2020 (2) TMI 885 - AT - Income Tax

Unexplained Unsecured Loans - Addition u/s 68 - consequential disallowance on account of interest paid on above Loans - HELD THAT - Since all the confirmations from the depositors have been submitted, so there was no conclusion of any afterthought or make believe transactions. All the transactions are duly recorded in the regular books of accounts. Therefore, genuineness of those cannot be doubted. Even otherwise, Hon'ble jurisdictional Gujarat High Court in the case of DCIT Vs. Rohini Builders 2001 (3) TMI 9 - GUJARAT HIGH COURT along with PAN and confirmation, then in that eventuality no additions are sustainable. Even in the case of CIT Vs. Ranchhold Jivabhai Nakhava 2012 (5) TMI 186 - GUJARAT HIGH COURT it has categorically been held that when once the initial onus has already been discharged by the assessee, then in that eventuality it was the duty of the ld.AO to ascertain from the ld.AO s of those lendors, whether in the respective returns they have shown existence of such amount of money or not. The ld.AO in the present case has not carried out any such exercise as has been laid down by the Hon'ble Gujarat High Court in the case of CIT vs. Ranchhod Jivabhai Nakhava(supra). Additions made by the ld.AO in the case of assessee are against the principles laid down u/s.68 - no addition could have been made by the ld.AO as in the present case the assessee has already discharged his initial onus. Therefore, the unsecured loan received by the assessee cannot be termed as unexplained. Thus, no addition on that account is sustainable. Disallowance being 20% general labour wages, workers salaries and freight expenses of lumsum basis - only reason for making disallowances was that assessee was not maintaining any register and had only submitted self-made vouchers - HELD THAT - We notice that in this particular year, there are less expenditure, then that occurred in the earlier years. Therefore, keeping in view of the above submissions, we are of the view that there is no justification of making any disallowance on account of expenses incurred by the assessee. When the assessee has substantiated the same by producing documents, therefore, we delete the addition/disallowance, accordingly Ground No.3 is allowed.

Issues Involved:
1. Addition of ?21,90,000/- for alleged unexplained unsecured loans.
2. Consequential disallowance of ?3,22,637/- on account of interest paid on the above loans.
3. Disallowance of ?12,97,716/- being 20% of general labor wages, worker salaries, and freight expenses on a lump sum basis.

Detailed Analysis:

1. Addition of ?21,90,000/- for Alleged Unexplained Unsecured Loans:

The assessee challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)] confirming the Assessing Officer's (AO) addition of ?21,90,000/- as unexplained unsecured loans. The assessee argued that the identity, creditworthiness, and genuineness of the depositors were established through the submission of PAN cards, election cards, income tax returns, and bank passbooks. The AO's reasons for the addition included the depositors' negligible taxable income and the timing of cash deposits before loan issuance. The assessee countered these points, asserting that the loans were evident from bank passbooks and confirmations, and the depositors' financial means were proven by their returns of income.

The Tribunal noted that the AO had not verified the depositors' financial status with their respective AOs, as required by law. The Tribunal cited precedents from the Gujarat High Court, emphasizing that once the initial burden of proof is discharged by the assessee, the AO must verify the depositors' financial status. The Tribunal concluded that the assessee had adequately demonstrated the genuineness of the loans, thus no addition was warranted.

2. Consequential Disallowance of ?3,22,637/- on Account of Interest Paid on the Above Loans:

Given the deletion of the addition for unexplained unsecured loans, the consequential disallowance of ?3,22,637/- on account of interest paid on these loans was also deleted. The Tribunal reasoned that since the principal amount was not considered unexplained, the interest paid on such loans could not be disallowed.

3. Disallowance of ?12,97,716/- Being 20% of General Labor Wages, Worker Salaries, and Freight Expenses on a Lump Sum Basis:

The assessee contested the disallowance of ?12,97,716/- made by the AO without issuing a show-cause notice, arguing that it violated the principles of natural justice. The AO had disallowed the expenses due to the absence of a register and reliance on self-made vouchers. The assessee explained that the nature of their business, involving illiterate laborers, necessitated self-made vouchers.

The Tribunal observed that the disallowance was made without providing the assessee an opportunity to explain the discrepancies, which breached the principles of audi alteram partem. The Tribunal also noted that the expenses in the current year were lower than those in previous years. Consequently, the Tribunal found no justification for the disallowance and deleted it.

Conclusion:

The Tribunal allowed the assessee's appeal, deleting the additions and disallowances made by the AO. The stay petition filed by the assessee was dismissed as infructuous, given the favorable outcome of the appeal. The order was pronounced in the open court on 14-02-2020.

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