Application of Section 68 in allotment of shares against existing liabilities
Section 68 of the Income Tax Act, 1961 focuses on the treatment of unexplained cash credits in determining tax liability of any individual. The section states that if any sum is found credited in the books of any assessee, for which the assessee fails to explain the nature or source in a satisfactory manner, the assessing officer may add the same to his income to be charged to tax in the relevant previous year.
However, allotment of shares as settlement against existing liabilities cannot be taken as an unexplained cash credit, as determined in the case of Principal Commissioner of Income Tax vs. Vishnu Distributors (P.) Ltd in the High Court of Calcutta.
Facts of the case
- The assessee allotted shares at a premium to several entities and in lieu of such allotment it received shares of other private limited companies.
- The assessing officer issued notices to the directors of all the above companies through powers granted under section 131 of the Act. When no response was received, the AO made an addition under section 68.
- This addition to income was deleted by Commissioner (Appeals) and later affirmed by the Tribunal before the appeal reached the High Court.
Conclusion
- The high court held that the Tribunal was correct in its decision, as it had referred to the decisions in: –
- CIT vs. Alishan Steels (P.) Ltd.
- CIT vs. Abhijeet enterprise Ltd.
- R. Global Energy (P) Ltd. v. ITO
- According to above decisions there was no cash element involved in such transactions where shares were issued in lieu of other shares or shares were issued to setoff existing liabilities, thus requiring no addition to be made as ‘unexplained cash credit’ u/s 68 of the Act.
Payment of STT does not govern whether capital gain losses can be set off against gains
As per section 74 of the Income Tax Act, 1961, short term capital losses can be setoff against both short-term and long-term capital gains. On the other hand, long term capital losses can only be setoff against long term capital gains. Any losses not setoff in this manner can be carried forward for a period of 8 subsequent assessment years.
In Eastspring Investments India Equity Open Ltd. Vs Deputy Commissioner of Income Tax, the assessee had setoff short term capital losses (on which STT – securities transaction tax was paid) against short term capital gains (on which STT was not paid). The AO considered such a setoff not in accordance with the provisions of the Act and thus recomputed the capital gains offered to tax by the assessee. The Dispute Resolution Panel upheld the decision of the AO and subsequently an appeal was raised in the ITAT Mumbai Bench ‘I’.
It was contended that while the provisions of section 70(2) and 74 mention the incomes against which short term capital losses can be set off, such sections do not make a distinction on the basis of whether STT has been paid. Further, similar decisions have been taken in the favour of the assessee in cases like CIT vs. Rungamatee Trexim (P.) Ltd. In the High Court of Calcutta. There was no reason to deviate from such precedents and thus the AO was directed to correct his computation as per the law.
Section 37 disallowance cannot be made solely on the basis of GST Registration
In the case of Roopa Rana Infrastructures (P.) Ltd vs. DCIT, the assessee was not allowed expenses amounting to ₹49.48 lakhs u/s 37 as the invoices furnished by assessee were from parties not registered under GST. The view of the AO was upheld by the Commissioner (Appeals) before an appeal was raised with the Tribunal.
The contention of the assessee was that the above-mentioned section did not require entities to be registered under GST for expenses to be allowed. The transactions were carried through legitimate banking channels along with appropriate deduction of tax at source, thus proving them to be genuine, alongside the furnishing of valid invoices. This view was held as correct by the Tribunal and the AO was directed to delete the additions made earlier.
