2013 (4) TMI 171 - AT - Income Tax

Capital reserve represents share premium amount or investments - as per assessee this share premium account which resulted in capital reserve is related to share capital and so should not be added back - search and seizure operation was conducted - disallowing the commission payable - Held that - The assessee filed return indicating that the cash seized was on the basis of liquidation of investment which were incorporated in the balance sheet may or may not have been paper transactions but were on the basis of receipt of cash which was duly acknowledged and incorporated in the books of account. AO having accepted the return in accordance with the provisions of the I.T.Act, was not to verify further the treatment given to the income so rendered which is part and parcel of the accounting as per the Companies Act duly audited under the provisions of the I. T. Act as well. Therefore the capital reserve which the AO believed was liquidated but required explanation was on the basis of share holders investing in the Company along with the premium which premium was income in the hands of the assessee as capital were liquidated and rendered to tax u/s.132(4). Thus the earning of commission to be passed on to the real creditor was not to be disturbed as expenditure remaining unexplained. Deletion of Rs.30,85,000 as commission claimed as expenditure which was to be on the basis of income earned to the like amount directed. Similarly the enhancement of Rs.6,17,000 does not have any basis as computed by the AO as they are contrary to his own finding for the purpose of taxation expenditure from undisclosed income. Loans and advances standing were against the reserve created by the assessee was on the basis of income rendered to tax and therefore could not be taxed in the hands of the assessee insofar as the AO accepted that the major loans and advances was to Sudha Devi Foundation. When the balance was rendered to tax it was nobody s case that the assets were to be verified which assets were not created and were part and parcel of the physical cash found at the time of search. Thus having rendered income, AO ought to have considered that the assets and liabilities cannot be taxed over and above the returned income have to be under specific provisions - direction to AO to accept the return as filed by the assessee.

Summary

Issues:
1. Treatment of capital reserve related to share premium account.
2. Disallowance of commission payable.
3. Addition of sundry debtors.
4. Imposition of penalty.
5. Justification of additional tax and penalty.

Issue 1: Treatment of Capital Reserve:
The assessing officer linked the capital reserve to investments, but the appellant argued it was related to share capital and should not be added back. The appellant explained the capital reserve was from share premium account, not investments. The ITAT found the capital reserve was due to share premium from shareholders, not investments, and directed the deletion of the amount added back.

Issue 2: Disallowance of Commission Payable:
The assessing officer disallowed commission payable, despite the appellant crediting a similar amount as commission receivable. The appellant contended that commission payable was already included in the profit and loss account and taxed accordingly. The ITAT ruled in favor of the appellant, directing the deletion of the disallowed commission payable amount.

Issue 3: Addition of Sundry Debtors:
The assessing officer added sundry debtors due to lack of confirmation, but the appellant argued the sources were explained in the balance sheet's liability side. The ITAT agreed with the appellant, stating that adding back debtors already taxed was unjustified and directed the deletion of the amount.

Issue 4: Imposition of Penalty:
The appellant contested the penalty imposition, stating no concealment of income particulars occurred. The ITAT found the basic additions did not warrant penalty, as there was no concealment or inaccurate information. The penalty was deemed unjustified and not payable by the appellant.

Issue 5: Additional Tax and Penalty Justification:
The appellant argued against the additional tax and penalty, stating they were not justified. The ITAT agreed, ruling that the additional tax and penalty were not warranted based on the facts presented. Consequently, the appellant was not liable to pay the additional tax and penalty.

This judgment by the ITAT Cuttack addressed various issues concerning the treatment of capital reserve, disallowance of commission payable, addition of sundry debtors, penalty imposition, and justification of additional tax and penalty. The ITAT ruled in favor of the appellant on all counts, directing the deletion of amounts added back and penalties imposed. The decision highlighted the importance of accurate assessment and proper justification for additions in income tax cases.