When Merits are Fragile, Pre-Deposit of Recovery Amount is Must: Delhi High Court

Facts of the case

• Assessee, being a group of companies has taken unsecured loan amounting to ₹ 557 crore and ₹ 185 crore (approx.) from GTPL & DEPL (hereafter referred to as lender Companies) in AY 2017-18.
• The lender companies have a paid-up share capital of ₹99 crore and ₹ 10 lakhs respectively and the total profit earned in A.Y. 2017-18 was ₹ 84 lakhs and ₹ 6 crore respectively. Both of the lender companies have some common directorship with various group companies of the assessee.
• Assessing officer doubted the genuineness and creditworthiness of the companies and made an addition under section 68 of the Income Tax Act, 1961 (the Act) and issued a recovery notice of 20% of the loan amount which had to be pre-deposited in view of instruction and office memorandum issued by CBDT dated 02.12.1993, modified dated 29.02.2016 and 31.07.2017.
• Being aggrieved with the recovery notice of assessing officer assessee filed writ against such recovery notice in High Court of Delhi.

Contention of the Assessee

• Assessee contended that, assessment order had been made on a ‘high pitched basis’ and therefore, the recovery and collection of tax had to be kept in abeyance.
• Assessee further contended that, the CBDT instructions, guidelines and office memorandum cannot substitute or override the basic tenets to be followed in the consideration and disposal of stay applications.

Contention of the Department

• Assessing officer further contended that, the assessee has provided various registered addresses of both the lender companies without any physical existence proof.
• The Companies have common directorships and lender companies have not commenced/set-up or have made efforts to set-up/commence their businesses as per the main objects of their respective memorandum of association and no income has been generated by such companies.
• GTPL and DEPL have been used as conduits in availing unsecured loans covered u/s 68 of the Act. The identity and credit worthiness of the lender companies cannot be established. Hence, the assessee failed to establish the identity, creditworthiness and genuineness of the transaction.

Decision held & our conclusion

• Hon’ble Delhi High Court through Video conferencing on 08.04.2020 held that GTPL and DEPL have been used as conduits in providing unsecured loans covered u/s 68 of the Act. The identity and creditworthiness of the above companies and genuineness of the transaction of unsecured loans received from them are doubtful and could not be proved.
• It is further held that, the present writ petition and application for stay of recovery proceeding being bereft of merits is dismissed. However, department is directed to decide the appeal filed by the petitioner within thirty days from the date the lockdown ends.
• Thus, it can be concluded that, the part of the recovery amount has to be pre-deposited if demand is raised. Mere considering the demand as high-pitched, when merits of the case does not hold good, cannot help in getting stay from pre-deposit of recovery amount.

 Source: JINDAL ITF LIMITED v. UNION OF INDIA & ORS. W.P.(C) 2949/2020