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2019 (7) TMI 1437 - AT - Income TaxDisallowance u/s 36(1)(iii) - addition as assessee has diverted its interest bearing funds for purchase of an industrial plot at Greater Noida which has not been put to use for business - CIT(A) enhancing the disallowance - HELD THAT - The own capital funds of the assessee is far more than the investment made in the industrial plot and the income of the assessee during the impugned assessment year is more than 1.06 crores. Therefore, no disallowance u/s 36(1)(iii) is called for. We find merit in the above argument of assessee. It is an admitted fact that in the past assessment years the Assessing Officer has not made any disallowance u/s 36(1)(iii) on account of purchase of this industrial plot out of borrowed funds. No disallowance has been made in assessment year 2009-10 and 2010-11 and although disallowance has been made u/s 36(1)(iii) for assessment year 2008-09, however, the disallowance is for some other reasons and not on account of investment in this particular industrial plot. Subsequent to passing of the order for impugned assessment year which was upheld by the CIT(A) the A.O. in the order passed u/s 153A/143(3) for assessment year 2012-13, has not made any such disallowance. We, therefore, find merit in the argument of the assessee that following the rule of consistency no disallowance u/s 36(1)(iii) is called for. Even otherwise, the bank account of the assessee is a mixed one where the own funds as well as the business receipts are deposited. The own capital of the assessee is far more than the investment made for the industrial plot which, according to the Assessing Officer, has not been put to use for business purposes. The income of the current year of the assessee of ₹ 1.06 crores is much more than the investment towards industrial plot. We, therefore, hold that no disallowance could be made u/s 36(1)(iii) on account of the said investment in the industrial plot in view of the decision of the Hon'ble Bombay High Court in the case of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . The grounds of appeal No.1 and 2 by the assessee are, therefore, allowed. Addition on account of loan received u/s 68 - HELD THAT - We find force in the argument of the ld. counsel for the assessee that when the Assessing Officer has not doubted the identity and credit worthiness of the party and genuineness of the said advance of ₹ 1 crore in the subsequent year, how can he disbelieve the amount of advance of ₹ 29,50,000/- during the current year especially when the assessee has furnished all the details such as the copy of confirmation, bank account statements reflecting the advances so received, copies of ITRs/audited financial statements, etc. Further, the amount so obtained as advance has also been repaid by the assessee in the subsequent years and it is not a case of bogus share capital. Therefore, various decisions relied on by the CIT(A) as well as the DR are not applicable to the facts of the present case. Further a perusal of the balance sheet of the loan creditor shows that it has got sufficient share capital and free reserves of its own and, therefore, merely because the assessee has incurred loss during the current year should not be a ground for making the addition u/s 68 especially when in subsequent year more than ₹ 1 crore has been accepted by the AO in the order passed u/s 153A/143(3). We, therefore, set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of ₹ 29,50,000/-. So far as the amount of ₹ 5 lakhs received from Mahesh Finsec Pvt Ltd. is concerned, we find M/s Mahesh Finsec Pvt. Ltd., has filed the return of income for assessment year 2010-11 declaring total income of ₹ 2,35,251/- and ₹ 26,97,925/- for assessment year 2011-12 in the name of M/s RPL Capital Finance Ltd. after its merger with the said company. The balance sheet of RPL Capital Finance Ltd., as on 31st March, 2011 shows capital and free reserves of ₹ 53.78 crores. When the assessee has filed the full details of the said lender along with the copy of the income tax return, audited financial statements, bank statements, confirmation, etc., we are of the considered opinion that the assessee has discharged the onus cast on it by proving all the three ingredients of section 68, namely, the identity and credit worthiness of the persons and the genuineness of the transaction. Further, it is not a case of issue of any bogus share capital with high premium. We, therefore, set aside the order of the CIT(A) on this issue and direct the AO to delete the addition. The grounds raised by the assessee are accordingly allowed.
Issues Involved:
1. Disallowance under Section 36(1)(iii) of the Income Tax Act. 2. Addition under Section 68 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance under Section 36(1)(iii) of the Income Tax Act: Facts and Arguments: The assessee, an individual engaged in business through a proprietorship concern, claimed interest expenses of ?12,53,670/-. The Assessing Officer (AO) disallowed ?2,20,164/- under Section 36(1)(iii) on the ground that the interest was paid for capital borrowed for an industrial plot at Greater Noida, which was not put to business use. The CIT(A) not only upheld this disallowance but enhanced it to ?6,39,600/-, without giving a show-cause notice, which was challenged by the assessee. Key Findings: - The CIT(A) observed that the property was purchased using funds from an overdraft account with PNB, which had a persistently negative balance. - The CIT(A) concluded that the proviso to Section 36(1)(iii) applied as the property was not put to use and the borrowed funds were used for its acquisition, justifying the enhanced disallowance. Tribunal's Decision: - The Tribunal noted that in past and subsequent years, no disallowance under Section 36(1)(iii) was made for the same investment. - The Tribunal upheld the rule of consistency, citing various judicial precedents, including decisions from the Hon'ble Karnataka High Court and Delhi High Court, which emphasized consistency in tax assessments. - It was observed that the assessee's own capital funds were significantly higher than the investment in the industrial plot, and the income for the year was substantial. - The Tribunal concluded that no disallowance under Section 36(1)(iii) was warranted, allowing the assessee's appeal on this ground. 2. Addition under Section 68 of the Income Tax Act: Facts and Arguments: The AO made an addition of ?34,50,000/- under Section 68, questioning the creditworthiness of two parties from whom advances were received: Mahesh Finsec Pvt. Ltd. (?5,00,000) and Indian Probuild Pvt. Ltd. (?29,50,000). The CIT(A) upheld this addition. Key Findings: - The assessee provided confirmations, bank statements, ITR copies, and audited financial statements for both parties. - For Indian Probuild Pvt. Ltd., the assessee had received and repaid substantial amounts, and the AO did not make similar additions in subsequent years. - For Mahesh Finsec Pvt. Ltd., the assessee provided detailed financial documents showing significant capital and reserves. Tribunal's Decision: - The Tribunal found that the assessee had discharged the onus of proving the identity, creditworthiness, and genuineness of the transactions. - The Tribunal noted that the AO did not make similar additions in subsequent years for the same parties, reinforcing the assessee's position. - The Tribunal directed the deletion of the addition of ?29,50,000/- from Indian Probuild Pvt. Ltd. and ?5,00,000/- from Mahesh Finsec Pvt. Ltd., allowing the assessee's appeal on this ground. Conclusion: The Tribunal allowed the appeal partly, holding that no disallowance under Section 36(1)(iii) was justified and directing the deletion of the additions made under Section 68. The decision was pronounced in the open court on 25.07.2019.
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