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Facts
The Revenue appealed against the CIT(A)'s order deleting additions made by the AO under Section 143(3) related to disallowance of interest on bank overdraft and unexplained cash deposits/credits under Section 68. The assessee-respondent did not appear, and the case proceeded ex-parte.
Held
The Tribunal held that the deletion of the interest disallowance was justified as the interest-bearing funds were used for business purposes, and the payments to sundry creditors were for business expediency. The Tribunal also deleted the additions under Section 68, stating that cash deposits into bank accounts from sales, or payments to genuine creditors for purchases, cannot be added back if the sales and purchases are accepted.
Key Issues
Whether the disallowance of interest paid on bank overdraft for business purposes is valid. Whether cash deposits into the bank and payments to sundry creditors for purchases, when sales and purchases are accepted, can be treated as unexplained income under Section 68.
Sections Cited
143(3), 68, 36(1)(iii), 37, 133(6)
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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
This Revenue’s appeal for assessment year 2014-15, arises against the Commissioner of Income Tax (Appeals)-15 [in short, the “CIT(A)”], Delhi’s order dated 24.10.2019 passed in case no. 95/18- 19 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).
Case called twice. None appears at the assessee-respondent’s behest. It is accordingly proceeded ex-parte.
This Revenue’s appeal raises the following substantive grounds:
1. 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs 10,01,305/- made by the A.O. on account of disallowance of interest paid on bank overdraft.
2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs 1,20,00,000/- made by the A.O. on account of unexplained cash deposits u/s 68 of the Income Tax, 1961.
3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs 2,06,48,496/- made by the A.O. on account of unexplained credits u/s 68 of the Income Tax Act, 1961.
4. The appellant craves leave to add, amend of forego any ground(s) of appeal at any time before or during the hearing of this appeal.
4. We first of all advert to the Revenue’s endeavour to revive the Assessing Officer’s action disallowing interest paid on bank overdrafts of Rs.10,01,305/-; deleted in the CIT(A)’s order as under: “4.1 Grounds No. 1, 2 & 6 are general in nature and do not require any specific adjudication. 4.2 The Ground no 3 is against the addition of Rs. 10,01,305/- by disallowing the interest paid to bank. The AO made the disallowance by observing that the assessee has taken interest bearing loans from the banks for business activities and paid interest to the bank which was debited to P&L account for the year under reference. Similarly, the amount borrowed for business activities was further advanced as loan to related parties and no interest was charged from them. In this way tax liability on the part of the assessee company has been dwindled by debiting the interest paid, to P&L account. The assessee company deliberately lent interest born funds and paid interest to the bank which is inadmissible and contravention to business ethics. The need of commercial expediency could not be explained. During the course of appellate proceedings, the AR of the appellant has filed written submissions. The relevant portion of the submission are as under:
2 | P a g e 7.4 It is submitted that the appellant had OD account with RBL Bank vide account no 609000022090 from where a sum of Rs. 3,00,00,000/- has been borrowed on dated 24-01-2014. A copy of bank statement of this account is placed at page no 68 of paper book. The outstanding balance of OD account was Rs. 3,03,24,423/- as on 31-03-2014, which can be verified form the financial statement of the appellant company. (Placed at page no 1 to 21 of paper book). Such amount has been transferred to appellant's company current account no 409000074606 maintained also with RBL Bank. A copy of bank statement of current account is placed at page no 69 to 70 of paper book. A sum of Rs. 2,00,00,000/- has been paid to M/s DCP India Pvt. Ltd., who is the creditor of the appellant and remaining Rs. 1,00,00,000/- paid to Mrs. Rashi Jain and Mr. Gaurav Jain (Rs. 50,00,000/- each) as advance for purchase of commercial space for operations of the company from the aforesaid current account. 7.5. Apart from that the appellant company had availed the temporary overdraft from RBL Bank of Rs. 2,50,00,000/- vide account no 409000075740 which has been closed on 28-09-2013 i.e. during the year under appeal. A copy of bank statement of this account is placed at page no 71 of the paper book. It is evident from the bank statement that a sum of Rs. 2,50,00,000/- has been paid to M/s DCP India Pvt. Ltd. (Creditor of the appellant) 7.6 The appellant company had submitted the copy of ledger account of bank interest of Rs. 10,01,305/- (placed at page no 72 of paper book) along with the confirmation from M/s DCP India Pvt. Ltd (placed at page no 27 to 31 of paper book), which clearly evident that a sum of Rs. 4,50,00,000/- has been paid during the year under appeal from OD account. The AO has accepted the aforesaid confirmation of M/s DCP India Pvt. Ltd. but disallowed the interest paid on RBL OD account alleging that interest paid to bank is inadmissible and in contravention to business ethics. The need of commercial expediency could not be explained. It is respectfully submitted that M/s DCP India Pvt. Ltd is one of the sundry creditors of the appellant company from whom a major purchase had been made during the year under appeal. A payment made to sundry creditor against purchases is always commercial expediency. The details of interest paid on bank OD amounting to Rs. 10,01,305/- is submitted as under: Particulars Amount (in Rs.) Interest of Temporary OD from RBL of Rs.2,76,882/- Rs.2,50,00,000/- Interest on OD from RBL of Rs.3,00,00,000/- Rs.7,24,423/- Total Rs.10,01,305/-
3 | P a g e 7.7 As regards the advances, the appellant company had paid a sum of Rs. 3,90,00,000/- during the year under appeal for purchase of commercial space. A sum of Rs. 1,00,00,000/- has been utilised from RBL Bank OD account as mentioned above. The total advances made as on 31-03-2014 amounting to Rs. 5,00,92,367/- as mentioned by the AO in para 3 of the assessment order. 7.8 It is further submitted that the appellant company was incorporated on 27-11-2012. The A.Y. 2014-15 is the second year of the operation of the company. As in the initial year, the appellant company did not have proper commercial office for operations. The appellant company planned to purchase the commercial space for operations of the company. For this the appellant company paid an advance to purchase the property. A copy of agreement for sale is placed at paper book. (page no 34 to 37). This agreement is duly submitted before the AO and this fact is also mentioned at para no 3 of the assessment order. 7.9 The AO on point no 3.3 of the assessment order had referred the case law - SA Builders Ltd Vs. CIT 288 ITR-1(SC)/2007 (placed at pager no 73 to 78 of paper book): Some extract of the case is as under: "In this connection we may refer to Section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income tax under Section 28 of the Act." "In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby." "The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." "We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business 4 | P a g e of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits." 7.10 It was also held in Delhi High Court order in case of CIT Vs Dalmia Cement Bharat Ltd. (ITR No 249-250/1987) (Page no 79 to 90 of Paper Book) that - The Tribunal was correct in holding that no portion of the interest paid by the assessee on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to subsidiary company and that that the Assessing Officer was not justified in disallowing the assessee company in debiting the interest paid to the bank as a revenue expenditure merely because it had given further loan of Rs.40,00,000/- to its subsidiary company. 7.11 From the above facts it is evident that the amount of loan taken RBL bank had been utilized for the purpose of business only i.e. payment made to creditors against the material purchased and advance given for purchase of commercial space for operations of the company. The appellant company also mentioned this fact vide its letter dated 06-12-2016 (filed on 06-12-2016) to AO. (Page no 25 to 32 of Paper Book). 4.3 The contentions of the AR have been considered and the order of the AO has also been perused. The AR has also raised the issue that the A.O. while framing the assessment order, has not granted adequate opportunity of hearing and specific show cause notice to the assessee and without discharging the onus for such illegal additions made only on the basis of imaginations. From the documents submitted during the appellate proceedings, it is apparent from bank statement and copy of ledger that major portion of loan amount is utilized by paying off the sundry creditors of the appellant. The AO has mentioned in his order that the need of commercial expediency could not be explained but he has accepted the confirmation of sundry creditors to whom the amount has been repaid from the bank overdraft account. These two facts are contradictory. So, the addition of Rs. 10,01,305/- made by the AO by 5 | P a g e disallowing the interest paid on bank overdraft is not tenable and is deleted hereby. Accordingly ground no 3 is allowed.”
The Revenue vehemently argues that the CIT(A) has erred in law and on facts in deleting the impugned interest disallowance made by the Assessing Officer. We find in this factual backdrop and in light of the assessee’s cogent supportive evidence that it had made the impugned payments to the sundry creditors in the regular business activities only which has nowhere been controverted on the ground that there was any diversion of interest- bearing funds for non-business purposes. We thus affirm the learned CIT(A)’s action deleting the impugned interest disallowance. Ordered accordingly.
Next comes section 68 twin additions of Rs. 1,20,00,000/- and 2,06,48,496/- made by the Assessing Officer and deleted in the CIT(A)’s order reading as under: “4.4 The Ground no 4 is against the addition of Rs. 1,20,00,000/- u/s 68 against the cash deposit into bank. It is seen from the order of the AO that the AO has made the addition on account of the cash deposited into bank amounting to Rs. 1,20,00,000/- u/s 68 of IT Act. It is pointed out by the AR that after going through the bank statement, it is found that the amount deposited into the bank during the year under appeal is Rs. 1,15,00,000/-and not Rs. 1,20,00,000/-. During the course of appellate proceedings, the AR of the appellant has filed written submissions. The relevant portion of the submission are as under:
6 | P a g e 8.2 As per Ld. AO, the sum of the above cash deposited comes to Rs. 1,20,00,000/- but the actual total of the aforesaid amount comes to Rs. 1,65,00,000/-. The Ld. AO mentioned that a sum of Rs. 50,00,000/- had been deposited on 13.01.2014 but there is no deposited of such amount in the bank statement of the aforesaid account maintained with Central Bank of India (Placed at page no 38 to 57 of paper book). It shows that the Id. AO did not verify these figures and all cash deposited during the year under appeal had disallowed and added back u/s 68 of the Act. 8.3 The Ld. AO had made addition u/s 68 against the cash deposited in to bank generated through cash sales. The Ld. AO did not question about the sales which was respectfully credited in the books of the appellant. 8.4 The extract of section 68 is reproduced as under: "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 not, in the opinion of the Assessing officer, satisfactory, sum so credited may be charged to Income Tax as the income of the assessee of that previous year." 8.5 From the extract of section 68, it is evident that cash deposited in to bank account could not be added u/s 68. 8.6 Without prejudice the above, the appellant company has made cash sales during the year under appeal. The summary of the sales is as under:
7 | P a g e 8.7 From the above table it is clear that the appellant has made cash sale of Rs. 1,23,32,925/-during the year under appeal and deposited a sum of Rs. 1,15,00,000/- to bank account out of cash generated through sales. A copy of quarterly Vat Returns along with the summary is placed at page 90 to 113 of paper book showing the total sales as per revenue records which has been duly accepted by the Ld. AO. 8.8 The Ld. AO has also mentioned in para no 4.4 of the assessment order that the appellant company had produced the cash sale register and contended that VAT/sales tax has been duly charged on sales made on account of cash sales. The Ld. AO did not question on the revenue has been booked in the form of cash sales. The total sales has been accepted by the Ld. AO but the cash deposited against the cash sales has been added back to the income of the appellant u/s 68 which means dual tax on income. One considering the revenue and second added back the cash generate from the revenue deposited into the bank. 4.5 The contentions of the AR have been considered and the order of the AO has also been perused. An addition u/s 68 of the Act can only be made where any sum is credited in the books of the assessee maintained for previous year. Thus, the very sine qua non for making an addition u/s 68 of the Act presupposes a credit of the amount in the books of the assessee. The scope and gamut of the aforesaid statutory provision is to be construed by according a plain meaning to the language used in section 68. It is further seen that the AR has explained the source of cash deposited out of cash sales. The AO had also accepted the revenue generated through cash sales and no objection was found in the assessment order in respect of cash cash sales made. Once the revenue of cash sales has been accepted then cash deposited in to bank account can-not be added to the income of the appellant. So, the addition of Rs. 1,20,00,000/- (actual figure 1,15,00,000/-) made by the AO on account of cash deposits in the bank account is not tenable and is deleted hereby. Accordingly ground no 4 is allowed. 4.6 The Ground no 5 is against the addition of Rs. 2,06,48,496/- u/s 68 payable to sundry creditor. The AO has mentioned in his assessment order that genuineness and creditworthiness of the creditor was not established despite according numerous opportunities. Therefore, creditor amounting to Rs. 2,06,48,496/- on account of M/s Khushi Impex, appearing in the books of accounts of the assessee stands unexplained and was added back u/s 68 of the IT Act, to the total income of the assessee for the relevant year. 8 | P a g e During the course of appellate proceedings, the AR of the appellant has filed written submissions. The relevant portion of the submission are as under: 9.2 The Ld. AO has treated the sundry creditor i.e. M/s Khushi Impex for purchase made during the year as not genuine and not existing. The creditor is held to be not genuine on the ground that the enquiry letter u/s 133(6) of the Act is received back with remarks "no such firm" leaving the Ld. AO to conclude that the appellant company has failed to discharge its onus of proving the capacity of the creditor and genuineness of the transaction. The Ld. AO has not appreciated the facts of the case in its entirety where the books of accounts are not out rightly rejected, there is no adverse inference drawn regarding quantum of purchases. Even the purchase accounts of the sundry creditor have not been disturbed. The appellant company maintained the regular books of accounts. The Ld. AO had not disallowed the purchase from such creditor nor is the trading result disturbed. 9.3 It was held in Delhi High Court order in case of CIT Vs Ritu Anurag Agarwal, of 2008 (Placed at page no 135 to 136 of paper book) that The Assessing Officer did not consider this aspect while making additions of the sundry creditors under section 68 of the Income Tax Act. As there was no case for disallowance for corresponding purchases, no addition could be made under section 68 inasmuch as it is not in dispute that the creditors' outstanding related to purchases and the trading results were accepted by the Assessing Officer. We are, therefore, of the opinion that no substantial question of law arises for consideration in this case. The appeal is accordingly dismissed. 9.4 It was also held in ITAT, Ranchi order in case of M/s Gulf Steel & Minerals Vs I.T.O., Ward 1(4), Jamshedpur (placed at page no 137 to 142 of paper book) that - The AO in our view was confused. He at para no (3) of his order states that the addition u/s 68 of the Act and para no 3.6 states that he is disallowing sundry creditors. The Ld. CIT (A) also did not dispute the facts that the purchase is genuine. While so section 68 of the Act cannot be invoked. Thus the order of the CIT (A) is set aside and direct the AO to delete additions involved.
9 | P a g e 9.5 It was also held in Allahabad High Court order in case of Commissioner of Income Tax Vs Pancham Dass Jain (2006) 205 CTR All 444 (Placed at page no 143 to 145 of paper book) that As purchases were on credit, corresponding debits for them should appear in some accounts. Such credits in those accounts would not be for cash but for goods and it would be wrong to call them cash credits. The names of the suppliers may be wrong, but the supplies of the goods were reality. For wrong names of suppliers, the reality of purchases cannot be negative. The finding of the learned CIT (A) was, therefore, correct that it is not a case of cash deposits covered by Section 68. It is a case of purchases having been made by the assessee without properly disclosing the identity of the suppliers. Such a situation is not covered by section 68 of the Act. We, therefore, confirm the order of the learned CIT (A) who deleted the addition made on account of such credits. In the result the Departmental appeal stands rejected. 9.6 It was also held in ITAT, Delhi order in case of Smt. Suhda Loyalka Vs ITO, Ward-35(2), New Delhi (Placed at page no 146 to 154) that we are of the opinion that the Authorities below are not justified in making / sustaining the addition in dispute. Accordingly, the total addition of Rs. 3,50,94,758/- made by AO and confirmed by Ld. CIT (A) is hereby deleted. 9.7 It was also held in Delhi High Court Order in case of Commissioner of Income Tax Vs. JMD Computers & Communications (P.) Ltd (2009) 180 TAXMAN 485 (DELHI) (Placed at page no 155 to 156 of paper book) that - The Tribunal came to conclusion that the deletion made by CIT-(A) had to be sustained. The Tribunal, in particular, noted that the department having accepted the purchases, it could not have been assumed that the assessee had inflated its purchases by introducing fictitious purchases. In view of findings of the fact returned by two authorities below which are not perverse, no question of law, much less a substantial question of law, arises for our consideration. In the result, the appeal is dismissed. 9.8 It was also held in ITAT, Allahabad in case of JCIT Vs. Mathura Das Ashok Kumar (2006) 101 TTJ 810 (All ITAT) (Placed at page no 157 to 166 of paper book) that As the purchases have been held to be genuine and accepted as such, the credits that remained outstanding in such account cannot be treated to have remained unexplained. The balance appearing in this account, which included the disputed 10 | P a g e addition also, is the sum total of purchases that remained unpaid at the end of the year. As the genuineness of such purchases has not been disputed, rather, the same has been accepted, the credits stand fully explained and no adverse inference is called for, either on facts or in law. Thus, the learned CIT (A) has rightly deleted the addition and no interference in the same is called for. While upholding his finding, we dismiss the grounds of appeal raised by revenue. 9.9 From the above facts laws, it is respectfully submitted that the appellant had made genuine purchase from M/s. Khushi Impex and sold. The Ld. AO has not disbelieved the purchases or sales, as book results have been accepted. The confirmation was provided during the assessment proceedings vide letter dated 06-12-2016 (Placed at page no 32 paper book). Hence, the addition made of Rs. 2,06,48,496/- is liable to be deleted. 4.7 The contentions of the AR have been considered and the order of the AO has also been perused. The Hon'ble High court of Delhi in the case of CIT VS RITU AGARWAL in of 2008 (Supra) held that since there was no case for disallowance for corresponding purchases, no addition could be made under section 68 in as much as it is not in dispute that the creditors outstanding related to purchases and the trading results were accepted by the assessing officer. The similar view was held by Hon'ble Delhi High Court in case of COMMISSIONER OF INCOCME TAX VS J.M.D. COMPUTERS & COMMUNICATIONS (P) LTD. The facts of the extant case are identical to those facts. Therefore, considering the facts and circumstances of the case and the judicial pronouncements referred above, the action of the AO in making the addition of Rs. 2,06,48,496/- is not tenable and therefore the addition made by the AO is hereby deleted. Therefore, the ground no 6 of appellant is allowed.”
7. Suffice to say, it has already come on record that not only the Assessing Officer had wrongly made addition on the corresponding figure of Rs. 1,20,00,000/- instead of actual figure of Rs.1,15,00,000/-, but also the assessee’s cash sales in the regular business activity herein duly stand accepted as per entries in the 11 | P a g e books of account. Learned CIT(A) has further taken note of the hon’ble jurisdictional high court’s decision in CIT Vs. Ritu Agarwal (ITA No. 325 of 2008) that no sales could be disallowed once the corresponding purchases entry have not been disputed going by the assessee’s P & L Account. We thus take note of all these relevant facts to conclude that the learned CIT(A) has rightly reversed the assessment findings making the impugned twin additions under section 68 of the Act. Ordered accordingly.