2024 (12) TMI 375 - AT - Income Tax

Addition u/s 68 - creditworthiness of the lenders in the absence of the income tax return and bank statements - HELD THAT - CIT(A) was of the opinion that the assessee has failed to provide complete and satisfactory documentation that could establish the of the transactions concerning all creditors. CIT(A) further held that assessee also failed to comply with the notices issued by the AO, as it indicated a lack of due diligence in substantiating the claimed transactions. The primary burden of proof lies with the assessee to establish that the source of the cash credits appearing in the books are from genuine sources and in this case, the assessee was unable to discharge this burden satisfactorily. Therefore, the addition as unexplained cash credit u/s 68 of the Act was upheld by dismissing the ground raised by the assessee. Disallowance on account of interest - assessee failed to provide adequate documentation to prove that the interest expenses were incurred solely for the purpose of business - linkage between the borrowed funds and their utilization in business activities was not substantiated satisfactorily - HELD THAT - CIT(A) observed that the borrowed funds were used for non-business purposes, such as providing interest-free loans to related parties weakens the case for a business deduction as per income tax laws. CIT(A), based on the examination of the documents furnished and the legal framework, the AO's decision to disallow the interest expenses was upheld, as the assessee did not meet the burden of proof required to establish that these expenses were incurred wholly and exclusively for business purposes. Thus the ground raised by the assessee was dismissed and addition made by the AO was upheld. Disallowance u/s 57 - AO observed that the assessee claimed an expenditure as interest expenses, which were asserted to be incurred for earning income from other sources, but were not recorded in the Profit Loss Account of the business - HELD THAT - Certain lenders have confirmed the transaction. AO out of total 43 lenders, issued notices u/s 133(6) of the Act only to 10 lenders out of which 4 lenders confirmed the transaction, while 6 lenders did not respond. There is no denial in any case. AO only on the basis of non receipt of response from 6 lenders, coloured the entire unsecured loan borrowed during the year as unexplained cash credit, conveniently ignoring the fact that majority of loans were repaid during the current year and subsequent year and the assessee has duly paid interest and complied with TDS provisions. AO erred in drawing negative inference based on non response from few parties. Moreover, the A.O. only enquired from 10 parties out of 43. It was least expected from the AO to at least verify the return of income of the lenders from their own database. Needless to say that in case of non response, the Assessing Officer has all the powers to issue summons under section 133 of the Act and enforce attendance of the lenders. However, the said exercise was also not conducted by the AO. No enquiry was made by the AO by issuing summons. Further, no incriminating evidences were brought on record to dislodge the materials relied upon by the assessee to prove the ingredients of section 68. Accordingly, we set aside the impugned order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer for verification of the fact as to whether loans were duly repaid back by the assessee either in current year or subsequent years and if so, the same need not be added back. Needless to say that the assessee be provided reasonable opportunity of being heard. Thus, ground no.1, raised by the assessee is allowed for statistical purposes. Disallowance of interest considering the fact that the funds were not used for the purpose of business - AO disallowed the interest considering the fact that the funds were not used for the purpose of business - HELD THAT - For claiming deduction under section 57(iii) of the Act, it would be sufficient to prove that there is nexus between the income which will be earned and amount expended. In the given case, it is undisputed fact that the funds have been advanced to related concern. At this juncture it is also apropos to refer to the landmark judgment of S.A. Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT wherein it has been held that the tax authorities must not look at the matter from their own view point but that of a prudent businessman. In case, it is found that transfer of borrowed funds to a sister concern was on account of commercial expediency even if the same is interest free, the deduction claimed by the assessee cannot be disallowed. Thus, ground raised by the assessee is allowed. It is reiterated that the allowance of any expenditure is within the judicial periphery laid in the Act and mere non recording in the books of account can hardly negate the claim. Disallowance of interest expenses claimed u/s 36(1)(iii) in the books of accounts - The matter has to be directed to be re examined since we do not ascribe to the views that loan is unexplained. AO could not make out a single case of diversion of funds for non business purpose apart from making a general and casual statement which has no basis to be sustained. Hence, we find force in the submissions of the learned Counsel for the assessee that the interest is used for the purpose of business. The order of CIT(A) cannot be sustained because he has failed to highlighted about how the submissions of the assessee is fallacious. He failed to advert about the financial affairs which clearly demonstrates that the assessee has own funds to the extent of ₹ 1.25 crore. Thus, it is beyond any logic as to how the entire interest can be disallowed straightway. Moreover, out of the total interest of ₹ 0.97 crore, the interest paid by the assessee on cash credit of ₹ 0.53 crore is availed from Bank, which is undisputedly loan taken for business, which fact is examined and is not in dispute. Even for the balance interest, not even single instance of diversion of funds have been brought by the AO In the absence of any instance of diversion of funds, the interest claimed under section 36(1)(iii), which are part of audited books of account, cannot be disallowed.

Summary

Issues Involved:
1. Justification of addition under Section 68 for unexplained cash credits.
2. Disallowance of interest expenses under Section 36(1)(iii).
3. Disallowance of interest expenses under Section 57.

Issue-wise Detailed Analysis:

1. Addition under Section 68 for Unexplained Cash Credits:

The primary issue was whether the addition of Rs. 5,20,84,000 as unexplained cash credits under Section 68 was justified. The assessee received unsecured loans from various parties, and the Assessing Officer (AO) questioned the genuineness, creditworthiness, and identity of the creditors due to the non-submission of their tax returns and bank statements. The assessee argued that these documents were personal and could not be obtained, suggesting that the AO verify the details through departmental records. Despite providing PAN details, addresses, and confirmations from most lenders, the AO added the amount under Section 68, which was upheld by the CIT(A) due to the assessee's failure to fully substantiate the transactions. However, the Tribunal noted that the majority of loans were repaid within the same or subsequent year, and the AO did not dispute the repayments. The Tribunal directed the AO to verify the repayment details and reconsider the addition.

2. Disallowance of Interest Expenses under Section 36(1)(iii):

The AO disallowed interest expenses of Rs. 97,66,308, claiming the funds were not used for business purposes. The assessee contended that the borrowed funds were forwarded to a related company, Khandelwal Jewellers Akola Private Limited, for business purposes, and the interest should be allowed under commercial expediency principles. The Tribunal agreed with the assessee, noting that the funds were used for business purposes and that the AO failed to establish any diversion of funds for non-business purposes. The Tribunal allowed the interest expenses, emphasizing that the AO's conclusions lacked substantive evidence.

3. Disallowance of Interest Expenses under Section 57:

The AO disallowed interest expenses of Rs. 74,32,292 claimed under Section 57, arguing that the expenses were not recorded in the Profit & Loss Account and were not incurred for earning income from other sources. The assessee argued that the funds were borrowed for business purposes and advanced to a related company, thus qualifying for deduction under Section 57. The Tribunal found merit in the assessee's argument, noting that the borrowed funds were used for business purposes and that the AO did not provide evidence of personal use or diversion. The Tribunal allowed the interest expenses, reaffirming the principle that expenses incurred for commercial expediency are deductible.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to verify the repayment of loans and reconsider the addition under Section 68. The interest expenses under Sections 36(1)(iii) and 57 were allowed, as the Tribunal found that the funds were used for business purposes, and the AO failed to prove otherwise. The Tribunal emphasized the importance of commercial expediency and the need for the AO to substantiate claims of non-business use with evidence.