Unreported Decisions – February 2022

By Ajay R. Singh, Advocate and CA Rohit Shah

1. Section 68- Receipt of share capital and premium thereon–AO doubted creditworthiness of investors because of low income declared in ROI – no enquiry or investigation was made with regard to worth of investor companies :

Assessee-company received share capital and premium thereon. AO doubted creditworthiness of investors because low income was declared in the return of income by investors and credits were appearing in the bank accounts of investors through banking channel before making investment in assessee-company. Accordingly, AO taxed amount received by assessee as unexplained credit under section 68.

Held: Assessee in respect of investors filed their confirmation, PAN, ITR and bank statements and wherever applicable filed copies of balancesheet of investor companies. AO did not doubt documentary evidences filed by assessee. No investor was asked to appear before AO for recording their statements regarding genuineness of the transaction in the matter. No cash was found to have been deposited in the accounts of investors before making investment in assessee company. AO did not make any investigation or enquiry with regard to worth of the investors, whether they were able to make investment in assessee-company. Merely because low income was declared in the return of income by investors same could not be a ground to reject explanation of assessee and documentary evidences, particularly when no enquiry or investigation was made with regard to worth of investor companies. AO had also not brought any evidence on record that even if share applicants did not have the means to make investments, the investments made by them actually emanated from coffers of assessee so as to enable it to be treated as undisclosed income of assessee. There were sufficient funds available in bank accounts of investors to make investment in assessee-company and investors were assessed to tax and had filed their return of income and all the transactions were carried out through banking channel. Accordingly, assessee had proved creditworthiness of investors and genuineness of transaction in the matter and, therefore, addition made under section 68 could not be upheld.

ACIT v. S.P. Singla Construction (P) Ltd. [ITA No. 5163/Del/2016 ; dt 17/2/2021 AY 2010-11 ; Bench : G Delhi]

2. S. 37(1): Disallowance of tax credit/service tax written off—Allowable expenditure

Assessee was engaged in the business of manufacturing, assembling and trading of parts and accessories for mobile phones. AO noticed that assessee had debited an amount towards Service Tax written off account. Therefore, AO called upon the assessee to explain as to why Service Tax written off should not be disallowed under section 37(1). Assessee submitted that he availed various input services during the financial year relevant to assessment years 2008-09 and 2009-10 and had followed an accounting method, whereby expenses have been debited to profit & loss account, excluding Service Tax. Further, when Service Tax Department had rejected refund claim made by assessee for reasons best known to them, assessee had reversed input tax credit and claimed same as expenditure deductible under section 37(1). AO, however, was not convinced with the explanation furnished by assessee. According to him, Service Tax credit being rejected, cannot impact the profit & loss account.

Held: When input service tax credit was carried forward from earlier financial year to the current financial year, it partakes the nature of taxes paid for the current financial year and hence deductible as and when assessee had debited service tax component paid on input services to the profit & loss account. It is well settled principle of law by decision of various courts and Tribunals that input tax credit/CENVAT is deductible under section 37(1), when such input tax credit was reversed or written off in the books of account.

FIH India (P) Ltd. v. Dy. CIT [ITA No.1184/ Chny/2018; Bench B Chennai ; AY 2010-11 ; dated 8/2/2021]