Amount Paid towards License Fee in the First Year of starting Business can’t be treated as Unexplained Income: ITAT [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) has held that the amount paid towards license fee in the first year of commencement of business cannot be treated as unexplained income.

The decision was based on the Apex Court decision in the case of CIT vs. Bharat Engg. & Construction Co.  wherein it was held that the unexplained cash credit entries in the first year of its business represents capital receipts and could not be its income.

The assessee, was running a wine shop, filed his return of income for the A.Y 2009-10 declaring income of Rs.3,05,150/-. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the relevant A.Y is the first year of the business of the assessee and from the balance sheet, it was observed that the assessee has introduced a capital of Rs.21,05,152/-. The assessee, during the survey, gave a statement that the initial investment in the business is Rs.18.00 lakhs towards the first instalment of license fee and lifting of stock from the Beverage Corporation and sources for such investment is from agricultural operations of the family. The assessee submitted that the capital introduced in the business was Rs.18.00 lakhs only and the capital as on 31.03.2009 including the current years profit amounted to Rs.21,05,152/-.

On second appeal, the Tribunal noted that this is the first year of operation of the assessee and the assessee could start the business only after obtaining license from the Govt. and by making payment of the license fee.

“The assessee has made the payment of Rs.18.00 lakhs towards the first instalment of the license fee and therefore, such an amount cannot be treated as unexplained income from the business of the assessee. This is the capital introduced by him and if at all, it can only be the income from the earlier years and not from the relevant previous year. Therefore, respectfully following the judgment of the Hon’ble Supreme Court, we delete the addition of Rs.18.00 lakhs,” the Tribunal said.