2021 (8) TMI 983 - AT - Income Tax

Rejection of books of accounts - disallowance of loss for after rejecting the book of accounts by treating the loss claimed by it as bogus in nature - HELD THAT - As decided in own case 2017 (1) TMI 1759 - ITAT AHMEDABAD AO was erroneous as he has selected only few transactions on which only loss has incurred without giving cognizance to the fact that assessee has gained in other transactions with the impugned parties which are very well evidenced with the independent itemwise transaction details forming part of the books of account of assessee -In the present case when the assessee is maintaining regular books of account which are audited and all transactions are fully supported by bills and vouchers, impugned transactions have taken place through banking channels, confirmations have been received from the alleged parties no adversity has been found in the statements recorded by the Revenue of the alleged parties, quantitative records are regularly maintained, similar transactions have not been disputed even in the subsequent assessment u/s 143(3) of the Act as supported by the copy of the order u/s 143(3) of the Act for Asst. Year 2012-13 framed on 13.2.2015. We, therefore, hold that the impugned 15 transactions giving rise to loss of are genuine and cannot be termed as colourable with the intention of evasion of tax and ld. Assessing Officer erred in disallowing the same. - Decided in favour of assessee. Addition made on account of diversion of fund - disallowance of interest expenses - AR before us contended that the own fund and interest free fund of the assessee exceeds the interest-free advances, therefore he was of the view that disallowance of interest is not warranted - HELD THAT - Admittedly the assessee has given interest free loan and advances amounting to ₹ 31,61,09,415/- and simultaneously incurred interest cost of ₹ 14,51,773/- only. The ld. AR before us contended that interest free funds were available with assessee which exceeds the amount of loan and advances given without charging interest. There cannot be any disallowance of interest expenses in a situation where the own fund exceeds the amount of interest free advances provided by the assessee. As such, there is a presumption that the interest free advances has been made by the assessee out of its own without involving any borrowed fund. In holding so we draw support and guidance from the judgment of Hon ble jurisdictional High court in the case of CIT vs. Torrent Power Ltd 2010 (6) TMI 414 - BOMBAY HIGH COURT Thus we hold that there cannot be any disallowance of interest expenses provided the own fund of the assessee exceeds the interest free advance. Accordingly, we direct the AO to verify whether the own fund of the assessee exceeds the amount of interest free advances and adjudicate the issue afresh in accordance with the provisions of law. Hence, the ground of appeal of the assessee is allowed for the statistical purposes.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145(3) of the Income Tax Act, 1961.
2. Disallowance of losses amounting to ?3,25,74,320 as alleged non-genuine losses.
3. Non-allowance of set-off of disallowed losses against other business income.
4. Disallowance of interest expenses amounting to ?14,51,773.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145(3):
The assessee, engaged in trading of gold bars, ornaments, silver, and diamonds, showed sales to related parties at concessional rates. The AO observed that these sales were made at rates 2.04% lower than the market rate, resulting in a loss in the assessee's books. The AO suspected that these losses were artificially booked to set off other income, particularly from the sale of land amounting to ?2,31,76,100. Additionally, cash deposits of ?4,04,47,995 were claimed to be from cash sales, but the bills lacked party names, and there was a mismatch between cash sales and deposits. Consequently, the AO rejected the books of accounts under Section 145(3) and disallowed the loss of ?3,25,74,320.

2. Disallowance of Losses Amounting to ?3,25,74,320 as Alleged Non-Genuine Losses:
The assessee argued before the CIT(A) that all necessary documents were submitted, and the books were duly audited. The GP had improved compared to the previous year, and the AO did not specify any explicit shortcomings. The assessee contended that cash sales were to random customers reluctant to disclose their identity, justifying the lack of party names on bills. The CIT(A) upheld the AO's decision, relying on a similar case from AY 2009-10. However, the ITAT noted that in AY 2009-10, the addition was deleted, and the facts were identical. The ITAT found that the AO failed to provide conclusive evidence of suppressed sales and that the transactions were genuine, supported by independent inquiries. Thus, the ITAT set aside the CIT(A)'s order and directed the AO to delete the addition.

3. Non-Allowance of Set-Off of Disallowed Losses Against Other Business Income:
The ITAT's decision to delete the disallowance of losses inherently addressed the issue of non-allowance of set-off against other business income. Since the losses were deemed genuine, the set-off against other business income was implicitly allowed.

4. Disallowance of Interest Expenses Amounting to ?14,51,773:
The AO disallowed interest expenses on borrowed funds, arguing that the assessee made interest-free advances. The CIT(A) upheld this, stating the assessee failed to prove sufficient interest-free funds. The assessee contended that its own funds exceeded the interest-free advances, invoking judgments like Reliance Utilities & Power Ltd. The ITAT directed the AO to verify if the assessee's own funds exceeded the interest-free advances and adjudicate accordingly, following the principle that no disallowance is warranted if own funds exceed interest-free advances.

Conclusion:
The ITAT allowed the appeal regarding the disallowance of losses, directing the AO to delete the addition, and remanded the issue of interest expenses for verification, allowing the appeal partly for statistical purposes.