2011 (9) TMI 277 - AT - Income Tax

Accommodation entry - Undisclosed income - held that - keeping in view of the fact that the transactions were duly recorded by assessee and the transactions are made by account payee cheques and the interest on the said transactions have been paid after deduction of TDS and that AO should have enucleated or brought on record unassailable, concrete and incontrovertible facts that could have clinched the issue in the Departmental favour as observed by ld. CIT(A). - Order of CIT(A) deleting additions upheld. Interest Free Advances - Commercial expediency - the assessee borrowed funds form the bank on interest and lent it to sister concern without charging any interest - Held that - On these facts it cannot be alleged that the said current account transactions with Mauria Udyog were not based on any commercial expediency whatsoever. - Held that - In respect of advance of Rs.50,00,000/- such disallowance is called for in view of the fact that such advance was given for earning income exempt from Income-tax. Therefore, in any case proportionate expenses on interest attributable to this amount of advance of Rs. 50.00 Lacs should be disallowed u/s. 14-A (1) of the Act. - before applying the provisions of section 14A of the IT Act the disallowance can be made only if there is actual nexus between the tax free income and expenditure. Therefore, we direct AO to apply provisions of section 14A of the IT Act after analyzing the facts of the present case.

Issues Involved:
1. Deletion of addition of Rs. 39,50,000/- as undisclosed income.
2. Disallowance of interest of Rs. 18,90,411/- on borrowed funds.

Issue 1: Deletion of addition of Rs. 39,50,000/- as undisclosed income

The Revenue's appeal concerns the deletion of an addition of Rs. 39,50,000/- made by the Assessing Officer (AO) as undisclosed income. The AO had determined that the assessee received an accommodation entry from M/s. Ankur Marketing, which admitted to providing accommodation entries against matching cash received from the assessee. The AO added the amount as undisclosed income after the assessee failed to produce corroborative evidence or the party involved.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the transactions were conducted through account payee cheques, and loan confirmations were obtained from M/s. Ankur Marketing. The CIT(A) observed that the assessee had discharged its initial burden of proving the sources of receipts, and the AO did not bring concrete and incontrovertible facts to support the addition. The CIT(A) also noted that the AO did not utilize available mechanisms, such as making a reference under section 133(6) or through counterparts at Delhi, to verify the transactions with M/s. Ankur Marketing.

The Tribunal upheld the CIT(A)'s order, agreeing that the assessee had duly recorded the transactions and paid interest after deducting TDS. The AO failed to provide unassailable evidence to substantiate the addition. Consequently, the Revenue's appeal was dismissed.

Issue 2: Disallowance of interest of Rs. 18,90,411/- on borrowed funds

The Revenue's second appeal involved the disallowance of interest of Rs. 18,90,411/- on borrowed funds, which the AO claimed were used for non-commercial purposes. The AO observed that the assessee provided interest-free loans to group companies and others while incurring interest expenses on borrowed funds. The AO disallowed the interest, citing a lack of commercial expediency and referencing court decisions that emphasize the need for proving commercial expediency for claiming interest expenses.

On appeal, the CIT(A) deleted the disallowance, noting that the assessee had current account transactions with the concerned parties and provided mutual benefits. The CIT(A) distinguished the cases cited by the AO and relied on the Supreme Court decision in S.A. Builders Ltd. v. CIT, which held that commercial expediency should be considered from the perspective of the business's benefit, not just profit generation. The CIT(A) also admitted additional evidence showing the commercial purpose of advances made for property purchases, which were later refunded due to defective titles.

Regarding the advance of Rs. 50,00,000/- for share purchases, the CIT(A) held that proportionate interest expenses should be disallowed under section 14A of the Act, as the advance was for earning tax-exempt income.

The Tribunal upheld the CIT(A)'s order, agreeing that the assessee demonstrated commercial expediency for the advances and that the AO did not refute the assessee's contentions. However, the Tribunal directed the AO to apply section 14A after analyzing the actual nexus between tax-free income and expenditure for the Rs. 50,00,000/- advance.

Conclusion:
Both appeals by the Revenue were dismissed, and the cross-objection concerning the Rs. 50,00,000/- advance was allowed for statistical purposes, directing the AO to reassess the application of section 14A based on the actual nexus between tax-free income and expenditure.

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