2023 (12) TMI 548 - AT - Income Tax

Unexplained cash credit - share application money received from the group companies - Addition made as summons u/s 131 were not complied with - AR submitted that the it s is not open to the AO to make addition simply on the basis of non-compliances of summons issued u/s 131 of the Act when the assessee has filed all the evidences in respect of money raised and AO has failed to carry out any further verification or point out any defects or deficiencies in those evidences - HELD THAT - As decided in case of Crystal Networks Pvt. Ltd. 2010 (7) TMI 841 - KOLKATA HIGH COURT wherein it has held that where all the evidences were filed by the assessee proving the identity and creditworthiness of the loan transactions , the fact that summon issued were returned un-served or no body complied with them is of little significance to prove the genuineness of the transactions and identity and creditworthiness of the creditors. Also see CIT Vs Orchid Industries (P) Ltd 2017 (7) TMI 613 - BOMBAY HIGH COURT by holding that provisions of section 68 of the Act cannot be invoked for the reasons that the person has not appeared before the AO where the assessee had produced on records documents to establish genuineness of the party such as PAN ,financial and bank statements showing share application money . In the instant case before us assessee has furnished all the evidences proving identity and creditworthiness of the investors and genuineness of the transactions but AO has not commented on these evidences filed by the assessee. Besides the investors have also furnished complete details/evidences before the AO which proved the identity , creditworthiness of investors and genuineness of the transactions. Thus we are inclined to set aside the order of Ld. CIT(A) by allowing the appeal of the assessee. Disallowance u/s 14A r..w.r. 8D - expenditure incurred on earning income - Whether exempt income was earned or not? - Scope of explanation to Section 14A by Finance Act, 2022 w.e.f 01.04.2022 as added- HELD THAT - This is a settled position that no disallowance is to be made u/s 14A read with Rule 8D where there is no exempt income as has been decided in the case of PCIT Vs State Bank of Patiala 2018 (11) TMI 1565 - SC ORDER and CIT Vs Joint Investment Pvt Ltd 2015 (3) TMI 155 - DELHI HIGH COURT . No disallowance is made u/s 14A prior to AY 2022-23 as the explanation to Section 14A vide Finance Act, 2022 w.e.f 01.04.2022 is prospective and not retrospective. Accordingly we set aside the order of Ld. CIT(A) on this issue and direct the AO to delete the addition. This ground of assessee is allowed.

Summary

Issues Involved:
1. Addition of Rs. 2,70,50,000/- as unexplained cash credit.
2. Disallowance of Rs. 1,26,958/- under Section 14A read with Rule 8D.

Issue 1: Addition of Rs. 2,70,50,000/- as unexplained cash credit

The assessee filed a return of income declaring a total loss of Rs. 1,15,357/-. During scrutiny, the AO observed that the assessee had raised share application money of Rs. 2,70,50,000/- and issued a notice under Section 142(1) of the Act. Despite the assessee providing detailed information, including ITRs, bank statements, and audited accounts, the AO treated the share application money as unexplained cash credit due to non-compliance with summons issued under Section 131.

The assessee appealed to the Ld. CIT(A), who upheld the AO's decision, citing the same reason of non-compliance with summons. The assessee argued that the AO and Ld. CIT(A) failed to conduct further verification despite all evidences being provided. The assessee relied on several judicial decisions, including CIT vs. Orissa Corporation Ltd. and DCIT vs. Rohini Builders, to support their case.

The tribunal noted that the AO and Ld. CIT(A) did not investigate the provided documents and prematurely concluded that the share application money was unexplained cash credit. The tribunal emphasized that the authorities are duty-bound to investigate further when all necessary documents are provided. Citing relevant case laws, the tribunal concluded that the mere non-appearance of directors or investors does not justify the addition. The tribunal set aside the order of Ld. CIT(A) and directed the AO to delete the addition.

Issue 2: Disallowance of Rs. 1,26,958/- under Section 14A read with Rule 8D

The AO disallowed Rs. 1,26,958/- under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the year. The Ld. CIT(A) upheld this disallowance. The tribunal referred to the settled position that no disallowance under Section 14A is to be made in the absence of exempt income, as decided in PCIT Vs State Bank of Patiala and CIT Vs Joint Investment Pvt Ltd. The tribunal also addressed the Ld. D.R's argument regarding the retrospective application of the explanation to Section 14A by Finance Act, 2022, concluding that it is prospective and not applicable prior to AY 2022-23. The tribunal set aside the order of Ld. CIT(A) and directed the AO to delete the disallowance.

Conclusion:

The tribunal allowed the appeal of the assessee, setting aside the orders of the Ld. CIT(A) on both issues and directing the AO to delete the additions.

Order pronounced in the open court on 11th December, 2023.