Income Tax Appellate Tribunal - Indore
Vaibhav Cotton Pvt. Ltd., Indore vs Department Of Income Tax on 14 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, J.M. AND SHRI R.C.SHARMA, A.M.
PAN NO. : AACCV3182F
I.T.A.No. 370/Ind/2010
A.Y. : 2007-08
Income-tax Officer M/s. Vaibhav Cotton Pvt.Ltd.,
4(4), vs Indore.
Indore.
Appellant Respondent
Appellant by : Shri Keshav Saxena, CIT DR
Respondent by : S/Shri M. C. Mehta & Hitesh
Chimnani
Date of Hearing : 14.10.2011
Date of : 31.10.2011
pronouncement
ORDER
PER R. C. SHARMA, A.M.
This is an appeal filed by the Revenue against the order of CIT(A) dated 15th March, 2010, for the assessment year 2007-08, in the matter of order passed by the Assessing Officer u/s 143(3) dated 30th December, 2009.
2. Following grounds have been taken by the Revenue :-
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1. On the facts and in the circumstances of the case , the order of the ld. CIT(A) is contrary to the facts and law.
2. On the facts and in the circumstances of the case , the ld. CIT(A) erred in deleting the addition of Rs.
3,30,55,000/- ( Rs. 28,15,000+3,02,40,000) made by the Assessing Officer on account of unsecured loans.
3. Rival contentions have been heard and records perused The facts, in brief, are that the assessee is a Private Limited Company incorporated on 12.9.2006. In the course of scrutiny assessment for the assessment year 2007-08, the AO observed that the assessee has shown share capital of Rs. 3,80,000/- and reserve and surplus of Rs. 25,40,998/-. In addition to above assessee has also shown unsecured loans of Rs. 3,33,09,596/- Unsecured loans were stated to be taken from the following parties :-
S. Name of the Party Amount of Unsecured No. Loan 1 M/s. Shradha Agencies Rs. 3,02,40,000/- 2 M/s Sourabh Cotton Rs. 28,15,000/-
3 Smt. Kiran Choudhary Rs. 2,50,000/-
Total" Rs. 3,33,05,000/-
2
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13.2. The information u/s 133(6) of the Income Tax Act was called for and person wise position emerged as under:-
1. M/s Shardha Agencies, Prop. Shri Dispatch First notic was received un Rajendra Chhajed, 125, through Speed served withe postal comment Ramchandra Nagar, Indore Post/AD "Diye pat per nahi hone se vapas" and 111 the second attempt on providing latest address the information complied but after due dates
2. M/s Sourabh Cotton, Prop Dispatch Information received 111 first Hastimal Jain, 62, Swami through Speed attempt Vivekanand Nagar, Kanadi Post/AD Road, Indore a ..,.). Smt. Kiran Choudhary, 398, Dispatch Notice served and information Clerk Colony, Indore through Speed received in first attempt Post/AD
4. To verify genuineness of transaction, the statement of Shri Hastimal Jain Prop. Sourabh Cotton, 62, Swami Vivekanand Nagar, Kanadia Road. Indore was recorded u/s 131. As per statement so recorded, Shri Hastimal Jain is engaged in business of Rui and brokership of cotton. The statement was taken with reference to loan shown to have given to M/s. Vaibhav Cotton and in flow and out flow of huge entries in the bank account. The inflow and outflow of funds in his account maintained with Union Bank of India , Malharganj, is as under. It is pertinent to mention here that bank account of M/s. 3
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Vaibhav Cotton company is also there in the same bank. Major entries in the bank account of Shri Hastimal Jain are as under
:-
~
Date Amount of Date Description Amount of
Description
inflow outflow
18.01 Cash deposits Rs. 4,50,0001- 18.01.2007 Vaibhav Rs.
:2007 Agencies 4,50,0001-
19.02.2007 High value Rs. 5,49,518/-
cheque from STI
India Rau.
19.02.2007 Cash Rs. 1,95,0001- 19.02.2007 Vardhmaan Rs.2.50,000/--
Traders
19.02.2007 Cash Rs.55,000/-
20.07.2007 Vardhmaan Rs.5.50,000/-
Traders
21.02.2007 High value Rs.2,95,357/-- 22.02.2007 Vardhmaan Rs.
clearin from Traders 2,95.000/-
g India Rau.
STI
08.03.2007 M/s Vaibhav Rs. 5,00,000/-- 08.03.2007 M/s Rs.
Cotton Vardhrnaan 5,00,000/-
Traders
17.03.2007 Rai enterprises Rs. 8,50,000/- 17.03.2007 M/s Rs.
Vardhmaan 8,50,000/-
Traders
17.03.2007 Rai enterprises Rs. 8,50,000/-- 17.03.2007 Arihant Rs.
Traders 8,50,000/-
17.03.2007 Rai enterprises Rs. 16,65,000/- 17.03.2007 M/.s Rs.
Vaibhav 16.65.000/-
Cotton
17.03.2007 Rai enterprises Rs.15,OO,OOOI-
17.03.2007 Rai enterprises Rs.1,50,OOOI- 17.03.2007 M/s Rs.
Vaibhav 16,50,000/-
Cotton
5. The AO further observed that genuineness of transaction entered with Shri Hastimal Jain was not 4
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duly proved. With regard to creditworthiness of lender, the AO observed as under :-
During the assessment proceeding related details were procured from Shri Hashtimal Jain. A brief description of the same is as under:-
A.Y. Returned income ( in Rs.)
2005-06 85,121/-
2006-07 83,520/-
2007-08 2,22,848/-
The AO stated that perusal of the above clearly shows that the claimed lender has no creditworthiness to advance Rs.28.15 lacs that to a company (the assessee company) who have just started their business in the assessment year concerned ( for few days of March 2007) with its date of incorporation only on 12/09/2006. On the basis of above discussion, the AO held that the creditworthiness of the claimed lender i.e Shri Hastimal Jain is not proved.
Shri Rajendra Kumar Chhajed Prop. Shradha Agencies 5
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unsecured loans taken Rs.3,02,40,OOO/-. With regard to the genuineness of the transactions, the AO observed that the assessee has also shown loan taken in its balance sheet from Shri Rajendra Kumar Chhajed Prop. M/s. Shradha Agencies amounting to Rs.3,02,40,000/--. The copy of account was furnished during assessment proceedings. Confirmation letter was also filed. Statement of Shri Rajendra Kumar Chhajed was recorded u/s.131 of the Income-tax Act,1961. In the statement it was stated in the introduction that he is a broker of Rui and also engaged in business of trade of cotton casually. The statement was taken with reference to loan given to the assessee M/s. Vaibhav Cotton Pvt.Ltd. and inflow and outflow of huge entries in the Bank account was also verified by AO. The inflow and outflow of funds in his account maintained with Union Bank of India, Malharganj, Indore was also verified by the Assessing Officer. It is pertinent to mention here that bank account of M/s. Vaibhav Cotton Pvt. Ltd. is also there in the same bank. Major entries in the bank account of Shri Rajendra Kumar Chhajed are as under :-
Date Description Amount of Date Description Amount of
inflow outflow
07/06/2006 Vardhaman 9,50,000/- 07/0612006 Suresh Mehta 9,50,000/-
Traders
07/06/2006 Vardhaman 9,50,000/- Suresh Mehta 9,50,000/-
I
6
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Traders
11/0712006 --11 0-- 6,40,000/- 11/0712006 -do- 6,30,000/-
13/07/2006 -do- 1,50,000/- 13/07/2006 -do- 1,50,000/-
14/07/2006 Suresh 5,25,000/- 14/0712006 Vardhaman Traders 5,25,000/-
Mehta
17/07/2006 Clearing 3,18,021/- 17/0712006 --do-- 3,25,000/-
20/07/20006 -do- 13,70,000/- 20/0712006 Suresh i\lehta 1,00,000/
20/07/2006 Vardhman 1,00,000/- 20/07/2006 Vardhaman Traders -13,70,000
Traders /-
24/0712006 Clearing 6,50,000/- 24/07/2006 --do-- 6,50,000/-
26/0712006 Suresh 3,50,000/- 26/07/2006 --do--
Mehta
3,50,000/-
31107/2006 --do-- 5,68,0001- 31/0712006 --do-- 6,00,000/
22/08/2006 Vaibhav 3,90,000/- 22/0812006 --do-- -3,65,000/-
Agencies
2011012006 Vardhman 9,70,000/- 20/10/2006 Suresh Mehta 9,70,000/-
Traders
26/12/2006 Cash 1,00,000/- ----
-- --
26/12/2006 Cash 10,000/- 26/12/2006 ---do-- 1,10,000/
03/0312006 Vardharnan 1,00,000/ 03/0312007 Cash -1,00,000/
Traders - -
19/03/2007 Rai 16,80,000/- 19/0312007 Vaibhav Cotton 16,85,000/-
Enternrises
19/03/2007 Kat·tik 8,50,000/-
Trading
Company
19/03/2007 Rai 8,30,000/- 19/0312007 Valbhav Cotton 16,70,000/-
_ Enterprise~
-- -
19/0312007 Kartik.: 17,00,000 19/0312007 --do-- 17,00,000/-
/-
Trading Co.__ ---
19/03/2007 --do-- 17,20,000/- 19/03/2007 --do-- 16,95!00
20/03/2007 --do-- 16,80,000/- 19/03/2007 --do-- 16,80,000/- --
0/-
20/03/2007 --do-- 17,00,000/- 20/0312007 --do-- 17,00,000/ -
--
-do-- --do-- 17,25,000/- -- 20/031200 -do-- 17,25,000/-
21/03/2007 Clearing 1,20,675/- 21/03/2007 --do-- 17,35,000/-
21/03/2007 Kartik 117,35,000/- 21/0311007 17,35,000/-
Trading 16,90,000 - -do- 16,90,000/-
Co.
I 21/03i2007 Vardhman Traders 1,60,000/-
23/03/2007 -do- I 17,.25,000/- 22 03,200" Vaibhav Cotton 17,25,000/-
22/0312007 -do- 17,25,000'- 22 03.2007 -do-- 17,25,000/-
23/03/2007 -do- 16.65,000/- 23.03,2007 -do-- 16,65,000/-
17,15,000 - 17,15,000/-
24/03/2007 -do-
017,00,000'/-
16.95,000/-
I H/03/2007 -do-
17,00,000/-
16,95,000/-
26/03/200-7 -do- 16,50,000/- 26/03/2007 -do- 16,50,000/-
17,00,000/- 17,00,000/-
16,75,000/- 16,75,000/-
29/031200- Valbhav 2 90,000/- 29/0312007 Vardhaman Traders 2,90,000/-
Cotton
,
The introduction of proprietors or owners of the above concerns have 7
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been narrated by AO as under :-
Loan taken from :-
1. Shri Vardhaman Traders prop. Shri Suresh Kumar Mehta (Director of assessee company).
2. Shri Suresh Kumar Mehta savings account. (Director of assessee company).
3. Shri Vaibhav Agencies Prop. Smt. Kanaklata Mehta ( mother of Shri Suresh Kumar Mehta)
4. M/s. Rai Enterprises Prop. Shri Rakeh Kumar Rai, Nijar pura Ujjain (cotton purchased by assessee company from Rai Enterprises. ).
5. M/s. Kartik Trading Co. Prop. Shri Ramesh Agrawal Mahawar Nagar, Annapura Road, Indore ( cotton purchased by assessee company from Kartik Trading Company) Loans given to :-
1. Shri Suresh Kumar Mehta savings account. (Director of assessee company).
2. M/s. Shri Vardhaman Traders prop. Shri Suresh Kumar Mehta (Director of assessee company).
3. M/s. Vaibhav Cotton Pvt. Ltd. the assessee company in which Shri Suresh Kumar Mehta and Smt. Anita Mehta are Directors.
5.1 In question No.6 he was asked to explain the loans taken and given during the period of F.Y.2006-07. How many loans have 8
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taken from different persons and also shown rate of interest and how many amount was advanced to other persons showing the rate of interest. Shri Rajendra Chhajed explained that during the F.Y.2006- 07 he taken loan of an amount of Rs.2.81 crore from M/s. Kartik Trading Co. Indore, Rs.25,17,428/- from M/s. Rai Enterprises, Ujjain and Rs.39,64,742/- from Shri Vardhaman Traders Prop. Shri Suresh Kumar Mehta, Indore(Director of the assessee company) and he further stated that he has paid interest @9% per annum to M/s. Kartik Trading Company only and no interest is to be paid to the other parties being interest free. He also stated that he has advanced a loan of Rs.3,02,40,OOO/- to assessee M/s. Vaibhav Cotton Pvt. Ltd. this is also interest free loan. The explanation given was that he has business relations with these parties, therefore neither interest paid nor taken.
He also denied about any contract/agreement made in respect of loan taken/given. In further question he replied that he has only one bank account with M/s. Union Bank of India which is O.D. current account. He further stated that he forgot to tell that interest of RS.7428/- was paid to M/s. Rai Enterprises also and no interest has been paid to Shri Vardhman Traders Prop. Shri Suresh Kumar Mehta who is my near relative ( wife's brother). On-asking that how he could get a loan of 9
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Rs.2.81 crores from M/s. Kartik Trading Co. on what basis loan was taken. It was explained that the proprietor of M/s. Kartik Trading Company Shri Rarnesh Agrawal of Mahawar Nagar Annapurna Road, Indore is also doing the business of cotton and he is a broker, therefore the relations are professional/business relations. The loan was given to him on his personal reputation. He had taken this loan as Shri Suresh Kumar Mehta was in requirement of funds for his company. It was asked when Shri Suresh Kumar Mehta was also knowing these parties why did he not take these loans directly, he stated that these loans were provided on his personal reputation/goodwill.
6. With respect to M/s. Vaibhav Cotton, the observation of the AO was as under :-
14.3. The gist of question answer produced above and totality of facts and circumstances makes it clear how in the business of Rs. 8,44,875/- only, there is inflow of funds of Rs. 62,16,873/-
and out flow of Rs. 70,60,696/- without doing any proportionate business. Thus these are mere entries in statement. He replied that all the transactions are due to his personal goodwill and the related parties are well known to him to whom credit has been 10
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given and from whom credit has been taken. It is clear from the above that assessee is engaged in routing the funds of a particular group, in this case Shri Suresh Kumar Mehta Group, from one concern to another concern. The funds have flown from one concern of Mehta Group to the assessee company in which in which Shri Suresh Kumar Mehta is director. It is also pertinent to note that Shri Hastimal Jain is not charging interest on these huge transactions which is not possible during the recent times present market conditions. A person gives, normally, a loan to get some profit out of it. It means, Shri Suresh Kumar Mehta managed to route his own funds required for his company through Shri Hastimal Jain has been used as unsecured loan provider.
14.4 It is not out of place to mention an example that Vaibhav Cotton Pvt. Ltd, the assessee, has purchased cotton bales from M/s. Rai Enterprises and made payment to them by taking loan from Shri Hastimal Jain Prop. of M/s Saurabh cotton. The money paid to Rai Enterprises by the company again came back as loan to Shri Hastimal Jain and then Shri Hastimal Jain routed this money as loan to the assessee company M/s 11
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Vaibhav Cotton Pvt. Ltd.
This can be suitably described graphically as follows :-
Loan from Hastimal Jain------- Vaibhav Cotton P.Ltd.-------- Rai Enterprises----- -----Hastimal Jain----- Vaibhav Cotton P.Ltd. the assessee company. In this way same money was routed through these places or persons and came back to the assessee. It is thus found that the sale of bales by Rai Enterprises was actually not a business transaction but it was shown in the books just to release the money of the assessee company to get back same again as a loan and same money was routed again and again among these three parties. It means these shown transactions are not real and genuine transactions but only circulation of money which was managed by the assessee i.e. M/s. Vaibhav Cotton Company Pvt. Ltd. Therefore, the genuineness of transaction of the claimed lender i.e Shri Hastimal Jain is not proved. " 12
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7. In view of the above, discussion, entire amount of unsecured loans were treated by the Assessing Officer as non- genuine and the creditworthiness of loan creditors were held to be not proved. Thus, the amount of loan taken was added by the Assessing Officer in assessee's income.
8. By the impugned order, the ld. CIT(A) deleted the addition after having the following observations :-
"Now, coming to ground no.2, resulting in addition of Rs.28.15 lakh and Rs.302.46 lakh from M/s. Saurabh Cotton & Sarda Agencies, it is to be seen that AO has not doubted the identity of both these parties. All he has doubted is the genuineness of such transaction and creditworthiness of both such persons to advance the huge amount outstanding in their name vis-a-vis the total income declared in the return of income filed. In fact, the proprietor of both the concerns have appeared before the AO and has owned up such transactions. The AO was himself taken note of the fact about the 13
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circular nature of such transactions whereby the funds from such creditors have been routed through other entities including the appellant and has finally landed back with the appellant. Thus, though, the AO's observation and findings in the matter that these transactions are not genuine business transactions may have its own merit but nevertheless it is difficult to understand that in such circumstances when the source of entire funds are established from the books of accounts of the creditors, identity thus been disputed and the funds have again flown back to such creditors from the assessee's own records, it is difficult to appreciate how the final amount standing in their name which includes funds advanced by the appellant himself can be treated as unexplained and so added in the hands of the appellant.
5.01 The appellant has amply established the source of such transactions by filing the copy of bank account of M/s. Saurabh Cotton on 14
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page 127 of the compilation where source of each and every amount advanced to the appellant is clearly established. So is the position about the statement prepared from the bank transactions of M/s. Sarda Agencies in compilation in page 135 explaining the transaction as per bank statement included in compilation at pages 136 and 137, whereby source of each and every amount credited to the appellant's account are clearly established. The aforesaid pages on Paper book being 127,135,136 and 137 are enclosed with the appeal order and collectively market as Annexure Al to A4. The appellant has also filed further written submission dated 12.3.10 as extracted above repelling AO's observation that business transaction with two concerns Rai Enterprises, Ujjain and Karthik Trading, Indore being not genuine.
5.02 In course of discussion, it was 15
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emphasized by the AR that under the vague and wrong impression that no outstanding balance should be reflected in the savings bank account particularly in cotton business which could be adversely viewed by I.T. Authorities, the appellant resorted to such circular transactions to square off the balance appearing in two savings account namely Rai Enterprises and Karthik Trading co. The contention so advanced are not found to be very convincing as how a person could hold such a wrong notion but then nothing turns out of it. This could have been at best a point of investigation for inquiring into the affairs of the appellant company in the matter of transactions, but based on such findings and observation, the amount of funds which are amply explained cannot be treated as unexplained so as to be added in the hands of the appellant. Thus, the addition made by the AO at Rs.28.15 lakh for 16
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the outstanding amount standing in the name of M/s. Saurabh Cotton of Rs.302.40 lakhs standing in the name of Shraddha Agencies cannot be sustained, both in facts and in law and are accordingly directed to be deleted."
9. Aggrieved by the above order of the ld. CIT(A), the Revenue is in further appeal before us. It was argued by the ld. CIT DR that creditworthiness of loan creditor was not proved in so far as they were having very low income returned during the last three years as noted by the Assessing Officer. He further contended that the loan transaction was merely a circular entry, the genuineness of which was not established, therefore, the AO was justified in adding entire amount in assessee's income.
10. On the other hand, the ld. Authorized Representative reiterated the submission made before the CIT(A) and also drew our attention to the observation of the AO in support of the contention that the AO himself has accepted each and 17
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every credit entry in the Bank account and also issue of cheques out of the same. He further relied on the findings recorded by the ld. CIT(A) with regard to the genuineness of the transaction and creditworthiness of the loan creditors.
11. We have considered the rival contentions, carefully gone through the orders of the authorities below and also decisions relied on by lower authorities in their respective orders as well as relied on by the ld. Authorized Representative and ld. CIT DR during the course of hearing before us in the context of factual matrix of the case. From the record, we found that assessee company is carrying on business in cotton and brokerage of cotton. The loan was received from the close relatives/friends of the Director of the assessee company. To prove the genuineness of credit balance in the account of Saurabh Cotton and Sharda Agencies, the assessee had filed copy of accounts and Bank account of creditors. The assessee and creditor have explained each and every entry of inflow of money in the bank account and their respective utilization. The assessee has also filed detailed copy of account of M/s. Karthik Trading Company and M/s. Rai Enterprises from 18
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whom these creditors received money in their Bank account. The assessee company has filed detailed copies of accounts of all the four parties with the assessee company alongwith the copy of account of the assessee company in their books and so also copies of their bank accounts with narration against each entry.
12. After going through all these accounts, we found that entries in the account of all these four parties and those in the books of the assessee were through account payee cheques. All these entries were clearly reflecting rotation of funds from one concern to another and that too by account payee cheques. Source of deposit in bank was not in doubt. All these concerns are regular income tax payers and have filed confirmations in respect of their accounts with the assessee company. The source of each of these entries were fully proved. The statement of the creditors was also recorded by the Assessing Officer by calling them u/s 131 wherein they have owned the funds given to the assessee company, their relation with the Director of the assessee company and the source of fund in their respective Bank account. The AO in its 19
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order itself has observed inflow of funds in respective dates in the Bank account and out flow of the same out of the sufficient balance in their Bank account. Proprietor of both the concerns Shri Hashtimal Jain and Shri Rajendra Kumar Chhajed in their statement accepted the amount of advances given by them to the assessee. There is no dispute to the well settled legal proposition that in case of cash credit not only identity and genuineness of the loan transaction is required to be proved but at the very same time, creditworthiness of loan creditor is equally important to be proved. With regard to the identity of the creditors, we found that both the creditors are income tax payers and copies of their assessment orders for the past three years have been filed to prove their identity and they also personally appeared before the AO and their statement was also recorded. The genuineness of the transaction stand proved by the personal appearance of the creditor and their acceptance in respect of their credits appearing in the books of the assessee and the loan was given out of their Bank account. The creditworthiness of creditors are proved by their regular books of account which indicated 20
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that all entries in their accounts have traveled through bank account through account payee cheques. The respective deposit in the Bank account was also verified by the Assessing Officer. By filing various details, these creditors have proved their capacity to advance these loans. The detailed finding recorded by the ld. CIT(A) has not been controverted by the Department by bringing any positive material on record, which clearly establishes the fulfillment of all the three ingredients of cash credit. Accordingly, no interference is required in this part of the CIT(A)'s order.
13. In the result, the appeal of the Revenue is dismissed.
This order has been pronounced in the open court on 31st October, 2011.
Sd/- Sd/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 31st October, 2011. CPU* 1925 21