2025 (2) TMI 1136 - AT - Income Tax

Addition u/s 68 - Unexplained cash credit - HELD THAT - We find that the assessee submitted confirmations bank statements and ITRs of all share applicants thereby discharging its initial burden of proof. As held in the case of CIT vs. Vrindavan Farms (P) Ltd. 2015 (11) TMI 279 - DELHI HIGH COURT once the assessee submits basic documentary evidence the onus shifts to the AO to make further inquiries and bring contrary material on record. In the present case the AO merely rejected the documents without conducting further verification which is contrary to this principle. As decided in case of Arjun Trading Co. Pvt. Ltd. 2018 (6) TMI 1860 - ITAT AGRA where a company is newly incorporated and has not commenced business cash credits cannot be treated as unaccounted income. AO rejected creditworthiness solely on the ground of low-income levels of investors which is legally untenable - AO failed to conduct any further inquiry or cross-examine the investors despite having their details. This is contrary to the principle laid down in the case of Clavecon India P. Ltd. 2023 (12) TMI 625 - ITAT DELHI where it was held that if the AO doubts the creditworthiness he must conduct independent inquiries before making an adverse inference. The rejection of share applicants creditworthiness solely on the basis of their low-income levels is not legally sustainable. Since no business activity had commenced during the relevant year the application of Section 68 in this case is wholly unwarranted. Accordingly the addition under Section 68 deserves to be deleted in its entirety. Alternative addition u/s 56(2)(viib) - AO s action of ignoring the DCF method without any proper basis and replacing it with the NAV method is arbitrary contrary to legal precedents and unsustainable in law. Accordingly the alternative addition under Section 56(2)(viib) of the Act is unjustified and deserves to be deleted. Disallowance of expenses - As per AO since no business operations were carried out the expenses could not be allowed as business expenditure - AO noted that the financial cost was related to borrowings used for investment in the share capital of an associate company which is not allowable u/s 57(iii). Similarly ROC expenses were held to be capital in nature. Other expenses such as traveling legal and professional fees were also disallowed due to lack of any direct connection with the interest income. The CIT(A) upheld the disallowance concurring with the AO s finding that the expenditure was not incurred for the purpose of earning interest income and thus could not be allowed u/s 57(iii) of the Act. The only expenses allowed were statutory audit fees postal expenses and telephone charges which were deducted from the income. We find no reason to interfere with the decision of the lower authorities. The assessee did not demonstrate any direct nexus between the claimed expenditure and the income earned which is a necessary condition u/s 57(iii) - AO and CIT(A) have correctly applied the provisions of law and accordingly the disallowance is justified. Appeal of the assessee is partly allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered the following core legal questions in the appeal:

(i) Whether the disallowance of expenses amounting to Rs. 1,97,068/- was justified given the lack of business operations during the relevant assessment year.

(ii) Whether the addition of Rs. 95,00,000/- under section 68 of the Income Tax Act, 1961, as unexplained cash credit, was valid.

(iii) Whether the alternative addition of Rs. 70,99,350/- under section 56(2)(viib) of the Act on account of excessive share premium was appropriate.

ISSUE-WISE DETAILED ANALYSIS

Disallowance of Expenses

- Relevant Legal Framework and Precedents: Section 57(iii) of the Income Tax Act allows deduction of expenses incurred wholly and exclusively for the purpose of earning income. The Tribunal considered precedents related to disallowance of expenses when no business operations are conducted.

- Court's Interpretation and Reasoning: The Tribunal upheld the disallowance of Rs. 1,97,068/- as the assessee did not demonstrate a direct nexus between the expenses and the income earned. The financial cost was related to borrowings for investment in share capital, which is not allowable under section 57(iii).

- Key Evidence and Findings: The AO noted that the expenses were not connected to any business activity, and the CIT(A) concurred, allowing only statutory audit fees, postal expenses, and telephone charges.

- Application of Law to Facts: The Tribunal found no reason to interfere with the lower authorities' decision, as the expenses did not meet the criteria under section 57(iii).

- Conclusions: The disallowance of Rs. 1,97,068/- was confirmed.

Addition under Section 68

- Relevant Legal Framework and Precedents: Section 68 of the Act deals with unexplained cash credits. The Tribunal referenced judicial precedents that emphasize the burden of proof on the assessee to explain the source of funds.

- Court's Interpretation and Reasoning: The Tribunal concluded that the assessee discharged its burden by submitting confirmations, bank statements, and ITRs of investors. The AO failed to conduct further inquiries or provide contrary evidence.

- Key Evidence and Findings: The assessee provided documentary evidence, and the AO's rejection was based solely on the low income of investors, which the Tribunal found legally untenable.

- Application of Law to Facts: The Tribunal applied the principle that once the assessee provides basic evidence, the onus shifts to the AO to disprove the creditworthiness or genuineness.

- Treatment of Competing Arguments: The Tribunal noted the Departmental Representative's reliance on CIT(A)'s order but found the assessee's evidence compelling.

- Conclusions: The addition under Section 68 was deleted.

Alternative Addition under Section 56(2)(viib)

- Relevant Legal Framework and Precedents: Section 56(2)(viib) concerns excessive share premium. The Tribunal considered rules under Rule 11UA(2) regarding valuation methods.

- Court's Interpretation and Reasoning: The Tribunal held that the AO's substitution of the DCF method with the NAV method was arbitrary and contrary to legal precedents.

- Key Evidence and Findings: The assessee followed the DCF method as per Rule 11UA(2), and the AO's action lacked a valid basis.

- Application of Law to Facts: The Tribunal emphasized that the choice of valuation method lies with the assessee, and the AO's rejection was unjustified.

- Treatment of Competing Arguments: The Tribunal considered the Departmental Representative's support for the AO's method but found it unsustainable.

- Conclusions: The alternative addition under Section 56(2)(viib) was deleted.

SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The rejection of share applicants' creditworthiness solely on the basis of their low-income levels is not legally sustainable."

- Core Principles Established: The Tribunal established that the burden of proof under Section 68 shifts to the AO once the assessee provides basic documentary evidence. Additionally, the choice of valuation method under Rule 11UA(2) lies with the assessee.

- Final Determinations on Each Issue: The Tribunal confirmed the disallowance of expenses, deleted the addition under Section 68, and also deleted the alternative addition under Section 56(2)(viib).