Jesus Sudhir Lall v. Assistant Commissioner Of Income Tax-30(1), Mumbai .

Per G Manjunatha, AM : This appeal filed by the assessee is directed against the order of the CIT(A)-14, Mumbai dated 14-06-2017 and it pertains to AY 2012-13. The assessee has raised the following grounds of appeal:-

1. On facts and circumstances of the case and in la\\. the learned Commissioner (Appeals) erred in confirming the disallowance made b\ the learned Assessing Officer towards professional fees paid by the Appellant of Rs. 18.88. 349/-. which was claimed as expenditure in assessment. The Appellant submits that he had correctly claimed the professional fees as expenditure and that the said disallowance may therefore please be deleted in appeal. ITA 5088/Mum/2017

2. On facts and circumstances of the case and in law. the learned Commissioner (Appeals) erred in confirming the following additions made by the learned Assessing Officer as unexplained cash credits u/s 68 of the Income Tax Act. 1961 in respect of the following loans' taken by the Appellant Name of lender Amount of loan (Rs) Messrs. Balaji Enterprises 5.00.000 Smt. Mukta Rai _ 22,45.000 Shri Rahul Fulfagar 5,00.000 Ms. Rinki Rajan 3,00.000 Total (Rs) 35,45,000 The learned Commissioner (Appeals), here more particularly, failed to appreciate that the Appellant had adequately established the identity of the lenders, the genuineness of the loan Transactions and the credit worthiness of lenders and thereby discharged the primary onus cast on him u/s 68 to prove the loans. The additions u/s 68. as confirmed by the learned Commissioner (Appeals), are clearly erroneous and deserve to be deleted in appeal.

3. In consequence of treating the loan received from Messrs. Balaji Enterprises of Rs. 5.00,000 as unexplained cash credit u/s 68. the interest paid of Rs. 55.500 by the Appellant on the said loan has also been disallowed in appeal. This disallowance may likewise also be deleted in appeal

4. Both the learned Commissioner (Appeals) and the learned Assessing Officer erred in passing their respective orders without granting the Appellant &n adequate opportunity of being heard. The orders passed by them are in contravention of the principles of natural justice and hence, bad in law.

2. The brief facts of the case are that the assessee has filed his return of income for AY 2012-13 declaring total income of Rs.89,78,500. The case has been selected for scrutiny and accordingly notices u/s 143(2) and 142(1) were issued. In response to notices, the authorised representative of the assessee ITA 5088/Mum/2017 appeared from time to time and filed various details, as called for. The assessment has been completed u/s 143(3) on 31-03-2015 determining total income at Rs.1,95,87,350 by making addition towards disallowance of expenses u/s 37(1) for Rs.18,88,349 and disallowance of unexplained cash credit u/s 68 of the Act for Rs.85,45,000 and also disallowance of consequential interest paid on such unsecured loans for Rs.1,75,500.

3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed complete written submissions on both additions made by the AO which has been reproduced on pages 3 to 6 of the order of Ld.CIT(A). The sum and substance of arguments of the assessee before Ld.CIT(A) are that he has proved primary onus cast upon u/s 68 by filing necessary details in order to prove identity, creditworthiness and genuineness of transactions, therefore, merely for the reason that notices issued u/s 133(6) were returned unserved, the AO was erred in making addition towards loans received from certain parties without carrying out further enquiries to ascertain creditworthiness and genuineness of transactions. In respect of disallowance of expenses u/s 37(1) claimed against interest on capital received from partnership firm, the assessee submitted that interest on capital from firm is a business receipt against which expenses incurred wholly and exclusively for the purpose of business was claimed, ITA 5088/Mum/2017 therefore, the AO was incorrect in disallowing expenses claimed against interest on capital from firms.

4. The Ld.CIT(A), after considering submissions of the assessee held that the assessee has incurred certain expenses on behalf of the partnership firm and such expenses are incurred in connection with loan borrowed for the purpose of business. Therefore, expenses incurred on behalf of firm cannot be allowed as deduction against interest on capital received from the partnership firm. Insofar as addition u/s 68 of the Income-tax Act, 1961 towards unsecured loan, the Ld.CIT(A) has allowed partial relief in respect of two parties where the assessee has filed complete details of identity, genuineness of transactions and creditworthiness of the parties; however, confirmed addition made by the AO in respect of four parties where the assessee could not satisfactorily prove genuineness of transactions and creditworthiness of the parties. The relevant observations of the Ld.CIT(A) are extracted below:- 11.1. Ground 1: Disallowance u/s 37f 1) of Professional Fees Paid amounting to Rs, 18,88.349/- Ground No. 1 relates to disallowance of professional fees u/s 37(1) of the Act. According to the Appellant, such expenses were incurred by him for the purpose of valuing the properties/land owned by him which were either mortgaged or given by way of personal guarantee to the bankers for the loan taken by the partnership firm M/s General Computer Services International. The Ld. AO has stated in the remand report that the expenses relating to the loan raised is to be claimed by the firm and not the partner. I have verified the invoices for the same which have been placed on record. I have carefully perused the same and concur with the view of the Ld. AO that such expenses incurred by the Appellant are on behalf of the Partnership Firm and as such an expense of the Partnership Firm and not the Partner himself. The loans raised were used by the firm. Therefore, any expenses which are in connection with raising the loan by the firm cannot be allowed in the hands of ITA 5088/Mum/2017 the appellant. Thus, the AO has rightly disallowed the professional fees of Rs. 18,88,349/-. Accordingly, this ground is dismissed. 11.2. Ground 2: Addition U/S 68 Of Rs. 85,45,000/- Ground No. 2 relates to disallowance of the unsecured loans u/s 68 of the Act. The Appellant has submitted the requisite details related to the 6 lenders. The AO has in his remand report stated that except for one party no one has appeared or filed reply to notice u/s 133(6) and hence the additions should be confirmed. I find that many of the loan creditors have prepared the reply or sent the reply to the AO in response to notices u/s 133(6). Moreover, the details already filed before the AQ by "the appellant during the remand proceedings should have been examined by the AO independently to decide the matter in each case. I have carefully perused the details submitted by the Appellant with respect to each of the unsecured loan creditors and my decision is as under: (a) Loan taken from M/s Balaii Enterprises (Prop. Mr. Hemant Dani) of Rs. 5,00.OOP/- The Appellant has filed the ledger account of the said party along with accounts confirmation, his own bank statement highlighting receipt of loan, bank statement of the said party highlighting the loan given and copy of PAN. The appellant has not filed copy of ITR, Balance Sheet, Profit & Loss Account of the said party to prove credittworthiness of the party. Bank statement of lender shows equivalent receipt few days back. The Source has been explained in general manner that it is out of accumulated earnings. To conclude, the creditworthiness in this case is not proved and hence addition of Rs. 5,00,000/- u/s 68 is sustained. Loan taken from Late Mrs. Mukta Rai of Rs. 22,45.000/- The Appellant has filed the ledger account of the said party along with confirmation of accounts signed by husband as the lender is no more, his own bank statement highlighting receipt of loan, bank statement of the said party highlighting the loan given, copy of PAN and copy of her ITR Acknowledgement for A.Y 2011-2012. Return for AY 2012-13 when the loan was advanced has not been filed. Bank statement of lender shows receipt of Rs. 2l,14,000/- on 2/11/2011 and the loan of Rs. 22,45,000/- was given on 03/11/2011. No clear cut explanation about credit entry of Rs. 21,11,400/- on 2.11.2011 in the bank account of the lender has been filed. Only a general explanation that she was working with Vijaya Bank for over 25 years and the loan was from her personal funds has been submitted. Since her balance sheet and profit & loss has not been provided as also the nature of receipt in her bank account of Rs, 21,14,000/- on 02.11.2011 (just before advancing Joan to Appellant) has not been explained, her creditworthiness cannot be ascertained. Hence, addition of Rs. 22,45,000/- u/s 68 of the Act is sustained. (c) Loan taken from Mr. Rahul D. Fulfagar of Rs. 5,00,000/- The Appellant has only provided the ledger account of the said party along with his own bank statement highlighting receipt of loan. Since PAN number, ITA 5088/Mum/2017 ITR acknowledgement, bank statement, Balance Sheet and Profit & Loss Account of the lender has not been provided, the identity, genuineness and the creditworthiness of the party cannot be ascertained. Hence, disallowance of Rs. 5,00,000/- u/s 68 of the Act is sustained. (d) Loan taken from Ms. Rinkv Raian of Rs. 3,00,000/- Appellant has provided the ledger account of the said party along with confirmation of accounts, his own bank statement highlighting receipt of loan and bank statement of the said party highlighting the loan given. As regards the creditworthiness of the party, only a general statement has been made that she is employed in Dubai since 2010 and the loan has been given out of her personal savings. Since her income tax return, balance sheet and profit & loss has not been provided as also the nature of receipt in her bank opening balance (out of which loan been advanced to the Appellant) has not been explained, her creditworthiness cannot be ascertained. Hence, addition of Rs.3,00,000 u/s 68 of the Act is sustained. (e) Loan taken from Ms. Vidhee Garq of Rs.10,00,000/- The Appellant has filed the ledger account of the said party along with confirmation of accounts signed by father of the lender who is a non-resident and lives in USA, his own bank statement highlighting receipt of loan, bank statement of the said party highlighting the loan given, Copy of ITR acknowledgement of AY 2011-12, Copy of ITR acknowledgement of AY 2012-13 along with balance sheet, computation of income and copy of PAN, Hence, the identity of the party and the nature and genuineness of the transaction is established. As regards the creditworthiness of the party, her computation of total income and balance sheet has been provided, which duly reflects her total income which is FD income. The loan has been given by her from her Overdraft Account. As per her Balance Sheet, it is clear that she owns FD's worth Rs. 36 lacs (approx.) which would have been pledged against the OD. Hence, disallowance of Rs. 10,00,000/- u/s 68 of the Act is hereby deleted. (f) Loan taken from M/s SML Properties Put Ltd of Rs. 40.00.000/- The Appellant has filed the ledger account of the said party along with confirmation of accounts, his own bank statement highlighting receipt of loan, bank statement of the said party highlighting the loan given, copy of PAN, copy of ROC master data, copy of ITR showing nil income, copy of balance sheet and profit & loss account of the said party showing no business activities apart from loans received and paid, copy of ledger confirmation from JND Edu Management Services Pvt. Ltd., the party from whom this Company has received advance, copy of ITR filed acknowledgment of JND Edu Management Services Pvt. Ltd. and copy of the balance sheet and profit & loss account of 3ND Edu Management Services Pvt. Ltd. There is private school being run by the 3ND Edu Management Services Pvt. Ltd. showing revenue of Rs. 8.20 crores and profit of Rs. 1.04 crore. Hence, the identity and creditworthiness of lender along with genuineness of the transaction is found to be proved in this case. Hence, addition of of Rs. 40,00,000/-u/s 68 of the Act is hereby deleted. Accordingly, this ground is partly allowed. ITA 5088/Mum/2017 11.3. Ground 3: Disallowance U/S 36(1)(iii) of Interest Paid of Rs. 1.75.5007- Ground No. 3 relates to disallowance of interest paid on unsecured loans to M/s Balaji Enterprises and Ms. Vidhee Garg. Since the same is only consequential to the outcome of Ground No. 2 above, the Ld. AO is directed to allow/disallow the same w.r.t decision rendered at Ground No. 2 above. For statistical purpose, this ground is taken as partly allowed.

5. The first issue that came up for our consideration from assessees appeal is disallowance of expenses claimed against interest on capital received from firm. The Ld.DR for the assessee, at the time of hearing fairly accepted that deduction claimed against interest on capital is not interest paid on loans, but other expenses including professional fees paid in connection with investments made in partnership firm. Since interest on capital is a business receipt assessable u/s 28 of the Income-tax Act, 1961, consequent expenditure incurred in relation to capital is wholly and exclusively for the purpose of business can be allowed against interest on capital.

6. Having heard both the sides and considered material on record, we find that the assessee claimed certain expenses including professional fees paid in connection with loan borrowed and used by the partnership firm against interest on capital received from partnership firm. The expenses claimed by the assessee against interest on capital from the partnership firm are professional fees and other expenses incurred in connection with loan raised for the partnership firm. In order to get credit for expenses against interest income, the expenses should be in the nature of interest paid on loan and ITA 5088/Mum/2017 other expenses expended wholly and exclusively for the purpose of making or earning such income including commission or remuneration to a person for the purpose of realising such interest income. In this case, the lower authorities have brought out clear facts to the effect that the assessee has claimed expenses incurred on behalf of the firm and also in connection with the loan borrowed for the purpose of firm. Therefore, we are of the considered view that the AO was right in disallowing expenses claimed against interest on capital received from partnership firm. The Ld.CIT(A), after considering relevant facts has rightly affirmed the finding of the AO. We do not find any error in the findings of the Ld.CIT(A) and accordingly reject ground taken by the assessee.

7. The next issue that came up for our consideration is addition u/s 68 in respect of unsecured loans. The AO has made addition of Rs.85,45,000 u/s 68 of the Income-tax Act, 1961 in respect of loan received from six parties on the ground that the assessee failed to prove creditworthiness of the parties by filing their income-tax returns and bank statements. According to the AO, although the assessee has filed PAN in certain cases to prove the identity, but failed to prove the creditworthiness or financial strength of the creditors to lend such a sum with necessary evidences including their income-tax returns and bank statements. The Ld.CIT(A) has allowed partial relief in respect of loan ITA 5088/Mum/2017 received from Vidhee Garg for Rs.10 lakhs and M/s SML Properties Pvt Ltd for Rs.40 lakhs, where the assessee filed complete details of identity and creditworthiness by filing ITR acknowledgement for relevant financial years and also their bank statements. In respect of remaining four parties, the Ld.CIT(A) confirmed addition made by the AO on the ground that the assessee failed to file complete details in order to prove creditworthiness of the parties.

8. The AR for the assessee submitted that when the assessee has discharged primary onus cast upon u/s 68 in order to prove identity and genuineness of transactions, merely for the reason that 133(6) notices were returned unserved, the AO cannot make addition without carrying out further verifications in order to ascertain creditworthiness of the parties. The Ld.AR further submitted that the assessee has done whatever it could possibly do by filing the identity including confirmations and their PAN, but could not obtain their income-tax returns and bank statements because the parties were not co-operative. The Ld.AR further submitted that when identity has been proved by filing their PAN, the AO is well aware of their PAN details which he could have obtained by carrying out further enquiries, but the AO has not done anything more than issuing notices u/s 133(6) of the Act. The Ld.AR further submitted that the loans were taken through account payee cheques for which the assessee has filed bank statements of the parties. The assessee also filed ITA 5088/Mum/2017 PAN except in one case. The assessee also filed confirmation from certain parties. When all these evidences are filed to prove identity and genuineness of transactions, merely for non filing of income-tax returns, the AO cannot make addition u/s 68 of the Income-tax Act, 1961. In this regard, he relied upon the decision of Honble Supreme Court in the case of CIT vs Orissa Corporation Pvt Ltd (1986) 159 ITR 78 (SC).

9. The Ld.DR, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that the Ld.CIT(A) has appreciated the facts in each creditors case by considering evidences filed by the assessee to come to the conclusion that in case of four parties, the assessee could not satisfactorily prove genuineness of transactions and creditworthiness of parties, although identity has been proved by filing PAN and other details. Therefore, he has rightly confirmed addition made by the AO and hence, his order should be upheld.

10. We have heard both the parties and perused the material available on record. The Ld.CIT(A) has confirmed unsecured loan received from M/s Balaji Enterprises for Rs.5 lakhs on the ground that though the assessee has filed confirmation alongwith bank statement of the parties, but failed to file their income-tax returns alongwith financial statements to prove creditworthiness. The Ld.CIT(A) further observed that on perusal of bank statements it was ITA 5088/Mum/2017 noticed that equivalent amount of money has been received few days back in the bank account of the creditors. Therefore, he came to the conclusion that the assessee has not explained the source of income to explain unsecured loan of Rs. 5 lakhs given to the assessee. In respect of loan received from M/s Mukha Rai of Rs.22,45,000, the Ld.CIT(A) has accepted the fact that the assessee has filed confirmation alongwith ledger extract and bank statement to prove the identity. The Ld.CIT(A) further observed that the assessee also filed income-tax returns of the creditor for AY 2011-12. The Ld.CIT(A) confirmed addition made by the AO on the ground that no return of income has been filed for AY 2012-13 and also no clear cut explanation has been given in respect of source of income to explain loan given to the assessee. Similarly, in respect of loan taken from Ms.Rinky Rajan for Rs.3 lakhs, the Ld.CIT(A) accepted the fact that assessee has filed confirmation alongwith bank statement, but he confirmed addition made by the AO only for the reason that no income-tax return has been filed by the creditor in order to prove capacity to explain source of income in respect of loan given to the assessee. As regards loan from Mr. Rahul D Fulpagar for Rs.5 lakhs, the Ld.CIT(A) has recorded categorical finding that no details including their PAN and ITR acknowledgement copy has been filed in order to prove genuineness of transactions and creditworthiness, but filed ledger account of the said party ITA 5088/Mum/2017 alongwith assessees own bank statement highlighting receipt of loan by account payee cheque. Therefore, he opined that loan received from Mr. Rahul D Fulpagar of Rs.5 lakhs is not explained.

11. In this factual background, if we examine the addition confirmed by Ld.CIT(A) in respect of loan received from M/s Balaji Enterprises, we find that the assessee has filed confirmation from the party, bank statement and their PAN. Once the primary onus cast upon u/s 68 has been discharged by filing necessary evidence, it is for the AO to carry out further enquiries in order to ascertain creditworthiness of the parties. Had it been a case of the AO that the assessee could not file even PAN, then certainly, the credits found in the nature of unsecured loans would have come within the purview of provisions of section 68 of the Act. Since the assessee has filed confirmation alongwith PAN, the AO ought to have carried out further enquiries by exercising his powers to ascertain the creditworthiness of the parties, but the AO has made addition only for the reason that notices u/s 133(6) were returned unanswered without carrying out further enquiries. Therefore, we are of the considered view that the Ld.CIT(A) was incorrect in confirming addition made by the AO in respect of loan received from M/s Balaji Enterprises for Rs.5 lakhs. Accordingly, we direct the AO to delete addition made in respect of loan taken from M/s Balaji Enterprises. In respect of loan taken from late Mrs. Mukhta ITA 5088/Mum/2017 Rai, there is no denial of the fact that the assessee has filed ledger account, confirmation letter, bank statement, PAN and ITR acknowledgement for AY 2011-12. When all these evidences are placed before the AO, the AO could have carried out necessary enquiries in order to ascertain creditworthiness of the parties. But, the AO has made addition merely for the reason that notices issued u/s 133(6) were returned unserved without carrying out further enquiries. On the other hand, the assessee has explained before the AO that the creditor is having capacity to explain unsecured loan given to the assessee and such loan has been given through proper banking channel. Therefore, we are of the considered view that the Ld.CIT(A) was incorrect in confirming addition made by the AO in respect of loan received from late Mrs. Muktha Rai. Accordingly we direct the AO to delete addition of Rs.25,45,000 in respect of loan taken from late Mrs. Muktha Rai.

12. Coming to loan taken from Mr. Rahul D Fulpagar for Rs.5 lakhs. It is an admitted fact that except filing ledger account of the said party, the assessee could not file even PAN to establish identity of the parties. No details have been filed including ITR acknowledgement and bank statement to prove genuineness and creditworthiness. Similarly, in respect of loan taken from Ms. Rinky Rajan of Rs.3 lakhs, the assessee has filed a simple confirmation without specifying even PAN. No details have been filed including bank statement in ITA 5088/Mum/2017 order to explain source of income. Further, the assessee has given a general statement to explain source of income and stated the loan has been given out of personal savings. Since the assessee could not file necessary details in order to prove creditworthiness of the parties, we are of the considered view that the Ld.CIT(A) was right in confirming addition made by the AO in respect of loan taken from Mr. Rahul D Fulpagar and Mrs. Muktha Rai. Accordingly, we confirm the findings of Ld.CIT(A). Insofar as addition made towards disallowance of interest, we find that addition made by the AO towards interest is consequential to unsecured loan taken by the assessee. Since we have deleted addition made by the AO in respect of loan taken from Balaji Enterprises and late Mrs. Muktha Rai, consequent interest paid on those two loans is also directed to be deleted. Insofar as interest paid on other loans, the addition made by the AO towards interest is confirmed. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 21 -12-2018. (Saktijit Dey) (G Manjunatha) Judicial Member ACCOUNTANT MEMBER Mumbai, Dt : 21 December, 2018 Pk/- ITA 5088/Mum/2017 Copy to :

1. Appellant

2. Respondent

3. CIT(A)

4. CIT

5. DR /True copy/ By order Asstt. Registrar, ITAT, Mumbai