2021 (12) TMI 1247 - AT - Income Tax

Disallowance u/s 14A - interest from the partnership firm - HELD THAT - We note that assessee has invested in partnership firm out of own funds alongwith some borrowed funds. These amounts have been invested in the partnership firm as a capital contribution. The assessee is getting interest from the partnership firm on his contribution @ 12% and such interest is assessable u/s. 28 of the Act, as a business income. Therefore, it should not be brought in the ambit of the provision of 14A of the Act, for that reliance can be placed on the judgment of the Co-ordinate Bench of Mumbai in the case of Asstt. Commissioner of Income-tax, Circle-19(2) Mumbai vs. Shri Harish P Shah 2011 (6) TMI 1009 - ITAT MUMBAI - thus we allow ground no. 1 raised by the assessee. Unexplained cash credits u/s. 68 - HELD THAT - The assessee has received fresh loans from these two persons in the year. Both the lenders are assessed to tax. One of the two lenders (Shri Shailesh Savani) is since deceased, another lender, Smt. Sonalben Shah is alive. Smt. Sonalben Shah appeared before Ld. AO u/s. 131 and deposed that she has advanced the said amount to the assessee - AO found that there were cash deposits of exact amount in bank accounts of the two lenders just prior to the cheques being issued to the assessee. It is also seen that the existing bank balance prior to these deposits are kept as it is. One of the lender Smt. Sonalben Shah explained this cash deposits as loans received in cash from 6 persons. All loans are just below ₹ 20,000/- (the permissible limit) and all 6 are not income tax assessees. So Ld. AO arrived at conclusion that the creditworthiness of lender and genuineness of transaction is not established. In case of late Shailesh Savani, the cash deposits were not explained by his legal heir. We note that assessee has failed to discharge his onus of establishing creditworthiness and genuineness, therefore, we confirm the order of ld. CIT(A).- Decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Addition of unexplained cash credits under Section 68 of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue in both assessment years (AY 2013-14 and 2015-16) was the disallowance under Section 14A of the Income Tax Act, amounting to ?7,38,063/- and ?3,06,480/- respectively. The Assessing Officer (AO) observed that the assessee had invested borrowed funds in a partnership firm, earning taxable interest income and partner remuneration, and exempt share of profit. Consequently, the AO disallowed the entire amount of ?10,43,888/- (comprising ?1,50,345/- as other expenses and ?8,93,543/- as interest on borrowed funds).

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] made a proportionate disallowance, restricting it to ?7,38,063/-. The assessee contended that Section 14A was not applicable since the interest and remuneration from the partnership firm were taxable. The Tribunal, referencing the Mumbai Tribunal's decision in the case of Asstt. Commissioner of Income-tax, Circle-19(2) Mumbai vs. Shri Harish P Shah, held that interest received from the partnership firm should be treated as business income under Section 28 of the Act and should not be subjected to disallowance under Section 14A. The Tribunal allowed the assessee's appeal on this ground for both assessment years.

2. Addition of Unexplained Cash Credits under Section 68 of the Income Tax Act:
For AY 2013-14, the assessee challenged the addition of ?1,17,500/- and ?2,00,000/- as unexplained cash credits under Section 68. The AO noted that the loans were received from Smt. Sonalben Shah and the late Shri Shailesh Savani, with cash deposits in their bank accounts just before issuing cheques to the assessee. Smt. Sonalben Shah appeared before the AO and explained the cash deposits as loans received from six persons, each below ?20,000/-, who were not income tax assessees. The AO concluded that the creditworthiness and genuineness of the transactions were not established. In the case of the deceased lender, the legal heir could not explain the cash deposits.

The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee failed to discharge the onus of proving the creditworthiness and genuineness of the transactions. Therefore, the additions under Section 68 were confirmed, and the grounds raised by the assessee were dismissed.

Conclusion:
Both appeals were partly allowed. The Tribunal allowed the assessee's appeal concerning the disallowance under Section 14A for both assessment years, following the precedent set by the Mumbai Tribunal. However, the additions under Section 68 for unexplained cash credits were upheld, as the assessee failed to prove the creditworthiness and genuineness of the transactions.