2015 (3) TMI 612 - AT - Income Tax

Disallowance of higher rate of depreciation claimed on assets classified by the assessee as pollution control equipment - Held that - It is a settled proposition of law that the Income-tax Act has to be construed in a strict manner. The depreciation rates are prescribed under the Act in table given in Appendix I of the Income tax Rules. Under the said Appendix I of the Income-tax Rules, the pollution control equipment, which are eligible for depreciation at 100 per cent. have been listed out. We notice that five items of equipment have been listed under the head Air pollution control equipment and 17 items of equipment have been listed under the head Water pollution control equipment . We also notice that the following words have been used in the Appendix I, viz., Air pollution control equipment, being Water pollution control equipment, being . The presence of the word being signifies that the pollution control equipment should be falling in the nature or category of the list specified in the depreciation schedule. We notice that both tax authorities have given a finding that the assets, on which the higher rate of depreciation has been claimed by the assessee, do not fall in the category of assets listed out in the depreciation table given Appendix I of the Income- tax Rules. Before us, the assessee could not controvert the said finding of the tax authorities. Hence, we do not find any infirmity in the decision taken by the learned Commissioner of Income-tax (Appeals) on this issue and accordingly confirm his order on this issue - Decided against assessee. Assessment of loan receipt as cash credit under section 68 - Held that - It is a well settled proposition of law that the initial burden of proof to prove the cash credits is placed upon the assessee under section 68 of the Act, i.e., the assessee is required to prove cumulatively the three main ingredients, viz., the identity of the creditors, the creditworthiness of the creditor and the genuineness of transactions. As held by the learned Commissioner of Income-tax (Appeals), the receipt of money through the banking channels may prove the genuineness of the transaction, but the assessee has failed to establish the identity of the creditor and also failed to prove the creditworthiness of the creditor. Hence, we are of the view that the decision taken by the learned Commissioner of Income-tax (Appeals) on this issue is in accordance with the law and accordingly confirm the same. - Decided against assessee. Disallowance of part of interest expenditure - portion of interest bearing funds has been diverted as interest-free advance in the form of advance for purchase of materials - Held that - The assessee has furnished an analysis of balance- sheet to show that the advance for purchase of raw materials was out of own funds. We notice that the learned Commissioner of Income-tax (Appeals) has taken the view that the interest-free sundry creditors cannot be considered as own funds and accordingly rejected the analysis furnished by the assessee. The claim of the assessee appears to be that the interest bearing funds have been used for other purposes and the advance for purchase of raw material has been given out of interest-free funds (own funds interest-free sundry creditors). However, in our view, the said claim cannot be substantiated by mere analysis of the balance-sheet as at March 31, 2010.We notice that the Assessing Officer has not brought out whether the advance was given to related parties or to outsiders, which is also a vital factor to be considered. Accordingly, we are of the view that the tax authorities have not properly examined this issue and the assessee has also failed to furnish proper details relating thereto. Accordingly, we are of the view that this issue requires fresh examination at the end of the Assessing Officer. - Decided in favour of assessee for statistical purposes. Assessment of profit from commodity trading as cash credit under section 68 - Held that - the assessee has not furnished any material to controvert the finding reached by the Assessing Officer that the profit from commodity trading declared by the assessee was a sham or bogus transaction. We notice that the Assessing Officer has given the above said finding after making necessary enquiries with the commodity exchange. Hence, we do not find any reason to interfere with his decision on this issue and accordingly hold that the claim of receipt of profit from commodity trading is a sham or bogus one. Further as per section 68 of the Act, it is the responsibility of the assessee to explain about the nature and source of any sum found credited in the books of account. In the instant case, the assessee has failed to prove about the nature of credit . Hence we are of the view that the Assessing Officer has rightly assessed the same as cash credit under section 68 of the Act. - Decided against assessee. Assessment of cash credits and profit from commodity trading as income not falling under any of the heads and consequently rejection of claim of set off of business loss and carry forward business loss/depreciation against them - Held that - In the instant case, the contention of the assessee is that it has no other source of income other than business income. The said contention was not controverted by the tax authorities. The assessee has credited the loan amount of ₹ 18 lakhs and the profit from commodity trading of ₹ 5.13 crores in its books of account. In fact the profit from commodity trading was credited in the profit and loss account and offered as business income. Since the assessee could not explain to the satisfaction of the Assessing Officer the nature and source of loan amount as well as the profit from commodity trading, the Assessing Officer has treated them as deemed income, i.e., as unexplained cash credits under section 68 of the Act. While dealing with the issue relating to the disallowance of interest, the Assessing Officer has pointed out that the assessee has a loan liability of ₹ 21.56 crores and claimed interest expenditure of ₹ 3.33 crores. The Assessing Officer has allowed depreciation of ₹ 2.63 crores. All these figures throw light on the magnitude of operations of the company. Under these set of facts, we are of the view that it may not be unreasonable to treat the loan receipts and profit from commodity trading assessed under section 68 of the Act as receipts from the business activity of the assessee. Accordingly, we direct Assessing Officer to allow set off of current year's business loss as well as the brought forward business loss/unabsorbed depreciation against the income assessed under section 68 of the Act in accordance with the provisions of the Act relating to set off. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of higher rate of depreciation claimed on assets classified by the assessee as "pollution control equipment".
2. Assessment of loans received as cash credit under section 68 of the Act.
3. Disallowance of part of interest expenditure as diversion of interest-bearing funds.
4. Assessment of profit from commodity trading as cash credit under section 68 of the Act.
5. Rejection of claim of set-off of business loss against income assessed as cash credits.

Detailed Analysis:

1. Disallowance of Higher Rate of Depreciation:
The assessee claimed higher depreciation on assets classified as "pollution control equipment". The Assessing Officer (AO) restricted the depreciation to the normal rate, stating that the assets did not fall under the category of pollution control equipment as per Appendix I of the Income-tax Rules. The Commissioner of Income-tax (Appeals) confirmed this view. The Tribunal upheld the decision, noting that the assets did not match the specified categories of pollution control equipment eligible for 100% depreciation. The Tribunal emphasized the need for strict interpretation of the Income-tax Act and confirmed the lower authorities' decision.

2. Assessment of Loans Received as Cash Credit:
The AO assessed a loan of Rs. 18 lakhs received by the assessee as unexplained cash credit under section 68, due to the absence of a confirmation letter. The Commissioner of Income-tax (Appeals) upheld this assessment, noting the failure to establish the identity and creditworthiness of the creditor. The Tribunal confirmed this decision, emphasizing the necessity for the assessee to prove the identity, creditworthiness, and genuineness of the transaction, which was not done in this case.

3. Disallowance of Part of Interest Expenditure:
The AO disallowed part of the interest expenditure, suspecting diversion of interest-bearing funds to interest-free advances. The Commissioner of Income-tax (Appeals) confirmed this disallowance, rejecting the assessee's claim that the advances were given from own funds. The Tribunal found that the issue was not properly examined by the tax authorities and the assessee failed to furnish adequate details. Therefore, the Tribunal set aside the order and remanded the issue back to the AO for fresh examination.

4. Assessment of Profit from Commodity Trading as Cash Credit:
The AO treated the profit from commodity trading as sham and bogus, assessing it as cash credit under section 68. The Commissioner of Income-tax (Appeals) confirmed this view. The Tribunal upheld the decision, noting that the assessee failed to provide material to controvert the AO's findings. The Tribunal agreed that the transactions were sham and bogus, justifying the assessment under section 68.

5. Rejection of Claim of Set-Off of Business Loss:
The AO and Commissioner of Income-tax (Appeals) rejected the claim of set-off of business loss against income assessed under section 68, arguing that such income does not fall under any heads of income and thus is not eligible for set-off. The Tribunal disagreed, citing the Calcutta High Court's decision in Daulatram Rawatmull, which allows treating such income as business income if the assessee has no other source of income. The Tribunal directed the AO to allow the set-off of current year's business loss and brought forward loss/unabsorbed depreciation against the income assessed under section 68, in accordance with the relevant provisions of the Act.

Conclusion:
The Tribunal partly allowed the appeal, confirming the disallowance of higher depreciation and assessment of loans and commodity trading profits under section 68, but remanded the issue of interest expenditure for fresh examination and directed the AO to allow the set-off of business losses against income assessed under section 68.