1. This appeal is preferred by the Revenue against the order dated 01.08.2018 of the Commissioner of Income Tax (Appeals)-7, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No.10675/257/CIT(A)-7/Del/2015-16 arising out of the appeal before it against the order dated 25.03.2015, passed u/s 153C/143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ITO, Ward-21(2), New Delhi (hereinafter referred to as the Ld. AO).
2. The assessee has filed return of income of Rs.2,96,708/- and the case of the assessee was taken up for scrutiny and a notice u/s 143(2) Act was issued followed by a questionnaire u/s 142(1) of the Act. The assessee is a non-banking financial company carrying on the financial business during the year under consideration and the AO had examined the fact that in the revised return, the assessee had shown an investment of Rs.1,30,00,000/- in debentures of M/s V. Hotels Ltd., but, no interest income for the same was shown in the return of income. Thus, an addition of Rs.17,808/- was made on account of undisclosed interest income which the CIT(A) had deleted with the following relevant findings in para 5.2 of his order:-
“5.2. I have carefully considered the assessment order and written submission filed by the Ld. AR. The appellant is a non-banking financial company and is in the business of investment and financing. The appellant purchased the debentures of V-Hotels Ltd. for a sum of Rs.1,30,00,000/- on 27.03.2012 as ex-interest from M/s Manglam Vanijya (P) Ltd. (hereinafter called Manglam Vanijya). As per such understanding the interest for the F.Y. 2011-12 was received by the seller company Manglam Vanijya. In support of this the copy of certificate of Manglam Vinijya confirming receipt of interest was also filed. The AO was of the view that the interest for the period 27.03.2012 to 31.03.2012 on the basis of accrual has to be assessed in the hand of the appellant and made the addition of Rs.17,808/-. The appellant stated that the accrual of interest on the debentures for a commercial transaction, particularly in the matter of purchase of debentures and securities, depends upon the terms of the contract and because as per the understanding the interest for the F.Y. 2011-12 was to be received on such debentures by Manglam Vanijya as per the contract, no interest can be said to have accrued under the law in the case of the appellant and accordingly the addition of Rs.17,808/- as made by the AO deserves to be deleted. Since Mangalam Vanijya has confirmed to have received the interest on debentures for the F.Y. 2011-12, the addition on deeming basis in the hands of the appellant is not sustainable and is directed to be deleted. This ground of appeal is ruled in favour of the appellant.”
3. The AO had further made an addition of Rs.1,36,612/- on account of the fact that the assessee had issued debentures of Rs.50 crores on 21.02.2012 at 10% rate of interest and a provision of interest of Rs.54,64,481/- was made. However, the AO was not satisfied that this calculation of interest which the assessee had shown to be of 366 days, February being leap year. The AO, however, re-calculated it and Rs. 1,36,612/- being the difference of Rs.56,01,093/ minus Rs.54,64,481/- was added. The CIT(A) has deleted the same with the following relevant findings in para 6.2:-
“6.2. I have carefully considered the assessment order and written submission filed by the Ld. AR. During the year under consideration, the appellant-company has issued non-convertible debentures for Rs.50,00,00,000/- on 20.02.2012 carrying the interest @ 10% per annum which was payable annually. The appellant had calculated the interest pertaining to the year under appeal, i.e. 20.02.2012 to 31.03.2012 i.e. for a period of 41 days at Rs.56,01,093/-. However, the AO was of the view that the interest should have been claimed only for 40 days and not for 41 days and then made the disallowance of Rs.1,36,612/-. The appellant submitted that because the year under consideration was a leap year and month of February was of 29 days, therefore the proportionate interest as claimed by the appellant for 41 days is correct. In the alternative, the appellant submitted that in case the disallowance is sustained by CIT(Appeals), then a proper direction be issued for allowance of such interest of Rs.1,36,612/- in the subsequent year because as per the terms of the issuance of debentures, the interest was payable on annual basis which falls in the subsequent year and has been actually paid in subsequent year. In view of the factual clarification on the number of days as 41 instead of 40 days the addition is directed to be deleted. This ground of appeal is ruled in favour of the appellant.”
4. The AO had made an addition of Rs.30,88,500/- on the basis that the assessee had raised Rs.50 crores during the year by issue of debentures @ 10%. On the other side has given interest free loan to M/s Arambagh Hatcheries Ltd. of Rs.30,88,500/-. The AO examined the fact that the loans were given to three parties which included M/s Liz Investments Pvt. Ltd. and M/s Mangalam Vanijya Pvt. Ltd. who had paid interest, but, no interest was received from M/s Arambagh Hatcheries Ltd. Thus, the AO disallowed interest @ 10% u/s 36(1)(iii) of the Act on account of interest free loans @ 10% which has been deleted by CIT(A) having considered the evidences on record and making the following observations in paras 7.2 & 7.3:-
“7.2. I have carefully considered the assessment order and written submission filed by the Ld. AR. During the course of its business, the appellant-company had acquired a non-performing asset of M/s Arambagh Hatcheries Ltd. from AXIS Bank Ltd. under distress sale for a sum of Rs.30,88,500/-. AXIS Bank Ltd. had given loans to M/s Arambagh Hatcheries Ltd., but on account of certain financial problems, the said M/s Arambagh Hatcheries Ltd. did not pay the interest to AXIS Bank Ltd. and as per the guidelines of Reserve Bank of India, the said loan of Arambagh Hatcheries Ltd. had become a non-performing asset. In order to mobilize its resources and maintain its liquidity, AXIS Bank Ltd. had sold such NPA of M/s Arambagh Hatcheries Ltd. to the appellant vide agreement dated 27.03.2012 - copy of agreement with Axis bank for assignment of its business assets was furnished.
7.3. It was submitted that the purpose of acquisition of NPA of Arambagh Hatcheries was a business investment and duly shown in the Balance sheet. By way of such acquisition, the appellant acquired the risk of loss as well as the gain, if any, materialized and as and when the amount would be recovered from Arambagh Hatcheries. The AO, while scrutinising the details of interest received by the appellant, found that the appellant had not shown any interest from Arambagh Hatcheries although from other parties to whom the advances had been given, the interest has been received and accordingly the AO disallowed the interest of Rs.30,88,500/- being the amount of Arambagh Hatcheries out of the interest paid u/s 36(1 )(iii) of the Act.”
5. The AO made an addition of Rs.4,35,00,000/- being unexplained cash credit u/s 68 of the Act on the basis of share capital raised by the assessee from four entities on the basis that the assessee had given loans and advances to three companies who had advanced loan to the assessee and the AO concluded that it is assessee’s own funds which are infused in the form of share capital. This was deleted by the CIT(A) with the following observations:-
“8.6 The appellant submitted that such inference of the AO about the availability of funds in the hands of the respective subscriber is contrary to the actual facts without verifying the date-wise loans advanced by the appellant to Manglam Vanijya further submitted that whatever the amount had been received by the aforesaid companies from Manglam Vanijya was in fact return back of ICD loans which were advanced by the aforesaid: companies in earlier years and for this fact the appellant had filed copies of accounts of all;, the aforesaid companies in the books of Manglam Vanijya'.
8.7. The appellant also submitted that the loan advanced by the appellant to Manglam Vanijya was an independent transaction undertaken during the course of its NBFC business. In order to contradict the inference of the AO, the appellant had filed a date-wise cash flow chart of the receipt of funds from the aforesaid companies and the date-wise Advance to Manglam Vanijya by the appellant. By way of this chart, the appellant demonstrates that the advances made by the appellant to Manglam Vanijya generally after the date from receipt of funds from the aforesaid companies and not after the date of advances made by the appellant to Manglam Vanijya.
8.8. In order to substantiate his case, the appellant had moved an application under Rule 46A of the I. T. Rules, 1962 wherein the appellant had filed copies of account of the aforesaid four companies in the books of Manglam Vanijya for the FY 2011-12 as well as the copy of account of the appellant in the books of Manglam Vanijya in F. Y. 2011-12 and had also for filing of confirmation from Manglam Vanijya for receipt of interest on debentures sold. Copies of the application under Rule 46A as well as the appellant’s submissions as filed during the course of appeal were forwarded to the AO for the purpose of verification.
8.9. The AO submitted its remand report dated 07.04.2017, the copy whereof has been supplied to the appellant. In the remand report, the AO though had objected to the admission of additional evidence and reiterated the facts as stated in the assessment order by the original AO. In rejoinder to the remand report, the appellant vide letter dated 18.05.2017 objected to the observation of the AO. The appellant submitted that in the remand proceedings, the present AO had further issued the notices u/s 133(6) of the Act to all the aforesaid companies who had subscribed the share capital as well as to Manglam Vanijya and required various information from them.
8.10. The appellant submits that in compliance to notice u/s 133(6) of the Act, Manglam Vanijya had furnished the date-wise investment made by the four companies in ICD which were made in earlier years and had also provided their copies of accounts in its books as well as the bank statement which clearly proved that the funds which were received back by the aforesaid companies from Manglam Vanijya were not the funds alleged by the AO. The appellant also filed copies of all the documents as were submitted by the aforesaid four companies as well as Manglam Vanijya in compliance to the notice u/s 133(6) of the four companies had made the investments in share capital prior to the date when the appellant company had made the investment with Manglam Vanijya. The investment with Manglam Vanijya was made by the appellant on interest which had been duly offered by the appellant and the TDS thereon had also been deducted. The receipt of share capital by the appellant from the aforesaid companies and the advancement of loan to Manglam Vanijya by the appellant are totally separate independent transactions. The appellant submitted that in the remand report the AO, without looking into documents and information in an objective manner, had made the report in a subjective manner. The appellant submitted that it is not the case of the AO that the source of investment made by the aforesaid four companies is unexplained but on contrary the appellant had explained the source though under the law no obligation is cast upon the appellant. The appellant relied on the following judgments:
205 ITR 98 (Del) (FB), CIT vs. Sophia Finance Ltd.
333 ITR 119 (Del), CIT vs. Oasis Hospitality (P) Ltd.
8.11. The appellant submitted that in the case of Oasis Hospitality (P) Ltd., the Jurisdictional high Court, after considering the various judgments as propounded by the Delhi high Court from time to time in relation to the share capital u/s 68 of the Act as well as the judgment of the Hon'ble supreme Court in the case of CIT vs. Lovely Exports (P) Ltd. In 319 ITR [Statutes] 5, held that there is no dispute that the initial burden is upon the assessee to explain the nature and the source of the share application money received by an assessee. In order to discharge this burden, the assessee is required to prove:
(a) the identity of shareholder,
(b) the genuineness of transaction, and
(c) the creditworthiness of the shareholder.
8.12. The Hon'ble Delhi high Court further stated that if the creditor/subscriber is a company, then the details in the form of registered address or PAN etc. can be furnished to prove its identity.
8.13. As far as the genuineness of transaction is concerned, the Hon'ble Delhi high Court stated that it may be demonstrated by showing that the assessee had, in fact, received money from the said shareholder and it came from the coffers of that very shareholder and if the money is received by cheque and/or is transmitted through banking or other any indisputable source, the genuineness of transaction would be proved.
8.14. As far as the creditworthiness or financial strength of the creditor/subscriber is concerned, that can be proved by producing the bank statement of the creditor/subscriber showing that it had sufficient balance in its account to enable it to subscribe to the share capital and if all these documents are produced, the assessee would have specifically discharged the onus cast upon him. The Hon'ble Delhi high Court further stated that thereafter it is for the AO to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, then he can prove the matter further, but to discredit the documents produced by the assessee on the aforesaid aspects, there have to be some cogent reasons and materials for the AO and he cannot go into the realm of suspicion.
8.15. The appellant submitted that in the instant case, the appellant company had not only filed the confirmations, PAN numbers, ITRs, balance sheets, bank statements of all the aforesaid companies but had also confirmed and affirmed in compliance to notice u/s 133(6) of the Act. Over and above that, their authorised representative Mr. Nilesh Modi, Chartered Accountant had personally appeared. The appellant also brought to the notice another judgment dated 16.04.2015 of Delhi high Court in the case of CIT vs. Anshika Consultants (P) Ltd. In ITA No. 467/2014, wherein the subscribed companies has made the investment out of realisation of their sundry debtors/realisation of their assets which were found sufficient by the Delhi high Court.
8.16. The appellant further submitted that the facts of the instant case are totally different from those in the judgments of Delhi high Court in the case of Nipun Builders in 214 Taxman 429 as well as N. R. Portfolio in 214 Taxman 408 as relied by the AO, and have been distinguished by the appellant in paragraphs 7.16 and 7.17 of the submissions dated 08.07.2016. The appellant submitted that when all the assessee are existing, identifiable and have creditworthiness and the transactions are genuine, the addition of Rs.4,35,00,000/- as made by the AO u/s of the Act deserves to be deleted.
8.17. In view of the above, the appellant has discharged its onus and no specific fact has been brought out by the AO challenging the identity, creditworthiness or genuineness of the transactions. The addition on this account is directed to be deleted.”
6. The revenue is in appeal raising the following grounds:-
“1. On the facts and under the circumstances of the case, theLd CIT (A) has erred in deleting the addition of Rs.17,808/- being the proportionate interest on investment in debenture of Rs.1.30 crore, ignoring the fact that the assessee company had claimed interest expenses proportionately for the Debentures issued but it had not shown the interest income proportionately on Debentures purchased in the Return of income filed.
2. On the facts and under the circumstances of the case, the Ld CIT (A) has erred, in allowing a sum of Rs.1,36,612/- out of interest expenses, ignoring the fact that the assessee company has erred in calculating the interest expenses payable. The assessee company should have claimed the interest expenses for 40 days instead of 41days.
3. On the facts and under the circumstances of the case, the Ld CIT (A) has erred, in allowing a sum of Rs.30,88,500/- U/s 36(l)(iii) of the Act, proportionate interest out of interest ignoring the fact that the assessee company has raised Rs. 50 crores during the year under consideration by way of issue of Debentures @ 10% and on other side given interest free loans to M/s Arambagh Hatcheries Ltd. amounting Rs.3,08,85,000/-. The assessee company was asked to furnish details of interest received and rate of interest charged on loans advances given to M /s Arambagh Hatcheries Ltd. but no such details provided by the Assessee company.
4. On the facts and under the circumstances of the case, the Ld. CIT(A) has erred, in deleting the addition of Rs.4,35,00,000/- being the unexplained cash credit U/s 68 of the Act, ignoring the fact that the primary and main onus lies upon the assessee to establish the three essential ingredients i.e. identity of the creditor, credit worthiness of the creditor, and genuineness of the transaction and the assessee failed to discharge its onus cast upon by the Sec 68 of the IT Act.
5. The appellant craves to be allowed to add and alter any fresh ground(s), of appeal and delete or amend any ground(s) of appeal.”
7. Heard and perused the record.
8. Ld. DR has basically relied upon the order of the Assessing Officer, while the Ld. AR reasserted the arguments as raised before the Ld. CIT(A).
8.1 As we appreciate the material before us and the submissions, it comes up that with regard to the addition of Rs. 17,808/- made on account of undisclosed interest income, Ld. CIT(A) was correct to accept the plea of the assessee that the parties were bound by the agreement under which debentures were purchased. Assessee company being NBFC has to make several statutory compliances and thus entering into in security contract transaction whatever terms are agreed have to be complied and the Revenue cannot question the same on the ground of prudence, without actually alleging and substantiating the loss of revenue.
8.2 Similarly, in regard to addition of Rs. 1,36,612/- the factual clarification with regard to number of days for which interest provisions was made, the findings of the Ld. CIT(A) requirs no interference.
8.3 In regard to addition of Rs. 30,88,500/- , the Ld. CIT(A) has taken into consideration the fact that AO had actually fallen in error in considering the investment made in purchase of assets of M/s Arambagh Hatcheries Ltd. being a Non-performing Asset as a loan transaction. Thus, the conclusion drawn by the Ld. CIT(A) requires no interference.
8.4 As regards addition of Rs. 4,35,00,000/- alleged unexplained cash credit u/s. 68 of the Act, it comes up that assessee had filed additional evidences by taking recourse to Rule 46A of the Income Tax Rules, 1962 upon which the Remand Report was called from the Assessing Officer and based upon the same, the Ld. CIT(A) has extensively examined the source and genuineness of the transactions leading to conclusion that assessee had discharged its onus for the purpose of section 68 of the Act. The ground of Revenue in that regard was merely questioning the wisdom of Ld. CIT(A) in accepting the evidences and concluding that assessee had discharged its onus. There is no assertion that the factual conclusion drawn on the basis of the additional evidences are factually incorrect or otherwise not sustainable under law.
9. Thus, we find no substance in the grounds as raised by the Revenue, hence, the appeal of the Revenue is dismissed.
