2014 (1) TMI 1641 - HC - Income Tax

Disallowance of lease rentals - Tribunal deleted disallowance - Held that - When once the managing director admits in his affidavit that there was no purchase of materials/machinery, there was no lease of machinery and, therefore, the amounts paid is not lease rentals, we fail to understand what more evidence was required to establish that the case of lease rentals pleaded by the assessee is a sham transaction or unreal transaction. Therefore, the Tribunal without any justification erred in setting aside the concurrent findings recorded by the two courts below, which is based on legal evidence. However, after holding that the assessee is not entitled to a claim of depreciation on the lease rentals it holds that the said amount is to be treated as financial transactions and treated as interest paid for the financial loans availed of by the assessee, a finding, which is without any basis, without any legal evidence on record. When once the case pleaded by the assessee was found to be without basis and the transaction, on which reliance is placed was found to be bogus, sham and unreal, the assessee s claim is to be negatived. - Decided against the assessee. Unexplained cash credit - Unapproved creditors - addition u/s 68 deleted by ITAT - Held that -Particulars were sought for, complete particulars were not furnished thereby disabling the assessing authority to make any further enquiry. It is in those circumstances, the assessing authority has been very reasonable, instead of treating the entire credit, for which the particulars are not given, he has treated only 10 per cent. of the total advances as unexplained cash credit. The finding of the Tribunal that such procedure is contrary to the spirit of judicial precedents is unfounded. In view of that, the finding recorded by the Tribunal cannot be sustained. It is contrary to law. - Decided against the assessee. Interest on borrowed funds disallowed - ITAT allowed the claim - Held that - Unfortunately, the Tribunal did not look into all the three transactions as one transaction. It was of the view because S. N. Project Ltd. did not take off and because of the memorandum of understanding entered into between the parties towards the purchase of the electricity, which is not in dispute. It was of the view that the transaction cannot be held to be a sham transaction. However, it holds that the amount of ₹ 45.5 crores invested by S. N. Project Ltd. is money, which the assessee had raised from the shareholders, it is not a part of borrowed amount. Absolutely there is no material to substantiate this particular aspect, thereby the Tribunal also accepts if this represents the borrowed money that transaction cannot be sustained. Both the authorities below on a careful scrutiny of the material on record and on the basis of the admission of the managing director, which is found in the affidavit have recorded the aforesaid findings. It is based on the legal evidence. Such concurrent findings of fact has been disturbed by the Tribunal without there being any evidence to the contrary. That is not the scope of appeal, in which the appellate authority could have interfered with the concurrent findings of fact. In that view of the matter, the said finding is also unsustainable. Accordingly, it is hereby set aside. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of lease rentals.
2. Addition of unexplained cash credits under Section 68 of the Income-tax Act.
3. Disallowance of proportionate interest on borrowed funds.

Issue 1: Disallowance of Lease Rentals

The assessee-company, involved in manufacturing iron and steel products, claimed lease rentals for the assessment years 1997-98, 1998-99, and 1999-2000. During a survey under Section 133A, it was found that the lease rentals claimed were bogus, and the lessor companies were claiming depreciation on non-existent assets. Consequently, the assessing authority disallowed the lease rentals, a decision upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal overturned this, stating that unless the Revenue disputed the claim with documentary evidence, it could not be termed as a sham. The High Court, however, found that the Tribunal erred in setting aside the concurrent findings of the lower authorities, which were based on legal evidence, including an affidavit from the managing director admitting no purchase or lease of machinery. The High Court concluded that the Tribunal's decision was without basis and contrary to the material on record, thus favoring the Revenue.

Issue 2: Addition of Unexplained Cash Credits under Section 68

For the assessment year 1998-99, the assessee was found to have unexplained cash credits amounting to Rs. 7.16 crores. The assessing authority requested details of parties and confirmations, which the assessee failed to provide satisfactorily. Consequently, 10% of the total advances were treated as unexplained cash credits under Section 68. The Tribunal set aside this addition, citing the assessing authority's failure to conduct necessary enquiries. The High Court, however, noted that the assessee's inability to provide complete particulars disabled the assessing authority from making further enquiries. It upheld the assessing authority's reasonable decision to treat 10% of the advances as unexplained cash credits, thus favoring the Revenue.

Issue 3: Disallowance of Proportionate Interest on Borrowed Funds

For the assessment year 1999-2000, the assessee invested Rs. 45.5 crores in S. N. Project Ltd. for electricity generation. It was found that S. N. Project Ltd. siphoned off Rs. 25 crores to S. N. Securities Ltd., which then invested in the assessee's shares. The assessing authority disallowed the proportionate interest on the grounds of sham transactions. The Tribunal, however, viewed the transactions as bona fide, citing a memorandum of understanding for electricity purchase. The High Court disagreed, noting the interconnected transactions and common directors, which indicated a sham transaction. It upheld the disallowance of interest, thus favoring the Revenue.

Conclusion:

The High Court allowed all three appeals, favoring the Revenue on all substantial questions of law, and ordered each party to bear their own costs.