2020 (2) TMI 835 - AT - Income Tax

Non commencement of business - disallowance of business loss on the ground that business was not actually started on commercial basis - income from credit report is not shown - HELD THAT - AO has not disputed these aspects. He is only drawing adverse inference that the assessee has not able to submit credit report to any customer during the period and has not shown any income therefrom - when the business has been set up and operation duly commenced after due approval of RBI, the Assessing Officer cannot deny the aspect of commencement of business only on the ground that income from credit report is not shown - there is no law that in business duly incurred business expenditure cannot be allowed if little income has been earned - CIT(A) has very elaborately considered his aspect. and held that business has been set up the assessee had duly shown that capital, regulatory permission, available infrastructure, employees are all available and in place. Assessing Officer is incorrect that the assessee has adopted colorable device. - Decided in favour of assessee. Disallowance of payment to related party u/s. 40A(2)(b) - HELD THAT - This aspect that the said party is not related party u/s. 40A(2)(b) was never submitted by the assessee before the Assessing Officer. In fact when the Assessing Officer issued a questionnaire in this regard, the assessee has only explained the business exigency of expenditure. It had never explained that the said party is not falling under section 40A(2)(b). CIT(A) s factual finding that the assessee was not holding specific stake in the said party and hence it was not falling u/s. 40A(2)(b) has not been examined by the Assessing Officer - remit this issue to the file of the Assessing Officer for factual verification. Accordingly the issue stands remitted. Disallowance of bonus u/s. 43B - HELD THAT - CIT(A) has given factual finding that impugned payment have been done before the due date. This has not been disputed by the Revenue. CIT(A) is correct in holding that the Assessing Officer is not justified in sitting in the shoes of businessman and deciding whether the assessee s employees are deserving bonus or not. In our considered opinion there is no infirmity in the order of learned CIT(A) in this regard. Hence, we uphold the same. Addition of share capital u/s. 68 - assessee is not giving financials and share capital is routed through Mauritius - HELD THAT - It is settled law that powers and duty of learned CIT(A) are co-terminus with that of the Assessing Officer. If the Assessing Officer has failed to issue notices which are crucial, it was incumbent upon learned CIT(A) to himself ask for the financial and give findings about the same. We find that in absence of financial statement, only RBI approval alone cannot be said to have fully proved creditworthiness of the party. It is settled law that the Income Tax Officer is entitled to make necessary examination, which is considered necessary under the provisions of Income Tax law. Furthermore KAPURCHAND SHRIMAL VERSUS COMMISSIONER OF INCOME-TAX, AP 1981 (8) TMI 2 - SUPREME COURT has expounded that it is the duty of the appellate authority to correct the error in the order of the authority below and remit the matter for reconsideration with or without direction unless prohibited by law. Accordingly, in the interest of justice, we remit this issue to the file of the Assessing Officer.

Summary

Issues Involved:
1. Disallowance of business loss on the ground that business was not actually started on a commercial basis.
2. Deletion of disallowance of payment to a related party under Section 40A(2)(b) of the Income Tax Act.
3. Disallowance of bonus payments.
4. Deletion of addition of share capital under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Business Loss:
The Revenue appealed against the disallowance of business loss for A.Y. 2011-12 and 2012-13, arguing that the business had not commenced on a commercial basis. The Assessing Officer (AO) issued a questionnaire noting the negligible income from services and suspected it as a colorable device. The assessee responded, detailing the commencement of business post the Certificate of Registration (COR) from the RBI on March 26, 2010. The company started enrolling lenders and had a substantial database by September 2, 2010. The AO, however, was not convinced and disallowed the claim, stating the business had not actually commenced. The CIT(A) overturned this, noting that the business was set up with all necessary infrastructure, regulatory approval, and personnel by April 1, 2010. The Tribunal upheld the CIT(A)'s decision, stating that the business had commenced following regulatory approval and the AO's inference was incorrect.

2. Deletion of Disallowance of Payment to Related Party (Section 40A(2)(b)):
The AO disallowed payments made to M/s. Equifax Software Systems Pvt. Ltd. under Section 40A(2)(b), deeming them excessive and unreasonable. The CIT(A) found that the provisions of Section 40A(2)(b) were not applicable for the assessment year in question, as the related party provisions were amended only with effect from April 1, 2013. The Tribunal noted that the AO had not examined whether the party was a related party under the extant provisions and remitted the issue back to the AO for factual verification.

3. Disallowance of Bonus Payments:
The AO disallowed the bonus payment under Section 43B, stating that the payment was shown as payable and there was no audit report confirming payment before the due date of filing the return. The CIT(A) noted that tax audit was not required due to the turnover and provided evidence of payment before the due date. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO should not question the business's decision to pay bonuses, especially when the payment was made before the due date.

4. Deletion of Addition of Share Capital (Section 68):
The AO added the share capital received from EFX Holdings Ltd. as unexplained cash credit under Section 68, citing lack of financial information to prove creditworthiness. The CIT(A) found that the AO should have issued a notice for the financials and that the RBI's approval indicated creditworthiness. The Tribunal noted that while the RBI approval was significant, it did not fully prove creditworthiness. It remitted the issue back to the AO for issuing the requisite notice and re-examining the creditworthiness of the shareholder.

Conclusion:
The appeals were partly allowed for statistical purposes, with specific issues remitted back to the AO for further verification and consideration.