TaxTMI 
TaxTMI 
TaxTMI 
2017 (3) TMI 1934
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....of unsecured loan of Rs. 60,00,000/- for alleged unexplained cash credit u/s. 68 of the IT. Act. 3. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of income-tax (Appeals) has erred in confirming the action of assessing officer in making consequential disallowance of Rs. 5,39,057/- on account of interest expenses u/s. 68 of the IT. Act." 3. In this case, assessee filed return of income on 29th September, 2012 showing income of Rs. 57,94,830/-. Subsequently, the case was selected under scrutiny and notice u/s. 143(2) of the act was issued on 7th August, 2013. The assessee company was engaged in the business of manufacturing of narrow width fabrics. The brief facts of the case are mentioned grounds of appeal wise as below. First ground of appeal: Disallowance u/s. 14A of the act 4. During the course of assessment proceedings, the assessing officer has noticed that assessee has shown investment in equity share of Rs. 2,95,00,000/- as on 31st March, 2012 under the head short term investment. He also noticed that the assessee has debited interest expenditure under the finance costs borrowings for assessment year 2011-12 of Rs. 7....
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....of Rs. 79,69,711/-. The AO found that the appellant did not provide details regarding any expenses being incurred on the exempt income. The AO disallowed an amount of Rs. 22.12.957/- under Rule 14A r.w. Rule 8D of the IT Rules. The appellant submitted that the entire investment made by the appellant was out of non interest bearing funds. The appellant had share capital and reserves of Rs. 452.14 lacs as against the investment of Rs. 295 lacs. It was contended that the investment in the shares had been made in private limited company shares and the dividend income is not tax free in case of private company. 6.1.2 The appellant contended that the investment in share is out of non-interest bearing funds in the form of capital and reserves which are in excess of the interest free investment made. I find that this contention is based on the overall macro analysis of the figures in balance sheet, where it is presumed that all the interest free funds available in the balance sheet were used only for making these investments in shares, irrespective of the dates of their utilization. This presumption cannot hold good where borrowed funds and own funds are mixed. In .this situation it can....
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....ture in relation to income which does not form part of the total income of the assessee; (b) section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) the principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; (d) the basic principle of taxation is to tax net income. This principle applies even for the purposes of section 14/4 and expenses towards non-taxable income must be excluded; (e) once a proximate cause for disallowance is established-which is the relationship of the expenditure with income which does not form part of the total income-a disallowance has to be effected. 6.1.5 The appellant has submitted that efforts have been made to show that there is no nexus between the borrowed funds and investment in shares. Therefore, there was no' application of section 14A, This contention is not acceptable in view of the decision of the ITAT, Delhi Spl. Bench in the case of Cheminvest Ltd. Vs. ITO 124 TTJ (Del) SB 577 in which it has been held >' that disallowance u/s. 14 can be....
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....n which no income has been brought in the books of account of the company and disallowance out of interest expenses has been made in view of the provisions of section 14A of the Act. On the perusal of the details, it is observed that the appellant had made investment in shares of two companies of Rs. 295 lacs while the company had share capital and reserves of Rs. 452.14 lacs available. 6.1.10 Section 14A was first inserted by the Finance Act, 2001. However, same was inserted with retrospective effect from 1-4-1962. The inserted section reads as '14A. Expenditure incurred in relation to income not includible in total income. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assesses in relation to income which does not form part of the total income under this Act.' The purpose for which the section was introduced, and given in the explanatory memorandum issued with the Finance Bill, 2001, the most relevant part reads as under:- '.....It is proposed to insert a new section 14A so as to clarify the intention of the Legislature, since the inception of the Income-tax Act, 1961, th....
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....ew sub-section (2) has been inserted in section 14A so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall follow the prescribed method if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. Provisions of subsection (2), will also be applicable in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income. 11.3 Applicability from assessment year 2007-08 onwards.' 6.1.12 Subsequently, Rules for determination of disallowance were prescribed "vide IT, (5th Amend,) Rules, 2008, w.e.f. 24-3-2008. Further, under Form 3CD, a column was also inserted w.e.f. 23-8-2006 vide the Income-tax (Ninth Amendment) Rules, 2006 regarding amount of disallowance under section 14A. Hence, it is the liability of tax audito....
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.... be tax free in case of private company. We have also perused the judicial pronouncement In the case of CIT v Corrtech Energy (p) Ltd (2014) 45 taxmann.com. 116 of Hon'ble High Court of Gujarat held that as per section 14A of income Tax Act 1961 read with rule 8D of the income tax rules 1962 expenditure incurred in relation to income not includable in income in a case assessee did not make any claim for exemption of any income from payment of taxes, in that case disallowance u/s 14A of the act could not be made. It is crystal clear that the jurisdictional High Court has decided to attract the provision of section 14A it is required that assessee should have earned an exempt income, if the assessee has not earned an exempt income and not claimed so in the return of income then the provision of section 14A are not applicable. We find that during the year under consideration the assessee company has not earned any exempt income and has not claimed any such exempt income in the return of income therefore as per our considered opinion the provision of section 14A are not applicable. In view of the above mentioned facts and legal findings we find the decision of the Ld. CIT(A) is not....
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....nless and until the ground reality i.e. the de-facto existence of the creditor is first established prima facie paving the way for the Assessing Officer to examine further the capacity and genuineness aspects. Merely based on arranged affairs and supporting documents, the identity cannot be said .to be established, and in many case not the capacity and genuineness of the transaction, in this aspect it would be necessary to advert to two decisions of the Supreme Court, the first being in Commissioner of Income Tax Vs. P. Mohanakaia AIR 2007 SC 2116. While considering the scope of Section 68, the Supreme Court observed as follows: ". ...When and in what circumstances section 68 of the Act would come into play? That a bare reading of Section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income, of the assess....
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....evidence, a bald explanation furnished by the assesses about the source of the credits in question viz. realisation from the debtors of the erstwhile firm, in the opinion of the assessing officer, was not satisfactory. It is well settled that in view of Section 68 of the Act, where any sum is found credited in the books of the assesses for any previous year, the same may be charged to income tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the assessing officer, not satisfactory." ' 6.2.18. The only requirement for establishing the cash credit to be undisclosed income of the taxpayer is that proper enquiry must be made by A.O before making any addition u/s 68. In Khandelwal Constructions-v. CIT 227 ITR 900 (Gau.) It has been held that section 68 of Income Tax Act, 1961, empowers the Assessing officer to make enquiry regarding cash credit, if he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before "rejecting the assessee's explanation A.O. must make proper enquiries and in the absence of proper enq....
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.... Hatti v CIT [1977] 107 ITR (SC), it has been held that the law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee, is on him. Where, the nature and source thereof cannot be explained satisfactorily, it is open to the revenue to hold that it is the income of the assessee and no further burden is on the revenue to show that the income is from any particular source. It may also be pointed out that the burden of proof is fluid for the purposes of sec. 68 of the Aqt. Once assessee has submitted basic documents relating to identity, genuineness of transaction and creditworthiness then AO must do some inquiry to call for more details to invoke section 68. An assessee can discharge his onus of proof by proving three things: Identity of the creditor, capacity to the creditor and the genuineness of the transaction. Once the assessee proves ail three things his onus is discharged. Section 68 of the Income Tax Act provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is n....
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....ons are there and the burden of rebutting the presumptions is on the assessee. Commissioner of Income-tax v. Devi Prasad Vishwanath Ptasad J1969] 72 ITR 194,196,197 (SC).}" 6.2.22. in Sreelekha Banerjee v. Commissioner of Income-tax [1969] 49 ITR (SC) 114, 120; [1964] 2 SCR 552 (SC), the Supreme Court observed: "The very words ' an undisclosed source' show that the disclosure must come from the assesses and not from the department." 6.2.23. Section 68 of the Act clearly shows that any sum found credited in the books of an assessee maintained for a previous year may be charged to incometax as the income of the assessee of that previous year, if (a ) the assessee offers no explanation about the nature and source of such sum, or (b ) the explanation offered by him is, in the opinion of Assessing Officer, not satisfactory. As a matter of fact, section 68 is a statutory recognition, of what was previously established by judicial decisions to the effect that where certain sums of money were claimed by the assessee to have been borrowed from certain persons, it was for the assessee to prove by cogent and proper evidence that there were genuine borrowings as the facts are ....
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....e' of accommodation entries held that the methodology and acts done in such cases of capital formation is not tax avoidance. It is more in the nature of tax evasion by money laundering. These transactions have in effect three limbs. The first limb is the creation of the shell companies with substantial share capital which is balanced with inventories in the form of shares in other shell companies. The second limb is the transfer of such shell companies to persons who desire to use such substantial share capital companies for converting their unaccounted money into accounted funds and use such shell companies to do legitimate business. The third limb is when the shell companies after being taken over, the assets in the form of inventories are encashed whereby the unaccounted monies are laundered and brought into the company for conducting the legitimate business. All these three limbs are not done in one assessment year but in different assessment years 6.2.27. The Assessing Officer has brought certain facts on record to highlight that the loan received actually represents an accommodation entry. It could be proved that the company providing loan exists only on paper, it has ....
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....sessee company, detail of interest payment made during the year etc. Ld. counsel has also filed copies of judicial pronouncements of hon'ble high court of Gujarat in the cases of CIT, Rajkot vs. Ayachi Chandrashekhar Narsangji and in the case of CIT vs. Apex Therm Packaging P. Ltd. On the other hand the departmental representative relied on the order of the ld. CIT(A). 9. We have heard both the sides and perused the material on record. We have noticed that subsequently at the appellate proceedings the Ld.CIT(A) has raised certain queries briefly regarding the decision of the Board of Directors of raising loans, how the assessee came in contact with these four companies, any other financial transactions these 4 companies having in last 3 preceding/ subsequent assessment years and what was the purpose of the loans. We have also noticed the explanation and submission made by the assessee in response to the queries raised by the Ld.CIT(A) reproduced as under:- "The assessee is a private limited company and it is dully authorized vide its Articles of Association to raise the loans as and when the need arises. The clause no. 54 of the Articles of Association of the company has dully a....
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....arding the existence of the 5 companies on their given addresses. We have noticed that Ld.CIT(A) stated that the assessing officers reported that the commission u/s 131(1)(d) of the Act was issued to the Investigation Wing Kolkata on 14.12.20-15.and it was informed that the companies were found to be nonexistent on the given addresses In this connection we have also noticed the assessee's explained submitted to Ld.CIT(A) reproduced as under:- "The findings of the department are not correct based on the following facts- 1. All the depositors are corporate entities and are duly registered with the registrar of companies. Details with respect to their incorporations were duty submitted to the learned AO and also in our earlier submissions made before the Ld.CIT(A). 2. The status of all the companies are dully considered as Active Status in the records of the Company Master Data obtained from the Ministry of Company affairs. Copies of the latest company master data was submitted to the Ld.CIT(A). The lenders were maintaining and having operative banking accounts with regular dealings in these accounts. Copies of the latest bank accounts of the lenders were also furnishe....
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....tive latest return of income, however, none of them were found at the given address, not only by the employee of the Department, but also by the postal authorities. It was submitted that the assessee had failed to produce any of such persons before the Assessing Officer. It was submitted that it is by now well settled that merely because payments are made by cheques would not establish the genuineness of the transactions. In support of his submissions, the learned counsel placed reliance upon the decision of this court in the case of Manoj Kumar Saraf v. ITO [2014] 45 taxmann.com 63/223 Taxman 43. It was, accordingly, urged that the impugned order passed by the Tribunal does give rise to a substantial question of law, as proposed or as may be formulated by this court. 5. This court has considered the submissions advanced by the learned counsel for the appellant and has perused the orders passed by the authorities below. A perusal of the order passed by the Commissioner (Appeals) reveals that he has, upon appreciation of the material on record, found as a matter of fact that during the assessment proceedings, the assessee had furnished all the customers' details like name, ad....
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....has concurred with the above findings recorded by the Commissioner (Appeals) and has noted that the solitary grievance of the Assessing Officer was that he had tried to serve the notice upon the investors but failed to serve them. The Tribunal, after considering the material on record, was of the view that as to how the Assessing Officer could not serve the notices upon these persons was not specifically discernible. It took note of the fact that there were two sets of evidences. The alleged assertions of the Assessing Officer on the basis of the alleged report of the process server which has not been placed on record by the revenue, nor reproduced by the Assessing Officer in the assessment. The Assessing Officer has not even made reference to any particular witness in whose presence the process server had tried to locate the alleged investors. Whereas on the other hand, the assessee has furnished copies of the income tax returns, bank statement, PAN coupled with the fact that the amounts have been returned through account payee cheques, which had been accepted by the Commissioner (Appeals). Considering the material on record, the Tribunal found that the findings recorded by the Co....
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....sing officer was not justified in making the addition. We have noticed that in the case of the assessee, the confirmation with the name, address, copy of ledger account, copy of balance sheet and profit and loss account, copy of income tax returns and computation of total income in respect of all the parties were filed before the assessing officer. We have also perused the judicial pronouncement in the case of CIT-Rajkot vAyachi Chandrashekhar Narsangji in which the Hon'ble High Court of Gujarat held that in case the loan amount has been repaid by the assessee in the immediate next financial years that indicate that the department has accepted the repayment of loan without proving into it. We have also observed that it was undisputed fact that the assessee had repaid considerable amount of the loans to the lenders in the next year along with the interest amount. The assessment records of all the lenders are available with the income tax department and the assessing officer could have easily verify the same. We have also noticed that not any lender has made denial of not extending any loan to the assessee company. We have also noticed that all the transactions have been made t....