TaxTMI 
TaxTMI 
2026 (2) TMI 558
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.... 29.03.2019, declaring a total income of Rs. 11,54,370/-. The return was processed under section 143(1) of the Income Tax Act, 1961 [hereinafter referred to as "the Act"]on 23.10.2019. 3. Subsequently, the case was selected for complete scrutiny on the issues relating to business loss, contract receipts or fees and unsecured loans. Notice under section 143(2) was issued. Thereafter, notices under section 142(1) were issued calling upon the assessee to furnish details of unsecured loans reflected in Note No. 3 of the balance sheet, loans and advances reflected in Note No. 9 of the balance sheet, bank statements and other related particulars. According to the Assessing Officer, there was no compliance to the notices initially issued, whereupon reminders were issued. The assessee ultimately furnished details relating to unsecured loans taken and given along with bank statements through submissions, which were taken into consideration. 4. On examination of the balance sheet and other details, the Assessing Officer observed that the assessee had unsecured loans aggregating to Rs. 1,13,37,71,357/- as on 31.03.2018, on which interest had been paid to various parties, including relat....
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....ieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A).Before the Ld. CIT(A), the assessee reiterated its submissions regarding business exigencies, commercial expediency and capitalisation of interest in respect of the addition of Rs. 5,31,46,170/-. It was also contended that section 68 could not be invoked in respect of interest expenditure. With regard to the addition of Rs. 30,09,99,829/-, the assessee explained that the difference arose only due to regrouping of balances from loans liability to loans and advances and vice versa, that confirmations, ledger accounts, bank statements and financial statements of the parties were furnished, and that the Assessing Officer failed to appreciate the same. The Ld. CIT(A), after considering the material on record, confirmed the addition of Rs. 5,31,46,170/- under section 68 of the Act. However, the Ld. CIT(A) deleted the addition of Rs. 30,09,99,829/-, accepting the explanation of regrouping of balances furnished by the assessee. 7. Aggrieved by the decisions of CIT(A), both, revenue and assessee are in appeal before us raising following grounds of appeal: Assessee's Appeal in ITA No. 5580/MUM/2....
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....was submitted that the entire interest expenditure on unsecured loans had been capitalised to the cost of work-in-progress, having regard to the nature of the assessee's real estate development activity. 10. The Ld. AR took us through the profit and loss account and the ledger account of Work-in-Progress placed in the paper book, particularly at page 165, to demonstrate that the interest cost on unsecured loans was not claimed as revenue expenditure. It was pointed out that the interest was initially debited in the books and thereafter capitalised to Work-in-Progress, forming part of the cost of the project. It was thus submitted that no deduction of such interest had been claimed in computing the income under the head "Profits and gains of business or profession". 11. According to the Ld. AR, since no claim of interest expenditure was made in the profit and loss account, there was no question of any disallowance or addition on account of interest under the normal computation of income, and the invocation of section 68 in respect of such capitalised interest was, therefore, misconceived. It was submitted that section 68 applies only to a sum found credited in the books of acc....
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....terest has been paid through disclosed banking channels, to identified parties, and forms part of the loan transactions already reflected in the balance sheet. The Assessing Officer has not doubted the identity of lenders in this context while making this particular addition. What has been doubted is the rate of interest. Determination of reasonableness of interest expenditure falls within the domain of allowability of expenditure under the appropriate charging provisions. It does not fall within the ambit of section 68. Therefore, we hold that invocation of section 68 in respect of alleged excess interest is legally unsustainable. On this short ground alone, the addition made under section 68 cannot be sustained. 16. Though we have held that section 68 is inapplicable, the Ld. AR has raised an alternate plea, namely, that the entire interest cost has been capitalised to Work-in-Progress and not claimed as revenue expenditure, and therefore even if any portion is regarded as excessive, the consequence would be reduction of WIP and not addition as income. The Ld. AR took us through the profit and loss account and the ledger account of Work-in-Progress (paper book page 165) to dem....
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....se merely on account of regrouping of balances between unsecured loans and loans and advances, and that the addition was deleted without proper verification of the creditors' identity, genuineness and creditworthiness. 22. The Ld. Departmental Representative relied upon the reasoning contained in the assessment order and submitted that the Assessing Officer had merged the loan accounts and worked out a difference of Rs. 30,09,99,829/- which remained unexplained. It was contended that the Ld. CIT(A) erred in granting relief without appreciating that the assessee had not discharged the burden cast under section 68. 23. On the other hand, the Ld. Authorised Representative supported the order of the Ld. CIT(A) and submitted that there was no unexplained credit during the year, that the difference arose purely due to accounting regrouping when credit balances turned into debit balances upon repayment, and that the addition was made merely on the basis of a merged tabulation without identifying any specific unexplained credit entry. In support of the same, the Ld. AR took us through the ledger accounts of the concerned parties to demonstrate the manner in which regrouping had taken....
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....cer in the present case, corresponding discrepancies would have necessarily emerged in the assessment of Shri Sushil R. Kothari. The absence of any such adverse finding in the assessment of the said party, it was contended, supports the correctness of the balances as recorded in the books of the assessee. 26. The Ld. AR thus submitted that the addition made under section 68 on the premise of alleged mismatch or artificial regrouping of balances is not borne out by the factual position reflected in the corresponding accounts of the parties concerned. 27. We have heard the rival submissions and perused the material available on record. Having considered the submissions, we find that the addition made by the Assessing Officer is founded not on identification of any specific unexplained credit entry in the books of account, but on a reclassification exercise. Section 68 contemplates a situation where any sum is found credited in the books of the assessee and the assessee fails to satisfactorily explain the nature and source thereof. In the present case, the Assessing Officer has not pointed out any particular credit entry which remained unexplained. Instead, he has merged figures....