ITAT Deletes Section 68 Addition on Funds Received from Directors and Group Concern

The Income Tax Appellate Tribunal (ITAT) Delhi, holds that additions cannot be made merely on suspicion when identity, creditworthiness and genuineness of transactions are duly established through documentary evidence.

The assessee company was engaged in the business of dyeing and printing of cloth but discontinued its operations due to restrictions imposed on highly polluting industries. During assessment year 2017-18, the company received funds from directors, their relatives and a group concern, which were shown as share application money. The AO treated the amount of Rs.1,780,839 as unexplained cash credit under Section 68 and further assessed rental income of Rs.11 lakh under the head “Income from House Property”.

The Tribunal observed that the assessee had furnished confirmations, bank statements and copies of income tax returns of the parties from whom the funds were received. The transactions were carried out through banking channels and the creditors comprised directors, their relatives and a company under the same management.

The Tribunal held that the authorities had proceeded merely on suspicion without bringing any evidence or documentary material on record to rebut the evidence produced by the assessee. It referred to the Supreme Court’s decision in S.A. Builders v. CIT and observed that it is not for the Revenue to decide how a businessman should organise his affairs, unless the arrangement is intended to evade taxes. Accordingly, the addition of Rs.1,780,839 made under Section 68 was deleted.

With regard to rental income, the Tribunal noted that the assessee had discontinued its manufacturing activities because of pollution restrictions and had merely let out the factory premises with the intention of earning rental income. Since no systematic business activity was carried on, the receipts were rightly assessable under the head “Income from House Property”. The Tribunal upheld the allowance of a standard deduction under Section 24(a).

Further, with respect to the profit of Rs. 4,55,938 arising from the sale of assets, the Tribunal restored the matter to the Assessing Officer for verification of the assessee’s claim. Consequently, the appeal filed by the assessee was partly allowed.