2022 (12) TMI 1262 - AT - Income Tax

Penalty imposed u/s 271(1)(c) - addition to the capital of the assessee firm - CIT-A deleted the addition - HELD THAT - CIT (A) has considered that fact that the first proviso was inserted by the Finance Act 2012 w.e.f 01/04/2013 i.e. A. Y. 2013-14 and therefore, prior to the insertion of first proviso to section 68, the liability of the assesses was limited to establish the identity of the Creditor/Lender/Investor, the creditworthiness and genuineness of transaction, and further the proviso is not applicable to the appellant assessee being a partnership Firm. (Not a company in which the public are substantially interested). According we find no perversity in the order of the CIT(A) to the facts on record inasmuch as the appellant firm succeeded in proving the three essential ingredients u/s 68 of the act to prove the identity, credit worthiness and the genuineness of the transactions. According, the order of the CIT(A), deleing the impugned addition of Rs.9,80,000/-, is sustained. Addition on account of transfer of interest-bearing borrowed funds at lesser rate of interest - CIT(A) has rightly followed case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT wherein it is held that if assessee possesses sufficient interest free funds as against investment in tax free securities, then, there is a presumption that investment which has been made in tax free securities were out of interest free funds owned by the assessee. The case of Principal Commissioner of Income Tax (Central) - 1 vs. NRA Iron and Steel Pvt. Ltd. 2019 (3) TMI 323 - SUPREME COURT relied by the Department is distinguished of peculiar fact of the instant case. Accordingly, we find no infirmity in finding of the Ld. CIT(A) in deleting Addition. Since the assessee gets relief in quantum appeal, the consequential penalty levied u/s 271(1)(c) is deleted. - Decided in favour of assessee.

Issues Involved:
1. Deletion of addition to the capital of the assessee firm.
2. Deletion of addition on account of unsecured loans.
3. Deletion of addition on account of disallowance of excess interest paid to the bank.
4. Application of the law laid down by the Supreme Court in the case of NRA Iron and Steel Pvt. Ltd.
5. Deletion of penalty imposed under section 271(1)(c) of the Income Tax Act.

Issue-wise
Detailed Analysis:

1. Deletion of Addition to the Capital of the Assessee Firm:
The Revenue challenged the deletion of the addition made by the AO, who treated the addition to the capital of the assessee firm amounting to Rs. 1,87,00,000/- by three partners as unexplained under section 69 of the Act. The CIT(A) deleted the addition, observing that the identity, creditworthiness, and genuineness of the transactions were satisfactorily explained by the assessee. The partners' capital accounts, bank statements, and income tax returns were provided as evidence. The CIT(A) concluded that the introduction of partner capital does not fall under the ambit of section 69 and that the assessee had discharged its duty to prove the identity, genuineness, and creditworthiness of the partners.

2. Deletion of Addition on Account of Unsecured Loans:
The AO had added Rs. 9,80,000/- as unexplained cash credit under section 68, alleging that the assessee failed to provide sufficient evidence for the unsecured loan received from Neerja Magan. The CIT(A) deleted the addition, noting that the assessee provided the partner's capital account, bank statements, and income tax returns. The CIT(A) held that the assessee had proven the identity, creditworthiness, and genuineness of the lender, thereby fulfilling the requirements under section 68.

3. Deletion of Addition on Account of Disallowance of Excess Interest Paid to the Bank:
The AO disallowed Rs. 11,98,567/- on the grounds that the assessee transferred funds to M/s Harlal Gupta & Sons as an advance at a lower interest rate while borrowing from the bank at a higher rate. The CIT(A) deleted the addition, stating that the loan to M/s Harlal Gupta & Sons was given from the assessee's own funds before obtaining an overdraft facility from the bank. The CIT(A) relied on the Supreme Court's judgment in 'South Indian Bank Ltd. vs. CIT,' which presumes that investments in tax-free securities are made from interest-free funds if such funds are available.

4. Application of the Law Laid Down by the Supreme Court in the Case of NRA Iron and Steel Pvt. Ltd.:
The Revenue argued that the CIT(A) failed to appreciate the principles laid down by the Supreme Court in the case of NRA Iron and Steel Pvt. Ltd., which discusses the genuineness of share capital transactions. The CIT(A) distinguished the facts of the current case from the NRA Iron and Steel case, noting that the assessee had sufficiently proven the identity, creditworthiness, and genuineness of the transactions.

5. Deletion of Penalty Imposed under Section 271(1)(c) of the Income Tax Act:
Since the assessee received relief in the quantum appeal, the consequential penalty levied under section 271(1)(c) was also deleted by the CIT(A). The grounds raised by the Revenue in ITA No. 472/Asr/2019 were rejected.

Conclusion:
The Tribunal upheld the CIT(A)'s order, finding no merit in the Revenue's appeal. The grounds raised by the Revenue were rejected, and the appeals were dismissed. The Tribunal pronounced the order in the open court on 17.11.2022.

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