2020 (10) TMI 1204 - AT - Income Tax

Unexplained cash credit u/s 68 - professional fees received - HELD THAT - Action of the AO in treating the sum shown as income in the form of professional fees received as unexplained credit u/s. 68 of the Act cannot be sustained. There is no dispute with regard to the identity and capacity of VHPL. The genuineness of the transaction cannot be disputed merely on the basis that no services were rendered. The basic presumption u/s. 68 is that the sum treated as unexplained has to be assessee s money. TDS has been deducted on the sum payable by VHPL. The AO himself has found that VHPL does not have employees and assessee catered to the needs of VHPL. In these circumstances, the addition of ₹ 6 lakhs u/s. 68 was not justified. Disallowance of expenses - Rental expenditure treated as unexplained expenditure u/s. 69C - HELD THAT - The assessee has explained that apart from the rent for godown of the previous year, which was allowed by the AO at ₹ 15,600, the balance amount of ₹ 2,11,542 was rent paid to accommodation provided to the assessee s director. This fact is evidenced in the Notes to the Accounts at Point No.9. In these circumstances, the addition u/s. 69C of the Act was not justified. Disallowance of depreciation is use of BMW car by the director of assessee - HELD THAT - There is use of car by director of company for the purpose of business of assessee and this is not disputed. There is nothing to show that property was used only for personal purposes. The car in question was a business asset and depreciation had to be allowed on the same. The AO could have disallowed depreciation on the ground of personal user in respect of a particular item of depreciable asset. He could not have disallowed the entire claim of depreciation. Disallowance of depreciation on the ground that there was no business activity, cannot also be sustained, for the reasons which will be given later. Employee cost was salary paid to 3 employees and had to be allowed as a deduction - no dispute that salary was paid to employees of the assessee. No valid justification for the comments and conclusions of AO in the order of assessment which was endorsed by the CIT(Appeals). Whether lack of business activity can result in disallowance of expenses incurred by the assessee? - HELD THAT - Business of assessee had not come to a complete halt and it was a going concern and expenses in question had to be incurred to keep the concern going. We are therefore of the view that the expenses in question should be allowed as a deduction. Tribunal in the appeal of the revenue for AY 2009-10, on the aforesaid reasoning had upheld the order of CIT(Appeals) deleting the addition made by AO by way of disallowance of expenses. We are therefore of the view that the expenses claimed by the assessee should be allowed as a deduction and it has also to be held that income of ₹ 6 lakhs has to be regarded as operating business income. Disallowance of expenses u/s. 14A - HELD THAT - Disallowance u/s.14A as made by the assessee in computation of income has already been subsumed in total income declared by the assessee. Since the total income of assessee has been computed by the AO in the order of Assessment with the starting point as loss declared by the assessee in the return of income, which also includes disallowance u/s. 14A, there was no occasion to further make a disallowance u/s. 14A. Disallowance made by the assessee is greater than the disallowance made by the AO. In these circumstances, we hold that no separate disallowance u/s. 14A is warranted in the facts and circumstances of the present case.

Issues Involved:
1. Disallowance of expenses amounting to ?1,22,50,626.
2. Addition of ?6 lakhs as unexplained credit under Section 68.
3. Disallowance of expenses under Section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Amounting to ?1,22,50,626:

The assessee, a company engaged in distributing security products, filed a return of income declaring total income at NIL for AY 2010-11. The AO examined the Profit & Loss account and found various expenses claimed by the assessee, including depreciation, employee costs, repairs, maintenance, and other business expenditures. The AO disallowed these expenses, concluding that the business income was not genuine and the business expenditure was not substantiated with supporting documents. The CIT(Appeals) upheld the AO's decision, stating that the assessee did not provide evidence to show that the business had not ceased and that the expenses were incurred to keep the business alive.

Before the Tribunal, the assessee argued that the business had not closed but was experiencing a temporary lull. The Tribunal agreed with the assessee, citing judicial precedents that expenses incurred to keep a business going, even in the absence of income, should be allowed as a deduction. The Tribunal noted that the business was a going concern and that the expenses were necessary to keep the concern operational. Therefore, the Tribunal allowed the expenses claimed by the assessee as a deduction.

2. Addition of ?6 Lakhs as Unexplained Credit Under Section 68:

The AO treated ?6 lakhs shown as income from professional fees as unexplained credit under Section 68, citing that the services rendered could not be substantiated. The CIT(Appeals) upheld this addition.

The Tribunal, however, found that there was no dispute regarding the identity and capacity of the payer, VHPL, and that TDS had been deducted on the amount. The Tribunal concluded that the genuineness of the transaction could not be disputed merely because no services were rendered. Therefore, the addition of ?6 lakhs under Section 68 was not justified and was deleted.

3. Disallowance of Expenses Under Section 14A:

The AO disallowed ?7,85,024 under Section 14A, which pertains to expenses incurred to earn exempt income. The CIT(Appeals) noted that the assessee had already disallowed ?9,71,314 in its computation of total income and held that no further disallowance under Section 14A was warranted. However, the CIT(A) added that if the appellate authorities allowed the assessee's claim for deduction, the disallowance under Section 14A would survive.

The Tribunal found that the disallowance made by the assessee was greater than that made by the AO and that this disallowance had already been subsumed in the total income declared by the assessee. Therefore, the Tribunal held that no separate disallowance under Section 14A was warranted.

Conclusion:

The Tribunal allowed the appeal by the assessee, holding that the expenses claimed should be allowed as a deduction, the addition of ?6 lakhs under Section 68 was not justified, and no separate disallowance under Section 14A was warranted. The appeal was partly allowed.

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