A two-judge bench of the Madras High Court comprising the Chief Justice Indira Banerjee recently held that the provisions of section 68 of the Income Tax Act providing addition on account of unexplained cash credit does not attract if there was no cash transaction on the allotment of shares.
The assessee is a Company carrying on the business of manufacture of Wind Electric Generators and parts of Wind Electric Generators. The assessee had to pay a sum of Rs.65.95 to one Mrs. Vathsala Ranganathan on her retirement from M/s.Shriram Auto Finance. Consequently, the appellant decided to allot its shares to Smt. Vathsala Ranganathan in settlement of the amount due to her. The shares were allotted against the liability that had accrued to the appellant-assessee from transfer to it of the assets being receivables and preference shares of equal value and correspondingly there was a liability created in favour of the transferors, viz., M/s.Shriram Auto Finance.
The Assessing Officer suspected the genuineness of the transaction and made an addition under section 68 of the Income Tax Act.
The ITAT, on the second appeal, held that by way of introducing cash credit in the name of share premium and share capital, the appellant-assessee is making attempts to reduce the tax liability. It was further held that when the Assessing Officer found credit in the books of account and the appellant-assessee could not offer any satisfactory explanation, then the entries found in the books have to be treated as income of the appellant-assessee.
The appellant-assessee contended that shares were allotted to Smt. Vathasala Ranganathan and others in settlement of pre-existing liability and, therefore, it will not amount to unexplained cash credit.
The division bench comprising Chief Justice Indira Banerjee, and Justice Abdul Quddhose accepted the plea of the appellant that when there was no cash involved in the transaction of allotment of shares, provisions of Section 68 of the said Act treating it as unexplained cash credit are not attracted.
“It was argued that inasmuch as the source of credit in which shares were allotted was clearly explainable, the same cannot be treated as an unexplained cash credit. Moreover, the identity of the shareholders and the liability of the company to shareholders has been established and, therefore, the allotment of shares cannot be treated as unexplained cash credit,” the bench said.
“However, the second question is answered in favour of the assessee and against the Revenue by the judgment of the Division Bench of this Court in Commissioner of Income Tax v. Electro Polychem Ltd., supra, and Commissioner of Income Tax v. Steller Investment Ltd., supra,” the bench added.
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