2023 (8) TMI 1440 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - Onus to prove - HELD THAT - The assessee has filed the necessary evidences comprising names addresses PANs bank statements ITRs balance sheet profit and loss accounts share allotment letter share application with bank statement besides filing the bank statements of the assessee thereby evidencing the receipt of amounts of from these investors. We note that the assessee is a trading in shares and textiles and all the subscribers were also trader in textiles. We also note that it s customary in the business of textiles to business dealings in cash and so deposit into the banks accounts out of sales proceeds is in the normal course of business. Therefore mere fact that the cash has been deposited in the bank accounts of the subscribers immediately one or two days before issuance of cheques in favour of the assessee will not perse prove that these transactions were non-genuine. As examined the evidences filed before us in respect of share subscriber companies. We note that these companies are in fact having business in textiles and their turnover justified the cash deposits. Therefore the reasoning given by authorities below without looking into the nature of business of the assessee and the subscribers qua the cash deposit in the account of the subscribers before the date of the payment to the assessee is not sustainable. Besides the mere fact that the assessee has failed to produce the principals / directors of the subscribing company due to which investment could not be verified cannot be a ground for making addition in the hands of the assessee. As both the authorities have failed to point out any defects in the documents/evidences furnished by the assessee and simply relied on the theory principal officers/ directors of the assessee company were not produced. In our opinion the addition is based upon conjecture and surmises and not on the records which were available before the authorities below. Decided in favour of assessee. Addition u/s 14A r.w.r. 8D(2)(iii) - assessee has received exempt income and has suo motto disallowed a sum under Rule 8D(2)(i) - HELD THAT - We find that the issue is squarely covered in favour of the assessee by a series of decisions wherein it was held that the disallowance of expenses has to be restricted to the amount of exempt income received by the assessee. We note that the assessee has earned tax free income of Rs. 1, 53, 600/- and therefore the disallowance cannot exceed the said amount of exempt income. Accordingly we set aside the order of Ld. CIT(A) and direct the AO to restrict the addition - Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Confirmation of addition of Rs. 18,00,000/- as unexplained cash credit under Section 68 of the Income Tax Act.
2. Confirmation of addition of Rs. 3,14,401/- under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules.

Issue 1: Confirmation of Addition of Rs. 18,00,000/- as Unexplained Cash Credit

The Assessing Officer (AO) observed that the assessee received share application money from three parties and called upon the assessee to furnish evidence to prove the identities and creditworthiness of the investors and the genuineness of the transactions. The assessee provided various documents, including names, addresses, PANs, bank statements, ITRs, balance sheets, and share allotment letters. However, the AO added the amount as unexplained cash credit under Section 68, stating that the principal officers/directors of the subscribers were not produced for verification.

In the appellate proceedings, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's findings, noting that the assessee could not produce the directors of the subscriber companies to explain the creditworthiness and genuineness of the transactions.

Upon hearing the rival contentions, the tribunal noted that the assessee provided sufficient evidence, including names, addresses, PANs, and bank statements, to substantiate the transactions. The tribunal emphasized that in the textile business, cash deposits are customary and the mere fact of cash deposits before issuing cheques does not prove the transactions were non-genuine. The tribunal found that both the AO and CIT(A) failed to point out any defects in the documents provided by the assessee and relied on conjecture and surmises. The tribunal cited the case of ITO vs. Naina Distributors Pvt. Ltd., where it was held that non-production of directors cannot be a ground for making additions under Section 68 if other evidence supports the transactions. Therefore, the tribunal directed the AO to delete the addition.

Issue 2: Confirmation of Addition of Rs. 3,14,401/- under Section 14A read with Rule 8D(2)(iii)

The AO disallowed Rs. 3,14,401/- under Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules, against the assessee's exempt income of Rs. 1,52,600/-. The assessee had suo motu disallowed Rs. 2,600/- under Rule 8D(2)(i).

In the appellate proceedings, the CIT(A) dismissed the appeal of the assessee, rejecting the contention that the disallowance should be restricted to the exempt income.

Upon reviewing the case, the tribunal found that the issue is covered in favor of the assessee by various judicial decisions, including Joint Investment Pvt. Ltd. vs. CIT, where it was held that disallowance should be restricted to the amount of exempt income. Therefore, the tribunal directed the AO to restrict the disallowance to Rs. 1,53,600/-, the amount of exempt income received by the assessee.

Conclusion:

The appeal of the assessee was allowed, with the tribunal directing the deletion of the addition of Rs. 18,00,000/- under Section 68 and restricting the disallowance under Section 14A to Rs. 1,53,600/-. The order was pronounced in open court on 22nd August 2023.