2022 (6) TMI 841 - AT - Income Tax

Addition u/s 68 - addition in share capital and share premium, identity and creditworthiness of the share holders, valuation report - Assessee has failed to discharge its onus of proving the identity and creditworthiness of the investors and genuineness of the transaction - HELD THAT - Admittedly during the relevant year no cash was actually infused in the fund flow of company. There was mere dressing of accounts. As for the purpose of invoking Section 68 in the case of VR Global Energy Pvt. Ltd . 2018 (8) TMI 866 - MADRAS HIGH COURT has held that where the assessee allotted shares to a company in settlement of pre-existing liability of assessee to the said company by way of adjustment and since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credit u/s 68 of the Act. It was held that since the cash credits towards share capital were only by way of book adjustment and not actual receipts, therefore, the same could not be treated as receipt towards share subscription money. Since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credits u/s 68. - Decided in favour of assessee. Allowable expenditure u/s 37(1) - HELD THAT - As there is no matter on record to suggest that the expenses were examined on the basis of actual expenditure corroborated by evidence. Therefore the issue in regard to the disallowance of expenses is restored to the files of the ld AO with a direction to evaluate the genuineness of the expenses on actual expenditure basis and then pass fresh assessment order. Accordingly ground allowed in favour of the Assessee for statistical purposes.

Summary

Issues Involved:
1. Addition of unexplained share capital and share premium under Section 68 of the Income Tax Act.
2. Disallowance of business expenses due to lack of business activity.

Issue-Wise Detailed Analysis:

1. Addition of Unexplained Share Capital and Share Premium:
The Assessee filed a return declaring NIL income and claimed a loss for the current year. During the assessment, the Assessee received Rs. 590 as share capital and Rs. 6,72,03,810 as share premium upon conversion of fully convertible debentures (FCDs) into equity shares. The Assessing Officer (AO) added the total amount of Rs. 6,72,04,400 to the income of the Assessee as unexplained credit under Section 68 of the Income Tax Act, citing failure to prove the identity and creditworthiness of investors and genuineness of the transaction. However, the Commissioner of Income Tax (Appeals) [CIT(A)] set aside this addition, stating that the principal amount was received in earlier financial years (from 2007-08 onwards) and was merely converted into equity shares in the current year. The CIT(A) concluded that since no actual cash was credited during the relevant year, Section 68 was not applicable. The Tribunal upheld this view, referencing the Madras High Court decision in VR Global Energy Pvt. Ltd. vs. ITO, which held that conversion of liabilities into share capital without actual cash involvement cannot be treated as unexplained cash credits under Section 68. Consequently, the Tribunal dismissed the revenue's ground of appeal on this issue.

2. Disallowance of Business Expenses:
The AO disallowed business expenses amounting to Rs. 41,61,481, except for bank charges and audit fees, on the basis that the Assessee did not conduct any business activities during the relevant year. The CIT(A) upheld this disallowance, noting that without business activity, the question of allowing business expenses does not arise. The Assessee argued that expenses were necessary to maintain corporate status and should be allowed, referencing previous years where no such disallowances were made despite similar circumstances. The Tribunal observed that expenses related to maintaining corporate status could be allowable even without active business operations. Referring to precedents, including the Delhi High Court's decision in CIT vs. Integrated Technologies Ltd. and ITAT decisions, the Tribunal noted that expenses necessary for maintaining the corporate identity and readiness for future business should be considered. However, since there was no evidence on record to substantiate the actual expenditure, the Tribunal remanded the issue back to the AO to evaluate the genuineness of the expenses based on actual expenditure.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the addition under Section 68 and allowed the Assessee's appeal concerning the disallowance of business expenses, directing the AO to reassess the genuineness of the expenses.

Order Pronouncement:
The Tribunal pronounced the order in the open court on 15/06/2022, dismissing the revenue's appeal and allowing the Assessee's appeal for statistical purposes.