2025 (3) TMI 1083 - AT - Income Tax

Disallowance of u/s. 40(a)(ia) - As argued as per the provisions of Section 201(1) of the Act when the recipient of income has paid tax on such income the assessee cannot be treated as an assessee in default - As submitted that the assessee is willing to furnish a Chartered Accountant s certificate in Form 26A to confirm that the interest income has been offered to tax by the recipient - HELD THAT - In view of the above the matter is restored to the AO for verification of Form 26A as per the provisions of Section 201(1) of the Act. If the assessee furnishes a valid Form 26A demonstrating that M/s H J Associates has paid tax on the interest received the AO shall delete the disallowance made u/s 40(a)(ia) of the Act. Accordingly this ground is allowed for statistical purposes. Disallowance of interest Expenses - assessee failed to deduct TDS on these payments as required u/s 194A - AR contended that all the lenders are agriculturalist having agricultural income and their other income is below taxable limit - DR contended that the interest is not paid and only credited to the account of parties from whom the amounts have been borrowed - HELD THAT - As in the interest of justice we deem it appropriate to restore the matter to the file of the AO for the limited purpose of verifying the validity and correctness of Form 26A and to examine whether the recipients have duly filed their returns of income disclosing the interest income and paying tax thereon as per the provisions of Section 201(1) of the Act. Addition u/s 43B - assessee had an outstanding VAT liability at the end of the financial year - AO held that the unpaid amount was outstanding as of the balance sheet date and was not cleared before the return filing due date the disallowance u/s 43B of the Act was considered justified - HELD THAT - Considering the submissions made and the decision of SDCE Projects Pvt. Ltd 2019 (10) TMI 309 - ITAT AHMEDABAD we deem it appropriate to restore this issue to the file of the AO for verification. The AO is directed to examine whether the VAT liability was indeed reversed in the subsequent year and whether it was ever claimed as a deduction in the profit and loss account. AO shall verify to which account the VAT liability has been reversed and whether it has impacted the taxable income of the assessee. If it is found that the liability was merely carried forward as a current liability without being claimed as an expense the disallowance under Section 43B of the Act shall be deleted. Addition of unsecured loan u/s 68 - AO observed that the assessee failed to establish the creditworthiness of the lenders and the genuineness of following loan transactions - HELD THAT - Considering the submissions and the judicial pronouncement relied upon by the AR we deem it appropriate to restore the matter to the file of the Assessing Officer for fresh verification. The AO is directed to verify whether the loans in question were repaid in part or full and to reconsider the addition made under Section 68 of the Act after examining the genuineness of transactions and the creditworthiness of the lenders in light of the ratio laid down in the case of CIT Vs. Apex Therm Packaging (P.) Ltd 2013 (12) TMI 1541 - GUJARAT HIGH COURT Accordingly this ground is allowed for statistical purposes. Addition u/s 69 - treating the opening cash balance as unexplained investment citing the assessee s failure to substantiate the source of funds - HELD THAT - We find that the assessee has relied on the certified personal balance sheet as on 31-03-2014 which reflects the opening cash balance. The assessee has contended that this balance was duly carried forward from the preceding year and does not represent any fresh credit during the year under consideration. We deem it appropriate to restore the matter to the file of the AO for fresh verification. The AO is directed to examine the certified balance sheet and other supporting documents including the cash book to verify the genuineness of the opening cash balance. If it is found that the cash balance was genuinely carried forward from earlier years and is duly reflected in the books of accounts the addition under Section 69 of the Act shall be deleted. This ground is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, for non-deduction of TDS on interest payments, was justified.
• Whether the disallowance of interest expenses due to non-deduction of TDS was appropriate.
• Whether the addition under Section 43B for unpaid VAT liability was correct.
• Whether the addition of unsecured loans under Section 68 as unexplained cash credits was warranted.
• The legality of the addition under Section 69 for unexplained investment based on opening cash balance.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Interest Payments

The relevant legal framework involves Section 40(a)(ia) of the Income-tax Act, which mandates disallowance of certain expenses if TDS is not deducted. The court considered the assessee's argument that the recipient of the interest, M/s H J Associates, had already paid tax on the income, and therefore, the disallowance under Section 40(a)(ia) should not apply. The court agreed to remand the issue to the AO for verification of Form 26A to confirm tax payment by the recipient.

Disallowance of Interest Expenses for Non-Deduction of TDS

The court examined whether the disallowance of Rs. 8,55,000/- under Section 40(a)(ia) was justified. The assessee argued that the lenders were agriculturists with income below the taxable limit and had furnished Form 26A certificates. The court decided to remand the issue to the AO for verification of the certificates and to determine if the conditions of Section 201(1) were satisfied.

Addition under Section 43B for Unpaid VAT Liability

Section 43B requires disallowance of unpaid statutory liabilities unless paid before the due date of filing the return. The assessee argued that the VAT liability was not claimed as an expense in the P&L account. The court remanded the issue to the AO to verify whether the VAT liability was reversed in subsequent years and whether it was ever claimed as a deduction.

Addition of Unsecured Loans under Section 68

The court considered the addition of Rs. 12,83,000/- as unexplained cash credits. The assessee provided PAN details and argued that the loans were received through banking channels. The court remanded the issue to the AO for fresh verification of the genuineness of the transactions and the creditworthiness of the lenders.

Legality of Addition under Section 69 for Unexplained Investment

The court examined the addition of Rs. 22,19,000/- as unexplained investment based on the opening cash balance. The assessee argued that the opening balance was from earlier years and should not be taxed in the current year. The court remanded the issue to the AO to verify the genuineness of the opening cash balance and determine if the addition under Section 69 was justified.

3. SIGNIFICANT HOLDINGS

The court made several significant determinations:

• The court held that if the recipient of interest has paid tax on the income, disallowance under Section 40(a)(ia) should not apply, pending verification of Form 26A.
• The court emphasized the need for verification of Form 26A certificates to determine the applicability of Section 40(a)(ia) for interest expenses.
• The court noted that Section 43B disallowance does not apply if the liability is not claimed as an expense, pending verification of the VAT liability's treatment in subsequent years.
• The court highlighted the importance of verifying the genuineness of transactions and the creditworthiness of lenders for additions under Section 68.
• The court stressed that opening balances from previous years should not be taxed in the current year under Section 69, pending verification of the opening cash balance.

In conclusion, both appeals were allowed for statistical purposes, with all issues remanded to the AO for necessary verification and fresh adjudication in accordance with the law.