SRI. H.C. MAHADEVAIAH,,MYSORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1),, MYSORE

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC-C” BENCH : BANGALORE

BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER

ITA No. 1845/Bang/2018 Assessment Year : 2012-13

Shri H.C. Mahadevaiah, The Assistant Prop: M/s. Sri Commissioner of Income Siddalingeshwara Traders, Vs. Tax, No. 169, Ramavilasa Road, Circle – 1 [1], Mysuru – 560 024. Mysuru. PAN: ACMPM7684C APPELLANT RESPONDENT

Assessee by : Shri Narendra Sharma, Advocate Revenue by : Dr. Nischal .B, Addl. CIT (DR)

Date of hearing : 11.09.2018 Date of Pronouncement : 28.09.2018

O R D E R Per Shri A.K. Garodia, Accountant Member This appeal is filed by the assessee and the same is directed against the order of ld. CIT(A), Mysuru dated 29.12.2017 for Assessment Year 2012-13.

ITA No. 1845/Bang/2018 Page 2 of 11 claim of the appellant unreasonably without proper appreciation of the proofs established as no proof, on the facts and circumstances of the case. 5. The learned Commissioner of Income-tax [Appeals] failed to appreciate that the learned assessing officer having summoned the loan creditors and recorded the statement under section 131 of the Act and the said loan creditors having confirmed the transaction of loan with the appellant and ought not to have added the loan amounts as income of the appellant as unexplained unsecured loans on the facts and circumstances of the case. 6. The learned Commissioner of Income-tax [Appeals] failed to appreciate that once the existence of the loan creditor is proved and such persons own the credits which are found in the books of the appellant, the appellant's onus stands discharged and the appellant is not further required to prove the source from which the creditors could have acquired the money advanced to him and consequently no addition can be made in the hands of the appellant on the facts and circumstances of the case. 7. The learned Commissioner of Income-tax [Appeals] failed to appreciate that the proportionate disallowance of interest made by the learned assessing officer amounting to Rs. 3,07,625/- is not pertaining to the alleged unexplained Unsecured loans and ought to have deleted the said disallowance which was made on a wrong presumption and without application of mind, on the facts and circumstances of the case. 8. The learned Commissioner of Income-tax [Appeals] is not justified in confirming the disallowance of interest by the learned assessing officer amounting to Rs. 43,088/- by invoking the provisions of section 40[a][ia] of the Act is not warranted as the said amounts have been received by the appellant from the companies and the appellant has not paid the interest and claimed as an expenditure to warrant disallowance under section 40[a][ia] of the Act on the facts and circumstances of the case. 9. The learned Commissioner of Income-tax [Appeals] is not justified in confirming the addition made by the learned assessing officer on account of Interest on TDS amounting to Rs. 7,670/- without considering the correct position, on the facts and circumstances of the case. 10. The addition made by the learned assessing officer and confirmed by the learned Commissioner of Income-tax [Appeals] are arbitrary, on suspicion and surmises and also without any application of mind and consequently the entire additions and disallowance made by the authorities below requires to be cancelled, on the facts and circumstances of the case.

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ITA No. 1845/Bang/2018 Page 4 of 11 given out of salary savings. He also drawn my attention to various letters dated 14.05.2018, 18.05.2018, 23.05.2018 etc. available on pages 110 to 113 of paper book and it was pointed out by him that as per these letters, it was pointed out by the assessee to the AO that out of the various loan creditors, three loan creditors i.e. 1) Santhosh H.M, 2) Sheetal G Mohithe and 3) Poornima B.C. have appeared before the AO and the AO has recorded their sworn statement u/s. 131 of IT Act before and the assessee requested the AO to provide the copy of statement recorded from them. But such copy of statement was not provided by the AO to the assessee in spite off various requests and as per letter dated 30.05.2018, copy available on page no. 113 of paper book, it has been stated by the AO that the statement recorded u/s. 131 of IT Act can be recorded only when proceedings are pending before the AO and statement from these three persons were recorded when assessment proceedings were in progress. But since there are no proceedings pending before the present AO, the assessee’s request for providing copies of such statements cannot be acceded to. He submitted that in the absence of copy of the statements of these three loan creditors, the assessee cannot meet the objections of the AO if any in respect of their statements. Reliance was placed by him on the following judicial pronouncements along with the submission that all the loans were received by way of account payee cheques. A) Labh Chand Bohra Vs. ITO ([2008] 219 CTR 571) (Rajasthan) B) CIT Vs. Jai Kumar Bakliwal ([2014] 366 ITR 217) (Rajasthan) C) CIT Vs. DeenDayal Choudhary ([2017] 293 CTR 468) (Rajasthan) D) ACIT Vs. Shri Abhishek Agarwal in ITA No. 835/LKW/2014

He submitted copy of all these judgements. As against this, ld. DR of revenue supported the orders of authorities below. 5. Thereafter the learned. AR of assessee submitted that the next issue involved in this appeal is regarding disallowance of Rs. 3,07,625/- out of interest expenditure claimed by the assessee and this issue is raised by the assessee as per ground no. 7 and the next issue raised by the assessee is as per ground no. 8 in respect of disallowance of Rs. 43,088/- out of interest expenditure claimed by the assessee by invoking the provisions of section 40(a)(ia) of IT Act. He submitted that the amount of interest disallowed by the AO of Rs. 3,07,625/- is not justified because the basis of this disallowance is this that the

ITA No. 1845/Bang/2018 Page 5 of 11 interest paid by the assessee on those loans which are not accepted as explained but in fact, this interest payment is not on those loans. Regarding disallowance of Rs. 43,088/- u/s. 40(a)(ia), it was submitted by ld. AR of assessee that in fact, this is not interest expenditure but this is interest receipt and in this regard, he drawn my attention to pages 82 and 83 of paper book in respect of interest expenditure and it was pointed out that out of total interest expenditure of Rs. 4,29,727.41/-, an amount of Rs. 4,18,539/- is interest on cash credit from bank and the balance amount of interest expenditure of Rs. 11,188.41 is in respect of interest on car loan. Regarding disallowance u/s. 40(a)(ia), he drawn my attention to pages 100 and 105 of paper book and pointed out that these are ledger accounts of M/s. Mangalore Chemicals and Fertilizers Ltd. on page 100 and M/s. Zauri Industries Ltd. on page no. 105 and as per these two pages, it can be seen that an amount of Rs. 22,860/- on page 100 and Rs. 15,918.68 on page 105 is in fact, interest income and not interest expenditure and therefore, the AO has wrongly proceeded by treating these two amounts as interest expenditure and made disallowance by invoking the provisions of section 40(a)(ia) of IT Act. He submitted that this disallowance should be deleted. 6. Regarding ground no. 9 he did not make any argument. The ld. DR of revenue supported the orders of authorities below in respect of all issues. 7. I have considered the rival submissions. First of all, I examine and decide the issue raised by assessee in respect of addition of Rs. 24.61 Lakhs u/s. 68 of IT Act which has been raised by assessee as per ground nos. 3 to 6 of this appeal. In this regard, I find that this disallowance was made by the AO in respect of loan from 5 loan creditors i.e. 1. Poornima BC – Rs. 2 Lakhs 2. Santosh HM – Rs. 7.65 Lakhs 3. Sheetal G Mohite – Rs. 3 Lakhs 4. Sandeep – Rs. 5.96 Lakhs 5. Avinash KJ – Rs. 6 Lakhs -------------------------- Total - Rs. 24.61 Lakhs -------------------------- Out of these five loan creditors, the assessee has submitted that the loan confirmation of two loan creditors i.e. Mr. Avinash .K.J – 6 Lakhs and Mr. Sandeep .H.M – Rs. 5.96 Lakhs is available on pages 12 to 16 of the paper

ITA No. 1845/Bang/2018 Page 6 of 11 book. On these pages, the loan confirmations of these two persons are available along with this submission that they are employed outside India and they are fling their return of income in India and they have given this loan to present assessee out of salary savings and it is also stated that the present assessee Shri H.C. Mahadevaiah is their relative and as per the email of Shri Avinash .K.J. to the AO, it has been pointed out that his bank statement for the year 01.04.2011 to 31.03.2012 was also sent by him to the AO. The AO in the assessment order stated that the assessee was requested to furnish the details of outstanding liability of Rs. 6 Lakhs shown in the case of Shri Avinash KJ along with the mode of payment, date of receipt, bank statements etc. as per AO’s letter dated 21.01.2015. But on 04.03.2015, an email has been sent by Shri Avinash to the AO and in the said email, it was stated that this is second time he is providing the bank statements on the request of the AO for the period from 01.04.2011 to 31.03.2012 and as per earlier email dated 03.01.2015, it was stated by this loan creditor Shri Avinash that he has sent bank statement to the AO. Regarding the date of giving of the loan, it is seen that in the email dated 18.11.2014, it has been stated that this amount was given by him of Rs. 5 Lakhs by RTGS from his saving account on 13.12.2011. Hence it is seen that the objections of the AO that the required information was not furnished is not correct. Similarly in respect of loan from Mr. Sandeep, the AO stated in the assessment order in para 3.4 that the summons in the case of Shri Sandeep has been duly served, no communication has been received from Shri Sandeep in the office of the AO. But as per the email dated 23.12.2014 available on page no. 16 of the paper book, it has been stated by Shri Sandeep to the AO that he has given unsecured loan to his father Mr. H.C. Mahadevaiah and since, he is working abroad in USA, he is unable to appear before the AO and on page no. 15 of paper book is the loan confirmation from Mr. Sandeep .H.M. Hence it is seen that this allegation of the AO is also not correct that there is no compliance from Mr. Sandeep. In respect of the remaining three loan creditors i.e. Santosh HM, Poornima BC and Sheetal G Mohite, it is noted by AO on page no. 3 of the assessment order that these three persons appeared before him and their statements

ITA No. 1845/Bang/2018 Page 7 of 11 were recorded and in Para no. 3.2, the objection of the AO is this that as per bank statements given by these loan creditors, it was noticed that there was cash deposit on the day on which the loan amount has been transferred to the assessee and the reason for such cash deposit made have not been satisfactorily explained by these persons. There is one more objection of the AO in respect of loan from Shri Santosh HM that this person is also having taxable income, no return of income have been filed by him till the date of recording statement u/s. 131 on 24.09.2014 and he has filed return of income only on 10.10.2014 and I fail to understand that how it can be said that the loan given by these persons to the present assessee is the income of the present assessee. Regarding Smt. Sheethal G. Mohite,this is the objection of the AO that this person claimed that the source for the loan given was the salary earned by her in the earlier years but she has not furnished any substantiating proof in support of the same. Regarding Smt. Poornima B.C, the AO has stated on page no. 3 of the assessment order that she has furnished copy of bank account in support of the loan given but her claim that the cash deposit was due to the reason that she is in the habit of not depositing cash to the bank regularly is not acceptable. Hence it is seen that in respect of these three persons, who had appeared before the AO and recorded their sworn statement and in the statement recorded u/s. 13,1 these persons have accepted that they have given loan to the present assessee. Now in the light of these facts, I examine the applicability of various judgements cited by ld. AR of assessee before me. First I examine the applicability of the judgment of Hon’ble Rajasthan High Court rendered in the case of CIT vs. Jai Kumar Bakliwal (supra). Para nos. 17 to 21 of this judgement are relevant and hence, the same are reproduced hereinbelow for ready reference. “17. As observed herein above, though u/s 68, AO is free to show with the help of the enquiry conducted by him into the transaction which has taken place between the creditor and the sub-creditor that the transaction between two were not genuine and that the sub- creditor had no creditworthiness, it will not necessarily mean that loan advanced by the sub-creditor to the creditors was income of the assessee from undisclosed sources unless there is evidence direct or circumstantial, to show that the amount which had been

ITA No. 1845/Bang/2018 Page 8 of 11 advanced by the sub-creditor to the creditor had actually been received by the sub-creditor from the assesseee. 18. The logical interpretation will be that while the assessee has to prove as special knowledge i.e. from where he has received the credit and once he disclosed the source from which he has received money, he must also establish that so far as his transaction with his creditor is concerned, the same is genuine and his creditor had the creditworthiness to advance the loan which the assessee had received. When the assessee discharges the burden so placed on him, onus then shifts to the AO, if the AO assesses the said loan as the income of the assessee from undisclosed source he has to prove either by direct evidence or indirect/ circumstantial evidence that the money which the assessee received from the creditor actually belong to and was owned by the assessee himself. 19. If there is direct evidence to show that the loan received by the assessee actually belong to the assessee, there will be no difficulty in assessing such amount as the income of the assessee from undisclosed source but if there is no direct evidence in this regard, then the indirect or circumstantial evidence has to be conclusive in nature and should point to the assessee as the person from whom the money has actually flown to the hands of the creditor and then from the hands of the creditor to the hands of the creditor. 20. When we peruse the facts herein above, it is an admitted position that all the cash creditors have affirmed in their examination that they had advanced money to the assessee from their own respective bank accounts. Therefore, when there is categorical finding even by the AO that the money came from the respective bank accounts of the creditors, which did not flow in the shape of the money, then, in our view, such an addition cannot be sustained and has been rightly deleted by both the two appellate authorities. There is no clinching evidence in the present case nor the AO has been able to prove that the money actually belonged to none but the assessee himself. The action of the AO appears to be based on mere suspicion. 21. Accordingly, in our view, the ITAT, after appreciation of evidence has rightly come to the aforesaid conclusion and when there is appreciation of evidence, then it is purely a finding of fact and no question much less substantial question of law can be said to emerge out of the said order of the Tribunal and we do not find any infirmity or perversity in the order of the ITAT so as to call for any interference of this Court. In our view, no substantial question of law arises out of the order passed by the ITAT.”

ITA No. 1845/Bang/2018 Page 9 of 11 8. From the above paras of this judgement of Hon’ble Rajasthan High Court , it is seen that when all the cash creditors haveaffirmed in their examination that they had advanced money to the assessee from their own respective bank accounts, then it is burden on the AO to prove that the money actually belonged to none but assessee himself and without this, the addition made by the AO u/s. 68 in the hands of the assessee is not justified. In the present case also, all the five loan creditors have admitted in their statements recorded in case of three persons and in their email in respect of remaining two persons that they have advanced money to assessee by way of loan and the AO had not been able to prove that the money actually belonged to the present assessee and hence, respectfully following this judgement of Hon’ble Rajasthan High Court, I hold that in the facts of present case as discussed above, the addition made by the AO u/s. 68 is not justified and hence, I delete the same. Accordingly ground nos. 3 to 6 are allowed. 9. Regarding ground no. 7, I find that the basis of this disallowance is this that as per Para 4 of assessment order where the AO states that the assessee has paid amount of Rs. 3,77,150/- towards interest during the present year and since unsecured loan of Rs. 24.61 Lakhs is unexplained, proportionate interest paid is also disallowed. This disallowance is not sustainable for two reasons. First reason is this that I have already deleted the addition made by the AO of Rs. 24.61 Lakhs made by him that this loan is unexplained and hence, the consequent disallowance of interest on such loan is not sustainable. The second reason is this that out of total interest payment of Rs. 3,77,150/-, the assessee has submitted that the assessee has incurred interest expenditure of Rs. 4,18,539/- as interest on cash credit and Rs. 11,188.41 as interest on car loan total of Rs. 4,29,727.41. As per the P&L account available on page no. 4 of the paper book, the total amount of interest debited in P&L Account is Rs. 4,29,727.41 and I do not know from where the AO has taken this figure of interest expenditure of Rs. 3,77,150/- as stated by him in para 4 of the assessment order. Hence in view of this fact that the entire interest expenditure debited in P&L account is in respect of cash credit and car loan, disallowance made by the AO is not justified even if the addition of Rs. 24.61

ITA No. 1845/Bang/2018 Page 10 of 11 Lakhs made by the AO u/s. 68 is confirmed at any stage. Hence this disallowance is also deleted and accordingly ground no. 7 is allowed. 10. Now I decide the ground no. 8. In this regard, I find that as per para 5 of the assessment order, the AO says that the assessee has paid interest of Rs. 43,088/- but as per page no. 4 of paper book on which P&L account is appearing, I do not find any such debit of interest payment of Rs. 43,088/-. There is debit of Rs. 4,29,727.41/- on account of interest paid and there is also one more debit of Rs. 46,125.62/- as interest paid to others. Moreover as per the copy of ledger account of M/s. Mangalore Chemicals & Fertilizers Ltd. available on page no. 100 of paper book, interest receipt of Rs. 22,860/-is seen and as per copy of ledger account of M/s. Zuari Industries Ltd., there is credit of Rs. 15,918.68/- on account of interest. Under these facts, I feel it proper to restore the matter back to the file of AO for fresh decision for examining this factual aspect as to whether there is any payment of interest by the assessee to M/s. Mangalore Chemicals & Fertilizers Ltd. of Rs. 25,400/- and M/s. Zuari Industries Ltd. of Rs. 17,688/- as stated by the AO in para 5 of the assessment order after providing adequate opportunity to assessee because this is the claim of the assessee that there is no such payment of interest to these two parties but in fact there is receipt of interest from these two parties of Rs. 22,860/- from M/s. Mangalore Chemicals & Fertilizers Ltd. and Rs. 15,918.68/- from M/s. Zuari Industries Ltd. Accordingly ground no. 8 is allowed for statistical purposes. Ground no. 9 is rejected as not pressed because no argument has been made by ld. AR of assessee in respect of ground no. 9.

Sd/- (ARUN KUMAR GARODIA) Accountant Member Bangalore, Dated, the 28th September, 2018. /MS/

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Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Senior Private Secretary, Income Tax Appellate Tribunal, Bangalore.