2018 (1) TMI 446 - AT - Income Tax

Addition u/s 68 - CIT(A) had concluded that the assessee by raising loans from others, which had not been properly explained by him, had thus created assets to the said extent - Held that - We would not hesitate to observe that even if the unsubstantiated reasoning of the CIT(A) was to be accepted, even then, without pointing out as to which unexplained cash credit of ₹ 38,94,877/- backed/sourced the addition of ₹ 38,94,877/- in the account of M/s Avdhoot Finance & Investments P. Ltd., no addition u/s 68 could validly be made in the hands of the assessee. We are afraid that the reasoning adopted by the CIT(A) to conclude that the addition of ₹ 38,94,877/- made by the A.O by characterizing the same as an unexplained cash credit in the hands of the assessee is beyond comprehension and cannot be accepted. We are of the considered view that as the provisions of Sec. 68 presupposes an unexplained cash credit, failing which no addition can validly be made under the aforesaid statutory provision, therefore, now when it remains as a matter of fact that not only the assessee had duly explained that the addition of ₹ 38,94,877/- had occasioned on account of a wrong journal entry which thereafter had been reversed, but rather, no such cash credit had been brought to our notice which could persuade us to conclude that the addition of the aforesaid amount of ₹ 38,94,877/- made by the A.O was rightly upheld by the CIT(A). We thus in the backdrop of our aforesaid observations not being persuaded to subscribe to the observations of the lower authorities, therefore, set aside the order of the CIT(A) and delete the addition - Decided in favour of assessee

Summary

Issues Involved:

1. Validity of the CIT(A)'s order.
2. Addition of ?38,94,880 under Section 68 of the Income Tax Act, 1961.
3. Whether the addition was a typographical error or a valid transaction.

Issue-wise Detailed Analysis:

1. Validity of the CIT(A)'s order:
The assessee challenged the validity of the CIT(A)'s order, claiming it was "invalid and bad in law." However, the judgment primarily focused on the substantive issues rather than the procedural validity of the CIT(A)'s order. The tribunal did not find any procedural lapses or jurisdictional errors in the CIT(A)'s order, thus implicitly upholding its validity.

2. Addition of ?38,94,880 under Section 68 of the Income Tax Act, 1961:
The primary contention was regarding the addition of ?38,94,880 made by the Assessing Officer (A.O) under Section 68 of the Act, which the CIT(A) upheld. The A.O observed that the assessee had credited ?1,47,54,165 to the general reserve, which included ?38,94,880 from Avdhoot Finance & Investments Ltd., shown as an asset. The A.O concluded that the assessee failed to provide a plausible explanation for this addition, thus treating it as unexplained cash credit under Section 68.

The CIT(A) partially agreed with the assessee, deleting the addition of ?1,08,59,288 related to Arodyne Chemicals Ltd. but upheld the addition of ?38,94,880. The CIT(A) reasoned that the assessee attempted to create an unexplained liability and observed an increase in unsecured loans, suggesting unexplained sources.

3. Whether the addition was a typographical error or a valid transaction:
The assessee argued that the addition was due to a typographical error by their accountant, who wrongly transferred amounts to the general reserve. They provided ledger accounts and journal vouchers to support their claim. The tribunal, after careful consideration, found that the explanation, though not entirely convincing, was plausible. The tribunal noted that the assessee had rectified the error in their books and that the CIT(A)'s reasoning did not conclusively establish the addition as unexplained cash credit.

The tribunal concluded that the provisions of Section 68 presuppose an unexplained cash credit, which was not established in this case. Therefore, the addition of ?38,94,880 was deleted, and the appeal of the assessee was allowed.

Conclusion:
The tribunal allowed the appeal, setting aside the CIT(A)'s order regarding the addition of ?38,94,880 under Section 68, and concluded that the amount was not an unexplained cash credit but a result of a rectifiable error in the assessee's accounting.