2018 (2) TMI 251 - AT - Income Tax

Addition to capital account of partners made u/s 68 - assessee failed to provide the evidence to substantiate the source of capital introduced - Held that - From CIT(A) s finding, we find that he has passed a speaking and detailed order whereby he has discussed the explanations and evidences in respect of them with respect to various persons. The learned CIT(A) has made a finding of fact that the creditors had advanced money to the assessee on interest @12% per annum and all the depositors were having PAN & had filed confirmation and therefore, has rightly arrived at the conclusion that the additions were not sustainable and therefore, we do not find any infirmity in the order of CIT(A). In view of the above, ground No. 3 is also rejected. Disallowance of interest on term loan - allowable busniss expenses - Held that - We find that CIT(A) has made a finding of fact that the assessee was already running a unit and it had installed a new machinery and interest was paid for the loan taken for the new plant & machinery installed in already running unit and therefore, it was not a new business which had come into existence and therefore, proportionate interest relating to the period before start of machinery was an allowable expense. Addition on account of sundry creditors consisting of three parties - Held that - Assessing Officer during remand proceedings had accepted the explanation in respect of two creditors for which necessary confirmations were filed and in respect of one creditor amounting to ₹ 1,61,885/- he has not accepted the same as the necessary confirmation was not filed and therefore, he had recommended the addition to the extent of ₹ 1,61,885/- only. However, learned CIT(A) has deleted the same also by relying on certain case laws which states that addition of sundry creditors cannot be made u/s 68 of the Act. Revenue appeal dismissed.

Issues Involved:
1. Deletion of addition made under Section 68 for capital introduced by partners.
2. Deletion of proportionate disallowance of interest paid on capital contribution.
3. Restriction of addition on account of unexplained credits and disallowance of interest on unexplained unsecured loans.
4. Deletion of disallowance of interest on term loan.
5. Deletion of addition on account of unexplained Sundry Creditors.

Detailed Analysis:

1. Deletion of addition made under Section 68 for capital introduced by partners:
The Assessing Officer (AO) made additions totaling ?57,00,000/- on account of capital contributions by various partners, treating them as unexplained cash credits under Section 68 of the Income Tax Act. The CIT(A) deleted these additions based on additional evidence submitted during the remand proceedings. The AO, in the remand report, accepted the explanations for most partners but recommended additions for a few. CIT(A) further reviewed and accepted the explanations for all partners, including those not initially accepted by the AO.

2. Deletion of proportionate disallowance of interest paid on capital contribution:
The AO disallowed interest paid on the unexplained capital contributions. This disallowance was also deleted by CIT(A) in line with the deletions of the principal amounts. The CIT(A) found that the sources of the capital contributions were adequately explained, thus the interest disallowance did not survive.

3. Restriction of addition on account of unexplained credits and disallowance of interest on unexplained unsecured loans:
The AO made a significant addition of ?90,54,000/- and disallowed interest of ?3,96,569/- for unexplained unsecured loans. CIT(A) restricted this addition to ?2,50,000/- and interest disallowance to ?11,877/-. CIT(A) examined the explanations and evidence for each creditor, accepting most of them as satisfactorily explained. The AO's approach of doubting creditworthiness based on the absence of bank statements or cash deposits was not upheld by CIT(A), who relied on various judicial precedents to support the assessee's case.

4. Deletion of disallowance of interest on term loan:
The AO disallowed ?2,09,499/- as interest on a term loan, treating it as pre-operative expenses. CIT(A) found that the interest was for a new machinery installed in an existing unit, thus allowable as revenue expenditure. CIT(A) relied on judicial precedents to conclude that interest paid for expansion of an existing business is deductible under Section 36 of the Act.

5. Deletion of addition on account of unexplained Sundry Creditors:
The AO added ?43,25,930/- for unexplained sundry creditors. CIT(A) deleted this addition, noting that the creditors were for trade purposes and the transactions were genuine. CIT(A) relied on judicial precedents which state that additions under Section 68 cannot be made for trade creditors if the purchases are accepted as genuine. The AO's acceptance of the genuineness of purchases and depreciation claims further supported CIT(A)'s decision.

Conclusion:
The appeal by the Revenue was dismissed, with CIT(A)'s detailed and reasoned order being upheld. The CIT(A) provided comprehensive explanations for deleting or restricting the additions and disallowances made by the AO, relying on additional evidence, remand reports, and relevant judicial precedents.

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