Provision of section 68 applicable even if business not commenced

Provision of section 68 applicable even if business not commenced but the sum is credited in the books of account of the assessee

ABCAUS Case Law Citation:
ABCAUS 3010 (2019) (06) ITAT

Important Case Laws Cited/relied upon by the parties:
CIT V Bharat Engineering and Cost Co 83 ITR 187 (SC) (1972)
CIT Vs Orrisa Corporation P Ltd (1986) 159 ITR 78

The appeal was filed by the assessee Trust against order of the CIT(A) wherein he had confirmed the  addition made by the Assessing Officer (AO) on account of unexplained credit u/s 68 of the Income Tax Act, 1961 (the Act).

During the course of assessment proceedings, it was found that the assessee had obtained unsecured loan from a Pvt ltd Company. The assessee had shown above unsecured loan in its balance sheet on liabilities side.

The assessee was asked to prove the identity, creditworthiness of this party as well as genuineness of the transaction. Assessee submitted the copy of the account of the party, its return of income, bank statement.

The AO found that income of the lender was only a meagre amount. Further, the bank account was only for the part of the year in which there was a heavy debit and credit which did not commensurate with the return of income of the assessee.

On failure of the trust to produce the directors of the lender company the AO got the enquiry conducted and found that neither the company not its directors existed at their given addresses. Accordingly, the AO made an addition u/s 68 of the Act.

Before the Tribunal one of the ground taken by the appellant trust was that funds were received before starting of the business, and therefore addition could not be made in the hands of the assessee u/s 68 of the act. The assessee relied upon the series of decisions to substantiate its case.

The Tribunal observed that the assessee was a charitable trust which on coming into existence obtained huge unsecured loan, purchased land, started constructing the building and spent substantially thereon itself showed that assessee trust had conducted the charitable activities by creating the assets of the trust.

The Tribunal observed that apparently, the application of the assessee u/s 12AA and 80G were pending. Registration u/s 12 AA is only applicable where the activities of the trust are found to be genuine. Unless the assessee had started its activities how they can be found to be genuine. Therefore, it was apparent that the assessee had started its charitable activities for which it was formed. Further in the order against the rejection of application u/s 12AA it was stated that it fulfilled all the conditions of the respective section, therefore, now it could not be said that it had not carried out any activities.

Further the Tribunal pointed out that arguments of the assessee that activities of the trust having not started and therefore, no addition can be made in the hands of the assessee stood negated by the Hon’ble Supreme Court.

The Hon’ble Supreme Court has observed that Section 68 of the 1961 Act was introduced for the first time in the Act. There was no provision in the 1922 Act corresponding to this section. Comparing the provisions of section 68 with 1922 Act, the Apex Court stated that under the 1922 Act, where a large amount of cash was found credited on the very first day of the accounting year, and considering the extent of the business, it was not possible that the assessee earned a profit of that amount in one day, the amount could not be assessed as the income of the year on the first day on which it was credited in the books. Under this section, even in such a case, the unexplained cash credit might be assessed as the income of the accounting year for which the books are maintained.

In view of the above, the Tribunal opined that the Hon’ble Supreme Court had already considered this issue and held that even if the business are not commenced but the sum is credited in the books of account of the assessee the provision of section 68 is applicable.

The Tribunal confirmed the order of the CIT-A confirming the addition in the hands of the assessee u/s 68 of the income tax act as assessee had failed to prove the identity and creditworthiness of the lender as well as the genuineness of the transaction.

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