2016 (4) TMI 351 - AT - Income Tax

Earnest money received - addition u/s 68 - Held that - We find that an FIR was filed on 30. 7. 2008, in pursuance of the order of the Metropolitan Magistrate dt. 27. 5. 2008 with regard to monetary transaction taken place between the assessee and MDC, that in the order of the Metropolitan Magistrate it has been observed that the assessee had received token money ₹ 73. 21 from MDC, that those papers with regard to the FIR were filed during the course of appeal proceedings in the penalty matter. As per the established principles of taxation jurisprudence, provisions of Section 68 can be invoked if the identity and creditworthiness of the creditor is not established and that the transaction is not genuine. In the case under consideration, the genuineness of the transaction stands proved because the money has come from a known source-through banking channels. As far as identity and credit worthiness is concerned, same cannot be doubted. Proprietor of the MDC and the assessee are fighting legal battle in the Court and the order of the Magistrate clearly states that payment of ₹ 23. 00 lacs was made by MDC to the assessee during the under appeal. Therefore, in absence of existence of basic ingredients of Section 68, the FAA was not justified in upholding the order of the AO, who had made the addition of ₹ 23 lakhs. - Decided in favour of the assessee. Disallowance of administrative expenses, employees expenses and depreciation - Held that - We find that assessee had shown income of ₹ 8. 53 lacs for the year under appeal. (Pg-8 of the paper book), that income from business centre had been shown at ₹ 2. 70 lacs as against the income of ₹ 4. 85 lacs for the previous year, under the head Business-income, that the assessee had shown expenditure of ₹ 29. 80 lacs for the year under consideration as against expenditure of ₹ 48. 13 lacs for the earlier year. In these circumstances, it cannot be stated that assessee was not carrying out any business activity. It is a fact that assessee has closed down its manufacturing unit long back, but it does not mean that he was not carrying out any business activities. We find that while finalising the assessment of the assessee for the AY. 2005-06, the AO had allowed 75% of the identical expenses. On a query by the Bench the AR conceded that assessee had not agitated the issue before the FAA in that matter. Considering the peculiar facts and circumstances of the case, we want to restrict the disallowance to 25% of the expenses disallowed. Effective ground of appeal is decided in favour of the assessee in part.

Summary

Issues Involved:
1. Confirmation of earnest money amount received.
2. Addition made under section 68 of the Income Tax Act.
3. Penalty imposed by Assessing Officer under section 271(1)(c) of the Act.
4. Disallowance of administrative expenses, employees' expenses, and depreciation.

Issue 1: Confirmation of Earnest Money Amount Received:
The assessee received earnest money of ?23.00 lakhs against the purchase of Transfer of Development Rights (TDR). The Assessing Officer (AO) treated this amount as unexplained cash credit under section 68 of the Act due to the lack of confirmation from the payer, MDC. The First Appellate Authority (FAA) upheld the AO's decision, citing discrepancies in the Memorandum of Understanding (MOU) and the absence of credible evidence. However, the ITAT found that the transaction's genuineness was established through banking channels and legal proceedings between the parties. The ITAT reversed the FAA's decision, ruling in favor of the assessee.

Issue 2: Addition Made under Section 68 of the Income Tax Act:
The AO made an addition of ?23.00 lakhs under section 68 of the Act, which the FAA confirmed. However, the ITAT, while deciding the quantum appeal, deleted this addition, considering the established genuineness of the transaction. Consequently, the penalty imposed by the AO under section 271(1)(c) was also deleted by the ITAT, as the addition was no longer valid.

Issue 3: Penalty Imposed by Assessing Officer:
The penalty imposed by the AO under section 271(1)(c) was deleted by the FAA based on considerations of the FIR, the Metropolitan Magistrate's order, and payments made by MDC. Since the ITAT had already deleted the addition under section 68 while deciding the quantum appeal, the penalty was deemed not applicable, and the ITAT upheld the FAA's decision in this regard.

Issue 4: Disallowance of Administrative Expenses, Employees' Expenses, and Depreciation:
The AO disallowed administrative expenses, employees' expenses, and depreciation totaling ?42.54 lakhs, stating that the assessee had not conducted any significant business activity in recent years. The FAA upheld this disallowance, considering the closure of the main business in 1990 and the disproportionately high expenses. However, the ITAT found that the assessee was still engaged in business activities, albeit on a reduced scale, and allowed a partial disallowance of 25% of the expenses, considering the previous year's treatment by the AO.

In conclusion, the ITAT allowed the appeal for the Assessment Year 2006-07 and partially allowed the appeal for the Assessment Year 2007-08, based on the detailed analysis and findings for each issue presented before the Tribunal.