2017 (11) TMI 999 - AT - Income Tax

Addition u/s 68 - unexplained cash credit in the Federal Bank A/c - Held that - We are of the opinion that when it appears to the AO that the financial capacity of the lenders was weak with their earning capacity of ₹ 1,500/- to ₹ 4,500/- per month, the AO should have examined the issue by questioning them to know the source of the amounts for extending the loan to the assessee, instead of rejecting the sworn statements without scrutiny. No reasons are assigned by the AO for discarding the sworn statements and it is not known where from the AO gathered the information relating to the financial capacity of these persons. For this reason, we find that ₹ 1 lakh is not such a big amount as could not be contributed by five persons and in the absence of any material the AO should have accepted the contention of the assessee. Addition of pigmy savings of the daughter of the assessee and the other amount as compensation from Insurance Company - Held that - In so far as the compensation from Insurance Company is concerned the assessee could have produced the relevant documents. However, we cannot expect any such evidence in respect of ₹ 38,085/- and the pigmy savings of the daughter of the assessee cannot be termed as income of the daughter so as to club such income with the income of the assessee. Such savings of the daughter could obviously be out of the amounts provided by the assessee. We, therefore, find it just and reasonable to accept the explanation of the assessee in respect of ₹ 38,085/- and reject the contention of the assessee in respect of the balance amount. We, therefore, direct the AO to delete ₹ 1 lakh and ₹ 38,085/- and we confirm the rest of the addition. Addition relating to the interest paid on unsecured loans - non deduction of TDS - Held that - There was a clear assertion by the assessee before the Ld. CIT (A) that since the deductee-assessee had paid due taxes in time on the interest income received from the assessee and duly shown in their respective return, the payment of interest cannot be treated as income of the assessee and hence, addition made on this aspect cannot be sustained. In spite of this clear submission, Ld. CIT (A) failed to deal with this aspect in his order while dealing with ground no. 3. In all fairness Ld. CIT (A) should have rejected this contention of the assessee only after considering the same and by assigning the cogent reasons. Though the Ld. CIT (A) recorded a finding that the submissions of the assessee were considered and those were found to be out of context and devoid of merits, we are unable to agree with him. It is not known how the contentions raised by the assessee by referring to the provisions u/s 201(1A) of the Act and the payment of the advance tax by the recipients of the interest amount are irrelevant. We, therefore, do not find reasoning given by the Ld. CIT (A) as satisfactory and find it difficult to sustain the same. We consider that it is a fit case to restore the ground to the file of the AO for verification of the facts pleaded by the assessee and to give a fresh finding. We, therefore, remand this ground to the file of the AO to verify whether the recipients of the interest amount have paid the advance tax and self assessment tax in respect of this particular interest amount by giving an opportunity to the assessee of being heard. Disallowance towards 10% of the total expenses on the ground that the same is attributable to the personal use of telephone and travelling expense - Held that - In so far as telephone is concerned, we agree with the authorities below but in so far as travelling and shop expenses are concerned, we do not find it justifiable to make any disallowance without pointing out any discrepancy in respect of those two expenses. We, therefore, sustain the disallowance u/s 37 of the Act to a tune of ₹ 1,536/- and delete the rest of the same.

Summary

Issues:
1. Acceptance of income as returned by the assessee for assessment.
2. Addition of unexplained cash credit under section 68 of the Income Tax Act.
3. Treatment of interest paid on unsecured loans as income.
4. Addition of unexplained entries in bank account.
5. Disallowance of business expenditure under section 37(1) of the Income Tax Act.

Issue 1 - Acceptance of Income:
The assessee appealed against the order of the Ld. Commissioner of Income Tax (Appeals) sustaining various additions to the income declared for assessment. The Tribunal noted that the first ground of appeal was general in nature and did not require specific adjudication.

Issue 2 - Unexplained Cash Credit:
The Assessing Officer (AO) made additions to the income for unexplained cash credits in the bank account. The Tribunal found that the AO did not adequately examine the financial capacity of the alleged lenders and rejected their affidavits without sufficient reasons. Consequently, the Tribunal directed the deletion of a portion of the addition based on the explanation provided by the assessee.

Issue 3 - Treatment of Interest on Unsecured Loans:
The AO disallowed the interest paid on unsecured loans for non-deduction of TDS under section 40(a)(ia) of the Income Tax Act. The Tribunal observed that the CIT (A) failed to consider the argument that the deductee-assessees had paid taxes on the interest income, which should not be treated as income of the assessee. The Tribunal remanded the issue to the AO for verification and fresh findings.

Issue 4 - Unexplained Entries in Bank Account:
Regarding the addition of unexplained entries in the bank account, the Tribunal accepted the explanation provided by the assessee for a portion of the amount, directing the deletion of the corresponding additions.

Issue 5 - Disallowance of Business Expenditure:
The disallowance of business expenditure under section 37(1) was partially sustained by the Tribunal, agreeing with the authorities on disallowance related to personal use of telephone but deleting the disallowance related to travelling and shop expenses due to lack of specific discrepancies.

In conclusion, the Tribunal allowed the appeal of the assessee in part for statistical purposes, providing detailed reasoning and directions for each issue raised in the appeal.