2022 (1) TMI 295 - AT - Income Tax

Unexplained share capital / share application money received from Kolkata based companies - HELD THAT - AO had categorically held that the all the companies are bogus - on perusing the balance sheet and P L Account of M/s. Tirumala Dealers Private Limited it is apparent that the company is making loss. We further observed from the balance sheet of M/s. Tirumala Dealers Private Limited that the investment of ₹ 7,05,00,000/- was made from the earlier reserves and surplus - Therefore, the exact source of the reserves and surplus of the earlier years resulting in liquidity to the company for making investment in the assessee company is not coming out clearly. It is also not in dispute that all the five company s address are in the same building and the building is deserted. In this situation, we are of the view that the Ld. CIT (A) s finding is erroneous. Hence, we hereby set aside the order of the Ld. CIT(A) on this issue and uphold the order of the Ld. AO. Therefore, the issue is decided in favour of the Revenue. Addition towards notional interest charged on interest free advances extended to Directors of the assessee company - HELD THAT - Before us, the assessee has filed the income tax returns and statement of affairs of M/s. Jagadamba Cotton Industries Pvt Ltd for the relevant assessment year to establish the genuineness of the transaction. However, we find that there is no discussion about these documents in the order of the Ld. Revenue Authorities. Therefore, to verify the veracity of these documents, we remit back the issue of share application money received from M/s. Jagadamba Cotton Industries Pvt Ltd to the file of the Ld. AO for de novo verification. As regards the amount received from share application money received from Smt. Susheelabai Rungta even before us at this stage nothing is produced to establish the genuineness of the transaction. Therefore, we do not find it necessary to interfere with the orders of the Ld. Revenue Authorities. Accordingly ground raised in para 2(ii) is disposed off.

Summary

Issues:
1. Notional interest on interest-free advances to Directors
2. Addition of share application money under section 68 of the Act
3. Unexplained share capital/share application money received from Kolkata and Hyderabad based companies

Analysis:

Issue 1: Notional interest on interest-free advances to Directors
The assessee advanced &8377; 92,23,775 to its Directors from interest-bearing funds without receiving any interest. The Ld. AO disallowed 12% p.a on the deposits as interest, resulting in an addition of &8377; 11,06,853. The Ld. CIT (A) upheld the addition, and the ITAT concurred, noting the lack of evidence to prove the advances were from interest-free funds. The ground raised by the assessee was deemed devoid of merits.

Issue 2: Addition of share application money under section 68 of the Act
The assessee received &8377; 1 Cr from M/s. Jagadamba Cotton Industries Pvt Ltd and &8377; 18,10,000 from Smt. Susheelabai Rungta as share application money. The Ld. AO treated this amount as unexplained cash credit under section 68 due to the lack of evidence establishing the genuineness of the transaction and creditworthiness of the investors. The Ld. CIT (A) confirmed this order. The ITAT remitted the issue of share application money from M/s. Jagadamba Cotton Industries Pvt Ltd back to the Ld. AO for verification, as documents submitted by the assessee were not discussed in the previous orders.

Issue 3: Unexplained share capital/share application money received from Kolkata and Hyderabad based companies
The Revenue made additions towards unexplained share capital/share application money received from Kolkata and Hyderabad based parties. The ITAT upheld the addition of &8377; 1 Cr concerning Kolkata based companies, as the companies were found to be bogus entities lacking genuine investment sources. However, the addition of &8377; 7,05,00,000 made by M/s. Tirumala Dealers Private Limited was deleted, as the company demonstrated business activity and turnover, supported by VAT returns. The ITAT found the Ld. CIT (A)'s decision erroneous and upheld the Ld. AO's order on this issue, deciding in favor of the Revenue.

In conclusion, the ITAT allowed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes, as per the detailed analysis provided for each issue.