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2023 (2) TMI 198 - AT - Income TaxAddition u/s 69A - unexplained money and disallowance of interest expenditure - AO submitted that the assessee did not file the return of income even though he had taxable income during the year - As submitted that the assessee is a non-resident Indian and therefore what is the source of such huge amount of cash deposit made during the year - CIT(A) sustained the addition estimating net profit @ 8% on the alleged cash deposit - HELD THAT - We notice that the assessee is a non-resident Indian and he holds bank accounts in India in which funds are transferred from outside India and also there are transactions carried out during the year in these bank accounts by way of withdrawal of cash deposit of cash and also issuing cheques and receiving cheques from local parties. On going through the bank statement as well as the cash book we find that there are regular credits in this bank account through clearing and the assessee has withdrawn the cash on multiple occasions and has deposited also on multiple occasions. Now why the assessee or the person authorised on its behalf withdrew and deposited the cash cannot be questioned because the assessee was having sufficient balance in the bank as well as cash in hand to explain the said sum. Further since the assessee is a non-resident Indian and except earning income from fixed deposits there is no iota of evidence which could indicate that the assessee is carrying out any activity in the nature of business or otherwise to earn income from any other sources in India. Simply suspicion and behavioural pattern of frequent withdrawal by the assessee cannot be the basis of treating cash deposits as unexplained money u/s 69A of the Act and for this proposition we find support from the decision of the coordinate Bench of Lucknow in the case of DCIT vs Smt. Veena Awasthi 2018 (12) TMI 206 - ITAT LUCKNOW On the overall analysis of the facts and circumstances of the case examination of the bank statement for FY 2011-12 2012-13 and availability of cash in hand on various dates during the year as well as the availability of cash in the preceding FY 2011-12 we come to a conclusion that firstly the assessee has successfully explained the source of alleged cash deposits and secondly ld. CIT(A) erred in treating the frequent transactions in the bank account as those carried out in the course of business and further ld. CIT(A) erred in estimating the profit @ 8% of the alleged cash deposit without finding any evidence which could show that the assessee is carrying out the business activity. We therefore set aside the finding of ld. CIT(A) and delete the addition of unexplained money made by ld. AO u/s 69A and accordingly dismissed the Revenue s ground nos. 1 to 5 and allow the assessee s ground nos. 1 2 raised in the Cross Objection. Disallowance of interest paid on cash credit limits availed by the assessee and claimed against the interest earned on fixed deposits - In this case the assessee has not incurred any expenditure to earn the income on fixed deposits. In case the assessee had first taken loan and then utilised such amount for earning interest then the interest paid on such loan could have been claimed against the interest income but in the instant case the situation is reverse. For the purpose of Section 57(3) of the Act the assessee can claim an expenditure against the income provided u/s 56 of the Act if it is laid out or expanded wholly and exclusively for the purpose of making or earning such income. Since in the instant case the alleged interest expenditure is not laid out or expanded wholly and exclusively for the purpose of earning interest income on fixed deposits the same deserves to be disallowed and to this extent finding of ld. AO is confirmed and so far as the grounds raised by the Revenue in ground nos. 6 to 8 are concerned the same are allowed and the ground no. 3 raised by the assessee in the Cross Objection is dismissed. Taxing net interest income at the beneficial tax rate prescribed in Double Taxation Avoidance Agreement (DTAA) - As from perusal of the above Article we notice that the interest may be taxed in the Contracting State (i.e. in India) in which it arises and according to the law of that State and if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution and @ 12.5% of the gross amount of the interest in all other cases. Now perusal of the above Article 11 of the DTAA between India and UAE we note that the same is applicable in the case of the assessee and the alleged interest earned on fixed deposit of Rs. 46, 36, 912/- is liable to be taxed at the beneficial rate i.e. @ 12.5%. Accordingly ground no. 4 raised in the Cross Objection is partly allowed.
Issues Involved:
1. Deletion of addition for unexplained money under Section 69A of the Income Tax Act, 1961. 2. Estimation of profit at 8% of total cash deposits. 3. Source of cash deposits and opening cash balance. 4. Treatment of interest income and bank charges. 5. Applicability of beneficial tax rate under DTAA between India and UAE. Detailed Analysis: 1. Deletion of Addition for Unexplained Money under Section 69A: The Revenue challenged the deletion of Rs. 1,73,77,481/- added by the Assessing Officer (AO) as unexplained money under Section 69A. The AO was not convinced by the assessee's explanation that the cash deposits were sourced from cash withdrawals made during the year and preceding years. The AO made the addition due to the lack of books of accounts and failure to file a return of income. However, the CIT(A) found that the transactions were in the nature of business and estimated the income at 8% of the cash deposits, thereby reducing the addition to Rs. 13,90,198/-. 2. Estimation of Profit at 8% of Total Cash Deposits: The CIT(A) estimated the profit at 8% of the total cash deposits, treating the cash deposits as business turnover. The Revenue contended that the CIT(A) should have considered all deposits, including those through RTGS and cheques, as business turnover. The CIT(A) also held that the assessee was not required to maintain books of accounts, which the Revenue argued was contrary to Section 44AA of the Act. 3. Source of Cash Deposits and Opening Cash Balance: The assessee argued that the source of cash deposits was explained through regular cash withdrawals and an opening cash balance of Rs. 81,93,269/-. The AO did not accept this explanation, citing the absence of books of accounts and the assessee's non-resident status. The Tribunal found that the assessee had sufficient cash in hand to explain the deposits and that the frequent transactions did not necessarily indicate business activity. The Tribunal concluded that the assessee successfully explained the source of the cash deposits and deleted the addition of Rs. 1,73,77,481/-. 4. Treatment of Interest Income and Bank Charges: The AO disallowed the interest expenditure of Rs. 28,27,141/- claimed against the interest income earned from fixed deposits, stating that it was not incurred to earn the income. The CIT(A) allowed the claim, treating it as a business expenditure. The Tribunal, however, held that the transactions were not in the nature of business activity and confirmed the AO's disallowance. The Tribunal noted that the interest expenditure was not laid out exclusively for earning the interest income and thus did not qualify for deduction under Section 57(3) of the Act. 5. Applicability of Beneficial Tax Rate under DTAA between India and UAE: The assessee claimed that the interest income should be taxed at the beneficial rate prescribed in the DTAA between India and UAE. The Tribunal agreed, noting that the interest income of Rs. 46,36,912/- should be taxed at the beneficial rate of 12.5% as per Article 11 of the DTAA. The Tribunal allowed this claim, partially allowing the assessee's cross-objection. Conclusion: The Tribunal deleted the addition of Rs. 1,73,77,481/- made under Section 69A, confirming that the assessee successfully explained the source of cash deposits. The Tribunal also disallowed the interest expenditure claimed by the assessee, confirming the AO's decision. However, the Tribunal allowed the beneficial tax rate of 12.5% on the interest income under the DTAA between India and UAE. The appeal filed by the Revenue and the cross-objection filed by the assessee were both partly allowed.
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