In a recent ruling, the Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) directed the re-examination of the financial statements of investors regarding the Rs. 27.04 crore share application money added under Section 68 of the Income Tax Act, 1961.
The assessee had issued shares to four investors: Mr. Sekhar Kapur, Mr. A.R. Rahman, Mrs. Nishith Desai, and M/s CSI BD Mauritius. While shares were issued at Rs. 10 each to the first three, they were issued at Rs. 302.80 each to M/s CSI BD Mauritius. The company provided income tax returns and balance sheets for Mr. Sekhar Kapur and Mr. A.R. Rahman during the assessment. Still, it failed to furnish details for Mrs. Nishith Desai and M/s CSI BD Mauritius.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
The assessing officer ( AO ) treated Rs. 27.23 crores received from the latter two as unexplained cash credit under Section 68 of the Income Tax Act, 1961. The AO observed that the assessee claimed Rs. 4.36 crores as expenses in the profit and loss account without reporting any operational income. Concluding that business activities had not commenced, the AO disallowed the expenses as revenue expenses.
During the appeal, the Commissioner of Income Tax ( Appeals ) [ CIT(A) ] accepted the assessee’s claim that the business was set up and operating per its objectives.It held that the absence of income generation after business setup is not grounds for disallowing expenses and deleted the disallowance.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
The assessee contended that the AO had not examined the relevant documents furnished to prove the creditworthiness of both investors.
The bench observed that the financial statements filed by the assessee of M/s CSI BD Mauritius required proper examination. It set aside the order passed by the CIT(A) on this issue and restored the same to the file of the AO for the limited purpose of examining the financial statements filed by CSI BD Mauritius.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
With regard to the disallowance of Rs. 4.36 crore in business expenses, which the AO had treated as pre-operative on the grounds of non-generation of income, the tribunal referred to its own precedent in the company’s appeal for the assessment year 2013-14, where it had ruled that Qyuki Digital Media had already set up its business operations.
Referring to the judgements highlighting the distinction between setting up and commencing business, the bench upheld CIT(A)’s order allowing the expenses, stating that the non-generation of revenue did not negate the operational status of the business.
Become PF & ESIC Pro: Basic to Advance Course – Enroll Today
The ITAT comprising Justice ( Retd.) C.V. Bhadang ( President ) and B.R. Baskaran ( Accountant Member ) partly allowed the appeal filed by the assessee.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
