2020 (11) TMI 927 - AT - Income Tax

Investment from undisclosed source, USL, interest disallowance - additions are made on the facts of the case and the documentary strength impounded during the survey u/s.133A - HELD THAT - No separate addition on account of unsecured loans is warranted as the income of the assessee has been estimated for the year is found to be on incorrect interpretation of the ratio laid down by the Hon'ble Courts. CIT(A) misread the judgments and combined, transplanted, bamboozled herself in considering the items of P L account with that of balance sheet items interchangeable. The case laws referred pertains to purchases, disallowances u/s. 40A(3) and on account of expenses on trading account. Extrapolation of judgments rendered in connection with the items of trading account cannot be extended to the addition of unsecured loans which is balance sheet item. The unsecured loans do not have impact on the estimation of gross profit as they do not constitute a part of the trading account. Hence, the issue of unsecured loans has to be adjudicated independently on the merits of the case. With regard to the loans from four people, while the ld. DR argued that even the copy of the bank statement has not been furnished by the assessee thus failing to discharge the primary onus in the case of the loans received from various parties, we find from the paper book, the relevant documents proving identity, genuineness and creditworthiness of the loaners. All the bank statements of the loan parties have been duly submitted before the AO. The revenue has not disputed the presence of the primary documents before the ld. CIT(A) at this juncture. Hence, it can be held that the assessee has discharged the primary onus to prove the loans whereas the revenue has not acted upon such evidences filed by the assessee to bring anything contra. The addition has been made without conducting any enquiry on the grounds that the assessee has not filed the primary documents necessary to prove the genuineness of the loans, the observation of which, we find contrary to the facts on record. Hence, the addition made on account of the loans from the above parties is directed to be deleted. Disallowance of Interest - AO held that the assessee has advanced to various parties and no interest has been received - AO calculated interest @ 12% on these advances and disallowed and deducted the same from the interest expenses paid - HELD THAT - The total expenditure on account of interest claimed by the assessee was ₹ 30,41,080/- out of which an amount of ₹ 24,56,648/- has been paid to the bank on account of the CC limit raised. The remaining amount of ₹ 5,84,432/- has been paid nearly to 25 outstanding unsecured loan parties. Hence, it cannot be said that the amount debited on account of interest hasn't been utilized for business purpose. The notional interest calculated on the advances given is without any legal basis and hence hereby directed to be deleted. Undisclosed Investment - HELD THAT - Since, the advance has been duly reflected in the balance sheet, no addition on this account is required. That leaves us with the question whether the interest accrued on this amount can be brought to tax or not. We find that the assessee has been following mercantile system of accounting and the fact of advance given to M/s. S.K. Traders is not in dispute. Hence, in tune with the accounting procedure and as per the impounded document, the interest @3% per annum stands accrued to the assessee on the advance of ₹ 65,23,720/- which the assessee omitted to show as interest receipt. Hence, we confirm interest @ 3% on the principle amount of ₹ 65,23,720/-. The principle amount of ₹ 65,23,720/- stands reflected in the name of M/s. S.K. Traders, in the regular books of accounts of the assessee, hence, we hold that no addition of this amount is required. Unexplained investment based on the impounded material - HELD THAT - As specifically asked the revenue as to the statement recorded on the date of survey and the reply of the assessee pertaining to these transactions on the date of survey. We find no mention of statement recorded at the time of survey either on the assessment order or in the order of the ld. CIT(A). No statement recorded at the time of the survey has been produced even before us as to what the transactions pertain to. No enquiries have been conducted by the revenue to substantiate to unexplained investments. The figures pertaining to three different years cannot be brought to taxation without proving as to what type of transactions the document signifies. Hence, in the absence of any primary, secondary or corroborative evidences, no addition can be made based on the impounded document. The revenue could not even prove with certainty to whom the document belongs nor tested the hand writing on the document either by the way of statement or by the way of forensics. Hence, keeping in view the entire gamut of events peculiar to the facts of this case, we hereby hold that no addition is warranted in the hands of the assessee for the instant year. Estimation of GP - Having heard the arguments and keeping in view the market averages, the GP is reduced to 25% from 35% on the sale of scrap and from 15% to 10% on the sale of other electronic goods. The AO is hereby directed to re-compute the taxable income taking into consideration the revised GP rate.

Summary

Issues Involved:
1. Investment from Undisclosed Source
2. Unsecured Loans
3. Disallowance of Interest
4. Undisclosed Investment
5. Unexplained Investment based on Impounded Material

Issue-wise Detailed Analysis:

1. Investment from Undisclosed Source:
This issue is comprehensively dealt with in other grounds.

2. Unsecured Loans:
The AO observed that the assessee received loans from four parties totaling ?7,53,000. The AO disallowed these loans due to insufficient proof of identity, genuineness, and creditworthiness. The CIT(A) deleted the addition, arguing that since the income was estimated by calculating the GP, no separate addition was warranted. The Tribunal found the CIT(A)'s decision incorrect, stating that unsecured loans should be adjudicated independently. Upon review, the Tribunal found that the assessee had provided sufficient documentation to prove the loans' genuineness and identity, and the revenue failed to act on these evidences. Thus, the addition made on account of the loans was directed to be deleted.

3. Disallowance of Interest:
The AO disallowed ?23,25,000 as interest on advances given without receiving interest. The assessee argued that the interest expenses were for business purposes, supported by financial statements showing the secured loan was represented by stock. The Tribunal found the AO's disallowance without legal basis, noting the interest expenses were indeed for business purposes. Hence, the disallowance was directed to be deleted.

4. Undisclosed Investment:
During a survey, the revenue impounded a document showing entries of ?90,58,000 and ?50,58,000 with calculated interest. The AO taxed these amounts as undisclosed investments. The assessee argued these were old loans reflected in regular books. The Tribunal found that the principal amount was already reflected in the balance sheet and only the interest accrued should be taxed. Thus, the principal amount was not added, but interest at 3% on ?65,23,720 was confirmed.

5. Unexplained Investment based on Impounded Material:
The AO added ?98,59,212 based on impounded documents showing investments not reflected in the return of income. The assessee argued the documents did not belong to them and no such investments were made. The Tribunal found that the revenue did not provide sufficient evidence to prove the transactions or the ownership of the document. No enquiries or forensic tests were conducted to substantiate the claim. Thus, the Tribunal held that no addition was warranted based on the impounded document.

Cross Objection:
The assessee's cross-objection regarding the estimation of GP was partly allowed. The Tribunal reduced the GP rate from 35% to 25% for the sale of scrap and from 15% to 10% for other electronic goods. The AO was directed to recompute the taxable income based on the revised GP rates.

Conclusion:
The appeal of the revenue was dismissed, and the cross-objection by the assessee was partly allowed. The order was pronounced in the open court on 10/08/2020.