2018 (7) TMI 657 - HC - Income Tax

Addition being cash found during the course of search on the basis of statement at the time of search - Held that - We fail to appreciate the contention that an assessee will be in a state of shock at the time of the raid. A person who had done no wrong, cannot be shaken by a search and seizure operation. The search admittedly took place on 09-10-2007. The alleged agreement with Smt. Anantha Lakshmi had been entered into by the assessee, according to his subsequent theory, on 18-9-2007. In other words, the assessee, even according to his story, had received the said cash towards part of the sale consideration, just 21 days before the date of conduct of the search. It is quite strange that such a huge amount was kept in the house for nearly 20 days and the assessee, in a state of shock, had forgotten, to recall how he received the said cash, when questioned during the search operations. It is true that at that time when the assessment was completed, Section 269SS was confined only to loans and advances. But the authorities did not invoke Section 269SS to disbelieve the claim of the assessee. The authorities went by the statement of the assessee at the time of the raid and the explanation offered by him subsequently as an after thought and disbelieved the story with which he came up later. Therefore, in our considered view, the reframed substantial questions of law 1 and 2 are liable to be answered against the assessee Addition as interest income - claiming credit for TDS on entire amount in utter disregard to the provisions of Section 145 and method of accounting followed by the assessee? - Held that - Issue as decided in PENDURTHI CHANDRASEKHAR VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-11, HYDERABAD 2018 (3) TMI 799 - TELANGANA AND ANDHRA PRADESH HIGH COURT as held that the finding that the assessee has received interest income but chose to keep it in the account in order to get interest, is in conflict with his previous observations that there is no prohibition for the assessee to withdraw the interest on the unsecured loan in the books of account of the company. Indeed, the Revenue has not disputed the claim of the assessee that the loanee company converted the unsecured loan and unpaid interest into equity shares during the year 2011-12 and accordingly issued equity shares certificates in lieu of repayment of unsecured loans and unpaid interest thereon. As submitted by the learned counsel for the assessee, the AO could have at best directed to restrict the claim of TDS in proportion to the income admitted and to allow the balance in the year in which interest income is admitted on receipt basis - decided in favour of assessee

Summary

Issues:
1. Addition of unexplained cash found during search
2. Addition of interest income on unsecured loans
3. Reframed substantial question regarding interest income

Analysis:

Issue 1: Addition of unexplained cash found during search
The appellant challenged the addition of ?23,35,000 as unexplained cash found during a search operation. The appellant initially provided an explanation for the source of the cash, mentioning contributions from partners and family. However, during the assessment proceedings, the appellant presented a different story involving a sale agreement with another individual. The Assessing Officer, CIT (Appeals), and the Tribunal rejected this revised explanation. The appellant argued that the initial shock during the search should be considered, but the court found it implausible that the appellant could forget the source of such a significant amount kept in the house for nearly 20 days. The court also scrutinized the reliability of the sale agreement presented by the appellant, highlighting discrepancies that raised doubts about its authenticity. Ultimately, the court upheld the decision to add the unexplained cash to the appellant's income.

Issue 2: Addition of interest income on unsecured loans
The second issue pertained to the addition of ?38,74,350 as interest income on unsecured loans advanced to a company. The Assessing Officer added this amount to the appellant's income based on TDS certificates. The CIT (Appeals) upheld this addition, but with a direction to verify the exact amount found during the search. The Tribunal confirmed the addition, leading to the present appeal. The court referred to a similar case where it was established that crediting interest in account books does not imply availability for withdrawal. The court noted that the appellant had converted the unsecured loan into equity shares, indicating that the interest income was not physically available for withdrawal. Therefore, the court ruled in favor of the appellant, aligning with the decision in the referenced case.

Issue 3: Reframed substantial question regarding interest income
The court addressed a reframed substantial question related to interest income, which was previously decided in another case. The court referred to the decision in the previous case where it was established that the appellant did not have physical access to the interest income credited in the account books. The court emphasized that the appellant's ability to withdraw the interest income was restricted due to the conversion of the unsecured loan into equity shares. Consequently, the court ruled in favor of the appellant based on the precedent set in the earlier case.

In conclusion, the court partially allowed the appeal, ruling in favor of the appellant regarding the interest income issue but against the appellant concerning the unexplained cash addition. The court provided detailed reasoning for each issue, emphasizing the importance of credible explanations and legal interpretations in determining the tax liabilities of the appellant.