2023 (5) TMI 1464 - AT - Income Tax

Addition under s.68; assessee discharged primary onus, SC precedent inapplicable; no further s.14A/Rule 8D disallowance

ITAT upheld deletion of addition under s.68, finding the assessee had discharged the primary onus by producing financial statements and evidence of share ... Unexplained cash credit - Addition u/s 68 - creditors did not appear before AO to explain the genuineness of the transaction - HELD THAT:- Section 68 of the Act is invoked if any sum is found credited in the books of an assessee for which the assessee either does not offer any explanation about the nature and source thereof or the explanation offered by him is not found to be satisfactory in the opinion of the AO. In the given case, the assessee has given the explanation and successfully discharged the primary onus casted upon it by filing the financial statements and all necessary documents and evidences of the share applicants and they are in itself sufficient to satisfy the nature and source of the alleged credit. Recently, this Tribunal in the case of Mainak Suppliers Put. Ltd.[2023 (2) TMI 506 - ITAT KOLKATA] has adjudicated similar set of facts and circumstances wherein the assessment proceedings were carried out under the directions of CIT(A) u/s 263 of the Act and the issue was also the same i.e. unexplained share application money and share premium and this Tribunal after considering the facts of the case and the documents filed by the assessee and those being regularly assessed to tax, decided in favour of the assessee Assessee having discharged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifted upon ld. AO to examine the evidences furnished and even make independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the assessee and confronting with the same to the assessee - The aforesaid decision of NRA Iron and Steel Put. Ltd. [2019 (3) TMI 323 - SUPREME COURT] in our humble view, is not applicable to the facts and circumstances of the case in hand. No infirmity in the finding of ld. CIT(A) deleting the impugned addition made u/s 68 - Assessee ground allowed. Disallowance made u/s 14A read with Rule 8D - We observe that the assessee has earned exempt income and in the computation of income of the assessee has suo-moto disallowed expenditure u/s 14A - CIT(A) deleted the said disallowance referring to the exempt income earned by the assessee. HELD THAT:- We fail to find any consistency in the finding of ld. CIT(A), since for the year under appeal the disallowance u/s 14A of the Act could not have exceeded exempt income earned by the assessee and for this proposition we draw support from the decision of Era Infrastructure (India) Ltd. [2022 (7) TMI 1093 - DELHI HIGH COURT] - Therefore, since the assessee has suo moto offered disallowance which is more than the exempt income by the assessee, no further disallowance was called for u/s 14A of the Act. Thus, ground nos. 4 & 5 raised by the Revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer (AO) was justified in invoking Section 68 of the Income-tax Act to treat inter-corporate unsecured loans totalling Rs.1,00,00,000 as unexplained cash credit where the assessee produced borrower/creditor particulars, bank evidence of receipt/repayment, tax deductions on interest and corroborative financial statements of the creditors, while summons under section 131 issued to creditor-directors were not complied with. 2. Whether disallowance of corresponding interest expense paid on the above disputed loans should follow deletion of the Section 68 addition. 3. Whether the AO properly invoked Section 14A read with Rule 8D to disallow expenditure attributable to exempt income when (a) the assessee had declared exempt income of Rs.7,36,767 and (b) the assessee had itself made a suo-moto disallowance of Rs.27,99,056, whereas AO computed a larger disallowance of Rs.3,29,27,727. ISSUE-WISE DETAILED ANALYSIS - SECTION 68 ADDITION (ISSUE 1) Legal framework: Section 68 casts a primary onus on the assessee to explain the nature and source of any sum credited in its books; the assessee must prove (i) identity of creditors, (ii) creditworthiness/capacity to advance money, and (iii) genuineness of the transaction. Once primary onus is discharged, the burden shifts to Revenue to make independent inquiries and point out specific deficiencies. Precedent treatment: The Tribunal relied on settled principles in higher-court authorities that require AO to conduct independent enquiry if documentary evidence is filed; authorities cited emphasize that mere non-appearance to summons is not conclusive where documentary proof and creditor replies are on record. The decision distinguished situations where field enquiries established non-existence or lack of creditworthiness of subscribers (where Section 68 could be sustained). Interpretation and reasoning: The Tribunal examined documentary matrix - PANs, addresses, audited financial statements, bank statements showing account-payee cheque payments, loan confirmations, TDS on interest and the creditors' income-tax filings - and factual material demonstrating substantial net worth of each creditor relative to the loans advanced. The AO's sole reliance on (a) statements of an alleged entry operator and (b) non-personal appearance of creditor-directors under section 131 was found insufficient in absence of any specific lacuna, infirmity or falsity in the documentary evidence. The Tribunal held that the AO neither controverted the documentary evidence nor conducted independent inquiries required after the assessee discharged primary onus; therefore AO's adverse conclusion was based on conjecture/human probabilities rather than cogent material. Ratio vs. Obiter: Ratio - where an assessee furnishes contemporaneous documentary evidence establishing identity, creditworthiness and genuineness of creditors and transactions (including creditor responses to AO's notices and corroborative bank/financial records), the AO must point to deficiencies or make independent enquiries before invoking Section 68; mere non-attendance to summons or reliance on a third-party statement not directly connecting creditors to bogus entries is not sufficient. Obiter - critical commentary on AO's use of terms like 'money laundering' and admonition against reliance solely on entry-operator statements without opportunity for cross-examination (procedural fairness observations). Conclusions: The Tribunal upheld the appellate authority's deletion of the Section 68 addition of Rs.1,00,00,000, concluding the assessee discharged its initial burden and the AO failed to rebut or make required independent inquiries; reliance on the entry-operator's statement and non-appearance under section 131 did not justify addition. ISSUE-WISE DETAILED ANALYSIS - INTEREST DISALLOWANCE (ISSUE 2) Legal framework: Interest expense attributable to an income subsequently held not to be taxable because underlying credit was explained is claimable unless disallowed on independent grounds. Precedent treatment: Where additions under Section 68 are deleted as the assessee has established genuineness, corresponding disallowances of interest tied solely to those additions fall away. Interpretation and reasoning: Since the Section 68 addition was deleted on facts - the loans were held genuine and creditors creditworthy - the corresponding disallowance of interest of Rs.1,94,958 had no independent basis and was properly allowed by the appellate authority. Ratio vs. Obiter: Ratio - deletion of principal addition rooted in failure of Revenue's case necessitates restoration of corresponding deductible interest; Obiter - none additional. Conclusions: The Tribunal sustained allowance of interest expense of Rs.1,94,958 consequential to deletion of the Section 68 addition. ISSUE-WISE DETAILED ANALYSIS - SECTION 14A READ WITH RULE 8D (ISSUE 3) Legal framework: Section 14A read with Rule 8D governs disallowance of expenditure in relation to exempt income. Judicial trend requires a reasoned calculation and a limit that is not arbitrary; disallowance generally should not exceed exempt income actually earned unless law/precedent permits otherwise. Precedent treatment: The Tribunal relied on authority indicating that disallowance under Section 14A cannot exceed exempt income for the year and that when the assessee has itself made a suo-moto disallowance, AO must justify any higher disallowance with cogent reasoning and computation compliant with Rule 8D. Interpretation and reasoning: The assessee earned exempt income of Rs.7,36,767 and had itself made a suo-moto disallowance of Rs.27,99,056. The AO computed a disallowance of Rs.3,29,27,727, a figure inconsistent with the exempt income actually earned. The Tribunal found the appellate authority's deletion of the AO's larger disallowance consistent with the principle that disallowance cannot exceed exempt income and that no additional justification was on record to sustain AO's higher figure. Ratio vs. Obiter: Ratio - in absence of cogent Rule 8D-based computation and where assessee's own disallowance exceeds exempt income, AO cannot sustain a markedly higher disallowance without appropriate reasoning; Obiter - emphasis on consistency and reasoned application of Rule 8D calculations. Conclusions: The Tribunal dismissed Revenue's grounds invoking Section 14A/Rule 8D and upheld deletion of the AO's disallowance; no further disallowance was warranted beyond the assessee's own adjustment. OVERALL CONCLUSION The Tribunal dismissed Revenue's appeal on all contested grounds: the Section 68 addition of Rs.1,00,00,000 was deleted because the assessee proved identity, creditworthiness and genuineness of creditor transactions and the AO failed to conduct required independent enquiries or point to specific documentary defects; consequential interest disallowance was therefore reversed; and the Section 14A/Rule 8D disallowance was not sustainable in the quantum assessed by AO given the exempt income declared and the assessee's suo-moto adjustment.