TMI Blog2015 (7) TMI 684X X X X Extracts X X X X X X X X Extracts X X X X ..... stances, the assessee having proved the credits by establishing the identity of the creditors, genuineness of the transaction and creditworthiness of the creditors, through proper documentary evidence, he is not required to prove any further. Therefore, on overall consideration of facts and materials on record, we are of the view that no addition under section 68 of the Act can be made in the present case - Decided in favour of assessee. Unexplained credit under section 68 - Held that:- If the A.O. had any doubt with regard to the creditworthiness, he should have made proper enquiry with the concerned person to find out whether they had the capability to advance the amount to the assessee. The material on record demonstrate that A.O. without making any enquiry has made the addition merely on presumption and surmises. In case of trade credits also assessee has established the identity of the creditors by furnishing confirmation letters containing their name, address, income tax particulars etc. The entire transaction is through proper banking channel, thereby, proving its genuineness. Lastly, all creditors are income tax assessees which prove the source of credits. Therefore, fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubtful debts written off - Held that:- As could be seen the A.O. while completing the assessment, has disallowed assessee’s claim of bad and doubtful debts by observing that the assessee has failed to prove that the debt has become irrecoverable. However, on going through the provision of section 36(1)(vii) read with sub-section (2), it is very much clear that the only condition which are required to be satisfied are, it must have been shown as income in the earlier assessment year and it is actually written off in the books of account. There is no necessity on the part of the assessee to prove that the debt has become irrecoverable. Therefore, keeping in view the clear statutory provision, we direct the A.O. to verify these aspects and allow the deduction claimed by the assessee.- Decided in favour of assessee for statistical purposes. Disallowance of fee paid for increase of share capital - Held that:- Assessee did not challenged the disallowance before the Ld. CIT(A) but has chosen to challenge the same before us through an additional ground. However, on going through the facts and materials on record as well as principle of law on the issue, we agree with the view of the A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de credits. The Commissioner (Appeals) failed to appreciate that the parameters applied for making addition under section 68 of the Income Tax Act, cannot be applied with equal force to the trade credits. 4. The Learned Commissioner Of Income Tax (Appeals) erred in sustaining the disallowance of the interest expenditure of ₹ 55,69,108/ - on the alleged ground that they are not advanced in the course of business. 5. The learned Commissioner Of Income tax(Appeals) erred in setting aside the addition an amount of ₹ 8,92,937/- being the payment made towards hire purchase installment on vehicles. Having regard to the Board Circular which was referred to in the appellate order, the learned CIT(A) ought to have deleted the disallowance made by the Assessing Officer . 2.1. In addition, assessee has also sought permission to raise the following additional grounds: ADDITIONAL GROUNDS 6. Without prejudice to ground no.5 raised above, the learned Commissioner (Appeals) failed to appreciate that the above payment towards hire purchase installments on vehicles could not have been disallowed in view of the fact that no amount remained payable as at the end o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68 of the Act. 6. Briefly, the facts relating to this issue are, assessee a company is in the business of manufacturing of earth boring and drilling equipments. For the impugned assessment year, assessee filed its return of income on 15.11.2007 declaring total income of ₹ 3,05,94,470. During the assessment proceeding, AO noticed that assessee, in the PY relevant to AY under dispute, has introduced an amount of ₹ 9,88,50,000 as share application money in its books of account. From the details furnished by assessee, AO found that the amount has been introduced in the names of 19 persons as under: Sl.No. Name of share applicant Amount 1. Rajeswari Enterprises 44,25,482 2. A Krishna Reddy 90,00,000 3. Prem Raj 50,00,000 4. Rupireddy Shantha 34,00,000 5. Vasanthi Kochar 5,00,000 6. Vani Mudha 30,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, assessee submitted confirmation letters in respect of the following 7 persons covering an amount of ₹ 2,95,91,391. Sl.No. Name of share applicant Amount 1. Rajeswari Enterprises 44,25,482 2. A Krishna Reddy 90,00,000 3. Prem Raj 50,00,000 4. Rupireddy Shantha 34,00,000 5. Vasanthi Kochar 5,00,000 6. Vani Mudha 30,00,000 7. Madan Mohan Rao 42,65,909 Total 2,95,91,391 8. Assessing Officer after verifying the confirmation letters, observed that though the creditors/share applicants have confirmed of having advanced amounts to one of the Directors Shri K. Laxma Reddy for investing in the company, but, none of them have explained the source of the amounts advanced. He also observed, assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that they have advanced money and more over when the entire transactions are through banking channels by way of account payee cheque/drafts and when affidavits have been filed to prove the genuineness of the transaction and creditworthiness of the creditors, amounts appearing in the books of account as share application money cannot be treated as unexplained credit. In support of such contention, assessee relied upon certain judicial precedents. 10. Ld.CIT(A) after considering the submissions in the light of the facts and materials on record as well as report submitted by AO, though, acknowledged the fact that identity of the creditors have been established by furnishing PAN, addresses and assessment details, but, as far as the creditworthiness of the creditors is concerned, no evidence has been furnished by assessee. Ld. CIT(A) was of the view that when assessee had stated that Directors undertook to pay the said amount individually by themselves and advised the company to treat the money as share application money, then, how could it be treated as share application money. He observed that the statement given by director indicate that these are loans taken by Directors in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of rest of the creditors. Ld. AR submitted, when assessee has disclosed identity of the creditors with assessment particulars and all other necessary details with their bank account copies and when the creditors have confirmed of having made investment in the company, it cannot be said that assessee has failed to discharge its onus of providing cash credits. Ld. AR submitted, as far as the ingredients of section 68 are concerned, assessee has fulfilled the first ingredient of establishing identity of creditors which also the department has accepted. As far as the second ingredient, genuineness of the transactions is concerned, there cannot be any doubt with regard to the same as each of the transaction is through regular banking channel by way of account payee cheque/draft and credit entries are appearing in the respective bank accounts. Therefore, the only other ingredient remains to be fulfilled is creditworthiness of the creditor. Ld. AR submitted, when all the creditors have confirmed of having advanced the amount and it is reflected in their respective accounts and more over when all the creditors are income-tax assessees, no doubt can be raised with regard to their cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that the assessee during the relevant previous year has introduced an amount of ₹ 9,88,50,000 as share application money in the name of 19 persons enquired into the source of such credit and ultimately concluded that assessee s claim that they represent share application money received from certain persons cannot be accepted and accordingly treated them as unexplained cash credit under section 68 of the Act. Learned CIT(A) also confirmed such addition. As can be seen from the materials available on record, before the A.O. assessee submitted confirmation letters in case of seven persons covering an amount of ₹ 2,95,91,391. In course of hearing of appeal before the first appellate authority, the assessee submitted confirmation letters containing not only the name, address of the party, but also the income tax particulars including PAN. In addition to the confirmation letters, the assessee also submitted affidavits of the concerned persons confirming advancing of money along with other necessary details like the mode of advancement of money, account copies etc., before the first appellate authority. As it appears the A.O. as well as Ld. CIT(A) only emphasizing on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees in the role of the department. 13.2. As it appears from the orders of the A.O. as well as CIT(A) as well as the remand report submitted by the A.O., the primary reason for not accepting assessee s explanation is creditworthiness has not been proved. If at all the A.O. or Ld. CIT(A) had any doubt with regard to creditworthiness of the creditors, it should have triggered an enquiry by the A.O. to find out the real facts. When the identity of the creditors along with their income tax particulars including PAN and assessment details were available with the A.O. it would not have been difficult on the part of the A.O. to verify their bank accounts and other details to ascertain whether the advances were from explained sources. Even the A.O. could have taken up the issue with the concerned A.Os with whom the creditors are assessed. When all the creditors are assessees of the Income Tax Department and the entire transaction is through proper banking channel, it is not understood how the A.O. and Ld. CIT(A) could doubt the creditworthiness of the concerned creditors without bringing any positive evidence or material on record through a process of enquiry to indicate that the credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Ld.CIT/D.R., the Bench made a specific query to the learned D.R. to produce evidence before the Bench by way of order sheet entry or communication made to the assessee to indicate that assessee was asked to produce creditors for examination. Though, Ld.D.R. stated before us that such evidence would be brought to record by way of written submission but till date neither any written submission or evidence have been filed before us by the Ld. CIT/D.R. Thus, from the aforesaid facts, a conclusion can be drawn that the assessee was never asked to produce the creditors. If the department had any doubt with regard to the genuineness of the transaction or creditworthiness of the creditors, they should have made proper enquiry and brought positive material on record to establish such fact. More so, when not only the identity of the creditors are available with the department, but their income tax particulars are also submitted by the assessee. The department could have also made enquiry with regard to the source of the money advanced as it was through proper banking channel and could have ascertained whether there is a nexus between the unaccounted income of the assessee and the money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee preferred appeal before the first appellate authority. 16. In course of hearing of appeal before the first appellate authority, out of the 9 persons in whose cases assessee could not produce confirmation letters before the A.O., assessee produced confirmation letters in respect of six persons for credit amount of ₹ 6,23,24,518. On the basis of the submissions made by the assessee and evidences produced, Ld. CIT(A) called for a remand report. In the remand report, the A.O. stated that though the assessee has established the identity of the creditors, but, he has failed to establish the creditworthiness of the creditors and genuineness of the transaction. Learned CIT(A) after considering the report of the A.O. confirmed the addition by observing that assessee has failed to prove the creditworthiness of the creditors and genuineness of the transaction. 17. We have considered the submissions of the parties and perused the orders of the authorities and other materials available on record. The Learned Counsel for both the sides adopted the arguments advanced in case of cash credit. In addition, learned A.R. submitted that the ingredients of section 68 cannot be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich also equally applies to the trade creditors, we delete the addition of ₹ 6,23,24,518. However, in respect of three creditors viz., Palomi Estates, Zisanuddin and others for a total amount of ₹ 28,69,185, it is a fact on record that assessee has neither furnished any confirmation letters nor any other evidence to establish the identity of the creditors, their creditworthiness and genuineness of the transaction. Therefore, in absence of any evidence submitted by assessee to prove the credits for the aforesaid amount, addition to the extent of ₹ 28,69,185 is sustained. This ground is partly allowed. 18. In Ground No.4, assessee has challenged the disallowance of an amount of ₹ 55,69,108 out of the interest expenditure claimed during the year. 19. Briefly the facts are, during the assessment proceeding, the A.O. while verifying the balance sheet of the company along with the books of account noticed that during the year assessee has made the following investments out of the borrowed funds : Sl.No. Name Amount 2. KLR Mining Equipments Ltd., 1,32,86,98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the nature of investment. The A.O. therefore, referring to the provisions of section 36(iii) of the Act held that since the assessee has utilized borrowed fund to the extent of ₹ 3,63,09,237 not for business purposes, proportionate interest calculated at the rate of 12% on such investment made has to be disallowed out of the total interest expenditure claimed by the assessee. Accordingly, the A.O. worked out the disallowance at ₹ 43,57,108. The A.O. also found that during the year assessee has made personal advances to Sanjay Kumar Jain and Rashmi Reddy amounting to ₹ 56 lakhs and ₹ 45 lakhs respectively. The A.O. observed that personal advances cannot be treated as funds utilized for business and accordingly worked out proportionate disallowance from interest expenditure at ₹ 12,12,000. Therefore, the total disallowance made by the A.O. was to the tune of ₹ 55,69,108. Being aggrieved of such disallowance, assessee preferred appeal before the first appellate authority. However, learned CIT(A) also confirmed the addition made by the A.O. Being aggrieved, assessee is in appeal before us. 20. The learned A.R. submitted before us that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is that the investments made are out of surplus fund and no interest bearing fund has been utilized. In our view, the aforesaid facts require verification since if there is no nexus between the investment made and the borrowed fund, then, no disallowance can be made. As these aspects are not examined by either A.O. or learned CIT(A), we are inclined to remit the matter back to the file of A.O. to verify and take a decision in the matter, after giving due opportunity of being heard to the assessee. 23. The next issue as raised in Ground No.5 of the revised ground as well as Ground Nos.6 and 8 of the additional ground are with regard to disallowance made under section 40(a)(ia) of the Act. 24. Briefly the facts relating to this issue are, during the assessment proceeding, the A.O. noticed that the assessee has debited an amount of ₹ 25,46,846 as interest on other loans, the details of which are as under : Sl.No. Particulars Amount Remarks 1. Int. on vehicle loans Sundaram Finance Sri Lekha Transportation 8,92,937 TDS not deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble on record. The primary contention of the assessee is, since the entire interest amount is paid during the relevant previous year and nothing remained payable, no disallowance under section 40(a)(ia) can be made. We find merit in the aforesaid submissions of the assessee. As held by the ITAT, Vizag Special Bench in the case of Merylin Shipping and Transport (supra), no disallowance under section 40(a)(ia) can be made if the entire amount was paid during the relevant previous year and nothing remained payable. The Hon ble Allahabad High Court also in case of CIT vs. Vector Shipping Services P. Ltd., 357 ITR 647 expressed similar view. Therefore, following the aforesaid decisions, we direct the A.O. to verify and allow the deduction claimed, if it is found that the entire amount was paid during the relevant previous year and nothing remained payable. 29. In ground No.7, assessee has challenged disallowance of an amount of ₹ 53,58,187 as bad and doubtful debts written off. 30. We have considered the submissions of the parties and perused the relevant materials available on record. As could be seen the A.O. while completing the assessment, has disallowed assessee s claim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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