f) Affidavits from Smt Nikita Mahesh Sagar and Smt Usha Chauhan wherein they had affirmed that they were carrying on business of tailoring and embroidery works for the past 15 and 30 years respectively. The said affidavit also contained their income tax assessment particulars and also their respective source for advancing loans to the assessee herein. It was further pleaded that all the loan transactions were carried out through regular banking channels by account payee cheques and that the said loans were also duly repaid by the assessee in subsequent years.

The ITAT held that the assessee had furnished the complete details of the loan creditors in the instant case before the ld AO as detailed hereinabove. With regard to Arabian Sea Food and Shatrunjaya Estates Pvt. Ltd., the assessee had not produced the bank statement of the loan creditors as the same was not in the control of the assessee and this fact was also informed to the Ld. AO at the time of assessment proceedings.

The Ld. AO having known that the assessee was not having control over the bank statements of lending entities, could have issued notice u/s. 133(6) of the Act or summons u/s. 131 of the Act to those parties seeking for their bank statements. In the instant case, the Ld. AO had failed to do so. All the primary documents that are in possession of the assessee as a borrower were duly placed on record before the Ld. AO and thereafter the onus shifts to the Ld. AO, which was not discharged by the Ld. AO in the instant case. This would be more so, when the assessee had submitted his bank statements even for the subsequent year to prove that the said loans were duly repaid by him to the concerned lenders. It is not in dispute that these loan creditors are duly assessed to income tax and their income tax assessment particulars together with their addresses were on record. The AO without making even the basic verification with the lenders by using the statutory powers vested in him u/s. 133(6) or u/s. 131 of the Act, cannot simply make an addition towards the unsecured loans as unexplained cash credit merely on surmise and conjecture. Hence deleted the addition made in respect of loans received from Arabian Sea Food and Shatrunjaya Estate Pvt Ltd in the sums of ₹ 78 lacs and ₹ 20 lacs respectively.

With regard to loans received from Smt Nikita Mahesh Sagar and Smt Usha Chauhan, it was held that the Ld AO had merely disregarded the affidavit by stating that the same lacks verification. Even in this case, no verification was carried out by the Ld. AO either u/s. 133(6) or u/s. 131 of the Act to clear the doubts that were in mind of the Ld. AO with regard to the veracity of the loan creditors. Hence the availability of source in their hands stands proved beyond doubt. Hence by mere surmise and conjecture, the Ld. AO had resorted to disbelieve the loan transactions with these two parties, hence the addition was deleted. Accordingly, the grounds raised by the revenue was dismissed.

ACIT-33(3) vs. Mr. Vinodkumar Shyamsingh Yadav, ITA NO.: 4281/M/2015, dated: 18/09/2019 (Mum.)(Trib.)

Mr. Vinodkumar Shyamsingh Yadav

2. S 92D r.w.s 271G: – Transfer pricing – failed to maintain documentation – diamond trade – substantial compliance – no adjustment made in the ALP – penalty u/s. 271G could not be sustained

The assessee being resident corporate assessee is stated to be engaged in the business of manufacturing of cut and polished diamonds studded jewellery. Certain international transactions carried out by the assessee with its Associate Enterprises (AE) during the year under consideration, were referred to Ld. TPO for determination of Arm’s Length Prices. These transactions were in the nature of purchase / sale of rough as well as polished diamonds and sale of diamond studded jewellery. The approximate sale to AE was 23% of assessee’s turnover whereas purchases were approx. 56% of total purchases. The assessee benchmarked the same using entity level TNMM. Although Ld. TPO accepted the transactions to be at Arm’s Length Price, but initiated penalty u/s. 271G in view of the fact that the assessee was unable to submit internal TNMM by working out the profitability of AE and non-AE segment.

The assessee explained that owing to its nature of business, it was not practical to identify and bifurcate the stock, cost and revenue between AE and non-AE segment and work out profitability of the two segments separately. However, concluding that the assessee failed to maintain documentation as required under Clause (g) and (h) of Rule 10D(1), the aforesaid penalty was initiated.

The assessee submitted that the rough diamonds were procured from both AEs and non-AEs. The finished product of cut and polished diamonds would pass through a lengthy manufacturing process including assortment / re-assortment of rough diamonds and at initial stages, it would not be possible to forecast the final outcome of rough diamonds. During the process of manufacturing, a semi-manufactured diamond would be assorted many times and handled by many craftsmen. Various direct and indirect expenditure would be incurred at various stages of manufacturing process and the rough diamond would ultimately lose its identity as to source of purchase due to inherent nature of diamond manufacturing process. Therefore, due to peculiar nature of the product and constant mixing and re-mixing of diamonds obtained from AEs and non-AEs, it would not be feasible to maintain records to determine segmental profitability to work out internal TNMM.

The learned CIT(A), held that in facts of the case, viz., the nature of diamond trade, substantial compliance made by the assessee and the reasonable cause showed by the assessee and above all, when there is no adjustment made in the ALP, the levy of penalty under Section 271G of I.T. Act, 1961 was not justified.

Tribunal held that the only basis of levying impugned penalty against the assessee is the fact that the assessee did not furnish internal TNMM by providing segmental profitability of AE and non-AE transactions. The same stood explained by the inherent nature of business being carried out by the assessee. In course of transfer pricing proceedings, revenue could not point out any specific non-compliance on part of assessee regarding production of documents maintained under section 92D(1), impugned penalty order passed u/s. 271G was to be set aside

In view of the aforesaid position, CIT(A) order in deleting the penalty u/s. 271G is upheld.

DCIT-5(2)(1) vs. M/s. K. Girdharilal International Ltd., ITA No. 6446/Mum/2016, DOH: 03/10/2019 (Mum.)(Trib.)

M/s. K. Girdharilal International Ltd.

3. S. 263 : Commissioner – Revision of orders prejudicial to revenue – AO made detailed enquiry at assessment stage for accommodation entry provided by assessee – CIT found enquiry inadequate – Revision not permissible

The assessee company return was processed u/s. 143(1) of the Act. Later the assessment was reopened u/s. 148 of the Act. In the re-assessment proceedings, the Ld. AO observed that Sales tax authorities, Maharashtra had conducted search operation in the case of assessee company and other group concerns wherein Shri Abhishek Morarka, Director of assessee company had given a statement on 06-01-2010 u/s.14 of the Maharashtra Value Added Tax Act, 2002. In the said statement, the said Director had categorically stated that no purchase or sales activities were actually carried out by his concern and that they are merely accommodation entries provided to various persons. The Ld. AO based on the conduct of the assessee in the past i.e. A. Yrs 2006-07, 2007-08 and 2008-09 and also in the subsequent years i.e., A.Yrs 2011-12 and 2012-13 rejected the book results of the assessee u/s.145(3) of the Act and proceeded to treat the assessee as an accommodation entry provider and taxed the commission income alone on the total value of purchase and sale transactions at 1% thereon.

The Ld. CIT had sought to revise the said assessment order by treating the same as erroneous and prejudicial to the interest of the revenue by invoking his revisionary jurisdiction u/s. 263 of the Act for the limited purpose of examination of bogus purchases.

Tribunal held that the AO had made proper enquiry with regard to the status of the assessee to be an accommodation entry provider in the facts and circumstances of the instant case. For this purpose, the Ld. AO had also placed reliance on the behaviour of the assessee in the past as well as in the subsequent years. The Ld. CIT(A) for the A. Yrs. 2006-07 and 2007-08 vide its order dated 25-01-2017 had recorded a categorical finding that assessee is indeed an accommodation entry provider and had proceeded to estimate net profit i.e. commission income at 0.15% of the total turnover as against 1% adopted by the Ld. AO. Since a categorical finding is recorded by the Ld. CIT(A) in assessee’s own case in earlier years that assessee is merely an accommodation entry provider and that situation had admittedly not been changed during the year under consideration , there is absolutely no need for the ld. CIT to take a divergent stand by directing the ld. AO to examine the veracity of bogus purchases alone.

Now, the law is well-settled that the order of the ld. AO should be both erroneous and as well as prejudicial to the interest of the revenue in order to enable the Ld. CIT to invoke his revisionary jurisdiction u/s. 263 of the Act. In the instant case, certainly one of the conditions is conspicuously absent. Moreover, the conscious decision has been taken by the Ld. AO by considering the past and future behaviour of the assessee while framing the assessment. Hence, the Ld. AO had indeed taken a possible view in the matter. Hence, on this ground also, the Ld. CIT could not invoke revisionary jurisdiction u/s. 263 of the Act. The revision order passed by the Ld. CIT u/s. 263 of the Act is quashed .

Realstone Exports Ltd v. Income Tax Officer 11(1)(2), ITA No. 3580/Mum/2019, DOH: 04/10/2019 (Mum)(Trib)

Realstone Exports Ltd.