2024 (3) TMI 436 - HC - Income Tax

Disallowance of interest expenses incurred for non-business purposes - AO has disallowed interest paid to banks and others on the ground that assessee diverted interest bearing funds for giving interest free advances - ITAT deleted addition - HELD THAT - ITAT came to a factual finding that assessee had huge interest free sundry creditors balance with him and the Assessing Officer has failed to recognize the same. ITAT came to a finding, with which we agree, that when interest free funds and interest-bearing funds are mixed together, they loose their respective identity and hence, the presumption should be that assessee has used interest free funds to give interest free advances. The ITAT in the impugned order has given a table of the position of funds and has concluded that even for Assessment Year 1989-1990 interest free funds available with assessee was sufficient to take care of interest free advances made. Therefore, the ITAT is justified in coming to the conclusion that the interest expenditure claimed by assessee was allowable. Addition u/s 68 in respect of cash credits - ITAT deleting the addition made by holding that the additions were made by the AO without proper examination of evidences furnished and proper reasoning - HELD THAT - For credit from one Paresh Patel ITAT has accepted, and rightly so, the explanation of assessee that the confirmation letter for Rs. 1,38,772/- only referred to the closing balance at the end of the year and the same was carried forward in the succeeding year. The ITAT has also come to a factual finding that Paresh Patel has confirmed the balance available on 31st March 1991 also and the amount was repaid on 14th June 1991. Similarly with regard to cash credit from one Nitin Patel, there is a factual finding that there was a confirmation letter for the year ending 31st December 1986 and the ledger account furnished showed that the outstanding balance was repaid subsequently. The ITAT also has come to a factual finding that there was no reason to suspect this cash credit. The next item related to cash credit from one Ranak Pate ITAT has come to a finding on facts that the creditor was having a opening balance of Rs. 1,25,000/- and interest have been regularly paid and this creditor is continuing from the earlier years. Similarly with regard to cash credit from one Sudha Patel, from one V.C. Patel and from one Vithalbhai Patel, the ITAT has come to a factual finding that the Assessing Officer has not properly examined the ledger account of assessee because these parties also had share trading transactions and major portion of the credit has been repaid during the year and the Assessing Officer has accepted the debit entries of the trading transactions as genuine. Therefore, no case is made out for interference. Addition made under various heads - ITAT deleted addition by holding that the matter was reached finality by the order of CIT(A) which was not contested by the Revenue as such the same disallowance cannot be made while completing the set aside assessment - HELD THAT - It is noted by the ITAT that various types of additions aggregating to this amount were made by the Assessing Officer in the original assessment proceedings and in the appeal filed by assessee, the CIT(A) deleted these additions. The Revenue did not prefer an appeal challenging the order of the CIT(A) and hence, the same has attained finality. The ITAT has noted only assessee went in appeal before ITAT challenging the additions confirmed by the CIT(A) and the ITAT has also restored those additions, which were confirmed by the CIT(A), to the file of the Assessing Officer for fresh examination. We would, therefore, agree with the ITAT that the Assessing Officer could not have assessed these various additions again since the CIT(A) had deleted the same in the first round of proceedings and the concerned matters have attained finality. We would also agree with the ITAT that the CIT(A) in the second round of proceedings correctly held that the Assessing Officer was not legally entitled to make these additions again in the second round of proceedings. Therefore, on this issue no substantial question of law arise.

Summary

Issues involved:
The judgment involves issues related to income tax appeals for multiple assessment years, including disallowance of interest expenses, addition made under Section 68 of the Act for cash credits, and deletion of various additions aggregating to a significant amount.

Disallowed Interest Expenses:
The Assessing Officer disallowed interest expenses incurred for non-business purposes, alleging diversion of interest-bearing funds for interest-free advances. The ITAT found that the Assessing Officer failed to recognize the significant interest-free sundry creditors balance held by the assessee. Referring to a previous judgment, the ITAT concluded that when interest-free and interest-bearing funds are mixed, the presumption should be that interest-free funds were used for interest-free advances, justifying the allowance of the claimed interest expenditure.

Cash Credits under Section 68:
Regarding the addition made under Section 68 of the Act for cash credits, the ITAT accepted the explanations provided by the assessee for various credit entries. For instance, the ITAT found that discrepancies in confirmation letters were due to closing balances carried forward to the next year, and repayments were made as evidenced by ledger accounts. The ITAT also noted regular interest payments and genuine trading transactions with the credited parties, leading to the dismissal of suspicions raised by the Assessing Officer.

Deletion of Various Additions:
The appeal filed by the Revenue challenged the deletion of various additions totaling Rs. 10,89,30,545/-. The ITAT noted that the CIT(A) had deleted these additions in the first round of proceedings, and since the Revenue did not appeal against this decision, it had attained finality. The ITAT correctly held that the Assessing Officer was not entitled to reassess these deleted additions in the second round of proceedings. Consequently, the ITAT restored the additions confirmed by the CIT(A) for fresh examination, leading to the conclusion that no substantial question of law arose on this issue.

In conclusion, the High Court dismissed the appeal, finding no merit in the arguments presented.