Commonality of directors of companies does not mean deposits received was bogus

Merely because directors of two companies were common not mean that deposits received was bogus and companies were shell companies

In a recent case, the Hon’ble Allahabad High Court has stated that merely because the directors of the two companies are common may have given rise to suspicion but would not make the deposits received as bogus.

ABCAUS Case Law Citation:
ABCAUS 3981 (2024) (04) HC

In the instant case, the Income Tax Department had challenged the order passed by the  Income Tax Appellate Tribunal dismissing the appeal of the revenue on the issue of alleged unexplained credits by applying Section 68 of the Income Tax Act, 1961 (the Act).

Common directors deposits bogus

The appeal has been filed raising following questions of law:

(i) Whether the ITAT erred by deleting the addition made on account of bogus unsecured loans received by the assessee even though the assessee had failed to discharge its onus of establishing the sources of the impugned receipts?

(ii) Whether the ITAT erred by failing to appreciate that the primary onus to prove the genuineness of the transactions and the identity and creditworthiness of the lender lies on the assessee which the assessee has failed to discharge?

(iii) Whether the ITAT erred by acting in contravention to the established judicial precedents and deleting the additions made on account of bogus unsecured loans received by the assessee even though the assessee had fully failed to explain the sources of the same?

(iv) Whether the ITAT erred by acting in contravention to the letter and legislative spirit of amendments brought to section 68 of the Act by the Finance Act, 2012 since most of the so-called lender entities had accrued majority of their net worth only in the form of shareholdings of related entities with common directors ?”

The assessee had disclosed large amount of closing balance of Investment. Upon queries raised during the assessment proceedings, it was submitted to the Assessing Officer that it had received unsecured interest bearing loans from three corporate entities. After considering the replies the Assessing Officer proceeded to disallow the above loan amounts and treated the same to be undisclosed investment and added the same to the income of the assessee.

Upon appeal, the assessee succeeded on that count before the CIT (Appeals). However, the matter was carried to the Tribunal at the instance of the revenue.

The Tribunal observed that the AO had called for information u/s 136(6) of the Act from all companies and received confirmation from three. The A.O. also examined the bank statement of the Investor Companies and noticed that the money received by it was transferred on the same date to the assessee. Apart from the same, necessary documentation such as loan confirmation, certificate of incorporation, PAN Number, Copy of ITR, Balance Sheet and P & L Accounts, Bank statement of creditors etc. were also provided as evidence of identity, creditworthiness and genuineness of the creditor.

The Tribunal further observed that there was no finding of any cash deposited in the bank account of the creditors prior to disbursement of loan and no adverse finding recorded regarding the identity and existence of creditors and further no findings that the creditors were entry operators of any kind by the A.O.

It was also noted by the Tribunal that the loans were interest bearing loans and the related interest income was duly reflected in the ITR of the Creditor Companies. The AO without having any basis observed that the Creditor Companies were ‘Shell Companies‘ on the basis of common Directors among Group Companies and the rotation of funds/money in the Group Companies which was unfounded.

In view of the above findings, the Tribunal had dismissed the appeal of the Revenue.

The Hon’ble High Court noted that the suspicion voiced by the Assessing Officer as to the source of deposit received by the assessee was gone In the instant appeal, the assessee had challenged the order of CIT(A) in confirming by the ITAT. On the strength of material and evidence, the Tribunal reached a finding that the loans obtained by the assessee were interest bearing. Interest was actually paid. Second, the Tribunal found that the Assessing Officer had not been able to doubt the identity and existence of the creditors. As to the source of money deposited by the creditors, adequate enquiry had not been conducted by the Assessing Officer to doubt the claim made by the assessee.

The Hon’ble High Court stated that once the deposits were credited in the bank account of the assessee through banking channel, prima facie evidence existed of genuine transactions. In any case, the Assessing Officer was not successful in establishing that the money deposited by the creditors was not theirs but that it had been routed through the creditors by the assessee.

The Hon’ble High Court noted that the Tribunal had categorically observed that there was no proof to establish that such money had been received by the creditors through cash deposits made by the assessee.

The Hon’ble High Court opined that merely because the Directors of the two companies were common may have given rise to suspicion that the deposits received by the assessee company from the other, was bogus. However, the Tribunal had found, there was no material or evidence on record to establish that the creditors were shell companies. The observation made by the Assessing Officer in that regard was described as unfounded.

The Hon’ble High Court opined that no question of law arose, as proposed and accordingly, the appeal was dismissed.

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