2019 (7) TMI 1262 - AT - Income Tax

Assessment u/s 153A - unexplained advances - in search evidences were found in the form of receipts for payment of ₹ 180 lakhs to Sri Srisaila Babu, GPA holder in cash and ₹ 15 lakhs in cash and ₹ 10 lakhs by DD to Sri Murali Krishna - HELD THAT - In the instant case, the receipts are available evidencing the payment to the builder but no other documents are available at the time of search in the residential premises, evidencing the repayment of the amounts advanced to Sri L. Murali Krishna. There was no agreement or an iota of evidence available in the premises. Having not produced any evidence during the course of search or post search proceedings and failed to produce the books of accounts and confirmation during assessment proceedings, mere oral statements without furnishing the corroborating evidence is not sufficient to hold that the source for the advances are explained or to prove that the amount paid to the builder was returned. AO neither examined Sri Murali Krishna nor examined Sri Srisaila Babu and the reasons for not producing the evidence at the time of search or post search and the assessment proceedings. Therefore, we are of the considered opinion that the issue was not properly verified by the lower authorities to find out the source and the receipt of the amount. It is incumbent upon the AO to verify the bank accounts of the assessee with matching dates of advance as well as the bank accounts of Sri L. Murali Krishna with matching dates for the sources of both the parties. Therefore, we are of the view that the issue needs detailed examination to verify the sources with the bank accounts of the assessee, Sri Murali Krishna and other corroborative evidences. Hence, we are of the considered opinion that the issue should be remitted back to the file of the AO to make detailed examination and decide the issue afresh on merits. - The appeals of the revenue and cross objections of the assessee for the A. Y. 2008-09 and 2009- 10 on this issue are allowed for statistical purposes. Disallowance of expenses as Direct work expenditure, General Expenses and EPUI Expenses - CIT(A) allowed up to 50% - HELD THAT - It is settled issue that the expenditure wholly and exclusively laid for the purpose of the business is to be allowed as deduction and it is the obligation of the assessee to prove that the expenditure with proper evidences. It is incumbent upon the assessee to furnish the names of the persons to whom the payments were made, nature of services rendered by them and the sources of payment. Though the assessee explained the source of payment, the assessee failed to furnish the evidence with regard to payments made. The expenditure of the assessee is income of the recipient. Therefore, for allowing the expenditure, payment should be capable of cross verification. Apart from the above, the AO obliged to see various issues such as the disallowance u/s 40A(3), deduction of TDS, the disallowance u/s 40(i)(a), the allowability of expenditure u/s 37(1) and the illegal payments. In the absence of evidences filed by the assessee to support the expenditure, the AO is incapable of making the cross verification and also it is impossible to decide whether such expenditure was incurred in regular course of business or not. In the normal course these excess expenses also required to be explained with relevant evidences and the reasons. It appears that assessee neither explained before the AO nor before the CIT(A). Though glaring differences were found by the Ld. CIT(A), the CIT(A) considered the trade practices and the explanation offered by the assessee and reasonably allowed 50% of expenditure. Considering all the facts and materials placed before us, we are of the considered opinion that it is also unreasonable to disallow the entire expenditure and restricting the disallowance to the extent of 50% is fair and reasonable. Accordingly, we uphold the order of the Ld. CIT(A) and dismiss the appeals of the revenue, cross objections filed by the assessee as well as the cross appeals filed by the assessee Addition made towards pronotes found in search - whether pro-notes were not financial transactions and they are only paper transactions given for security in the absence of any documentary evidence? - HELD THAT - We are unable to accept the theory of the assessee as well as the executant of the pro-notes that the pro-notes were not financial transactions and they are only paper transactions given for security in the absence of any documentary evidence. Accordingly we reject the argument placed by the assessee that the pro-notes are not financial transactions. We have gone through the pro-notes, the pro-notes are written very clearly that the recipient has received a sum of ₹ 50. 00 lakhs each on 01. 07. 2011 from R. Sulochana Devi and Sri R. Venkatramaiah and as per the contents of the pro-notes, they are genuine transactions with complete details on the pro-notes. Since the valid pro-notes are available with the assessee, during the course of search, as per section 292C of the Act, it is presumed that the assessee had given loans to Sri R. Muthaiah. Since the assessee failed to prove that the pro-notes were obtained only for the purpose of security, we have no hesitation to hold that the promissory notes of ₹ 1. 00 crore (50. 00 lakhs each) on 01. 07. 2011 are genuine transactions, accordingly we uphold the order of the CIT(A) and dismiss the appeal of the assessee. Telescopic benefit - Set off of addition made by the AO relating to pronotes against the undisclosed income admitted by the assessee - HELD THAT - The assessee has claimed for the set off of addition made by the AO against the additional income declared by the assessee in the earlier assessment years. However, the assessee did not furnish the details of expenditure which was bogus. The modus operandi of the expenditure and the generation of cash flow out of the disallowance of expenditure were not explained by the assessee. As per the statement of computation of income, the assessee admitted the additional income disallowing the expenditure. It is seen from the statement of computation of income that the sum was spent and there was no cash balance or generation of cash made out of the disallowance of expenditure. The assessee, even during the appeal hearing also did not explain how the assessee could generate the cash by disallowing the expenditure which was already spent. Though the disallowance of expenditure is hidden the addition, the assessee must explain the modus operandi of inflation of expenditure under each head and also explain the generation of cash for advancing the amount out of sums saved from the inflation of expenditure. In the absence of such details, it is not correct to allow telescopic benefit, hence, we set aside the order of the Ld. CIT(A) and restore the order of the AO. Accordingly, appeal of the revenue is allowed and CO of the assessee is dismissed.

Summary

Issues Involved:
1. Deletion of addition of ?1.80 crores and ?15 lakhs as unexplained investment.
2. Disallowance of expenses under the heads: Direct Work Expenditure, General Expenses, and EPC Expenses.
3. Addition of ?50 lakhs based on promissory notes and allowing telescopic benefit.

Detailed Analysis:

1. Deletion of Addition of ?1.80 Crores and ?15 Lakhs as Unexplained Investment:
The appeals by the revenue and cross appeals by the assessees pertain to the deletion of additions of ?1.80 crores for A.Y. 2008-09 and ?15 lakhs for A.Y. 2009-10 as unexplained investment. During a search, incriminating material was found showing payments towards property purchase. The assessee claimed the amounts were returned by the seller, but failed to provide documentary evidence. The Assessing Officer (AO) treated the amounts as undisclosed income due to lack of evidence. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the additions after considering the remand report, which the revenue appealed against. The Tribunal found the issue was not properly verified and remitted it back to the AO for detailed examination, directing both parties to provide necessary evidence.

2. Disallowance of Expenses Under Various Heads:
The AO disallowed expenses under Direct Work Expenditure, General Expenses, and EPC Expenses due to lack of proper vouchers and supporting evidence. The CIT(A) restricted the disallowance to 50% of the claimed expenses, considering the complexity of the accounts and the business nature. The Tribunal upheld the CIT(A)'s decision, noting that while the assessee failed to substantiate the expenses with proper evidence, it was unreasonable to disallow the entire amount. The Tribunal found the CIT(A)'s approach of disallowing 50% of the expenses to be fair and reasonable.

3. Addition of ?50 Lakhs Based on Promissory Notes and Allowing Telescopic Benefit:
During the search, promissory notes totaling ?50 lakhs were found, which the AO treated as unexplained investment. The assessee claimed the notes were security for business transactions, but failed to provide supporting evidence. The CIT(A) confirmed the addition but allowed a set-off against additional income offered by the assessee in A.Y. 2011-12. The Tribunal upheld the CIT(A)'s decision to treat the promissory notes as genuine financial transactions but set aside the telescopic benefit, as the assessee failed to explain the generation of cash from disallowed expenditure. The Tribunal restored the AO's order, rejecting the telescopic benefit.

Conclusion:
The Tribunal remitted the issue of unexplained investment back to the AO for detailed examination, upheld the CIT(A)'s decision to disallow 50% of the expenses due to lack of proper vouchers, and confirmed the addition of ?50 lakhs based on promissory notes while rejecting the telescopic benefit. The appeals and cross objections were accordingly disposed of.