Old Loans Converted into Share Allotment Not Unexplained Money: ITAT Kolkata

Sachdev Steel Pvt. Ltd. Vs ITO (ITAT Kolkata)

In the case of Sachdev Steel Pvt. Ltd. Vs ITO, the Income Tax Appellate Tribunal (ITAT) Kolkata dealt with an appeal filed by the assessee against an order dated January 20, 2023, from the National Faceless Appeal Centre. The appeal challenged the confirmation of an addition of Rs. 2,48,00,000 made by the Assessing Officer (AO), who had treated the share application money received by the assessee as unexplained income under Section 68 of the Income Tax Act.

Background

The Assessing Officer observed during the assessment proceedings that Sachdev Steel Pvt. Ltd. had received share application money from three parties:
– Bharat Bhushan Sachdev HUF: Rs. 30,00,000
– Shangrila Builders Pvt. Ltd.: Rs. 45,00,000
– Spoxy Vincom Pvt. Ltd.: Rs. 1,73,00,000

The total amount received was Rs. 2,48,00,000. The AO asked the assessee to explain the identity and creditworthiness of the creditors and the genuineness of the transactions. The assessee submitted that these parties were related to the company and that the amounts received were not fresh share applications but rather conversions of old outstanding loans into share application money. The loans were converted into shares to discharge old loan liabilities.

Assessing Officer’s Decision

Despite the explanations and documents provided by the assessee, the AO did not consider these submissions and added the entire amount as unexplained income. The AO’s decision was based on the fact that the assessee did not produce any of the investors for examination.

 CIT(A) Decision

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition made by the AO, leading the assessee to appeal to the ITAT.

 Assessee’s Argument

The counsel for the assessee referred to several documents submitted during the assessment proceedings:
– The balance sheet as of March 31, 2012, showing outstanding loans from the three parties.
– A resolution by the Board of Directors indicating that the unsecured loans were converted into share application money.
– Confirmation of accounts by each of the three parties, showing the opening balances as loans before conversion into shares.

The counsel argued that no fresh share application money was received during the year under consideration. Instead, the old loans were converted into shares, and thus, the addition made by the AO was unjustified.

 ITAT’s Decision

The ITAT considered the rival contentions and perused the materials on record. The tribunal found that the documents submitted by the assessee sufficiently demonstrated that no fresh share application money was received during the year. Instead, the old loans were rounded off by way of share allotment to the respective creditors. Since no fresh amount in cash or otherwise was received, the observation by the AO that the assessee had introduced unexplained money as share application money was incorrect.

The ITAT concluded that the additions made by the AO were not justified and ordered the deletion of the additions. Consequently, the appeal by Sachdev Steel Pvt. Ltd. was allowed.

Conclusion

The case of Sachdev Steel Pvt. Ltd. Vs ITO highlights the importance of providing adequate documentation to support the nature of transactions in income tax assessments. The ITAT Kolkata ruled in favor of the assessee by emphasizing that the conversion of old loans into share application money does not constitute unexplained income under Section 68 of the Income Tax Act. The tribunal’s decision reinforces the principle that additions under Section 68 require clear evidence of unexplained cash credits and cannot be based on assumptions without proper consideration of the provided explanations and supporting documents.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

The present appeal has been preferred by the assessee against the order dated 20.01.2023 of the National Faceless Appeal Centre [hereinafter referred to as ‘CIT(A)’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’).

2. The assessee in this appeal has agitated against the confirmation of addition of Rs.2,48,00,000/- made by the Assessing Officer treating the share application money received by the assessee as unexplained income of the assessee invoking provisions of section 68 of the Act.

3. At the outset, the ld. Counsel for the assessee has invited our attention to the impugned assessment order to submit that the Assessing Officer during the assessment proceedings noted that the assessee had received share application/share allotment money from the following three parties:

3.1 The ld. Counsel has further submitted that on being asked to explain about the identity and creditworthiness of the creditors and genuineness of the transaction, the assessee furnished the necessary documents and explained that no fresh share application money was received from the above-noted share subscribers. That the above-noted share subscribers were the group companies/related parties of the assessee company. That there were old outstanding loans of these parties towards the assessee, which were converted into share application money and share were allotted to the assessee company in discharge of old loan liability. However, the Assessing Officer did not examine or consider the above submission and simply made the addition of the aforesaid amount observing that the assessee has not produced any investor for examination before him.

4. The ld. CIT(A) confirmed the addition so made by the Assessing Officer.

5. Before us, the ld. Counsel for the assessee has referred to the copy of the paper-book and documents which were also filed before the Assessing Officer. The ld. Counsel for the assessee has invited our attention to page 13 of the paper-book, which is a copy of balance sheet as on 31.03.2012, which shows that there was outstanding loan of Rs.30,00,000/- of Bharat Bhushan Sachdev HUF, further loan of Rs.45,20,000/- of Shangrila Builders Pvt. Ltd. and another loan of Rs.1,73,00,000/- of Spoxy Vincom Pvt. Ltd. as on 31.03.2011 i.e. in the financial year 2010-11. The ld. Counsel has further invited our attention to page 39 of the paper-book, vide which a resolution was passed by the Board of Directors, whereby, the unsecured loan of Rs.24800000/- on the total consideration of 124000 equity shares of Rs.10 each with security premium of Rs190/- per share were allotted to various parties by way of final settlement of the contract value for consideration otherwise than in cash. Further, the ld. Counsel has invited our attention to page 47 of the paper-book, which is confirmation of accounts by Bharat Bhushan Sachdev (HUF), wherein, a sum of Rs.30,00,000/- is shown as opening balance credit as on 01.04.2011. Similarly, at page 50 of the paper-book, there is a opening balance of Shangrila Builders Pvt. Ltd. of Rs.45,20,000/- as on 01.04.2011 and at page 62 of the paper-book, there is opening balance of Rs.1,73,00,000/- of Spoxy Vincom Pvt. Ltd. on 01.4.2011, which have been converted into share application and shares have been allotted to the respective parties during the financial year under consideration.

4. We have heard the rival contentions and perused the materials on record. We note that the above documents referred by the ld. Counsel for the assessee are enough to prove on record that no fresh share application money was received by the assessee during the year under consideration. The old loans were rounded off by way of share allotment to the respective creditors. Therefore, since no fresh amount either in cash or otherwise has been received by the assessee during the year and only the old loans were converted into the share allotment, therefore, the observation of the Assessing Officer that the assessee has introduced the unexplained money as share application money, is not correct. Hence, the additions made by the Assessing Officer are not justified in this case and accordingly the same are ordered to the deleted.

5. In the result, the appeal of the assessee stands allowed.

Kolkata, the 28^th June, 2024.