The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted an addition of Rs. 17.80 lakh made under Section 68 of the Income Tax Act, observing that the tax department cannot make additions merely on suspicion or question the commercial wisdom of a taxpayer in raising funds.
The bench of Ramit Kochar (Accountant Member) observed that once the assessee has discharged its primary burden by furnishing confirmations, bank statements, and income-tax records of creditors, the addition cannot be sustained in the absence of contrary evidence.
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The assessee company had filed its return for Assessment Year 2017-18 declaring a loss of ₹8.24 lakh. The case was selected for limited scrutiny. During assessment proceedings, the Assessing Officer (AO) noticed that the company’s share application money balance had increased from approximately ₹3.00 crore as on March 31, 2016, to ₹3.18 crore as on March 31, 2017.
The company explained that it had earlier been engaged in the business of dyeing and printing of cloth at its Bhiwadi, Rajasthan facility. However, due to restrictions applicable to heavily polluting industries, business operations had been discontinued since March 2015. Pending exploration of a new business venture, the company allowed third parties to use certain business assets and raised funds from directors, relatives, and a group company.
According to the assessee, the funds were utilized for repayment of secured loans, repairs and renovation of business premises, and settlement of outstanding liabilities.
The AO questioned the genuineness of the receipts, observing that the company was not carrying on active business during the relevant year and therefore there was no rationale for receiving share application money. The AO also noted that no prospectus had been issued and ultimately treated the net amount received during the year as unexplained cash credits under Section 68. An addition of ₹17,80,839 was consequently made.
The Commissioner of Income Tax (Appeals) upheld the addition, holding that while the identity of the parties stood established through confirmations, the assessee had failed to prove the creditworthiness of the contributors and the genuineness of the transactions.
Before the Tribunal, the assessee contended that all confirmations, bank statements, and supporting documents had been furnished during assessment proceedings. It was pointed out that the contributors were directors, relatives, and entities under the same management and that even the inquiry conducted by the AO under Section 133(6) had elicited confirmation from the concerned group company. The assessee argued that the addition had been made despite the availability of documentary evidence supporting the transactions.
The ITAT examined the material placed on record and noted that the funds had been received through banking channels. The Tribunal further recorded that the assessee had furnished confirmations, bank statements, and copies of income-tax returns of the concerned parties. It also took note of the explanation regarding utilization of the funds for repayment of loans, electricity charges, RIICO payments, repairs, renovation, and old liabilities.
The Tribunal observed that although the amounts had originally been classified as share application money, one of the contributors had described them as unsecured loans and the assessee later accepted that characterization. Nevertheless, the receipts were required to be examined as cash credits under Section 68.
After reviewing the evidence, the Tribunal concluded that the assessee had successfully discharged the primary onus cast upon it under Section 68. It held that the tax authorities had proceeded largely on suspicion and assumptions without bringing any incriminating material on record to rebut the evidence submitted by the assessee.
Importantly, the Tribunal observed that it is for a businessman to decide how business affairs should be organized and that tax authorities cannot sit in the “armchair of a businessman” to determine whether funds ought to have been raised, unless there is evidence of tax evasion or mala fide conduct. The Tribunal relied upon the Supreme Court’s decision in S.A. Builders v. CIT in support of this principle.
Accordingly, the addition of ₹17.80 lakh under Section 68 was deleted.
On a separate issue, the Tribunal upheld the tax department’s stand that rental income of ₹11 lakh earned from letting out the factory premises should be assessed under the head “Income from House Property” rather than “Business Income.” The Tribunal noted that the company’s core manufacturing activity had ceased due to pollution restrictions and there was no systematic business activity being carried on. The intention behind the letting arrangement was found to be earning rental income.
However, the Tribunal directed the AO to verify and allow eligible deductions under Sections 23 and 24, including possible interest deductions relating to loans used for construction of the building, if found admissible.
The Tribunal also dealt with the assessee’s claim of business loss and the taxation of profits arising from the sale of assets. While upholding the remand of the business loss issue for fresh examination, the Tribunal directed the AO to verify the assessee’s claim regarding adjustment of sale proceeds against the block of assets and grant relief if the claim is found to be correct under law.
The appeal was partly allowed. While the assessee secured relief on the crucial Section 68 addition of ₹17.80 lakh, the Tribunal upheld taxation of rental receipts as income from house property and remanded certain other issues to the Assessing Officer for fresh verification and adjudication.
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