2017 (1) TMI 1107 - AT - Income Tax

Unexplained Cash Credits - there was a difference between the amounts shown as received in the books of account of the assessee and the confirmation letter - Held that - There should not be any dispute that the assessing officer has made the addition by comparing two different years, which is not correct. Further, the assessee has pointed out that he has filed confirmation letter for the years ending 31.12.1984, 31.12.1985 and 31.12.1987. He has expressed its inability to obtain confirmation letter for the current year, since the creditor has migrated to USA and also due to passage of long time. In our view, the difficulty of the assessee should be appreciated. Further, the assessee has also submitted that, out of the total credit of ₹ 1,12,500/- a sum of ₹ 91,000/- related to the share trading transactions. Hence, on a conspectus of the matter, we are of the view that there is no reason to suspect the credit obtained - Decided in favour of assessee Cash credit available in the name of Ronak Patel the sources to the extent of ₹ 12,000/- can be considered to have been explained in view of the payment of interest, referred above. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to sustain the addition in respect of this cash credit to the extent of ₹ 28,000/-. Cash credit received from Shri Saurin Patel the assessee has paid interest of ₹ 12,600/- in Feb & Aug, 1986. The fresh credit of ₹ 12,000/- was obtained on 3-12-1986. Hence, we are of the view that the interest payment of ₹ 12,600/- is sufficient to explain the sources for the fresh credit of ₹ 12,000/-. Accordingly we are of the view that this cash credit may be treated as explained Cash credit received from Shri Vikram U Patel assessee has received a sum of ₹ 60,000/- on 06.05.1986. We notice that the AO has given credit for principal portion of ₹ 50,000/- repaid by the assessee and accordingly made the addition of ₹ 10,000/-. However, he has not given credit for the interest amount of ₹ 7,057/- referred above. Considering the opening balance of ₹ 1,00,000/- available in this account and the interest payment made to this creditor, we do not find any reason to sustain the addition of ₹ 10,000/-. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Disallowance of interest paid on purchase of securities - Held that - It can be visualised that a person who purchases a security from the assessee will not bother to ascertain the cum-interest received by the assessee from the person from whom the assessee had purchased the security. The purchaser will only ensure that the he makes payment towards cum-interest from the last coupon date to the date of purchase. Hence the question of nexus, in our view, may not arise in these type of transactions. AO has not given proper reasoning or any credible material to make this addition and the same is not warranted in the facts and circumstances of the case, when one considers the trade practice, method of accounting etc. Hence the same is liable to be deleted. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition relating to Interest on securities. Addition on account of Negative balance of securities - Held that - One cannot come to the conclusion that the assessee has sold shares which were not available with him, i.e, negative stock. Hence we hold that the inference drawn by the assessing officer on the basis of above said figures is wrong and hence the impugned addition of ₹ 3,22,72,000/- is not justified. We notice that the Ld CIT(A) has also confirmed the addition with the observation that the assessee has failed to furnish any explanation with regard to the negative stock. Since the question of negative stock does not arise in this case and since the Ld CIT(A) has also not examined the figures furnished by the AO properly, we are unable to sustain the order passed by Ld CIT(A) on this issue. In any case, the proper interpretation of figures would only show that the assessee has incurred loss in the transaction of purchase and sale of units of UTI. However this loss also could not be recognised, since the assessee is disputing the stock summary worked out by the assessing officer. Thus we are of the view that there is no merit in the addition relating to negative stock. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Bogus loss claim - Held that - Assessing officer should not have come to such a conclusion without examining relevant contract notes issued by the third party brokers. Accordingly we are of the view that the tax authorities have not given proper justification in presuming that the loss shown by the assessee is bogus one and constitutes negative brokerage. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Undisclosed investment in Stock - Held that - Since the assessee has held fully convertible debentures of Reliance G series, he became entitled to apply for shares on a prescribed rate upon conversion. As per the market mechanism, the assessee is entitled to sell his rights in favour of another person, instead of applying for the shares. According to the assessee, he has sold the rights, which has accrued from the debentures, which are already held by him, i.e., he has not purchased such rights, but the right has accrued to him from the debentures held by him. Hence the right to apply for shares, in our view, cannot be taken as undisclosed item of asset. We notice that though the assessee has submitted these explanations and accordingly contended that the assessing officer was wrong in considering the sale of rights as sale of shares , yet the AO did not address the same. Hence in the absence of anything to contradict the submissions made by the assessee, his explanations should be accepted. Accordingly, we hold that the sale of rights cannot be considered to be the sale of shares and accordingly, we direct the AO to delete the addition relating to undisclosed stock of shares of Reliance Industries Ltd. The order of Ld CIT(A) stands set aside accordingly. Addition of credit balance standing in the name of M/s Champaklal Devidas - Held that - AO has made this addition on general observations, surmises and conjectures without bringing any material to substantiate his views. The observations made by the AO about the repayments made in March 1992 and transfer of funds to group concerns are also, in our opinion, would not justify the addition under the Income tax Act. Accordingly, we are of the view that the AO was not justified in considering the closing balance available in the account of M/s Champaklal Devidas as nongenuine. Accordingly he was not justified in assessing the outstanding balance as income of the assessee. In any case, the opening balance shown in the account cannot be assessed in this year. Thus direct the AO to delete this addition relating to M/s Champaklal Devidas. Disallowance of interest paid to banks & others - as per AO assessee has given interest free funds to persons covered by sec. 40A(2)(b) - Held that - As discussed the method of usage of bank overdraft facility, i.e., it was mainly used for purchase and sale of securities. Thus, the possibility of diverting funds from bank overdraft facility is minimal. We notice that the assessing officer has compared the figures available in Balance sheet and has taken adverse view of the matter. According to the assessee, he was having huge interest free sundry creditors balance with him and the AO has failed to recognize the same. In our view, there is merit in the said submissions of the assessee. When interest free funds and interest bearing funds are mixed together, they loose their respective identity and hence the presumption should be that the assessee has used interest free funds to give interest free advances. For this proposition, we get support from the decision rendered by in the case of Reliance Utilities and Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT ). Accordingly we are of the view that there is no justification in disallowing interest claim, when the assessee is possessing huge interest free funds. Disallowance of loss on securities transactions - Held that - Before Ld CIT(A), the assessee has furnished relevant vouchers and also made a reference to the bank accounts, but the Ld CIT(A) has proceeded to uphold the disallowance by putting up the responsibility on the assessee. In our view, the assessee has been asked by the tax authorities to prove the loss, but according to the assessee the same can be examined from the details available in the books of account only, i.e., by examining the corresponding purchase and sale. Hence, in our view, the tax authorities have disallowed this claim by drawing inferences without actually carrying out examination, which is not justified. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance.

Summary

Issues Involved:
1. Unexplained Cash Credits.
2. Disallowance of Interest Paid on Purchase of Securities.
3. Addition on Account of Negative Balance of Securities.
4. Negative Brokerage.
5. Undisclosed Investment in Stock.
6. Addition of Credit Balance in the Name of a Creditor.
7. Disallowance of Interest Paid to Banks and Others.
8. Disallowance of Loss on Securities Transactions.
9. Levying of Interest under Sections 139(8) and 217.
10. Legality of Additions Aggregating to ?10,89,30,545/-.

Detailed Analysis:

1. Unexplained Cash Credits:
- Rita Chopra: The addition of ?32,100 was made due to a discrepancy between the amounts shown as received in the books and the confirmation letter. The Tribunal found that the assessing officer compared receipts from different years, which was incorrect. The assessee's difficulty in obtaining confirmation due to the creditor's migration was acknowledged. The addition was deleted.
- Ronak Patel: The addition of ?40,000 was contested. The Tribunal found that the assessee could not obtain confirmation due to the passage of time but had paid interest to the creditor. The addition was partially sustained to ?28,000.
- Saurin Patel: The addition of ?12,000 was deleted as the interest payment of ?12,600 was sufficient to explain the source.
- Vikram U Patel: The addition of ?10,000 was deleted, considering the interest payment and the opening balance.

2. Disallowance of Interest Paid on Purchase of Securities:
- The assessee claimed interest of ?47,45,108 on securities. The AO disallowed it, considering it excessive and non-genuine. The Tribunal found that the AO failed to appreciate the trade practice and method of accounting followed by the assessee. The addition was deleted, noting that the AO did not examine specific instances of expenditure.

3. Addition on Account of Negative Balance of Securities:
- The AO added ?3.22 crores for negative stock of UTI units. The Tribunal found that the AO did not provide the basis for the stock statement and that there was no difference in the quantity of units. The addition was deleted, noting that it was based on an incorrect interpretation of figures.

4. Negative Brokerage:
- The AO disallowed ?19.61 lakhs as negative brokerage, considering losses in share transactions as bogus. The Tribunal found that the method of accounting followed by the assessee was not appreciated by the AO. The addition was deleted, noting that the transactions were supported by contract notes.

5. Undisclosed Investment in Stock:
- The AO added ?31,38,502 for undisclosed stock. The Tribunal found that the AO made mistakes in the computation, such as considering the renunciation of rights as the sale of shares. The addition was deleted, noting that the AO did not address the mistakes pointed out by the assessee.

6. Addition of Credit Balance in the Name of a Creditor:
- The AO added ?1,26,12,035 for the credit balance in the name of M/s Champaklal Devidas. The Tribunal found that the AO did not carry out the examination as directed by the CIT(A) and that the transactions were supported by bank records. The addition was deleted.

7. Disallowance of Interest Paid to Banks and Others:
- The AO disallowed ?8,99,443 for interest paid, considering that the assessee used interest-bearing funds for interest-free loans. The Tribunal found that the assessee had sufficient interest-free funds and that the bank overdraft was used for business purposes. The addition was deleted.

8. Disallowance of Loss on Securities Transactions:
- The AO disallowed ?16,05,045 for loss on securities transactions, considering it booked through journal entries. The Tribunal found that the AO did not examine the corresponding purchase and sale of securities. The addition was deleted.

9. Levying of Interest under Sections 139(8) and 217:
- The levying of interest was considered consequential and did not require adjudication.

10. Legality of Additions Aggregating to ?10,89,30,545/-:
- The AO made various additions aggregating to ?10,89,30,545 in the second round of proceedings. The Tribunal found that these additions were deleted by the CIT(A) in the first round and the revenue did not appeal. The additions were deleted, noting that the AO was not legally entitled to make these additions again.

Conclusion:
The Tribunal provided a comprehensive analysis, addressing each issue with detailed reasoning. The majority of the additions made by the AO were deleted, emphasizing the importance of proper examination and adherence to trade practices and accounting methods.