2014 (10) TMI 1028 - AT - Income Tax

Addition u/s 68 - AO made addition of opening balances without properly verifying the record - whether AO did not place any material on record or evidence to support that the appellant had in some way generated unaccounted funds and rotated its own unaccounted funds through these creditors? - HELD THAT - AO did not point out any discrepancy while examining the creditors u/s 131 and gave a finding that an X creditor was bogus - AO did not place any material on record or evidence to support that the appellant had in some way generated unaccounted funds and rotated its own unaccounted funds through these creditors. Observations of the AO in the remand are against the provisions laid down in section 68 as he did not bring any adverse finding with corroborative evidence that the sundry creditors were not genuine - There are no fresh credit during the year. Hence section 68 cannot be invoked during the year. Hence we uphold the order of the Ld. CIT(A) and dismiss this ground of the revenue. Addition being notional interest on loans and advances - whether there is no provision of Income Tax Act which authorizes the AO to tax notional income? - HELD THAT - The fact that the loans and advances that were given by the appellant in the course of its normal business activities for acquiring land is not in dispute which is also agreed by the Assessing Officer in his remand report. This fact has also been confirmed in writing by the concerned parties. It is also true that the Income Tax Act does not envisage taxability of any notional income as such. AO in his remand report has not doubted the nature of advances but has given a vague reasoning for upholding the addition made. As perused the definition of income in Section 2(24) and the various judicial decisions relied upon by the appellant. Since AO did not establish with any supporting material or evidence that interest was earned or accrued to the appellant notional income or interest cannot be taxed under the provisions of law. Accordingly the addition made by the Assessing Officer on account of notional interest is here with deleted. Decided in favour of assessee.

Summary

Issues:
1. Addition u/s 68 - Verification of opening balances of sundry creditors.
2. Deletion of addition of notional interest on interest-free advances.

Analysis:

Issue 1: Addition u/s 68 - Verification of opening balances of sundry creditors
The assessee, a partnership firm in real estate development, declared a loss in its return of income for the Assessment Year 2009-10. The Assessing Officer (AO) made additions u/s 68, including a substantial amount as notional interest on interest-free advances. The first appellate authority deleted these additions, leading the revenue to appeal. The Tribunal observed that the AO did not properly verify the opening balances of the sundry creditors. The Ld. CIT(A) found discrepancies in the AO's approach, noting that the creditors' identities were established with evidence, banking transactions were conducted, and confirmations were provided. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing that no fresh credits were identified during the year, rendering section 68 inapplicable. The factual findings were not disputed by the Departmental Representative, resulting in the dismissal of this ground of the revenue's appeal.

Issue 2: Deletion of addition of notional interest on interest-free advances
Regarding the deletion of the addition of notional interest on loans and advances, the Tribunal highlighted that there is no provision in the Income Tax Act authorizing the taxation of notional income. Citing precedents, including the Gauhati High Court and the Supreme Court, the Tribunal emphasized that income tax authorities cannot include notional interest in the income if it was not due or collected. Applying these principles to the case, the Tribunal upheld the Ld. CIT(A)'s findings that the advances given by the assessee for acquiring land were in the course of normal business activities and not subject to taxation as notional income. The Tribunal dismissed this ground of the revenue's appeal, resulting in the overall dismissal of the revenue's appeal.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decisions on both issues, emphasizing the importance of proper verification and adherence to legal provisions in assessing income tax liabilities, ultimately dismissing the revenue's appeal.