2019 (9) TMI 774 - AT - Income Tax

Addition u/s 68 - unexplained cash credit - non-compliance of notice issued u/s. 133(6) - HELD THAT - As decided in ORISSA CORPORATION PVT. LIMITED 1986 (3) TMI 3 - SUPREME COURT it is for the department to pursue a creditor particularly once the assessee had duly furnished the complete particulars of the person from whom monies have been received by the assessee. In absence of such a burden having been discharged, the AO could not have mechanically proceeded to make impugned addition in the instant case. It is a settled law that non-compliance of notice issued u/s. 133(6) of the Act to all the entities giving unsecured loan cannot be a basis to make the addition u/s. 68 . The nature of income and source of income can be examined only by the AO of the lenders and not by the AO of the assessee. In this case there is lack of enquiry by the AO to rebut the burden discharged by the assessee as no enquiries were made either from corporate entity providing unsecured loan or enquiry from AO of such corporate entity or its banker or Registrar of Companies by issuing notice u/s. 131 of the Act - we delete the addition on account of sums received as unsecured loan and erroneously held as unexplained cash credit under section 68 - Decided in favour of assessee Addition on account of alleged excess remuneration paid to the partners and disallowed by invoking clause (v) of section 40(b) - HELD THAT - Remuneration to the working partners are duly authorized by the Partnership deed dated 1.4.2013 and such payment has been made as per clause 7 and 8 of the deed of partnership, working partners and the amount of remuneration payable and the manner of quantifying such remuneration is to be decided mutually between them from time to time. We further note that this disallowance is contrary to the principle of consistency as no disallowance made in the preceding years i.e. from assessment year 2010-11 to 2014-15 and only from the instant assessment year i.e. AY 2015-16 the addition was made which action is not tenable. This view is fortified by the decision of the Hon ble Supreme Court of India in the case of CIT vs. Excel Industries Ltd. 2013 (10) TMI 324 - SUPREME COURT TDS u/s 194C - addition invoking section 40(a)(ia) - HELD THAT - We note that since assessee is not liable to deduct TDS on in interest payment on borrowed loan and the second proviso to section 40(a)(ia) of the Act is retrospective, therefore, the provisions u/s 40(a)(ia) of the Act read with section 194A of the Act were inapplicable and as such, disallowance so made is not in accordance with law. In any case since the payee had paid the taxes on the interest paid by the assessee, no disallowance was warranted in view of second proviso to section 40(a)(ia) of the Act. Accordingly, the addition confirmed by the Ld. CIT(A) is hereby deleted - Assessee appeal allowed.

Summary

Issues Involved:
1. Addition of ?62,50,000 representing alleged unexplained unsecured loans under Section 68 of the Income Tax Act.
2. Disallowance of ?18,00,000 representing alleged excess partners' remuneration under Section 40(b)(v) of the Income Tax Act.
3. Disallowance of ?7,69,097 representing interest paid by invoking Section 40(a)(ia) of the Income Tax Act.
4. Jurisdictional issues regarding additions made beyond the scope of assessment.

Issue-wise Detailed Analysis:

1. Addition of ?62,50,000 Representing Alleged Unexplained Unsecured Loans under Section 68 of the Income Tax Act:
The Assessee argued that the Ld. CIT(A) erred in upholding the addition of ?62,50,000 as unexplained unsecured loans from three parties: M/s Multi Brand Trading Corporation (?27,50,000), GST Corporation Ltd. (?30,00,000), and Prem Dua (?5,00,000). The Assessee contended that confirmations, income tax particulars, and account payee cheque details were provided, discharging their initial burden. The Tribunal found that the Assessee had furnished substantial documentary evidence, including audited financial statements, confirmations from lenders, and bank statements. It was noted that the lenders were corporate entities assessed to tax, and the transactions were through banking channels. The Tribunal held that the Assessee had successfully discharged the burden of proof regarding the unsecured loans, and the AO failed to conduct further inquiries. Consequently, the addition of ?62,50,000 was deleted.

2. Disallowance of ?18,00,000 Representing Alleged Excess Partners' Remuneration under Section 40(b)(v) of the Income Tax Act:
The Assessee challenged the disallowance of ?18,00,000 on the grounds that the partnership deed dated 01.04.2013 authorized the remuneration to the working partners. The Tribunal noted that the remuneration was consistently allowed in preceding and succeeding assessment years. The partnership deed specified the manner of quantifying the remuneration, which was mutually decided by the partners. The Tribunal emphasized the principle of consistency and found the disallowance contrary to the established practice. Thus, the disallowance of ?18,00,000 was deleted.

3. Disallowance of ?7,69,097 Representing Interest Paid by Invoking Section 40(a)(ia) of the Income Tax Act:
The Assessee argued that the provisions of Section 40(a)(ia) read with Section 194A were inapplicable as the payee had paid taxes on the interest received. The Tribunal agreed that the second proviso to Section 40(a)(ia) is retrospective, and since the payee had paid the taxes, no disallowance was warranted. Accordingly, the disallowance of ?7,69,097 was deleted.

4. Jurisdictional Issues Regarding Additions Made Beyond the Scope of Assessment:
The Assessee contended that the AO acted beyond jurisdiction by making additions not covered under the computerized aided selection of scrutiny cases. The Tribunal did not specifically address this issue in detail but focused on the substantive grounds of appeal.

Revenue’s Cross Appeal:
The Revenue challenged the deletion of ?7,60,20,000 by the Ld. CIT(A), arguing that the genuineness, creditworthiness, and identity of lenders were not established as several parties did not respond to notices under Section 133(6). The Tribunal upheld the CIT(A)'s findings, noting that the Assessee provided sufficient evidence, including loan confirmations, bank statements, and ITRs of the parties. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal.

Conclusion:
The Tribunal allowed the Assessee's appeal, deleting the additions and disallowances made by the AO and confirmed by the CIT(A). The Revenue's cross appeal was dismissed, upholding the CIT(A)'s deletion of ?7,60,20,000.