2025 (2) TMI 577 - AT - Income Tax

Addition u/s 68 - creditworthiness of the creditor/party - Party from whom the Assessee has received the loan had declared an accumulative total income of only Rs. 2.26 crore during the last four Assessment Years and the accounts are not audited and assets and liabilities were not declared in the ITR and there is no official records are available on the capital balance of him as assets and liabilities were not declared to the Department - also AO observed that there is no existence of other transaction like sale of assets during past four years to explain the source of funds to advance huge unsecured loan HELD THAT - CIT(A) finding that the Assessee has repaid the loan and also paid interest and TDS was duly deducted of such interest payment and further finding that the AO has considered the cumulative total loans received by the Assessee from the ledger however ignored the repayment and fresh receipt of loans from lender. Thus we are of the opinion that the CIT(A) has rightly deleted the addition. Finding no merit we dismiss the Ground No.1 of the Revenue. Admission of additional advances - Revenue contended that the Assessee erred in holding that the balance sheet was furnished along with the return by the creditor whereas the A.O. observed otherwise and the CIT(A) has not remanded back the issue to the A.O. under Rule 46A of the I. T. Rules 1962 - During the appeal proceedings against specific query of the CIT(A) the Assessee submitted complete details of every customer with its address PAN total sell amount and various discounts or rebates allowed by the Assessee. Those documents were submitted as per a specific query raised by the CIT(A). Therefore the Rule 46A of the Rules will not come in the way of the Assessee. Considering the fact that the copy of the ITR etc. were available with the AO there was no requirement for the Ld. CIT(A) for calling for the Remand from the A.O. as there is no application for additional evidence was filed by the Assessee under Rule 46A of the Rules. Disallowance of expenses u/s 69C - DR submitted that the Assessee has failed to furnish the substantive documents evidencing the actual purchases and transportation of goods and failed to establish the genuineness of the transaction - HELD THAT - Assessee Company has constructed new factory building of 15.06 crore and purchased the sand and Bajri from Hardev Singh and the said transaction was subjected to applicable GST at 5% and also considering the fact that those payments have been made from term loan raised by the Assessee from the Bank we find no reason to interfere with the findings and conclusion of the CIT(A) and we find no error or infirmity in the order of the Ld. CIT(A) in deleting the addition. Accordingly Ground No. 3 of the Revenue is dismissed. Addition u/s 37 - expenses claimed by the Assessee were aimed to reduce the purchase cost of third parties which were not accrual business expenses - HELD THAT - AO was of the opinion that in the transaction related to discount the nexus existents between the Assessee s expenses and it is distributor s income and not that all the Assessee therefore the same cannot be said to be made out of Assessee s business. AO opined that the Assessee had aimed at reducing the purchase price of the third parties who are independent entities cannot be said to be under the premises of business expediency. During the appellate proceedings the said disallowance has been reversed by the Ld. CIT(A). It is found that the total rebate and discount allowed by the Assessee was less than 1% and all the rebates and discounts are well account for and while disallowing the expenses the Ld. A.O. has not rejected the books of account. Appeal filed by the Revenue is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the CIT(A) erred in deleting the addition of Rs. 6,27,25,000/- made under Section 68 of the Income Tax Act, 1961, due to the alleged failure of the assessee to prove the creditworthiness of the creditor.

2. Whether the CIT(A) erred in holding that the balance sheet was furnished along with the return by the creditor, contrary to the Assessing Officer's (A.O.) observations, and whether the CIT(A) should have remanded the issue back to the A.O. under Rule 46A of the Income Tax Rules, 1962.

3. Whether the CIT(A) erred in deleting the addition of Rs. 83,70,259/- made under Section 69C of the Income Tax Act, due to the alleged failure of the assessee to furnish substantive documents evidencing actual purchases and transportation of goods.

4. Whether the CIT(A) erred in deleting the disallowance of Rs. 2,78,48,066/- made under Section 37 of the Income Tax Act, ignoring the claim that the expenses were aimed at reducing the purchase cost of third parties and were not actual business expenses.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Addition under Section 68 of the Income Tax Act

- Relevant Legal Framework and Precedents: Section 68 of the Income Tax Act deals with unexplained cash credits, where the assessee is required to prove the identity, creditworthiness, and genuineness of the creditor.

- Court's Interpretation and Reasoning: The Tribunal noted that the A.O. questioned the creditworthiness of the creditor, Sh. Narain Dass, due to his low declared income and lack of audited accounts. However, the CIT(A) found that the loans were legitimate, as they were reflected in the creditor's income tax return and supported by documentary evidence.

- Key Evidence and Findings: The CIT(A) considered the ledger, repayment details, and the fact that the creditor was a legitimate taxpayer. The creditor's loans to other group entities and subsequent repayments were also documented.

- Application of Law to Facts: The Tribunal agreed with the CIT(A) that the A.O. failed to consider repayments and fresh loans, and the creditor's transactions were adequately explained.

- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument, emphasizing the sufficiency of evidence presented by the assessee.

- Conclusions: The Tribunal upheld the deletion of the addition, finding no merit in the Revenue's ground.

Issue 2: Balance Sheet and Rule 46A

- Relevant Legal Framework and Precedents: Rule 46A governs the admission of additional evidence at the appellate stage.

- Court's Interpretation and Reasoning: The Tribunal found that the CIT(A) did not violate Rule 46A, as the additional evidence was submitted in response to specific queries and was already available with the A.O.

- Key Evidence and Findings: The CIT(A) had access to the ITR and supporting documents, negating the need for a remand.

- Application of Law to Facts: The Tribunal concluded that the CIT(A) acted within the rules by not remanding the issue, given the circumstances.

- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's contention, supporting the CIT(A)'s approach.

- Conclusions: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Issue 3: Disallowance under Section 69C

- Relevant Legal Framework and Precedents: Section 69C pertains to unexplained expenditure, requiring substantiation of expenses.

- Court's Interpretation and Reasoning: The Tribunal noted that the purchase of sand and Bajri was substantiated by GST payments and bank transactions.

- Key Evidence and Findings: The assessee's construction of a factory and the documented purchase of materials were considered legitimate expenses.

- Application of Law to Facts: The Tribunal found the CIT(A)'s deletion of the addition appropriate, given the evidence.

- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument, citing the adequacy of the assessee's documentation.

- Conclusions: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Issue 4: Disallowance under Section 37

- Relevant Legal Framework and Precedents: Section 37 allows deductions for business expenses, provided they are not personal or capital in nature.

- Court's Interpretation and Reasoning: The Tribunal observed that the discounts offered by the assessee were legitimate business expenses.

- Key Evidence and Findings: The discounts were less than 1% of total expenses and were accounted for, without the A.O. rejecting the books of account.

- Application of Law to Facts: The Tribunal found the CIT(A)'s reversal of the disallowance justified, given the business rationale for the discounts.

- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's argument, supporting the CIT(A)'s findings.

- Conclusions: The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

SIGNIFICANT HOLDINGS

- The Tribunal preserved the CIT(A)'s findings and conclusions on all grounds, emphasizing the adequacy of evidence and adherence to legal procedures.

- Core principles established include the importance of documentary evidence in substantiating claims and the proper application of procedural rules.

- The Tribunal's final determination was to dismiss the Revenue's appeal, upholding the CIT(A)'s order in its entirety.