2015 (11) TMI 1304 - AT - Income Tax

Appeal outcome: Revenue's addition dismissed, assessee's addition partly allowed, Assessing Officer directed to restrict addition.

M/s Paramshakti Distributors Pvt. Ltd. Versus ACIT, Cent. Cir-45, Mumbai

M/s Paramshakti Distributors Pvt. Ltd. Versus ACIT, Cent. Cir-45, Mumbai - TMI Issues Involved:1. Deletion of addition made on account of share application money.2. Deletion of addition made on account of sundry creditors and enhancement of Gross Profit (GP) rate.Issue 1: Deletion of Addition Made on Account of Share Application MoneyThe solitary issue in this appeal relates to the deletion of the addition made on account of share application money. The Assessing Officer (AO) made the addition on the grounds that the assessee failed to prove the identity, creditworthiness, and genuineness of the share application money received from 15 companies. The AO alleged that the assessee company paid cash and took accommodation entries of share application money.Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee submitted various details such as the address, PAN identity of the subscribers, confirmation of investment, copies of audited balance sheets, bank statements showing receipt of amounts by cheques, signed share applications, resolutions, and extracts from the Ministry of Corporate Affairs website. The assessee argued that the law regarding the source of share application money is well-settled and that it is for the share applicants to explain the source if they are identifiable. The assessee cited several judicial pronouncements, including the Apex Court's decision in CIT v. Lovely Exports, to support their argument that section 68 cannot be invoked if the identity of the subscribers is established.The CIT(A) deleted the addition by considering the assessee's arguments and judicial pronouncements. The CIT(A) noted that the appellant company had received share capital money from shareholders and had provided documentary evidence to prove the identity, creditworthiness, and genuineness of the transaction. The CIT(A) concluded that the AO had not made a case of unexplained cash credits and that the share application money could not be added as undisclosed income in the hands of the company.The Tribunal upheld the CIT(A)'s order, noting that the CIT(A) had found the share capital to be genuine after considering various documentary evidence and applying the propositions of law laid down by various High Courts and the Supreme Court. The Tribunal found no infirmity in the CIT(A)'s order deleting the addition made on account of share application money.Issue 2: Deletion of Addition Made on Account of Sundry Creditors and Enhancement of Gross Profit (GP) RateThese are cross-appeals filed by the assessee and revenue for the assessment year 2005-06. The AO made an addition of Rs. 23.16 lakhs on account of sundry creditors, specifically from M/s Chevron Metal Products Pvt. Ltd., based on the statement of its Director, Mrs. Mehrunnisa Hussaini, who admitted that the transactions were only accommodation entries. The AO also referred to the orders passed in the case of SKS Ispat and Power Ltd., wherein similar additions were made.The CIT(A) deleted the addition, noting that the AO had accepted the purchases from the said party and the trading results but treated the credit balance as unexplained cash credit. The CIT(A) observed that the amount added had been paid to the party in the subsequent year and that similar additions were not made in the hands of the Director's company. The CIT(A) directed the AO to apply a GP rate of 6%, resulting in an enhancement of Rs. 4.92 crores.The Tribunal considered the rival contentions and found that the AO had merely relied on the statement of Mrs. Mehrunnisa Hussaini, which contained contradictory statements regarding the genuineness of the transactions. The Tribunal noted that the AO had not carried out any inquiry to show that the purchases were not genuine and that the quantitative tally of purchase and sale had not been doubted by the AO. The Tribunal directed the AO to restrict the addition to 10% of the purchases, amounting to Rs. 2,21,600/-, to serve the ends of justice.Regarding the CIT(A)'s direction to estimate the GP rate at 6%, the Tribunal found no merit in estimating the profit without rejecting the books of accounts. The Tribunal observed that the AO had not doubted the quantitative tally/stock register maintained by the assessee and that no incriminating material or evidence in respect of other transactions had been brought on record. The Tribunal concluded that the addition in the GP should be restricted to the extent of part of the purchases made from M/s Chevron Metal Products Pvt. Ltd. and upheld the addition of Rs. 2,31,600/-.Conclusion:1. The appeal of the revenue regarding the deletion of addition made on account of share application money was dismissed.2. The appeal of the assessee regarding the addition made on account of sundry creditors was allowed, and the appeal of the revenue was partly allowed, with the Tribunal directing the AO to restrict the addition to Rs. 2,21,600/- and rejecting the CIT(A)'s direction to estimate the GP rate at 6%.