2022 (5) TMI 1094 - AT - Income Tax

Tribunal upholds additions for bogus loans, disallows interest; confirms profit estimation on alleged on-money

ITO-22 (3) (2), Mumbai. Versus M/s Sai Everest Building And Developers

The Tribunal partly allowed the Revenue's appeals, upholding the AO's additions under section 68 for bogus unsecured loans and the disallowance of related ... Addition u/s 68 - Bogus unsecured loan - Investigation wing of Kolkata establishes that the loan creditors are accommodation entry provider - onus to prove - paper concerns only for providing accommodation entry for commission - HELD THAT:- In closely held companies/firm where unsecured loan is raised from close knit circles mostly known to partners/owners, onus required under section 68 is very heavy on such firms to prove identity as well as creditworthiness of lenders and genuineness of transaction; mere submission of name and address of creditor, income tax returns, Balance Sheet/statement of affairs of creditor and bank statement of creditor is not sufficient. On perusal of the bank account of the lenders it is revealed that average bank balance maintained by lender in its aforesaid bank account is a very meagre amount. Thus average bank balance maintained by lenders in the aforesaid bank account are very meagre sum, while huge amounts of money suddenly comes into this bank accounts which immediately finds its exit into some other bank accounts, which is another peculiar feature of a shell company engaged in laundering money by providing bogus accommodation entries through a web of shell companies and bank accounts. The orders of the authorities below have been carefully gone through and the assessee is not able to discharge its onus as is casted under section 68 as the assessee could not prove genuineness of the unsecured loan taken and underneath sources for making these investments. The assessee no doubt has produced bank statement/confirmation of the entities from which the money found its place in the bank account of the assessee to be further used in its business but the genuineness of these transactions could not be proved as the assessee did not bring on record cogent evidences to substantiate the unsecured loans taken. Merely bringing confirmations and showing that the payments were made through banking channel is not sufficient. As discussed above about the specifics of lender’s financials it can be reasonably concluded that out of three essential ingredients, i.e. Identity of Creditor, Genuineness of the Transaction and Creditworthiness of the lender, only Identity can be assumed to be established. Rest of the 2 essential elements, i.e. Genuineness and Creditworthiness not established. Hence Addition made by AO u/s. 68 of the Act upheld and order of Ld. CIT (A) is set-aside. Accordingly, ground no.1 to 4 of the Revenue is allowed Addition u/s 69A - on-money received on sale of flats by the appellant - estimation of profit - CIT held no undisclosed cash belonging to the appellant was found during course of survey and on considering the statements recorded during course of survey u/s 131 of the working partners Shri Ghanshyam Sompura and Shri. Govind Patel who had stated of having incurred the labour payments, extra work, etc and on considering the other documents related to expenses found during survey, hold that it would be fair and reasonable to estimate the profit.- HELD THAT:- As considering the fact that the appellant’s housing project is of re-development project of 14 flats and since no undisclosed cash was found during course of survey and on considering the profit disclosed by the appellant on housing project of 5.47%, Ld. CIT (A) correctly hold that it would be reasonable to estimate the profit @ 10 % on the on-money/undisclosed consideration. Issues Involved:1. Bogus Unsecured Loans2. Disallowance of Interest Expenses3. Addition of On-Money Received on Sale of FlatsIssue-wise Detailed Analysis:1. Bogus Unsecured Loans:The Revenue challenged the deletion of additions made on account of bogus unsecured loans by the CIT (A). The AO had added unsecured loans received from Kolkata-based companies, deemed non-genuine based on a report from the DDIT (Inv.), Kolkata. This report indicated that the lender parties were controlled by entry operators and were non-existent. The assessee provided documentary evidence to support the genuineness of the loans, including PAN details, bank statements, and TDS certificates. The CIT (A) deleted the addition, citing that the assessee had discharged its onus by providing sufficient documentation and that the AO had not issued any notice under section 133(6) to verify the source of funds. The CIT (A) relied on various judicial decisions, including those from the Hon’ble Bombay High Court and the Hon’ble Supreme Court, which held that the source of the lender’s funds need not be proved by the assessee. However, the Tribunal found that the financials of the lender companies were not consistent with their claimed creditworthiness and that the transactions were merely circular in nature. The Tribunal upheld the AO’s addition under section 68, stating that the assessee failed to prove the genuineness and creditworthiness of the lenders.2. Disallowance of Interest Expenses:The Revenue also contested the deletion of disallowance of interest expenses related to the alleged bogus unsecured loans. The CIT (A) had deleted the disallowance, but the Tribunal, in line with its findings on the bogus unsecured loans, held that since the assessee failed to establish the genuineness of the transactions and the creditworthiness of the lenders, the interest paid on these loans was also disallowed.3. Addition of On-Money Received on Sale of Flats:The AO made additions under section 69A for on-money received on the sale of flats, based on entries found in a diary during a survey. The AO inferred that entries marked “Ca” and “Cas” represented on-money transactions. The assessee contended that these entries related to extra work done for customers and not undisclosed sales. The CIT (A) partially agreed with the assessee, noting that no undisclosed cash was found during the survey and that the entries could be related to extra work. The CIT (A) estimated the profit on the alleged on-money at 10%, considering the nature of the redevelopment project and the profit margin disclosed by the assessee. The Tribunal upheld the CIT (A)’s estimation, finding it reasonable and in line with judicial precedents.Conclusion:The Tribunal partly allowed the Revenue’s appeals, upholding the AO’s additions under section 68 for bogus unsecured loans and the disallowance of related interest expenses. However, it confirmed the CIT (A)’s estimation of profit on the alleged on-money received on the sale of flats. The judgment highlights the importance of proving the genuineness and creditworthiness of loan transactions and the necessity of a reasonable estimation of income based on the facts and circumstances of the case.