2018 (3) TMI 799 - HC - Income Tax

Court allows appeals, sets aside Tribunal orders, directs adjustment of TDS claim for interest income.

Pendurthi Chandrasekhar Versus The Deputy Commissioner of Income Tax, Central Circle-11, Hyderabad

Pendurthi Chandrasekhar Versus The Deputy Commissioner of Income Tax, Central Circle-11, Hyderabad - [2018] 407 ITR 179 (T&AP) Issues Involved:1. Addition of Rs. 73,00,000 as unexplained credit under Section 68.2. Addition of Rs. 87,95,724 as unexplained loan from Mr. Dev Singh Palak.3. Addition of Rs. 10,00,000 as unexplained loan from Mr. J.V. Sudhakar.4. Addition of Rs. 3,05,713 as interest income.5. Addition of Rs. 14,50,000 as unexplained loan from the assessee’s wife.Detailed Analysis:1. Addition of Rs. 73,00,000 as Unexplained Credit:The assessee received Rs. 73,00,000 as a gift from his maternal aunt, Smt. Mikkilineni Nirmala. The AO, CIT(A), and Tribunal questioned the genuineness of the gift, citing a lack of occasion and doubting the relationship and source of funds. The assessee provided substantial documentation, including bank statements and confirmation letters, proving the transfer of funds from the aunt’s daughter in the USA to the aunt and then to the assessee. The court held that Section 56(2)(v) of the Act, which does not require an occasion for gifts from relatives, was not properly considered. The court found the AO's reasoning flawed and perverse, emphasizing that the identity and relationship of the donor were established, and the gift was genuine.2. Addition of Rs. 87,95,724 as Unexplained Loan:The assessee received Rs. 87,95,724 as a loan from Mr. Dev Singh Palak, a family friend residing in the UK. The AO, CIT(A), and Tribunal questioned the genuineness of the loan, doubting the lender's means and the transaction's authenticity. The assessee provided confirmation letters, bank statements, and other documentation proving the lender's identity, creditworthiness, and the transaction's genuineness. The court criticized the AO's reliance on the pattern of the lender's signature and the failure to consider the favorable report from the Foreign Tax Division. The court found the AO's approach prejudiced and the findings of the lower authorities perverse.3. Addition of Rs. 10,00,000 as Unexplained Loan:The assessee received Rs. 10,00,000 as a loan from Mr. J.V. Sudhakar, which was repaid within four months. The AO added this amount as unexplained credit, citing the non-appearance of the lender and returned summons. The assessee provided bank statements showing the loan transaction. The court found that the AO failed to consider the overwhelming documentary evidence proving the transaction's genuineness and the lender's creditworthiness. The court criticized the AO's prejudiced approach and found the lower authorities' findings perverse.4. Addition of Rs. 3,05,713 as Interest Income:The assessee advanced a loan to M/s. Dakshin Shelters Pvt. Ltd., which credited interest in its books and deducted TDS, but did not pay the interest to the assessee. The assessee, following the cash system of accounting, did not admit the interest income. The AO and Tribunal added the interest income, ignoring Section 145 of the Act. The court held that the assessee was entitled to follow the cash system and that the AO should have restricted the TDS claim proportionately. The court directed the AO to adjust the TDS claim accordingly.5. Addition of Rs. 14,50,000 as Unexplained Loan from Wife:The assessee received Rs. 14,50,000 as a loan from his wife, who received the amount as a gift from her father in the UK. The AO questioned the wife's creditworthiness and the transaction's genuineness. The assessee provided confirmation letters, bank statements, and documentation proving the source of funds and the transaction's authenticity. The CIT(A) accepted the explanation, but the Tribunal reversed this decision. The court found the AO's and Tribunal's approach myopic and criticized their undue suspicion. The court held that the transaction was genuine and the onus under Section 68 was discharged.Conclusion:The court set aside the Tribunal's orders and allowed both appeals, finding that the assessee had satisfactorily explained the nature and source of the credits. The court directed the AO to adjust the TDS claim proportionately for the interest income. All substantial questions of law were answered in favor of the assessee.