2020 (10) TMI 1088 - AT - Income Tax

Validity of reassessment proceedings - reasons to believe - HELD THAT - Since the assessee was found to be one of the beneficiary, the case was reopened within 4 years from end of relevant assessment year as per due process of law by issuance of statuary notices u/s 148 as well u/s 143(2) 142(1). Original return filed by the assessee was not subjected to scrutiny assessment. It is quite discernible that Ld. AO was clinched with specific tangible information as to possible escapement of income. Nothing more, in our opinion, was required at this stage to reopen the assessment proceedings. Therefore, we do not find any substance in legal grounds raised before us. Ground Nos. 1 to 3 stand dismissed Rejection of books would stand dismissed in view of the fact that Ld. AO has made specific item-wise additions without disturbing the overall financial results shown in the audited financial statements. Ground Nos. 1 to 4 stands dismissed. Estimation of income - Bogus purchases - AO estimated an addition of 12.5% against suspicious purchases - HELD THAT - The assessee s accounts were duly audited wherein various stock register as well as quantitative details of traded goods were furnished. As uncontroverted fact that not even a single piece of diamond was found at the premises of the suspicious suppliers which came to light during search / survey proceedings. The said aforesaid facts would justify the stand of AO in rejecting the profits shown on these purchases and make estimated additions to account for undeclared profit element earned by the assessee on these purchase transactions. As rightly concluded that the said purchase-sale transactions recorded in the books would not reflect true picture of profits earned by the assessee on these transactions and purchase rate as mentioned in the supplier s sale invoices could not be accepted. Estimation of profit - assessee has reflected overall Gross profit (GP) Rate of 6.65% during the year as against corresponding rate of 6.11% in preceding year. AR has stated that since the profit earned on these suspicious transactions is 7.25%, no further addition should be made. We are not inclined to accept the said plea. Assessee was dealing in low margin commodity like diamond which attract lower VAT rate of 1% and in view of the overall GP rate reflected during the year, we restrict the estimation to 2% of aggregate purchase Addition of Unsecured Loans, interest commission - HELD THAT - Nothing was brought on record to suggest any cash got exchanged between the assessee and the lenders. In the background of stated facts, it could very well be said that the assessee had duly discharged the onus of proving the fulfilment of primary ingredients of Sec.68. The onus, thus shifted on revenue, to controvert the same by bringing on record cogent material to dislodge the documentary evidences submitted by the assessee. However, except for third party statements, the revenue is not cinched with any specific evidence against the assessee to declare the said loans as the money of the assessee brought into the books by way of unexplained cash credit. No effective investigation is shown to have been carried out by the revenue to dislodge the assessee s documentary evidences. Addition of unexplained cash credit could not be sustained in the eyes of law. Consequently, interest disallowance as well as commission / brokerage addition as made against the same would not survive. Disallowance u/s 14A - HELD THAT - While computing the said disallowance, only those investments which have fetched exempt income during the year are to be considered. Overall disallowance could not exceed the exempt income earned by the assessee during the year. Therefore, we direct Ld. AO to re-compute the said disallowance considering only those investments which have fetched exempt income during the year. Ground No.9 stands partly allowed. Disallowance u/s 36(1)(iii) - interest free loans given to partners - nexus of borrowed funds vis- -vis capital withdrawals - HELD THAT - Assessee firm has not provided any interest on credit balances of partners capital in earlier years and likewise it has also not charged the interest on debit balances during the year. Partners had credit balances in all earlier three years whereas debit balances have arisen only due to the withdrawals during the year. Assessee s financial statements for the year, as placed on record, would show that there is overall reduction in secured and unsecured loans during the year whereas sundry creditors for goods and expenses have shown hefty increase which would lead to a conclusion that the withdrawals were funded out of credit float enjoyed by the assessee. Further, the assessee has reflected taxable income of ₹ 204.42 Lacs which could be said to have accrued evenly throughout the year. Therefore, unless direct nexus of borrowed funds vis- -vis capital withdrawals was established, no such disallowance u/s 36(1)(iii) could have been made. We find that Ld. AO has failed to bring on record this nexus - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reassessment proceedings and rejection of books.
2. Addition on account of bogus purchases.
3. Addition of unsecured loans, interest, and commission.
4. Disallowance under Section 14A.
5. Interest disallowance under Section 36(1)(iii).
6. Charging of interest under Sections 234A, 234B, 234C, and 234D.
7. Initiation of penalty proceedings under Section 274 r.w.s. 271(1)(c).

Detailed Analysis:

1. Validity of Reassessment Proceedings & Rejection of Books:
The reassessment proceedings were initiated based on information from DGIT (Investigation), Mumbai, indicating that the assessee obtained bogus loans from entities managed by the Bhanwarlal Jain Group. The initiation was within four years from the end of the relevant assessment year and followed due process with statutory notices issued under Sections 148, 143(2), and 142(1). The original return was not scrutinized, and the AO had specific tangible information suggesting possible income escapement. Hence, the Tribunal found no substance in the legal grounds challenging the reassessment and dismissed Ground Nos. 1 to 4.

2. Addition on Account of Bogus Purchases:
The assessee correlated the purchases from suspicious suppliers with sales, supported by primary purchase documents and bank payments. However, during search/survey proceedings, no diamonds were found at the suppliers' premises, justifying the AO's rejection of the profits shown on these purchases. The Tribunal noted that the overall Gross Profit (GP) Rate was 6.65% during the year. Considering the low margin in diamond trading, the Tribunal restricted the profit estimation to 2% of the aggregate purchase amounting to ?6,72,904/-, partly allowing Ground No. 5.

3. Addition of Unsecured Loans, Interest, and Commission:
The unsecured loans were treated as unexplained cash credits based on third-party statements. The assessee provided substantial documentary evidence, including ledger confirmations, IT return acknowledgments, audited financial statements, and bank statements. The loans were repaid, and interest was paid with applicable TDS deducted. The Tribunal found that the assessee had discharged the onus of proving the loans' genuineness. The revenue failed to provide specific evidence against the assessee. Consequently, the addition of unexplained cash credits, interest disallowance, and commission/brokerage addition were deleted, allowing Ground Nos. 6 to 8.

4. Disallowance under Section 14A:
The assessee earned exempt dividend income of ?40,972/-. The Tribunal directed the AO to re-compute the disallowance under Section 14A, considering only those investments that fetched exempt income during the year. The disallowance should not exceed the exempt income earned. Ground No. 9 was partly allowed.

5. Interest Disallowance under Section 36(1)(iii):
For AY 2013-14, the AO disallowed interest of ?5.32 Lacs under Section 36(1)(iii) due to partners' debit balances and interest-free advances. The Tribunal noted that the firm had not charged interest on debit balances nor provided interest on credit balances in earlier years. The withdrawals were funded out of the credit float enjoyed by the assessee, and no direct nexus between borrowed funds and capital withdrawals was established. The Tribunal deleted the interest disallowance, allowing this ground.

6. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
These grounds were either premature or did not require specific adjudication by the Tribunal.

7. Initiation of Penalty Proceedings under Section 274 r.w.s. 271(1)(c):
This ground was not specifically adjudicated by the Tribunal.

Conclusion:
All three appeals were partly allowed to the extent indicated in the order, with specific directions for re-computation and deletion of certain additions and disallowances. The Tribunal's decision was pronounced on 22nd October 2020.