2013 (6) TMI 502 - AT - Income Tax

Addition while completing the assessment on account of 80HHC - reserve which the appellant had transferred to his capital account in the books of his sole proprietary concern M/s Loreto & Co on closure of export business - Held that - As during the accounting year relevant to assessment year under consideration, the assessee only transferred, reserve created as per provision of Section 80HHC as it existed in the year 1985, to the capital account. By transfer of such reserve to the capital account, there cannot be any income unless the provision of Section 80HHC so provides. Admittedly, there is no provision in Section 80HHC prohibiting the transfer of reserve so created to the capital account. In view of the above, agreeing with the CIT(A) that by transfer of reserve to the capital account, no income is generated. However, merely because there was a debit balance of the assessee in the books of account of M/s Loreto & Company, then also the addition cannot be made to the extent of debit balance. Transfer of reserve to the capital account and debit balance in the capital account are two different things. Therefore, there is no justification for sustaining the addition to the extent of debit balance i.e. Rs.8,14,073/-. In favour of assessee.

Summary

Issues:
1. Addition of Rs.8,14,073 out of Rs.10,48,461 made by the AO on account of 80HHC reserve transferred to capital account.

Analysis:
The appeal pertains to the assessment year 2008-09, where the only ground raised by the assessee was the addition of Rs.8,14,073 out of Rs.10,48,461 made by the Assessing Officer (AO) on account of 80HHC reserve transferred to the capital account. The Assessing Officer treated the transferred amount as undisclosed income under Section 68 of the Income-tax Act, 1961. However, the CIT(A) disagreed with the AO's view and deleted the addition of Rs.4,15,618 related to the reserve transferred from M/s Jyoti Apparels. Regarding the reserve transferred from M/s Loreto & Co., the CIT(A) restricted the addition to Rs.8,14,073 due to a debit balance in the appellant's account, providing relief of Rs.2,33,758 to the appellant.

Upon further appeal, the Tribunal agreed with the CIT(A) that the transfer of reserve to the capital account did not generate income, as Section 80HHC did not prohibit such transfers. The Tribunal emphasized the distinction between transferring reserves and debit balances in the capital account, stating that the existence of a debit balance did not justify the addition made by the AO. Consequently, the Tribunal deleted the addition of Rs.8,14,073, allowing the assessee's appeal.

In conclusion, the Tribunal held that the transfer of reserves to the capital account did not result in income generation, and the presence of a debit balance in the capital account did not warrant the addition made by the AO. Therefore, the Tribunal allowed the assessee's appeal, deleting the addition of Rs.8,14,073.