2019 (1) TMI 2059 - AT - Income Tax

Revenue's appeal dismissed; Section 68 doesn't apply to non-cash share exchanges. CIT(A)'s decision to delete Rs. 85L upheld.

Income-tax Officer, Ward-2 (2), Kolkata Versus M/s. Aryvarat Construction Pvt. Ltd.

Income-tax Officer, Ward-2 (2), Kolkata Versus M/s. Aryvarat Construction Pvt. Ltd. - TMI ISSUES PRESENTED and CONSIDEREDThe core issue in this case was whether the addition of Rs. 85,00,000/- made by the Assessing Officer (AO) under Section 68 of the Income-tax Act, 1961, as unexplained cash credit, was justified. The Tribunal needed to determine if the share application money received by the assessee, allegedly without proper explanation of its nature and source, warranted such an addition.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsSection 68 of the Income-tax Act, 1961, deals with unexplained cash credits. It allows for the addition of any sum credited in the books of an assessee if the nature and source of such sum are not satisfactorily explained. The Tribunal referred to precedents, including the cases of ITO Vs. Anupam Nandi and Jatia Investment Co. Vs. CIT, to interpret the application of Section 68 in situations involving share transactions.Court's Interpretation and ReasoningThe Tribunal observed that the AO added the share application money as unexplained cash credit without considering that the assessee had exchanged shares with the share applicant companies rather than receiving cash. The Tribunal noted that this was a crucial factor since Section 68 applies to cash credits, and no cash transaction occurred in this case.Key Evidence and FindingsThe Tribunal found that the shares were allotted in exchange for acquiring shares from other companies, and no cash was transferred. The balance sheet of the assessee company indicated that the share capital was raised for consideration other than cash. This evidence supported the assessee's claim that the transaction did not involve unexplained cash credits.Application of Law to FactsThe Tribunal applied the legal principles established in similar cases, such as Anand Enterprises Ltd. and Kantilal and Bros. vs. ACIT, where it was held that Section 68 does not apply to transactions settled through share exchanges without cash consideration. The Tribunal concluded that the AO erroneously invoked Section 68, as the transaction involved share exchanges rather than cash credits.Treatment of Competing ArgumentsThe Tribunal considered the arguments presented by the revenue, which challenged the deletion of the addition by the CIT(A). However, the revenue could not demonstrate any factual or legal differences between this case and the precedents cited. The Tribunal found the CIT(A)'s decision consistent with established legal principles and thus upheld it.ConclusionsThe Tribunal concluded that the provisions of Section 68 were not applicable in this case, as the transaction involved share exchanges without cash transfer. Therefore, the addition of Rs. 85,00,000/- as unexplained cash credit was unjustified, and the CIT(A)'s order to delete the addition was correct.SIGNIFICANT HOLDINGSThe Tribunal held that Section 68 of the Income-tax Act does not apply to transactions involving the exchange of shares without cash consideration. The core principle established is that for Section 68 to apply, there must be a cash credit, which was absent in this case.Final Determinations on Each IssueThe Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs. 85,00,000/-. The Tribunal's decision was based on the lack of cash transactions and the proper documentation of the share exchanges in the assessee's financial records.