Revenue Cannot Sit In The Armchair Of Businessmen: ITAT Delhi Deletes ₹17.8 Lakh Addition

Tax authorities cannot sit in the armchair of businessmen and decide how businesses should be run merely because operations have ceased, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held.

The tribunal deleted an addition of nearly ₹18 lakh that the Income Tax Department had treated as unexplained cash credits after a company received funds from its directors, their relatives, and a company under the same management.

Accountant Member Ramit Kochar, sitting as a single-member tribunal, partly allowed the appeal filed by Palco Tex Feb Limited.

“The AO has concluded that since the business stood discontinued, there is no need to raise share application money, in my considered view, it is the businessman who has to decide the manner in which his business needs to be organized keeping in view commercial expediency, and not for the Revenue to sit on the arm chair of businessmen to decide as to the manner in which businesses are to be run by the assessee, unless the purpose of such organizing is malafide in order to evade taxes,” the tribunal held.

Palco Tex Feb Limited was engaged in the business of dyeing and printing cloth at its factory in Rajasthan. According to the company, it had to discontinue operations in 2015 because restrictions applicable to heavily polluting industries prevented it from continuing the business.

During the assessment year in question, the company received about ₹23.5 lakh from its directors, their relatives and a company under the same management. It repaid about ₹5.7 lakh during the year, resulting in a net increase of about ₹17.8 lakh.

The company initially reflected the amounts as share application money in its books. During the proceedings, however, it clarified that the transactions were unsecured loans. It submitted confirmations, bank statements and income tax returns of the persons who advanced the funds.

The company also explained that the money had been used for repayment of secured borrowings, repairs and renovation of business premises, electricity payments and discharge of old liabilities.

The Assessing Officer treated the amount as an unexplained cash credit. The officer questioned the receipt of funds after the business had stopped operating and concluded that the addition was liable to be made. The Commissioner of Income Tax (Appeals) upheld that view.

On examining the record, the tribunal noted that the transactions had taken place through banking channels. It also recorded that confirmations, bank statements and income tax returns of the concerned parties had been placed on record.

“I have observed that the assessee has duly discharged its primary onus u/s 68 of the 1961 Act,” the tribunal observed.

The tribunal found that the tax authorities had failed to produce material capable of dislodging the explanation offered by the company.

“The authorities below proceeded to make addition u/s 68 on account of suspicion, conjectures and surmises. The authorities below has not brought on record any cogent incriminating material to rebut the initial onus u/s 68 which stood discharged by the assessee,” it held.

Finding no justification for the addition of about ₹17.8 lakh, the tribunal directed that it be deleted.

The tribunal, however, declined to interfere with the treatment of rental receipts as income from house property. It observed that the company had merely let out its property after its manufacturing operations ceased and had not demonstrated any systematic business activity connected with the rental arrangements.

Certain other issues were remitted to the Assessing Officer for fresh examination

For Assessee: Advocate Deepak Bansal,

For Revenue: Manoj Kumar, Senior Departmental Representative