Delhi High Court

Yamuna Synthetics (P) Ltd. vs Dy. Cit on 15 March, 2004

Equivalent citations: (2004) 91 TTJ Del 69

ORDER

G.S. Pannu, A.M.

These two appeals by the assessed are arising out of the respective orders of the Commissioner (Appeals), dated 4-8-2003 and 5-8-2003, pertaining to assessment years 1995-96 and 1996-97. Since the two appeals by the assessed raise a common ground, they are disposed of by way of this consolidated order for the sake of convenience and brevity. Although the assessed has preferred multiple grounds of appeal, but essentially the grievance of the assessed is against the stand of the lower authorities in holding that the transaction of unsecured loan from M/s Sumit Polymers Ltd. was a sham transaction.

2. Briefly, the facts and background giving rise to the present dispute can be summarised as follows. The assessed had received loans of Rs. 89.35 lakh and Rs. 33.10 lakh in the two assessment years in question, namely, 1996-96 and 1996-97, respectively, from one M/s Sumit Polymers Ltd. During the course of the impugned assessment proceedings, commenced in terms of section 148, the assessed was asked to explain the nature and genuineness of the impugned loan. The assessed could not obtain the confirmations for the impugned cash credit but nevertheless obtained and filed a copy of the balance sheet of M/s Sumit Polymers Ltd., i.e., the creditor and stated that the impugned- credits were reflected as loans and advances in the said balance sheet of the creditor. The assessing officer was not satisfied with the explanations furnished by the assessed and held that the assessed had not discharged its onus as laid down in section 68, Secondly, after making a detailed discussion, the assessing officer also held the impugned loans as mere accommodation entries which reflected a sham transaction, The background relevant to the second objection of the assessing officer can be understood in the following lines. There was a search and seizure action under section 132 on the assessed and its allied concerns. Sh. Parveen Kumar is a director of the assessed- company. Similarly, a search action under section 132(l), was also carried out at the premises of one Shri Praveen Khurana who is a director of M/s Sumit Polymers Ltd., the loan creditor. The aforesaid two searches took place on the same date, i.e., 19-10-2001. The assessing officer noticed that the investigations carried out by the investigation wing revealed that Shri Praveen Kumar was having unaccounted cash which was desired to be brought into the account books without attracting tax. That one Shri Praveen Khurana was in need of cash because he wanted to take over certain concern by name of M/s Krishna Steel Industries Bombay (whose name later changed to Golden Falcon). In this regard, the assessing officer referred to the statement of Shri Praveen Khurana recorded on 19-10-2001, the relevant extract is reproduced hereinafter for proper appreciation :

"On 19-10-2001, during the search operation under section 132(l) statement of Shri Parveen Khurana was recorded by the authorised officer. Relevant extracts from his statement (reply to question No. 2 of the statement) is reproduced below :

I came into contact with Parveen Kumar of Jagadhri through my CA Ashok Sharma in financial year 1994-95. I was in process of taking over a company M/s Krishna Steel Inds. Ltd., Bombay (later on changed to M/s Golden Falcon Pacific Ltd.) from BIFR. There were certain disputes in this proceg raised by workers and old management. I was in need of cash to make payments to resolve the disputes. These payments were to be made to workers and old management to settle the disputes. Since these payments were not to be made from the books of accounts of my business concerns, I was in need of cash. As already told Sh. Ashok Sharma introduced me to Parveen Kumar of Jagadhri in this connection through his CA Shri Surinder Verma. Parveen Kumar of Jagadhri was interested in taking entry, i.e., introduction of funds without tax liability. My family concern M/s Sumit Polymers (P) Ltd., made the payment of Rs. 1.22 crore approximately to M/s Yamuna Polymers (P) Ltd. a concern of Parveen Kumar of Jagadhri as unsecured loan in financial year 1995-96 and 1996-97, as and when the cash was received by me from Parveen Kumar or his representative the cheques of equal amount was given to them from the account of Sumit Polymers (P) Ltd. on the same date. Total Rs. 89.35 lakhs: were paid during financial year 1994-96 and balance Rs. 33.1 lakhs was paid during the financial year 1995-96 before taking the entry of Rs. 1.22 crore, Parveen Kumar safe guarded their interest by becoming major shareholders of M/s Sumit Polymers (P) Ltd. and thereby taking control of Sumit Polymers..."

On the basis of the aforesaid, the assessing officer concluded that the assessed had entered into the impugned loan transaction with the purpose of mere accommodation in so much as that cash was paid outside the books by the assessed to the said Shri Parveen Khurana in lieu of the impugned loans having been received through banking channels.

3. Another feature of the transaction analysed by the assessing officer to reach at the above conclusion is as follows. The assessing officer noticed that there were four entities who were interconnected in carrying out the impugned transaction. Firstly was the assessed and a company XILON (P) Trading Company (hereinafter referred to as XILON) on one side and M/s Sumit Polymers Ltd., the creditor and M/s Blue Star Enterprise (on behalf of Golden Falcon Ltd.) on the other side. The former two companies, according to the assessing officer, are controlled by the assessed and the latter two are in control of Shri Parveen Khurana. It was noticed by the assessing officer from the perusal of the bank accounts of the aforesaid entities that the assessed company liquidated the impugned loan by making an initial payment to M/s Sumit Polymers Ltd. of a small amount. The said particular sum was later remitted by M/s Sumit Polymers Ltd. to M/s Blue Star who in turn remitted it to M/s XILON. The said XILON in turn, remitted the said sum back to the assessed- company as loan. The said circuitous route was carried out on more than one occasion. The result was that each such rotation resulted in the reduction of the credit balance of M/s Sumit Polymers Ltd. in the assessed's books and yet the said money came back to the assessed- company. The assessing officer concluded that the aforesaid circuitous route carried out to repay the impugned loan also depicted that the impugned loan transaction was a mere sham and was carried out for extraneous considerations, Further it was noticed that each such rotation of funds was carried out on a single day as the above entities were maintaining accounts in the same bank. In the end, the assessing officer concluded that the transaction of receiving Rs. 1,22,45,000 from M/s Sumit Polymers Ltd. as unsecured loan was a sham transaction being the result of a collusive arrangement by way of which the said cheque payments were received against payments of cash by the assessed or on its behalf by its director Mr. Parveen Kumar. Hence, the impugned addition in the two years as income from undisclosed sources. Aggrieved, the assessed carried the matter in appeal before the Commissioner (Appeals).

4. When the matter was in appeal before the Commissioner (Appeals), the submissions of the assessed were manifold. With regard to the merits of the addition, the stand of the assessed was that the order of assessment was against established rules of procedure and principles of natural justice. It was submitted that on account of practical difficulties, it was impossible, after a gap of 7 years for the assessed to get confirmation letters from the alleged creditors whereas, according to him, the copy of the audited balance sheet of M/s Sumit Polymers Ltd. was produced which showed that the said creditor had declared such loans in its balance sheet and that the entire transaction was through the banking channels, which was established by the departmental enquiry itself. Further, the balance sheet of the creditor itself demonstrated its financial capacity. Thus, the assessed pleaded that it had discharged its onus cast under section 68 on a prima facie basis. That the impugned loans have been repaid through banking channels during the subsequent asstt. year. 1997-98, a fact established by the enquiries conducted by the assessing officer. It was also submitted that the assessing officer did not find any deficiency or discrepancy with respect to the information furnished by the assessed during the course of the assessment proceedings. That at no stage the assessing officer confronted the assessed with any adverse material. That the assessing officer reached improper conclusions on the basis of material which was not confronted to the assessed. In this manner it was pleaded before the Commissioner (Appeals) that on facts as also in law, the impugned addition was not justified.

5. The Commissioner (Appeals), however, was not satisfied with any of the pleas of the assessed and instead sustained the action of the assessing officer. Hence, the present appeals of the assessed before us.

6. Before us, Shri Ashwin Kumar, learned counsel appearing on behalf of the appellant, has reiterated the earlier stand taken before the lower authorities. It is further submitted by the counsel that the reply will establish rule of "audi alteram partem" has been violated in so much as that the impugned addition has been made by placing reliance on statement of a third party without confronting the same to the assessed during any stage of the assessment proceedings. It is vehemently argued on the basis of the paper book filed, which records the chronological events during assessment proceedings, to demonstrate that the assessed had filed the necessary details as called for by the assessing officer and that at no stage the alleged adverse material available with the assessing officer was ever confronted to the assessed. In fact, according to him, the assessing officer also recorded the statement of the director of the assessed- company Mr. Parveen Kumar, a copy of which is placed in the paper book filed before us. Even at that stage, the assessed was not confronted. It was submitted that the only question asked in relation to the impugned transaction was satisfactorily explained. According to him, the impugned addition was clearly in violation of the law laid down in the apex court in the case of Kishin Chand Chellaram v. CIT (1980) 125 ITR 713 (SC). The assessed's counsel also placed reliance on the decision of the Delhi Bench in Dwarkadish Financial Services (P) Ltd. v. Dy. CIT 177 Taxation 110 (Del). Reliance was also placed on the case of Nemi Chand Kothari v. CIT & Anr. (2003) 264 ITR 254 (Gau) and also Union of India & Anr. v. Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC) . It was convassed vehemently that the principles of natural justice have been violated and, therefore, the impugned proceedings are also vitiated in terms of the decision of the Apex Court in the case of R.B. Shreeram Durga Prasad & Fatechand Nursing Das v. Settlement Commission (IT & WT) & Anr. (1989) 176 ITR 169 (SC). With regard to the merits, it was submitted that there was no evidence, except a self-serving statement of a third party, which again was not confronted to the assessed, to suggest that cash has changed hands in lieu of the impugned loan transactions. That the result of the enquiries of the assessing officer itself lend support to the assessed's case that the impugned transaction was a pure loan and nothing more. It was evident that the moneys have been repaid and there is no evidence of cash having come back to the assessed or its nominees.

7. On the other hand, learned Departmental Representative Shri R.K. Jha while not controverting the factual matrix brought out by the counsel of the assessed with regard to the chronology of proceedings during the course of assessment, however, defended the orders of the lower authorities. The learned Departmental Representative has in extenso taken us through the orders of the lower authorities in support of his submissions. With regard to the denial of opportunity for cross-examination and non-confronting of the statement of Shri Praveen Khurana to the assessed, the learned Departmental Representative submitted that the matter may be remitted to the file of the assessing officer for carrying out the said exercise.

8. In reply, the learned counsel for the assessed submitted that the facts and circumstances of the case do not warrant any remand in so much as that the records evidently portray that the impugned additions are liable to be set aside.

9. We have heard the rival counsels, perused the orders of the lower authorities and the material placed before us conscientiously and on the basis of the same we proceed to dispose of the impugned issue in the following lines. In our view, the impugned appeals throw up the two issues for adjudication. Firstly, as to whether the impugned transaction of loan could be said to be a sham transaction. Secondly, whether the assessed has been able to discharge the onus cast under section 68 to explain the nature and source of the impugned credits. The aforesaid issues are intertwined.

10. The factual matrix that is pertinently clear from the material before us can be detailed as under. That the assessed has received the impugned amounts during the two years under consideration through banking channels. That the impugned loans have also been returned or repaid to the creditor M/s Sumit Polymers Ltd. through banking channels. That during the course of search in the premises of Mr. Praveen Khurana, the director of M/s Sumit Polymers Ltd. a statement was made to the effect that the impugned loan was an accommodation entry made against cash received. It is from here that the dispute starts. The revenue contends on the strength of the above that it is a sham transaction by way of which the assessed has introduced its own unaccounted money into the books of account.

11. It is discernible that the only material available with the assessing officer to hold that it was accommodation entry was the statement made by a third party, i.e., Shri Praveen Khurana. The said statement, it is apparent, has not been confronted to the assessed as can be seen from the record of the proceedings submitted before us in the paper book filed on behalf of the assessed, It is an accepted position in law that whenever the revenue proposes to rely on a material found from a third party, which is adverse to the assessed, the principles of natural justice require the revenue to confront the same to the assessed. The aforesaid infirmity coupled with the factum of the assessed not being put to notice with respect to details furnished during assessment proceeding lend ample support to the pleas of the assessed. In fact in such circumstances, the veracity of the statements made by the third party comes in doubt and could not be said to be sacrosanct so as to clinch the issue against the assessed. It is also noteworthy that even at the time when the assessing officer recorded the statement of the assessed's director with regard to the impugned transaction nothing was put to the assessed of any material contrary to what was being canvassed by the assessed. Therefore, we are of the firm view that the entire edifice built by the revenue to view the transaction as suspect is not on the basis of a credible evidence. It is in the realm of possibilities that the statement made by Parveen Khurana (director of M/s Sumit Polymers) was a self-serving statement and the same has not been subjected to any cross-examination. The department has not led any evidence or material which would lend support to the averments made by said Shri Parveen Khurana on 19-10-2001, which is extracted by us in the earlier paragraphs.

12. The said issue can also be looked at from a different angle. Even if the statement of Shri Parveen Khurana is accepted, yet certain questions remain unanswered which arise out of the enquiries conducted by the assessing officer. The circuitous route of repayment noticed by the assessing officer leads to a definite conclusion that the transactions done through banking channels and that the parties existed and were identifiable as the bank accounts were maintained. Further, the furnishing of the balance sheet of the creditor by the assessed also lends credence to the existence and identification of the source of loans. It is a moot point to consider as to whether all these conclusions could be brought to nought by a mere statement made by the third party, that also, at the back of the assessed. In fact the averment in the statement of Shri Parveen Khurana that monies have been paid in cash on behalf of the assessed- company with respect to the impugned loan is not supported by any material or evidence and hence lacks factual support.

13. In view of the aforesaid discussion, we are of the considered view that the revenue does not have enough material to justify the conclusion drawn to the effect that the impugned transaction was a sham transaction. In particular, there is no evidence or cogent material brought out by either of the lower authorities which suggesis that the assessed had made any payment to the creditor company or to Shri Parveen Khurana outside the books of account. Hence, on account of lack of evidence and factual support, we do not sustain the conclusions drawn that the impugned transaction was a sham. Hence, on the first issue, we hold the issue in favor of assessed.

14. The second issue is in relation to the discharge of onus cast in terms of section 68. On this issue also, we are of the view that the assessed has ample force in its contentions. Admittedly, the impugned amount has been received from M/s Sumit Polymers Ltd. as is discernible from its balance sheet, a copy of which is placed at pp. 17-18 of the paper book filed by the assessed. The said balance sheet evidently reflects adequate sources for advancing of the impugned amount to the assessed. It is also an admitted position that the money has come through the banking channels. Thus, in view of the detailed facts noted by us in earlier paragraphs, the inferences that can be safely drawn are that the creditor is identified; that the creditor has necessary financial capacity to advance the impugned amount. Thus, the duty cast on the assessed under section 68, is said to have been discharged. Hence, the assessed is liable to succeed on this issue also.

15. In the result, we are of the considered opinion that the impugned additions are liable to be deleted. We hold so.

16. Before we part, we would like to state that the assessed has taken another ground which is in relation to the action of the assessing officer in assuming jurisdiction under section 148 for making the impugned assessment. The plea of the assessed is that the assumption of jurisdiction itself was untenable in so much as that no notice under section 148 was received by the assessed and, therefore, the consequent assessment stood vitiated and deserved to be cancelled.

17. As we have already deleted the addition by accepting the pleas of the assessed on merits of the issues, we do not deem it fit to deal with the technical objection raised by the assessed. We refrain from adjudicating the same as it would be a mere academic exercise.

18. In the result, both the appeals of the assessed are treated as allowed.