2021 (9) TMI 1259 - AT - Income Tax

Addition u/s 68 - Unexplained cash credit - HELD THAT - No cash credits were found in the books of accounts during the previous year relevant to the assessment year for which the assessee could not offer explanation. What was found by the AO was sundry creditors were converted into share application money in the hands of one of the Directors and reflected the same as share application money. The sundry creditors were reduced and the share application money was increased. Subsequently, the sundry creditors balances were reversed back and the company has paid the same. The assessee also furnished evidence in the paper book in the form of copies of confirmation letters from the creditors. There was no cessation of liability and facts are identical to case of M/s Srinivasa Hair Industries, Eluru 2019 (2) TMI 1463 - ITAT VISAKHAPATNAM - In the facts and circumstances of the case we, hold that there is no case for making addition u/s 68 and the Ld.CIT(A) has rightly deleted the addition, hence, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the revenue.

Summary

Issues Involved:
Appeal against addition of share application money under section 68 of the Income Tax Act.

Analysis:

Issue 1: Addition of Share Application Money
The Assessing Officer (AO) added ?5,53,16,938 as share application money under section 68 of the Act due to an increase in the balance sheet without fresh capital infusion. The assessee explained that a director agreed to take over liabilities, which were reflected as share application money, but the transactions did not materialize. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting no fresh cash credits and verified accounts. The Tribunal upheld the CIT(A)'s decision, emphasizing no cash inflow, unethical practice, but no tax evasion. The Tribunal cited a similar case to support the decision.

Issue 2: Transfer of Trade Creditors to Capital Accounts
In a separate case, trade creditors were transferred to partners' capital accounts to enhance the capital base for better bank loan facilities. The Tribunal found the explanation reasonable, though unethical, and noted retransfer of balances in subsequent years. The Tribunal emphasized the need for creditor consent for tax implications under section 41(1) of the Act, citing legal precedents. The Tribunal concluded no error in the AO's decision and canceled the CIT's order under section 263 of the Act, upholding the appeal of the assessee.

Conclusion:
The Tribunal dismissed the revenue's appeal, affirming the deletion of the addition of share application money and emphasizing no cash credits, reversal of balances, and evidence provided by the assessee. The Tribunal also highlighted the importance of creditor consent for tax implications, supporting its decision with legal precedents.