2019 (3) TMI 1701 - AT - Income Tax

Additions u/s 68 - share application money - Genuineness and valid reasons for issuing shares at a high premium - cash credit - discharge of duty casted upon the assessee to explain the nature and source of credit found in his books - Held that - section 68 of the Act provides that if any sum found credited in the year in respect of which the assessee fails to explain the nature and source shall be assessed as its undisclosed income. In the facts of the present case, both the nature source of the share application received was fully explained by the assessee. The assessee had discharged its onus to prove the identity, creditworthiness and genuineness of the share applicants. The PAN details, bank account statements, audited financial statements and Income Tax acknowledgments were placed on AO's record. Without doing so, the addition made by the AO is based on conjectures and surmises cannot be justified. - Additions deleted. Disallowance u/s 14A - Held that - section 14A will not apply if the assessee does not receive any exempt income during the relevant previous year. - Additions deleted.

Issues Involved:
1. Violation of principles of natural justice.
2. Addition of ?1,95,00,000/- on account of share application money as cash credit under Section 68 of the Income Tax Act, 1961.
3. Disallowance of ?75,193/- under Section 14A of the Income Tax Act, 1961.
4. Interest computation under Sections 234A/B/C/D of the Income Tax Act, 1961.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee claimed that the appellate order violated the principles of natural justice and should be quashed. However, the tribunal did not find any merit in this ground as it was not substantiated with specific instances or evidence.

2. Addition of ?1,95,00,000/- on Account of Share Application Money:
The primary issue was the addition of ?1,95,00,000/- as cash credit under Section 68. The assessee issued shares at a premium to six entities, which were later scrutinized by the Assessing Officer (AO). The AO deputed an inspector to verify the registered offices of the share allottees, who reported that these companies were not traceable. Consequently, the AO issued summons under Section 131, but there was only partial compliance. The AO concluded that the assessee failed to prove the identity, creditworthiness, and genuineness of the transactions, leading to the addition of ?1,95,00,000/-.

The tribunal noted that Section 68 requires the assessee to explain the nature and source of any sum credited in its books. The assessee provided extensive documentation, including income tax returns, certificates of incorporation, audited accounts, share application forms, allotment letters, and bank statements of the share applicants. The tribunal emphasized that mere non-appearance of directors does not invalidate the documentary evidence provided. It cited several judicial precedents, including the Supreme Court's decision in CIT v. Lovely Exports Pvt. Ltd., which stated that if the share application money is received from genuine parties, the addition under Section 68 cannot be justified.

The tribunal concluded that the assessee had discharged its onus to prove the identity, creditworthiness, and genuineness of the share applicants. The AO's reliance on the non-appearance of directors was insufficient to sustain the addition. Therefore, the addition of ?1,95,00,000/- was deleted.

3. Disallowance of ?75,193/- under Section 14A:
The AO made a disallowance of ?75,193/- under Section 14A read with Rule 8D, citing that the assessee had made investments in shares but did not show any disallowance. The tribunal noted that the assessee had sufficient own funds to cover the investments, and there was no nexus between borrowed funds and the investments. It relied on the Bombay High Court's decision in CIT v. Reliance Utilities and Power Ltd., which held that if interest-free funds are sufficient to cover investments, no disallowance can be made under Rule 8D(2)(ii).

Additionally, the tribunal observed that the assessee did not earn any exempt income during the assessment year. It cited the Delhi High Court's decision in Chem Invest v. CIT, which held that Section 14A does not apply if no exempt income is received. Consequently, the disallowance of ?75,193/- was deleted.

4. Interest Computation under Sections 234A/B/C/D:
The assessee contended that the interest computed under Sections 234A/B/C/D was overcharged and wrongly calculated. The tribunal noted that this ground is consequential and premature, thus requiring no adjudication.

Conclusion:
The tribunal allowed the appeal of the assessee, deleting the addition of ?1,95,00,000/- under Section 68 and the disallowance of ?75,193/- under Section 14A. The issue regarding interest computation was deemed consequential and not adjudicated.

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