2012 (5) TMI 231 - AT - Income Tax

Tribunal partially allows appeal, remands unexplained cash credits issue.

The Tribunal partly allowed the appeal, setting aside the disallowance of interest except for three parties and remanding the unexplained cash credits ... Disallowances/additions on account of interest - AO observed debit interest entry against the business income and Royalty income - unsecured loan and interest paid thereon – Held that:- as per the clauses of the Addendum agreement with the company and in order to fulfillment of the condition, the assessee through its partners has deposited Rs.2 crores after taking unsecured loans from the various parties and in lieu thereof the assessee has received the interest free deposits of Rs.1.50 crores and Royalty - the amount advanced to the company by the assessee firm through its partners is a measure of commercial expediency and the AO has erred in holding that the investment cannot be said for business consideration. Payment of interest without deducting TDS – disallowance u/s 40(a)(ia) - Held that:- the assessee has submitted Form No.15H in respect of two parties for not deducting TDS no default on the part of the assessee. Disallowance of unexplained cash credit – assessee not filed the copy of bank statements and copy of returns of loan creditors to prove the genuineness and creditworthiness of the creditors - summons u/s 131 issued - 11 summons returned back by the postal authority as un-served and 23 loan creditors have not filed any submission in response to summons issued to them - assessee during hearing submits that these loans are 'Hundi' loans taken through the brokers by cheques with TDS on interest – Held that:- In the absence of any material to show that apart from issuing notice u/s 133(1) as to how the AO pursued the matter further with the said parties and keeping in view that the assessee is ready to file confirmation letter along with the PAN, we are of the view that in the interests of justice, the matter should go back to the file of the AO. Issues Involved:1. Disallowance of interest of Rs.17,51,997/-.2. Disallowance of unexplained cash credits of Rs.4,00,000/-.Issue-wise Detailed Analysis:1. Disallowance of Interest of Rs.17,51,997/-:The assessee firm, engaged in trading Thermoware, Vaccumware, Glassware, and imported articles, filed a return declaring an income of Rs.5,93,000/-. The assessment was completed at an income of Rs.48,72,255/- after various disallowances, including an interest disallowance of Rs.17,51,997/-. The AO observed that the firm had unsecured loans of Rs.2,32,42,889/- and paid interest of Rs.17,51,997/- thereon. The partners withdrew funds amounting to Rs.2,34,33,638/-, and loans and advances of Rs.1,46,73,258/- were given to various entities without charging interest, except Rs.3,74,375/- from M/s Bluplast Industries Ltd. The assessee explained that the funds were borrowed to invest Rs.2 crores in the share capital of the company for an IPO, as per an obligation in an addendum dated 14.3.2005. However, the AO disallowed the interest, stating that the interest-bearing funds were not used for the assessee's business, thus not allowable under Section 36(1)(iii) of the Income Tax Act, 1961. Additionally, Rs.91,725/- was disallowed under Section 40(a)(ia) for failure to deduct TDS on interest payments.On appeal, the CIT(A) upheld the disallowance, considering the investment an in-house arrangement not aligned with business principles. The Tribunal, however, found that the investment was a measure of commercial expediency, citing the Supreme Court's decision in S.A. Builders Ltd. v/s CIT(A), which allows interest deduction if the borrowed money is used for business purposes. The Tribunal deleted the disallowance except for interest paid to three parties (Umesh Bajaj, Nimesh Biharilal, and Kundandas Punjwani), which was remanded to the AO for fresh examination. Regarding the Rs.91,725/- disallowed under Section 40(a)(ia), the Tribunal directed the AO not to consider payments to Kundandas Punjwani and Smt. Nirmala Bajaj, as Form No.15H was obtained but not submitted. The disallowance for the remaining 12 parties was upheld due to a lack of explanation from the assessee.2. Disallowance of Unexplained Cash Credits of Rs.4,00,000/-:The AO noted that the assessee firm had loans of Rs.2,32,42,889/- and requested loan confirmations, bank statements, and returns from creditors. The assessee provided confirmations but not bank statements or returns. Summons issued to various parties resulted in 11 returned as unserved and no response from 23 creditors. The AO added Rs.23,50,000/- as unexplained cash credits. On appeal, the CIT(A) remanded the matter for verification and ultimately confirmed the addition of Rs.4,00,000/- for three creditors (Omesh Bajaj, Nimesh Biharilal, and Kundandas Panjwani) due to a lack of confirmation and PAN.The Tribunal noted that the assessee was willing to provide confirmation letters and PAN, and in the interest of justice, remanded the issue back to the AO for fresh examination. The AO was directed to re-examine the matter and provide a reasonable opportunity for the assessee to present evidence.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, setting aside the disallowance of interest (except for three parties) and remanding the unexplained cash credits issue for fresh consideration. The order was pronounced in the open court on 9.12.2011.