The Delhi Bench of High court has upheld the deletion of addition under Section 68 of Income Tax ACT 1961 holding that creditworthiness could be ascertained only from availability of funds and not from the period of existence and revenue earing. The record shows that the Assessing Officer (AO), while framing the assessment order had made the additions/disallowances namely under Section 68 of the Income Tax Act and Travelling expense claimed by the assessee, Azure Retreat Pvt Ltd was disallowed.
This amount constituted 70% of the travelling expenses claimed by the respondent/assessee. The respondent/assessee, being aggrieved, preferred an appeal with the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A), allowed the appeal and deleted the additions made by the AO.
The appeal preferred by the appellant/revenue against the CIT(A) decision before the Income Tax Appellate Tribunal failed. It was in this background that the appellant/revenue has preferred the instant appeal before us under Section 260A of the Income Tax Act, against the order passed by the Tribunal. insofar as the addition was concerned, it constituted an investment made by a company going by the name Blue Bay Hospitality Pvt. Ltd. [BBHL]. BBHL was incorporated in Mauritius as per the laws prevalent in that country. BBHL was issued equity shares, albeit at a premium. The face value of the shares was Rs. 10. The premium paid by BBHL was Rs. 110.
It was also relevant to note that the record discloses that in and about the same time, investment in the respondent/assessee’s share capital had also been made by certain domestic investors. Sanjeev Menon, on behalf of the revenue, submitted that both additions were wrongly deleted by the Tribunal. According to Menon, insofar as the investment made by BBHL was concerned, the amount received by the respondent/assessee was rightly added to its income, having regard to the fact that the respondent/assessee had failed to demonstrate the creditworthiness of the source of source.
He contended that the transaction concerning investment made by BBHL was not genuine. Insofar as the other addition qua travelling expenses was concerned, in support of his submission that the expenses incurred for or on behalf of the directors of the company were personal, it was submitted that no material has been placed on record by the respondent/assessee to demonstrate that the expenses incurred on hotels and hiring of vehicles had any nexus with the business of the assessee. Sachit Jolly, on behalf of the revenue submitted that this was not a case where a substantial question of law arises for consideration by this Court and all materials had been submitted.
The division Bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that the concerned Mauritius authority gave details as to the persons who were directors of BBHL and indicated in their response, that the directors were residents of Mauritius. Furthermore, the very same authority also clarified that Joseph Thomas was the beneficial owner of the BBHL. Besides this, the concerned authority of Mauritius also provided the financial statements concerning BBHL, The Mauritius Revenue Authority had also forwarded the bank statement of BBHL. BBHL was an investment company and therefore, its creditworthiness could only be ascertained from the availability of funds and not by having regard to the period for which it had been in existence and earned its revenue.
The Bench further observed that the argument advanced by revenue, that the onus was on the respondent/company to further demonstrate creditworthiness of the source of source, was flawed as per the amendment in law with regard to the identifying source of source was inserted by way of a proviso to Section 68 of the Income Tax Act with effect from 01.04.2013. Therefore, this obligation in law could not be cast on the respondent/assessee, although it did identify the source of source. The Bench held that no interference was called for with the impugned order passed by the Tribunal as no substantial question of law arises for consideration.