2008 (9) TMI 943 - HC - Income Tax

Addition u/s 68 - unexplained cash credit - Disallowance of deferred revenue expenditure. Addition u/s 68 - unexplained cash credit - HELD THAT - We have heard the ld counsel for the appellant and have examined the findings returned by the Tribunal as well as those returned by the CIT (A) and find ourselves to be in agreement with the conclusions arrived at by the Tribunal. The AO is not permitted to examine the source of the source once the assessee has been able to establish that the transaction with his creditors is genuine and that the creditors identities and creditworthiness have been established. In this case, this had been done, therefore, it was not open to the AO to make the addition after entering upon an examination of the source of the source - Consequently, we feel that no interference is called for on this conclusion in the impugned order passed by the Tribunal. Disallowance of deferred revenue expenditure - We note that this is a clear finding of fact and the Tribunal has accepted the findings returned by the CIT (A) and has permitted the deduction of expenses towards advertisement which were admittedly of a revenue nature. The assessee had deferred the revenue expenditure in the year preceding the previous year relevant to the assessment year in question. The advertising expenses had been incurred on account of the franchise agreements - The finding of the CIT (A) is that the business has commenced in the year in question. He has also returned a finding that due to certain reasons, the franchisee agreements got revoked in this year also. There was no option left with the assessee but to claim the deduction in this year after having deferred the revenue expenditure in the preceding year. The Tribunal confirmed the findings of the CIT (A). We do not find any infirmity in the impugned order. In any event, no substantial question of law arises for our consideration. The appeal is dismissed.

Summary

Issues:
1. Addition of Rs. 23,00,000 under section 68 of the Income Tax Act, 1961 for unexplained cash credit.
2. Deletion of Rs. 5,49,189 made by the assessing officer on account of disallowance of deferred revenue expenditure.

Analysis:

Issue 1: Addition of Rs. 23,00,000 under section 68 of the Income Tax Act
The assessing officer added Rs. 23,00,000 as unexplained cash credit, which was deleted by the Commissioner Income-tax (Appeals) and upheld by the Tribunal. The Tribunal found that the assessee had adequately explained the cash credit by establishing the identity and capacity of the creditor, Mr. Ram Phool, who had advanced the sum. Mr. Ram Phool provided his income tax returns, confirmation, bank statements, and other relevant documents to support the transaction. The Tribunal emphasized that the assessing officer cannot delve into the source of the source once the genuineness of the transaction and the creditor's creditworthiness are established. The Tribunal concluded that the addition of Rs. 23,00,000 was not sustainable under section 68 of the Act.

Issue 2: Deletion of Rs. 5,49,189 for deferred revenue expenditure
The second ground involved the deletion of Rs. 5,49,189 made by the assessing officer for disallowance of deferred revenue expenditure, which was also upheld by the Tribunal. The Commissioner Income-tax (Appeals) allowed the deduction of expenses towards advertisement as revenue expenditure. The Tribunal accepted this finding, noting that the business had commenced during the relevant year, and due to unforeseen circumstances, the franchise agreements were revoked, necessitating the claim of the expenditure in that year. The Tribunal concurred with the Commissioner's decision, emphasizing that no substantial question of law arose for consideration. The appeal was dismissed, affirming the Tribunal's decision.

In conclusion, the High Court upheld the Tribunal's decision on both issues, emphasizing the importance of establishing the genuineness of transactions and the commencement of business activities for claiming deductions. The Court found no reason to interfere with the Tribunal's findings, as they were in accordance with the law and supported by the evidence presented during the proceedings.