2015 (7) TMI 684 - AT - Income Tax

Addition made as unexplained cash credit u/s 68 - Held that - A conclusion can be drawn that the assessee was never asked to produce the creditors. If the department had any doubt with regard to the genuineness of the transaction or creditworthiness of the creditors, they should have made proper enquiry and brought positive material on record to establish such fact. More so, when not only the identity of the creditors are available with the department, but their income tax particulars are also submitted by the assessee. The department could have also made enquiry with regard to the source of the money advanced as it was through proper banking channel and could have ascertained whether there is a nexus between the unaccounted income of the assessee and the money advanced. Without any such enquiry, the department cannot be permitted to treat the credit as unexplained income of the assessee on mere presumption and surmises or solely relying upon the entries made in the books of account showing the credit as share application money. In the aforesaid facts and circumstances, the assessee having proved the credits by establishing the identity of the creditors, genuineness of the transaction and creditworthiness of the creditors, through proper documentary evidence, he is not required to prove any further. Therefore, on overall consideration of facts and materials on record, we are of the view that no addition under section 68 of the Act can be made in the present case - Decided in favour of assessee. Unexplained credit under section 68 - Held that - If the A.O. had any doubt with regard to the creditworthiness, he should have made proper enquiry with the concerned person to find out whether they had the capability to advance the amount to the assessee. The material on record demonstrate that A.O. without making any enquiry has made the addition merely on presumption and surmises. In case of trade credits also assessee has established the identity of the creditors by furnishing confirmation letters containing their name, address, income tax particulars etc. The entire transaction is through proper banking channel, thereby, proving its genuineness. Lastly, all creditors are income tax assessees which prove the source of credits. Therefore, following our detailed reasoning in paragraph Nos.13 to 13.3 in case of share application money, which also equally applies to the trade creditors, we delete the addition of ₹ 6,23,24,518. However, in respect of three creditors viz., Palomi Estates, Zisanuddin and others for a total amount of ₹ 28,69,185, it is a fact on record that assessee has neither furnished any confirmation letters nor any other evidence to establish the identity of the creditors, their creditworthiness and genuineness of the transaction. Therefore, in absence of any evidence submitted by assessee to prove the credits for the aforesaid amount, addition to the extent of ₹ 28,69,185 is sustained. - Decided partly in favour of assessee. Disallowance of interest expenditure claimed - Held that - The primary contention of the assessee is that the investments made are out of surplus fund and no interest bearing fund has been utilized. In our view, the aforesaid facts require verification since if there is no nexus between the investment made and the borrowed fund, then, no disallowance can be made. As these aspects are not examined by either A.O. or learned CIT(A), we are inclined to remit the matter back to the file of A.O. to verify and take a decision in the matter, after giving due opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. Disallowance made under section 40(a)(ia) - Held that - The primary contention of the assessee since the entire interest amount is paid during the relevant previous year and nothing remained payable, no disallowance under section 40(a)(ia) can be made is acceptable. As held by the ITAT, Vizag Special Bench in the case of Merylin Shipping and Transport (2012 (4) TMI 290 - ITAT VISAKHAPATNAM), no disallowance under section 40(a)(ia) can be made if the entire amount was paid during the relevant previous year and nothing remained payable. The Hon ble Allahabad High Court also in case of CIT vs. Vector Shipping Services P. Ltd., 2013 (7) TMI 622 - ALLAHABAD HIGH COURT expressed similar view. Therefore, following the aforesaid decisions, we direct the A.O. to verify and allow the deduction claimed, if it is found that the entire amount was paid during the relevant previous year and nothing remained payable. - Decided in favour of assessee for statistical purposes. Disallowance as bad and doubtful debts written off - Held that - As could be seen the A.O. while completing the assessment, has disallowed assessee s claim of bad and doubtful debts by observing that the assessee has failed to prove that the debt has become irrecoverable. However, on going through the provision of section 36(1)(vii) read with sub-section (2), it is very much clear that the only condition which are required to be satisfied are, it must have been shown as income in the earlier assessment year and it is actually written off in the books of account. There is no necessity on the part of the assessee to prove that the debt has become irrecoverable. Therefore, keeping in view the clear statutory provision, we direct the A.O. to verify these aspects and allow the deduction claimed by the assessee.- Decided in favour of assessee for statistical purposes. Disallowance of fee paid for increase of share capital - Held that - Assessee did not challenged the disallowance before the Ld. CIT(A) but has chosen to challenge the same before us through an additional ground. However, on going through the facts and materials on record as well as principle of law on the issue, we agree with the view of the A.O. that the fee paid to ROC for increasing authorized share capital is a capital expenditure, hence, cannot be allowed. - Decided against assessee. Disallowance of employees contribution to ESI and PF - assessee has not remitted the employees contribution to PF and ESI within the prescribed date as mentioned in section 36(1)(va) - It is the contention of the assessee that the employees contribution to ESI and PF though, was not paid within the due date as prescribed under section 36(1)(va) but such dues having been paid before the due date of filing of return of the income as prescribed under section 139(1), the amount is allowable as a deduction as per the provisions of section 43B. We find merit in the aforesaid submissions of the assessee - Held that - There are a number of judicial precedents on this issue wherein it is held that if the employees contribution to PF and ESI is paid within the due date of filing of return of income under section 139(1), then, the amount is allowable as a deduction in view of the provision of section 43B. In view of the afore said, we delete the addition of ₹ 2,07,209 - Decided in favor of assessee.

Summary

Issues Involved:

1. Sustaining the addition of Rs. 9,78,50,000 as unexplained credits under Section 68 of the Income Tax Act.
2. Sustaining the addition of Rs. 6,51,93,703 in respect of trade credits.
3. Disallowance of interest expenditure of Rs. 55,69,108.
4. Disallowance of Rs. 8,92,937 being the payment made towards hire purchase installment on vehicles.
5. Disallowance of Rs. 53,58,187 as bad and doubtful debts.
6. Disallowance of interest on car finance and loans amounting to Rs. 3,78,909, Rs. 12,00,000, and Rs. 75,000.
7. Disallowance of Rs. 3,01,452 paid for the increase of share capital.
8. Disallowance of Rs. 2,07,209 being employees' contributions to ESI and Provident Fund.

Detailed Analysis:

1. Addition of Rs. 9,78,50,000 as Unexplained Credits under Section 68:

The assessee, a company in the business of manufacturing earth boring and drilling equipment, filed its return of income declaring a total income of Rs. 3,05,94,470. During the assessment, the Assessing Officer (AO) noticed an introduction of Rs. 9,88,50,000 as share application money from 19 persons. The AO questioned the identity, creditworthiness, and genuineness of these transactions. Despite providing confirmation letters for some creditors, the AO found the evidence insufficient, leading to the addition of Rs. 7,44,17,609 as unexplained credits. The CIT(A) sustained the AO's addition, emphasizing the lack of evidence proving the creditworthiness of the creditors and the genuineness of the transactions.

Upon appeal, the Tribunal noted that the assessee had provided sufficient documentary evidence, including confirmation letters, PAN details, and affidavits from creditors, establishing the identity and genuineness of the transactions. The Tribunal criticized the AO for not conducting further inquiries to verify the creditworthiness of the creditors. Consequently, the Tribunal deleted the addition made under Section 68, concluding that the assessee had discharged the primary onus cast upon it.

2. Addition of Rs. 6,51,93,703 in Respect of Trade Credits:

The AO observed trade credits amounting to Rs. 12,41,93,703 and treated Rs. 6,51,93,703 as unexplained credits due to the lack of confirmation letters for certain creditors. The CIT(A) upheld the AO's decision, citing the assessee's failure to prove the creditworthiness and genuineness of the transactions.

The Tribunal, however, found that the assessee had provided confirmation letters and other necessary details for most of the creditors, establishing their identity and the genuineness of the transactions. The Tribunal emphasized that the AO failed to conduct proper inquiries to verify the creditworthiness of the creditors. Consequently, the Tribunal deleted the addition of Rs. 6,23,24,518 but sustained the addition of Rs. 28,69,185 due to the lack of evidence for those specific creditors.

3. Disallowance of Interest Expenditure of Rs. 55,69,108:

The AO disallowed Rs. 55,69,108 out of the interest expenditure claimed, citing that the investments made were not for business purposes. The CIT(A) upheld this disallowance.

The Tribunal remitted the matter back to the AO for verification, directing the AO to ascertain whether the investments were made out of surplus funds or borrowed funds. If the investments were made out of surplus funds, no disallowance should be made.

4. Disallowance of Rs. 8,92,937 for Hire Purchase Installments:

The AO disallowed Rs. 8,92,937, citing non-deduction of TDS on interest payments. The CIT(A) directed the AO to re-examine the claim.

The Tribunal directed the AO to verify if the entire amount was paid during the relevant previous year and nothing remained payable. If so, following the decision of the ITAT, Vizag Special Bench in the case of Merlyn Shipping and Transport, no disallowance under Section 40(a)(ia) should be made.

5. Disallowance of Rs. 53,58,187 as Bad and Doubtful Debts:

The AO disallowed the claim, stating that the assessee failed to prove the debt had become irrecoverable. The Tribunal directed the AO to verify if the debt was shown as income in earlier years and actually written off in the books of account. If these conditions were met, the deduction should be allowed.

6. Disallowance of Interest on Car Finance and Loans:

The AO disallowed interest payments amounting to Rs. 3,78,909, Rs. 12,00,000, and Rs. 75,000 due to non-deduction of TDS. The Tribunal directed the AO to verify if the entire amount was paid during the relevant previous year and nothing remained payable. If so, no disallowance under Section 40(a)(ia) should be made.

7. Disallowance of Rs. 3,01,452 Paid for Increase of Share Capital:

The AO disallowed the fee paid to ROC for increasing authorized share capital, treating it as capital expenditure. The Tribunal upheld this disallowance, agreeing with the AO's view.

8. Disallowance of Rs. 2,07,209 Being Employees' Contributions to ESI and Provident Fund:

The AO disallowed the expenditure due to late payment. The Tribunal noted that if the contributions were paid before the due date of filing the return under Section 139(1), the amount should be allowed as a deduction. The Tribunal deleted the addition, directing the AO to verify the payment dates.

Conclusion:

The Tribunal partly allowed the appeal, providing substantial relief to the assessee by deleting several additions and disallowances while remanding some issues back to the AO for further verification.