2017 (8) TMI 1442 - HC - Income Tax

Claim of depreciation on hotel building - additions u/s 41(1) - additions u/s 68 - unexplained share capital - Held that - Appeal of the revenue dismissed - Decided in favor of assessee.

Issues Involved:

1. Justification of deleting the addition made by AO by way of disallowance of depreciation claimed on hotel building.
2. Justification of deleting the addition made by the AO on account of cessation of liability under Section 41(1) of the I.T. Act.
3. Justification of deleting the additions made under Section 68 of the Act of unexplained cash credits.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claimed on Hotel Building:
The department challenged the Tribunal's decision to delete the addition of ?43,05,806/- and ?1,07,64,515/- made by the Assessing Officer (AO) by way of disallowance of depreciation claimed on the hotel building. The AO contended that the related investment in the building was not explained and only bogus bills were arranged for construction expenses. The Tribunal, however, dismissed this addition, leading to the department's appeal.

The High Court referenced the Supreme Court's decision in K.M. Sugar Mills Ltd. vs. CIT, which emphasized that once the income from leasing assets is treated as business income, depreciation on those assets should not be disallowed. The court also cited CIT vs. Kesaria Tea Co. Ltd., where it was held that unilateral actions by the assessee, such as writing off liabilities, do not necessarily mean that the liability ceased in the eye of law. Thus, the High Court found no substantial question of law in the department's appeal and dismissed it.

2. Cessation of Liability under Section 41(1) of the I.T. Act:
The department also contested the deletion of ?1,45,45,000/- made by the AO on account of cessation of liability under Section 41(1) of the I.T. Act. The Tribunal had ruled in favor of the assessee, leading to the department's appeal.

The High Court referred to the decision in CIT vs. Lovely Exports (P) Ltd., which stated that if share application money is received by the assessee-company from alleged bogus shareholders, the department is free to re-open their individual assessments. The court also cited the case of CIT vs. T.V. Sundaram Iyengar and Sons Ltd., which held that if an amount is received in the course of a trading transaction and becomes the assessee's own money, it should be treated as income. The High Court found that the loan taken was always treated as a capital liability and if wiped out, it should naturally go as wiping out the capital liability. Consequently, the High Court upheld the Tribunal's decision and dismissed the appeal.

3. Unexplained Cash Credits under Section 68:
The department challenged the Tribunal's decision to delete the additions made under Section 68 of the Act for unexplained cash credits, where the assessee could not discharge the burden of proving the creditworthiness of creditors and genuineness of transactions.

The High Court referred to the case of Commissioner of Income Tax vs. M/s VTC Leasing & Finance Ltd., where it was held that if the share application money is received from alleged bogus shareholders, the department can re-open their individual assessments. The court found no infirmity with the Tribunal's judgment, stating that the issue was squarely covered by previous decisions and upheld the Tribunal's decision, dismissing the department's appeal.

Conclusion:
The High Court dismissed the department's appeals on all issues, upholding the Tribunal's decisions. The court found no substantial question of law in the department's contentions and relied on precedents that supported the Tribunal's rulings. The judgments emphasized the principles of proving the genuineness of transactions, the treatment of liabilities, and the conditions under which depreciation and cessation of liabilities are to be assessed.

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