2018 (7) TMI 2373 - AT - Income Tax

Multiple business expense disallowances and section 68 additions upheld; unexplained cash credits remitted for fresh adjudication

Mr. C.R Raghu Versus The Income-tax Officer, Ward-6 (2) (2), Bengaluru

ITAT, Bangalore (AT) upheld multiple disallowances: vehicle maintenance, repairs and maintenance (Rs.1 lakh) and interest claimed on loans shown to be ... Disallowance of vehicle maintenance charges - HELD THAT:- Since no supporting bills/documentary evidence was filed to establish the assessee’s claim in respect of expenses raised by the assessee. Decided against assessee. Disallowance of interest on loan - interest claimed on loans which were borrowed for the purpose of his business through his mother from the bank u/s 40(a)(ia) - HELD THAT:-The fact that the loan in question is taken by the assessee’s mother from Corporation Bank is not disputed. It is also not disputed that the assessee’s mother is an Income-tax assessee. On perusal of the assessee’s balance sheet as on 31/3/2012 as pointed out by the ld DR, we find that the assessee’s mother Smt. Vijayalakshmi is not reflected as a loan creditor in the case on hand. There is no case for deduction of interest claimed as paid on such loan which has not been availed by the assessee or expended wholly and exclusively for his business and accordingly uphold the finding of the CIT(A) in the matter - Decided against assessee. Disallowance of Repairs & Maintenance Expenditure - absence of supporting documents/details being filed - HELD THAT:- CIT(A) has upheld the above disallowance made by the AO since no documentary evidence was filed before her to support the assessee’s claim. Before us also, since no supporting documentary evidence is filed to establish the assessee’s claim, we uphold the disallowance of Rs. 1 lakh, out of repairs and maintenance expenses claimed, made and upheld by the authorities below. Disallowance of Vehicle Maintenance expense - Since no supporting documentary evidence is filed to establish the assessee’s claim, we uphold the disallowance. Disallowance of Interest paid - said loan was taken, not by the assessee but by the assessee’s mother - The fact that the assessee’s mother is an assessee is also not disputed. From the details on record, it appears to us that the assessee made payment of interest on loan taken by his mother from Axis Bank and has not established before us that the same was incurred in the course of the assessee’s business and we, therefore, uphold finding of the ld CIT(A) in the matter. Additions u/s 68 - outstanding unsecured loans pertained to balances from earlier periods - We find that except for raising the grounds (Supra) and reiterating the averments made in the submissions put forth before the authorities below, which have been considered by the ld CIT(A), the assessee has failed to bring on record any material evidence to controvert the factual findings rendered by the ld CIT(A) in the impugned order - Additions confirmed. Violation of provisions of Rule 46A(3) - as alleged CIT(A) erred in deciding the matter and granting relief to the assessed based on fresh evidences submitted by the assessee and without affording any opportunity of being heard and to examine such evidence, which tentamounts contravention/violation of the provisions of Rule 46A(3) - HELD THAT:- As we set aside the findings and order of the ld CIT(A) in respect of the deletion of the unexplained cash credits in respect of Brigade Gateways of Rs. 55,94,091/- and of Mrs. Vijayalakshmi of Rs. 46,09,541/- and restore the same matter to the file of ld CIT(A) with directions for fresh adjudication thereon, in accordance with law and after affording the AO adequate opportunity to examine the fresh additional evidence furnished by the assessee only before the ld CIT(A) and to file comments/rebuttals required which shall be duly considered. ISSUES PRESENTED AND CONSIDERED 1. Whether vehicle maintenance and repairs & maintenance expenditures claimed without supporting documentary evidence are allowable deductions under the Income-tax Act. 2. Whether interest claimed as business deduction is allowable where the loan was availed by a third party (assessee's mother) and interest payments were made by the assessee. 3. Whether unsecured loans/opening balances and other unexplained credits can be brought to tax under section 68 where identity, creditworthiness and genuineness of creditors/transactions are not established. 4. Whether unexplained cash credits deleted by the Commissioner (Appeals) on the basis of additional documents filed before the appellate authority (but not before the Assessing Officer) can be sustained without complying with Rule 46A(3) of the Income-tax Rules. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of claimed vehicle maintenance and repairs & maintenance expenses absent supporting documents Legal framework: Deduction for business expenditure requires proof that the expenditure was incurred and is wholly and exclusively for the purpose of business; the Assessing Officer may disallow claims unsupported by documentary evidence. Precedent Treatment: No specific precedent is relied upon in the judgment to alter the well-settled evidentiary requirement. Interpretation and reasoning: The AO placed the assessee on notice to produce supporting documents; no vouchers/bills were produced before AO, CIT(A) or the Tribunal. In absence of documentary evidence, the Tribunal accepted the factual findings of AO/CIT(A) that the claims could not be substantiated. Ratio vs. Obiter: Ratio - undisputed principle applied: unsupported claims may be disallowed. No obiter on relaxation of evidentiary standard. Conclusions: Disallowances of Rs. 49,834 (vehicle maintenance), Rs. 72,925 (vehicle maintenance) and Rs. 1,00,000 (repairs & maintenance) upheld for want of supporting documentary evidence; corresponding grounds dismissed. Issue 2 - Deductibility of interest where loan is in name of third party (assessee's mother) but interest paid by assessee Legal framework: Section 37/general principles require expenditure to be incurred wholly and exclusively for business; interest deduction is allowable only if loan is availed by the assessee or the expenditure is incurred for the assessee's business. Precedent Treatment: A Supreme Court judgment was referenced by the assessee as distinguishable; the Tribunal did not accept the assessee's reliance and did not overrule or follow any new precedent. Interpretation and reasoning: Facts are undisputed that loans were taken by the mother (an independent assessee) and the assessee's balance sheet did not reflect the mother as a creditor. Payments made by the assessee on behalf of the mother were not established to be incurred wholly and exclusively for the assessee's business. Therefore the interest expense claimed was not allowable as deduction to the assessee. Ratio vs. Obiter: Ratio - payments of interest on a loan not availed by the assessee (and not proved to be for his business) are not deductible; reference to the cited apex judgment is held distinguishable and not controlling. Conclusions: Disallowances of interest aggregating Rs. 12,24,714 and Rs. 3,23,106 were sustained; corresponding grounds dismissed. Issue 3 - Additions under section 68 on account of unsecured loans/opening balances/unexplained credits where identity/creditworthiness/genuineness not proved Legal framework: Section 68 permits treating credited amounts as unexplained where the assessee fails to prove identity, creditworthiness and genuineness of creditors/transactions; documentary confirmations and credible evidence are required to rebut section 68 additions. Precedent Treatment: The Tribunal applied established factual and legal tests under section 68; no change in precedent was announced. Interpretation and reasoning: AO sought PAN, confirmations, addresses, and other evidence; substantial part of creditors lacked PAN/confirmation and several confirmations were denied or returned undelivered. The CIT(A) examined submissions and certain documents (litigation record, bank statement, letters) and deleted specific amounts (Rs. 55,94,091 and Rs. 46,09,541) to the extent shown to relate to payment to bank and mother's book balance, but sustained additions aggregating Rs. 2,47,73,480 and Rs. 50,00,000 for which the assessee failed to discharge onus. Ratio vs. Obiter: Ratio - where identity, creditworthiness and genuineness are not proved by reliable documentary evidence or confirmations, additions under section 68 are sustainable; if specific documentary proof demonstrates the nature of credit (e.g., bank payment evidence, litigation documents, ledger showing opening balances), those specific credits may be deleted. Conclusions: Tribunal upheld additions of Rs. 2,47,73,480 and Rs. 50,00,000 under section 68; deletions of Rs. 55,94,091 and Rs. 46,09,541 as found by CIT(A) were initially accepted on merits but see Issue 4 concerning admissibility of that evidence. Issue 4 - Admissibility and consideration of additional evidence before the Commissioner (Appeals) without affording Assessing Officer opportunity under Rule 46A(3) Legal framework: Rule 46A(1)-(4) restricts production of additional evidence before the appellate authority except in specified circumstances; sub-rule (2) requires recording reasons for admission; sub-rule (3) mandates that additional evidence shall not be taken into account unless the Assessing Officer is allowed a reasonable opportunity to examine, cross-examine or rebut such evidence. Precedent Treatment: The Rule's mandatory procedure was applied; the Tribunal followed statutory requirements rather than any differing precedent. Interpretation and reasoning: The CIT(A) admitted fresh documents during appellate proceedings and acted upon them to delete specified unexplained credits (Brigade Gateway and an amount relating to the mother). The Tribunal found that these documents were not before the AO and that the AO was not given an opportunity to examine or rebut them as required by Rule 46A(3). The appellate authority did not record compliance with sub-rule (3) and thereby contravened Rule 46A. Sub-rule (4) (power to direct production) was not invoked to cure the defect. For these procedural defects, the Tribunal concluded that the deletions based on the fresh evidence could not be sustained without compliance with the Rule. Ratio vs. Obiter: Ratio - admission and consideration of additional evidence at appeal stage without affording the AO the opportunity contemplated by Rule 46A(3) is procedurally impermissible and vitiates appellate deletions based on such evidence. This is a binding procedural holding for the matter before the Tribunal. Observations on the merits of the fresh documents are consequential and remedial (not obiter). Conclusions: Deletions of unexplained cash credits of Rs. 55,94,091 (Brigade Gateway) and Rs. 46,09,541 (mother) effected by the CIT(A) based on additional evidence were set aside for non-compliance with Rule 46A(3); matter restored to CIT(A) for fresh adjudication after affording the Assessing Officer reasonable opportunity to examine/rebut the additional evidence. Revenue's appeal on this procedural ground allowed for statistical purposes. Dispositionary conclusion (as between issues): The Tribunal dismissed the assessee's appeal on merits in respect of unsupported expenses, interest claims, and most section 68 additions, but remanded specific deletions to the CIT(A) for fresh adjudication because additional evidence was admitted and acted upon without complying with Rule 46A(3), necessitating restoration for compliance with statutory procedural safeguards.