2024 (4) TMI 260 - AT - Income Tax

Addition of cash deposits u/s 68 - abnormal sales reported by the assessee during demonetized period - assessee is a partnership firm and stated to be engaged in jewellery business - On abnormal sales assessee submitted that after announcement of demonetization, there was panic amongst the public and they were finding the easiest and safe way of parking the funds and at that point of time, the only option was to purchase the jewellery. The huge rush in the jewellery shops was reported widely in the media and there was increase in volume of sales - CIT(A) deleted addition - HELD THAT - In the present case, the assessee has duly discharged the burden of establishing the source of cash deposit and the onus was on Ld. AO to disprove the same. However, except for mere allegation and few statistics, there is nothing on record to support the conclusions drawn by AO that the assessee s own unaccounted money was introduced and accommodated under bogus customers name during the demonetization period. The demand of Ld. AO to produce CCTV recording after lapse of considerable period of time could not be said to be reasonable particularly when all the other evidences supports the case of the assessee. There is no finding by Ld. AO that any particular sales affected by the assessee exceeded threshold limit which would require collection of tax at source (TCS). Since cash generated out of sales has been credited in the books of accounts, the provisions of Sec.69A could not be invoked in the present case. The case laws as cited by Ld. CIT(A) duly supports the case of the assessee. Under these circumstances, the impugned additions have rightly been deleted by Ld. CIT(A) - Decided against revenue. Excessive interest paid on unsecured loan creditors - AO observed that the assessee paid interest of 21% to loan creditors - AO, invoking the provisions of Se.40A(2)(b) r.w.s. 37 restricted the same to 12% and disallowed a sum accordingly - CIT(A) deleted addition - HELD THAT - Due regard has to be given to fair market value of the facilities or the legitimate needs of the business. Simply because bank loan rate is lower, the same would not entitle Ld. AO to invoke these provisions unless it was shown that the same was excessive having regards to the fair market value. As rightly held by CIT(A), taking loans from financial institutions would involve lot of procedures and documents including pledging of properties. The loans from family members would be easy to take and no collateral security would be required. Naturally, such loans are subjected to higher risk and therefore, carry higher rate of interest. The Ld. AR has also demonstrated that these loans have been offered the same rate of interest since long time and no such disallowance has been made in earlier years. AR has placed on record first appellate order of the assessee for AY 1987-88 wherein the assessee had paid interest @22% and similar disallowance was made by Ld. AO. However, CIT(A) deleted the same considering the fact that the loans were available to the assessee for larger period of time. Therefore, considering all these facts, we would concur with the adjudication of Ld. CIT(A).- Decided against revenue.

Summary

Issues Involved:
1. Addition of cash deposits.
2. Disallowance of interest payments.

Summary:

1. Addition of Cash Deposits:

The Revenue contested the CIT(A)'s decision to allow cash sales in demonetized currency, arguing that the sales on 08/11/2016 were not backed by evidence such as CCTV footage and party-wise sales details. The assessee, a partnership firm engaged in the jewellery business, provided detailed records of cash deposits and sales, including a month-wise summary and daily cash summary for the relevant period. The Assessing Officer (AO) rejected the assessee's claim of abnormal sales on 08/11/2016, alleging that the cash deposits represented unaccounted money introduced during the demonetization period and added Rs. 766 Lacs u/s 69A, subject to tax u/s 115BBE.

The CIT(A) found that the assessee maintained proper books of accounts, which were audited u/s 44AB, and all sales were recorded and accepted by the Sales Tax/VAT Department. The CIT(A) held that there were no discrepancies in the books or stock records, and the AO's allegations were unsupported by concrete evidence. The CIT(A) concluded that the sales on 08/11/2016 were genuine and the cash deposits were sourced from these sales, thus deleting the addition made by the AO.

2. Disallowance of Interest Payments:

The AO disallowed excessive interest paid to unsecured loan creditors, restricting the interest rate to 12% from the claimed 21%, resulting in a disallowance of Rs. 274.11 Lacs u/s 40A(2)(b) r.w.s. 37. The CIT(A) deleted this disallowance, reasoning that loans from family members do not require collateral and carry higher risk, justifying a higher interest rate. The CIT(A) noted that similar interest rates were accepted in previous years without disallowance.

Appellate Tribunal's Findings:

The Tribunal upheld the CIT(A)'s decisions on both issues. It found that the assessee provided sufficient documentary evidence to support the cash deposits and that the AO's suspicions were not substantiated by concrete evidence. The Tribunal also agreed with the CIT(A) that the higher interest rates on loans from family members were justified given the lack of collateral and higher risk involved. Consequently, the appeal by the Revenue was dismissed.

Order Pronounced on 3rd April, 2024.