Sheela Overseas Private Limited v. Pr Commissioner Of Income Taxdelhi-08 Delhi & Anr

Signature Not Verified *IN THE HIGH COURT OF DELHI AT NEW DELHI %Judgement delivered on: 28.05.2025 +ITA 546/2023 SHEELA OVERSEAS PRIVATE LIMITED ..... APPELLANT versus PR COMMISSIONER OF INCOME TAXDELHI-08 DELHI & ANR. CORAM:HON'BLE MR. JUSTICE VIBHU BAKHRUHON'BLE MR. JUSTICE TEJAS KARIA JUDGMENT VIBHU BAKHRU, J. 1.The appellant [Assessee] has filed the present appeal under Section260A of the Income Tax Act, 1961 [the Act], inter alia, impugning theorder dated 07.02.2023 [impugned order] passed by the learned Income Signature Not Verified Tax Appellate Tribunal [Tribunal] in ITA No.1430/Del/2020 in respect ofAssessment Year 2015-16. 2.TheAssesseehadpreferredtheaforesaidappeal[ITANo.1430/Del/2020] impugning the order dated 31.01.2020 passed by theCommissioner of Income Tax (Appeals)-25 [CIT(A)] in an appeal preferredby the Assessee in respect of the assessment order dated 30.12.2017 passedby the Assessing Officer under Section 143(3) of the Act. 3.The present appeal was admitted on 24.11.2023 on the followingquestions of law: - “(i) Whether the Income Tax Appellate Tribunal[in short “Tribunal”] misdirected itself in fact andlaw in holding that Rs.27,50,000/-, received by theappellant/assessee from its director i.e. Mr HiteshBhatia,intheformofaloan,constitutedunexplained credit/entry in his books of accountsand hence, liable for addition under Section 68 ofthe Income-tax Act, 1961 [in short “Act”]?(ii) Whether, in the facts and circumstances of thecase,theTribunal’sconclusionthat,Rs.27,50,000/- was required to be added to theincome of the appellant/assessee, was perverse,having regard to the fact that the appellant/assesseehad discharged its onus?” PREFATORY FACTS 4.The Assessee is engaged in the business of readymade garments andleather goods and filed its return of income for AY 2015-16 on 29.09.2015,declaring a total income of ₹93,660/-. During the previous year relevant to AY 2015-16, the Assessee had received unsecured loans aggregating to ₹83,00,000/- from its two directors namely, Mr. R.C. Bhatia and Mr. Hitesh Bhatia. The Assessee’s return was selected for scrutiny and the assessmentproceedings culminated in the assessment order dated 30.12.2017 underSection 143(3) of the Act. The Assessee produced the relevant material toestablish that it had received a sum of ₹51,00,000/- through banking channels from its director and also provided the corresponding bankstatement. The AO had also issued summons under Section 131 of the Actto Mr. Hitesh Bhatia, requiring him to appear on 13.11.2017. However, Mr.Hitesh Bhatia failed to respond to the said summons. 5.The AO treated the sum of ₹51,00,000/- received by the Assessee from its director, Mr. Hitesh Bhatia, as unexplained income and added it tothe total income. Accordingly, the Assessee’s total income was assessed at₹51,93,660/-. The AO also directed the initiation of penalty proceedings under Section 271(1)(c) of the Act. The assessment order was accompaniedby a notice of demand issued under Section 156 of the Act for a sum of₹20,36,590/-. 6.Aggrieved by the assessment order, the Assessee preferred an appealbefore the CIT(A). The Assessee explained that the amount received wassourced from an overdraft facility availed by Mr. Hitesh Bhatia fromLakshmi Vilas Bank.The Assessee claimed that Mr. Hitesh Bhatia hadsecured the said overdraft facility by pledging his fixed deposit receipts.The Assessee also furnished the bank certificate in support of the claim. Inaddition, the Assessee annexed copies of the income tax returns filed by Mr.Hitesh Bhatia for AY 2013-14 and AY 2014-15, whereby he had declaredtotal incomes of ₹6,67,030/- and ₹8,61,790/-, respectively. 7.The CIT(A) also called for a remand report from the AO in respect ofthe additions made to the income of the Assessee. In the report, the AOpointed out that there were cash deposits in the bank account of Mr. HiteshBhatia, which were found to be suspicious. 7.The CIT(A) also called for a remand report from the AO in respect ofthe additions made to the income of the Assessee. In the report, the AOpointed out that there were cash deposits in the bank account of Mr. HiteshBhatia, which were found to be suspicious. 8.The CIT(A) observed that the overdraft facility secured by Mr. HiteshBhatia from Lakshmi Vilas Bank had been utilized in the previous yearthrough cash deposits in his account. The CIT(A) found that cash depositsmade in the bank account of Mr. Hitesh Bhatia from 13.09.2014 to22.12.2014 were to the extent of ₹27,50,000/-, which remained unexplained. Accordingly, the CIT(A) sustained the addition of the said amount underSection 68 of the Act. 9.As noted above, the Assessee appealed the said decision of theCIT(A) before the Tribunal. The Tribunal concurred with the decision of theCIT(A) and accordingly, dismissed the Assessee’s appeal. REASONS AND CONCLUSION 10.At the outset, it would be relevant to refer to Section 68 of the Act.The said Section as original enacted reads as under: “68. Cash credits. Where any sum is found credited in the books of an assessee maintained for any previousyear, and the assessee offers no explanation about thenature and source thereof or the explanation offered byhim is not, in the opinion of the Assessing Officer,satisfactory, the sum so credited may be charged toincome tax as the income of the assessee of thatprevious year.” 11.The said Section was amended by the Finance Act, 2012 and a proviso was added. Section 68 of the Act, as amended and in force at thematerial time, is set out below: “68. Cash credits.— Where any sum is found credited in thebooks of an assessee maintained for any previous year, and theassessee offers no explanation about the nature and source thereofor the explanation offered by him is not, in the opinion of theAssessing Officer, satisfactory, the sum so credited may becharged to income tax as the income of the assessee of thatprevious year. Provided that where the assessee is a company, (not being acompany in which the public are substantially interested) and thesum so credited consists of share application money, share capital,share premium or any such amount by whatever name called, anyexplanation offered by such assessee-company shall be deemed tobe not satisfactory, unless— (a) the person, being a resident in whose name such credit isrecorded in the books of such company also offers an explanationabout the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officeraforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shallapply if the person, in whose name the sum referred to therein isrecorded, is a venture capital fund or a venture capital company asreferred to in clause (23-FB) of Section 10.” 12.As is apparent from the above, if certain sums are found credited inthe books of the account of an assessee maintained for the previous year andthe assessee offers no explanation regarding the nature and source of suchsums so credited, the same may be charged to tax. 13.In the present case, the Assessee has clearly, offered an explanationregarding the nature as well as source of the funds. There is no dispute thatthe payments are reflected as unsecured loans. The Assessee has duly Signature Not Verified explained the source of the unsecured loan as being from its director, thus,there is no cavil regarding the identity of the creditor as well. There is alsono dispute as to the nature of the credit entry. 14.The key issue to be addressed is whether the explanation provided bythe Assessee satisfies the proviso to Section 68 of the Act. 13.In the present case, the Assessee has clearly, offered an explanationregarding the nature as well as source of the funds. There is no dispute thatthe payments are reflected as unsecured loans. The Assessee has duly Signature Not Verified explained the source of the unsecured loan as being from its director, thus,there is no cavil regarding the identity of the creditor as well. There is alsono dispute as to the nature of the credit entry. 14.The key issue to be addressed is whether the explanation provided bythe Assessee satisfies the proviso to Section 68 of the Act. 15.It is clear from the plain language of the proviso that it is applicableonly in cases where the amount credited in the assessee’s books consists ofshare application money, share capital, share premium or any such amount.The expression “such amount” would necessarily take its colour from theterms share application money, share capital and share premium. 16.In our view, the rule of noscitur a sociis would clearly be applicable,as the share application money, share capital and share premium, all fallwithin the broad spectrum of share holders’ fund, which are introduced ascapital in a company. The amendment to Section 68 of the Act, introducedby virtue of the Finance Act, 2022 also makes it abundantly clearly thatSection 68 of the Act as was in force prior to 01.04.2023, did not require theassessee to explain the source of the source of funds other than share capitalmoney, share capital, share premium or any amount of such nature. Thus,the enlargement of the assessee’s onus to explain the source of the source ofsums credited as unsecured loans necessitated the amendment to Section 68of the Act to expressly provide for the same. Accordingly, the proviso toSection 68 of the Act, as amended by the Finance Act, 2022, reads as under: - “Provided that where the sum so credited consists of Signature Not Verified loan or borrowing or any such amount, by whatevername called, any explanation offered by such assesseeshall be deemed to be not satisfactory, unless,–(a) the person in whose name such credit is recorded inthe books of such assessee also offers an explanationabout the nature and source of such sum so credited;and (b) such explanation in the opinion of the AssessingOfficer aforesaid has been found to be satisfactory:Provided further that where the assessee is a company,(not being a company in which the public aresubstantially interested) and the sum so creditedconsists of share application money, share capital,share premium or any such amount by whatever namecalled, any explanation offered by such assessee-company shall be deemed to be not satisfactory,unless— (a) the person, being a resident in whosename such credit is recorded in the booksofsuchcompanyalsooffersanexplanation about the nature and sourceof such sum so credited; and(b) such explanation in the opinion of theAssessing Officer aforesaid has beenfound to be satisfactory:Provided also that nothing contained in the firstproviso or second proviso shall apply if the person, inwhose name the sum referred to therein is recorded, isa venture capital fund or a venture capital company asreferred to in clause (23FB) of section 10.” 17.It is seen from the above that the requirement of explaining thesource of the source of funds credited as unsecured loans in the books ofaccounts was introduced by virtue of the Finance Act, 2022. The same wasnot applicable during the relevant assessment year – AY 2015-16. Thus, inour view, the Assessee cannot be burdened with the requirement to explainthe source of funds of Mr. Hitesh Bhatia. Signature Not Verified 18.Having stated the above, we also find that the Assessee had producedsufficient material in support of its explanation. As noted by the Tribunal,the Assessee was required to establish (a) the identity of the source; (b)capacity of such source; and (c) the genuineness of the transaction. 17.It is seen from the above that the requirement of explaining thesource of the source of funds credited as unsecured loans in the books ofaccounts was introduced by virtue of the Finance Act, 2022. The same wasnot applicable during the relevant assessment year – AY 2015-16. Thus, inour view, the Assessee cannot be burdened with the requirement to explainthe source of funds of Mr. Hitesh Bhatia. Signature Not Verified 18.Having stated the above, we also find that the Assessee had producedsufficient material in support of its explanation. As noted by the Tribunal,the Assessee was required to establish (a) the identity of the source; (b)capacity of such source; and (c) the genuineness of the transaction. 19.In the present case, it is clear that the Assessee had discharged thesaid burden.As noted above, there is no cavil as to the identity of theperson who had extended the unsecured loan reflected as outstanding in thebooks of account of the Assessee. The Assessee had explained that the fundshad been lent by its director – Mr. Hitesh Bhatia. 20.Additionally, the Assessee produced relevant documents to show thatfunds had been received through banking channels from the bank account ofMr. Hitesh Bhatia.Insofar as the genuineness of the transaction isconcerned, there is material on record to indicate that the amount credited inthe books of account, which has been reflected as loans from Mr. HiteshBhatia were unsecured loans. Mr. Bhatia had also confirmed the same. Heis not a stranger to the Assessee and is vitally interested in the affairs of theAssessee. Therefore, the financial assistance extended by him cannot bedoubted. 21.The only remaining issue in this regard is the capacity of Mr. HiteshBhatia to lend the funds to the Assessee. Here too, we find no ground todoubt the capacity of Mr. Hitesh Bhatia to extend the unsecured loan to theAssessee. There is no dispute that the amount received by the Assessee wasprovided from the overdraft facility extended by Lakshmi Vilas Bank. TheAssessee also produced the certificate which established that Lakshmi Vilas Signature Not Verified Bank had extended the overdraft facility to Mr. Hitesh Bhatia. The saidoverdraft facility was provided against the fixed deposits maintained by Mr.Hitesh Bhatia and therefore, his capacity to pay the amount standsestablished. The overdraft facility extended by the Lakshmi Vilas Bank wassecured by the assets of Mr. Hitesh Bhatia. 22.The additions made to the income of the Assessee are solely onaccount of certain cash deposits by Mr. Hitesh Bhatia in his bank accountduring the relevant period from 13.09.2014 to 22.12.2014. Any doubt as tothe source of funds used by Mr. Hitesh Bhatia to discharge his liability toLakshmi Vilas Bank cannot be a ground to make an addition of unexplainedcredit in the hands of the Assessee. The unsecured loan amount, as reflectedby the Assessee in its books of account, has been duly explained. The sourceof the source of the funds has also been established as the overdraft fromLakshmi Vilas Bank.Any further explanation regarding the cash creditedin the books of Mr. Hitesh Bhatia for neutralizing any part or whole of itsoverdraft facility from Lakshmi Vilas Bank, is a matter which is required tobe examined in the assessment proceedings of Mr. Hitesh Bhatia and notthat of the Assessee. 23.Having stated above, we find that Assessee also explained that Mr.Hitesh Bhatia had an opening balance of ₹26,50,637/- in his books; therefore, even the source of the cash deposited in the bank account wasexplainable. At this stage, it is also relevant to note that it was also pointedout that Mr. Hitesh Bhatia is a regular assessee and had filed its return ofincome for AY 2015-16 declaring the income of ₹9,05,220/-. 23.Having stated above, we find that Assessee also explained that Mr.Hitesh Bhatia had an opening balance of ₹26,50,637/- in his books; therefore, even the source of the cash deposited in the bank account wasexplainable. At this stage, it is also relevant to note that it was also pointedout that Mr. Hitesh Bhatia is a regular assessee and had filed its return ofincome for AY 2015-16 declaring the income of ₹9,05,220/-. 24.It is also material to note that the Assessee had specifically disputedthe finding that the overdraft facility extended to Mr. Hitesh Bhatia wasextinguished by depositing the cash amount. The Assessee submits that thebank had disclosed that the overdraft facility was finally reduced bydepositing the aggregating sum of ₹43,50,000/- from various entities through banking channels. The Assessee also produced confirmationsregarding the source of those deposits. The tabular statement setting out thedetails of the entities is set out below: - Signature Not Verified theandledgerassesseeaccountattachedearlier7.20.02.2015Sheela Overseas5,00,000Director inConfirmationtheandledgercompanyaccountattachedearlier8.20.02.2015Sheela Overseas2,50,000Director inConfirmationtheandledgercompanyaccountattachedearlierGrand Total43,50,000” 25.It is not necessary for us to examine the above assertions as in anyevent, the amount credited in the books of account stands explained. 26.In view of the above, we find that the additions made as unexplainedcredit under Section 68 of the Act are unsustainable. The questions of law,as framed, are answered in the affirmative, that is, in favour of the Assesseeand against the Revenue. 27.The appeal is, accordingly, allowed. VIBHU BAKHRU, J TEJAS KARIA, J MAY 28, 2025M