2024 (5) TMI 1413 - AT - Income Tax

Unexplained cash deposited in bank u/s 68 - Assessee explained that the deposits were from cash withdrawals and opening cash in hand - HELD THAT - On reading of the assessment order, it is observed that the AO has only took note of the fact that the withdrawals made by the assessee from the bank accounts to co- relate with the deposits made with the bank accounts completely ignoring the cash balances stood as on the first day of last month. Therefore, the entire exercise made by the AO appears to be futile. It is not in dispute that the cash book filed before the AO and the AO failed to examine the entries thoroughly and co-relate the deposits made into bank accounts vis- -vis the cash balances as on first day of every month in the cash book. It appears that AO not even examined detailed submissions made by the assessee. Therefore, as the AO did not consider the cash balances and the realization of debtors and has simply gone by the just withdrawals, the addition cannot be sustained merely on that basis when the assessee had clearly demonstrated that the cash deposits were all made out of withdrawals, opening cash balance and realization of debtors. Thus, we direct the AO to delete the addition made u/s 68. Decided in favour of assessee. Disallowance of interest paid u/s 36(1)(iii) - contention of the assessee is that the interest paid on bank loans is business expenditure and is deriving income from business on account of real estate and finance business was not accepted by the AO as the assessee has not sold any property or built/purchased any property during the current assessment year - HELD THAT - Incomes/loss returned by the assessee under the head income from business have been accepted for the assessment years 2017-18 to 2022-23 by the Revenue and in none of these years, the incomes/losses shown by the assessee were disturbed. It is the submission that the decision of the Tribunal for the assessment year 2009-10 affirming the order of the learned Commissioner of Income-Tax (Appeals) in holding that the assessee is into real estate business has became final and this was accepted by the Revenue for assessment year 2009-10. We are of the view that simply because the assessee has not shown any business income during the current assessment year, it cannot be held that the assessee is not carrying on the real estate business. Thus, following the order of the Tribunal for the assessment year 2009-10, we hold that the assessee is into the business of real estate and finance the interest expenditure incurred by the assessee is an allowable deduction. Accordingly, we delete the disallowance made by the AO. Ground no.1 of grounds of appeal raised by the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of interest paid by the assessee.
2. Addition of cash deposits in bank invoking Section 68 of the Income-Tax Act, 1961.

Summary:

Issue 1: Disallowance of Interest Paid by the Assessee

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee had debited Rs. 1,65,65,973/- towards interest paid on loan. The AO disallowed this interest, arguing that the loans were not used for any business purposes and were instead interest-free advances to friends and relatives. The AO concluded that there was no nexus between the interest paid on borrowed funds and the income earned, thus not allowable as deduction u/s 36(1)(3) and Section 37(1) of the Act.

On appeal, the learned Commissioner of Income-Tax (Appeals) sustained the disallowance. However, the Tribunal found that in previous assessment years (2007-08 to 2013-14), it was established that the assessee was in the real estate and finance business, and interest expenses were allowed as deductions. The Tribunal held that the assessee is into the business of real estate and finance, and the interest expenditure incurred is an allowable deduction. Thus, the disallowance of Rs. 1,65,62,973/- was deleted, and the appeal on this ground was allowed.

Issue 2: Addition of Cash Deposits in Bank Invoking Section 68

The AO noticed cash deposits of Rs. 66,70,000/- in the assessee's Karnataka Bank account and treated them as unexplained, invoking Section 68 of the Income-Tax Act, 1961. The assessee explained that these deposits were from cash withdrawals, opening cash in hand, and realization from debtors. The AO, however, was not convinced and made the addition.

On appeal, the learned Commissioner of Income-Tax (Appeals) sustained the addition, stating that the cash book provided by the assessee was not part of audited books and lacked authentication. The Tribunal, however, found that the AO had examined the cash book and that the auditor did not report any issues with the cash book. The Tribunal noted that the AO failed to consider the opening cash balances and realization from debtors, focusing only on proximate withdrawals. The Tribunal directed the AO to delete the addition made u/s 68, allowing the appeal on this ground.

Conclusion:

The appeal of the assessee was allowed, deleting both the disallowance of interest paid and the addition of cash deposits in the bank.