2013 (9) TMI 677 - AT - Income Tax

Addition u/s 68 of the Income Tax Act - capital introduced by the partner - the partner who introduced the capital has confirmed and owned the same Held that - Reliance has been placed upon the judgment in the case of CIT v. Pankaj Dystuff Industries 2005 (7) TMI 601 - GUJARAT HIGH COURT , which is squarely applicable in the present case in the hand The Hon ble High Court in the said case after examining the principles laid down in the judgment of the Allahabad High Court in the case of CIT v. Jaiswal Motor Finance 1983 (2) TMI 47 - ALLAHABAD High Court answered the question in the favor of Assessee Decided in favor of Assessee. Disallowance of Rs.4,96,231/- as interest expenditure - documentary evidence for utilization of partnership capital and borrowed funds to the extent for the purpose of business - Held that - the question of reasonableness of expenditure is a subjective matter which is to be determined by the assessee who is running a business and it is not expected from the Assessing Officer to step into the issues of a businessman - The business need and the business purpose depends upon the circumstances of each case - Merely because the assessee had maintained cash balances at its several branches being in angadia business should not be a cause of disallowance of interest on borrowed funds - Above order of the hon ble co-ordinate Bench was not available at the time when the impugned order was passed by the learned Commissioner of Income-tax (Appeals) Matter remitted back to the file of the learned Commissioner of Income- tax (Appeals) to decide this issue afresh Decided in favor of Assessee for statistical purpose.

Issues Involved:
1. Addition of Rs. 20 lakhs as unexplained credits under Section 68 of the Income-tax Act.
2. Disallowance of interest expenditure amounting to Rs. 4,96,231.

Issue-Wise Detailed Analysis:

1. Addition of Rs. 20 lakhs as unexplained credits under Section 68 of the Income-tax Act:

The primary contention of the assessee was against the addition of Rs. 20 lakhs introduced as fresh capital by one of the partners, Shri Kantilal R. Patel, which was added by the Assessing Officer (AO) as unexplained credits under Section 68 of the Income-tax Act. The AO's rationale was the failure of the assessee-firm to justify the source of the funds introduced by the partner, despite the partner confirming and owning the same.

The assessee argued that the capital contribution of partners cannot be considered unexplained under Section 68, especially when the partner is assessed to income tax. The assessee cited several judicial precedents, including the decisions in CIT v. Metachem Industries, CIT v. Jaiswal Motor Finance, and CIT v. Rameshwar Dass Suresh Pal Cheeka, which support the view that once a partner confirms the investment, the burden of proof shifts away from the firm. The assessee also emphasized that the transactions were through bank accounts, establishing the genuineness of the transactions.

The Tribunal found merit in the assessee's submission, noting that the Revenue had not disputed the fact that the partner introduced the capital. The Tribunal referred to the Gujarat High Court's judgment in CIT v. Pankaj Dystuff Industries, which supports the assessee's position. Consequently, the Tribunal directed the deletion of the Rs. 20 lakhs addition, allowing grounds 1 to 4 of the assessee's appeal.

2. Disallowance of interest expenditure amounting to Rs. 4,96,231:

The second issue pertained to the disallowance of interest expenses amounting to Rs. 4,96,231 by the AO, who contended that the assessee had not proved the utilization of partnership capital and borrowed funds for business purposes. The AO observed that the assessee maintained huge cash balances throughout the year, which were not justified as necessary for the business. The AO concluded that the interest-bearing funds were not utilized wholly for business purposes and disallowed a proportionate interest amount.

The assessee argued that the nature of its business as an angadia (courier service) required maintaining substantial cash balances to meet business contingencies. The assessee also contended that the AO's basis for disallowance was incorrect and that the interest paid to partners, which constituted a significant portion of the disallowed amount, had already been taxed in the partners' hands, leading to double taxation.

The Tribunal referred to the decision of the co-ordinate Bench in Asst. CIT v. Patel Mathavlal Magnilal, which held that maintaining large cash balances is not inherently illegal and that the business need for cash should be assessed based on the specific circumstances of the business. The Tribunal found the AO's disallowance to be based on incorrect presumptions and noted that the Commissioner of Income-tax (Appeals) had not provided a detailed reasoning in his order. Therefore, the Tribunal remitted the issue back to the Commissioner of Income-tax (Appeals) for a fresh decision, providing the assessee an opportunity for a hearing.

Conclusion:

The appeal of the assessee was allowed in part. The addition of Rs. 20 lakhs under Section 68 was deleted, and the issue of disallowance of interest expenses was remitted back to the Commissioner of Income-tax (Appeals) for a fresh decision. The Tribunal emphasized the necessity of a detailed and reasoned order from the appellate authority.

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