2013 (10) TMI 210 - AT - Income Tax

Ad-hoc disallowance of 20% of the creditor value Held that - the way the Assessing Officer has decided this issue is really surprising because there is no provision in the Act to disallow 20% out of sundry creditors. If the sundry creditors are not genuine, the AO should have made whole of the addition against the assessee, but it would not allow the AO to make 20% of disallowance out of sundry creditors finding the rest of the amount of the creditors to be genuine. It appears that the AO has considered this issue with the eyes of disallowance of part of the expenses which may not be related to the business of the assessee. The way, the AO has decided this ground and made addition of 20% disallowance out of sundry creditors is really surprising and would show that the AO has not applied his mind to this issue as per law and the addition is purely adhoc in nature. Decided in favor of Assessee. Addition u/s 68 of the Income Tax Act on unsecured loan taken from different parties Assessee could not bring out all creditors for examination on the pretext of medical advice etc. Held that - as discussed in the cases of various creditors, we find that the assessee has been able to prove the creditworthiness of the creditors and genuineness of the transactions in certain cases of the creditors, for which the additions have been deleted. However, in other cases, the assessee failed to prove the creditworthiness of the creditors and genuineness of the transaction, for which the additions have been sustained. In the result, the appeal of the assessee is partly allowed.

Issues Involved:
1. Deletion of addition of Rs. 12,75,000/- on account of unsecured loans under section 68 of the IT Act by the CIT(A).
2. Confirmation of addition of Rs. 24,25,000/- on account of unsecured loans under section 68 of the IT Act by the CIT(A).
3. Deletion of addition of Rs. 7,01,635/- on account of disallowance of 1/5th of the sundry creditors by the CIT(A).
4. Admissibility of additional evidence under Rule 46A of the IT Rules.

Detailed Analysis:

Issue 1: Deletion of Addition of Rs. 12,75,000/- on Account of Unsecured Loans
The Revenue challenged the deletion of Rs. 12,75,000/- on account of unsecured loans under section 68 of the IT Act. The CIT(A) deleted the addition concerning seven creditors, accepting the evidence provided by the assessee, including PAN, bank statements, income tax returns, and balance sheets. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided sufficient documentary evidence to prove the genuineness of the loans and the creditworthiness of the creditors. For instance, in the case of Deepak Varshney, the Tribunal confirmed the deletion as there was no immediate cash deposit before giving the loan, and all necessary documents were provided. Similar findings were made for other creditors like Mukesh Varshney, Kumar Trading Co., and Pramod Varshney, where the Tribunal found the evidence satisfactory to prove the genuineness of the loans.

Issue 2: Confirmation of Addition of Rs. 24,25,000/- on Account of Unsecured Loans
The assessee challenged the confirmation of Rs. 24,25,000/- made by the AO under section 68 of the IT Act. The CIT(A) sustained the addition for nine creditors due to immediate cash deposits before issuing cheques to the assessee, lack of regular books of accounts, and insufficient evidence of the creditors' creditworthiness. The Tribunal upheld the CIT(A)'s decision for creditors like Chandrakanta, Krishna Gopal, and Ratan Kumar Agarwal, where cash deposits were made shortly before issuing the cheques, and the creditors failed to prove the source of the cash. The Tribunal emphasized that the burden of proof under section 68 lies on the assessee to establish the identity, creditworthiness, and genuineness of the transactions, which was not satisfactorily discharged in these cases.

Issue 3: Deletion of Addition of Rs. 7,01,635/- on Account of Disallowance of 1/5th of the Sundry Creditors
The AO disallowed 20% of the sundry creditors amounting to Rs. 7,01,635/- due to lack of confirmations. The CIT(A) deleted the addition after the assessee provided confirmations and other documents during the appellate proceedings, which were remanded to the AO for verification. The AO did not question the genuineness of the confirmations on merit but objected to their admission at the appellate stage. The Tribunal upheld the CIT(A)'s decision, noting that the disallowance was purely adhoc and not tenable. The Tribunal found that the additional evidence was relevant and admissible for a judicious assessment, and the AO's approach to disallow 20% of the sundry creditors was inappropriate.

Issue 4: Admissibility of Additional Evidence under Rule 46A
The Revenue contended that the CIT(A) erred in accepting additional evidence without adjudicating its admissibility under Rule 46A. The Tribunal noted that the CIT(A) had called for a remand report from the AO, who did not raise any substantial objections on merits but only on procedural grounds. The Tribunal held that the CIT(A) rightly admitted the additional evidence as it was relevant for a judicious assessment. The Tribunal cited the case of Kuldeep Industrial Corporation, where it was held that Rule 46A is not violated if the AO does not object to the additional evidence on merits.

Conclusion:
The Tribunal partly allowed both the departmental appeal and the assessee's appeal. The Tribunal confirmed the deletion of Rs. 12,75,000/- and the addition of Rs. 24,25,000/- under section 68 of the IT Act. It also upheld the deletion of Rs. 7,01,635/- on account of disallowance of 1/5th of the sundry creditors and found no violation of Rule 46A in admitting additional evidence.

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