2017 (12) TMI 1658 - AT - Income Tax

Tribunal partly allows assessee's appeals on unsecured loans and construction profit, upholds disallowance on purchases and interest

M/s Shree Laxmi Developers, M/s Shree Laxmi Estate Pvt Ltd. Versus ITO, Wd. 26 (3) (2), Mumbai

M/s Shree Laxmi Developers, M/s Shree Laxmi Estate Pvt Ltd. Versus ITO, Wd. 26 (3) (2), Mumbai - TMI Issues Involved:1. Addition towards unsecured loan under Section 68 of the Income-tax Act, 1961.2. Estimation of net profit from construction projects.3. Disallowance of purchases under Section 40A(3) of the Income-tax Act, 1961.4. Disallowance of interest under Section 40(a)(ia) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Addition towards unsecured loan under Section 68 of the Act:The Assessing Officer (AO) made additions towards unsecured loans received from Josh Trading Company Pvt Ltd and Viraj Mercantile Pvt Ltd, claiming these were bogus accommodation entries from group companies of Shri Pravinkumar Jain. The AO's conclusion was based on information from the Investigation Wing and the statement of Shri Dinesh Choudhary, who confirmed that Shri Pravinkumar Jain provided accommodation entries. Despite the assessee furnishing confirmation letters, bank statements, and financial statements to prove the identity, genuineness, and creditworthiness of the transactions, the AO considered the loans unexplained credits under Section 68.The Tribunal found that the assessee had met the initial burden of proof by providing sufficient evidence to establish the identity, genuineness, and creditworthiness of the creditors. The AO's addition was based solely on information from the Investigation Wing without any direct evidence disproving the loan transactions. The Tribunal cited judgments from the Hon'ble Bombay High Court and the Hon'ble Supreme Court, emphasizing that once the initial burden is discharged by the assessee, the burden shifts to the AO to prove otherwise. Consequently, the Tribunal directed the AO to delete the addition made towards loans under Section 68.2. Estimation of net profit from construction projects:The AO estimated a net profit of 10% on the total expenditure incurred for the projects Zoom Plaza and Aurm Park, arguing that the assessee followed different accounting methods for different projects. The assessee contended that it consistently followed the project completion method for Aurm Park and the profit method for Zoom Plaza, maintaining separate books of account for both projects.The Tribunal noted that the AO failed to provide reasons for the incorrectness in the books of account maintained by the assessee and found no merit in the AO's findings. The Tribunal directed the AO to adopt the net profit as declared by the assessee for both projects, rejecting the AO's estimation of net profit.3. Disallowance of purchases under Section 40A(3):The AO disallowed purchases amounting to Rs. 57,705 under Section 40A(3) due to cash payments exceeding the prescribed limit. The assessee argued that the cash purchases were made at the construction site on an urgent basis.The Tribunal upheld the AO's disallowance, stating that the reasons provided by the assessee did not fall within the exclusions under Rule 6DD of the Income-tax Rules, 1962. Therefore, the Tribunal found the AO's disallowance justified and rejected the assessee's ground.4. Disallowance of interest under Section 40(a)(ia):In ITA 5954/Mum/2016, the AO disallowed interest payments to financial institutions under Section 40(a)(ia) due to the assessee's failure to deduct tax under Section 194A. The assessee contended that interest was paid through post-dated cheques based on instalments granted by the banks, thus not requiring tax deduction at source.The Tribunal found that the assessee failed to meet the obligation of deducting tax at source as mandated by Section 194A. The Tribunal upheld the AO's disallowance of interest under Section 40(a)(ia), agreeing with the CIT(A)'s findings and rejecting the assessee's ground.Conclusion:Both appeals filed by the assessee were partly allowed. The Tribunal directed the deletion of additions made towards unsecured loans under Section 68 and the adoption of the net profit as declared by the assessee for the construction projects. However, the Tribunal upheld the disallowance of purchases under Section 40A(3) and the disallowance of interest under Section 40(a)(ia).