1986 (2) TMI 76 - AT - Income Tax

Summary

Issues Involved:
1. Addition of Rs. 1,25,000 under Section 68 of the Income Tax Act.
2. Disallowance of the assessee's claim for interest paid to various creditors.

Detailed Analysis:

Addition of Rs. 1,25,000 under Section 68 of the Income Tax Act:

The core issue in these appeals pertains to the addition of Rs. 1,25,000 made by the Income Tax authorities under Section 68 of the Income Tax Act. The assessee firm had borrowed money from 13 different parties during the financial year relevant to the assessment year 1975-76. The loans were taken through a broker, M/s Narottam & Co., and all transactions were conducted via account payee cheques. The assessee also provided the GIR/P.A. numbers of the creditors, asserting that these were genuine business loans.

The Income Tax Officer (ITO) did not accept the assessee's explanation regarding the nature and source of the loans, and included Rs. 1,25,000 in the total income of the assessee by invoking Section 68. Consequently, the ITO disallowed the interest paid to these creditors.

Upon appeal, the Commissioner (Appeals) upheld the ITO's decision, concluding that the assessee failed to prove the genuineness of the transactions despite providing confirmatory letters, permanent account numbers, and other evidence. The Commissioner noted that some creditors had either denied the transactions or claimed they were involved in bogus havala entries.

However, the Tribunal found considerable merit in the assessee's submissions. The Tribunal noted that the assessee had provided all relevant details, including the names and addresses of the creditors, their GIR/P.A. numbers, and evidence that all transactions were conducted via account payee cheques. The Tribunal also emphasized the statement of Shri Narottam Laxmidas Jobanputra, a partner of M/s Narottam & Co., who confirmed arranging the loans and could identify the creditors.

The Tribunal concluded that the assessee had discharged the initial burden of proof, and the addition of Rs. 1,25,000 under Section 68 was not justified. The Tribunal deleted the addition from the total income of the assessee.

Disallowance of Interest Paid to Creditors:

Consequent to the addition of Rs. 1,25,000, the ITO disallowed the assessee's claim for deduction of interest paid to the creditors, amounting to Rs. 12,810 for the assessment year 1975-76 and similar amounts for subsequent years. The Commissioner (Appeals) upheld this disallowance.

The Tribunal, however, directed the ITO to allow the deduction of interest paid to the creditors for all the years under appeal. This decision was based on the Tribunal's finding that the loans were genuine and the assessee had discharged its burden of proof.

Penalty Proceedings under Section 271(1)(C):

The ITO had initiated penalty proceedings under Section 271(1)(C) for the assessment year 1975-76 but later dropped these proceedings. The Tribunal noted that while assessment and penalty proceedings are separate, the fact that the ITO dropped the penalty proceedings could not be ignored.

Other Grounds:

The assessee did not press other grounds taken up in respect of the assessment years 1975-76 and 1978-79, and these were rejected by the Tribunal.

Conclusion:
The appeals for the assessment years 1975-76 and 1978-79 were partly allowed, and those for the assessment years 1976-77 and 1977-78 were fully allowed. The Tribunal directed the ITO to delete the addition of Rs. 1,25,000 and allow the interest deduction for all years under appeal.