2013 (4) TMI 90 - AT - Income Tax

Unexplained cash credit u/s. 68 - CIT(A) restricted the addition made by AO of Rs.43,70,000 to Rs.2,00,000/- - Held that - Loan extended by the depositors to the assessee company does not appear to be genuine. All the loan depositors are persons of meager resources and do not have any genuine reason to extend their lifetime savings as loan to the assessee company. In all these cases cash was deposited in the bank shortly before the cheques were issued to the assessee company. All the depositors do not appear to have genuine banking transactions because the only transaction pertains to the cheque issued to the assessee company for advancing loan. Further, the opening balances maintained in the bank by the depositors are meager which establishes that the depositors have maintained the bank account only to document the loan to give a color of genuineness to these transactions. Only by establishing the existence of the individuals purported to be the depositors and creating documentary evidence for extending loan will not make the transactions genuine. Thus as AO has analyzed the depositors thread-bare and has established that they cannot be genuine depositors who could extend loans to the assessee company. Thus the order of the AO confirmed - in favour of revenue. Disallowance of interest paid on account of unexplained cash credit - CIT(A) restricted the addition made by AO of Rs.1,82,648 to Rs.11,770 - Held that - Since the disallowance of interest of Rs.1,82,648/- is consequential to the addition made under the head cash credit invoking section 68 and since the order of the AO was sustained on that count, the order of the AO with respect to this issue was also confirmed - in favour of revenue.

Summary

Issues Involved:
1. Addition of Rs.43,70,000 as unexplained cash credit under Section 68 of the Income Tax Act.
2. Disallowance of interest expenses amounting to Rs.1,82,648 on the alleged unexplained cash credit.

Detailed Analysis:

Issue 1: Addition of Rs.43,70,000 as Unexplained Cash Credit under Section 68

The revenue contested the decision of the CIT(A) to restrict the addition made by the Assessing Officer (AO) from Rs.43,70,000 to Rs.2,00,000 on account of unexplained cash credit. The AO had identified 17 creditors who allegedly provided unsecured loans to the assessee company. Upon verification, the AO found discrepancies such as cash deposits in the creditors' bank accounts just before issuing cheques to the assessee, indicating that these accounts were likely created solely to facilitate these transactions. Further, the AO observed that many creditors could not substantiate their financial capacity to extend such loans, and several notices sent to creditors were either received by unauthorized persons or returned undelivered.

The CIT(A), however, accepted the loans as genuine except for one creditor, Shri Om Prakash Sharma, based on the production of depositors during remand proceedings, their admission of giving loans, and the provision of relevant documents (PAN, income tax returns, balance sheets, and bank statements). The CIT(A) noted that the loans were returned with interest via account payee cheques in subsequent financial years.

Upon appeal, the Tribunal reviewed the AO's detailed examination and concluded that the loans were not genuine. The Tribunal noted that all creditors were persons of meager resources, and their bank transactions were limited to the alleged loan transactions, with cash deposits preceding cheque issuances. It was inferred that the assessee company had infused its unaccounted funds into its capital using these dubious transactions. Consequently, the Tribunal set aside the CIT(A)'s order and upheld the AO's addition of Rs.43,70,000 under Section 68.

Issue 2: Disallowance of Interest Expenses of Rs.1,82,648

The AO had disallowed interest expenses of Rs.1,82,648 claimed by the assessee on the alleged bogus loans, which was included in the total interest payment of Rs.3,92,407 debited in the profit and loss account. The CIT(A) had reduced this disallowance to Rs.11,770 in line with his decision to accept most of the loans as genuine.

Given the Tribunal's decision to uphold the AO's addition of Rs.43,70,000 as unexplained cash credit, it also sustained the AO's disallowance of the entire interest expense of Rs.1,82,648. The Tribunal reasoned that since the loans were not genuine, the interest paid on such loans could not be allowed as a deductible expense.

Conclusion:

The Tribunal allowed the revenue's appeal, thereby confirming the AO's addition of Rs.43,70,000 as unexplained cash credit and the disallowance of Rs.1,82,648 in interest expenses. Consequently, the Cross Objections filed by the assessee in support of the CIT(A)'s order were dismissed.