2014 (1) TMI 934 - AT - Income Tax

Addition made u/s 68 of the Act Unexplained cash credits Genuineness of the transaction Held that - In the absence of any corroborative material brought on record, doubting of genuineness of transaction on mere conjectures and surmises is legally unsustainable - Whether a particular credit in the books of account of the assessee is genuine or not in terms of section 68 of the Act is purely a question of fact and has to be decided on the basis of facts and materials available on record. Relying upon RB Mittal Vs. CIT 2000 (8) TMI 54 - ANDHRA PRADESH High Court - The assessee have established the identity of the creditor his creditworthiness and also genuineness of the transaction (having been routed through banking channels) with supporting evidence, the conclusion arrived at by the revenue authorities disallowing the claim of the assessee on mere conjectures and surmises cannot be sustained - Sri Gurmeet Ajit Singh Rajpal has the creditworthiness to make the gift thus, the department without having any material, direct or indirect, in its possession to substantiate the allegation that the gift is not genuine cannot make addition u/s 68 of the Act - there is no material before the department to show that the donor was either compensated by the assessee or assessee s money was routed back to him by way of gift through the donor - the addition made by treating the gift of Rs. 45 lakhs as unexplained cash credit is without any basis and cannot be sustained order of the CIT(A) set aside Decided in favour of Assessee. Disallowance of interest payment either u/s.37(1) or u/s. 57(iii) of the Act Held that - The assessee has not been able to establish as to how and in what manner the interest free advance of borrowed fund to Smt. Inderjit Kaur Bagga has benefitted to the assessee- That besides, the assessee has not established the fact that interest payment is directly related to or has any nexus with the interest income earned by the assessee - Hence, the deduction claimed by the assessee cannot be allowed considering the facts and circumstances of the case Decided against Assessee.

Issues Involved:
1. Addition of Rs. 45 lakhs as unexplained cash credit under Section 68 of the Income Tax Act.
2. Disallowance of interest payment of Rs. 4.20 lakhs under Section 57(iii) of the Income Tax Act.
3. Charging of interest under Sections 234B and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 45 lakhs as Unexplained Cash Credit Under Section 68 of the Income Tax Act:

The primary issue concerns the addition of Rs. 45 lakhs received by the assessee as a gift from Sri Gurmeet Ajit Singh Rajpal, which was treated as unexplained cash credit under Section 68 by the Assessing Officer (AO). The assessee claimed the donor had the financial capacity and provided various documents to support this, including the donor's audited balance sheet, P&L account, passport, and gift declaration. However, the AO and CIT(A) disbelieved the genuineness of the gift, citing reasons such as the unusual nature of the gift given in two installments within nine days, the distant relationship between the donor and donee, and the lack of evidence proving the donor's capacity to make such a gift at a young age.

The ITAT, upon reviewing the evidence and the previous order, noted that the AO did not dispute the donor's identity and creditworthiness but questioned the genuineness of the transaction. The Tribunal highlighted that the gift was made through proper banking channels and that the department failed to provide any material evidence to counter the assessee's claims. The Tribunal concluded that the addition under Section 68 was based on conjectures and surmises without substantial evidence and directed the AO to delete the addition.

2. Disallowance of Interest Payment of Rs. 4.20 Lakhs Under Section 57(iii) of the Income Tax Act:

The second issue pertains to the disallowance of Rs. 4.20 lakhs claimed as interest payment to M/s Rajpal Credit & Capital Ltd. The AO disallowed this deduction, stating that the borrowed funds were advanced interest-free to a family member and were not used for earning income under the head 'Income from other sources.' The CIT(A) upheld this disallowance.

The ITAT reviewed the facts and found that the assessee failed to establish a direct nexus between the borrowed funds and the interest income earned. The Tribunal agreed with the lower authorities that the interest payment did not qualify for deduction under Section 57(iii) as it was not incurred wholly and exclusively for earning the income declared under 'other sources.' Consequently, the disallowance of the interest payment was confirmed.

3. Charging of Interest Under Sections 234B and 234C of the Income Tax Act:

The final issue involved the charging of interest under Sections 234B and 234C, which is consequential in nature. The Tribunal directed the AO to compute the interest accordingly, based on the final taxable income determined after giving effect to the Tribunal's order.

Conclusion:

In summary, the ITAT allowed the appeal concerning the addition of Rs. 45 lakhs as unexplained cash credit, directing the AO to delete the addition. However, the Tribunal dismissed the appeal regarding the disallowance of interest payment of Rs. 4.20 lakhs, upholding the decision of the lower authorities. The charging of interest under Sections 234B and 234C was directed to be consequentially adjusted. The appeal was thus partly allowed.

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