Addition for unsecured loans tenable when profits are estimated using gross profit

Addition for unsecured loans tenable when profits are estimated as it is not trading account but balance sheet item

ABACUS Case Law Citation
ABCAUS 3368 (2020) (08) ITAT

Important case law relied upon by the parties:
Addl. CIT vs Hanuman Agarwal 151 ITR 150 (Pat)
Mather & Platt (India) Ltd vs CIT 168 ITR 493 (Cal)
Addl. CIT Bihar vs Bahri Bros P. Ltd. 154 ITR 244 (Pat)
Nemi Chand Kothari vs. CIT 136 Taxman 213 (Gau)
Labh Chand Bohra vs. ITO 219 CTR 571 (Raj)

In the instant case, the Revenue had challenged the order passed by the CIT(A) in deleting addition made for unsecured loans taken.

The assessee e-filed return of income which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny through CASS.  A survey u/s 133A of the Act was carried out at the business premises of the assessee.  

The AO observed that the assessee had received the loans from four parties during the year.

The assessee filed copy of account of these persons and copy of ITR.  However, in one case, the AO held that the assessee had not furnished the ID proof and bank statement. Similarly, in another case the AO was not satisfied with the copy of the ITR acknowledgment.  The AO held that in these two cases, the assessee had not filed the primary documents to prove the genuineness of the transactions

The CIT(A) deleted the addition which were based on such material on the grounds that no separate addition was warranted when the profits of the were estimated taken into consideration the gross profit of the year.  

Aggrieved, the revenue filed appeal before the Tribunal.

The assessee argued that loans were received from identifiable parties and through banking channel. It was, thus argued that burden of the assessee in respect of the loans received from various parties stood discharged and therefore no addition was tenable. 

It was argued that once the amount had been received by account payee cheques and the creditors had duly confirmed the transactions no adverse reference can be drawn.

Addition for unsecured loans tenable when profits are estimated using gross profit rate

The Tribunal opined that the decision of the CIT(A), that no separate addition on account of unsecured loans is warranted as the income of  the assessee had been estimated for the year was incorrect interpretation of the ratio laid down by the Hon’ble Courts. 

The Tribunal stated that the CIT(A) misread the judgments in considering the items of P&L account with that of balance sheet items interchangeable.

The Tribunal stated out that the case laws relied upon by the CIT(A)/Parties pertains to purchases, disallowances u/s 40A(3) and  on account of expenses on trading account.

The Tribunal pointed out that extrapolation of judgments rendered in connection with the items of trading account cannot be extended to the addition of unsecured loans which is balance sheet item. The unsecured loans do not have impact on the estimation of gross profit as they do not constitute a part of the trading account. Hence, the issue of unsecured loans has to be adjudicated independently on the merits of the case.

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