2020 (9) TMI 406 - AT - Income Tax

Disallowance u/s. 36(1)(iii) - Interest-free advances by the assessee-proprietor to his close relatives and to an associate concern - HELD THAT - It is the statement of affairs, i.e., the balance-sheet, both as at the beginning and the end of the period under reference, i.e., f.y. 2008-09, that shall, in a large measure, clarify the various sources and application of funds, demonstrating the utilization of borrowed funds during the relevant year. This is precisely what the assessee was required to do. Why, in a case of variety of sources and application of funds, directed for specific purposes or otherwise, it is the fund flow (or cash flow) statement for the year that may, in addition, be required to throw light on the said utilization. Rather, as afore-noted, the assessee s principal borrowings are secured loans (at least as on 31.3.2009), so that an adequate asset base comprising the security, would itself exhibit the utilization thereof for the stated purpose - matter, accordingly, i.e., in view of the foregoing, is remitted to the file of the AO to allow the assessee opportunity to present his case. Under-valuation of closing stock - HELD THAT - There has been no examination of the facts. What, then, is the basis for the Revenue to contend that the assessee had incurred a cost higher than ₹ 300/- per sq. ft. for the Township project? We could understand where the Revenue had based its charge of under-valuation w.r.t. the assessee s accounts, or found them unreliable, which is not so. The stated basis, as afore-noted, is wholly presumptuous. Thus, notwithstanding the fact that the assessee has not furnished the cost details, as it ought to have, we find no reason for remission. We have already observed that at no stage was the assessee called upon to prove his case. The onus to establish escapement of income is on the Revenue, which it has completely failed to, with there being no charge of the assessee being not cooperative, or having not, on asking, furnished the relevant details. It is a clear case of non-application of mind by the Revenue. It would therefore be unfair to call upon the assessee to, after lapse of a number of years, justify its case. The addition is without any basis, much less valid, as well as sans any factual finding, and deserves to be deleted. We direct so. Needless to add, the opening stock (for the following year) shall be the closing stock as reflected in the assessee s final accounts for the current year, i.e., as on 31/3/2009.

Summary

Issues Involved:
1. Disallowance under section 36(1)(iii) of the Income Tax Act.
2. Under-valuation of closing stock.
3. Addition for interest accrued on FDRs.

Issue 1: Disallowance under section 36(1)(iii) of the Income Tax Act:
The appeal contested the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009-10. The first issue was regarding the disallowance under section 36(1)(iii) of the Act. The Assessing Officer disallowed interest on borrowed capital due to interest-free advances made by the assessee to relatives and an associate concern. The disallowance was confirmed in the first appeal based on lack of commercial expediency. However, the Tribunal observed that the assessee had not provided the necessary information to substantiate the claim of sufficient interest-free capital to fund the advances. The matter was remitted to the AO for a fresh decision based on factual findings and material evidence.

Issue 2: Under-valuation of closing stock:
The second issue involved the under-valuation of closing stock in the real estate business. The AO inferred under-valuation for one of the projects based on location and cost variations among projects. The Tribunal found the AO's inference unfounded as the project in question was located on the outskirts, where land prices are lower. The Tribunal noted discrepancies in project sanction dates and emphasized the lack of a valid basis for comparison. The Tribunal criticized the CIT(A) for misdirection and lack of factual findings. The Tribunal held that the onus to establish under-valuation was on the Revenue, which failed to do so. The addition was deemed baseless and deleted, directing the use of closing stock as per the assessee's final accounts for the following year.

Issue 3: Addition for interest accrued on FDRs:
The third issue pertained to an addition for interest accrued on FDRs not returned. The amount was not pressed by the counsel during the hearing and was dismissed accordingly.

In conclusion, the Tribunal remitted the first issue back to the AO for a fresh decision based on factual findings. The second issue of under-valuation of closing stock was decided in favor of the assessee, with the addition being deleted due to lack of valid grounds. The third issue related to interest accrued on FDRs was dismissed as not pressed. The appeal was partly allowed and partly allowed for statistical purposes.