2015 (5) TMI 1216 - AT - Income Tax

Addition on account of processing charges paid for availing personal and home loans - Expenditure not connected with business - disallowance u/s 37(1) - whether section 40a(ia) is applicable to it or not? - HELD THAT - The assessee has paid interest on housing loan and claimed as business expenditure. We find from the order that the assessee has taken housing loan from HDFC Bank and he has also taken housing loan from Indiabulls Private Limited. It is the contention of the assessee that the assessee has taken this housing loan but this loan has been used in his jewellery business. Therefore this may be allowed as business expenditure but we find that the housing loan is taken from Indiabulls and Reliance Capital for construction of house therefore we are of the view that the AO has not verified whether this housing loan has been used for construction for construction of house or not. The AO has also not verified from the Bank as to how the assessee has taken his loan from Indiabulls and Reliance Capital for construction of house and housing loan has been used in business purpose. Therefore we restore this issue to the file of AO and the AO is directed to verify from Bank and concerned companies for what purpose the assessee has taken this loan and housing loan and how it was used and how it was shown to be taken from India bulls Housing Finanace and Reliance Capital. The AO is directed to make the inquiry and if the AO finds that the assessee has taken this housing loan for which housing loans are given for business purpose then processing charges and interest payment should be decided accordingly. The AO is directed to verify whether section 40a(ia) is applicable to it or not. Addition u/s 68 - assessee has taken unsecured loan from the above parties and has not submitted the income tax returns of the depositors - HELD THAT - The assessee has submitted the balance sheet and list of sundry creditors. The accounts of the two borrowers show that there was no movement in the accounts of the two parties. The borrowing amount was not paid since last three years therefore the AO has held that liability is ceased. Therefore he has added it u/s 41(1) of the Act. We find that Hon ble Supreme Court in the case of Sugauli Sugars 1999 (2) TMI 5 - SUPREME COURT wherein it is clearly held that if any liability which the assessee wanted to pay this amount then the Limitation Act would not apply and the liability still remains. Therefore the ld. CIT(A) is justified in his action and our Pinterference is not required. Gross profit addition by 2 % - HELD THAT - We find that the AO has not pointed out any specific explanation or evidence in rejecting the claim of low gross profit rate. The books of the assessee are audited by statutory auditors. The assessee has given the reasons that there was fall in gross profit due to the market condition on account of rate of fluctuation in gold and silver ornaments. Looking to these facts in to consideration we are of the view that it is proper and appropriate to restrict the addition on account of gross profit @ 2.5 % instead of 2% adopted by the ld. CIT(A). In the result this ground is partly allowed.

Summary

Issues Involved:
1. Deletion of addition on account of processing charges paid for personal and home loans.
2. Deletion of addition made under Section 68 of the Income Tax Act due to unverified creditworthiness of loan providers.
3. Deletion of addition made under Section 41(1) of the Income Tax Act due to non-movement of funds with sundry creditors.
4. Gross profit addition by 2%.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Processing Charges:
The Department challenged the deletion of Rs. 4,22,604 on account of processing charges for personal and home loans, which were not connected with the business. The CIT(A) had allowed the deduction under Section 37(1) of the IT Act, which rules out the allowability of capital or personal nature of expenses. The AO had disallowed these expenses under Section 40(a)(ia) of the Act due to non-deduction of TDS. The CIT(A) found that all loans, including personal and home loans, were utilized for business purposes, and hence, the provisions of TDS under Section 194A(3)(iii) were not applicable to banks like Axis Bank, Citi Bank, HDFC Bank, and ICICI Bank. However, the CIT(A) upheld the disallowance of Rs. 25,26,377 paid to India Bulls Financial Services Limited and Reliance Capital Limited under Section 40(a)(ia) due to non-deduction of TDS. The Tribunal restored the issue to the AO to verify the purpose of the loans and the applicability of Section 40(a)(ia).

2. Deletion of Addition Made Under Section 68:
The Department contended the deletion of Rs. 4,86,734 added under Section 68 due to the unverified creditworthiness of loan providers. The AO observed that the assessee had accepted loans in cash, which were deposited just before clearing the loan amount cheque, and the bank passbook showed negligible balance before and after clearing the loan cheque. The CIT(A) deleted the addition, noting that the assessee provided bank account copies of the lenders, PAN numbers, and evidence of interest payments with TDS deductions. The Tribunal restored the issue to the CIT(A) for fresh consideration, directing the CIT(A) to consider all additional evidence and provide an opportunity for both sides to be heard.

3. Deletion of Addition Made Under Section 41(1):
The Department challenged the deletion of Rs. 4,05,448 added under Section 41(1) due to non-movement of funds with sundry creditors for the last three years. The AO held that the liability ceased under the Limitation Act. The CIT(A) deleted the addition, citing the Supreme Court decision in Sugauli Sugars (236 ITR 518) and the jurisdictional High Court decision in CIT vs. Combined Transport (174 ITR 528), which held that if the liability is acknowledged, the Limitation Act does not apply. The Tribunal upheld the CIT(A)'s decision, finding no need for interference.

4. Gross Profit Addition by 2%:
The Department's appeal included the issue of maintaining the gross profit addition by 2%. The AO had added 3% amounting to Rs. 5,40,465 due to a fall in the gross profit ratio from 18.77% to 13.59%. The CIT(A) restricted the addition to 2%. The Tribunal found that the AO did not provide specific evidence to reject the claim of low gross profit rate and noted that the books were audited. Considering the market conditions and rate fluctuations in gold and silver, the Tribunal deemed it appropriate to restrict the addition to 2.5%.

Conclusion:
The Tribunal allowed the Departmental appeal and the assessee's cross-objection for statistical purposes, restoring certain issues to the AO and CIT(A) for further verification and fresh consideration. The Tribunal upheld the CIT(A)'s decision on the deletion of addition under Section 41(1) and partly allowed the gross profit addition by adjusting the percentage. The order was pronounced in the open court on 15th May 2015.