2017 (12) TMI 1658 - AT - Income Tax

Addition towards unsecured loan u/s 68 alongwith interest - unsecured loans are bogus accommodation entries provided by Shri Pravinkumar Jain through his hawala companies - Held that - On perusal of the financial statements filed by the assessee, we find that both the companies are active in the website of Ministry of Corporate Affairs. Also AO has accepted that both companies, viz. Josh Trading Company Pvt Ltd and Viraj Mercantile Pvt Ltd are active in MCA website. Both the companies have filed financial statements for the year ending 31-03-2006. Therefore, we are of the considered view that the assessee has discharged its initial burden cast u/s 68 by filing identity, genuineness of transaction and creditworthiness of the parties. Once, the assessee has discharged its initial burden, the burden shifts to the AO to prove otherwise. In this case, the AO made addition only on the basis of information received from Investigation Wing, but not based on any evidence to disprove the loan transaction from above companies are ingenuine. Therefore, we are of the view that there is no reason for the AO to treat loans from above 2 companies as unexplained credits u/s 68 - assessee has discharged identity, genuineness of transactions and creditworthiness of the parties. Therefore, there is no reason for the AO to make addition towards loan u/s 68 - Decided in favour of assessee. Estimation of net profit from Zoom Plaza and Aurm Park - AO has estimated net profit from Zoom Plaza and Aurm Park on the ground that the assessee is following different methods of accounting for different projects - Held that - AO has estimated 10% net profit on both the projects without assigning any reasons for incorrectness in books of account maintained by the assessee for both the projects. We further notice that the AO is only on the point that the assessee can follow only one method of accounting for both the projects. No merit in the findings of the AO that when assessee is following different method of accounting for different projects, that too, consistently for many years, there is no reason for the AO to reject those books of account and estimate net profit. Therefore, we are of the view that the AO was erred in estimating net profit of 10% on both the projects. Hence, we direct the AO to adopt net profit as declared by the assessee for both the projects. - Decided against revenue. Disallowance of purchases u/s 40A(3) - assessee has made cash purchases in contravention of provisions of section 40A(3) - Held that - No merit in the arguments of the assessee for the reason that the assessee has not assigned any reasons for cash payments for purchases in contravention of section 40A(3) of the Act. Though the assessee claims to have made purchases at construction site on urgent basis, the reasons given by the assessee are not coming within the exclusion provided under Rule 6DD of I.T. Rules, 1962. Therefore, we are of the considered view that the AO was right in disallowing cash purchases u/s 40A(3).- Decided against assessee. TDS u/s 194A - disallowance of interest paid to financial institutions u/s 40(a)(ia) for failure to deduct tax - Held that - assessee has failed to deduct tax at source u/s 194A in respect of interest payment to financial institution though it requires to deduct tax at source as per the provisions of section 194A of the Act. The reasons given by the assessee that it has paid interest through post dated cheques in advance based on the instalments granted by the banks cannot absolve the assessee of his responsibility of deducting tax at source as per the provisions of the Act. Since the assessee has failed to deduct tax at source on interest payment, the AO has rightly disallowed interest u/s 40(a)(ia) of the Act - Decided against assessee.

Issues Involved:

1. Addition towards unsecured loan under Section 68 of the Income-tax Act, 1961.
2. Estimation of net profit from construction projects.
3. Disallowance of purchases under Section 40A(3) of the Income-tax Act, 1961.
4. Disallowance of interest under Section 40(a)(ia) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition towards unsecured loan under Section 68 of the Act:

The Assessing Officer (AO) made additions towards unsecured loans received from Josh Trading Company Pvt Ltd and Viraj Mercantile Pvt Ltd, claiming these were bogus accommodation entries from group companies of Shri Pravinkumar Jain. The AO's conclusion was based on information from the Investigation Wing and the statement of Shri Dinesh Choudhary, who confirmed that Shri Pravinkumar Jain provided accommodation entries. Despite the assessee furnishing confirmation letters, bank statements, and financial statements to prove the identity, genuineness, and creditworthiness of the transactions, the AO considered the loans unexplained credits under Section 68.

The Tribunal found that the assessee had met the initial burden of proof by providing sufficient evidence to establish the identity, genuineness, and creditworthiness of the creditors. The AO's addition was based solely on information from the Investigation Wing without any direct evidence disproving the loan transactions. The Tribunal cited judgments from the Hon'ble Bombay High Court and the Hon'ble Supreme Court, emphasizing that once the initial burden is discharged by the assessee, the burden shifts to the AO to prove otherwise. Consequently, the Tribunal directed the AO to delete the addition made towards loans under Section 68.

2. Estimation of net profit from construction projects:

The AO estimated a net profit of 10% on the total expenditure incurred for the projects Zoom Plaza and Aurm Park, arguing that the assessee followed different accounting methods for different projects. The assessee contended that it consistently followed the project completion method for Aurm Park and the profit method for Zoom Plaza, maintaining separate books of account for both projects.

The Tribunal noted that the AO failed to provide reasons for the incorrectness in the books of account maintained by the assessee and found no merit in the AO's findings. The Tribunal directed the AO to adopt the net profit as declared by the assessee for both projects, rejecting the AO's estimation of net profit.

3. Disallowance of purchases under Section 40A(3):

The AO disallowed purchases amounting to ?57,705 under Section 40A(3) due to cash payments exceeding the prescribed limit. The assessee argued that the cash purchases were made at the construction site on an urgent basis.

The Tribunal upheld the AO's disallowance, stating that the reasons provided by the assessee did not fall within the exclusions under Rule 6DD of the Income-tax Rules, 1962. Therefore, the Tribunal found the AO's disallowance justified and rejected the assessee's ground.

4. Disallowance of interest under Section 40(a)(ia):

In ITA 5954/Mum/2016, the AO disallowed interest payments to financial institutions under Section 40(a)(ia) due to the assessee's failure to deduct tax under Section 194A. The assessee contended that interest was paid through post-dated cheques based on instalments granted by the banks, thus not requiring tax deduction at source.

The Tribunal found that the assessee failed to meet the obligation of deducting tax at source as mandated by Section 194A. The Tribunal upheld the AO's disallowance of interest under Section 40(a)(ia), agreeing with the CIT(A)'s findings and rejecting the assessee's ground.

Conclusion:

Both appeals filed by the assessee were partly allowed. The Tribunal directed the deletion of additions made towards unsecured loans under Section 68 and the adoption of the net profit as declared by the assessee for the construction projects. However, the Tribunal upheld the disallowance of purchases under Section 40A(3) and the disallowance of interest under Section 40(a)(ia).

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