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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries

2. The department has raised the following grounds of appeal in ITA No. 471/Asr/2019:

"1. Whether in the facts and circumstances of the case and in the law the Ld CIT(A) was in error in deleting the addition made by the AO on account of addition to the capital of the assessee firm without appreciating the facts of the case and material brought on record which remain uncontroverted.

2. Whether in the facts and circumstances of the case and in the law the Ld CIT(A) was in error in deleting the addition made by the AO on account of unsecured loan without appreciating the facts of the case and material brought on record which remain uncontroverted.

3. Whether in the facts and circumstances of the case and in the law the Ld CIT(A) was in error in deleting the addition made by the AO on account of disallowance of excess interest paid to bank without appreciating the facts of the case and material brought on record which remain uncontroverted.

4. Whether in the facts and circumstances of the case and in law the Ld. CIT(A) was in error in not appreciating the law laid down by the Hon'ble Supreme Court of India in the case of NRA Iron and Steel Pvt. Ltd., where the Apex Court while discussing genuineness of share capital laid down the general principles that would apply to judge the genuineness of a transaction, creditworthiness etc.

5. Whether in the facts and circumstances of the case and in law the Ld. CIT(A) was in error in establishing the source and genuineness of the addition in capital and unsecured loan.

Appellant craves leave to amend or add any one or more grounds of appeal."

3. The department has raised the following grounds of appeal in ITA No. 472/Asr/2019:

"1. Whether in the facts and circumstances of the case and in the law the Ld CIT(A) was in error in deleting the penalty levied by the AO on account of

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries addition made u/s 144 of the Income Tax Act, 1961 without appreciating the facts of the case and material brought on record which remain uncontroverted.

2. Whether in the facts and circumstances of the case and in law the Ld. CIT(A) was in error in not appreciating the law laid down by the Hon'ble Supreme Court of India in the case of NRA Iron and Steel Pvt. Ltd., where the Apex Court while discussing genuineness of share capital laid down the general principles that would apply to judge the genuineness of a transaction, creditworthiness etc.

3. Whether in the facts and circumstances of the case and in law the Ld. CIT(A) was in error in establishing the source and genuineness of the addition in capital and unsecured loan.

Appellant craves leave to amend or add any one or more grounds of appeal."

4. The appellant assesse is a partnership firm, purportedly engaged in the business of manufacturing of copper wires etc. at Shed No. 1-C, Industrial Area, Kathua in the state of J & K. For the assessment year under consideration. The said return was selected for scrutiny under CASS, pursuant to which the assessment proceedings commenced where it was mentioned in the assessment that the various opportunities given to the appellant firm, which remained unattended, constraining the AO to frame an ex parte order and treated the addition to the capital of the appellant firm amounting to Rs. l,87,00,000/- by three of the partners, as unexplained and as deemed income within the meaning of section 69 of the Act in the

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries impugned order of assessment, questioning the identity, credit worthiness and the genuineness of the transactions of the capital contributors.

5. The ld. CIT(A) has deleted the addition by observing as under:

"7. The addition to the capital of the appellant firm amounting to Rs. l,87,00,000/-by three of the partners, which was considered as unexplained and treated as deemed income within the meaning of section 69 of the Act in the impugned order of assessment, was also considered explained in terms of the identity, credit worthiness and the genuineness of the transactions of the capital contributors, who were all then existing partners of the appellant firm. The AO's enquiry and analysis with regard to the aforesaid is extracted hereinbelow for the facility of ready reference:

"The Assesses submitted that funds received from the partner of the firm during the year for the business. The capital was introduced out of their capital account. The summary of the partners,' capital amount provided are as under:

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries Genuineness of the credit in the accounts of the partners is submitted and the analysis made is submitted as under:

(a) Subhash Shroff, Partner:-

(i) Copy of partner's capital account for the period 01.04.2011 to 31.03.2012 in the Appellant books of accounts.

(ii) Copy of Bank Statements of the partner.

(i) Copy of Computation of Income and acknowledgment of income tax return filed inform no ITR-V for AY 2012-13.

The assessee partner had filed his return of income at Rs.5.86.562/- for the assessment year 2012-13 and has shown exempted income u/s 10(2A) at Rs.36,73,610/-. On going through the bank statement of the assessee maintained with Indian Overseas Bank it is observed that the assessees partner had transferred an amount of Rs.1,37,00,000/- to M/s KTMR Metals on dated 02/07/T2011 and this amount was received on transfer from Omkar Metal as reflected in the bank statement. However, source of Omkar Metal has not been made available.

2. Ashutosh Gupta, Partner:-

(i) Copy of partner's capital account for the period 01.04.2011 to 31.03.2012 in the Appellant books of accounts.

(ii) Copy of Bank Statements of the partner.

(iii) Copy of Computation of Income and acknowledgment of Income Tax return filed inform no. ITR-V for A.Y. 2012-13.

On going through the above details, it is observed that the assessee partner was also a partner in the firm M/s S K Impex and had declared exempt income u/s 10(2A) at Rs. 36,73,610/- in addition to his return of income at Rs.2,46,850/-. Transaction of Rs.25,00,000/- and Rs.10,00,000/- on dated 01/09/2011 and 23/09/2011 respectively were made to M/s KTMR metals account through RTGS is reflected in the bank statements of Sh. Ashutosh Gupta, Partner. This is Credit Entry of Rs.25

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries lacs in this account on 29^thAugust for which no documents made available.

3. Vikash Gupta, Partner

(i) Copy of partner's capital account for the period 01.04.2011 to 31.03.2012 in the Appellant books of accounts.

(ii) Copy of Bank Statements of the partner.

(iii) Copy of Computation of Income and acknowledgment of income tax return filed inform no ITR-V for AY 2012-13.

On going through the above details, it is observed that the assessee partner was also a partner in the firm M/s AKSHH International and had declared exempt income u/s 10(2A) at Rs.36,73,610/- in addition to his return of income at Rs.2,66,840/-. An amount of Rs. 15,00,000/- on dated 17/02/2011 was transferred to M/s KTMR Metals by Sh. Vikas Gupta. No further document has been provided."

8. view of the aforesaid, the impugned addition of Rs.l,87,00,000/-is also directed to be deleted. It is ordered accordingly. The ground of appeal pertaining to the aforesaid issue, thus, stands allowed.

9. The other two impugned additions of Rs.9,80,000/-and Rs.ll,98,567/-on account of unsecured loans and excess interest paid to bank, respectively, were also enquired and commented upon by the AO in the remand proceedings:

"In this contest, the assessee has received unsecured loan of Rs.49,90,000/- from Neerja Megan and out of that Rs.40,10,000/- has been returned and the balance amount of Rs 9,80,000/- only is outstanding and payable as on 31.03.2012. The complete details of unsecured loan is also reflected in the Form no 3CD viz.- name, address and PAN of the lender.

In support of the nature, mode, source and genuineness of the unsecured loan received from Neerja Megan, the following details/documents have been produced by the assessee:-

(i) Copy of Neerja Megan account in the assessee's books of account.

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries

(ii) Copy of Neeraj Magan's ITR-V and Computation of income for the A.Y.

2012

(iii) Copy of Bank Statement of Neeraj Magan for relevant periods. No further document has been provided to explain the source of credit in the account.

Regarding interest paid

In this connection, The Assessee has submitted that M/s Harlal Gupta & Sons was debtor in earlier years but later on in as per arrangement between the parties, it has been decided to consider that debt as interest bearing loan to him.

It is observed on verification of the details filed that the assessee opened an account with Oriental Bank of commerce on 30.08.2011 and availed overdraft facility from 06.09.2011 from the Bank whereas the assessee has given loan to M/s Harlal Gupta & Sons in the earlier year when there was no such loan. The loan to M/s Harlal Gupta & Sons was given out of own funds. Ln support of that fact the following documents are submitted by the assessee:

(a) Copy of Bank statement of Oriental Bank of Commerce from the period under consideration.

(b) Copy of ledger account of M/s Harlal Gupta and Sons for financial year 2011-12. Submitted for your kind perusal and further necessary action at your kind end."

10. In rebuttal, the appellant firm stated the following:

"The supported documents filed which has been listed/mentioned in remand report in respect of loan from Neerja Magan and these has been verified and placed on record.

Our submission -

The Assessee has duty discharged the duty cast under the provision of income Tax and provided the necessary supporting documents in respect of

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries outstanding loan of Rs.9,80,000/- from Neeraj Magan. In order to discharge this burden, the Appellant is required to prove:

(a) the identity;

(b) the genuineness of that transaction; and

(c) the creditworthiness. The tender is an individual and filing her return of income copy of acknowledgment of icome tax return is placed on records which is clearly mentioned the PAN and Address which as per income tax record and is proof of identity. The genuineness of the ★/ transaction has been demonstrated by the Appellant; as the amount received from the said lender by cheque and is transmitted through banking, creditworthiness or financial strength is concerned, that has been proved by producing the bank statement of the lender which is showing that it had sufficient balance in its accounts to enable it to give loan. The assessing officer referring that the Appellant has not provided further evidence. In this respect we respectfully submit that the first proviso was inserted by the Finance Act 2012 w.e.f 01/04/2013 i.e. A. Y. 2013-14. Prior to the insertion of first proviso to section 68 the duty of the Assesses was limited to establishing the identity of the Creditor/Lender/Investor, the creditworthiness and genuineness of transaction, and further the proviso is also applicable to the company (not being a company in which the public are substantially interested). The Appellant is as firm thus the proviso is also not applicable. The Assesses has duly discharged the duty cast under the provision of Income Tax Act. Thus, the assessing officer not justified in making an addition of Rs.9,80,000/- as an unexplained cash credit u/s 68 of the Income Tax Act, 1961 and the impugned addition deserves in be deleted.

Regarding interest paid page no 8:

The Assessing officer observed and confirmed the factual matrix that M/s Harlal Gupta & Sons was the debtor and as per arrangement with him that debit balance converted into loan in the earlier years and that time the Assessee did not have any OD limit/ loan facility from Bank.

Our Submission -

The Assessing Officer allegation in the assessment order that Assessee had transfer fund to M/s Harilal Gupta <£ Sons as advance at low rate of interest out

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries of borrowing fund from bank at higher rate of interest is incorrect. Thus addition/ disallowance on incorrect facts liable to be deleted.

Kindly place the above on record, and we request you to kindly consider the above submission along with written submission and paper book on record. We shall be pleased to provide further details, evidence and information. We also request your good office to grant a personal hearing before disposal off this appeal."

11. On a careful consideration of the aforesaid issue of unsecured loan, it is held that the appellant firm succeeded in proving the three essential ingredients to qualify as allowable loan viz the identity, credit worthiness and the genuineness of the transactions. The impugned addition of Rs.9,80,000/-, thus, cannot be sustained. The same is directed to be deleted. It is ordered accordingly. The ground of appeal pertaining to the aforesaid issue, thus, stands allowed. The allegation of transfer of interest-bearing borrowed funds at lesser rate of interest have also not been found to be sustainable. The impugned addition on this account amounting to Rs.11,98,567/- is also directed to be deleted. It is ordered accordingly."

6. The ld. DR for the department supported the assessment order. He contended that on the facts and circumstances of the case, the Ld CIT(A) has erred in deleting the addition made by the AO on account of addition to the capital of the assessee firm without appreciating the facts of the case and material brought on record which remain uncontroverted; that he has erred in deleting the addition made by the AO on account of unsecured loan without appreciating the facts of the case and material brought on record which remain uncontroverted; that the Ld CIT(A) was not justified in deleting the addition made by the AO on account of disallowance of excess interest paid to bank without appreciating the facts of the case and material

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries brought on record which remain uncontroverted; that Ld. CIT(A) was in error in not appreciating the law laid down by the Hon'ble Supreme Court of India in the case of NRA Iron and Steel Pvt. Ltd., where the Apex Court while discussing genuineness of share capital laid down the general principles that would apply to judge the genuineness of a transaction, creditworthiness etc. in establishing the source and genuineness of the addition in capital and unsecured loan.

7. Per contra, the ld. counsel supported the impugned order contending that the ld. CIT(A) was justified in deleting the addition. He has filed a brief synopsis which reads as under:

"1. KTMR is a partnership firm engaged in the business of manufacturing of Copper wires etc. in the state of Jammu and Kashmir. The KTMR had filed its original return of Income u/s 139 (1) for assessment year 2012-13 and declaring total Income of Rs. 4,88,570/- after claiming deduction u/s 80IB of the Income Tax Act, 196. The Assessment completed u/s 144 as best judgment assessment.

"Ground no 1: Addition in partner capital account Rs 1,87,00,000 : KTMR received Rs 1,87,000 from the partners and partners have withdrawn Rs 8,66,83,027. The detail of the partners' capital account is as under:

NAWAL MAGAN 87,62,024 2,78,77,193 55,10,415 (1,36,04,754)

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries

Assessing officer made addition of Rs. 1,87,00,000/- as unexplained capital u/s 69 of the Income Tax Act, 1961 on alleged that KTMR failure to furnish the nature, mode and source, evidence to prove the source and genuineness of additions to capital account. KTMR filed a) Copy of partner's capital account for the period 01.04.2011 to 31.03.2012 in the Assessee books of accounts b) Copy of Bank Statements c) Copy of Computation of Income and acknowledgment of income tax return filed in form no ITR-V for AY 2012-13 with CIT(A) in support of source and genuineness of capital introduced (three partners)

KTMR submitted : The introduction of partner capital is not come under the ambit of provision of section 69 of the Income Tax Act. The KTMR prove a) The identity b) The genuineness of that transaction; and c) The creditworthiness. The partners are individual and filing their return of income, the PAN and Address is the proof of identity. The genuineness of the transaction, amount received from the said partners by cheque and is transmitted through banking, creditworthiness or financial strength proved by producing the bank statement and have sufficient balance in its accounts to enable it to introduced capital. In remand report the assessing officer referring that KTMR not provided further evidence. Means not prove the sources of sources, KTMR submitted that this not applicable first proviso to section 68 inserted by the Finance Act 2012 w.e.f 01/04/2013 i.e A.Y. 2013-14 only.

The Ld . CIT1A) deleted the addition Submission: That the assessee has duly discharged the duty case under the provisions of the Income Tax Act .The CIT(A) after considering the remand report as well as documents available on record, has passed a reasoned order and directing the addition of Rs. 1,87,00,000/- be deleted.

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries

Ground no. 2: Unsecured loan Rs 9,80,000 : Unsecured loan of Rs 49,90,000 received from Neerja Magan and out of that Rs 40,10,000 returned and the balance amount of Rs 9,80,000 o/s as on 31.03.2012. The complete detail of unsecured loan is duly provided in the Form no 3CD including name, address PAN number of the lender.

AO alleged that KTMR failed to furnish detail/ documentary evidence to prove the genuineness of and offered no explanation nature and source of these loans.

KTMR filed Copy of Neerja Magan account in the Assessee book of account for period 01.04.2011 to 31.03.2012, Copy of Neerja Magan ITR-V and Computation of income for the AY 2012-13, Copy of Bank Statement of Neerja Magan in support of the nature, mode, source, genuineness of the unsecured loan received from Neeja Magan and submit that documentary evidence establishes the nature, mode, source and genuineness of unsecured loan from Neeja Magan.

AO in remand report stated that no further document has been provided to explain the source of credit in the account as mentioned in respect of addition in capital account.

KTMR submit that duly discharged the duty cast under the provision of Income Tax.

CIT delate the addition and held that prove three essential ingredients to qualify as allowable loan viz the identity, credit worthiness and the genuineness of the transactions.

Ground no. 3: disallowance of Rs 11,98,567 out of interest paid to bank M/s Harla Gupta & Sons was a debtor in the earlier years. Lateron as per arrangement between the parties, debt was considered as interest bearing loan when debt converted into loan the KTMR does not have any loan/ overdraft limit from bank. The debt / loan was given out of its own fund. In support of that documents supporting were duly filed before the CIT(A) AO disallowed of interest in following manner

11,98,567

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries KTMR submitted: Opened account with OBC on 30.08.2011 and availed the overdraft facility from 06.09.2011. Loan to M/s Harlal Gupta & Sons was given in the earlier year when there was no such loan.The learned AO allegation that assessee has transfer fund to M/s Harlal Gupta & Sons as advance at low rate of interest out borrowing fund from bank at higher rate of interest is against the facts on record and incorrect.

Ld. CIT(A) delete the addition

Submission: reiving on Hon'ble Supreme Court in the case of South Indian Bank Ltd. vs. CIT, AIR 2021 SC 4266, wherein it is held that if assessee possesses sufficient interest free funds as against investment in tax free securities, then, there is a presumption that investment which has been made in tax free securities.

Ground no 4 ; No followed the principal laid down In the case of Principal Commissioner of Income Tax (Central) - 1 vs. NRA Iron and Steel Pvt. Ltd. (05.03.2019 - SC); MANU/SC/0325/201

The facts of the case are different and further CIT(A) duly followed the principal laid down and matter has been analyzed by the AO."

8. We have heard the rival contention, perused the material on record and the written submissions filed. The Assessment Order has been passed exparte qua the assessee by the Assessing Officer (In short "the AO"). However, it is seen that the Ld. CIT(A) has called for remand report and adjudicating the issued raised challenged before it after taking into consideration the remand report of the AO and the rebuttal of the assessee. It is seen that the Ld. CIT(A) has addressed and controverted the contentions raised by the rival parties therein, while granting relief to assessee.

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries

9. It is seen that The Ld. CIT (A) has considered that fact that the first proviso was inserted by the Finance Act 2012 w.e.f 01/04/2013 i.e. A. Y. 2013-14 and therefore, prior to the insertion of first proviso to section 68, the lability of the assesses was limited to establish the identity of the Creditor/Lender/Investor, the creditworthiness and genuineness of transaction, and further the proviso is not applicable to the appellant assessee being a partnership Firm. (Not a company in which the public are substantially interested). According we find no perversity in the order of the CIT(A) to the facts on record inasmuch as the appellant firm succeeded in proving the three essential ingredients u/s 68 of the act to prove the identity, credit worthiness and the genuineness of the transactions. According, the order of the CIT(A), deleing the impugned addition of Rs.9,80,000/-, is sustained.

10. Regarding the last issue of addition on account of transfer of interest-bearing borrowed funds at lesser rate of interest, the CIT(A) has rightly followed the Hon'ble Supreme Court in the case of 'South Indian Bank Ltd. vs. CIT', AIR 2021 SC 4266, wherein it is held that if assessee possesses sufficient interest free funds as against investment in tax free securities, then, there is a presumption that investment which has been made in tax free securities were out of interest free funds owned by the

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ITA Nos. 471 & 472/Asr/2019 Asstt. CIT v. KTMR Metals Industries assessee. The case of 'Principal Commissioner of Income Tax (Central) - 1 vs. NRA Iron and Steel Pvt. Ltd.', (Supra) relied by the Department is distinguished of peculiar fact of the instant case. Accordingly, we find no infirmity in finding of the Ld. CIT(A) in deleting Rs.11,98,567/-.

11. Since the assessee gets relief in quantum appeal, the consequential penalty levied u/s 271(1)(c) is deleted. The grounds of the department in ITA No. 472/Asr/2019 are therefore rejected.

12. In the above view, we find no merit in the grievance of the department. Accordingly, the grounds raised by the revenue are rejected.

13. In the result, the appeals of the revenue are dismissed. Order pronounced in the open court on 17.11.2022

Sd/- Sd/- (Anikesh Banerjee) (Dr. M. L. Meena) Judicial Member Accountant Member

*GP/Sr/PS* Copy of the order forwarded to:

(1) The Appellant:

(2) The Respondent:

(3) The CIT(Appeals)

(4) The CIT concerned

(5) The Sr. DR, I.T.A.T True Copy

By Order

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