SRI NILESH N SHAH ,BANGALORE vs. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE-8, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “C”, BANGALORE Before Shri Chandra Poojari, AM & Shri George George K, JM ITA No.1998/Bang/2018: Asst.Year 2009-2010 Sri. Nilesh N.Shah The Addl.Commissioner of No.37/2 B, K.S.Garden, 4th Cross Income-tax, Range 8 v. Bangalore. Lalbag Road Bangalore – 560 027 PAN : AHQPS3453C. (Appellant) (Respondent) Appellant by : Sri.Ravi Shankar, Advocate Respondent by : Sri.Shashidhar N.S., Addl.CIT-DR Date of Pronouncement : 04.08.2021 Date of Hearing : 04.08.2021 O R D E R Per George George K, JM This appeal at the instance of the assessee is directed against CIT(A)’s order dated 30.12.2016. The relevant assessment year is 2009-2010.

We shall adjudicate the above issues as under:-

Addition u/s 68 of the I.T.Act amoungint to Rs.6,98,692 3. The A.O. had made an addition of Rs.6,98,692 u/s 68 of the I.T.Act, being loans received from three persons plus interest payment disallowed. The details of the persons from whom it is claimed that the loans were received and the interest payment made by the assessee are as follow:-

2 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. Sl. Persons from Loan Interest Total No. whom loans amount payment were received 1. Sri.Vinay Prasad 2,00,000 28,274 2,28,274 2. Sri. Praful V.Shah 2,00,000 29,671 2,29,671 3. Smt.Sarojamma 2,00,000 40,747 2,40,747 Total addition u/s 68 of the I.T.Act 6,98,692

3.1 On further appeal, the CIT(A) confirmed the addition of Rs.6,98,692.

3.2. Aggrieved by the confirmation of addition u/s 68 of the I.T.Act, the assessee has filed this appeal before the Tribunal. The learned AR has filed a paper book comprising of 74 pages enclosing therein copy of computation of income and audited financials for assessment year 2009-2010, submissions made before the Income Tax Authorities, copy of statement / ledger accounts of the creditors, etc. The learned AR reiterated the submissions made before the Income Tax Authorities.

3.3 The learned Departmental Representative supported the order of the Assessing Officer and the CIT(A).

3.4 We have heard rival submissions and perused the material on record. For making addition of Rs.2 lakh (plus interest payment) for the loan received from Sri.Vinay Prasad, the observation of the Assessing Officer reads as follow:-

“On perusal of the said bank account. It is seen that cash was deposited on 22nd April, 2008 cash of Rs. 2 lakhs is deposited and the next day on 23rd Aprii,2008, a cheque for the same amount cheque was issued to the assessee. Sri Vinay Prasad when questioned explained that he got the said money from his father. It is far from reality that his father who retired in March, 2003 would. give him two lakhs in April 2008 out of the VRS benefits received in the year, 2003, almost six years after he received the so called VRS benefits. Thus, the said. transaction lacks geniuses. The very fact, that

3 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. Shri S. Vinay Prasad was not earning any income as he was unemployed at the time when the said transaction is claimed to have occurred, shows that creditworthiness is not there. Shri Vijay do not have the capacity to have lent two lakhs. The above findings were brought to the notice of the assessee vide order sheet notings dated 20-12-2001,26-12-2011 and 28-12-2011. However, the assessee has not been able to refute the above findings with documentary evidence .It is a fact" that cash has been credited in the books of the assessee however. the assessee has failed to explained satisfactorily the genuiness of the transaction and credit worthiness of the said loan creditor. Hence in the light of the above facts, the sum of Rs. 2 lakhs is added U/S 68 of the Income-tax Act, 1961, to the total income of the assessee.” 3.4.1 As rightly pointed out by the Assessing Officer, a sum of Rs.2 lakh was deposited in cash in the bank account of Sri.Vinay Prasad on 22.04.2008 and on the very next date, i.e., on 23.04.2008 a cheque for the same was issued to the assessee. On questioned by the A.O. from where Sri.Vinay Prasad received the cash deposit of Rs.2 lakh on 22.04.2008, he stated that he got the money from his father, who in turn had received the money on his retirement by opting for VRS. This explanation of the loan creditor is far from truth because his father had retired in the year 2003, i.e., six year prior to alleged giving of cash loan to his son. Therefore, the loan transaction of Sri.Vinay Prasad and resultant interest payment on the same lacks genuineness and has been rightly added u/s 68 of the I.T.Act.

3.4.2 As regards the addition of Rs.2 lakh u/s 68 of the I.T.Act, (plus disbelieving interest payment) received from Sri.Praful V.Shah, the A.O’s observation for making the addition are as follows:-

From the copy of the statement of computation of income, it found that Sri. Praful V Shah has received salary income of

4 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. Rs. 49,400/- , interest from four firms who appear to be sister concerns, NSC interest and bank interest. all totaling to Rs.1,29,457/-. He showed receipts from commission an amount of Rs. 18,500/- . After claiming deductions under chapter VI A, the taxable income shown is Rs.1,56,421/- for A. Y. 2009-10. He is assessed to tax with Income Tax Officer Ward 2( 4), Bangalore. On examining the bank pass book it is observed that a sum of Rs. 2 Lakhs was deposited in cash on 21.08.2008 and on very next day i.e., on 22nd August. 2008 the said amount of Rs. 2 Lakhs is given to the assessee, the entry in the bank account appearing as given to M/s. Karnataka pipes cheque no.731138. Though the above documents have been submitted to show the existence of the so called loan creditor, the said documents do not conclusively establish the credit worthiness of the so called loan creditor. The prominent factor is the fact that cash of Rs. 2 Lakh was deposited only for the purpose of giving it to the assessee and showing it as loan as can be gathered from the said bank account statements. The above materials were placed before the Authorised Representative when he appeared for hearing on 20th and 26th December, 2011 and also on 28th December, 2011 when he attended this office along with the assessee Sri. Nilesh N Shah. In response to the above, the assessee submitted the aforesaid letter dt.28th December, 2011 received in this office on 29th December, 2011. The said letter is a repetition of the claims already made in the return of income and in the course of assessment proceedings. In other words mere submissions have been made without any documentary evidence to refute the findings of this office. Hence as the assessee has not been able to explain satisfactorily the credit shown in the books in. the form of loan is hereby added to the total income as unexplained credit u/s 68 of the LT. Act, 1961.” 3.4.3 The total taxable income declared by Sri.Praful V.Shah for assessment year 2009-2010 is Rs.1,56,421. The A.O. examined the pass book of Sri.Praful V.Shah and found that one day prior to giving loan to the assessee an equivalent sum of Rs.2 lakh was deposited in the bank account of Sri.Praful V.Shah. The creditworthiness of Shri Praful V.Shah has not been proved beyond doubt. Therefore, the genuineness of transaction is in question. Hence, the A.O. has

5 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. rightly added Rs.2 lakh u/s 68 of the I.T.Act and consequent disallowance of interest expenditure.

3.4.4 As regards the addition of Rs.2 lakh u/s 68 of the I.T.Act (plus interest payment disbelieved) received from Smt.Sarojamma, the observation of the A.O. in making the addition, reads as follow:-

“On examining the aforesaid bank account statement it is observed that a sum of Rs.2 lakhs was deposited in cash on 3rd April, 2008 and on the day after i.e., on 5th April, 2008 the said amount of Rs.2 lakh is given to the assessee, the entry in the bank account appearing as given to M/s.Karnataka pipes cheque No.731138. From the above submissions, it is found that Smt.Sarojamma B do not have the capacity to pay such an amount to the assessee as loan. The transaction shown in the said documents does not prove the genuineness of the claim of the assessee that loan has been taken from the said party. In view of the above facts, since the assessee has failed to prove satisfactorily that loan has been obtained from the above party, the said amount of Rs.2 lakh is added to the total income of the assessee u/s 68. The onus is on the assessee to prove the genuineness of the transaction and creditworthiness of the creditor which the assessee has failed to establish. Reliance is placed on the judicial rulings given by the Honourable High Court of Chattisgarh in the case of Kushal Prasad Manhar v. CIT 236 CTR 192.” 3.4.5 The assessee had received Rs.2 lakh from Smt.Sarojamma on 5th April, 2008. On examining the bank statement of Smt.Sarojamma, the A.O. found a sum of Rs.2 lakh was deposited in cash two days prior to loaning of amount to assessee. Smt.Sarojamma is aged about 75 years, she is a housewife and not having any other income except the interest income received from the assessee’s proprietary concern. This loan transaction also lacks genuinity and has been rightly added u/s 68 of the I.T.Act.

6 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. 3.4.6 In the light of the aforesaid reasoning, ground No.2 to 4 are dismissed.

Disallowance u/s 40A(2)(b) of the I.T.Act amounting to Rs.1,79,005

4.1 Aggrieved, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view taken by the Assessing Officer. The relevant finding of the CIT(A) reads as follow:-

“4………………….The sixth, seventh, eighth, ninth, tenth and the eleventh grounds of appeal pertain to the disallowance of Rs.l,38,365/- and the disallowance of Rs.40,700/- made u/s 80A(2)(b) of the Act from the interest paid on capital borrowed by the appellant from his spouse and his HUF, at the annual rate of interest of 18 percent, whereas the appellant paid interest on the capital borrowed from others at the annual rate of only 15 percent. During the course of the appellate proceedings, the appellant was unable to satisfactorily explain the differential rates of interest on capital borrowed from close relatives and from others. Further, no evidence was adduced to suggest that the higher rate of interest adopted for the capital borrowed from the close relatives of the appellant was determined by the rates of interest on such borrowed funds prevalent in the market. Therefore, after due consideration of all the relevant factors taken into

7 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. consideration by the Assessing Officer to hold that the aforesaid interest of Rs.1,79,065/- paid to the close relatives by the appellant and claimed as a deduction by the appellant was excessive and accordingly, the sixth, seventh, eighth, ninth, tenth and the eleventh grounds of appeal are dismissed on facts.”

4.2 Aggrieved by the order of the CIT(A), the assessee has preferred this appeal before the Tribunal. The learned AR reiterated the submissions made before the Income Tax Authorities.

4.3 The learned Departmental Representative supported the order of the Assessing Officer and the CIT(A).

4.4 We have heard rival submissions and perused the material on record. The interest expenditure has not been disallowed by the A.O. for non-utilisation of borrowed funds for purpose of business. The A.O. had invoked the provisions of section 40A(2)(b) of the I.T.Act by stating that the interest paid to wife of the assessee and the assessee himself by the proprietorship concern of the assessee is excessive. The A.O. in taking the above decision was governed by the fact that the assessee was paying interest at the rate of 15% on borrowings from other parties. The amounts borrowed from other parties at the rate of 15% interest per annum is only by furnishing collateral security, whereas no security needs to be offered when amounts are borrowed from assessee and his wife. The allowability of expenditure should be judged from the point of view of a prudent businessman. In this case, while making the interest payment, tax has been deducted by the proprietorship concern and the same has been disclosed as

8 ITA No.1998/Bang/2018. Sri. Nilesh N.Shah. the income in the return of income filed by the recipient of the interest income. The Hon’ble Karnataka High Court in the case of DCIT v. Microtex Separators Ltd. reported in 293 ITR 451 held that so long as it is not shocking and there is no intention to avoid tax, the expenditure has to be accepted and no disallowance can be made by invoking the provisions of section 40A(2)(b) of the I.T.Act.

4.4.1 In the light of the aforesaid reasoning and judicial pronouncement, we are of the view that the disallowance of interest amounting to Rs.1,79,005 by invoking the provisions of section 40A(2)(b) of the I.T.Act on facts of the given case is uncalled for and we delete the same. It is ordered accordingly.

4.4.2 Therefore, ground Nos. 5 and 6 are allowed.

Sd/- Sd/- (Chandra Poojari) (George George K) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore; Dated : 04th August, 2021. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A), Mysuru. 4. The Pr.CIT-7,Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore