2023 (3) TMI 907 - AT - Income Tax

Addition u/s. 68 - addition of loan from two lenders reassessment orders in lender companies - CIT-A deleted the addition - HELD THAT - CIT (A) has gave detailed reasoning for deleting the addition and further more clinching issue is reassessment of the lender companies where the monies received by them are accepted as genuine. When the source of money is accepted as compliant with provision of section 68 in absence of any further inquiry and findings the amount received by assessee form those companies cannot be held to be taxable in the hands of the assessee u/s 68. Thus, reassessment orders in lender companies accepting the money if at all received from companies operated by some unscrupulous persons, then money received by assessee cannot be held to non-genuine. In fact, that is the only allegation of AO, which is demolished by the reassessment orders of the lender companies. We therefore do not incline to interfere with the findings and reasoning of the ld. CIT(A) and uphold the order of ld. CIT(A). Disallowance of business loss - utilization of interest bearing funds for the purpose of business in order to claim the interest expenditure - AO held that assessee had not brought on record any evidence to show direct nexus of utilization of fund whereas in fact, he had used the funds for the purpose of investments in other concerns in which he is a partner and also for other assets - HELD THAT - Since out of the overall interest bearing funds, certain funds were utilized for the purpose of business of the proprietorship concern of the assessee, to that extent, interest ought to be allowed u/s. 36(1)(iii) - We therefore do incline to interfere with the order of the ld. CIT(A) and the Corrigendum Order passed thereafter in granting relief to the assessee to the extent of Rs. 3,86,176/- on this issue u/s. 36(1)(iii) of the Act. Hence, the ground no. 3 of the revenue is dismissed. Assessment u/s 153C - additions made in the assessment order having any basis to incriminating material, if any - HELD THAT - We find that the said issue is squarely covered by the decision of Sinhgad Technical Education Society Ltd. 2017 (8) TMI 1298 - SUPREME COURT wherein it is held that there has to be incriminating material pertaining to the assessment year in question in order to make any addition or disallowance in an assessment made u/s. 153C of the Act. In light of the above background of facts and settled judicial precedent, we are of the considered view that no additions or disallowances can be made devoid of any incriminating material found during the search on a third person. Accordingly, the Cross objection filed by the assessee is allowed.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 of the Income Tax Act, 1961.
2. Deletion of disallowance of interest expenditure.
3. Disallowance of business loss.
4. Validity of assessment order passed under Section 153C read with Section 143(3) of the Income Tax Act, 1961.

Detailed Analysis:

1. Deletion of Addition Made Under Section 68 of the Income Tax Act, 1961:
The primary issue was the addition of Rs. 3,00,00,000/- made by the Assessing Officer (AO) under Section 68, which was deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO's addition was based on the unsecured loans received from M/s. Divine Tradecom Pvt. Ltd. and M/s. Rowland Trexim Pvt. Ltd., which were alleged to be accommodation entries from shell companies. The CIT(A) deleted the addition, stating that the assessee had provided sufficient evidence to establish the identity, genuineness, and creditworthiness of the lenders, including confirmations, ITR acknowledgements, financial statements, and bank statements. The CIT(A) also noted that the statement of Shri Pradeep Poddar, which the AO relied on, was retracted and not corroborated by any incriminating evidence. The Tribunal upheld the CIT(A)'s decision, emphasizing that the reassessment of the lender companies had accepted the share capital and premium raised by them as genuine.

2. Deletion of Disallowance of Interest Expenditure:
The AO disallowed the interest expenditure of Rs. 3,17,213/- on the unsecured loans, which was also deleted by the CIT(A). The CIT(A) reasoned that since the loans were genuine, the interest expenditure on these loans should also be allowed. The Tribunal agreed with the CIT(A), noting that the AO had not brought any contrary evidence to disprove the genuineness of the loans or the interest expenditure.

3. Disallowance of Business Loss:
The AO disallowed the business loss of Rs. 30,93,410/- claimed by the assessee, stating that the interest-bearing funds were not used wholly and exclusively for business purposes. The CIT(A) partially allowed the assessee's claim, granting relief to the extent of proportionate interest for funds utilized for business purposes. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had used part of the interest-bearing funds for business purposes and was entitled to proportionate relief.

4. Validity of Assessment Order Passed Under Section 153C Read with Section 143(3) of the Income Tax Act, 1961:
For Assessment Year (AY) 2014-15, the Tribunal addressed the issue of jurisdiction under Section 153C. The Tribunal noted that the satisfaction note recorded by the AO did not point to any incriminating material found during the search that pertained to the assessee. The Tribunal emphasized that for an addition under Section 153C, there must be incriminating material found during the search. Since AY 2014-15 was an unabated year, the Tribunal held that no additions could be made devoid of any incriminating material. Consequently, the Tribunal allowed the cross-objection filed by the assessee and dismissed the revenue's appeal.

For AY 2011-12, the Tribunal similarly found that the satisfaction note did not indicate any incriminating material found during the search that pertained to the assessee. The Tribunal reiterated that additions under Section 153C must be based on incriminating material found during the search. As the AO's additions were not based on such material, the Tribunal dismissed the revenue's appeal.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of additions and disallowances made by the AO, emphasizing the need for incriminating material to justify additions under Section 153C. The Tribunal also upheld the CIT(A)'s decision to allow proportionate interest expenditure for funds used for business purposes. Consequently, the appeals filed by the revenue were dismissed, and the cross-objections filed by the assessee were allowed.