Failure to explain amount found credited in Books: ITAT upholds Invocation u/s 68 of Income Tax Act [Read Order]

In a significant ruling the Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) upheld the invocation of under Section 68 of the Income Tax Act, 1961, due to the failure to explain the amount found credited in the books.

The assessee company operated in the information technology services sector. For the Assessment Year 2012-13, the assessee filed a return of income on September 27, 2012, declaring a total income of Rs. Nil. This return was processed under Section 143(1) of the Income Tax Act. Subsequently, the case was selected for scrutiny under the Computer Assisted Scrutiny Selection ( CASS ), and the Assessing Officer ( AO ) issued notices under Sections 143(2) and 142(1) of the Income Tax Act. The assessee’s representative complied with these notices, appearing before the authorities and submitting necessary details.

The AO noted an increase in authorized capital from Rs. 10,00,000/- to Rs. 14,00,000/- from the financial year 2006-07 to the financial year 2011-12. The AO also observed that in the financial year 2006-07, the taxpayer received share application money along with share premium, and in the financial year 2011-12, Rs. 4,00,000/- was transferred to the share capital account and Rs. 1,96,00,000/- was transferred to the share premium account. However, the assessee  had shown pending share application money of Rs. 4,45,00,000/- for the financial year 2006-07, which included Rs. 2,00,00,000/- of share application money

The assessee submitted detailed explanations through letters, and the AO issued notices under section 133(6) of the Income Tax Act,  to the share/investor applicants, which remained unanswered. Consequently, the AO issued a show cause notice dated March 13, 2015. In response, the assessee provided detailed explanations via a letter dated March 17, 2015, asserting that there were no unexplained cash credits in their books for the financial year 2011-12, and shares were only allotted against the share application money received in previous years.

However, the AO was not satisfied with these explanations, doubting the genuineness and creditworthiness of the share applicants. Consequently, invoking the provisions of section 68 of the Act, the AO added Rs. 2,00,00,000/- as unexplained cash credit, resulting in an assessed total income of Rs. 2,00,00,000/-. This decision was finalized with an order under Section 143(3) of the Income Tax Act

 The counsel for the revenue, Bhumika Patel submitted that the CIT (A) has erred in deleting the addition of share capital and premium irrespective of the facts that the assessee has failed to establish the genuineness and creditworthiness of the transactions and supported the order of the Assessing Officer

Taking in to consideration the point highlighted by the counsels the  bench observed that the assessee received share application money along with share premium. Subsequently, in the Financial Year 2011-12, Rs. 4,00,000/- was transferred to the share capital account and Rs. 1,96,00,000/- was transferred to the share premium account. Additionally, the assessee disclosed pending share application money of Rs. 4,45,00,000/- for the Financial Year 2006-07, which included Rs. 2,00,00,000/- of share application money. Importantly, there was no dispute that the assessee did not receive any share application money in the Financial Year 2011-12, except for the allotment of shares.

The provisions of Section 68 of the Income Tax Act,  can be invoked or applied when amounts are found credited in the taxpayer's books for the Financial Year 2011-12, and the assessee failure to provide satisfactory explanations. However, in this case, the share application money was received along with a share premium in the Financial Year 2006-07, not in the Financial Year 2011-12.

The two member bench of the tribunal comprising Prashanth Maharishi ( Accountant member ) and Pavan Kumar Gadale ( Judicial member ) believed that the Commissioner of Income Tax ( Appeals ) [CIT (A)] had issued a well-founded and conclusive order. Therefore, the bench did not identify any shortcomings in the CIT (A)'s decision and upheld it accordingly.

As a result, the bench rejected the grounds of appeal raised by the revenue. Consequently, the appeal filed by the revenue was dismissed.

To Read the full text of the Order CLICK HERE

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