2019 (4) TMI 1647 - AT - Income Tax

Interest charged on the debit balance of the partner Shri Vinod Sharma - CIT (A) deleted the addition - HELD THAT - Audited P L account together with the computation of income filed before the concerned AO clearly revealed that the appellant did not pay any interest to any of its partners on its credit balances. At the same times, the over drawal by the partner Sh. Vinod Sharma, from the firm s capital was not made out of interest bearing funds of the firm. In such circumstances any interest free advances given to its partners by the appellant firm could not be made the subject matter of addition on the ground of notional receipt in the form of interest. Amount shown as interest paid to Usha Sharma by the AO in his order in fact represented the share of profit and not interest payable to her as wrongly understood by the AO. As a result of such a mistake in reading the P L account of the appellant an incorrect inference that the appellant firm ought to have charged interest on the debit balance of Vinod Sharma leading to the addition in the hands of the firm on account of debit balance in the books of the appellant firm which was calculated @ 12% Notional interest on interest free advances to the suppliers - CIT (A) deleted the addition - HELD THAT - Addition so made has no leg to stand on as the facts pointed out by the appellant accorded with the claim pressed by it in the appellate proceedings that it was not liable to receive any interest on advances given to suppliers as it did not pay any such interest to its suppliers. Also it is well settled law that notional additions are not tenable in law as held by the Hon ble Apex Court in the case of CIT vs. Excel Industries Ltd 2013 (10) TMI 324 - SUPREME COURT as held no real income but only hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic CIT (A) violated the provisions of Rule 46A of the Rules - production of books of accounts - HELD THAT - No specific error or mistake has been highlighted by the Ld. DR in the aforesaid factual inference other than to suggest that the books of accounts were not produced on 6.3.2013. However, having regard to the voluminous evidence enclosed with the replies and placed as part of paper book, we find no infirmity in the conclusion of the CIT (A) that once complete details in respect of books of account as above were produced and accepted there remained no valid justification for the AO to allege that books of account were not produced by the assessee firm, particularly when the trading results as declared have been accepted as such. Accordingly, we are unable to take a view different from that of the Ld. CIT (A) and dismiss ground no. 5. Addition being cash deposited in the bank by close relative of the assessee - AO noted that the partners of the assessee firm and their daughters had cash deposits in their independent bank accounts used for carrying on their businesses which sums were, thereafter, transferred to the assessee firm and, therefore, it was held that the sums transferred represented income from undisclosed sources of the assessee firm - HELD THAT - Once the assessee firm has received money through banking channels from its partners/their daughters who have duly deposed and confirmed the transaction/s and have also supported the same with documentary evidence/s then the addition, without any evidence/s to the contrary, is absolutely without any force of law and unsustainable. It is well settled law that surmises, conjecture and suspicion can never be resorted to make addition u/s 68 of the Act. The AO has proceeded to make the addition on an assumption that the cash deposited in the proprietorship concern of the partners and their daughter is the cash of the assessee. No basis whatsoever has been stated in the order of assessment for such a farfetched assumption. - Decided against revenue Cash deposited in the two bank accounts out of the cash withdrawals made by the assessee firm - HELD THAT - There were cash withdrawals from the bank to the extent of ₹ 2,18,20,000/- and also cash sales to the extent of ₹ 31,86,359/-. Under such circumstances, once the trading results and the cash flow statement filed during the assessment proceedings have been accepted, we find no error in the action of the CIT (A) in deleting the addition to the extent to the sum withdrawn in cash from the bank and cash sales duly declared and accepted in the order of assessment. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest on loans utilized for business purposes.
2. Excessive interest paid to a specific individual.
3. Notional interest on cash withdrawn and redeposited.
4. Disallowance of certain business expenses.
5. Violation of Rule 46A by the CIT (A).
6. Addition of unexplained cash deposits in the bank.
7. Acceptance of the theory that cash deposits were from cash withdrawals.
8. General grounds for modifying the order.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Loans Utilized for Business Purposes:
The assessee's appeal contended that the interest paid on loans utilized for business purposes was disallowed incorrectly by the CIT (A). The CIT (A) upheld the disallowance, stating that the assessee could not demonstrate with evidence the use of such loans for business purposes.

2. Excessive Interest Paid to a Specific Individual:
The CIT (A) upheld the disallowance of ?47,250/- representing alleged excessive interest paid to Ms. Priyanka Gupta by the appellant firm. The assessee did not press this issue further.

3. Notional Interest on Cash Withdrawn and Redeposited:
The CIT (A) made an arbitrary addition by concluding that interest chargeable at 12.5% per annum on the amount of withdrawn cash, claimed to have been redeposited, should be considered as income from other sources. The assessee argued that this addition was based on whimsical assumptions without granting any opportunity to prove otherwise.

4. Disallowance of Certain Business Expenses:
The CIT (A) upheld the disallowance of ?56,544/- being 10% of the expenses claimed by the appellant and ?24,655/- being 10% of the expenses on account of alleged personal use.

5. Violation of Rule 46A by the CIT (A):
The department contended that the CIT (A) violated Rule 46A by entertaining the affidavit and the paper book without confronting the Assessing Officer (AO). The CIT (A) held that the assessee was denied a valid opportunity during the assessment proceedings, and all documents forming part of the paper book were filed along with the replies, thus no additional evidence was relied upon.

6. Addition of Unexplained Cash Deposits in the Bank:
The AO added ?2,66,81,915/- as unexplained cash deposits in the bank accounts of the partners and their daughters, which were transferred to the assessee firm. The CIT (A) deleted the addition, stating that the partners and their daughters had independent businesses and provided sufficient evidence to support the cash deposits.

7. Acceptance of the Theory that Cash Deposits were from Cash Withdrawals:
An addition of ?2,45,40,167/- was made as unexplained cash deposits. The CIT (A) deleted the addition to the extent of ?2,38,56,526/-, accepting the assessee's explanation that the deposits were out of cash withdrawals. The remaining ?6,83,641/- was sustained.

8. General Grounds for Modifying the Order:
The department's appeal included general grounds for modifying the order of the CIT (A) and restoring the AO's order. These grounds were dismissed as they did not require specific adjudication.

Conclusion:
The appeal of the revenue was dismissed, and the CIT (A)'s order was upheld. The CIT (A) found no reason to interfere with the deletion of notional interest additions, upheld the deletion of unexplained cash deposits, and found no violation of Rule 46A. The assessee's cross-appeal was dismissed as withdrawn. The final result was the dismissal of both appeals.