2015 (11) TMI 282 - HC - Income Tax

Unexplained increase in shares capital - CIT(A) deleted the addition confirmed by ITAT - Held that - Assessee has furnished details of all the 14 subscribers from whom funds had been received by way of share application money. The money was also shown to have been received through banking channels. After obtaining a remand report from the AO, the CIT (A) concluded that the AO has not commented anything adverse on the additional evidences, copies of accounts and bank statements furnished by the Assessee to the AO. The AO has not disapproved/doubted the identity and the genuinely of the subscribers. The CIT(A) accordingly concluded that all ingredients of Section 68 stands satisfied as far as the receipt of share application money by the Assessee company is concerned. Accordingly, the CIT(A) deleted the additions on this account. ITAT relied on CIT v. Lovely Exports (P) Limited 2008 (1) TMI 575 - SUPREME COURT OF INDIA - Decided against revenue. Unexplained increase in sundry creditors - CIT(A) deleted the addition confirmed by ITAT - Held that - The increase in sundry debtors was interlinked with the increase in the sundry creditors and both were on account of the pure business transaction of purchases and sale of share. The CIT(A) was satisfied that the increase in sundry creditors stands fully explained and established by the Assessee. The ITAT, while observing that there is no presumption that if increase in sundry creditors is proved, the increase in sundry debtors should also be taken as proved , found that the AO did not examine the details of each credit entry as was required by Section 68 and affirmed the decision of the CIT (A). On this issue this Court finds that the Revenue is not able to controvert the factual finding - Decided against revenue. Disallowance of 50% expenditure claimed under the head of the profit and loss account - CIT(A) deleted the addition confirmed by ITAT - Held that - CIT (A) deleted the disallowance on the ground that the AO had not spelt out any basis for making the 50% disallowance and that there was no justification for such a huge addition. The ITAT agreed with the CIT (A) that no case for making ad hoc disallowance was made by the AO. The Revenue is not able to persuade this Court to interfere with the impugned order of the ITAT which appears to be on a sound legal basis. - Decided against revenue. Addition on account of stock in trading being shown in the balance sheet and not in the trading account - CIT(A) deleted the addition confirmed by ITAT - Held that - The effect of the closing stock stands automatically considered and reflected in the accounts. The Assessee had declared a loss on trading in shares. With the Assessee having followed the mercantile system of accounting, it is not possible for it to show the closing stock in trade in the balance sheet without taking into account the effect of the credit entry passed for the closing stock which necessarily had to be routed through the profit and loss account. Since no adverse comment has been made by the auditor and since the same method of accounting had been followed by the Assessee in the earlier as well as the subsequent year, the CIT (A) concluded that there was no justification for the addition. - Decided against revenue.

Summary

Issues:
1. Unexplained increase in shares capital
2. Unexplained increase in sundry creditors
3. Disallowance of 50% expenditure under profit and loss account
4. Treatment of stock in trade shown in the balance sheet

Issue 1: Unexplained increase in shares capital:
The Assessee disclosed a net loss in its income tax return, with a significant increase in share capital during the year. The Assessing Officer added the entire amount under Section 68 of the Income Tax Act due to lack of details or confirmation from share applicants. The Commissioner of Income Tax (Appeals) found that all requirements of Section 68 were satisfied as the Assessee provided details of subscribers and funds received through banking channels. The ITAT upheld this decision, citing the judgment in CIT v. Lovely Exports (P) Limited. The Court found no reason to interfere with the ITAT's order.

Issue 2: Unexplained increase in sundry creditors:
The Assessing Officer made an addition based on the increase in sundry creditors without proof of identity or creditworthiness. The Assessee explained that the increase was due to business transactions in stock broking. The CIT (A) and ITAT found the increase in sundry creditors was explained by the Assessee's business activities, and the AO did not adequately examine the details. The Court upheld the ITAT's decision as the Revenue failed to challenge the factual findings.

Issue 3: Disallowance of 50% expenditure under profit and loss account:
The CIT (A) deleted the disallowance as the AO did not provide a basis for the 50% disallowance. The ITAT agreed, stating there was no justification for the ad hoc disallowance. The Court found the ITAT's decision legally sound and declined to interfere with it.

Issue 4: Treatment of stock in trade shown in the balance sheet:
The AO added a significant amount concerning stock in trade shown in the balance sheet but not in the trading account. The Assessee's method of accounting reflected the closing stock effect in the accounts, leading to a loss on trading in shares. The CIT (A) and ITAT found no justification for the addition as the Assessee followed the mercantile system consistently. The Court upheld the ITAT's order, finding no legal errors in the decision.

In conclusion, the appeal by the Revenue under Section 260A of the Income Tax Act was dismissed, with the High Court upholding the decisions of the ITAT and CIT (A) on all issues raised.