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Facts
The assessee challenged the CIT(A)'s order confirming additions made by the AO for AY 2016-17. The additions involved ₹1,86,85,000/- under Section 68 for unsecured loans from directors, ₹1,01,96,477/- under Section 40A(3) for cash payments, and ₹1,64,259/- under Section 40(a)(ia) related to disallowance of interest.
Held
The Tribunal deleted the Section 68 addition as the DR accepted the nature and source of the loans. For the Section 40A(3) and Section 40(a)(ia) additions, the matters were remitted back to the AO for fresh examination, as the AO had not adequately analyzed individual transactions or verified the assessee's claims.
Key Issues
Whether the CIT(A) erred in confirming additions under Section 68 for unexplained cash credits (unsecured loans from directors), under Section 40A(3) for cash payments, and under Section 40(a)(ia) for disallowance of interest due to reporting discrepancies.
Sections Cited
40A(3), 68, 115BBE, 40(a)(ia)
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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI S.R.RAGHUNATHA
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter referred to as “the Ld.CIT(A)”), Delhi, dated 14.10.2024 for the Assessment Year (hereinafter referred to as "AY”) 2016-17.
2. At the outset, the Ld.AR of the assessee submitted that even though the assessee is aggrieved by the order of the Ld.CIT(A, it is assailing the action of the Ld.CIT(A) confirming the action of the AO, the assessee only on three issues i.e. (i) addition made to the tune of ₹1,01,96,477/- invoking the provisions of Sec.40A(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act”); (ii) addition of ₹1,86,85,000/- u/s.68 of the Act treating the equity subscription of the shareholders as unexplained credits u/s.115BBE of the Act, and (iii) addition of ₹1,64,259/- u/s.40(a)(ia) of the Act.
First of all, we will consider the addition made u/s.68 of the Act to the tune of ₹1,86,85,000/-.
The brief facts are that the AO noted from the financials submitted by the assessee that during the relevant year under consideration, it has received unsecured loan of ₹1,94,94,512/- from Financial Institution and ₹1,86,85,000/- from its director. Therefore, assessee was asked to prove the identity, creditworthiness and genuineness of the said transactions.
In order to prove the genuineness of the unsecured loan of ₹1,94,94,512/-, the assessee enclosed loan sanction letter from the Financial Institution dated 06.12.2018 which was accepted by the AO.
However, in respect of unsecured loan taken from the Director, the AO noted that the assessee only submitted copies of the confirmation letters from the two Directors and didn’t file any evidence to prove creditworthiness of the Directors for lending money to the assessee.
Therefore, he added ₹1,86,85,000/- as unexplained credit u/s.68 of the Act and taxed the same u/s.115BBE of the Act.
5. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who confirmed the same.
6. Aggrieved, the assessee is in appeal before this Tribunal.
We have heard both the parties and perused the material available on record. The AO is noted to have made addition of ₹1,86,85,000/- u/s.68 of the Act since the assessee company couldn’t submit any evidence to prove the creditworthiness with regard to the unsecured loan taken from the Directors to the extent of ₹1,86,85,000/-. On appeal, the Ld.CIT(A) is noted to have confirmed the action of the AO. Before us, the Ld.AR drew our attention to Page Nos.16-20 of the Paper Book and explained that the Directors who lend money to the company were namely Mr. K. Prasad, Mrs. P. Sudha and Mr.P. Arunkumar. And that they had maintained sufficient balance in the current account of the company and pointed out from relevant documents that the opening balance of the three Directors in the current account of the company were to the tune of ₹2,64,22,203/-.
During the course of hearing, we had asked the Ld.DR to verify the aforesaid claims of the assessee and the Ld.DR is noted to have filed a report before this Tribunal dated 6.06.2025 wherein the Ld.DR has accepted the nature and source of the unsecured loan given to the assessee company by its Directors to the tune of ₹1,86,85,000/-. The relevant portion of the reports reads as under:
The source of unsecured loans from directors
2.1 The assessing officer has added Rs. 1,86,85,000/- u/s 68 in the assessment order dated 10.12.2018 on the ground that the assessee company failed to prove the creditworthiness of the directors. The AO probably came to the conclusion considering that the income declared by the directors were less than Rs. 10 lakhs in the relevant AY. The assessment order is not detailed in this regard.
2.2 In this regard, the AR explained (page no 16-20 of the paper- book), that the directors who lent money to the company namely Mr K Prasad, Mr P Arunkumar and Mrs P Sudha maintained balances in the current account of the company. The opening balance of the three directors were Rs. 2,64,22,203 Cr. Balance.
2.3 The AR submitted that during the relevant year the funds infused by the three directors and the source of funds were as follows:
Director Fund infused during Source the year Mr K Prasad Rs. 50,00,000 Loan from SIB Bank availed by Mr Arun Kumar and transferred to Mr Prasad Mr P Arun Rs. 76,00,000 The current account had opening Kumar balance of Rs. 2,03,59,603/-. Out of this, Rs 76 lakhs was given to the company Mrs P Sunita Rs. 20,000 Pension from Saving Account
2.4 The claims of the AR were verified with the submissions and ledgers of the directors in the books of accounts of the company and bank statements. The claim of the AR in this regard are acceptable.
In the light of the aforesaid facts and discussion, and taking note of the report of Ld DR supra, we find that the nature and source of the unsecured loan given by the Directors to the assessee company to the tune of ₹1,86,85,000/- stands explained and therefore, the addition made u/s.68 of the Act was not warranted and so is directed to be deleted.
Coming to the next issue regarding the addition of ₹1,01,96,477/- invoking the provisions of Sec.40A(3) of the Act, we find that similar issue had cropped up in the earlier AY 2015-16 and the AO had made similar disallowance u/s.40A(3) of the Act; and the matter came up before this Tribunal, which is noted to have been decided on 27.04.2021, as under:
2. M/s. S.P Coal Resources Pvt. Ltd., the assessee, is in the business of trading in steam coal used for power generation and in chemical and sugar factories. While making the assessment for Assessment Year 2015-16, the Assessing Officer (A.O) noticed that the assessee has paid to its creditors and transporters in cash for purchase of coal in excess of Rs. 20,000/- in violation of provisions of s. 40A(3) of the Income Tax Act, 1961 (in short ‘the Act’) therefore, on examination, the A.O held, inter alia, that this payments could have been made through banking channel or online, there were no exceptional circumstances as prescribed under Rule 6DD of the Income Tax Rules, 1962 etc. and hence, made disallowance u/s. 40A(3) of the Act. Aggrieved, the assessee filed an appeal before CIT(A). The ld. CIT(A) held, inter alia, that the assessee as well as the creditors and transporters were established business concerns having bank accounts and they were operating in urban areas, the assessee could not demonstrate exceptional circumstances leading to violation of s. 40A(3) of the Act for seeking exemptions from the disallowance u/s. 40A(3) of the Act and hence upheld the disallowance. Aggrieved against that order, the assessee filed this appeal.
3. The case was heard through video conferencing. The Ld. AR submitted that the Ld. CIT(A) erred in confirming the disallowance en masse without looking into the nature of each of the amounts disallowed. The lower authorities having not appreciated the fact that the impugned sum comprised not only expenditure over Rs. 20,000/- by the cash, but also refund of trade advance received for supply of coal from various parties in the course of assessee’s business as an importer and supplier of coal. There are a large number of payments below the threshold limit of Rs. 20,000/-, which do not attract the provisions of s. 40A(3) of the Act. Without appreciating the facts and circumstances with accounts and without giving due opportunity to the assessee, the A.O made the addition and the Ld. CIT(A) confirmed the disallowance. The Ld. A.R invited our attention to the paper book in support of his grounds of appeal
4. Per contra, the ld. counsel for the D.R invited our attention to the observation made by the Ld. CIT(A) in the order that inspite of reasonable opportunity given, the assessee could not demonstrate exceptional circumstances and hence supported the orders of lower authorities.
We heard the rival submissions and gone through the relevant material on record. It is seen from the assessment order that the assessee has taken a plea that the payment was made due to unavoidable circumstances, because the company was in financial crisis. Some of the customers refused to accept company’s cheque and to overcome the payments were made in cash etc. It is seen from the assessment order, the A.O has not analyzed individual transactions before taking the decision. In the facts and circumstances of the case, we deem it fit to remit this issue back to the AO for fresh examination. The assessee shall furnish relevant material in support of its contention and comply with the requirements of the AO in accordance with law. The AO on due examination of them and after affording due opportunity to the assessee, decide the issues in accordance with law.
In the result, the appeal filed by the assessee is allowed for statistical purpose.
Before us, also the assessee reiterated the plea made for earlier AY 2015-16 and pleaded that cash payment was made due to unavoidable situation because the company was in dire financial crisis, and due to which, some of the customers refused to accept the company’s cheque and in order to overcome the same, payment had been made in cash.
And that factual situation still prevails in the relevant year under consideration and similar plea of assessee has not been considered/appreciated by AO. And brought to our notice that in this relevant AY also, the AO has not analyzed the individual transactions, before taking adverse view on this issue and pleaded that the matter may be restored back to the file of the AO for de novo adjudication as directed in AY 2015-16. Since the issue raised by the assessee before us are similar, we are inclined to follow the action taken by this Tribunal in assessee’s case for AY 2015-16 (supra), and remit back to the file of the AO for fresh examination this issue as directed for AY 2015-16 and the AO to pass order in accordance to law after hearing the assessee.
The next issue is regarding the addition of ₹1,64,259/- made by the AO u/s.40(a)(ia) of the Act. The AO while going through the Form 3CD took a view that the disallowance made by the assessee u/s.40(a)(ia) of the Act was lower than the amount quantified in the Form 3CD; and asked the assessee to explain the difference of ₹1,64,259/-. In response, the assessee submitted that by oversight what has been disclosed in the Audit Report was not disclosed in the ITR. Hence, the AO has disallowed the expenditure to the tune of ₹1,64,259/- u/s.40(a)(ia) of the Act. On appeal, the Ld.CIT(A) has not made any observation on this ground.
Aggrieved the assessee is before us.
Heard both parties and perused the records. On this issue, it is the case of the assessee that the AO has not appreciated the relevant facts even though it was explained before him, and misdirected himself to make the disallowance. According to the assessee, it had in fact suo- motto disallowed ₹1,64,259/- and had in fact disclosed the same in the ITR and therefore, the AO erred in disallowing the entire amount of ₹1,64,259/-. In order to buttress the aforesaid contention, he drew our attention to Page No.26 of the Paper Book, wherein, the relevant extract of the ITR has been reproduced. From a perusal of the same, it is noted that the assessee has debited to the P&L a/c to the extent disallowable u/s.40(a)(ia) of the Act of ₹49,278/- which is 30% of the amount of interest payable i.e. ₹1,64,259/-. Hence, ₹1,64,259/- should not be disallowed u/s.40(a)(ia) of the Act. Therefore, the contention of the assessee is that since the assessee has already suo moto disallowed 30% of ₹1,64,259/- [refer the ITR filed] and also in the computation of total income [refer Page No.66 of the Paper Book], the disallowance of 100% of ₹1,64,259/- is erroneous/unsustainable in law. Therefore, he pleaded for deletion of ₹1,64,259/-.
Having gone through the records, we find from perusal of the computation of income that the assessee has suo-moto disallowed ₹49,278/- and added the same, which is 30% of ₹1,64,259/- which fact is discernable from Page No.66 of the Paper Book. According to the assessee, since assessee has disallowed 30% of ₹1,64,259/-, the AO erred in disallowing 100% of ₹1,64,259/-. Be that as it may, anyway the AO has not verified the aforesaid factual assertion made by the assessee.
So, let the issue go back to the file of the AO and if the assessee is able to substantiate the fact that the assessee has already disallowed 30% of ₹1,64,259/-, then no disallowance to be made and in case, assessee fails
In the result, appeal filed by the assessee is partly allowed for statistical purposes.