2022 (7) TMI 1158 - AT - Income Tax

Addition u/s 68 - identity, creditworthiness and genuineness not proved - HELD THAT - There was no compliance of this notice also by the assessee. Then AO issued notice u/s 133(6) to the investor who had paid share application money to the assessee company towards share capital and share premium. However, the investor did not file details before the assessing officer. Therefore, we note that three ingredients of section 68, namely identity, creditworthiness and genuineness, have not been satisfied by the assessee. Hence, we are of the view that one more opportunity should be given to the assessee to furnish basic documents, as required by assessing officer before the assessing officer. Therefore, we set aside the order of CIT(A) and remit this issue back to the file of the assessing officer for denovo adjudication in accordance with law. Disallowance of interest expenses @ 12% on interest free advances given to its sister concern M/s Jay Bharat Fin stock Private Limited, when interest was incurred at the same rate by the assessee on its borrowed funds - HELD THAT - It is settled principle of law that when the assessee has adequate interest free funds to make interest free advances to sister concerns, then no disallowance of interest expenses can be made. For this, reliance can be placed on the judgment of Hon ble Gujarat High Court in the case of Commissioner of Income-tax, Gandhinagar vs. Rajendra Brother 2014 (9) TMI 885 - GUJARAT HIGH COURT . We note that where the assessee was having sufficient interest free funds available with him to lend interest free advances, the ld CIT(A) was justified in deleting disallowance of interest in relation to such interest free advances.

Summary

Issues Involved:
1. Addition of Rs. 1,83,81,000/- under Section 68 of the Income Tax Act, 1961 for AY 2012-13.
2. Disallowance of interest expenses of Rs. 80,02,302/- for AY 2013-14.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,83,81,000/- under Section 68 of the Income Tax Act, 1961:

The Revenue's appeal for AY 2012-13 challenges the deletion of an addition of Rs. 1,83,81,000/- made by the Assessing Officer (AO) on account of unexplained cash credit under Section 68. The AO observed that the assessee, a private limited company engaged in processing man-made fabrics, received a substantial amount of share application money towards share capital and share premium from Jay Bharat Finstock Pvt. Ltd. The AO issued notices under Sections 142(1) and 133(6) of the Act, seeking details and supporting material to establish the identity, genuineness, and creditworthiness of the transaction. However, there was no compliance from the assessee or the investor.

The AO concluded that the investor lacked creditworthiness, as evidenced by its meager income, and that the funds credited were a colorable device. Consequently, the AO added Rs. 1,83,81,000/- to the assessee's income under Section 68.

The CIT(A) deleted the addition, noting that the share applicant company held more than 50% of the assessee's shares and that its financial statements were scrutinized without adverse findings. The CIT(A) accepted the valuation report of a Chartered Accountant justifying the share premium.

The Tribunal disagreed with the CIT(A), emphasizing that the assessee failed to provide basic documents to substantiate the identity, creditworthiness, and genuineness of the transaction. The Tribunal noted that the CIT(A) did not allow the AO to examine the valuation report, violating Rule 46A. Therefore, the Tribunal set aside the CIT(A)'s order and remitted the issue back to the AO for denovo adjudication, giving the assessee another opportunity to furnish the required documents.

2. Disallowance of Interest Expenses of Rs. 80,02,302/-:

For AY 2013-14, the Revenue's appeal concerns the deletion of a disallowance of interest expenses amounting to Rs. 80,02,302/-. The AO disallowed this amount, calculated at 12% on interest-free advances made by the assessee to its sister concern, Jay Bharat Finstock Pvt. Ltd., despite the assessee incurring interest on its borrowings.

The CIT(A) deleted the addition, noting that the assessee had sufficient interest-free funds (own funds) to make the advances, which were about 2.5 times the maximum outstanding advance. The assessee demonstrated that the advances were made from its own funds and not borrowed funds, supported by bank statements and books of accounts. The AO did not provide any contrary findings.

The Tribunal upheld the CIT(A)'s decision, citing the principle that no disallowance of interest expenses can be made when the assessee has adequate interest-free funds to lend interest-free advances. The Tribunal referred to the Gujarat High Court's judgment in Commissioner of Income-tax, Gandhinagar vs. Rajendra Brothers, which supported this view.

Conclusion:

The Tribunal allowed the Revenue's appeal for AY 2012-13 for statistical purposes, remitting the issue back to the AO for further examination. The Revenue's appeal for AY 2013-14 was dismissed, upholding the CIT(A)'s deletion of the disallowance of interest expenses.