2012 (10) TMI 741 - AT - Income Tax

Unexplained cash credits Held that - Assessee has failed to prove the creditworthiness of all the creditors and no source of their income has been filed - there were no sufficient funds available in their bank account and they were having only small bank balance, which was even not sufficient to meet out their household expenses or day-to-day requirements - assessee has not adduced any sufficient evidence before the authorities below to prove the creditworthiness of the creditors and genuineness of the transactions in the matter. Therefore, the assessee has not satisfied the essential ingredients of section 68 of the IT Act - assessee appeal dismissed Disallowance of 20% expense out of conveyance and mobile phone expenses alleged that the assessee claimed several expenditures and it was also found that most of the expenses have been incurred in cash and appear excessive looking to the volume of business and also not fully verifiable Held that - Use of phone and car for personal purposes cannot be denied. Since no log book is produced to show that these expenses were used wholly and exclusively for the purpose of business - Only copies of the ledger account have been filed, but nothing is proved whether these expenses were incurred wholly and exclusively for the purpose of business against assessee

Issues Involved:
1. Addition of Rs. 13,00,000/- on account of unexplained cash credits/loans u/s. 68 of the IT Act.
2. Disallowance of 20% expenditure out of conveyance and mobile phone expenses.

Detailed Analysis:

1. Addition of Rs. 13,00,000/- on account of unexplained cash credits/loans u/s. 68 of the IT Act:

Findings by the Assessing Officer (AO):
- The AO observed cash deposits of identical amounts in the bank accounts of six lenders just before they advanced loans to the assessee.
- Despite opportunities, the assessee produced only one lender, Shri Abhay Maheshwari, for examination. The AO found that he lacked the creditworthiness to give an unsecured loan of Rs. 2,00,000/-.
- The remaining five lenders were not produced, and their creditworthiness was also doubted by the AO.
- The AO made the addition u/s. 68 of the IT Act, relying on the Supreme Court decision in Sumati Dayal v. CIT.

Assessee's Arguments before CIT(A):
- The assessee provided confirmatory letters, bank passbooks, balance sheets, cash flow statements, and affidavits of the creditors.
- It was argued that all transactions were through account payee cheques, and the creditors were assessed to tax.
- The assessee explained the inability to produce some creditors due to medical reasons.

CIT(A)'s Findings:
- The CIT(A) noted discrepancies in the total amount of credits and corrected the figures.
- The CIT(A) upheld the AO's findings, stating that the assessee failed to establish the creditworthiness of the creditors and the genuineness of the transactions.
- The CIT(A) concluded that the loans were accommodation entries, adding the credits as unexplained cash credit u/s. 68.

Tribunal's Analysis:
- The Tribunal noted that equivalent cash deposits were made in the creditors' bank accounts just before issuing cheques to the assessee, creating doubt about the genuineness of the transactions.
- The assessee failed to produce the remaining creditors for examination and did not request their examination through commission.
- The Tribunal found that the creditors had meager incomes and small bank balances, supporting the AO's conclusion that they lacked creditworthiness.
- The Tribunal cited several judicial precedents, emphasizing that mere production of confirmatory letters and transactions through banking channels do not prove genuineness if the creditworthiness is not established.
- The Tribunal upheld the CIT(A)'s order, confirming the addition u/s. 68 of the IT Act, as the assessee failed to prove the creditworthiness of the creditors and the genuineness of the transactions.

2. Disallowance of 20% expenditure out of conveyance and mobile phone expenses:

Findings by the Assessing Officer (AO):
- The AO noted that most expenses were incurred in cash, appeared excessive, and were not fully verifiable.
- The AO disallowed 20% of the expenses, considering the possibility of personal use.

Assessee's Arguments:
- The assessee argued that no opportunity was granted to explain these grounds at the assessment stage, and no query was raised as per the order sheet.

Tribunal's Analysis:
- The Tribunal observed that the AO found the expenses excessive and not subjected to verification, with no logbook produced to show exclusive business use.
- The Tribunal noted that the assessee did not raise the issue before the CIT(A) and did not provide details to contradict the AO's findings.
- The Tribunal confirmed the disallowance, agreeing with the AO's assessment that personal use of mobile phones and conveyance could not be ruled out.

Conclusion:
The appeal of the assessee was dismissed on both grounds. The Tribunal upheld the addition of Rs. 13,00,000/- on account of unexplained cash credits/loans u/s. 68 of the IT Act and the disallowance of 20% expenditure out of conveyance and mobile phone expenses.

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