2020 (6) TMI 32 - HC - Income Tax

Disallowance u/s 36 (1) (iii) - assessee has one bank account which consists of mixed funds - AO held that the assessee was not able to satisfy that the advances which were made for the purchase of land and investment in construction of the godown were entitled to the benefit of Section 36 (1) (iii) - CIT(A) gave a categoric finding that the funds used for purchase of land and construction were interest free funds and were not those which were obtained as loan from the bank and this finding on fact has been upheld by the Tribunal - HELD THAT - Petitioner is not in a position to deny that the matter is squarely covered by the judgments of S.A. Builders Limited Versus CIT (Appeals) 2006 (12) TMI 76 - SUPREME COURT and Bright Enterprises (P) Ltd. Versus Commissioner of Income Tax 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT - First question is answered in negative. Sum received as share capital from two companies were accommodation entries - ground taken by the AO was that those investors had sufficient funds yet they have been showing meagre profit from their business - Appellate Authorities noticed that on the asking of the AO, not only all the financers but even the directors of the company were produced. Moreover, the returns of those assessees had been accepted by the revenue and held that in these circumstances the share money investment could not be deemed to have been a paper transaction or an accommodation entry.

Summary

Issues:
1. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Share capital received from companies deemed as accommodation entries.

Analysis:

Issue 1: Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961
The appeal was filed against the order of the CIT (A) and Income Tax Appellate Tribunal, where two additions made by the Assessing Officer (AO) were deleted. The issue revolved around disallowance under Section 36(1)(iii) of the Income Tax Act. The AO contended that the advances made for land purchase and godown construction were not entitled to the benefit of Section 36(1)(iii) as the assessee failed to prove the source of funds. However, the Appellate Authorities, except the CIT (A), reversed the findings and only added a specific sum while deleting the rest of the additions. The CIT (A) categorically found that the funds used were interest-free and not obtained as a loan from the bank, a fact upheld by the Tribunal. The judgment cited precedents like S.A. Builders Limited Versus CIT (Appeals) and another; 2007 (15) SCC 147 and Bright Enterprises (P) Ltd. Versus Commissioner of Income Tax; 2016 (381) ITR 107 to support its decision.

Issue 2: Share capital received from companies deemed as accommodation entries
Regarding the second issue, the argument centered around share capital amounting to &8377;3,87,50,000 received from two companies being considered accommodation entries. The AO raised concerns about the companies' profitability despite having sufficient funds. However, the Appellate Authorities noted that all financiers and even company directors were produced upon request by the AO, and their tax returns had been accepted by the revenue. In light of these circumstances, the share money investments were not deemed as paper transactions or accommodation entries. Consequently, the court found no reason to deviate from this view and answered both questions in the negative, ultimately dismissing the appeal.