2022 (3) TMI 774 - AT - Income Tax

Unexplained cash credit u/s 68 - onus to prove - HELD THAT - The primary onus that lay on the assessee to establish the identity and capacity of the concerned loan creditors as well as the genuineness of the relevant loan transactions was duly discharged by the assessee and in the absence of any evidence brought on record by the AO to prove to the contrary, the unsecured loans cannot be treated as unexplained cash credits under Section 68 of the Act and the addition made by the AO on this issue was unsustainable. In our opinion, the Assessing Officer was not justified to require the assessee to establish the source of source while examining the relevant cash credits representing the unsecured loans and the addition made by the Assessing Officer under Section 68 of the Act by treating the unsecured loan of ₹ 32,00,000/- as unexplained cash credits was rightly deleted by the learned CIT(A). In that view of the matter, we uphold the impugned order of learned CIT(A) giving relief to the assessee on this issue and dismiss Ground No.1 of the Revenue s appeal. Addition treating the capital introduced by the partners of the assessee-firm as unexplained cash credits under Section 68 - HELD THAT - Respectfully following this decision of Hon ble jurisdictional High Court in the case of PCIT Vs. Vaishnodevi Refoils Solvex 2018 (1) TMI 861 - GUJARAT HIGH COURT we uphold the impugned order of the learned CIT(A) deleting the addition made by the Assessing Officer by treating the capital introduced by the partners of the assessee-firm as unexplained cash credits under Section 68 of the Act. Ground No.2 of the Revenue s appeal is accordingly dismissed. Disallowance under Section 40A(3) - assessee has made certain payments exceeding ₹ 20,000/-, in a single entry in cash , on account of purchase of diesel - HELD THAT - Nothing on record to establish that the payments in question against the purchase of diesel were made by the assessee in cash to the suppliers who ordinarily was carrying on his business in such village or town which on the date of payment was not served by any bank. As a matter of fact, all these payments aggregating to ₹ 4,72,176/- were made by the assessee against the purchase of diesel regularly made throughout the year, apparently from one party, and there is nothing on record to show that the said party always refused to accept the payment by crossed-cheque or crossed draft or that the said party was carrying on the business of sale of diesel in a village or town which was not served by the bank. We, therefore, set aside the impugned order of the learned CIT(A) giving relief to the assessee on this issue and restore the disallowance made by the Assessing Officer under Section 40A(3) of the Act. Ground No.3 of the Revenue s appeal is accordingly allowed.

Summary

Issues Involved:
1. Deletion of addition of ?32,00,000/- made by the Assessing Officer (AO) on account of unsecured loans treated as unexplained cash credits under Section 68 of the Income-tax Act, 1961.
2. Deletion of addition of ?1,32,55,000/- made by the AO by treating the capital introduced by the partners of the assessee-firm as unexplained cash credits under Section 68.
3. Deletion of addition of ?4,72,176/- made by the AO by way of disallowance under Section 40A(3) of the Act for cash payments exceeding ?20,000/-.

Issue-wise Detailed Analysis:

1. Deletion of Addition of ?32,00,000/- as Unexplained Cash Credits:
The assessee, a partnership firm engaged in manufacturing laminate sheets, filed a return declaring a loss and showed unsecured loans of ?1,43,91,315/-. The AO found discrepancies in the creditors' financial status and treated ?37,00,000/- of these loans as unexplained cash credits, eventually adding ?32,00,000/- after partial acceptance. The AO's reasons included lack of creditworthiness and unexplained source of deposits in creditors' accounts. The assessee argued that it had fulfilled the primary burden under Section 68 by providing identity, transaction genuineness, and creditors' capacity. The CIT(A) deleted the addition, noting that the assessee provided comprehensive details, including PANs, bank statements, and IT returns of creditors. The CIT(A) held that the primary onus was discharged and the AO failed to provide evidence proving the loans were bogus. The Tribunal upheld CIT(A)'s decision, emphasizing that the AO's requirement to establish the source of source was unjustified and unsupported by evidence.

2. Deletion of Addition of ?1,32,55,000/- as Unexplained Cash Credits for Partners' Capital:
The AO added ?1,32,55,000/- to the assessee's income, treating the capital introduced by partners as unexplained cash credits, citing insufficient evidence of the source of funds. The CIT(A) deleted the addition, paralleling the reasoning used for the unsecured loans, and emphasized that the assessee had provided necessary details for the partners' contributions. The Tribunal supported CIT(A)'s decision, referencing the Gujarat High Court's ruling in PCIT vs. Vaishnodevi Refoils & Solvex, which stated that the firm discharges its onus by providing details of partners' contributions, and any further inquiry should be directed at the partners, not the firm.

3. Deletion of Addition of ?4,72,176/- under Section 40A(3) for Cash Payments:
The AO disallowed ?4,72,176/- under Section 40A(3) for cash payments exceeding ?20,000/- for diesel purchases, arguing that the payments were habitual and not covered by exceptional circumstances under Rule 6DD. The assessee contended that the payments were genuine and necessary due to the unavailability of nearby diesel suppliers. The CIT(A) deleted the disallowance, relying on CBDT Circular No.220 and Rule 6DD(j). However, the Tribunal reversed CIT(A)'s decision, citing the Supreme Court's clarification in Attar Singh Gurmukh Singh v. ITO that genuine expenditures are not exempt from Section 40A(3) unless exceptional circumstances under Rule 6DD are proven. The Tribunal noted the absence of evidence showing the supplier's refusal to accept non-cash payments or the supplier's location being unserved by banks, thus restoring the AO's disallowance.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of additions for unsecured loans and partners' capital contributions under Section 68, affirming that the assessee had discharged its onus. However, it restored the AO's disallowance under Section 40A(3) for cash payments, finding no exceptional circumstances justifying the cash transactions. The appeal was partly allowed, with the Tribunal pronouncing the order on 16th March 2022 at Ahmedabad.