2012 (8) TMI 802 - AT - Income Tax

Addition u/s 69A - search - alleged unexplained advances and unexplained investment in pawned silver articles on ground of shortage of funds noticed in Girvi register and pawned silver articles found from the searched premises - assessee contended that there was no shortage of fund for making advances as the opening capital and incomes generated during the A.Y. under consideration was sufficient enough to explain this shortage, and appellant was engaged in money lending business for which silver articles were pawned with the appellant group by borrowers of money - Held that - There is uncontroverted finding in the impugned order that capital was available with the assessee before the search. Even as per the appraisal report, prepared by the department, the opening capital from Girvi register was arrived at Rs.1,12,85,080/- and the assessee group claimed that it was doing money lending business for the last 40 years. In view of this uncontroverted claim, we are of the view that the AO misdirected himself ignoring both the opening capital and repayment receipt, while making the additions. Notional interest on provision of interest free loan - assessee contended that it was personal loan given to the family friend to facilitate him to purchase the land and the property was merely mortgaged as a security and was to be returned back after return of money - Held that - Addition was made by the AO on the plea that full details of the transactions were not furnished by the assessee and he drew adverse inference. In the absence of any positive material brought by the Revenue, addition is deleted since notional income is not taxable under the Act - Decided in favor of assessee

Issues Involved:
1. Addition for unexplained investment in pawned silver articles.
2. Addition for shortage of funds in explaining advances made.
3. Availability of opening capital from prior years.
4. Deletion of notional interest on interest-free loan.

Issue-wise Detailed Analysis:

1. Addition for Unexplained Investment in Pawned Silver Articles:
The Assessing Officer (A.O.) added Rs. 7,36,282/- as unexplained investment in pawned silver articles found during a search. The A.O. contended that there were no funds available with the assessee at the beginning of the assessment year 2007-08. The assessee argued that the investment was made from opening capital and surplus generated during the year. The first appellate authority found that the assessee was engaged in money lending for over 25 years, and the pawned silver articles were adequately explained by the funds available from prior years. The addition was directed to be deleted as the A.O.'s action was not sustainable both in facts and in law.

2. Addition for Shortage of Funds in Explaining Advances Made:
The A.O. added Rs. 5,58,678/- for shortage of funds in explaining advances made, based on entries in the Girvi register. The assessee contended that there was no shortage of funds as the opening capital and income generated during the year were sufficient. The first appellate authority considered the availability of opening balance from prior years and concluded that the A.O.'s addition was not sustainable. The addition was deleted, considering the share of the appellant from the opening balance.

3. Availability of Opening Capital from Prior Years:
The Tribunal noted that the assessee group had an opening capital of Rs. 1,22,85,080/- from prior years, as per the appraisal report. The A.O. was found to have misdirected himself by ignoring both the opening capital and repayment receipts while making the additions. The first appellate authority's conclusion was based on the remand report, which did not contradict the assessee's claims. The Tribunal found no merit in the Revenue's appeal, affirming the deletion of additions based on the availability of opening capital.

4. Deletion of Notional Interest on Interest-Free Loan:
The A.O. added Rs. 45,000/- as notional interest on an interest-free loan of Rs. 1,50,000/- given by the assessee. The assessee explained that the loan was a personal advance to a family friend for purchasing land, and notional interest cannot be taxed. The first appellate authority agreed with the assessee, stating that under the Income Tax Act, notional income is not taxable. The Tribunal affirmed this view, finding no positive material from the Revenue to support the addition of notional interest.

Conclusion:
The Tribunal dismissed the Revenue's appeals, affirming the first appellate authority's decisions to delete the additions for unexplained investment in pawned silver articles, shortage of funds in explaining advances, and notional interest on an interest-free loan. The Tribunal emphasized the importance of considering the availability of opening capital and the factual matrix of the case.

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