Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2025 Supreme(Online)(ITAT) 27676

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Yogesh Kumar U.S., Judicial Member, Manish Agarwal, Accountant Member
DCIT – Appellant
Versus
Praveen Kumar Jolly – Respondent
ITA No.1654/Del/2023|C.O.-134/Del/2023

Advocates:
For the Appellants/Petitioners: Ajay Kumar Arora
For the Respondents: Ved Jain, Uma Upadhyay

Where an assessee maintains mixed funds consisting of both interest-free capital and borrowed funds, interest-free advances are presumed to be sourced from the self-owned interest-free capital, provided such capital is sufficient. Consequently, interest expenses on borrowed loans are not disallowable under Section 36(1)(iii).

Headnote:(A) Income Tax Act, 1961 - Sections 68, 147, 148, 151 and 36(1)(iii) - Reassessment proceedings - Addition of peak bank credits - Disallowance of interest expenses - Validity of reopening - Assessee provided comprehensive documentary evidence including confirmations, bank statements, and audited financial statements for transactions with corporate entities, establishing identity and creditworthiness - Reopening based on vague reasons and lack of independent application of mind challenged - Where assessee has mixed fund of interest-free and interest-bearing capital, presumption arises that investments are made from interest-free funds, provided they are sufficient to cover investments - Commercial expediency for interest-free loans to group entities established, precluding disallowance of interest under Section 36(1)(iii). (Paras 2, 4.1.14 to 4.2.9)

(B) Appeals - Additional Evidence - Rule 46A - Admission of evidence by appellate authority - Once documentary evidence is submitted and verified during remand proceedings without sustained rebuttal, appellate authority is justified in deleting additions based on peak credit or unexplained money theories. (Paras 4.1.17, 4.1.18)

Facts of the case:
The assessment was reopened following information regarding high-volume transactions in the assessee's bank accounts. The assessing officer made additions regarding unexplained peak credits and disallowed interest payments on the premise that interest-bearing borrowed funds were diverted to interest-free loans. The appellate authority deleted these additions, finding that the assessee had substantial own capital and that the credits were adequately substantiated through documentary evidence.

Findings of Court:
The court held that the appellate authority's order was a reasoned, fact-based decision. The evidence submitted regarding the 24 entities sufficiently established the genuineness of the transactions, and the cash deposits in group companies' accounts were shown to be out of cash withdrawals from those same accounts, thus rebutting the theory of unaccounted income being routed back to the assessee.

Issues: Whether the additions for unexplained bank credits and the disallowance of interest expenses were justified in light of available capital and documentary evidence, and whether the reassessment proceedings were legally valid.

Ratio Decidendi: When an assessee possesses interest-free funds significantly exceeding the interest-free advances, it is legally presumed that investments or advances are sourced from such interest-free capital. Further, the burden of proving that bank transactions are unexplained is not discharged by mere suspicion; documentation of identity and creditworthiness, when unchallenged during remand, warrants the deletion of additions under Section 68.

Result: Appeal of the revenue and the cross-objection of the assessee both dismissed.

Table of Content
1. procedural background, case history, and assessment reopening facts. (Para 1 , 2)

ORDER

PER MANISH AGARWAL, AM :

The present appeal is filed by the Revenue and Cross-objection is filed by the assessee against the order dated 31.01.2023 passed by Ld. Commissioner of Income Tax (A)-24, New Delhi [“Ld. CIT(A)”] in Appeal No. CIT(A), Delhi-35/10036/2019-20 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the order dated 31.12.2018 passed u/s 147 of the Act pertaining to Assessment Year 2011-12.

The appeal of the Revenue was delayed by 158 days which was condoned by Co-ordinate Bench of Tribunal in terms of the order sheet entry dated 10.02.2025. The relevant contents of the order sheet entry dated 10.02.2025 are reproduced as under:-

“There was a delay of 158 days in filing the appeal by the Department which has been explained by the CIT (DR), as consequence of procedural delay to internal administrative exigency. The Learned Authorized Representative for the assessee has no objection to the said delay in filing the appeal by the department. Accordingly, the aforesaid delay of 158 days is condoned, and the appeal was admitted on merits.

From the record, it is noted that the department has challenged the deletion of the addition of Rs. 8,09,95,988/- by the CIT (A) without appreciating the merits of the case ignoring that huge credit contribution received to the personal capital shown in assessment year 2011-12 (under consideration) claimed to be received through multiple opportunity to the department. Accordingly, the registry is directed to fix the appeal for hearing before regular Bench on the date available on board under notice to both the parties.”

Brief facts of the case are that assessee is engaged in the business of trading in property and Government securities and bonds besides having income from director’s remuneration and rental income. The return of income was originally filed u/s 139(1) on 29.09.2011, declaring total income of INR 1,25,55,794/- and the necessary Audit Report and other documents were filed alongwith the return of income. Thereafter, the case was re-opened in terms of the reasons recorded before issue of notice u/s 148 of the Act and notice u/s 148 was issued on 24.04.2018. The basis for re-opening the assessment was that there were heavy transactions in assessee’s bank account maintained with Bank of Rajasthan Ltd. (now known as ICICI Bank), Karol Bagh Branch, Delhi in saving bank A/c No. 1250301112512. In response to the notice issued on 31.03.2018 u/s 148 of the Act, the assessee filed return of income on 17.04.2018, declaring the same income as was declared in the return filed u/s 139(1) of the Act and thereafter, various notices were issued and after considering the replies, AO has made two additions, first, addition of INR 49,54,036/- by disallowing the interest paid on the loans holding that the assessee is providing interest free funds to various companies and second addition of INR 8,09,95,988/- was made regarding the peak credits in the bank account as unexplained u/s 68 of the Act.

Against the said order, assessee filed an appeal before Ld. CIT(A) wherein the assessee has challenged the reassessment order on re-opening as well as merits of the additions were also challenged. Ld. CIT(A) vide impugned order dated 31.01.2023 has deleted the additions on merits and not adjudicated the issues raised regarding re-opening of the assessment.

Aggrieved by the order of Ld.CIT(A), Revenue is in appeal before the Tribunal by taking following grounds of appeal:-

1. “The Ld. CIT (A) erred in law and on facts in deleting the addition of Rs. 8,09,95,988/-disregarding the fact that the assessee has not given the details of personal capital shown in AY 2011-12 and also no documentary evidence has been provided for explaining the genuineness of the personal capital in hand. Also, no evidence has been given by the assessee w.r.t availability of funds shown as the personal capital

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2025 Supreme(Online)(ITAT) 27676

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)Yogesh Kumar U.S., Judicial Member, Manish Agarwal, Accountant MemberDCIT – AppellantVersusPraveen Kumar Jolly – RespondentITA No.1654/Del/2023|C.O.-134/Del/2023

Cases Referred (1)

INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Yogesh Kumar U.S., Judicial Member, Manish Agarwal, Accountant Member
DCIT – Appellant
Versus
Praveen Kumar Jolly – Respondent
ITA No.1654/Del/2023|C.O.-134/Del/2023