ITO 21(2)(4), MUMBAI vs. SHREEJI ENGINEERING WORKS, MUMBAI

Grounds no.1 to 3 are in respect of deletion of addition of ` 1,00,00,000 and ` 82,192 under section 68 of the Income Tax Act, 1961 (for short "the Act").

Briefly stated the facts are, assessee, a partnership firm, is engaged in the business of iron & steel and other metal goods. For the assessment year under consideration, assessee filed its return of income on 30th September 2008, declaring total income at nil. During the assessment proceedings, Assessing Officer noticing that the assessee had taken loan from various parties, which is reflected in the balance sheet called upon the assessee to furnish the details. From the details furnished, the Assessing Officer observed that the assessee has submitted loan confirmation letters in respect of nine parties from whom loan was availed during the relevant previous year. As the confirmation letters contained PAN and other details Assessing Officer accepted the loan. However, he found that assessee during the year had availed unsecured loan of ` 1 crore from one Shri Vinesh N. Davda and has paid interest of ` 82,192. He noted, neither the details like PAN, etc., have been mentioned in the tax audit report nor any confirmation has been submitted by the assessee. He, therefore, alleging that the assessee has not been able to discharge onus of proving the genuineness of loan of ` 1 crore treated it as unexplained cash credit under section 68 and added back to the income of the assessee. As a consequence, he also disallowed the interest payment

In the course of hearing before the first appellate authority, assessee alleging that the Assessing Officer has never disclosed his doubt or suspicion in respect of loan amount of ` 1 crore and never given an opportunity to the assessee to establish the genuineness of the loan, addition was not justified. To further prove the fact, assessee submitted loan confirmation letter from the concerned creditor. On the basis of submissions made and evidence produced, the learned Commissioner (Appeals) called for a remand report from the Assessing Officer. During the remand proceedings, the Assessing Officer directly made enquiry with the creditor Shri Vinesh N. Davda, to ascertain the genuineness of the loan. On the basis of enquiry conducted, Assessing Officer submitted remand report which was also forwarded to the assessee inviting his objection. After considering the submissions of the assessee in the context of facts and material on record as well as the remand report of the Assessing Officer learned Commissioner (Appeals) found that during enquiry conducted by the Assessing Officer with the concerned party, the said party had submitted copy of return of income along with computation of income, Balance Sheet, Profit & Loss account, loan confirmation, ledger account and copy of 4 M/s. Shreeji Engineering Works bank statement. However, the Assessing Officer still did not accept the loan to be genuine only for the reason that immediately before the laon was advanced a cheque of ` 1 crore has been credited to the bank account of the lender. Learned Commissioner (Appeals) observed, when the Assessing Officer had directly made enquiries with the lendor and in response to the query raised, the lendor has accepted of having advanced the loan and furnished all relevant documents, the Assessing Officer cannot treat the transaction as not genuine without making any further investigation or enquiry. Learned Commissioner (Appeals) held, when all the details and supporting evidences are available with the Assessing Officer to prove the genuineness of the loan if the Assessing Officer had any doubt, he should have made further enquiry to establish the fact that the loan was not genuine without doing so, he could not have treated the loan as unexplained cash credit only on the basis of assumption and presumption. He held that once the assessee has proved the source of credit, the Assessing Officer cannot ask the assessee to prove the source of source. As far as disallowance of interest payment of ` 82,192 is concerned, learned Commissioner (Appeals) observed, only because the lendor has not credited such interest to his ledger account and has not shown in his return of income cannot be a ground to reject assessee’s claim as it is for the 5 M/s. Shreeji Engineering Works lendor to explain why he has not done so. Accordingly, learned Commissioner (Appeals) deleted both the additions.

Learned Departmental Representative supporting the reasoning of the Assessing Officer submitted, as the bank statement of the lender reveals that just prior to advancement of loan of ` 1 crore, there was a deposit of ` 1 crore in the lender’s account, presumption is raised regarding the creditworthiness of the lendor as his bank account did not reveal any such deposit earlier. He, therefore, submitted, the Assessing Officer was justified in treating the loan as unexplained cash credit. As far as interest payment is concerned, learned Departmental Representative submitted that since the lendor has not shown such interest income either in his books of account or in return of income, assessee’s claim cannot be accepted.

Learned Authorised Representative strongly supporting the order of the learned Commissioner (Appeals) submitted, the Assessing Officer only on presumption and surmises has treated the amount of ` 1 crore, as unexplained cash credit in spite of the fact that all documentary evidences were available before him in support of the loan transaction. He, therefore, submitted, decision of the learned Commissioner (Appeals) deleting both the addition was justified and proper.

We have considered the submissions of the parties and perused the material available on record. As is evident, the Assessing Officer at the time of assessment proceedings, has not made any enquiry in respect of loan amount of ` 1 crore on his own. Simply for the reason that assessee failed to submit any confirmation letter, he has treated it as unexplained cash credit. However, before the first appellate authority, assessee produced the confirmation letter from the concerned lender to prove not only the identity of the creditor but also creditworthiness and genuineness of the transactions. It is also observed, learned Commissioner (Appeals) to give a fair opportunity to the Assessing Officer to examine the evidence produced by the assessee and offer his comments remanded the matter to him. As found from record, the Assessing Officer during the remand proceeding, has not only examined the evidences produced by the assessee i.e., the loan confirmation letter, but directly enquired with the lender and in course of such enquiry, the lender submitted copy of his income tax return, computation of income, balance sheet, Profit & Loss account, loan confirmation, ledger account copy, bank statement, etc., to prove the genuineness of transactions. As is apparent, the Assessing Officer having examined the aforesaid documentary evidences submitted before him has not pointed out any discrepancy

In ground no.4, department has challenged deletion of addition of ` 14,18,458, made on account of interest expenditure.

Briefly stated the facts are, during the assessment proceedings, the Assessing Officer noticed that assessee has debited an amount of ` 72,60,406, in the Profit & Loss account towards interest payment. On a perusal of the balance sheet he found that assessee has shown loan

The first appellate authority having found that assessee had advanced loan of ` 3,00,34,527, on which it has charged interest of 9% whereas interest paid by the assessee on borrowed funds is also at 9%, he held that the disallowance is uncalled for and accordingly deleted the addition.

Learned Departmental Representative relied upon the reasoning given by the Assessing Officer.

Learned Authorised Representative strongly supporting the order of the learned Commissioner (Appeals) submitted, during the relevant previous year, assessee has taken loan of only ` 26.50 lakh. Drawing our attention to the balance sheet as at 31st March 2008, learned Authorised Representative submitted, in the impugned assessment year while the interest received has increased interest paid has gone down. He submitted, though the major portion of the loan is from the earlier assessment year but no disallowance has been made earlier. He submitted, the property purchased is for the business purpose of the assessee and there being no finding by the Assessing Officer to show that interest bearing funds have been diverted for non–business purpose, part disallowance of interest expenditure was not justified. He submitted, learned Commissioner (Appeals) was correct in deleting the addition made by the Assessing Officer.

We have considered the submissions of the parties and perused the material available on record. Alleging utilization of borrowed funds for non–business purpose, the Assessing Officer has disallowed part of interest expenditure. However, as could be seen from the material on record, during the year, assessee has advanced loan aggregating to ` 3,00,34,527, to three parties and assessee has charged interest @ 9% aggregating to ` 17,11,583 on such loan which forms part of interest income shown by the assessee. It has also been found that interest paid by the assessee on borrowed funds is also @ 9%. Therefore, the allegation of the Assessing Officer that assessee had advanced interest free loans is not on the basis of facts on record. The next allegation of the Assessing Officer that borrowed funds have been utilized for non– business purpose is also not supported by facts on record. As could be seen from the balance sheet of the assessee as on 31st March 2008, as against the secured loans of ` 1,26,20,613, in the preceding assessment year, secured loan in the impugned assessment year stands at ` 1,14,76,130. Though, there is increase in unsecured loans from ` 74538244=72 in the immediately preceding assessment year to ` 7,83,35,720 in the impugned assessment year but net increase in loan is to the tune of ` 26.50 lakh only. Further, it is evident from financial statement of the assessee while interest received in the 12 M/s. Shreeji Engineering Works impugned assessment year has increased there is corresponding decrease in interest payment compared to the preceding assessment year. Therefore, the allegation of the Assessing Officer that assessee has incurred huge loan unnecessarily and utilized it for non–business purpose is factually incorrect. It was forcefully contended by the learned Authorised Representative before us that no disallowance out of interest expenditure was made in the preceding assessment year though substantial part of the loan relate to preceding assessment year. The department has not controverted the aforesaid contention of the assessee with any evidence. As far as allegation of the Assessing Officer that the investment in purchase of property is not for the purpose of business, in our view, such allegation is not on the basis of any concrete evidence but in the nature of general observations. Moreover, the Assessing Officer has not established the nexus between the investment made and borrowal of funds. In the aforesaid view of the matter, disallowance of part of interest expenditure alleging utilization of borrowed funds for non–business purpose is only on the basis of presumption and surmises having no nexus with actual facts. In the aforesaid view of the matter we see no reason to interfere with the order of the learned Commissioner (Appeals) on the issue. Accordingly, ground no.4, raised by the department is dismissed.

In the result, appeal stands dismissed. Order pronounced in the open Court on 04.03.2016