2024 (10) TMI 704 - AT - Income Tax

Disallowance of interest on interest-free loans - diversion of interest bearing funds to other parties - HELD THAT - As observed that no doubt, assessee has borrowed funds for its business purposes but at the same time assessee also holds huge surpluses in the business and during the year, assessee has utilised an amount for other purposes. Since the assessee has both borrowed and owned funds in the business and the amount utilised for other purposes is very meager compared to surplus available in the business as held in the case of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT when the assessee has huge surplus as well as borrowed funds, it is natural to presume that the funds diverted for non-business purpose is only from own funds. Therefore, the disallowance made by the Assessing Officer is uncalled for. Accordingly, the same is directed to be deleted. Hence, ground no.2 raised by the assessee is allowed. Bogus issue of share capital with share premium - onus to prove - AO disallowed the allotment of share capital relating to 8 parties by observing that assessee has not brought on record the respective Directors before him - HELD THAT - The issue involved is allotment of shares and the assessee has clearly indicated that the assessee has received the cheque and made the allotment that means what is relevant is allotment of shares and confirmation made by the assessee that assessee has already received the relevant cash and as per the provisions of section 39 of the Companies Act, shares cannot be allotted before receipt of money. It is the obligation on the part of the assessee to allot the shares only upon realization of the case. Therefore, as per the information available on record, assessee has allotted the shares after receipt of cash only. Therefore, now claiming that the assessee has actually received or realised the cash in the subsequent year cannot be accepted and it is only an after-thought. Further, it is not brought on record why the payments were received through RTGS after six months of allotment of shares. Therefore, this argument of the assessee is rejected. Various documents submitted by the assessee before the authorities which includes confirmation of investment. Yes, those parties have confirmed and made the payment through banking channel. Yes, all these are regular confirmations or documentations submitted by all the parties to claim that these are genuine transactions. Now, the issue is failure to prove the capacity and identity of the investors/Directors acknowledged before the Assessing Officer during assessment proceedings as well as remand proceedings. This clearly raises several doubts that assessee has to submit additional information to substantiate the capacity and source of such investments. As observed that all the shareholders have meager income from the financial statements submitted before us. It clearly shows that they do not have means of their own to make such investment. Further we observed that all these parties have shown sources of the investment declared as other current liabilities and in detail, all the shareholders have shown as application money received for allotment of securities and due for refund/interest accrued on above . Strangely all the investors have the same source that application money was received for allotment of securities and there is no document submitted that all these companies have allotted the shares against such receipt of application pending for allotment. Therefore, all these shareholders have source which are doubtful and all of them have the same source of receipt of application money and all the application monies so received were all invested in the assessee company. This transaction does raise several questions on capacity of these shareholders. Even during remand proceedings, assessee has merely submitted the information what was already available on record and capacity of the shareholders who made the investments were never proved by the assessee. Therefore, we are inclined to agree with the tax authorities that assessee has proved the identity and failed miserably to prove the capacity of the investors. However, we are inclined to give conditional benefit to the assessee to submit the details of allotment of shares by the respective investors, who has shown the source of funds received as share application pending allotment. Accordingly, we dismiss the grounds raised by the assessee. Appeal filed by the assessee is partly allowed.

Issues Involved:

1. Addition of Rs. 7,23,72,000/- by the Assessing Officer.
2. Disallowance of Rs. 3,72,000/- as notional interest on interest-free loans.
3. Addition of Rs. 7,20,000/- treating share capital as unexplained cash credit.

Issue-wise Detailed Analysis:

1. Addition of Rs. 7,23,72,000/-:
The assessee challenged the addition made by the Assessing Officer, which was upheld by the CIT(A). The Assessing Officer had made this addition under section 143(3) of the Income Tax Act. The assessee contended that the addition was made without appreciating the facts, applicable law, and the evidence produced. However, the specific details regarding this issue were not elaborated in the judgment text provided.

2. Disallowance of Rs. 3,72,000/- as Notional Interest:
During the assessment proceedings, the Assessing Officer observed that the assessee had given interest-free loans to Aardee Infrastructure and J.P. Malhotra, amounting to Rs. 30,00,000/- and Rs. 1,00,000/- respectively. The Assessing Officer disallowed the interest on these loans at 12% per annum, determining a notional interest of Rs. 3,72,000/-, citing the lack of commercial expediency for these advances. The CIT(A) upheld this disallowance, noting that the assessee failed to prove the commercial purpose of these advances. However, the Tribunal found that the assessee had substantial own funds and surpluses, as evidenced by the balance sheet. Citing the decision in CIT vs. Reliance Utilities & Power Ltd., the Tribunal presumed that the non-business advances were made from the assessee's own funds, not borrowed funds. Consequently, the Tribunal directed the deletion of this disallowance, allowing the assessee's appeal on this ground.

3. Addition of Rs. 7,20,000/- Treating Share Capital as Unexplained Cash Credit:
The Assessing Officer treated the share capital received by the assessee as unexplained cash credit under section 69 of the Act, disallowing Rs. 7,20,000/- on the grounds that the assessee failed to prove the creditworthiness and identity of certain shareholders. The CIT(A) upheld this addition after considering the remand report. The assessee argued that most of the share capital was credited in the subsequent year, and thus, no addition should be made for the current year. The assessee provided various documents, including confirmations, bank statements, and financial statements, to substantiate the identity and creditworthiness of the investors. The Tribunal observed that the assessee had submitted confirmations and other documents, but failed to prove the capacity of the investors. The Tribunal, however, offered a conditional benefit: if the assessee could prove the allotment of shares by the respective investors within three months, the transaction would be considered genuine. Otherwise, the addition would be sustained. Thus, the Tribunal partly allowed the appeal on this ground, providing specific directions for further proceedings.

In conclusion, the Tribunal allowed the appeal in part, directing the deletion of the notional interest disallowance and providing conditional relief regarding the addition of share capital as unexplained cash credit. The decision emphasized the importance of proving the commercial expediency of transactions and the capacity of investors in such tax matters.

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