M/s. Iryd Automatrix Private Limited, Bangalore V. Income Tax Officer, Ward- 3(1)(4), Bangalore

ITA 314/BANG/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7629 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2016-2017
• Appeal Filed On: 05-07-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation
• Section: 68; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC-C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT ITA No.314/Bang/2021 Assessment Year : 2016-17 M/s.Iryd Automatrix Pvt. Ltd., No.13/1, 4 th Floor, Sukruthi Apartment, Subbaramachetty Road, Bengaluru – 560 004. PAN : AADCI 9051 R Vs. ITO, Ward – 3(1)(4), Bengaluru. APPELLANTRESPONDENT Assessee by :Shri.HemantPai,CA Revenue by:Shri.Ganesh R Ghale,Standing Counsel for Dept. Date of hearing:14.06.2022 Date of Pronouncement:14.06.2022 O R D E R Per N. V. Vasudevan, Vice President This is an appeal by the assessee against the order dated 24.02.2020 of CIT(A)-3, Bengaluru, relating to Assessment Year 2016-17. 2. The first issue that needs to be decided in this appeal is with regard to the addition of Rs.25 lakhs made by the AO under section 68 of the Income Tax Act, 1961 (Act). 3. The assessee is a company engaged in the business of renting of two wheelers. The business model of the assessee is that it has developed an app and the customers can book two wheelers on hire through the app. During the previous year, the assessee received unsecured loan of Rs.25 ITA No.314/Bang/2021 Page 2 of 10 lakhs. Three individuals by name Mr. Ram Mohan alias A. R. Arinaya, Mr. Ajit Hebbar and Ms. Mridula Hebbar gave loan of Rs.10 lakhs, Rs.5 lakhs and Rs.10 lakhs respectively. In the proceedings before the AO, the assessee did not respond to any of the notices and therefore an ex-parte assessment under section 144 of the Act. i.e., a best judgment assessment was made by the AO. The AO treated the credits in question as unexplained and added a sum of Rs.25 lacs to the total income of the Assessee u/s.68 of the Act, as the Assessee failed to prove the identity, credit worthiness of the creditors and genuineness of the transaction of receiving loan. 4. In the proceedings before the CIT(A) the assessee filed confirmation from Mr. Ram Mohan alias A. R. Arinaya, Mr. Ajit Hebbar and Ms. Mridula Hebbar and also affidavit from the above said three persons confirming that they had given a sum of Rs.10 lakhs, Rs.5 lakhs and Rs.10 lakhs respectively as loan to the assessee. Mr. Ram Mohan alias A. R. Arinaya explained his source by filing statement of bank account of his mother Smt. Lalitha. The CIT(A) noticed from the copy of bank statement of Smt. Lalitha that she had issued cheques for a sum of Rs.4,32,085/- directly to Silicon Motors for purchase of two wheelers by the assessee. The remaining sum of Rs.5,69,915/- was paid to the assessee by her through cheque. On noticing this fact, the CIT(A) was of the view that it is Smt. Lalitha, mother of Mr. Ram Mohan alias A. R. Arinaya who was the real person who gave the loan and since there is no evidence to show the creditworthiness of Smt. Lalitha, the credit in question does not stand explained. In so far as the loan from Mr. Ajit Hebbar and Ms. Mridula Hebbar is concerned, they had paid the sums directly to the assessee through banking channels. The CIT(A) was of the view that their creditworthiness was not proved before the AO by filing copy of their ITRs. ITA No.314/Bang/2021 Page 3 of 10 The CIT(A) therefore held that the assessee has not satisfactorily explained credits in question. 5. The learned Counsel for the assessee submitted that in respect of three loans availed by the assessee, the assessee had filed the following documents: Sl. No.Lender Name Amount lentDocuments submitted 1. Ram Mohan 10,00,000 1.Loan Agreement 2.PAN 3.Address 4.Confirmation 5.Affidavit 6.ITR of Lalitha 7.Bank Statement showing remittance 2. Mrudula Hebbar 10,00,0001.Loan Agreement 2.PAN 3.Address 4. Confirmation 5.Affidavit 6. Bank Statement showing remittance 3. Ajit Hebbar 5,00,0001. Loan Agreement 2. PAN 3. Address 4. Confirmation 5. Affidavit 6. Bank Statement showing remittance 6.It was submitted that by filing the aforesaid documents and by giving address, PAN of the three creditors and also the income tax returns of Smt. Lalitha, mother of Mr. Ram Mohan alias A. R. Arinaya, the assessee has ITA No.314/Bang/2021 Page 4 of 10 established identity, capacity and genuineness of the transactions of loan and hence the addition made cannot be sustained. It was submitted that despite the filing of the copy of the income tax returns of Smt. Lalitha (copy at page 105B of the assessee’s Paper Book and this return is with reference to Assessment Year 2016-17), the CIT(A) wrongly entered a finding that the assessee did not establish he creditworthiness of Smt. Lalitha. In so far as the loan availed by the assessee from Mr. Ajit Hebbar and Ms. Mridula Hebbar is concerned, the learned Counsel for the assessee drew our attention to pages 104 and 105 of the assessee’s Paper Book which contains the bank account of Mr. Ajit Hebbar and Ms. Mridula Hebbar respectively and it was submitted that their bank accounts had sufficient balance to lend the loan in question to the assessee. It was submitted that the bank account contained the address of these two persons besides the details of PAN given in the confirmation filed by these two parties. It was submitted that the CIT(A) failed to look into these documents and committed an error in coming to the conclusion that the assessee failed to establish the creditworthiness of the creditors. It was submitted that prima facie the assessee’s duty under section 68 of the Act is only to explain source of the creditors. The assessee cannot be called upon the sources of source of the creditors. In this regard, it was submitted that the first proviso to section 68 of the Act which was inserted by the Finance Act, 2012 casts an obligation on the assessee to prove the sources of source only in the case of investments in share capital or share application money or any such amount and cannot be extended to a case of a loan simpliciter. The Finance Act, 2022 w.e.f. 01.04.2023 also makes the first proviso applicable to loans but that amendment is only prospective. Reliance was placed by him on the decision of the Hon’ble Karnataka High Court in the case of Kumar Nirman and Nivesh Pvt. Ltd. v. ACIT (2020)425 ITR 486 (Karnataka) wherein it was held that when an assessee in support of identity, genuineness and ITA No.314/Bang/2021 Page 5 of 10 creditworthiness of a credit had supplied copies of Balance Sheet and P & L A/c and also copies of return of income of the creditor, the assessee has proved identity and creditworthiness of the creditor as well as the genuineness of the transaction and it is for the Revenue to conduct an enquiry and prove that the transaction in question was not genuine or identity of creditor was not established or the creditworthiness of the creditor has not been established. The Hon’ble Court took note of the decision of the Hon’ble Supreme Court in the case of CIT Vs. Orissa Corporation Ltd., 159 ITR 78 (SC). 7.The learned DR, on the other hand, while relying on the order of the CIT(A) submitted that the assessee failed to prove the creditworthiness of the creditors and therefore the addition has to be sustained. He also made a reference to the decision of the Hon’ble Karnataka High Court in the case of Kumar Nirman and Nivesh Pvt. Ltd. v. ACIT (2020)425 ITR 486 judgment dated 25.08.2017. He referred to para 42 of the aforesaid judgment wherein Hon’ble Karnataka High Court held that mere production of certain documents cannot discharge the burden that lay on an assessee to satisfactorily explain the credit under section 68 of the Act. 8. I have carefully considered the rival submission and I find that in so far as the loan taken by Mr. Ram Mohan alias A. R. Arinaya, is concerned, though the loan is in the name Mr. Ram Mohan @ A.R.Arinaya, the funds have come from Smt. Lalitha, mother of Mr.Rammohan @ A.R.Arinaya. Smt. Lalitha has filed her return of income for Assessment Year 2016-17 declaring a total income of Rs.4,62,808/-. The CIT(A) has however held that creditworthiness has not been proved. This finding of the CIT(A) is incorrect in the light of the fact that Smt. Lalitha is an income tax assessee having reasonable quantum of income. Mr. Ram Mohan alias A. R. ITA No.314/Bang/2021 Page 6 of 10 Arinaya has also filed return of income for Assessment Year 2016-17 (copy at page 103 of the Paper Book) declaring a total income of Rs.7,36,280/-. In these circumstances, I am of the view that the credit to the extent of Rs.10 lakhs in the name of Mr. Ram Mohan is duly explained and the said addition is deleted. 9. In so far as the addition made in respect of loans by Mr. Ajit Hebbar and Ms. Mridula Hebbar is concerned, the evidence on record shows their sources are reflected in the form of their bank accounts indicating sufficient funds and there are no circumstances indicating that the funds in their bank accounts is assessee’s money. The assessee has thus established the source of the creditors. As pointed out by the learned Counsel for the assessee, the PAN and the addresses of the creditors was very much available with the AO and he did not choose to issue any summons calling upon them to prove their source or any other explanation. In these circumstances, I am of the view that the assessee has duly discharged his onus all satisfactorily the credits in question under section 68 of the Act. Consequently, the aforesaid addition of Rs.5 lakhs and Rs.10 lakhs being credits from Mr. Ajit Hebbar and Ms. Mridula Hebbar are also deleted. I find support for my conclusion from the decision of the Hon’ble Supreme Court in the case of Orissa Development Corporation Pvt. Ltd., (supra). 10. The next issue that arises for consideration in this appeal is with regard to disallowance of depreciation made by the AO. In so far as this issue of disallowance of depreciation is concerned, the facts are that during the previous year, the assessee claimed depreciation of Rs.9,61,797/- as per the Act. The depreciation charged in the P & L A/c was a sum of ITA No.314/Bang/2021 Page 7 of 10 Rs.1,29,485/-. The AO disallowed the claim of the assessee for depreciation on the ground that the assessee did not file any evidence to substantiate the claim for depreciation. The sum disallowed by the AO was a sum of Rs.8,32,317/- being the difference between depreciation as per the income tax Act of a sum of Rs.9,61,797/- and the depreciation debited in the P & L A/c of Rs.1,29,485/-. 11. Before the CIT(A), the assessee produced evidence in the form of invoices showing purchase of assets on which depreciation was claimed. In this regard, it is worthwhile to observe that depreciation had been claimed by the assessee on the following assets: Sl. No. Asset Name Depreciation as per IT Act 1. Furniture & Fixtures 1,915 1. Vehicles 3,66,727 1. Computers 5,89,835 2. Office Equipment 3,320 3. Total Depreciation 9,61,797 4. Less : Depreciation as per P&L 1,29,485 5. Depreciation disallowed by AO 8,32,317 12. The copies of the invoices are at page Nos.9 and 10 and 26 to 84 of the assessee’s Paper Book. The CIT(A) however took the view that the assessee did not produce evidence to show that the assessee owned the assets in question and also failed to prove use of the assets for the purpose ITA No.314/Bang/2021 Page 8 of 10 of business which is a condition precedent for allowing deduction on account of depreciation. In this regard, the assessee also filed evidence to show receipt of hire charges on hiring of the vehicles. The CIT(A) took the view that since the assessee failed to establish ownership of the vehicles, the mere fact that the hire charges were received cannot be the basis to conclude that the assessee owned vehicles and used the same for the purpose of business. In this regard, the AO has also filed remand report before the CIT(A) dated 18.09.2016 and 16.01.2020. In both the remand reports, the claim of the AO was that the assessee did not produce any evidence to establish use of the vehicles for the purpose of business of the assessee. Therefore, the question of ownership of the asset as that of the assessee was not at all disputed by the AO. 13. Before us, learned Counsel for the assessee drew our attention to the list of asets on which depreciation was claimed and submitted that one of the items of assets on which depreciation was claimed was computers. The assessee entered into an agreement dated 07.09.2015 with Datacraft Technologies Pvt. Ltd., for developing the app for use by the assessee in its business and the Assessee paid consideration to the said company which sum was capitalized and depreciation was claimed on the same at 60%. The learned Counsel for the assessee drew our attention to the agreement between the assessee and Datacraft Technologies Pvt. Ltd., as well as the invoices evidencing payment to the said company for development of software. Copies of these documents are at pages 28 to 40 of the assessee’s Paper Book. So far as the disallowance of depreciation on vehicles is concerned, learned Counsel for the assessee submitted that the evidence of purchase of the vehicles was duly filed by the assessee and the AO has also accepted ownership of the vehicle. The only dispute was with regard to use ITA No.314/Bang/2021 Page 9 of 10 of the vehicles. It was submitted that evidence of receipt of hire charges was filed before the AO proves use of the vehicles for the purpose of business of the assessee and therefore the disallowance of depreciation cannot be sustained. Learned DR relied on the order of the CIT(A). 14. I have given a careful consideration to the rival submissions and I am of the view that the evidence on the record clearly shows that the assessee was owner of the items of assets on which depreciation was claimed. The AO in the first assessment report dated 17.09.2019 has made the following submissions with regard to claim for depreciation: “2) With respect to the depreciation claimed, the assessee's major claim includes vehicles, app development costs, computers etc, The same were examined. As per the order sheet and the discussions with the director, it was asked to furnish the details when the vehicles were put to use, the assessee failed to provide any evidence in this regard. Hence, genuineness of the claim of depreciation on vehicles could not be ascertained.” 15. In the second assessment report dated 16.01.2020, the AO has stated as follows on the claim of depreciation : “3) Disallowance of Wrongly claimed depreciation: The assessee had asked to provide the proof with respect to the details substantiating that the vehicles were 'put to use' during the year under consideration. The assessee submitted that the depreciation claimed is on leased vehicles and has submitted the booking confirmations received by the customers. The assessee further submitted that the comments of the customers on Facebook App. The assessee stated that the comment of the users, after they have used the mobile application of the assessee company substantiates the proof that the mobile application and vehicles were put to use in the year 2015-16.” ITA No.314/Bang/2021 Page 10 of 10 16. The evidence of the ownership of the asset is available at pages 26 to 84 of the assessee’s Paper Book. I am of the view that the assessee has established that it is entitled to claim depreciation. The depreciation in my view has to be allowed as claimed by the assessee. The other issue with regard to disallowance of sales promotion expenses was not pressed for adjudication. 17. In the result, appeal of the assessee is allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- (PADMAVATHY S) Sd/- (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 14.06.2022. /NS/* Copy to: 1.Appellants2.Respondent 3.CIT4.CIT(A) 5.DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.