2014 (10) TMI 352 - AT - Income Tax

Addition u/s 68 and interest disallowed u/s 14A - Held that - The AO is bound to issue notice to the assessee to furnish returns for each assessment year falling within the svc assessment years immediately preceding the assessment year relevant to the previous year In which the search or requisition was made - the AO asked the assessee to establish identity, genuineness and creditworthiness of these creditors. It was submitted that M/s. K.K.Patel Finance Limited, Indore, is being regularly assessed to tax and engaged in the finance activities and they have given the deposits on interest basis to other also the AO asked to explain the genuineness of the credits as well as identity and creditworthiness of the creditors - the AO did not agree with the assessee s contention and added the amount u/s 68 of the Income-tax Act, 1961 - CIT(A) deleted the addition by following his order in another assessee, wherein similar additions were deleted by observing that these additions were not warranted in the hands of the assessee but in the hands of the lenders - no cash was deposited in the Bank prior to issuance of cheque moreover there is no cash transaction in the bank statement and we found that all the amounts are received and paid through account payee cheques. AO has not made any efforts by calling information u/s 133(6) or by issuing summon u/s 131 to any of the creditors which is evident from the assessment order itself. Moreover, it is also clear from the assessment order that the Assessing Officer had never asked the assessee to produce the creditors - as per requirement of Section 68 the sum credited in the books of accounts can be considered to be the income of the assessee in a case where the assessee does not offer any explanation or the explanation offered by him, in the opinion of AO is not satisfactory - The explanation of the assessee in the present case is that all these creditors are income tax assessees and their PANs have given alongwith their copy of bank account as well as preceding years. By filing these evidences, it can be said that the assessee had discharged the initial burden laid upon him under Section 68. All the parties from whom loan was taken were having substantial funds available with them to advance the money merely on the basis of returned income, the AO jumped to the conclusion that these lenders were not having sufficient funds to advance the money to the assessee. The ld. AP without going through the audited accounts unnecessarily gone on the fact that these creditors are not having sufficient income to advance the money - It is settled law that the financial worth of a company could not be judged with its income but one has to see that how many funds is available with it in the bank account at the time of advancing loan. All the loan transactions were through account payee cheques, confirmations were given, creditworthiness were also proved from the balance sheet. Furthermore, all the loans were also repaid by cheques, there was no merit in the action of AO for making any addition in respect of these loan transactions - as the addition made u/s 68 is held to be not justified, the order of CIT(A) is upheld for deleting the disallowance of interest, which was based on the addition of cash credit u/s 68 Decided against revenue.

Issues Involved
1. Addition of unexplained cash credits under Section 68 of the Income-tax Act, 1961.
2. Disallowance of interest expenses.
3. Disallowance under Section 14A of the Income-tax Act, 1961.
4. Validity of additions made under Section 153A when no incriminating documents were found during the search.

Issue-wise Detailed Analysis

1. Addition of Unexplained Cash Credits under Section 68
The Revenue appealed against the deletion of additions made by the Assessing Officer (AO) under Section 68, concerning unexplained cash credits in the form of unsecured loans from various companies. The AO had added these amounts on both protective and substantive bases, suspecting that the funds were accommodation entries provided by the Lunkad group. The CIT(A) deleted these additions, stating that the Lunkad group failed to discharge the onus of explaining the source of share capital and loans. The CIT(A) observed that the Lunkad group issued confirmatory letters to beneficiaries, reinforcing the genuineness of transactions. Therefore, the additions should be sustained in the hands of the Lunkad group, not the beneficiaries, to avoid double addition.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided sufficient evidence, including confirmations, bank statements, and income tax returns of the creditors. The AO did not bring any material to disprove these claims. The Tribunal also emphasized that the loans were repaid through account payee cheques, further validating their genuineness.

2. Disallowance of Interest Expenses
The AO disallowed interest expenses related to the unexplained cash credits. The CIT(A) deleted this disallowance, reasoning that since the addition of cash credits was deleted, the related interest expense disallowance could not be sustained. The Tribunal agreed with the CIT(A), confirming that the disallowance of interest expenses was unjustified.

3. Disallowance under Section 14A
The AO made disallowances under Section 14A for various assessment years. The CIT(A) confirmed these disallowances. The Tribunal did not specifically address this issue in the detailed analysis, implying that the CIT(A)'s decision on this matter stood unchallenged.

4. Validity of Additions under Section 153A
The assessee contested the additions made under Section 153A, arguing that no incriminating documents were found during the search. The Tribunal referenced several judicial precedents, including the Special Bench decision in All Cargo Global Logistics Ltd. vs. DCIT, which held that in cases where no incriminating material is found, additions under Section 153A cannot be made if the assessments for those years have attained finality.

The Tribunal noted that for the assessment years in question, the time limit for issuing notices under Section 143(2) had expired, and no assessments were pending. Therefore, the additions made by the AO under Section 153A were invalid as they were not based on any incriminating material found during the search. The Tribunal upheld the CIT(A)'s decision to delete these additions.

Conclusion
The Tribunal dismissed the Revenue's appeals and the assessee's cross-objections, upholding the CIT(A)'s order to delete the additions made under Section 68 and the related interest disallowances. The Tribunal confirmed that no additions could be made under Section 153A in the absence of incriminating material found during the search. The disallowances under Section 14A, as confirmed by the CIT(A), remained unchallenged. This judgment underscores the necessity of incriminating evidence for making additions under Section 153A and the importance of substantiating claims with adequate documentation.

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