2022 (7) TMI 993 - AT - Income Tax

Addition u/s 68 - Assessee failed to prove the identity, credit worthiness of the creditors and genuineness of the transaction of receiving loan - HELD THAT - So far as the loan taken by Mr. Ram Mohan alias A. R. Arinaya though the loan is in the name Mr. Ram Mohan @ A.R.Arinaya, the funds have come from Smt. Lalitha, mother of Mr.Rammohan @ A.R.Arinaya. Smt. Lalitha has filed her return of income for AY 2016-17 declaring a total income - CIT(A) has however held that creditworthiness has not been proved. This finding of the CIT(A) is incorrect in the light of the fact that Smt. Lalitha is an income tax assessee having reasonable quantum of income. Mr. Ram Mohan alias A. R. Arinaya has also filed return of income for Assessment Year 2016-17 declaring a total income - In these circumstances, credit to the extent of Rs.10 lakhs in the name of Mr. Ram Mohan is duly explained and the said addition is deleted. Addition made in respect of loans by Mr. Ajit Hebbar and Ms. Mridula Hebbar - The evidence on record shows their sources are reflected in the form of their bank accounts indicating sufficient funds and there are no circumstances indicating that the funds in their bank accounts is assessee s money. The assessee has thus established the source of the creditors. As pointed out for the assessee, the PAN and the addresses of the creditors was very much available with the AO and he did not choose to issue any summons calling upon them to prove their source or any other explanation. In these circumstances, as assessee has duly discharged his onus all satisfactorily the credits in question under section 68 of the Act. Consequently, the aforesaid addition being credits from Mr. Ajit Hebbar and Ms. Mridula Hebbar are also deleted. We find support from the decision of Orissa Development Corporation Pvt. Ltd., (s 1986 (3) TMI 3 - SUPREME COURT . Disallowance of depreciation - AO disallowed the claim of the assessee for depreciation on the ground that the assessee did not file any evidence to substantiate the claim for depreciation - HELD THAT - As the assessee has established that it is entitled to claim depreciation. The depreciation in our view has to be allowed as claimed by the assessee.

Issues Involved:
1. Addition of Rs.25 lakhs under section 68 of the Income Tax Act, 1961.
2. Disallowance of depreciation amounting to Rs.8,32,317/-.

Issue-wise Detailed Analysis:

1. Addition of Rs.25 lakhs under section 68 of the Income Tax Act, 1961:

The first issue pertains to the addition of Rs.25 lakhs by the Assessing Officer (AO) under section 68 of the Income Tax Act, 1961, which was treated as unexplained credits. The assessee, a company engaged in renting two-wheelers through an app, received unsecured loans from three individuals: Mr. Ram Mohan alias A. R. Arinaya (Rs.10 lakhs), Mr. Ajit Hebbar (Rs.5 lakhs), and Ms. Mridula Hebbar (Rs.10 lakhs). The AO made an ex-parte assessment under section 144 due to non-response from the assessee, adding Rs.25 lakhs to the total income as the assessee failed to prove the identity, creditworthiness, and genuineness of the transactions.

Before the CIT(A), the assessee provided confirmations and affidavits from the lenders along with bank statements. The CIT(A) concluded that the loan from Mr. Ram Mohan was actually from his mother, Smt. Lalitha, whose creditworthiness was not established. For the loans from Mr. Ajit Hebbar and Ms. Mridula Hebbar, the CIT(A) found that their creditworthiness was not proved due to the absence of their ITRs.

The assessee argued that it had submitted sufficient documents to establish the identity, capacity, and genuineness of the loans, including loan agreements, PAN, addresses, confirmations, affidavits, and bank statements. The assessee contended that the CIT(A) erred in not considering these documents and that the duty under section 68 is only to explain the source of creditors, not the source of the source. The assessee cited the Karnataka High Court decision in Kumar Nirman and Nivesh Pvt. Ltd. v. ACIT, which held that providing balance sheets, P&L accounts, and ITRs of creditors is sufficient to establish identity and creditworthiness.

The tribunal found that the creditworthiness of Smt. Lalitha was established as she was an income tax assessee with a reasonable quantum of income. Thus, the addition of Rs.10 lakhs in the name of Mr. Ram Mohan was deleted. For the loans from Mr. Ajit Hebbar and Ms. Mridula Hebbar, the tribunal noted that their bank accounts indicated sufficient funds and the AO did not issue any summons to them. Therefore, the assessee had discharged its onus satisfactorily, and the additions of Rs.5 lakhs and Rs.10 lakhs were also deleted.

2. Disallowance of depreciation amounting to Rs.8,32,317/-:

The second issue concerns the disallowance of depreciation claimed by the assessee. The assessee claimed depreciation of Rs.9,61,797/- as per the Act, while the depreciation charged in the P&L account was Rs.1,29,485/-. The AO disallowed Rs.8,32,317/- due to a lack of evidence substantiating the claim for depreciation.

Before the CIT(A), the assessee submitted invoices showing the purchase of assets on which depreciation was claimed, including furniture, vehicles, computers, and office equipment. Despite this, the CIT(A) held that the assessee failed to prove ownership and use of the assets for business purposes. The AO's remand reports also indicated that the assessee did not provide evidence of the use of vehicles.

The tribunal reviewed the evidence, including the agreement with Datacraft Technologies Pvt. Ltd. for app development and invoices for vehicle purchases. The tribunal concluded that the assessee had established ownership and use of the assets for business purposes. Therefore, the depreciation claimed by the assessee was allowed.

Conclusion:

The tribunal allowed the appeal of the assessee, deleting the addition of Rs.25 lakhs under section 68 and allowing the depreciation claim of Rs.8,32,317/-. The other issue regarding the disallowance of sales promotion expenses was not pressed for adjudication.

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