2024 (12) TMI 861 - AT - Income Tax

Disallowance of proportionate interest Expenses - AO concluded that the borrowed funds were partly utilized for these non-income-generating investments and calculated a proportionate disallowance by attributing a portion of the interest expenses to investments in personal assets and interest-free loans - HELD THAT - It is evident that the assessee had sufficient interest-free funds in the form of owned capital and unsecured loans, exceeding the alleged investments in personal assets and interest-free advances for both assessment years. Following the principles established in South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT it must be presumed that the investments were made from interest-free funds in the absence of a direct nexus between borrowed funds and the investments. Assessee demonstrated that a substantial portion of the personal assets and liabilities were inherited or pre-existing and were not funded by interest-bearing borrowings. AO s failure to establish any direct connection between borrowed funds and non-income-generating investments, coupled with the inconsistent treatment of similar expenses in earlier scrutiny assessments, renders the disallowance unsustainable. CIT(A) erred in upholding the proportionate disallowance of interest expenses without adequately addressing the aspects discussed above.we hold that the proportionate disallowance of interest expenses is unjustified and liable to be deleted. Decided in favour of assessee. Addition u/s 68 on account of unexplained cash credit - HELD THAT - Assessee explained that the cash deposits were sourced from independent activities of the lenders, including business receipts, pre-existing cash balances, and in the case of Smt. Ramilaben Sanghavi, proceeds from the sale of land. The sale proceeds were offered to tax in her income tax return, and the assessment order for AY 2016-17 substantiates this claim. Despite these explanations and supporting documents, the AO did not issue any notice under Section 133(6) of the Act or summon the lenders under Section 131 of the Act to verify the cash deposits or their sources. This crucial step, which could have resolved any doubt regarding the lenders creditworthiness, was not undertaken by the AO. It is a settled legal position, as held in Ranchod Jivabhai Nakava 2012 (5) TMI 186 - GUJARAT HIGH COURT and Chanakya DevelopeRs 2013 (10) TMI 7 - GUJARAT HIGH COURT that once the assessee provides evidence to establish the identity, genuineness, and creditworthiness of the lenders, the onus shifts to the Revenue to prove otherwise. In the present case, the assessee has discharged its initial burden of proof, and the AO has failed to rebut the evidence submitted. We hold that the additions made u/s 68 are not sustainable. The loans have been sufficiently substantiated by the assessee, and no adverse inference can be drawn solely based on the cash deposits in the lenders bank accounts, especially when corroborative evidence of their sources has been provided. Decided in favour of assessee. Disallowance of cost of improvement while calculating capital gains - HELD THAT - While the evidence provided by the assessee substantiates a significant portion of the claimed expenses, the absence of additional corroborative evidence, such as agreements with contractors or photographic proof of the improvements, raises questions about the complete genuineness of the claim. Further, the AO did not undertake any verification to disprove the expenses but relied solely on the perceived inadequacies in the documentation. Considering these factors, we deem it appropriate to restrict the disallowance to 10% of the claimed expenses. This estimation is justified based on the following rationale 1. While the invoices and vendor details substantiate the majority of the expenses, the lack of full corroboration warrants a reasonable adjustment. 2. Activities such as Mati Puran and fencing often involve cash intensive transactions, increasing the possibility of overstatement. 3. A 10% disallowance provides a fair balance between recognizing genuine improvement costs and addressing the Revenue's concerns about incomplete verification. 4. Judicial precedents emphasize proportional disallowance in cases where documentation is partially verifiable. The assessee s alternative submission to restrict the disallowance to 5% is considered but given the above reasons and the fact that the assessee himself offered 10% disallowance before CIT(A), a higher disallowance of 10% better reflects the nature of the deficiencies noted. Disallowance is partly sustained, and the AO is directed to allow 90% of the improvement expenses claimed by the assessee for both AYs. The ground of appeal is partly allowed. Addition of Bogus gift receipt - AO treated as unexplained cash credit u/s 68 - AO s disallowance was primarily based on the unsigned confirmation and the absence of formal documentation, such as a gift deed - CIT(A) sustained the disallowance, concluding that the creditworthiness of the donor and the genuineness of the transaction were not established - Assessee submitted signed confirmation, cash book, and ITR of the donor, adequately addresses these concerns - HELD THAT - Considering the relationship of the donor with the assessee, the sufficiency of cash balance in the donor s hands, and the established creditworthiness and genuineness of the transaction, we find no justification to sustain the addition made by the AO and upheld by the CIT(A). Addition made u/s 68 of the Act is deleted. Addition of Notional Rent - addition considering notional rent u/s 23(1)(a) for certain properties owned by the assessee that were lying vacant - assessee contended that the properties were not let out, and hence no actual rental income was received - CIT(A) dismissed the ground stating that the assessee has not filed any details and evidence for admissibility of said interest - HELD THAT -AR did not advance any arguments on this ground before us. However, since the ground relating to interest on unsecured loans has been decided in favor of the assessee, this ground is dismissed as consequential. Since the additions made under Section 68 of the Act have been deleted, the following grounds are rendered infructuous.

Summary

Issues Involved:

1. Disallowance of proportionate interest expenses.
2. Addition under Section 68 for unexplained cash credits.
3. Disallowance of cost of improvement in capital gains calculation.
4. Addition for bogus gift.
5. Addition of notional rent.
6. Taxation under Section 115BBE.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Interest Expenses:

The Assessing Officer (AO) disallowed a portion of the interest expenses claimed by the assessee, attributing it to personal investments and interest-free loans. The AO's rationale was based on the observation that borrowed funds were used for non-income-generating investments. The CIT(A) upheld this disallowance due to a lack of evidence from the assessee proving the exclusive use of non-interest-bearing funds for these investments. However, the Tribunal found that the assessee had sufficient interest-free funds, such as owned capital and previous non-borrowed investments, to cover the personal assets and loans/advances. The Tribunal cited judicial precedents, including South Indian Bank Ltd. vs. CIT, to conclude that the disallowance was unjustified, as the AO failed to establish a direct nexus between borrowed funds and personal investments. Consequently, the Tribunal deleted the disallowance for both assessment years.

2. Addition under Section 68 for Unexplained Cash Credits:

The AO added unsecured loans received by the assessee as unexplained cash credits under Section 68, due to significant cash deposits in the lenders' accounts before issuing cheques. The CIT(A) upheld these additions, citing insufficient evidence of the lenders' creditworthiness. However, the Tribunal noted that the assessee provided comprehensive documentation, including loan confirmations and tax returns of the lenders. The Tribunal emphasized that the AO did not take necessary steps to verify the lenders' creditworthiness, such as issuing notices under Section 133(6). Citing precedents like CIT vs. Ranchod Jivabhai Nakava, the Tribunal held that the assessee had discharged its burden of proof, and the AO failed to rebut the evidence. Thus, the additions under Section 68 were deleted.

3. Disallowance of Cost of Improvement in Capital Gains Calculation:

The AO disallowed the cost of improvements claimed by the assessee, citing inadequate documentation. The CIT(A) upheld this disallowance. The Tribunal, however, recognized that the assessee provided substantial evidence, such as invoices and vendor details, to support the claimed expenses. The Tribunal criticized the AO for not conducting verification inquiries and decided to restrict the disallowance to 10% of the claimed expenses, acknowledging the possibility of overstatement due to cash-intensive transactions. Thus, the Tribunal directed the AO to allow 90% of the improvement expenses.

4. Addition for Bogus Gift:

The AO added Rs. 10,00,000/- as unexplained cash credit, treating a gift from a relative as bogus due to unsigned confirmations and lack of formal documentation. The CIT(A) upheld this addition. The Tribunal, however, found that the assessee provided sufficient evidence, including a signed confirmation and the donor's tax returns, establishing the donor's creditworthiness and the genuineness of the transaction. The Tribunal noted the relationship between the donor and the assessee, which was satisfactorily explained, and deleted the addition.

5. Addition of Notional Rent:

The AO added notional rent under Section 23(1)(a) for vacant properties, which the CIT(A) upheld. The assessee did not advance arguments on this ground before the Tribunal. However, since the interest on unsecured loans was decided in favor of the assessee, this ground was dismissed as consequential.

6. Taxation under Section 115BBE:

The AO taxed income under Section 115BBE at a higher rate retrospectively. However, since the additions under Section 68 were deleted, the related grounds became infructuous and were dismissed.

Conclusion:

The appeals filed by the assessee were partly allowed, with significant deletions of disallowances and additions made by the lower authorities. The Tribunal provided a balanced approach, considering the evidence and judicial precedents, to arrive at its decision.