AO cannot invoke Section 68 merely for Unsatisfactory Explanation from Assessee

Ashish Sumatibhai Shah Vs DCIT (ITAT Ahmadabad)

Hon’ble Supreme Court in the case of CIT vs. Smt. P.K. Noorjahan (1999) 237 ITR 570 (SC) in the context of the expression ‘may’ with reference to Section 69 of the Act observed that the word ‘may’ should not be read as ‘shall’. The Hon’ble Supreme Court held that the expression ‘may’ indicates that the intention of Parliament in enacting Section 69 (similar to Section 68) was to confer a discretion on the Assessing Officer in the matter of treating the source of investment, which has not been satisfactorily explained by the assessee. In terms of the decision of the Hon’ble Suprme Court, the Assessing Officer is not obliged to invoke Section 68/s.69 of the Act in every case where the explanation offered is found to be ‘unsatisfactory’ in the opinion of the Assessing Officer. In view of the overriding fact that loans so obtained stood re-paid through banking channel without any real advantage to the assessee, the onus cast upon the assessee is substantially discharged in view of the observations of the Hon’ble Supreme Court. The action of Assessing Officer is thus set aside and the issue is restored back to the file of Assessing Officer in terms of directions noted above.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned appeal has been filed at the instance of the Assessee against the order of the Commissioner of Income Tax (Appeals)–5, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)-5/DCIT Cir.5(2)/725/2016-17 dated 24/10/2017 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”) dated 19/02/2016 relevant to Assessment Year (AY) 2013-14.

2. The assessee has raised the following grounds of appeal:-

1. Whether, on facts and in circumstances of the case and in law, Ld.AO has erred in disallowing interest of Rs.171,801/- under section 40(a)(ia) of the income tax act 1961?

2. Whether, on facts and in circumstances of the case and in law, Ld.AO has erred in disallowing bad debt of Rs.450,000/- under section 36(1)(viii) of income tax act 1961?

3. Without prejudice to ground of appeal no.2, whether, on facts and in circumstances of the case and in law, Ld.AO has erred otherwise also in not allowing bad debt of Rs.450,000/- as business loss?

4. Whether, on facts and in circumstances of the case and in law, Ld.AO has erred in making addition of Rs.22,91,000/- under section 68 of the income tax act 1961?

3. Ground No.1 concerns disallowance of interest expenditure incurred amounting to Rs.1,71,801/- by invoking the provisions of section 40(a)(ia) for non-deduction of TDS. The assessee is stated to have availed a loan from Bajaj Finance Ltd. (BFL) and has paid interest amount to Rs.1,71,801/- during the AY 2013-14. It is the case of the assessee that he was under bonafide belief that Bajaj Finance Ltd. is a banking corporation and therefore TDS is not required to be deducted under s.194A of the Act. However, the Assessing Officer observed that Bajaj Finance Ltd. is a NBFC and therefore provisions of section 194A are squarely applicable. Consequently, the Assessing Officer invoked provisions of section 40(a)(ia) and disallowed interest of Rs.1,71,801/-incurred by the assessee on loans availed from NBFC Company owing to failure of the assessee to deduct tax thereon.

4. We have perused the assessment order and the first appellate order and also heard the rival submissions on the issue.

5. In the backdrop of long line of judicial precedents including judgement of Hon’ble Supreme Court in the case of Hindustan Coco Cola Beverage Ltd. reported at 293 ITR 226 (SC), we consider it expedient to set aside the disallowance and restore the issue to the file of the Assessing Officer. The assessee shall be entitled to produce such evidences as may be considered necessary to defend its case for non-deduction of TDS. The Assessing Officer shall be entitled to make such enquiry from the payee (Bajaj Finance Ltd.) as may be considered expedient to ascertain whether there is any loss of Revenue by such non-deduction. Needless to say, the Assessing Officer shall delete the disallowance of amount carried out under s.40(a)(ia) where it is found that the payee concerned has included the receipt obtained from the assessee for the purposes of computation of total income in its return. In other words, disallowance under s.40(a)(ia) of the Act will not survive in the hands of assessee where deductee has also included the corresponding income in its return of income. The issue raised is restored back to the file of the Assessing Officer for fresh determination in accordance with law.

6. In the result, ground No.1 of the assessee is allowed for statistical purposes.

7. Ground Nos.2 & 3 are dismissed as not pressed.

8. Ground No.4 concerns additions of Rs.22,91,000/- under s.68 of the Act.

8.1. In the course of assessment proceedings, the Assessing Officer inter alia observed that nature and source in respect of certain loans taken by assessee is not satisfactory. The details of loans availed as tabulated by Assessing Officer is reproduced hereunder:

8.2. The Assessing Officer accordingly invoked provisions of section 68 of the Act and added an amount of Rs.22,91,000/- in aggregate in respect of the aforesaid four parties. In the first appeal, before the CIT(A) as well, the assessee could not derive any relief.

8.3. Further aggrieved, the assessee preferred the appeal before the Tribunal.

8.4. The Ld.AR for the assessee in the course of hearing, strenuously harped on the fact that the loss have been taken for a very brief period and also repaid through banking channel in the same financial year in respect of loans taken from Sarojben Shah (Rs.4 lakhs), Wonderworld (INC) (Rs.6 lakhs) and Satnam Electric & Service Centre (Rs.2,91,000). It was further pointed out that loans of Rs.10 lakhs obtained from S. Kumar Computers Pvt.Ltd. has also been repaid in the next financial year. Additional evidences in the form of bank statement was filed to prove the factum of repayment. It was contended that this important fact has been totally overlooked by the Revenue. The Ld.AR for the assessee strongly asserted that where the loans obtained has been duly repaid, the assessee does not stand to benefit at all and consequently pleaded that the bonafides of the transaction requires to be seen having regard to entirety of the facts. It was submitted that there is no justification for the Revenue to increase the assessed income on account of loans already repaid. The Ld.AR thus contended that onus which lay upon the assessee has been broadly discharged in these peculiar circumstances.

9. We straight away notice that the fact of repayment of the loan in respect of Rs.12,91,000/- has been duly recorded by the Assessing Officer in the assessment order. The assessee has also furnished additional evidence in the form of bank statement to show that the repayment of remaining amount of Rs.10 lakhs paid to Shri S. Kumar Computers Pvt.Ltd. The Assessing Officer has not examined the fact of repayment. Under the circumstances, we consider it appropriate to set aside and restore the issue back on account of addition respect of such loans of Rs.22,91,000/- to the file of Assessing Officer. The Assessing Officer is directed to verify the factual aspects on claim of re-payment to the party and if found proper, is directed to grant appropriate relief. It shall be open to the Assessing Officer to make appropriate inquiry from the bank to ascertain the fact of re-payment to the lenders, if so considered expedient. Thus, the action of CIT(A) is cancelled and the additions made on account of receipt from aforesaid four parties is remitted back to the file of the Assessing Officer for necessary verification as noted above to enable him to pass a fresh order in accordance with law.

10. At this juncture, it will be relevant to note the pertinent observations of the Hon’ble Supreme Court in the case of CIT vs. Smt. P.K. Noorjahan (1999) 237 ITR 570 (SC) in the context of the expression ‘may’ with reference to Section 69 of the Act. The Hon’ble Supreme Court in that case observed that the word ‘may’ should not be read as ‘shall’. The Hon’ble Supreme Court held that the expression ‘may’ indicates that the intention of Parliament in enacting Section 69 (similar to Section 68) was to confer a discretion on the Assessing Officer in the matter of treating the source of investment, which has not been satisfactorily explained by the assessee. In terms of the decision of the Hon’ble Suprme Court, the Assessing Officer is not obliged to invoke Section 68/s.69 of the Act in every case where the explanation offered is found to be ‘unsatisfactory’ in the opinion of the Assessing Officer. In view of the overriding fact that loans so obtained stood re-paid through banking channel without any real advantage to the assessee, the onus cast upon the assessee is substantially discharged in view of the observations of the Hon’ble Supreme Court. The action of Assessing Officer is thus set aside and the issue is restored back to the file of Assessing Officer in terms of directions noted above.

11. As a result, ground No.4 of assessee’s appeal is allowed for statistical purposes.

12. In the result, appeal of the assessee is partly allowed for statistical purposes.

This Order pronounced in Open Court on 29/12/2020