2018 (1) TMI 330 - AT - Income Tax

Unexplained cash credit u/s 68 - Held that - The assessee had filed its income of return declaring the taxable income ₹ 2,53,39,948/- which fact is verifiable from the assessment order itself. The assessee company has share capital to the tune of ₹ 41.09 lacs and reserves and surpluses excluding share premium received during this year to the extent of ₹ 2,91,00,000/-. The assessee had turnover of ₹ 51.90 crores. These facts and figures depict that assessee is an existing profit making company and therefore, issuance of shares at a premium is justified. All the 3 ingredients required to be established u/s. 68 are established. We further find that the case laws cited by the Ld. DR are distinguishable to the facts of the present case and therefore are not applicable at this juncture. Therefore, the addition made by the AO treating the share capital and share premium as unexplained cash credit u/s 68 of the IT Act was not justified, hence, the same was rightly deleted by the Ld. CIT(A), which does not need any interference on our part, therefore, we uphold the action of the Ld. CIT(A) on this issue and reject the ground no. 1 raised by the Revenue. Disallowance of interest u/s. 36(1)(iii) - Held that - The copy of the bank statement of Axis Bank is filed at page 75 and 76 of the paper book. The above facts prove that prior to 16.07.2008 there were no interest bearing funds taken by the assessee except vehicle loans taken in earlier years. This goes to establish that if any investment or advance was made prior to that date, the same was given out of from the assessee s own funds or out of non interest bearing funds, except the amount of ₹ 5 lacs given to Mr. Mahadev Prasad this amount of loan was given to him on 21.7.2008 and it was given out of interest bearing funds, hence, proportionate interest for eight months @ 12% was rightly considered for disallowance which amounts to ₹ 41,750/-. Keeping all we are of the considered view that the proportionate disallowance of interest on the loans and advances comes to ₹ 41,750/- only u/s. 36(1)(iii) hence, the proportionate disallowance of interest charged u/s. 36(1)((iii) was rightly deleted to the extent of ₹ 69,07,310/- and ₹ 41,750/- was rightly confirmed, which does not need any interference on our part, therefore, we uphold the action of the Ld. CIT(A) on this issue and reject the ground no. 2 raised by the Revenue.

Summary

Issues Involved:
1. Deletion of addition of ?4,38,48,000/- made by the AO under Section 68 of the Income Tax Act, 1961.
2. Deletion of disallowance of interest under Section 36(1)(iii) of the Income Tax Act amounting to ?69,07,310/-.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?4,38,48,000/- under Section 68:

The assessee received share capital of ?31,32,000/- and share premium of ?4,07,16,000/- from M/s Tarun Vanizya Pvt. Ltd. The AO treated this as unexplained cash credits due to insufficient income sources of the lender company. The AO also noted that the lender company had negligible profits and turnover, questioning the genuineness of the transaction. Despite requests, the assessee did not produce the Directors of the lender company.

The assessee provided several documents, including confirmation from Tarun Vanizya Pvt. Ltd., PAN card, IT return, bank statement, audited financial accounts, and Form No. 2 submitted to the Registrar of Companies. The assessee explained that the funds were generated by liquidating past investments worth ?4,58,95,000/-.

The Tribunal found that the assessee had satisfactorily established the identity, creditworthiness, and genuineness of the transaction. The lender company had sufficient funds from liquidated investments, and the AO did not provide evidence of accommodation entries. The Tribunal upheld the CIT(A)'s decision to delete the addition, noting that the AO's observations regarding the production of Directors were incorrect as no specific directions or summons were issued.

2. Deletion of Disallowance of Interest under Section 36(1)(iii):

The AO disallowed ?69,49,060/- out of total interest payment of ?87,68,187/- on the grounds that the assessee had diverted interest-bearing loans to its group companies and relatives. The assessee argued that the fresh investment during the year was only ?64,53,300/- and that prior to 01.04.2008, there were no interest-bearing loans except a vehicle loan. The assessee had taken a cash credit facility of ?8 crore on 16.07.2008 and a term loan of ?1 crore on 11.02.2009.

The Tribunal found that the investments and advances made prior to the loans were from the assessee's own funds or non-interest-bearing funds, except for ?5 lacs given to Mr. Mahadev Prasad, which was rightly disallowed proportionate interest of ?41,750/-. The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?69,07,310/- and confirmed the disallowance of ?41,750/-.

Conclusion:

The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decisions on both issues. The deletion of the addition under Section 68 and the disallowance of interest under Section 36(1)(iii) were found to be justified based on the evidence and circumstances presented.