ITAT Deletes Section 68 Addition Against Palco Tex Feb Ltd, Upholds Taxation of Rental Income as House Property Income

June 18, 2026 : In a significant ruling on unexplained cash credits under Section 68 of the Income Tax Act, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has granted substantial relief to Palco Tex Feb Limited by deleting an addition of ₹17.80 lakh made by the Income Tax Department. The Tribunal held that the assessee had successfully discharged its burden of proving the identity, creditworthiness, and genuineness of the transactions relating to funds received from directors, relatives, and a group company.

The dispute arose for Assessment Year 2017-18 after the Assessing Officer (AO) questioned funds reflected by the company as share application money. Palco Tex Feb Ltd, which was previously engaged in the business of dyeing and printing cloth at its factory in Bhiwadi, Rajasthan, had discontinued operations in 2015 due to restrictions applicable to highly polluting industries. Despite the closure of business activities, the company received funds from its directors, their relatives, and an associated company. The AO treated the net amount of ₹17.80 lakh received during the year as unexplained cash credits under Section 68 of the Income Tax Act, 1961.

During assessment proceedings, the Revenue authorities took the view that it was commercially unreasonable for a company with no active business operations to continue receiving share application money. The AO also observed that the company had not issued any prospectus and later sought to treat the funds as unsecured loans rather than share application money. Based on these circumstances, the addition was made and subsequently confirmed by the Commissioner of Income Tax (Appeals), who held that the assessee had failed to establish the creditworthiness of the contributors and the genuineness of the transactions.

Before the Tribunal, the company argued that all relevant documentary evidence had been furnished, including confirmations, bank statements, and income tax returns of the persons and entities from whom the funds were received. It further contended that the money had been utilized for repayment of loans, renovation of business premises, payment of statutory dues, and maintenance of business assets while the management explored alternative business opportunities.

After examining the record, ITAT Accountant Member Ramit Kochar found merit in the assessee’s submissions. The Tribunal noted that the funds had been received through banking channels and that confirmations, bank statements, and income tax records of the contributors had been placed on record. The Tribunal also observed that one of the contributors, Palco Plast Pvt. Ltd., had independently confirmed the transactions in response to a notice issued by the department under Section 133(6) of the Income Tax Act.

Importantly, the Tribunal held that the assessee had discharged its primary burden under Section 68. Rejecting the approach adopted by the lower authorities, the Tribunal remarked that the additions were based largely on suspicion rather than evidence. In a notable observation, the Tribunal stated, “It is the businessman who has to decide the manner in which his business needs to be organized keeping in view commercial expediency, and not for the Revenue to sit on the arm chair of businessmen to decide as to the manner in which businesses are to be run.” The Bench relied upon the Supreme Court’s decision in S.A. Builders v. CIT while emphasizing the limits of tax authorities in questioning commercial decisions unless tax evasion is established.

Consequently, the Tribunal directed deletion of the entire addition of ₹17.80 lakh made under Section 68, holding that no incriminating material had been brought on record by the department to rebut the evidence furnished by the assessee.

However, the company did not receive complete relief on all issues. The Tribunal upheld the Revenue’s decision to assess rental receipts of ₹11 lakh under the head “Income from House Property” instead of “Business Income.” The company had argued that it had leased out its factory premises along with machinery, office infrastructure, and pollution-control equipment after business operations ceased. The Tribunal found that due to pollution-related restrictions, the core dyeing and printing machinery could not practically be used, and the dominant intention behind the arrangement was earning rental income rather than carrying on business activities.

The Bench observed that there was no evidence of systematic business operations or active commercial exploitation of assets. Accordingly, rental income was rightly taxable as house property income. At the same time, ITAT directed the AO to verify and allow eligible deductions under Sections 23 and 24 of the Income Tax Act, including possible interest deductions relating to construction loans, if legally admissible.

The Tribunal also addressed the issue of business loss claimed by the company. Since business operations had ceased in 2015 and no active business activities were conducted during the relevant year, the Bench held that ordinary business losses could not be automatically allowed. Nevertheless, it directed the AO to examine expenses necessary for maintaining the corporate entity, such as audit fees and statutory compliance expenses, and decide the issue afresh through a reasoned order after providing an opportunity of hearing.

On another disputed issue involving ₹4.55 lakh credited as profit on sale of assets, the Tribunal accepted that the assessee’s contention regarding treatment under the block of assets concept appeared prima facie correct. The matter was remanded to the Assessing Officer for verification and fresh adjudication in accordance with law.

The ruling is significant for taxpayers facing additions under Section 68, as it reiterates that once documentary evidence establishing identity, creditworthiness, and genuineness is furnished, tax authorities cannot sustain additions merely on assumptions regarding business prudence or commercial necessity. The judgment also highlights the distinction between business income and house property income in cases where industrial assets are leased after closure of business operations.

Case Reference : Palco Tex Feb Limited v. Income Tax Officer, Ward-19(3), Delhi