The Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled in favor of the assessee, deleting the addition of Rs.104.99 crore made under Section 69C. The ITAT held that the source of the expenditure was Letters of Credit (LC) and it rejected the challenge made by the assessee regarding the validity of the reassessment proceedings.
The case gained attention as the Letters of Credit (LC) in question became the subject matter of a Central Bureau of Investigation (CBI) First Information Report (FIR) filed by the Union Bank of India against the assessee. The bank alleged misappropriation and siphoning off of funds.
The ITAT, however, upheld the assessee’s argument that the expenditure was sourced from the Letters of Credit (LC). The tribunal considered this argument valid based on the evidence presented before it.
The assessee had also challenged the validity of the reassessment proceedings, claiming that the Section 148 notice was not valid. However, the ITAT dismissed this challenge, stating that the notice was based on information received from the meeting of the Regional Economic Intelligence Council in Mumbai. This meeting provided fresh and tangible material for the initiation of the reassessment.
As a result of this decision, the addition of Rs.104.99 crore under Section 69C has been deleted, providing a significant relief to the assessee. This ruling by the Mumbai ITAT sets an important precedent in cases where the source of expenditure is Letters of Credit (LC) and highlights the importance of fresh and tangible material in reassessment proceedings.
The tribunal dismissed the plea of the Assessee-Company challenging the reassessment proceedings regarding the alleged bank loan fraud. The ITAT upheld the revenue’s decision to reopen the assessment for the assessment year 2017-18 based on the information received.
The revenue held that the aggregate amount of outstanding Letters of Credit (LC) amounting to Rs. 104.99 crore should be considered as unexplained expenditure and taxed under Section 69C. Additionally, a tax of 60% was imposed on this amount under Section 115BBE.
The Assessee argued before the ITAT that the transactions were genuine and the bank default occurred due to legitimate hardship caused by the non-payment of the Assessee’s customers. The Assessee relied on a ruling by the SMC Bench in the case of Karsam Nandu, where the ITAT had deleted an addition made under Section 69C as the source of expenditure was explained. The Assessee opined that in the present case, Section 69C should not be applicable since the source of expenditure is clearly the bank funds.
However, the ITAT held that the requirements mandated by the Supreme Court judgment in the case of GKN Driveshafts were complied with in the reassessment proceedings. The Assessee was provided with the copy of the recorded reasons for initiating the reassessment proceedings and was duly informed through the statutory notice. Therefore, the ITAT dismissed the Assessee’s plea challenging the validity of the reassessment proceedings.
This decision by the Mumbai ITAT affirms the revenue’s assessment of the outstanding Letters of Credit as unexplained expenditure taxable under Section 69C.
Case Title: Executive Trading Co. Pvt. Ltd. V/s Additional/Joint/Deputy/Assistant Commissioner of Income Tax/ Income-tax Officer
Citation: ITA No. 281/MUM/2023