2017 (3) TMI 1263 - HC - Income Tax

Unexplained cash credit - addition u/s 68 - ITAT deleted addition - Held that - three essential tests while confirming the pre-proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. The Apex Court in Lovely Exports (P) Ltd. (supra) in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee s income as unexplained cash credit. - Decided in favour of assessee Disallowance under Section 14A - whether the Tribunal was justified in restricting the disallowance under Section 14A of the Act only to the amount of expenditure claimed by the assessee in the absence of any such restriction under Section 14A and/or Rule 8D? - Held that - Admit the substantial question of law no (II) The issue arising in question no. (ii) is essentially whether application of Rule 8D(2)(iii) of the Income Tax Act Rules would permit the Revenue to disallow expenditure not claimed i.e. much larger than the expenditure / debited in earning its total income. The Counsel inform us that there is no decision on this issue of any Court available and it would affect a large number of cases where similar issues arise. Therefore, this issue would require an early determination. In the above view, at the request of the Counsel, the appeal is kept for hearing on 17th April, 2017 at 3.00 p.m., subject to overnight part heard.

Summary

Issues:
1. Challenge to order passed by Income Tax Appellate Tribunal for Assessment Year 2008-09.
2. Deletion of addition under Section 68 of the Income Tax Act.
3. Restriction of disallowance under Section 14A of the Act.

Issue 1: Challenge to Tribunal's Order
The appellant challenged the order passed by the Income Tax Appellate Tribunal for Assessment Year 2008-09. The appellant raised reframed questions of law regarding the deletion of addition under Section 68 of the Act and the restriction of disallowance under Section 14A of the Act.

Issue 2: Deletion of Addition under Section 68
Regarding the first question of law, the respondent-assessee had increased its share capital and collected share premium during the relevant assessment year. The Assessing Officer treated the share premium as unexplained cash credit under Section 68 of the Act. However, the Commissioner of Income Tax (Appeals) deleted the addition, stating that the investment made was genuine, supported by evidence. The Tribunal upheld this decision, emphasizing the establishment of shareholder identity, genuineness, and capacity. The Tribunal also noted that the share capital and premium received were capital receipts, not in the revenue field. The introduction of the proviso to Section 68 with effect from April 1, 2013, was found not applicable to the assessment year in question. The Tribunal, based on facts and legal precedents, dismissed the Revenue's appeal, as the essential tests of genuineness, identity, and capacity were satisfied.

Issue 3: Restriction of Disallowance under Section 14A
The second question of law pertained to the disallowance under Section 14A of the Act. The issue revolved around whether Rule 8D(2)(iii) would permit the Revenue to disallow expenditure not claimed, significantly larger than the expenditure debited in earning total income. As there was no previous legal decision on this matter, the Court admitted the substantial question of law for further consideration. The appeal was scheduled for a hearing to address this issue, considering its potential impact on similar cases.

In conclusion, the High Court of Bombay upheld the Tribunal's decision to delete the addition under Section 68 of the Income Tax Act for the Assessment Year 2008-09, emphasizing the genuineness and legality of the transactions. Additionally, the Court admitted the substantial question of law regarding the restriction of disallowance under Section 14A, highlighting the need for further examination due to the absence of prior legal precedent on the matter.