Unreported Decisions – July 2021
By Ajay R. Singh, Advocate
1. S. 40A(2)(b): Disallowance of Interest paid to related Parties – Unsecured loans vis a vis bank loan :
The assessee is an individual, carrying on the business in a proprietorship firm. He had taken unsecured loans in the proprietorship firm from his relatives and paid interest@ 24% totaling to ` 17,81,293/-. A deduction of the above expenditure was claimed by the assessee in the return of income. The Assessing Officer has restricted the rate of interest payment to 15% and disallowed an amount of ` 6,67,990/- on account of excessive interest payment under section 40A(2)(b) of the Act.
The CIT-Appeal, upheld the action of the Assessing Officer thus the assessment order was upheld.
Before Hon’ble ITAT, appellant submitted that on bare perusal of section 40A(2)(a) of the Act would contemplate that if an assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities availed from the persons to whom such payment was made, then he can disallow the excess payment. Assessing Officer failed to bring any evidence on record which can show that the interest paid at 25% by the assessee is not inconsonance with the market rate. If since some service or goods availed at a legitimate rate from the open market then difference between the rate at which facilities would be availed vis-a-vis actually availed should be disallowed to the assessee. According to the Assessing Officer the loan which have been availed by the assessee from the persons falling in clause (b) of section 40A(2) would be availed at the rate of 15%, hence the interest paid over and above the rate of 15% was considered as excessive. These are unsecured loans for which assessee was not required to pledge anything or give any security. He was not required to fulfil other formalities which is to be fulfilled if loans were availed from the Banks. These aspects have not been looked into by the Assessing Officer while considering market rate of interest payment on the loans at 15%. Thus, it was held that interest payment @24% on unsecured loans is not excessive.
Anurag Goel vs. ITO Ward 5(3)(1), Ahmedabad [I.T.A. No. 2906/Ahd/2015 AY: 2012-13 “SMC”, DOH: 29/08/2017]
2. S. 68: Penny stock- Assessee discharged the primary onus – cross examination not allowed- addition cannot be made :
The assessee being resident HUF was assessed u/s. 143(3) wherein the assessee was denied exemption u/s. 10(38) on certain Long-term capital gains (LTCG) earned on sale of shares and the said gains were added to the assessee’s income as unexplained cash credit u/s. 68 of the Act. ` 38.47 Lacs were also added on account of estimated commission income which was consequential to the main addition. The aforesaid gains arose on sale of shares of an entity namely M/s. Moryo Industries Ltd. (MIL).In support of purchase transactions, the assessee furnished share allotment advice as well as its bank statements evidencing payment though banking channels. In support of sale transactions, the assessee furnished contract notes issued by the brokers, Account statements issued by the broker, bank statement evidencing inflow of funds through banking channels were also submitted. The shares were sold by the assessee at stock exchange in online mode of transaction. On the basis of these documentary evidences, the assessee substantiated the stated transaction. Subsequently, in the background of investigation carried out by Kolkata investigation wing in the matter of penny stocks, it was alleged by ld. AO that gains were arranged, premeditated and bogus. During the investigation, statements of various operators, entry providers and stock brokers were recorded wherein the said facts of their engagement in providing accommodation entries in the form of Long-Term Capital Gains (LTCG) / Short-Term Capital Losses (STCL)were admitted. In the above background, the gains earned by the assessee were alleged to be pre-arranged in connivance with the operators of the scrip. Notices issued u/s 133(6) to all the buyers did not elicit any satisfactory response. Upon analysis of financials of M/s MIL, it was observed by the AO that its net worth was negligible and it was alleged that the share prices were artificially rigged by operators to accommodate desirous beneficiaries. During survey u/s 133A by investigation wing on directors of the stock-broking entities, they admitted to have helped various persons to obtain accommodation entries in various scrips including the scrip of M/s MIL. The assessee submitted that in the absence of such crossexamination, those statements could not be used against the assessee, the findings of investigation wing were general in nature without implicating the assessee specifically, the price of the scrip would be totally dependent upon market perception and sentiment in which the assessee would have no role to play and allegations of Ld. AO were termed as based on mere presumption and surmises.
Hon’ble ITAT while allowing Assessee’s Appeal, held that the assessee had furnished all the requisite documentary evidences to substantiate the transactions and discharged the primary onus as required under law to establish the genuineness of the gains so earned during the year. No defect has been pointed out by the revenue in documentary evidences furnished by the assessee. Therefore, the onus had, thus, shifted on revenue to disprove assessee’s claim and establish with cogent evidences that the transactions were non-genuine transactions through which assessee’s unaccounted money has flown back to assessee in the garb of bogus capital gains. However, except for general findings of investigation wing and thirdparty statements on the basis of which it has been alleged that the scrip of M/s MIL was penny stock, there is nothing in the kitty of the revenue to prove the assessee’s involvement in manipulating the prices of the scrip. No exchange of cash between the assessee and the various exit providers could be proved. Therefore, the onus as casted upon revenue to dislodge the assessee’s claim could not be discharged. Also, the prices would be guided more by the market forces rather than the financials or other parameters. When both the parties would agree upon a price, the trade is matched and that price would become new market quotation. Therefore, the financials of underlying entities, in such cases, would lose much relevance in so far as the price movement of scrip is concerned. No additions could be made merely on the basis of suspicion, conjectures or surmise. The addition thus made purely on the basis of third-party statement recorded at the back of the assessee could not be sustained in the eyes of law unless the same are confronted to the assessee and the same are backed by any corroborative material.
Jagdish B. Prajapati HUF v. ACIT-24(2) [ITA NO.: 548/MUM/2019, A.Y. 2014-15, Date of Hearing: 03/05/2021]