2024 (7) TMI 1416 - AT - Income Tax

ITAT upholds deletion of unexplained cash credit addition under section 68 after establishing investor credibility and genuineness

Assistant Commissioner of Income Tax CIR. 6 (2) (1), Mumbai Versus M/s. Doshion Veolia Water Solution P. Ltd.

ITAT Mumbai dismissed revenue's appeal regarding unexplained cash credit u/s 68. CIT(A) correctly deleted addition after assessee established identity, ... Unexplained cash credit u/s. 68 - AO was not satisfied with the justification regarding share premium for want of evidence in respect of identity, creditworthiness and genuineness of the parties from whom share premium was received - HELD THAT:- Admitted under rule 46A of the rules and the final remand report submitted before learned CIT(A), the identity, genuineness of the transaction and the creditworthiness of the investor were unambiguously established in respect of the share capital and premium raised by the appellant by issue of preferential shares. We find that learned CIT(A) has left no stone unturned in taking out the grains from chaff. CIT(A) has rightly deleted the aforesaid addition as share capital & premium raised by the assessee on the basis of cogent and convincing evidence as stated hereinabove. No interference is warranted in the impugned order to this effect. The first point in respect of ground–1, is determined in negative against the revenue. Addition on account of section 14A - A Careful reading of the assessment order shows that learned AO found that the assessee company was in receipt of dividend which was claimed exempt u/s. 10(34) of the Act, however assessee did not apportion any expenditure attributable to the exempt income. AO thus computed interest expenditure by resorting to the computation as provided under rule 8D(2)(ii) of the Rules and worked out such interest expenditure. CIT(A), on examination of assessee’s balance sheet found that as on 31.03.2012, appellant assessee had paid up share capital of Rs. 14.48 Crores and reserve and surplus of Rs. 151.97 Crores. The investment, yielding exempt income, were shown at Rs. 48.70 Crores as on 31.03.2012 as against 1.13 Crores as on 31.03.2011. It was noted that assessee’s own fund aggregating to Rs. 166.45 Crores were much higher than the investments of Rs. 48.70 Crores that yield exempt income. Relying on HDFC Bank Limited [2014 (8) TMI 119 - BOMBAY HIGH COURT] CIT(A) deleted the aforesaid addition on the principle that if there are funds available, both interest free and interest bearing loans, than a presumption would arise that investments would be out of interest–free funds, generated or available with company provided that said funds are sufficient to meet investments. On the basis of assessee’s balance sheet, the reserves and surplus funds are in multiple times than the share capital of the assessee company. CIT(A), has thus rightly deleted the aforesaid addition. Determination of tax dues for a corporate debtor under liquidation, referencing the Insolvency and Bankruptcy Code (IBC) - In view of law laid down by Hon’ble Apex Court in Sundaresh Bhatt [2022 (8) TMI 1161 - SUPREME COURT] there is no shadow of any doubt that when the defaulter/corporate debtor goes either into corporate insolvency resolution process or under liquidation, the taxing authorities can stake their claims of tax dues either before the resolution professional or before liquidator or before the adjudicatory authority, as the case may be, within the time-limit for completion of insolvency resolution process provided under IBC. Proactive approach of the taxing authorities to stake the claim of dues as creditor, immediately after determination of tax dues subject, of course to the outcome of any pending appeal, may substantiate the claim to a larger extent as the claim has to go through the waterfall mechanism provided u/s. 53 of the IBC as explained by Hon’ble Apex Court in Rajendra Prasad Tak [2023 (11) TMI 626 - SC ORDER] The copy of this order be sent to CBDT with a request to issue necessary directions to the concerned taxing authorities to avoid any possibility of extinction of such public dues, whenever the corporate debtor goes either into the corporate insolvency resolution process or under liquidation. Issues Involved:1. Deletion of addition of Rs. 47,44,00,000/- as unexplained cash credit.2. Deletion of addition of Rs. 78,12,014/- on account of interest expenditure under Section 14A.3. Validity of reopening the assessment under Section 147.Issue-Wise Detailed Analysis:1. Deletion of Addition of Rs. 47,44,00,000/- as Unexplained Cash Credit:The assessee received Rs. 47,44,00,000/- on account of share capital and share premium. The Assessing Officer (AO) was not satisfied with the evidence provided regarding the identity, creditworthiness, and genuineness of the parties from whom the share premium was received. Consequently, the AO added this amount as unexplained cash credit under Section 68 of the Income Tax Act.The Commissioner of Income Tax (Appeals) [CIT(A)] noted that the assessee had furnished detailed documents, including the share application register and shareholders' register, which contained necessary details such as the number of shares allotted, issue price, amount of share premium, names of the persons to whom shares were issued, and the date of issue. The CIT(A) found that the AO did not make any specific query regarding the identity, genuineness, and creditworthiness of the shareholders.The CIT(A) admitted additional evidence under Rule 46A, including the financial statements of Doshion Ltd., the shareholder. The AO, in the remand report, verified the details and found no discrepancies. The CIT(A) concluded that the identity, genuineness of the transaction, and creditworthiness of the investor were established. Thus, the deletion of the addition was justified.2. Deletion of Addition of Rs. 78,12,014/- on Account of Interest Expenditure under Section 14A:The AO noted that the assessee received exempt dividend income but did not disallow any expenditure attributable to earning this income. The AO computed the disallowance under Rule 8D(2)(ii) of the Income Tax Rules, resulting in an addition of Rs. 78,12,014/-.The CIT(A) examined the balance sheet and found that the assessee had sufficient own funds (paid-up share capital and reserves) to cover the investments yielding exempt income. Relying on the principle established in HDFC Bank Limited (2014) 366 ITR 505 (Bom), the CIT(A) held that if there are sufficient interest-free funds available, the presumption is that investments are made out of these funds. Therefore, the CIT(A) deleted the addition.3. Validity of Reopening the Assessment under Section 147:For the Assessment Year (A.Y.) 2009-10, the revenue challenged the CIT(A)'s decision declaring the reopening of the assessment under Section 147 as bad in law. The CIT(A) ruled that the reopening was not based on a change of opinion but was made without any tangible material. Additionally, the AO did not make any addition on the grounds for which the reassessment was initiated.The Tribunal upheld the CIT(A)'s decision, noting that the reopening of the assessment was indeed bad in law due to the lack of tangible material and the absence of any addition based on the reassessment grounds.Conclusion:The Tribunal dismissed the revenue's appeals for both A.Y. 2012-13 and A.Y. 2009-10. The CIT(A)'s decisions to delete the additions of Rs. 47,44,00,000/- as unexplained cash credit and Rs. 78,12,014/- on account of interest expenditure were upheld. Additionally, the reopening of the assessment for A.Y. 2009-10 was declared invalid. The Tribunal emphasized the need for the tax authorities to proactively stake their claims in insolvency and liquidation proceedings to avoid the extinction of public dues.