2022 (6) TMI 261 - AT - Income Tax

Revision u/s 263 - CIT held that the impugned assessment order has been passed by the AO without making proper verification of the interest claimed on unsecured loan treated as unexplained cash credit u/s 68 - AO's order as erroneous and prejudicial to the interests of the Revenue - AO did not disallow the interest paid on the unsecured loan treated as unexplained cash credit u/s 68 of the Act, during the scrutiny assessment - HELD THAT - It is a settled law that no deduction /allowance is allowed and no loss can be set-off against such unexplained cash credit which is considered as income of the assessee. The Gujarat High Court in the case of Fakir Mohmed Haji Hasan 2000 (8) TMI 44 - GUJARAT HIGH COURT held that when (unexplained) income cannot be classified under any one of the heads of income under Section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. As it is seen that it is a settled proposition of law that no deduction /allowance is allowable against such unexplained cash credit which is considered as income of the assessee. In the present facts, during the course of assessment, the AO made an addition of ₹ 4,73,10,000/- on account of unexplained cash credit of unsecured loan u/s 68 - AO omitted to disallow the interest paid on the said unsecured loan while finalising the scrutiny assessment, which has resulted in under assessment of income. In our view, in the instant facts, the Principal CIT has not erred in facts and in law in setting aside the assessment order u/s. 263 of the Act by holding that the order is erroneous and prejudicial to the interests of the Revenue - Decided against assessee.

Summary

Issues:
Jurisdiction under section 263 - Conditions not satisfied
Cancellation of assessment order during pending appeal
Disallowance of interest on unsecured loan
Validity of assessment order

Analysis:
1. Jurisdiction under section 263 - Conditions not satisfied:
The appeal raised concerns regarding the jurisdiction exercised under section 263 by the Principal Commissioner of Income Tax. The Principal CIT held that the assessment order was erroneous and prejudicial to the Revenue's interests as the AO failed to disallow interest on unsecured loan treated as unexplained cash credit. The Principal CIT's decision was based on the provisions of section 37 of the Income Tax Act, which allows for the deduction of expenses laid out for business purposes. The Principal CIT concluded that the assessment order was not in compliance with the law, leading to the cancellation of the order and directions for a fresh assessment.

2. Cancellation of assessment order during pending appeal:
The appellant contested the cancellation of the entire assessment order by the Principal CIT, arguing that the assessment order was subject to appeal pending before the Commissioner of Income-tax (Appeals). However, the Principal CIT found that the AO had not properly verified the interest claimed on the unsecured loan treated as unexplained cash credit under section 68 of the Act. Consequently, the Principal CIT deemed the assessment order as both erroneous and prejudicial to the Revenue's interests, justifying the cancellation and the directive for a fresh assessment.

3. Disallowance of interest on unsecured loan:
The core issue revolved around the disallowance of interest on an unsecured loan during the assessment proceedings. The AO had added an amount on account of unexplained cash credit of an unsecured loan but failed to disallow the interest paid on the loan, resulting in an under-assessment of income. The Ld. DR argued that since the unsecured loan was considered unexplained income under section 68 of the Act, the interest should have been disallowed. The tribunal upheld this argument, citing established legal principles that no deduction or allowance is permissible against unexplained cash credits treated as income.

4. Validity of assessment order:
The tribunal, after hearing arguments and reviewing the case, upheld the decision of the Principal CIT to set aside the assessment order under section 263. The tribunal reiterated the legal principle that no deduction or allowance is allowable against unexplained cash credits treated as income. Based on this principle and the specific circumstances of the case where interest on the unsecured loan was not disallowed, the tribunal dismissed the appeal, affirming the decision to cancel the assessment order.

In conclusion, the tribunal dismissed the appeal, upholding the cancellation of the assessment order due to the failure to disallow interest on the unsecured loan, which was considered unexplained income. The judgment underscored the legal principle that no deductions or allowances are permissible against unexplained cash credits treated as income, emphasizing the importance of compliance with tax laws in assessment proceedings.