TaxTMI 
TaxTMI 
2017 (3) TMI 1934
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....action of assessing officer in making addition on account 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 und....
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....ant had shown interest expenses under finance cost borrowings for AY 2012-13 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 canno....
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....326 ITR 1 (SC): (a) the mandate of section 14A is to prevent claims for deduction of expenditure 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. ....
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....free funds available with the appellant and the investment in shares have been made out of the interest bearing funds. The appellant has made/investments on 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....
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.... income has been provided for. Consequently, there is considerable dispute between the taxpayers and the Department on the method of- determining such expenditure. 11.2 In view of the above, a new 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. 24-3-20....
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....sing share capital & reserves of Rs. 452.14 lacs as against investment of Rs. 295 lacs. The assessee also submitted that company had made investment in the shares of private limited company and the dividend income to be earned in future would not 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....
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....T(A) is reproduced as under:- 6.2.15. The identity, capacity and genuineness aspects are not water tight compartments. An assessee's explanation of the nature and source of the credits cannot be entertained and held by the Assessing Officer as satisfactory unless 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....
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....ved-in unison that the assesses did not produce any evidence to rebut the 'presumption drawn against him under Section 68 of the Act, by producing the parties in whose name the amounts in question had been credited by the assesses in his books of account. In the absence of any cogent 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....
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....atter any further and did not examine the source of income of these lenders to find out whether they were creditworthy or were such who could give the loans, Prima facie onus is always on the assessee to prove the cash credit entry found in the books of account of the assessee. In land mark cases like Kale Khan Mohammad Hanif v CIT[1963] 50 ITR 1 (SC),and Roshan Di 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 cr....
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.... sources' are presumptions which flow naturally from the circumstances that all facts which can establish the nature and source of the cash credit are peculiarly within the knowledge of the assessee. It may be that the onus of displacing the presumptions may be heavy in some cases and light in others, depending on the facts and circumstances of the case. But, the presumptions 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 opi....
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....979] 117 ITR 690, 694 (Cal); * Sajan Dass and Sons v. CIT [2003] 264 ITR 435 (Delhi); * Sumati Dayal v. CIT [1995] 214 ITR 801 (SC); and * JaspalSingh v. CIT [2006] 290 ITR 306 (P&H). * Dhanalaxmi Steel Re-rolling Mills 57 ITD 361 (HYD.) 6.2.26. The Hon. ITAT, Kolkata Bench in the case of [2014 ] 52 taxmann.com 305 (Kolkata -Trib.) Bisakha Sales (P.) Ltd, while deciding the racket/scam of the issue' 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....
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....ion of all lending companies, relevant bank statement of all the lending companies, ledger a/c of lenders, letter filed by the lenders in respect of notice u/s. 133(6) of the act, acknowledgement of return of income of lending companies, audit report along with audited financial statement of all lending companies, sanction letter obtained from SBI for SLC Credit facilities, minutes of Board Resolution for unsecured loan, relevant bank statement of the assessee 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....
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....al relations with Shri Vikas Kumar Badjatya one of the directors of the lending .companies and on personal persuasion and contacts of the said cousin brother of the directors they agreed 'to lend the funds to the appellant company." We have noticed that during the course of appellate proceedings the Ld. CIT(A) has issued directions u/s 250(4) of the Act on 04.12.2015 to the assessing officer to get enquiries conducted from the investigation Wing Kolkata regarding 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 ....
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....ement in the case of CIT-2 v.D& H Enterprises(2016) 72 taxmann.com.91(Gujarat High Court) in which it was held that the solitary reason of not serving of summons cannot be relied only by ignoring the other relevant material produced by the assessee. The relevant part of this judicial pronouncement in the case of CIT-2 v.D& H Enterprises(2016) 72 taxmann.com.91(Gujarat High Court) is reproduced as under:- "It was pointed out that all the summons were issued to the alleged parties at the address mentioned in their respective 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 t....
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....f the returns of income for assessment year 2009-10 for verification in support of his case. He further observed that it was not the case of the revenue that any evidence had been brought on the record which even remotely indicated that the money originally belonged to the assessee and it had returned back to the assessee again. In the light of the above findings of fact recorded by him, the Commissioner (Appeals) allowed the appeal and set aside the additions made by the Assessing Officer. 6. The Tribunal, in the impugned order, 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 reproduce....
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....order. We have further perused the judicial pronouncement in the case of CIT v Apex Therm Packaging P. Ltd ITA no.1070 of 2013 vide which the Hon'ble High Court Gujarat held that in case full particulars, inclusive of the confirmation with the name, address and pan number, copy of the income tax returns, balance sheet, profit and loss account and computation of the total income in respect of all the creditors, lenders were furnished and the loans were received through cheques, the loan account are duly reflected in the balance sheet the assessing 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 a....