2024 (5) TMI 1117 - AT - Income Tax

Addition u/s 41(1) converting the same having been made u/s 68 - actual receipt of money or only journal entry made an adjustment of accounts - Prior period expenses - AR has primarily contended that it is mere case of journal entries made for adjustments of loan taken in earlier year - HELD THAT - The purpose of section 68 of the Act, the conclusion drawn by the CIT(A) was erroneous because on the one hand, without there being any actual receipt of money, a mere journal entry was passed during the year in regard to entries of borrowed funds standing as unsecured loan and amount receivable from two different set of parties. On the other hand, the CIT(A) has doubted the identity of two lenders on the basis that companies are deregistered and their whereabouts are not known. However, the addition is made on the basis that source of credit shown as unsecured loan received from M/s Vrinda Developers Pvt. Ltd., remains unexplained. The journal entry only shows cessation of liability towards the two companies on the basis that these liabilities are taken over by M/s Vrinda Developers Pvt. Ltd. Thus, the conclusion of failure to explain the source of funds credited during the year in the name of M/s Vrinda Developers Pvt. Ltd. is an erroneous finding. The journal entry had the debit effect on the bank account with the increase in the bank balance and credit effect on the loan account. The assessee has explained that no entry in this regard was effected in the P L Account as a credit effect on the unsecured loan account was reflected in the balance sheet only. We are of the considered view that the opening balances on account of unsecured loans of the two parties and certain amount receivable from M/s Vrinda Developers Pvt. Ltd., being in the background of journal entry, then for the purpose of section 68 it cannot be said to be an unexplained cash credit. The fictitious cash entry in the bank account without any real credit of cash to the cash book cannot give rise to inclusion of the amount of the entry increasing bank balance as unexplained cash credit. Book entry transfer lets transfer only through the respective accounts in the books of the concerns. Accordingly, the deletion was made which was sustained by the Tribunal further observing that since there was no physical transfer of money from the account of Shri Pritam Goel and only a journal entry was passed, the findings of the AO that transaction was sham is baseless. A coordinate Bench at Delhi in the case of DCIT vs. M/s Glass Tech India Ltd 2022 (3) TMI 1281 - ITAT DELHI while dealing with the provisions of section 68, has held that it is not just an entry of cash credit in the books of account that would create liability of explanation from the assessee, but, there should be an actual flow of funds. Once the flow of funds is established, then, the question of explanation from the assessee actually arises. Thus, we are inclined to allow these grounds of the assessee. Prior period expenses - Allowability of expenditure being related to the project which had started in the year under consideration - All evidences make it clear that though the invoice for commission was raised by M/s Vrinda Developers Pvt. Ltd. in the last year, however, the expenditure being related to the project which had started in the year under consideration, the same is allowable in the year under consideration. In the light of the aforesaid, this ground is decided in favour of the assessee.

Issues Involved:

1. Validity of the assessment order under Section 143(3) of the Income Tax Act, 1961.
2. Addition of Rs. 35,00,000 under Section 68 of the Income Tax Act, 1961.
3. Addition of Rs. 15,00,000 on account of commission expenses being prior period expenses.

Detailed Analysis:

1. Validity of the Assessment Order under Section 143(3):

The assessee challenged the assessment order on the grounds that it was passed without issuing a statutory notice under Section 143(2) within the prescribed time limit. However, this ground was not pressed during the arguments, and thus, no detailed analysis was provided by the Tribunal on this issue.

2. Addition of Rs. 35,00,000 under Section 68:

The assessee contended that the addition of Rs. 35,00,000 was merely a result of journal entries made for adjustments of loans taken in an earlier year. The assessee argued that the liability had not ceased to exist, and the loan still appeared in the financial statements. The CIT(A) had converted the addition under Section 41(1) to Section 68, stating that the source of the credit shown as an unsecured loan from Vrinda Developers Pvt. Ltd. remained unexplained.

The Tribunal observed that the CIT(A)'s conclusion was erroneous because the journal entry was merely an adjustment of accounts without any actual receipt of money. The Tribunal emphasized that for Section 68 to apply, there must be an actual flow of funds, which was not the case here. The Tribunal referred to several judgments supporting the view that mere book entries without physical transfer of money do not attract the provisions of Section 68. Consequently, the Tribunal allowed the grounds related to this addition in favor of the assessee.

3. Addition of Rs. 15,00,000 on Account of Commission Expenses:

The assessee argued that the commission expenses were capitalized in the previous year and transferred to work-in-progress. Since the project had started in the year under consideration, the expenses were claimed in the current year. The CIT(A) had sustained the addition, treating the commission as prior period expenses.

The Tribunal found that the commission expenses were indeed capitalized in the previous year and related to the project that commenced in the current year. The Tribunal reviewed the journal voucher, invoice, ledger accounts, and balance sheet, which confirmed that the expenses were correctly claimed in the year under consideration. Therefore, the Tribunal decided this ground in favor of the assessee.

Conclusion:

The appeal was allowed, and the Tribunal ruled in favor of the assessee on both the major contested issues. The addition of Rs. 35,00,000 under Section 68 was deleted, and the addition of Rs. 15,00,000 on account of commission expenses was also deleted. The Tribunal emphasized the importance of actual flow of funds for Section 68 to apply and acknowledged the proper capitalization and subsequent claiming of commission expenses related to the project. The order was pronounced in the open court on 22.05.2024.

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