2012 (10) TMI 123 - AT - Income Tax

Addition on account of interest expenses Assessee is a partnership firm As per AO amount in partners capital account were advanced by firm and was paid out of borrowed fund AO treat it as it was not related to the business activity Held that - Firm has suffered loss in the previous years. Therefore outstanding debit balance in the names of the partners was on account of losses suffered by the firm and not because of withdrawal of borrowed funds. The AO had also not shown any nexus between the funds borrowed and the debit balance which in fact is the outcome of losses suffered by the assessee. Therefore, interest cannot be disallowed. Decision in favour of Assessee. Non-deduction of TDS u/s 194A - Assessee had not deducted tax at source in lieu of form No.15G/15H - Form No.15G/15H were not filed by the date with CIT Held that - The provisions of sec. 40(a)(ia) are mandatory in nature and where the assessee had not deducted tax at source, the deduction will not be allowable. There is no discretion with the CIT(A) to extend the time of filing of form No. 15G/15H beyond the last date of accounting year. Therefore, it was not right to direct the AO to allow the deduction on the ground that no loss of revenue has occurred and delay in filing was technical in nature. Case remand back to AO. Addition on account of unexplained cash credit u/s 68 - The AO did not consider the evidences filed by the assessee at all in the remand report in respect of additional evidence. Therefore the issue required to be examined by the AO afresh with reference to identity, creditworthiness of the creditors and genuineness of the transaction. Case remand back to the file of AO.

Summary

Issues Involved:
1. Deletion of interest disallowance on debit balances of partners' capital account.
2. Deletion of addition made under Section 40(a)(ia) of the Income Tax Act.
3. Deletion of addition under Section 68 for alleged unexplained unsecured loans.

Issue-Wise Detailed Analysis:

1. Deletion of Interest Disallowance on Debit Balances of Partners' Capital Account:
The first issue pertains to the deletion of an addition of Rs. 4,50,818/- which was disallowed by the Assessing Officer (AO) as interest on debit balances of the partners' capital account. The AO contended that the assessee firm had not charged interest on the debit balances of the partners' accounts, despite paying interest on loans. The AO disallowed 31.93% of the interest paid, amounting to Rs. 4,50,818/-, arguing that the funds were not utilized for business purposes.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, reasoning that the debit balances were due to recurring losses suffered by the firm, not withdrawals by partners. The CIT(A) concluded that no disallowance of interest could be made on this basis.

The tribunal upheld the CIT(A)'s decision, noting that the debit balances were indeed due to losses and not withdrawals, and the AO failed to show any nexus between borrowed funds and the debit balances. Thus, the deletion of interest disallowance was affirmed.

2. Deletion of Addition Made Under Section 40(a)(ia) of the Income Tax Act:
The second issue concerns the deletion of an addition made under Section 40(a)(ia) of the Act, amounting to Rs. 5,31,386/-. The AO disallowed this interest payment because the assessee did not deduct tax at source as required under Section 194A. The assessee argued that Form No. 15G and 15H were filed late, but within the permissible time frame.

The CIT(A) deleted the addition, considering the delay in filing the forms as a technical lapse without any revenue loss to the department. However, the tribunal disagreed, emphasizing that the provisions of Section 40(a)(ia) are mandatory. Since the forms were not filed on or before the 31st March 2006, the tribunal restored the AO's disallowance, stating that the CIT(A) had no discretion to extend the filing time.

3. Deletion of Addition Under Section 68 for Alleged Unexplained Unsecured Loans:
The third issue involves the deletion of an addition of Rs. 4,47,907/- under Section 68 for unexplained unsecured loans. The AO added this amount, arguing that the assessee failed to provide confirmations for deposits from 55 persons and a specific deposit of Rs. 50,000/- from one individual, Shri Manoj Kumar.

During appellate proceedings, the assessee submitted confirmations and other evidence, which were not considered by the AO in the remand report. The CIT(A) accepted the additional evidence and deleted the addition, noting that the deposits were genuine and the depositor was a man of means.

The tribunal, however, found that the CIT(A) did not adequately examine the identity, creditworthiness, and genuineness of the transactions. The tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for fresh examination, directing a thorough investigation into the creditors' details.

Conclusion:
The tribunal upheld the deletion of interest disallowance on debit balances of partners' capital accounts but restored the AO's disallowance under Section 40(a)(ia) due to the mandatory nature of the provisions. The issue of unexplained unsecured loans was remanded back to the AO for a fresh examination. The appeal by the Revenue was partly allowed for statistical purposes.