2015 (4) TMI 1236 - AT - Income Tax

Unexplained money - unexplained receipt of share application money - Held that - AO gives a finding that the money was received from one company and in turn was invested in another company. There is no finding that money received was unexplained. Invoking the provisions of Section 68 / 69 require a finding by AO that the credit is un-explained. There is no such finding either in the assessment order or in the Remand Reports. Just because another Government authority is investigating the fund flow it cannot be conclude that the funds received by assesseecompany are un-explained. No reason to interfere with the order. However this finding is only with reference to the provisions of the Act and should not come in the way of CBI investigating the various sources of funds and Revenue is free to take necessary action in case the funds are found to be un-explained. - Decided against revenue

Summary

Issues:
1. Tax treatment of share application money received by the assessee company.
2. Assessment of the nature and source of funds invested in the company.
3. Application of Section 68 of the Income Tax Act regarding unexplained cash credits.
4. Judicial review of the Assessing Officer's decision and the Commissioner of Income Tax(Appeals) ruling.

Issue 1: Tax treatment of share application money received by the assessee company:
The appeal was filed against the order of the Commissioner of Income Tax(Appeals)-V, Hyderabad, concerning the assessee-company engaged in the production and distribution of feature films. The Assessing Officer (AO) noted that the company received a significant amount as share application money during the year, which was invested in another company. The AO treated this amount as income of the assessee company without specifying the relevant section of the Income Tax Act under which it was considered as income.

Issue 2: Assessment of the nature and source of funds invested in the company:
The assessee claimed that the amount received was a loan from a director of another company, which was introduced as share application money. The company invested a similar amount in another entity for strategic reasons. The Commissioner of Income Tax(Appeals) reviewed the matter multiple times and ultimately deleted the addition based on the following reasons: the source of the loan was explained, the investment in the company was acknowledged, and there was no failure to explain the sources of investment. The CIT(A) emphasized that the Assessing Officer failed to conduct necessary inquiries and reach findings as required by law.

Issue 3: Application of Section 68 of the Income Tax Act regarding unexplained cash credits:
The CIT(A) highlighted that Section 68 of the Income Tax Act applies when the assessee fails to provide a satisfactory explanation for credited sums. In this case, the flow of funds was adequately explained by the appellant, and the Assessing Officer did not doubt the nature or source of the funds. The provision of Section 68 was deemed inapplicable as there was no failure to explain the sources of investment.

Issue 4: Judicial review of the Assessing Officer's decision and the Commissioner of Income Tax(Appeals) ruling:
The Tribunal found no merit in the Revenue's appeal as there was no finding that the money received was unexplained. The absence of such a finding under Sections 68/69 of the Act meant that the Revenue's appeal was dismissed. The Tribunal emphasized that the ongoing investigation by another government authority should not automatically imply unexplained funds. The decision of the CIT(A) was upheld, allowing the CBI to continue its investigation if necessary.

In conclusion, the judgment addressed the tax treatment of share application money, the assessment of fund sources, the application of Section 68, and the judicial review of the Assessing Officer's decision. The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of proper inquiries and findings in tax assessments.