2024 (7) TMI 1137 - AT - Income Tax

Disallowance of financial expenses in proportion of purchase from bogus companies - AO disallowed the expenditure to the extent of paper transaction not backed by actual business - HELD THAT - CIT(A) had disallowed the loss on circular transaction holding it to be artificial and managed and losses are fabricated, but on the other hand, he found that the financial charges to be incurred for the purpose of business, hence, to be allowed. The assessee has pleaded that the funds were required for working capital. But in case of paper transaction, there is no requirement of capital at all because there was neither any purchase nor was there any sale. However, the assessee has adopted this route to raise higher finance from the circular transaction. Since the discounting charges on letter of credits have been paid to bank, the genuinity is sacrosanct. The funds so raised have been used to augment the working capital required for delivery based business. The assessee had used the platform of circular trading to draw higher finance from the bank. There is no instance of any diversion of funds as pointed out by the AO. The funds from the discounted letter of credits are used for the purpose of business and is allowable under section 36(1)(iii) of the Act. There is no ground to interfere with the conclusions of CIT(A). Hence, the ground raised by the Revenue is dismissed. Assessment u/s 153A - Addition u/s 68 - In this case, the addition is not based on any incriminating evidences as evident from the assessment order. All the transactions were reflected in regular books of account. No incriminating evidences were unearthed. Neither there is any statement u/s 132(4) nor any corroborative evidences which goes against the assessee. Accordingly, no addition is sustainable in the absence of any incriminating document. DR pleaded that addition of ₹ 4 crore may be confirmed as transactions were not genuine. He, however, failed to pinpoint any incriminating evidence upon which the additions were made. Thus, all the grounds raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Deletion of addition made by AO on account of disallowance of financial expenses.
2. Deletion of addition made by AO on account of unexplained share premium and capital.
3. Requirement of incriminating material for additions under section 153A in unabated assessments.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Disallowance of Financial Expenses:

The Revenue challenged the deletion of an addition of Rs. 25,25,934 made by the AO due to disallowance of financial expenses proportional to purchases from bogus companies. The learned CIT(A) confirmed the loss of Rs. 8,33,594 related to circular transactions, stating these were fabricated. However, the CIT(A) allowed the financial charges, considering them necessary for business purposes. The Tribunal noted that the funds raised through circular transactions were used for business needs and allowed under section 36(1)(iii) of the Act. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

2. Deletion of Addition Made by AO on Account of Unexplained Share Premium and Capital:

The Revenue contested the deletion of a Rs. 4 crore addition made by the AO for unexplained share premium and capital. The AO argued that the investor companies were shell companies with no business activities, incorrect addresses, and lack of creditworthiness. The CIT(A) deleted the addition, and the Tribunal upheld this decision, citing the absence of incriminating material found during the search. The Tribunal referenced multiple cases, including ACIT v/s Krishna Gupta and CIT v/s Lovely Exports Pvt. Ltd., supporting the requirement of incriminating material for additions in unabated assessments.

3. Requirement of Incriminating Material for Additions Under Section 153A in Unabated Assessments:

The Tribunal emphasized that for unabated assessments, additions under section 153A require incriminating material found during the search. They cited the Supreme Court's decision in Abhisar Buildwell Pvt. Ltd., which held that no additions could be made in completed/unabated assessments without incriminating material. The Tribunal referenced various judgments from different High Courts, including Pr. CIT v. Abhisar Buildwell (P.) Ltd. and Principal CIT v. LKG Builders (P.) Ltd., which supported this view. The Tribunal concluded that since no incriminating evidence was found during the search in this case, the additions were unsustainable.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions to delete the additions made by the AO. The Tribunal emphasized the necessity of incriminating material for making additions under section 153A in unabated assessments, aligning with established judicial precedents.