ITAT Delhi Validates CIT(A)'s Order Deleting Section 68 Addition and Allowing Consultancy Expenses

Case Overview

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Delhi Bench has dismissed the Revenue's appeal and allowed the assessee's cross-objection in the matter of ACIT Vs Westcourt Hospitality Pvt. Ltd. The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to delete additions made under Section 68 of the Income Tax Act, 1961, while also directing the deletion of disallowances of professional consultancy charges claimed by the assessee company.

Background Facts

M/s Westcourt Hospitality Pvt. Ltd., a private limited company incorporated on 03.03.2009, operates in the domain of real estate project consultancy services. For Assessment Year 2018-19, the company submitted its income tax return on 09.10.2018, declaring a business loss of Rs.1,99,79,324/-.

The case was picked up for detailed scrutiny assessment to examine investments, advances, loans, and the reported business loss. Following the issuance of statutory notice under Section 143(2) of the Act and subsequent notices under Section 142(1) accompanied by detailed questionnaires, the assessee provided all necessary information and documents requested by the Assessing Officer (AO).

Assessment Completed by AO

On 09.02.2021, the AO finalized the assessment under Section 143(3) of the Act, determining the total taxable income at Rs.43,72,80,000/- against the declared loss of Rs.1,99,79,324/-. The AO made the following additions and disallowances:

  • Addition of Rs.43,72,80,000/- under Section 68 by characterizing the amount received through allotment of Compulsorily Convertible Debentures (CCDs) as unexplained cash credits
  • Disallowance of Rs.2,99,000/- claimed as expenditure relating to increase in share capital
  • Disallowance of Rs.1,78,50,000/- being professional and consultancy charges, holding them to be incurred for non-business purposes

Appellate Proceedings Before CIT(A)

Aggrieved by the assessment order, the assessee filed an appeal before the CIT(A), National Faceless Appeal Centre (NFAC). The assessee challenged all three additions/disallowances made by the AO.

During the appellate stage, the CIT(A) called for a remand report from the AO regarding additional evidences submitted by the assessee. In the course of remand proceedings, the AO conducted direct enquiries by issuing notices under Section 133(6) to:

  • Shri Manoharan Govindaswamy (Director of the assessee company)
  • Smt. M. Saraswathi (Spouse of the director)
  • Shri M. Naveen Kumar (Son of the director)
  • Shri M. Chandru Kumar (Son of the director)

All the parties responded to the enquiries by furnishing their bank account statements and other corroborative documents explaining the origin and trail of funds.

CIT(A)'s Decision

After thorough examination of the assessment order, remand report, documentary evidence on record, and detailed submissions from the assessee, the CIT(A) passed a partially favorable order:

  • Deleted the addition of Rs.43,72,80,000/- made under Section 68
  • Deleted the disallowance of Rs.2,99,000/- pertaining to share capital related expenses
  • Confirmed the disallowance of Rs.1,78,50,000/- toward professional consultancy expenses

Appeals Before ITAT

Both parties approached the ITAT:

Revenue's Appeal (ITA No.3294/Del/2025) challenged:

  1. Deletion of disallowance of Rs.2,99,000/- on account of expenses for increase of share capital
  2. Deletion of addition of Rs.43,72,80,000/- made under Section 68 for unexplained cash credits

Assessee's Cross-Appeal (ITA No.3351/Del/2025) challenged:

  1. Confirmation of disallowance of Rs.1,12,00,000/- paid to M/s Westcourt Real Estate Pvt. Ltd. for services
  2. Confirmation of disallowance of Rs.51,50,000/- paid to M/s Westcourt Real Estate Pvt. Ltd. for services
  3. Confirmation of disallowance of Rs.15,00,000/- paid to M/s Studio U Plus Advisory Pvt. Ltd. for services

Key Issues Before the Tribunal

Whether the CIT(A) correctly deleted the disallowance of Rs.2,99,000/- claimed as expenses toward increase in share capital.

Issue 2: Addition Under Section 68

Whether the CIT(A) was justified in deleting the addition of Rs.43,72,80,000/- made under Section 68 treating CCDs as unexplained cash credits.

Issue 3: Professional Consultancy Expenses

Whether the disallowance of Rs.1,78,50,000/- toward professional consultancy charges was sustainable in law.

Tribunal's Analysis and Findings

On Ground 1: Expenses for CCD Issuance (Rs.2,99,000/-)

The Revenue contended that the expenses of Rs.2,99,000/- claimed by the assessee toward increase in share capital should be disallowed under Section 35D of the Income Tax Act, 1961.

Assessee's Contention:

The assessee clarified that out of the total amount disallowed, only Rs.1,200/- was actually incurred as ROC fees for increase in authorized share capital. The remaining expenses comprised:

  • Rs.2,95,000/- for purchase of stamp duty for CCDs on 22/03/2018
  • Rs.2,800/- for ROC fee payment for CCD allotment

The assessee argued that CCDs are in the nature of borrowings/debt instruments and not share capital. Therefore, Section 35D provisions relating to preliminary expenses for issue of shares are not applicable.

Tribunal's Observations:

The Tribunal noted that the AO himself had observed in paragraph 4.2(c) of the assessment order that the assessee spent only Rs.1,200/- on ROC fees for increase in authorized share capital, while the balance amounts were spent on stamp duty and ROC fees for CCD issuance and allotment.

The Tribunal relied on the judgment of the Hon'ble Delhi High Court in CIT v. Havells India Ltd. (352 ITR 376), where it was categorically held:

"It is well settled that expenditure incurred in connection with the issue of debentures or obtaining loan is revenue expenditure... Though it prima facie appears that there are sufficient facts to indicate that what was contemplated was an issue of shares to the Mauritius Company under the Investor Agreement which would result in strengthening of the assessee's capital base, having regard to the judgments cited on behalf of the assessee, in which it has been held that despite indications to the effect that the debentures are to be converted in the near future into equity shares, the expenditure incurred should be allowed as revenue expenditure on the basis of the factual position obtaining at the time of the debenture issue."

Decision:

Following the ratio laid down by the Hon'ble Delhi High Court and considering that the expenses in question were incurred in relation to issuance of CCDs (which are borrowing instruments), the Tribunal held that there was no ambiguity about the revenue nature of these expenses. Accordingly, the Tribunal confirmed the CIT(A)'s order deleting the disallowance of Rs.2,99,000/-.

Ground No.1 of Revenue's appeal was dismissed.

On Ground 2: Addition Under Section 68 (Rs.43,72,80,000/-)

The core issue revolved around whether the assessee had satisfactorily discharged the onus cast upon it under Section 68 to explain the nature and source of credit entries in its books.

Revenue's Arguments: