Inappropriate use of discretionary powers by the Income Tax Department under Section 68 of the Income Tax Act: ITAT dismisses appeal [Read Order]

The Kolkata bench of the Income Tax Appellate Authority rejected revenue’s case for filing an appeal against the decision on CIT(A) for taxing the assessee under Section 68 of the Income Tax Act. The bench came to this conclusion as it was ascertained that there wasn’t sufficient cause for imposing Section 68 of the Income Tax Act on the assessee.

All four companies in question are affiliated with the assessee, constituting a group. Despite having a small number of positive income returns each year, these companies, such as Citizen Securities Pvt. Ltd., exhibit substantial net worth, with investments significantly lower than 10% of their own net worth. Directors of the company had attested before the Assessing Officer(AO), confirming investments and share premium payments made to the assessee. Another company, De-Con Projects Pvt. Limited, with a net worth of Rs.6.89 crores, invested Rs.50 lakhs and declared a profit of Rs.3,92,065/-. Software Conglomerate Pvt. Limited, having a net worth of Rs.2.63 crores, invested Rs.50 lakhs, while Quickpay Suppliers Pvt. Limited, with a net worth of Rs.2.77 crores, invested Rs.1.75 crores, having earned a profit of Rs.3.99 crores during the relevant year.

The solitary grievance of the Revenue is that. CIT(Appeals) has erred in deleting the addition of Rs.3,00,00,000/-, which was treated by the Assessing Officer as unexplained cash credit by disbelieving the receipt of share capital along with share premium. The  Assessing Officer had made the addition with the help of section 68 of the Income Tax Act.

As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year.

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The assessee had filed an income tax return declaring income as ‘NIL.’ The case underwent scrutiny assessment, and notices under section 143(2) and 142(1) were issued and served to the assessee. Upon examining the records, it was found that the assessee company received share application money, including a share premium of Rs. 3,00,00,000/- from four Group Concerns

Revenue had issued notices to the share applicants, and the directors of the subscriber companies appeared before him, providing necessary details. Despite being unable to question the credibility of the witnesses regarding the identity and creditworthiness of the share subscriber companies, as well as the genuineness of the transactions, the Assessing Officer noted that the assessee received Rs. 49 as premium against the face value of Rs. 1/- for each share. His perspective was that since the assessee-company consistently incurred losses, there was no justification for commanding such a premium from the market. Based on this belief, he deemed the transaction non-genuine and, invoking section 68, treated the share application money as an unexplained credit, making the corresponding addition.

Revenue contended that between January 2023 and May 2023, the Department was under significant pressure to resolve time-sensitive matters. Due to this circumstance and the insufficient availability of system resources, the regular searching of the appeal order in the ITBA system could not be conducted.

The two member bench comprising of Rajesh Kumar(Accountant Member) and Rajpal Yadav(Vice-President) after consideration of the order of CIT(Appeals) dismissed the appeal of the Revenue

The assessee was represented by Ashok Tulsyan. Revenue was represented by B.K. Singh.

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