2014 (2) TMI 612 - AT - Income Tax

Addition made u/s 68 of the Act - Unexplained cash credits - Gifts made by mother to son Held that - The mother of the assessee made gift to the assessee out of natural love and affection and it cannot be doubted - the assessee has to discharge the onus cast on him with regard to identity of the donor, capacity of the donor and genuineness of the transaction - all the ingredients are duly discharged by the assessee thus, the gift made by the mother to the son out of natural love and affection cannot be doubted so as to make addition u/s. 68 of the Act Decided in favour of Assessee. Addition towards disallowance of interest - Funds diverted for non- business purposes Held that - The assessee advanced an amount and there was also opening balance - The AO computed interest on the amount owed by the assessee to Smt. Annapurna as the net balance - the total interest liability incurred by the assessee in the assessment year under consideration is Rs. 7,18,000 on total borrowings thus, the AO is directed to disallow proportionate interest as attributable to the amount advanced to Smt. Annapurna instead of disallowing at 18% on total outstanding - interest is to be disallowed proportionately on the amount advanced to Smt. Annapurna which bears to the total borrowings i.e., Total Interest Paid x Amount advanced to Smt. Annapurna Total amount borrowed Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Addition of Rs. 10,00,000 out of total gifts of Rs. 14,60,000 received from the appellant's mother.
2. Disallowance of Rs. 6,47,883 being interest paid on bank loan utilized for personal use by the appellant's wife.

Issue-wise Detailed Analysis:

1. Addition of Rs. 10,00,000 out of total gifts of Rs. 14,60,000 received from the appellant's mother:

The assessee filed a return of income for the assessment year 2009-10 admitting a total income of Rs. 22,67,220. The Assessing Officer (AO) made additions to the income, including an addition of Rs. 17,60,000 as unexplained cash credits. This amount included gifts of Rs. 14,60,000 from the assessee's mother, Mrs. Subbayamma, and Rs. 3,00,000 from the assessee's father, Dr. C. Sri Rama Murthy. The AO disbelieved the gifts due to the non-genuine nature of the stamp papers used for the gift deeds and the lack of creditworthiness of the donors.

The CIT(A) observed that the gifts could be transferred through oral agreements and not necessarily through deeds. The main focus was on the creditworthiness of the donors. The CIT(A) accepted the gift of Rs. 3,00,000 from Dr. Sri Rama Murthy due to his sufficient income sources but was not satisfied with the creditworthiness of Mrs. Subbayamma for the gift of Rs. 14,60,000. The CIT(A) allowed a credit of Rs. 4,60,000 and treated the remaining Rs. 10,00,000 as unexplained.

Upon appeal, it was noted that the balance sheet and capital account of Mrs. Subbayamma reflected sufficient funds for the gift. The gift was made out of natural love and affection, and the assessee had discharged the onus of proving the identity, capacity, and genuineness of the transaction. The Tribunal concluded that the gift should not be doubted and deleted the addition of Rs. 10,00,000.

2. Disallowance of Rs. 6,47,883 being interest paid on bank loan utilized for personal use by the appellant's wife:

During the assessment proceedings, the AO observed that the assessee had diverted borrowed funds to his wife, Mrs. Annapurna, resulting in a debit balance of Rs. 35,99,931. The AO disallowed interest of Rs. 6,47,883, calculated at 13% on this amount, against the claimed expenditure of Rs. 7,18,000.

The CIT(A) upheld the disallowance of interest on the grounds that the borrowed funds were diverted for non-business purposes. The interest was to be charged on both the current year and opening debit balances. However, the CIT(A) restricted the interest rate to 13% instead of 18%.

Upon appeal, the Tribunal directed the AO to disallow interest proportionately on the amount advanced to Mrs. Annapurna, relative to the total borrowings, rather than at a flat rate of 18% on the total outstanding amount. This ground was partly allowed.

Conclusion:

The appeal of the assessee was partly allowed, with the deletion of the addition of Rs. 10,00,000 related to the gift from the mother and a directive to proportionately disallow interest on the amount advanced to the wife. The order was pronounced in the open Court on 11th February 2014.