The statement that the assessee has not explained the creditor’s creditworthiness and the transaction’s genuineness is incorrect: Bombay High Court

The decision that the statement that the assessee has not explained the creditor’s creditworthiness and the transaction’s genuineness is incorrect and hence, the reassessment notice has to be quashed is upheld by the High Court of Bombay through the learned bench led by HONOURABLE MR. JUSTICE K.R. SHRIRAM AND HONOURABLE MR. JUSTICE N.R. BORKAR in the case of Vapi Infrastructure and Industrial Township LLP Versus Income Tax Officer Ward – 22(3)(1) and others (WRIT PETITION NO. 996 OF 2022).

FACTS OF THE CASE- Brief facts of the case are that the petitioner/assessee is a limited liability partnership that specializes in real estate and development. The petitioner filed an income tax return for the fiscal year 2014-2015, reporting total income as “Nil.” The return was chosen for inspection by CASS. The petitioner was also served with a notice under Section 142(1) of the Income Tax Act, as well as a questionnaire. The petitioner filed its reply, which included a note on the nature of the business, a return of income, a profit and loss account and balance sheet, a relevant planned balance sheet, and bank account information.

Under Section 133(6) of the Income Tax Act, the department issued letters to various parties requesting verification and confirmation of loan transactions as well as supporting documents. The parties had reacted and revealed their identities, as well as their credit worthiness, the validity of the transactions, and the source of funds, among other things. Section 143(3) of the Income Tax Act was used to complete the assessment for the fiscal year 2014-2015. After reviewing the responses of third parties to notices issued, as well as the documents and explanations presented by the petitioner, the assessment order was issued.

The department sent a reassessment notice to the petitioner, saying that there were reasonable grounds to assume that the petitioner’s taxable income for the fiscal year 2014-2015 had eluded assessment. The reassessment notice was issued by the department because the petitioner had unsecured loans of Rs. 1,17,48,08,731 in the fiscal year 2014-2015. The net amount of loans received during the year was Rs. 27,87,70,259 out of this total. The petitioner supplied confirmation from the loan providers, but it was noted that the loan providers’ income was extremely low during the year.

The source of the loan remains unexplained and must be added to the assessee’s total income because the loan given by third parties was credited in the petitioner’s books during the year in question, and because the assessee provided no explanation about the nature and source of the loan, the credit worthiness of the creditor, or the genuineness of the transaction.

The Counsel for petitioner, Mr. Sameer G. Dalal objected to the reassessment on the grounds that information had been provided to the assessing officer, who had also independently issued notices under Section 133(6) of the Act, to which third parties had responded and provided the required documents explaining their identity, creditworthiness, and genuineness of the loans provided, and the assessment order had been passed after the assessing officer was satisfied. As a result, it was incorrect to claim that the source of the loans remained unknown, and that the re-opening was not permitted because of a change of heart. Even if the assessment order is silent, the Assessing Officer is presumed to have considered the problem and been satisfied with the explanation made by the assessee if a query has been raised and replies have been provided. Furthermore, notice under Section 133(6) of the Act was also issued in this matter to third-party lenders who, as indicated in the affidavit in reply, confirmed the transaction and credit worthiness,” the court observed in quashing the reassessment notice.

JUDGEMENT- The reassessment notice was quashed by the Court. The assessee explained the creditor’s creditworthiness and the transaction’s authenticity. The suggested re-opening, according to the judges, was solely based on a change of view. The credit worthiness and facts provided by third-party lenders also satisfied the assessing officer.


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