2025 (5) TMI 275 - AT - Income Tax

Unexplained cash credits u/s 68 - Unsecured loans - Onus to prove - HELD THAT - CIT(A) grossly erred in overlooking the submission made by the assessee in so far as providing the proof and evidence with regard to the loan availed from Smt. Seema Sharma. Assessee also drew our attention on the ledger account copy of Moti Industries as well as confirmation letter of Smt. Seema Sharma filed before the ld. CIT(A). Further before us assessee also submitted that the ITR-V of Smt. Seema Sharma for 3 years were also filed before the AO. Therefore in our opinion the assessee has primarily discharged his duty by providing the financial statement confirmation letter Ledger A/c Copy along with the income tax returns by providing the identity creditworthiness and genuineness of the loan transactions. Once the assessee furnishes the details of the loan creditor and the transaction the onus shifts to the AO to prove that the transaction is not genuine. In view of the above we delete the addition confirmed by the CIT(A) of Smt. Seema Sharma u/s 68 of the Act. In the result this ground of appeal is also allowed. Excess contribution to provident fund superannuation fund or gratuity fund - assessee vehemently submitted that assessee can contribute up to 27% - HELD THAT - The annual contribution by the employer to a fund in respect of employee shall not exceed 27% of his salary for each year as reduced by the employer s contribution. Rule does not make any difference in so far as payment of salary is concerned i.e. whether the salary is claimed as revenue expenditure or treated as capital in nature. The annual contribution to PF any other fund by the employer always depend upon the Salary paid to the employees. The annual contribution to PF any other fund by the employer are to be restricted to 27% of the salary each year irrespective of the fact that how the employer treats the Salary for their accounting purposes. AO has observed that salary and wages paid for the year were only to the tune of Rs. 4, 33, 616/ -. Further the AO has also observed that the salary capitalized is Rs. 8, 07, 000/- being paid towards the building supervision. AO invoked the provisions of Rule 87 of the I.T. Rules and thereby restricted the total contribution to 27% of the salaries which are revenue in nature. We are of the considered opinion that even the provisions of the provident fund Act do not make any difference so far as how the employer treats the salary i.e. whether revenue or capital in nature in their books of accounts. The provisions of Rule 87 also do not restrict that the salary which are capitalized shall not be treated as Salary for the purposes of Rule 87 of IT Rules. The Rule only emphasize that annual contribution in respect of any particular employee shall not exceed 27% of his salary for each year. The emphasis is on his Salary i.e. Employees s Salary. In view of the above we are of the opinion that the assessee has not contravene the provisions of Rule 87 and accordingly we direct the AO to delete this addition as made by him by invoking Rule 87 of the I.T. Rules. Accordingly this ground of appeal of the assessee is allowed.

The core legal questions considered in this appeal are:

1. Whether the disallowance of Rs. 2,06,966/- claimed as excess contribution to provident fund and other funds under Rule 87 of the Income Tax Rules, 1962, was justified.

2. Whether the addition of Rs. 15,32,615/- as unexplained cash credits under section 68 of the Income Tax Act, 1961, was warranted, specifically in relation to a loan from Smt. Seema Sharma.

3. Whether the addition under section 115BBE of the Act, taxing the impugned cash credits, was correctly upheld.

4. The procedural issue of condonation of delay of 35 days in filing the appeal before the Tribunal.

Issue 1: Disallowance of Excess Contribution to Provident Fund under Rule 87

Relevant legal framework and precedents: Rule 87 of the Income Tax Rules, 1962, prescribes that the ordinary annual contribution by the employer to a fund in respect of any particular employee shall not exceed 27% of his salary for each year, after reducing any employer's contribution to any provident fund in respect of the same employee. The Employee Provident Fund and Miscellaneous Provisions Act, 1952, also governs the contributions to provident funds.

Court's interpretation and reasoning: The Assessing Officer (AO) disallowed Rs. 2,06,966/- as excess contribution by restricting the contribution limit to 27% of the salary paid and claimed as revenue expenditure (Rs. 4,33,616/-), excluding salary capitalized (Rs. 8,07,000/-). The AO reasoned that only salary debited to profit & loss account should be considered for the 27% limit.

The Tribunal, however, emphasized that Rule 87 does not distinguish between salary treated as revenue expenditure and salary capitalized for accounting purposes. The Rule's language refers to "salary" without qualification, implying that the total salary paid, whether capitalized or expensed, must be considered. The Tribunal noted that the total salary paid was Rs. 12,40,616/- (Rs. 4,33,616/- revenue + Rs. 8,07,000/- capitalized), and 27% of this amount is Rs. 3,34,966/-, which exceeds the total contribution made (Rs. 3,24,042/-). Therefore, the employer's contribution did not exceed the statutory limit.

Key evidence and findings: The assessee produced salary details showing the total salary paid including capitalized salary. The AO's exclusion of capitalized salary was not supported by the statutory provisions.

Application of law to facts: The Tribunal applied the plain language of Rule 87 and relevant statutory provisions, concluding that the AO's approach was incorrect. The contribution was within the permissible limit.

Treatment of competing arguments: The AO and Departmental Representative (DR) argued for limiting the salary base to revenue expenditure only, but the Tribunal rejected this restrictive interpretation, favoring the broader statutory language.

Conclusion: The disallowance of Rs. 2,06,966/- was set aside, and the addition was deleted.

Issue 2: Addition of Rs. 15,32,615/- as Unexplained Cash Credits under Section 68

Relevant legal framework and precedents: Section 68 of the Income Tax Act mandates that unexplained cash credits are to be added to the income of the assessee unless the assessee satisfactorily explains the nature and source of such credits, including the identity, genuineness, and creditworthiness of the creditor.

Court's interpretation and reasoning: The AO had added Rs. 52,84,910/- as unexplained cash credits, out of which Rs. 15,32,615/- related to a loan from Smt. Seema Sharma was upheld by the CIT(A)/NFAC. The assessee contended that detailed submissions, including financial statements, confirmation letters, ledger accounts, and income tax returns (ITR-V) of the lender were furnished to establish the genuineness of the loan.

The Tribunal found that the assessee had discharged the initial onus by providing identity, creditworthiness, and genuineness evidence. The Tribunal observed that once the assessee furnishes such evidence, the burden shifts to the AO to disprove the genuineness of the transaction. The AO failed to prove that the loan was not genuine.

Key evidence and findings: The assessee produced confirmation letters, ledger account copies, financial statements, and ITR-Vs of the lender for three years. The AO did not produce contrary evidence to rebut these documents.

Application of law to facts: The Tribunal applied the principle that the assessee must first establish the identity and genuineness of the creditor and the transaction, after which the AO must disprove it. Since the AO failed to do so, the addition under section 68 could not be sustained.

Treatment of competing arguments: The AO and DR argued that the assessee did not furnish sufficient evidence such as bank statements and ITRs of the lender, but the Tribunal found that the documents provided were adequate to discharge the initial burden.

Conclusion: The addition of Rs. 15,32,615/- was deleted.

Issue 3: Taxation of Cash Credits under Section 115BBE

The Tribunal's order does not explicitly discuss the addition under section 115BBE. However, since the addition under section 68 related to the cash credits was deleted, the related addition under section 115BBE would logically stand deleted as well.

Issue 4: Condonation of Delay

The Tribunal considered the petition for condonation of delay of 35 days in filing the appeal. The assessee's representative explained that the delay was due to personal exigencies requiring travel, and there was no deliberate or intentional delay.

The Tribunal held that substantial justice should prevail over technicalities and that the delay was neither deliberate nor willful. The revenue did not claim prejudice or deliberate delay. Accordingly, the delay was condoned, and the appeal was admitted.

Significant holdings and principles established:

"The provisions of Rule 87 also do not restrict that the salary which are capitalized shall not be treated as Salary for the purposes of Rule 87 of IT Rules. The Rule only emphasize that annual contribution in respect of any particular employee shall not exceed 27% of his salary for each year. The emphasis is on his Salary i.e. Employees's Salary."

"Once the assessee furnishes the details of the loan creditor and the transaction, the onus shifts to the AO to prove that the transaction is not genuine."

"When substantial justice and technical consideration are pitted against each other, the cause of substantial justice deserve to be preferred, for the other side cannot claim to have vested right for injustice being done because of non-deliberate delay."

Final determinations:

- The disallowance of Rs. 2,06,966/- under Rule 87 was set aside, allowing the contribution claimed as within the statutory limit.

- The addition of Rs. 15,32,615/- as unexplained cash credits under section 68 was deleted upon the assessee satisfactorily discharging the initial burden of proof.

- The appeal was admitted by condoning the delay of 35 days.

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