2019 (4) TMI 353 - AT - Income Tax

Unexplained credit u/s. 68 - addition made towards unsecured loans - verification additional evidence filed before CIT(A) - HELD THAT - The assessee has segregated credits into three parts, as per which, credits in the form of return of advances given by the assessee to various parties in the earlier period, credits in the form of maturity proceeds of FDs and cash deposits; finally, credits in the form of unsecured loan accepted from various parties. As regards first kind of credits, i.e. repayment of advances given to various parties, although the Ld.CIT(A) has stated that the assessee has filed complete details, but whether these documents were part of AOs records or not is a question needs to be examined. Insofar as credits in the form of maturity of FD also, there is no discussion in the order of Ld.CIT(A) with regard to the source of such FDs. As regards unsecured loan taken from various individuals, the primary objection of the AO is with regard to genuineness of transactions and creditworthiness of the parties. But, the Ld.CIT(A) recorded his finding only on the issue of identity of the parties ignoring the other two aspects brought out by the AO including capacity of the parties to explain source of investments. According to the AO, none of the creditors had sufficient income to explain source, but there is no discussion in the order of the CIT(A) about this observation. Insofar as loan taken from Aditya Patel of ₹ 50 lakhs, the assessee, before the AO has claimed that he had accepted loan from the party for which assessment details have been filed. Before the Ld.CIT(A), the assessee has made an altogether different submission to argue that even though Aditya Patel is having minimum income in his return of income, but the source of credit was from loan for which details of company alongwith PAN was submitted to the AO. Before us, the asessees has come out with one more argument that this is an advance received from the party against sale of certain agricultural land which has been finally adjusted towards sale consideration of land - issue needs to be examined by the AO in light of the claim of the assessee that sufficient evidence has been filed in order to prove identity, genuineness of transaction and creditworthiness of the parties. Disallowance of interest expenditure - HELD THAT - We find that the assessee has filed complete details of interest expenses paid to Shamrao Vithal Co-operative Bank Ltd towards funds borrowed to make various income generating investments. When the assessee has offered to tax interest income generated from investments, corresponding expenses incurred including interest on loan borrowed from banks needs to be allowed as deduction. CIT(A), after considering relevant facts, has rightly allowed interest paid to Shamrao Vithal Co-operative Bank Ltd. We do not find any error in the findings of the Ld.CIT(A) while deleting addition made towards interest. Hence, we are inclined to uphold the findings of Ld.CIT(A) and reject ground taken by the revenue.

Summary

Issues Involved:
1. Addition of ?2,42,30,609 on account of unexplained credit under Section 68 of the Income Tax Act, 1961.
2. Addition of ?3,13,501 on account of disallowed interest expenses.

Issue-wise Detailed Analysis:

1. Addition of ?2,42,30,609 on Account of Unexplained Credit under Section 68 of the Income Tax Act, 1961:
The assessee, an individual deriving income from remuneration and other sources, filed a return of income for AY 2009-10 declaring a total income of ?23,88,230. During scrutiny, the AO noticed substantial investments in mutual funds, bonds, and debentures amounting to ?7,01,32,021. The AO asked the assessee to provide details to ascertain the source of these investments. The assessee submitted that these investments were funded by unsecured loans from various parties totaling ?2,42,30,609. However, the AO added this amount under Section 68 as the assessee failed to provide complete details proving the identity, genuineness, and creditworthiness of the creditors.

Upon appeal, the CIT(A) allowed the assessee to submit additional evidence, including confirmations from the creditors, PAN details, and income tax returns. The CIT(A) admitted this additional evidence and deleted the addition made by the AO, stating that the assessee had sufficiently proved the identity, genuineness, and creditworthiness of the creditors. The CIT(A) also noted that part of the addition related to the repayment of loans and advances given by the assessee, which had been substantiated with necessary details.

The revenue appealed against this decision, arguing that the CIT(A) erred in giving relief without properly appreciating that mere furnishing of bank statements does not absolve the assessee from proving the source of credits. The Tribunal found that the CIT(A) had primarily focused on the admissibility of additional evidence without addressing the AO's concerns about the creditworthiness of the creditors. The Tribunal noted discrepancies in the assessee's explanations and divergent arguments at different stages of the proceedings. Consequently, the Tribunal set aside the issue to the AO for re-examination, directing the AO to verify the additional evidence with a reasonable opportunity for the assessee to present their case.

2. Addition of ?3,13,501 on Account of Disallowed Interest Expenses:
The AO disallowed interest expenses claimed by the assessee on the grounds that the interest expenses could not be correlated with the interest income. The AO observed that the assessee failed to provide necessary details to substantiate the correlation between the interest expenses and the interest income.

The assessee contended that the interest expenses were incurred on loans taken to make income-generating investments, and therefore, should be allowed as deductions. The CIT(A) accepted this argument, noting that the assessee had provided complete details of interest expenses paid to Shamrao Vithal Co-operative Bank Ltd. The CIT(A) held that when the assessee has offered interest income for taxation, the corresponding expenses incurred, including interest on loans, should be allowed as deductions.

The Tribunal upheld the CIT(A)'s decision, agreeing that the interest expenses were rightly allowed as deductions against the interest income. The Tribunal found no error in the CIT(A)'s findings and rejected the revenue's ground on this issue.

Conclusion:
The Tribunal partly allowed the revenue's appeal for statistical purposes, setting aside the issue of unexplained credit under Section 68 for re-examination by the AO, while upholding the CIT(A)'s decision on the disallowance of interest expenses. The order was pronounced in the open court on 27-03-2019.