2012 (9) TMI 228 - AT - Income Tax

Addition made by invoking S28(iv) treating certain liabilities as in-genuine liability - Held that - In present case, assessee has shown liability of the aforesaid amounts in its books of account and the balance sheet. The liability is still existing, which is also noted in balance sheet. It is also evident that these were old loans, which were accepted by the Revenue in the preceding assessment year in the scrutiny assessment. Thus, these were opening balance coming up in the assessment year under appeal. The assessee has not written off or squared up any of the amounts in the accounts of the assessee. The amount in question has not been transferred to the P/L A/c. There is no waiver of the loan and the amounts have not been transferred to any reserve fund of the assessee. Therefore, the same cannot be treated as income of the assessee because the liability still existing in the books of the assessee. Dis-allowance u/s 14A - Held that - Addition is clearly unjustified in the matter. Firstly, assessee has shown that investments have been made in shares in AYs starting from 1991-92 to December, 2006 and Nov. 2007. Thus, no investment has been made in the AY under appeal. Secondly, no borrowed funds have been used for the purpose of investment. AO has not proved any nexus between the borrowed funds and the amounts invested in shares in assessment year. Further, sufficient funds and profits are available to the assessee to make investment though no investment has been made in this year, but it was made several years back. Thirdly, interest received by the assessee are in a sum of Rs.2,62,656/-, but interest paid was Rs.1,48,913/-, thus, assessee practically did not incur any expenditure on the interest. Hence, provisions of section 14A have been wrongly applied. Addition is, therefore, deleted. Dis-allowance u/s 36(i)(iii) - loan given to HUF for no business consideration - Held that - It is observed that assessee has sufficient capital, profit and interest-free funds available with him for the purpose of investment. No nexus between the borrowed funds and interest free funds has been established by the AO on record. Therefore, the addition would be unjustified in the year under consideration - Decided in favor of assessee

Issues Involved:

1. Addition of Rs. 25,03,452/- under Section 28(iv) of the Income Tax Act.
2. Addition of Rs. 6,02,311/- under Section 14A of the Income Tax Act.
3. Disallowance of Rs. 6,52,857/- under Section 36(1)(iii) of the Income Tax Act.

Detailed Analysis:

Issue 1: Addition of Rs. 25,03,452/- under Section 28(iv) of the Income Tax Act

The Assessing Officer (AO) added Rs. 25,03,452/- to the assessee's income by invoking Section 28(iv) of the Income Tax Act, arguing that the liabilities shown in the name of M/s CRB Capital Ltd. and M/s CRB Corporation Ltd. were not genuine. The AO noted that the assessee failed to provide confirmations from these creditors and did not explain the opening balances in the books of account. The AO also pointed out that the creditors were companies, and their directors were involved in serious irregularities, leading to legal proceedings. Consequently, the AO held that the liabilities had become the assessee's income due to the efflux of time.

The assessee contested this addition, arguing that the liabilities were old loans accepted in previous scrutiny assessments and that no new money was received during the assessment year. The assessee also emphasized that there was no cessation of liability, and the provisions of Section 28(iv) were not applicable as no benefit or perquisite had accrued during the year.

The CIT(A) upheld the AO's decision, citing the Supreme Court judgment in CIT vs. T.V. Undaram Iynger & Sons, which held that amounts initially treated as capital receipts could become the assessee's own money over time.

Upon appeal, the Tribunal found no justification to sustain the addition. It noted that the liabilities were still existing in the books and were accepted in previous assessments. The Tribunal concluded that the provisions of Section 28(iv) were not applicable as no income had accrued or been received by the assessee during the year. Consequently, the addition was deleted.

Issue 2: Addition of Rs. 6,02,311/- under Section 14A of the Income Tax Act

The AO made an addition of Rs. 6,02,311/- under Section 14A, arguing that the assessee had invested Rs. 1,83,12,000/- with the intention to earn exempt income. The AO applied Rule 8D to calculate the disallowance, even though the assessee contended that no exempt income was earned and that the investments were made from own funds, not borrowed funds.

The assessee argued that the investments were made in earlier years from own funds and that the borrowed funds were used for business purposes. The CIT(A) upheld the AO's decision, stating that the disallowance was justified even if no exempt income was earned.

The Tribunal, however, found the addition unjustified. It noted that the investments were made long ago and from own funds, not borrowed funds. The Tribunal also observed that the interest received by the assessee exceeded the interest paid, indicating no net expenditure on interest. Consequently, the addition under Section 14A was deleted.

Issue 3: Disallowance of Rs. 6,52,857/- under Section 36(1)(iii) of the Income Tax Act

The AO disallowed Rs. 6,52,857/- under Section 36(1)(iii), noting that the assessee had given Rs. 1,13,44,044/- to his HUF without any business consideration while incurring interest liability on borrowed funds. The AO argued that the assessee was not entitled to full allowance of interest.

The assessee contended that the borrowed funds were not used for the loan to the HUF and that sufficient interest-free funds were available. The CIT(A) upheld the AO's decision, stating that the assessee failed to demonstrate any business consideration for the funds given to the HUF.

The Tribunal found the disallowance unjustified, noting that the assessee had sufficient capital and interest-free funds for the investment. The Tribunal observed that no nexus between the borrowed funds and the interest-free funds given to the HUF was established by the AO. Consequently, the addition was deleted.

Conclusion

The appeal of the assessee was allowed, with all the additions and disallowances made by the AO and upheld by the CIT(A) being deleted by the Tribunal.

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