2017 (7) TMI 770 - AT - Income Tax

Tribunal decision: Agricultural income undisclosed, loan interest deductible, business expenses partly allowed

The Tribunal upheld the Assessing Officer's decision to treat agricultural income as undisclosed sources due to lack of concrete evidence provided by the ... Addition on account of treating agricultural income as income from undisclosed sources - Held that:- Admittedly, before the Assessing Officer, the assessee, inter-alia, admitted that no records were maintained in regard to sale of crops. The Assessing Officer had given due weightage to assessee’s plea regarding increase in land holdings. The submissions of ld. counsel that assessee’s plea on the basis of affidavit should have been accepted in toto, is devoid of any merit because unless the averments made in the affidavit are duly supported by evidence, the same cannot be taken as sacrosanct. The assessee had been provided opportunity to substantiate the averments by Assessing Officer as he had taken assessee’s statement also and, therefore, the estimate made by the Assessing Officer does not call for any inference. Accordingly, this ground is dismissed. Addition on account of interest on loan - Held that:- The onus was on assessee to establish that first step had been taken towards setting up of his business. CIT(A) concluded that there was no setting up of business because assessee failed to substantiate the purchases of ₹ 1,25,000/-. However, the assessee had also claimed rent of ₹ 69,000/- out of which ₹ 57,000/- had been paid through cheque and had also claimed ₹ 1,58,785/- towards repairs and maintenance out of which ₹ 1,51,105/- was paid through cheque as is evident from pages 52 to 53 of Paper Book. Further, the assessee had paid salary of ₹ 48,000/- in cash apart from telephone and conveyance of ₹ 9,700/-. Even if the Assessing Officer was not satisfied with the cash payments but the payments made through cheque towards rents clearly show that the assessee had taken the premises on rent for his business purpose and that was sufficient evidence to come to the conclusion that assessee had setup its business because it is not disputed that assessee eventually carried on business from the said premises. Therefore, the interest expenditure claimed by assessee was allowable as business expenditure u/s 36(1)(iii). Alternatively, even if, the Department’s view is to be accepted regarding no business activity, still, find that this claim is allowable u/s 57(iii) as entire amount borrowed had been invested in firm and, therefore, it was an allowable deduction being incurred wholly and exclusively for earning interest. Addition on account of business expenses on wrong observation & conclusions drawn - Held that:- Disallowance was that no business activity had been done by the assessee. However, as held earlier, in regard to ground no.2, that the business of the assessee had been setup, therefore, direct that expenses through cheque by assessee only should be allowed by Assessing Officer and rest incurred in cash to be disallowed as assessee failed to substantiate its claim. In the result, the ground no.3 is partly allowed. Issues:1. Treatment of agricultural income as undisclosed sources.2. Disallowance of interest on loan.3. Disallowance of business expenses.Analysis:1. The appellant contested the addition of agricultural income as income from undisclosed sources. The appellant claimed agricultural income based on the sale of various produce but failed to provide concrete evidence to support the claim. The Assessing Officer estimated the agricultural income and disallowed a portion of the expenses claimed. The appellant argued that the affidavit provided details of the agricultural income, but the Tribunal found the lack of substantiating evidence to be a crucial factor. The Tribunal upheld the Assessing Officer's decision, emphasizing the necessity of supporting evidence for claims, ultimately dismissing this ground of appeal.2. The disallowance of interest on a loan was challenged by the appellant, who asserted that the loan was utilized for a partnership business, justifying the interest as a deductible expense under Section 36(1)(iii) of the Income Tax Act. The appellant contended that business activities had commenced, evidenced by purchases made for the business. The Tribunal analyzed the evidence presented, including rent payments and other business-related expenses paid through cheques, to determine the establishment of the business. The Tribunal concluded that the interest expenditure was allowable as a business expense under Section 36(1)(iii) or alternatively under Section 57(iii). Consequently, this ground of appeal was allowed.3. The appellant challenged the disallowance of business expenses due to the perceived lack of business activity. Building on the previous analysis regarding the establishment of the business, the Tribunal directed that expenses paid through cheques should be allowed, while those incurred in cash should be disallowed due to insufficient substantiation. Acknowledging the evidence of business setup through rent payments and other expenditures, the Tribunal partially allowed this ground of appeal. As a result, the appeal of the assessee was partly allowed by the Tribunal, with specific directions regarding the treatment of business expenses incurred.