2018 (6) TMI 1860 - AT - Income Tax

Assessee wins appeal against Section 68 addition for pre-business share application money deemed unexplained cash credits

Arjun Trading Company Private Ltd. Versus ITO-5, (1), Firozabad.

ITAT allowed the assessee's appeal against addition under Section 68 for unexplained cash credits from bogus share application money. The tribunal held ... Addition u/s 68 - unexplained cash credits - Bogus share application money receipts - amounts were received before the commencement of the business - HELD THAT:- As decided in Bharat Engineering Construction Company [1971 (9) TMI 14 - SUPREME COURT]as in the present case, the amounts were received before the commencement of the business. The Hon’ble Supreme Court held that as such, they could not be added as the assessee’s income. The assessee is right in contending that the share application money having been received before the start of the assessee’s business, it cannot be considered as the assessee’s undisclosed income and that as such, no income of the assessee can be said to have escaped assessment. Assessee appeal is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment were:1. Whether the addition of Rs.59,80,000/- as unexplained cash credits under Section 68 of the Income Tax Act was justified when the share application money was received before the commencement of business operations.2. Whether the Assessing Officer (AO) erred in law and on facts by making the addition without substantial evidence that the share application money originated from the appellant's coffers.3. The appropriateness of charging interest under sections 234A and 234B of the Income Tax Act.ISSUE-WISE DETAILED ANALYSIS1. Addition of Rs.59,80,000/- as Unexplained Cash CreditsRelevant Legal Framework and Precedents: The legal framework revolves around Section 68 of the Income Tax Act, which allows the AO to add unexplained cash credits to the income of the assessee. The precedents considered include 'CIT vs. Bharat Engineering & Construction Company', where the Supreme Court held that amounts received before the commencement of business cannot be added as income. The Calcutta High Court's decision in 'CIT vs. Ashok Timber Industries' was also considered, which dealt with cash credits appearing within one month of business commencement.Court's Interpretation and Reasoning: The Tribunal noted that the assessee's business operations began on 28.02.2003, and all share application money was received before this date. The Tribunal criticized the reliance on decisions where amounts were received post-business commencement, finding them inapplicable to the present case.Key Evidence and Findings: The Tribunal acknowledged the evidence provided by the assessee, including documents and confirmations that demonstrated the receipt of share application money before business commencement.Application of Law to Facts: The Tribunal applied the principle from 'Bharat Engineering & Construction Company', determining that since the amounts were received before business operations began, they could not be treated as the assessee's income.Treatment of Competing Arguments: The Tribunal dismissed the CIT(A)'s reliance on 'Ashok Timber Industries' and other cases where amounts were received after business commencement, finding these precedents inapplicable.Conclusions: The Tribunal concluded that the addition of Rs.59,80,000/- was unjustified as the share application money was received before the business commenced. Therefore, the addition was deleted.2. Error in Making Additions Without Substantial EvidenceRelevant Legal Framework and Precedents: The legal framework involves the burden of proof on the AO to substantiate claims of unexplained income under Section 68.Court's Interpretation and Reasoning: The Tribunal found that the AO failed to provide substantial evidence that the share application money originated from the appellant's coffers.Key Evidence and Findings: The Tribunal noted the lack of evidence presented by the AO to support the claim of unexplained income.Application of Law to Facts: The Tribunal applied the principle that the AO must substantiate claims of unexplained income with evidence, which was not done in this case.Conclusions: The Tribunal concluded that the AO erred in making the addition without substantial evidence, leading to the deletion of the addition.3. Charging Interest Under Sections 234A and 234BRelevant Legal Framework and Precedents: Sections 234A and 234B pertain to interest charged for defaults in furnishing returns and payment of advance tax, respectively.Court's Interpretation and Reasoning: The Tribunal found that the interest charges were consequential to the primary issue of unexplained cash credits.Conclusions: Since the primary issue was resolved in favor of the assessee, the interest charges were rendered moot.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: 'In view of the above settled position of law, the assessee is right in contending that the share application money having been received before the start of the assessee's business, it cannot be considered as the assessee's undisclosed income and that as such, no income of the assessee can be said to have escaped assessment.'Core Principles Established: Amounts received before the commencement of business cannot be added as unexplained income under Section 68. The AO must substantiate claims of unexplained income with evidence.Final Determinations on Each Issue: The Tribunal deleted the addition of Rs.59,80,000/- as unexplained cash credits, finding that the amounts were received before business commencement. The interest charges under sections 234A and 234B were deemed consequential and thus resolved in favor of the assessee.