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IN THE HIGH COURT OF JUDICATURE AT CALCUTTA

SPECIAL JURISDICTION (INCOME TAX)

ORIGINAL SIDE

RESERVED ON: 04.07 .2022

DELIVERED ON: 14.07.2022

CORAM:

THE HON’BLE MR. JUSTICE T.S. SIVAGNANAM

AND

THE HON’BLE MR. JUSTICE BIVAS PATTANAYAK

ITAT/18/2022

(IA NO: GA/02/2022)

PRINCIPAL COMMISSIONER OF INCOME TAX – 9, KOLKATA

VERSUS

M/S. SREELEATHERS

Appearance:-

Mr. Vipul Kundalia, Adv.

Mr. Anurag Roy, Adv.

.….For the Appellant/Petitioner.

Mr. Abhratosh Mazumder, Adv.

Mr. Avra Mazumder, Adv.

Sk. Md. Bilawal Hossain, Adv.

…..For the Respondent.

2022:CHC-OS:5594-DB

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JUDGMENT

(Judgment of the Court was delivered by T.S.SIVAGNANAM, J.)

1. This appeal filed by the revenue under Section 260A of the Income Tax

Act, 1961 (the Act for brevity) is directed against the order dated 5

th

February, 2021 passed by the Income Tax Appellate Tribunal, A Bench,

Kolkata (Tribunal) in ITA No. 254/Kol/2020 for the Assessment Year 2015-

16. The revenue has raised the following questions of law for consideration:

(ii) Whether on the facts and circumstances of the case and

on question of law the Learned Income Tax Appellate Tribunal

“A” Bench, Kolkata has held that the order passed by the

Commissioner of Income Tax (Appeal) acceptable/

maintainable?

(iii) Whether on the facts and circumstances of the case the

Learned Income Tax Appellate Tribunal “A” Bench, Kolkata has

answered in favour of the assessee regarding addition under

Section 68 of the Income Tax Act, 1961 unsecured loan and

interest there off?

(iv) Whether on the facts and circumstances of the case and on

question of law the Learned Income Tax Appellate Tribunal “A”

Bench, Kolkata has dismissed appeal of the revenue on

addition under Section 68 of the Income Tax Act, 1961

unsecured loan and interest there of whereas per various case

laws the onus is on the assessee to establish the existence,

genuineness and creditworthiness of the new loan introduced,

which he has failed to satisfy the Assessing Officer?

2. The assessee filed the return of income for the assessment under

consideration, AY 2015-16 on 28.09.2015 declaring a total income of 2022:CHC-OS:5594-DB

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Rs. 7,35,35,310/-. The case was selected for scrutiny and notice under

Section 143 (2) was issued and thereafter notice under Section 142(2)

was issued and the case was discussed with the authorized

representative of the assessee. The assessee is a firm involved in the

business of trading/ retailing of footwear and other leather and non-

leather accessories. The Assessing Officer on examination of the

assessment records noticed that during the year under consideration

the assessee had received unsecured loans from various companies and

the names of 13 such companies were furnished and it was alleged that

those companies were the “paper companies” having no worth. The

assessee was directed to show cause on the said issue in respect of one

such company. By letter dated 22.12.2017, the assessee informed the

Assessing Officer that all transactions with one of such compan y

namely, M/s. Fast Glow Distributors Pvt. Ltd. were made through

banking channels. To establish the identity of the lender the assessee

enclosed the copy of their PAN card, the income tax acknowledgement,

copy of bank statement, certificate of incorporation, master data from

the register of companies and proof to show that the notice under

Section 133(6) of the Act was duly served on the lender. As regards the

creditworthiness, they enclosed the annual account of the lender and

the audited balance-sheet as on 31.03.2015 to show the net worth of

the lender as Rs. 25.37 crores. Further the assessee pointed out that

reply has been received from the lender to the notice issued by the

Assessing Officer under Section 133(6) of the Act which is also valid

proof of identity and genuinity of the lender company. The assessee 2022:CHC-OS:5594-DB

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further stated that they availed loans during peak season of their

business activity and after the season is over, the loan is repaid along

with interest after deducting taxes on source. Thus, the assessee

contended that the identity of the lender has been established,

genuineness of the transaction has been proved and the

creditworthiness of the lender is not in doubt and therefore, no adverse

inference should be drawn. The Assessing Officer while completing the

assessment by order dated 26.12.2017 under Section 143(3) of the Act

did not accept the explanation offered by the assessee. The Assessing

Officer stated that the modus operandi adopted by the assessee is

typical and prevalent in this part of the country where black-money is

being routed under the guise of unsecured loan. He branded the

transactions to be accommodation entries and held them to be not real.

On the documents produced by the assessee, the Assessing Officer

commented that mere filing of the PAN details, balance-sheet does not

absolve the assessee from their responsibilities of proving the

transaction and that the transactions are in the nature of tax evasion

by money laundering. With regard to the lender companies which in the

opinion of the Assessing Officer were “paper companies”, the Assessing

Officer stated that it has to be seen whether the identity and the

creditworthiness of the companies are real whether the transactions

were genuine and whether the transactions had been carried out at

arm’s length. The Assessing Officer proceeded to examine the

documents produced by the assessee held that on perusal of the

balance-sheet of the company it revealed that they hardly have any 2022:CHC-OS:5594-DB

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fixed assets and they are engaged in rotating money and further alleged

that the operators of such bogus companies ensure that money is

laundered through one Ashish Kumar Agarwal who was stated to be an

entry operator from whom statement was rendered . After referring to

the said statement, the Assessing Officer concludes that the assessee

has received an unexplained loan by routing unaccounted money. The

Assessing Officer placed reliance on the decision in the case of CIT

Versus Nipun Builders and Developers

1

, wherein it has been held

that the Assessing Officer has to adopt a reasonable approach when the

initial onus on the assessee stands discharged. Ultimately, the

Assessing Officer concludes that those lender companies are artificial

and the transactions are not genuine. Thus, the unsecured loans

availed by the assessee, were considered to be the assessee’s own funds

and they being unsecured cash credit was added back to the assessee’s

income. Penalty proceedings were to be initiated separately. Aggrieved

by such order, the assessee preferred appeal before the Commissioner

of Income Tax (Appeals), 09, Kolkata [CIT (A)]. Before the Appellate

Authority, the Assessee contended that the Assessing Officer failed to

take note of the genuineness of the transactions and failed to consider

the documents which were placed before him to establish the identity

and the creditworthiness of the lenders and the genuineness of the

transactions. Further, with regard to the statement of Mr. Ashish

Kumar Agarwal, the assessee stated that the statement was not

recorded in their presence and an opportunity of cross-examination

1

(2013) 350 ITR 407 (Del) 2022:CHC-OS:5594-DB

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ought to have been provided to the assessee. Further, it was contended

that no addition could be made merely on the statement given by a

third party without any additional evidence. Further, the Assessing

Officer erred in treating all the 13 lenders as bogus when the findings

which led to the issue of the show-cause notice dated 20.12.2018 is in

the name of only one lender, M/s. Fast Glow Distributors Pvt. Ltd.,

alleged to be a paper company and the amount involved is Rs.

62,79,268/- and, therefore, the addition made either as unexplained

cash credit or unexplained expenditure is not tenable. Further, it was

submitted that the unsecured loans added had been squared off during

the year itself and was non-existent in the year-end which does not call

for any addition. The unsecured loan during the year is on the basis of

pure assumption and surmises and the interest was paid at arm’s

length subjected to TDS and had all the characteristics of a working

capital loan. Further, the Assessing Officer ignored the reply given to

the notice issued under Section 133(6) of the Act. Further, the

Assessing Officer failed to appreciate that there is no reason for entity

with profit of more than Rs. 20 crores to take a fictitious loan of Rs. 4.5

crores and pay interest of Rs. 74 lakhs thereon. Further the TDS which

has been deducted by the assessee has not been disputed by the

department which will go to indicate their statutory compliance .

Further, reliance was placed on the decision in Nipun Builders and

Developers by the Assessing Officer was unsustainable as it is an

admitted fact that the notices under Section 133(6) were duly served on

the companies and they have also sent their reply as called for in the 2022:CHC-OS:5594-DB

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said notices. By placing reliance on the decision of the Hon’ble

Supreme Court in CIT Versus Khader Khan & Sons

2

, it was

contended that a statement recorded under Section 133A of the Act is

not admissible in law. For the proposition that there has been violation

of principles of natural justice, an opportunity of cross-examination

was not given. Reliance was placed on the decision of the Hon’ble

Supreme Court in Andaman Timbers Finance Versus CCE

3

. Further,

the assessee stated that nowhere the assessee has been referred to in

the statement given by Shri Ashish Kumar Agarwal and, therefore,

making an addition based on such statement is illegal. Further it was

contended that no show-cause notice was issued before making the

addition of the amounts received by the assessee as unsecured loan as

the show-cause notice dated 20.12.2017 had called for explanation

only in respect of the loan received from M/s. Fast Glow Distributors

which was explained by submitting documents. Therefore, the

Assessing Officer has travelled beyond the show-cause notice issued to

the assessee. The CIT (A) perused the evidence in the nature of

document and details produced by the assessee before the Assessing

Officer and on examination of those documents held that the loan

transactions have been squared off in the same year and therefore, it

cannot be assumed and presumed that the loans are in the form of

accommodation entry. Further, the CIT (A) notes that interest had been

paid at 12% in most cases and tax has been deducted at source.

2

(2013) 352 ITR 480 (SC)

3

CA No. 4228 of 2006 (SC) 2022:CHC-OS:5594-DB

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Further, the replies received by the Assessing Officer to the notice

issued under Section 133(6) of the Act was also held to be very relevant

and from the reply it was established that the net worth of the each of

the companies were in crores of rupees and they have declared their

income to the tune of Rs. 45 lakhs, Rs. 75 lakhs etc. which is

uncommon in companies providing such accommodation entries. Thus,

the CIT (A) held that the three factors in the Section 68 of the Act

namely, creditworthiness, identity and genuineness of the transactions

have been established. The statement recorded from Shri Ashish

Kumar Agarwal was held to be not admissible by referring to the

decision in Khader Khan & Sons (Supra) and Andaman Timbers

Finance. After referring to the various decisions of the High Court, the

CIT (A) held that the creditworthiness of the parties had been

established. The CIT (A) agreed with the assessee that the show-cause

notice issued by the assessee referred to only one of the lenders.

However, while completing the assessment, all the lender companies

were branded as “paper companies” and this was held to be in violation

of the principles of natural justice. Ultimately, the appeal filed by the

assessee was allowed by the order dated 14.11.2019. Aggrieved by the

same, the revenue filed appeal before the Tribunal. The Tribunal re-

examined the factual position and dismissed the appeal filed by the

revenue. Aggrieved by such order, the revenue is before us by way of

this appeal.

3. We have heard Mr. Vipul Kundalia, learned Senior Standing

Counsel along with Mr. Anurag Roy, learned Advocate for the appellant 2022:CHC-OS:5594-DB

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and Mr. Avratosh Mazumder, learned Senior Advocate assisted by Mr.

Avra Mazumder and Mr. Md. Bilwal Hossain, learned Advocates for the

respondents.

4. Before we examine the correctness of the order passed by the

Tribunal and consider whether a substantial question of law arises for

consideration in this appeal we need to take note of Section 68 of the

Act. This provision deals with cash credits. It states that where any

sum is found credited in the books of an assessee maintained for any

previous year, and the assessee offers no explanation about the nature

and source thereof or the explanation offered by him is not in the

opinion of the Assessing Officer, satisfactory, the sum so credited may

be charged to income tax as the income of the assessee of that previous

year. The crucial words in the said provision are “assessee offers no

explanation”. This would mean where the asse ssee offers no proper,

reasonable and acceptable explanation as regard the amount credited

in the books maintained by the assessee. No doubt the Income Tax Act

places the burden of proof on the tax payer. However, this is only the

initial burden. In cases where the assessee offers an explanation to the

credit by placing evidence regarding the identity of the investor or

lender along with their conformations, it has been held that the

assessee has discharged the initial burden and, therefore, the burden

shifts on the Assessing Officer to examine the source of the credit so as

to be justified in referring to Section 68 of the Act. After the Assessing

Officer puts the assessee on notice and the assessee submits the 2022:CHC-OS:5594-DB

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explanation with regard to the cash credit, the Assessing Officer should

consider the same objectively before he takes a decision to accept or

reject it. In Srilekha Banerjee & Ors. Versus CIT

4

, it was held that if

the explanation given by the assessee shows that the receipt is not of

income nature, the department cannot convert good proof into no proof

or otherwise unreasonably reject it. On the other hand, if the

explanation is unconvincing, the same can be rejected and an inference

shows that the amount represents undisclosed income either from a

disclosed or an undisclosed source [CIT Versus Mohanakala (P)

5

].

The explanation given by the assessee cannot be rejected arbitrarily or

capriciously, without sufficient ground on suspicion or on imaginary or

irrelevant grounds (Lal Mohan Krishna Lal Paul Versus CIT

6

and

Anil Kumar Singh Versus CIT

7

).

5. Further to be noted that where the assessee furnishes full details

regarding the creditors, it is up to the department to pursue the matter

further to locate those creditors and examine their creditworthiness. It

has been further held in Sivan Pillai (AS) Versus CIT

8

that while

drawing the inference, it cannot be assumed in the absence of any

material that there has been some illegalities in the assessee’s

transaction. Thus, more importantly, as held by the Hon’ble Supreme

Court in CIT Versus Daulat Ram Rawatmull

9

, the onus of proving

4

(1963) 49 ITR 112

5

(2007) 291 ITR 278 (SC)

6

(1944) 12 ITR 441 (Cal)

7

(1972 84 ITR 307 (Cal)

8

(1958) 34 ITR 328 (Mad)

9

(1973) 87 ITR 349 (SC) 2022:CHC-OS:5594-DB

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that the appellant was not the real was on the party who claims it to be

so. Bearing the above legal principles in mind, if we examine the case

on hand, it is clear that the assessing officer issued show cause notice

only in respect of one of the lender M/s. Fast Glow Distributors. The

assessee responded to the show cause notice and submitted the reply

dated 22.12.2017.The documents annexed to the reply were classified

under 3 categories namely: to establish the identity of the lender, to

prove the genuineness of the transactions and to establish the

creditworthiness of the lender. The assessing officer has brushed aside

these documents and in a very casual manner has stated that mere

filing PAN details, balance sheet does not absolve the assessee from his

responsibility of proving the nature of transaction. There is no

discussion by the assessing officer on the correctness of the stand

taken by the assessee. Thus, going by the records placed by the

assessee, it could be safely held that the assessee has discharged his

initial burden and the burden shifts on the assessing officer to enquire

further into the matter which he failed to do. In more than one place

the assessing officer used the expression “money laundering.” We find

such usage to be uncalled for as the allegations of money laundering is

a very serious allegations and the effect of a case of money laundering

under the relevant Act is markedly different. Therefore, the assessing

officer should have desisted from using such expression when it was

never the case that there was any allegations of money laundering.

Paragraph 5.4 and 5.5 of the assessment order are all personal

perception and opinion of the assessing officer which nee ds to be 2022:CHC-OS:5594-DB

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ignored. Much reliance was placed on the statement of Shri Ashish

Kumar Agarwal, which statement has been extracted in full in the

assessment order and it cannot be disputed that there is no allegation

against the assessee company in the said statement. There is no

evidence brought on record by the assessing officer to connect the said

entry operator with the loan transaction done by the assessee.

Therefore, the statement is of little avail and could not have been the

basis for making allegations. The assessing officer ignored the settled

legal principle and in spite of the assessee having offered the

explanation with regard to the loan transaction, no finding has been

recorded as regards the satisfaction on the explanation offered by the

assessee. Therefore, the assessing officer ignored the basic tenets of law

before invoking his power under Section 68 of the Act. Fortunately, for

the assessee, CIT(A) has done an elaborate factual exercise, took into

consideration, the creditworthiness of the 13 companies the details of

which were furnished by the assessee. More importantly, the CIT noted

that all these companies responded to the notices issued under Section

133 (6) of the Act which fact has not been denied by the assessing

officer. On going through the records and the net worth of the lender

companies, the CIT has recorded the factual findings that the net worth

of those companies is in crores of rupees and they have declared

income to the tune of Rs. 45,00,000/- and 75,00,000/-. Therefore, the

assessing officer if in his opinion found the explanation offered by the

assessee to be not satisfactory, he should have recorded so with

reasons. We find that there is no discussion on the explanation offered 2022:CHC-OS:5594-DB

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by the assessee qua, one of the lenders. Admittedly, the assessee was

not issued any show cause notice in respect of other lenders. However,

they are able to produce the details before the CIT(A) who had in our

view rightly appreciated the facts and circumstances of the case. As

pointed out earlier, the assessing officer brushed aside the explanation

offered by the assessee by stating that mer ely filing PAN details,

balance sheet does not absolve the assessee from his responsibilities of

proving the nature of transactions. It is not enough for the assessing

officer to say so but he should record reasons in writing as to why the

documents which were filed by the assessee along with the reply dated

22.12.2017 does not go to establish the identity of the lender or prove

the genuineness of the transaction or establish the creditworthiness of

the lender. In the absence of any such finding, we have to hold that the

order passed by the assessing officer was utterly perverse and rightly

interfered by the CIT(A). The Tribunal re-appreciated the factual

position and agreed with the CIT(A). The tribunal apart from taking into

consideration, the legal effect of the statement of Ashish Kumar

Agarwal also took note of the fact that the notices which were issued by

the assessing officer under Section 133 (6) of the Act to the lenders

where duly acknowledged and all the lenders confirmed the loan

transactions by filing the documents which were placed before the

tribunal in the form of a paper book. These materials were available on

the file of the assessing officer and there is no discussion on this

aspect. Thus, we find that the tribunal rightly dismissed the appeal

filed by the revenue. 2022:CHC-OS:5594-DB

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6. For all the above reasons, we find that no question of law much

less, substantial question of law arises for consideration in this appeal.

7. Accordingly, the appeal fails and is dismissed. No costs.

(T.S. SIVAGNANAM, J.)

I agree.

(BIVAS PATTANAYAK , J.)

(P.A.-PRAMITA/SACHIN) 2022:CHC-OS:5594-DB