Section 68 Addition Fails Once Identity and Source Are Proved: ITAT Delhi

ACIT Vs Westcourt Hospitality Pvt. Ltd. (ITAT Delhi)

ITAT: Affirms Section 68 addition deletion as onus discharged; Consultancy expenses incurred wholly & exclusively for business purposes

FACTS:

• The assessee, “M/s Westcourt Hospitality Pvt. Ltd.” is a private limited company incorporated on 03.03.2009 and is engaged in the business of consultancy in real estate projects. For the A-Y 2018-19, the assessee filed its return of income on 09.10.2018 declaring a loss of Rs.1,99,79,324/-.
• The case was selected for scrutiny assessment to verify investments/advances/loans and business loss. Statutory notice u/s 143(2) of the Income-tax Act, 1961 was issued, followed by notices u/s 142(1) along with a questionnaire. In response thereto, the assessee furnished the requisite details as called for by the Assessing Officer.
• The assessment was completed under section 143(3) of the Act vide order dated 09.02.2021, wherein the total income of the assessee was assessed at Rs.43,72,80,000/- as against the returned loss of Rs.1,99,79,324/-. While completing the assessment, the AO made an addition of Rs.43,72,80,000/- u/s 68 of the Act by treating the amount received by the assessee as unexplained cash credits. The said amount represented funds received by the assessee through allotment of CCDs.
• Further, the AO disallowed an amount of Rs.2,99,000/- claimed as expenses incurred towards increase in share capital. In addition, the AO disallowed professional and consultancy expenses amounting to Rs.1,78,50,000/- on the ground that the same were incurred for non-business purposes.
• Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A), National Faceless Appeal Centre. During appellate proceedings, the assessee contested the addition made u/s 68 as well as the disallowances of expenses. The Ld. CIT(A) called for a remand report from the AO in respect of the additional evidences filed by the assessee.
• During remand proceedings, the AO made direct enquiries from the director of the assessee company, Shri Manoharan Govindaswamy, as well as from his family members, namely Smt. M. Saraswathi, Shri M. Naveen Kumar and Shri M. Chandru Kumar, by issuing notices u/s 133(6) of the Act. In response, the said persons furnished their bank statements and other supporting documents explaining the source of funds.
• The Ld. CIT(A), after considering the assessment order, remand report, evidences placed on record and submissions of the assessee, partly allowed the appeal. The addition of Rs.43,72,80,000/- made u/s 68 of the Act was deleted. The disallowance of Rs.2,99,000/- relating to expenses for increase in share capital was also deleted. However, the disallowance of professional expenses amounting to Rs.1,78,50,000/- was confirmed.
• Against the said appellate order, the Revenue filed appeal before the Income Tax Appellate Tribunal challenging the deletion of the addition u/s 68 and deletion of disallowance of Rs.2,99,000/-. The assessee also filed a cross-appeal before the Hon’ble Tribunal challenging the confirmation of disallowance of professional expenses amounting to Rs.1,78,50,000/-.

ISSUE:

• Whether the Ld. CIT(A) was justified in deleting the disallowance of Rs.2,99,000/- made towards expenses for increase in share capital.
• Whether the Ld. CIT(A) was justified in deleting the addition of Rs.43,72,80,000/- made under section 68 of the Act on account of CCDs treated as unexplained cash credits.
• Whether the disallowance of Rs.1,78,50,000/- towards professional consultancy expenses incurred by the assessee was sustainable in law.

OBSERVATIONS:

• The Hon’ble Tribunal observed that the assessee had incurred only Rs.1,200/- towards ROC fees for increase in authorized share capital, while the remaining expenditure related to stamp duty and ROC fees for issuance and allotment of CCDs. The CCDs are in the nature of borrowing and not share capital and, therefore, the provisions of section 35D of the Act were not applicable to the facts of the present case.
• The Hon’ble Tribunal placed reliance on the judgment of the Hon’ble Delhi High Court in CIT v. Havells India Ltd. (352 ITR 376), wherein it was held that expenditure incurred in connection with the issue of debentures or for obtaining loans is revenue expenditure, even where such debentures are convertible into equity shares. Following the ratio laid down by the Hon’ble High Court and considering that the expenses disallowed were incurred in relation to issuance of CCDs, the Hon’ble Tribunal held that there was no doubt about the revenue nature of the expenditure and confirmed the order of the Ld. CIT(A) deleting the disallowance of Rs.2,99,000/-.
• The Hon’ble Tribunal observed that the assessee received funds through allotment of CCDs to its director, Shri Manoharan Govindaswamy. During appellate proceedings, the Ld. CIT(A) admitted additional evidences under Rule 46A and called for a remand report. The Hon’ble Tribunal noted that the AO did not dispute the authenticity of the evidences furnished during remand proceedings and had merely doubted the creditworthiness on account of low income disclosed in the returns.
• The Hon’ble Tribunal concurred with the finding of the Ld. CIT(A) that not only the source but even the source of source and further layers stood explained and further observed that the proviso to sec 68 inserted by the Finance Act, 2022 with effect from 01.04.2023 was not applicable to the year under consideration. In this context, reliance was placed on ACIT v. Smt. Prem Anand (ITA No. 3514/Del/2014) to hold that examination of source of source was confined to share capital cases and did not extend to non-share capital cases. The Hon’ble Tribunal also relied upon the judgment of the Hon’ble Delhi High Court in CIT v. Vrindavan Farms Pvt. Ltd. (ITA No. 71 of 2015), wherein it was held that merely because creditors disclosed low income in their returns, their creditworthiness could not be doubted in the absence of any investigation into the veracity of documents.
• Further reliance was placed on the judgment of the Hon’ble Delhi High Court in PCIT v. Agson Global Pvt. Ltd. ([2022] 134 Taxmann.com 256 (Delhi)), wherein it was held that once identity, creditworthiness and genuineness are established through documentary evidence, addition u/s 68 is not justified and judgment of the Hon’ble Delhi High Court in Creations (P.) Ltd. v. ITO ((2013) 354 ITR 282) to observe that once the assessee discharges its initial onus under section 68, it is not required to prove the creditworthiness of sub-creditors.
• On consideration of the entire material, the Hon’ble Tribunal held that the assessee had discharged the burden cast upon it u/s 68 and upheld the deletion of the addition of Rs.43,72,80,000/-.
• As regards the disallowance of expenses of Rs.1,78,50,000/- claimed by the assessee under the head professional charges, the Hon’ble Tribunal observed that the AO and the Ld. CIT(A) had disallowed the expenditure on the ground that the project belonged to another entity. The Hon’ble Tribunal held that the expenditure was incurred in the course of business and under business expediency and that the AO could not step into the shoes of the businessman to decide the necessity or prudence of such expenditure. In this regard, reliance was placed on Hughes (Inspector of Taxes) v. Bank of New Zealand (6 ITR 636) to hold that expenditure incurred for the purposes of trade does not cease to be deductible merely because it is unremunerative.
• The Hon’ble Tribunal further relied upon CIT v. C.J. Patel & Co. (158 ITR 486, Guj.) for explaining the meaning of the expression “wholly and exclusively”, and on DIT v. Health & Co. (P) Ltd. (141 ITR 605, Cal.) to hold that the connection between expenditure and business object must be real and not illusory. Reliance was also placed on Empire Jute Co. Ltd. v. CIT (124 ITR 1, SC) and SA Builders Ltd. v. CIT (158 Taxman 74, SC) to reiterate that commercial expediency is to be judged from the businessman’s perspective.
• The Hon’ble Tribunal further referred to Indian Molasses Co. (P.) Ltd. v. CIT (37 ITR 66, SC) for laying down the conditions for allowability of expenditure under section 37(1) and relied upon Uma Charan Shaw & Bros. Co. v. CIT (37 ITR 271, SC) to hold that additions cannot be sustained on surmises and conjectures and held that the expenditure was incurred wholly and exclusively for the purpose of business and directed deletion of the disallowance. Accordingly, the Hon’ble Tribunal deleted the disallowances made by the AO and allowed the grounds of appeal of the assessee.

FULL TEXT OF THE ORDER OF ITAT DELHI