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Facts
The assessee company challenged the confirmation of 50% disallowance of business promotion expenses by the CIT(A) due to insufficient details. Additionally, the assessee contested the treatment of Rs. 91 lakhs share capital as unexplained credit under Section 68, which the Assessing Officer and CIT(A) had confirmed. The assessee contended that this share capital represented the conversion of directors' accumulated current account balances and further capital contributions.
Held
The tribunal allowed the appeal regarding business promotion expenses, noting that small cash payments are normal business practice and the Assessing Officer failed to justify the disallowance. For the share capital issue, the tribunal held that the conversion of directors' current account balances into share capital was a legitimate explanation, and the assessee had discharged its onus of proof, directing the deletion of the Rs. 91 lakhs addition. The tribunal also condoned a delay of 1020 days in filing the appeal due to valid reasons like communication gaps and Covid-19.
Key Issues
1. Whether the disallowance of 50% of business promotion expenses was justified despite the assessee producing bills and vouchers. 2. Whether the conversion of directors' current account balances into share capital could be treated as unexplained credit under Section 68 of the Income Tax Act.
Sections Cited
Section 68, Section 234B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI ‘H’ BENCH,
Before: SHRI CHELLA NAGENDRA PRASAD, & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of
the ld. CIT(A) -8, Delhi – 9 dated13.12.2019 pertaining to A.Y 2013-14.
The grievances of the assessee read as under:
Ground No.1 The Ld. CIT(Appeals) has erred in law and facts by confirming the erroneous order of the Assessing officer on the facts and in the law. On the facts and in the circumstances of the case he ought to have accepted the returned income.
Ground No.2
The Ld. CIT(Appeals) has erred in law by confirming the disallowance of 50% of the expenses of Business Promotion on the plea that proper details were not filed. On the facts and in the circumstances of the case he ought to have accepted the whole expenditure as sufficient evidences like in the form of copies of bills and vouchers were produced.
Ground 0.3
The Ld. CIT(Appeals) has erred in law and facts by confirming disallowance on account of amount of TDS ofRs.3,861/=.
Ground 0.4
The Ld CIT(Appeals) is not justified in treating the issue of share capital against the accumulated credit balances over the years of the promoter Director as unexplained credit under section 68 and not considering the details along with confirmations and bank
details of the said Directors. other details are given in attachment.
Ground 0.5
The Ld. CIT(Appeals) had wrongly charged interest u/s 234B at Rs. 10,22,400/-.”
Ground 0.6
The assessee reserves the right to add, alter, delete, amend the grounds of appeal.
Ground 0.7
Any other ground or grounds as may be urged at the time of hearing.”
Representatives of both the sides were heard at length. Case
records carefully perused. Relevant documentary evidence brought on
record duly considered in light of Rule 18(6) of the ITAT Rules.
The assessee has filed an application for condonation of delay of
1020 days on the ground that the directors of the assessee are from
Jammu and Kashmir and there was a communication gap between Delhi
and Srinagar and subsequently, due to Covid and closure of the country
and business. The ld. counsel for the assessee relied upon the decision of
the ITAT Ahmadabad Bench in the case of Saraswati Trust Vs. CIT
Exemption in which 671 days were condoned.
We have heard the rival submissions and have perused the relevant
material on record. The present appeal is late by 1020 days. Finding the
reasons mentioned in the application for condonation of delay to be
reasonable, the delay is condoned.
Ground Nos. 1 and 3 have not been pressed. The same are
dismissed as not pressed.
Ground No. 2 pertains to the confirmation of disallowance of 50% of
the expenses of Business Promotion.
Brief facts relating to this issue are that the Assessing Officer
observed that the assessee company had claimed business promotion
expenses of Rs. 2,80,269/-. The assessee was asked to justify the
expenses with proper details. In response, the assessee filed some bills
but without names and address and to whom the payments were made.
In the absence of proper detail the Assessing Officer disallowed 50%
business promotion expenses. Accordingly, addition of Rs. 1,40,135/- was
added to the income of the assessee.
Aggrieved, the assessee went in appeal before the ld. CIT(A) who
was of the view that the assessee has furnished only part details and in
some vouchers it was written ‘cash’. The ld. CIT(A) also found that the
assessee was provided with several opportunities which the assessee
failed to avail. In the absence of cogent evidences, the ld. CIT(A)
confirmed the addition so made by the Assessing Officer.
Aggrieved, the assessee is in appeal before us and reiterated what
has been stated before the lower authorities. The assessee ld. counsel
for the assessee further contended that the disallowance is without any
justification and result of guess work. The amounts paid in cash in small
amounts are usual in the course of business and reasonable.
On the other hand, the ld. DR relied on the orders of the authorities
below.
We have heard the rival submissions and have perused the relevant
material on record. There is no dispute that the assessee has submitted
some bills and cash vouchers for expenses made. In the ordinary course of
business, small amounts of cash being paid is normal. In our considered
opinion, once the income has been accepted, legitimate expenses
incurred by the assessee in earning income have to be allowed. The
Assessing Officer has made disallowance stating absence of proper details
without elaborating the details required. We, therefore, do not find any
justification in the disallowance made by the Assessing Officer and
sustained by the ld. CIT(A). Ground No. 2 is allowed.
Ground No. 4 relates to the unexplained credit u/s 68 of the Act
amounting to Rs. 91 lakhs.
During the course of assessment proceedings, the Assessing Officer
noticed that the assessee has issued share capital of Rs. 91 lakhs @ Rs.
10/- per share during the year under consideration. The assessee was
asked to substantiate the genuineness of share capital received.In
response, the directors of the assessee company replied that the share
capital is merely conversion of current account balance of directors to
share capital. The Assessing Officer was not convinced and added the
same u/s 68 of the Act.
In appeal, the ld. CIT(A) concluded that mere filing of papers in
support of the transaction cannot be termed as genuine transactions.
Accordingly, the ld. CIT(A) confirmed the action of the Assessing Officer.
Aggrieved, the assessee is in appeal before us.
Before us, the ld. counsel for the assessee vehemently stated that
the directors of the company have converted their credit balances of
their current account with the company, toward the share capital of the
company. Each director has converted an amount of 45,50,000/- and
against which shares were allotted to the directors. Out of total share
capital amounting to Rs. 91 lakhs, Rs. 40,85,355/- was standing against
Mr. Ishfaq Mir, director of the company and an amount of Rs. 39,45,362/-
against Mr. Mohd Iqbal Bhat, another director of the company as on
31.03.2012. The balance of Rs. 10,69,283/- was paid by two directors
towards the various expenses of the company during the year under
consideration.
Further the ld counsel of the assessee submitted
that due to scarcity of the funds in the company, the
directors/shareholders of the assessee had been incurring the expenses
on behalf of the company. The expenses were made by Directors through
cash or thorough their bank account and these payments stood to credit
of the directors/shareholders of the assessee over the years.
Subsequently, the accumulated credit was adjusted against the
consideration for the share capital issued.
The ld. counsel for the assessee further contended that after
examining the above referred reply, the Assessing Officer has himself
noted that during the assessment year under consideration that the
assessee had received not cash or bank consideration towards issuance of
the shares but the assessee has received consideration on account of
credit balance of current account with directors.
The ld. counsel for the assessee further submitted that an amount
Rs.80,30,717/- is the opening balance for the year as per Balance Sheet
and Ledger Accounts, which has been converted into share capital and
balance of Rs. 10,69,283/- is the capital introduced during the year in
smaller amounts in the nature of various expenses of the company.
Hence, the addition is bad in law, therefore, liable to be deleted.
Per contra, the ld. DR vehemently contended that there is no
evidence that the opening balance has been converted into share capital.
Section 68 of the Act is applicable on the facts of the present case as
there is credit in the books in the nature of share capital.
We have heard the rival submissions and have perused the relevant
material on record. After careful consideration of the facts and
submissions, we are of the considered view that the addition made by the
Assessing Officer is unjustified and without any legal basis. An
examination of the balance sheets and ledger accounts of the company
with both the directors of the company shows that there was opening
balance of Rs. 80,30,717/- as on 31.03.2012 which was converted into
share capital. The balance amount of Rs. 10,69,283/- is the capital
introduced by both the directors during the years in smaller amounts in
the nature of various expense of the company.
We also note that the Assessing Officer has raised no doubts
regarding the veracity of the ledger accounts. Conversion of opening
balance of current account of the directors with the company into share
capital in the name of the directors is legal and valid. We therefore are
of the considered opinion that the assessee has explained the sources of
capital introduced in its books. If the Assessing Officer had doubts about
the veracity about the credit worthiness of the directors, it was
incumbent upon him to take action against the directors of the company.
As far as the assessee company is concerned, it has discharged its onus of
substantiating the credit in its books of account.
We also find that the judgments relied upon by the Assessing Officer
are quite distinguishable from the facts of the case in hand. Therefore,
we direct the Assessing Officer to delete the addition of Rs. 91 lakhs.
Ground No. 4 is allowed.
Ground Nos. 5, 6, and 7 are consequential in nature and therefore
left undetermined.
In the result, the appeal of the assessee in ITA No. 2819/DEL/2022
is allowed in part.
The order is pronounced in the open court on 05.07.2024.
Sd/- Sd/-
[CHALLA NAGENDRA PRASAD] [NAVEEN CHANDRA] JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 05th JULY, 2024.
VL/