V.V.D.Murali, Chennai vs Department Of Income Tax

अपीलाथ क ओर से / Appellant by : Shri. S. Das Gupta, IRS, JCIT. यथ क ओर से / Respondent by : Ms. S. Vidya, C.A.,

सन ु वाई क तार ख/Date of hearing : 23.04.2015 घोषणा क तार ख /Date of Pronouncement : 22.05.2015

आदे श / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

This appeal by Revenue is directed against the order of the

Commissioner of Income Tax (Appeals)-II, Chennai, dated 04.09.2014

for the assessment year 2010-2011.

:- 2 -: I.T.A.No.84/Mds/2015

2. The first ground raised by the Department for our consideration

is with regard to the Commissioner of Income Tax (Appeals) erred in

deleting the disallowance of ?1,74,000/- made u/s.40(a)(ia) on the

interest expenses, holding that the provisions of section 40(a)(ia) is

applicable for the amounts outstanding as on the end of the financial

year.

2.1 The brief facts of the case are that the assessee during the

assessment year 2010-11, debited the following the expense in the

profit and loss account:-

(i) audit fee :? 50,000/- (ii) interest payments :?1,74,000/- ---------------- Total: ?2,24,000/- ----------------

The assessee has not deducted/remitted any TDS on these expenses.

The Assessing Officer invoked the provisions of section 40(a)(ia) of the

Act and disallowed the same. Aggrieved, the assessee preferred an

appeal before the Commissioner of Income Tax (Appeals). On appeal,

the Commissioner of Income Tax (Appeals) allowed the appeal of the

assessee. Against this, the Revenue is in appeal before us.

3. We have heard both the sides and perused the material on

record. In this case ?1,74,000/- is not outstanding at the end of the :- 3 -: I.T.A.No.84/Mds/2015

close of the Financial year. Hence, in our opinion, the issue raised by

the Department is squarely covered by the order of the Special Bench

of the Tribunal (Vizag) in the case of Merilyn Shipping and Transports

vs. ACIT (2012) 136 ITD 23 (Visakhapatnam) wherein it was held that

the provisions of section 40(a)(ia) are applicable only to the expenses

that are "payable" and outstanding at the end of the close of the year

relevant to the assessment year and not to the amount already paid.

4. The same view was taken by the High Court of Allahabad in

the case of CIT vs. M/s. Vector Shipping Services (P) Ltd in ITA

No.122 of 2013 dated 09.7.2013 by holding that sec 40(a)(ia) is not

applicable when there is no outstanding balance at the end of the

close of the year relevant to the assessment year and SLP filed by the

Revenue in Supreme Court of India in CC No.8068/2014 dated

02.07.2014 is also dismissed. By respectfully following the decision of

Allahabad High Court, we incline to confirm the order of the

Commissioner of Income Tax (Appeals) on this issue.

5. The next ground is with regard to deletion /addition of

?3,57,70,443/- made by the Assessing Officer u/s.68 of the Act.

:- 4 -: I.T.A.No.84/Mds/2015

6. Brief facts of the case are that the assessee is engaged in

the business of civil construction (contract) activity in the name and

style of M/s. Deccan Constructions, a proprietary concern. The books

of accounts and the audit report under section 44AB of the Act were

filed along with the returns of income filed. In addition to the

business of civil constructions/contracts, he has certain transactions

at his personal (individual) level for which separate statement of

affairs (balance sheets) were being prepared. However, during the

financial year 2009-10, relevant to the assessment year 2010-11, for

the purpose of availing better credit facilities from the banks, the

assessee wanted to show a better picture of his business and net

worth of his civil constructions/contracts. For this purpose, he

consolidated the balance sheet of the civil constructions/contracts

business by transferring some of the assets (amounting to

?3,57,70,443/-) from his personal (individual) balance sheet to the

balance sheet of civil constructions/contracts business. The assets so

transferred were shown in the respective heads on the assets side

and the corresponding value is taken to the capital account as

additions to the capital account during the year. The assessee also

explained that he had already furnished all the details before the

Assessing Officer at the time of assessment proceedings. In support :- 5 -: I.T.A.No.84/Mds/2015

of his claim, the assessee furnished the relevant copies of the balance

sheets of the business and also the personal (individual) balance

sheet. However, the Assessing Officer did not accept the submissions

of the assessee and made addition towards capital account. Against

this, the assessee preferred an appeal before the Commissioner of

Income Tax (Appeals).

6.1 On appeal, the Commissioner of Income Tax (Appeals)

observed from the details furnished by the assessee, before the

Assessing Officer as well as before him, that the assessee has been

doing business of civil constructions/contracts under two

categories/divisions - one under the name and style of M/s. Deccan

Constructions (proprietary concern) and the other in his own name

(i.e. without forming any concern). The proprietary concern M/s.

Deccan Constructions has been floated by the assessee mainly for the

purpose of obtaining civil construction contracts from the CPWD.

Accordingly, the assessee registered the proprietary concern, M/s.

Deccan Constructions with the CPWD. All the contract works awarded

by the CPWD are being carried out by the assessee under the name of

M/s. Deccan Constructions and all the expenses and receipts in relation

to the CPWD contracts are, therefore, included in the books of :- 6 -: I.T.A.No.84/Mds/2015

accounts of the Deccan Constructions. As the annual turnovers of M/ s.

Deccan Constructions are more than Rs.40,00,000/-, the assessee has

been subjecting the accounts (of M/s. Deccan Constructions) to

compulsory audit u/s.44AB of the Act and enclosing the necessary

audit report in Form No.3CD, along with the returns of income.

6.2 In addition to the CPWD contracts etc, the assessee's

family also owns agricultural lands for which it purchased tractors etc.

The assessee also purchased several plant and machinery, vehicles,

other assets etc in various earlier financial years which were not

included in the balance sheet of M/s Deccan Constructions. Instead,

these items were lying his personal account statement of

affairs (balance sheet), thought most of these items are

being used for the construction works, undertaken under the

name Deccan Constructions. However, for the purpose of

filing the return of income, the assessee has been including

the various incomes derived under the personal capacity and

offering to tax, in addition to the profits derived from the

proprietary concern M/s. Deccan Constructions. In fact, this

fact can be evidenced from the details contained in the

computation of taxable income statement enclosed along :- 7 -: I.T.A.No.84/Mds/2015

with returns of income. The details of net business incomes

offered by the assessee under "Deccan Constructions" name

and individual name, in the returns of income filed are as

under:-

Assessment Net income Other incomes Total income Year from Deccan (including agr. of the year Constructions Income)

2009-10 ?9,37,117 ?11,44,960 ?20,82,077 2008-09 ?20,01,197 ?10,39,340 ?30,40,537 2007-08 ?15,33,934 ?9,37,092 ?24,71,026

6.3 The Commissioner of Income Tax (Appeals) also observed

that the assessee in support of his claim of business activities

undertaken at his individual level(name), the assessee, before the

Assessing Officer, has also filed the detail like receipts and payment

account, statement of affairs, capital account of the business

activities carried on by him, for various financial years. The details of

assets, liabilities, capital account, etc., of the assessee, at his

individual level on 31.03.2009, (i.e. before merging with those of the

Deccan Constructions ) are as under:-

Details of Personal Accounts

Receipts & Payments Account for the year ended 31.03.2009.

Opening Balance 26,489 Repayment of Canara 1,57,966 Bank Housing Loan Withdrawals from Deccan 10,35,080 Interest payment on 1,10,034 constructions Housing loan :- 8 -: I.T.A.No.84/Mds/2015

Dividend from Canara 44,960 Household expenses 1,50,000 Bank Amount from HUF- 11,00,000 Amount due from 88,80,697 Agriculture Income sundry debtors Amount due to Sundry 54,85,762 Creditors Advances from Customers 13,27,803 Closing Balance 2,139 ----------- ------------- 90,20,094 90,20,094 ------------- -------------

Statement of Affairs as at March 31, 2009.

Capital Account 66,78,081 Cash etc 2,139 Creditors for Finance 83,15,000 sundry debtors 2,37,70,675 Housing Loan from 9,07,741 Investment in 37,36,867 Canara Bank Deccan constructions Sundry creditors for 1,75,67,901 Investment in 1,40,500 Business shares Advances from 39,16,936 Fixed assets 97,16,220 Customers ---------------- --------------- 3,73,85,659 3,73,85,659 ----------------- ---------------

Capital Account of V.V.D Murali,

Opening Balance 59,56,037 Income from Contracts 9,37,117 Dividend from Canara 44,960 Bank Difference in roeunding 1 Off Drawings for household 1,50,000 expenses Intrest payment on 1,10,034 housing Loan -------------- ---------------- 2,60,034 69,38,115/- ------------ ---------------- Closing Credit Balance 66,78,081 :- 9 -: I.T.A.No.84/Mds/2015

--------------

The year-wise details of important assets, Capital accounts of the

assessee in his individual capacity, for various financial years are as

under:-

For the Financial years ending on Particulars 31.03.09 31.03.08 31.03.07 31.03.06 31.03.05

Capital account 66,78,081 59,59,037 41,81,804 28,33,381 22,53,200 Important Assets 1 Sundry debtors 2,37,70,675 1,51,89,978 95,78,206 59,92,751 44,22,742

2. Fixed Assets 97,16,220 97,16,220 84,06,220 76,41,280 52,01,680

3. Inv. In Deccan 37,36,867 38,34,829 27,80,985 13,50,884 8,97,075 constructions

4. Inv. In Margadarshi Chits -- -- -- -- --

6.4 Thus from the above details, it is clear that there were other

activities carried on by the assessee, in addition to the business

activities carried on in the name of M/s Deccan Constructions. The

above details also goes to prove that there were assets and liabilities

in the hands of the assessee in his individual name (capacity). In

other words, the audited balance sheet and (and statement) of M/s.

Deccan Constructions is only a part of the assessee's overall affairs.

Further analysis of the assets shown by the assessee, in his individual

name, some of these assets are clearly verifiable in nature. For

example, the fixed assets shown at Rs.97,16,220/- as on 31.03.2009

included a flat at Alwarpet (an immovable property) purchased in F.Y. :- 10 -: I.T.A.No.84/Mds/2015

2005-06 for Rs.22,34,600/- and a vacant site at Kadapakkam

purchased prior to 31.03.2004, for Rs.4,39,655/-. Similarly. the plant

and machinery, which are included in the fixed assets also included

vibrators and mixing machines worth Rs.5,76,000/- andRs.7,55,800/-,

respectively, which were purchased in the financial year 2004-05 in

the individual name. It was also mentioned that the vibrators and

mixing machines are clear machinery to be used in the construction

business. It cannot be used for any personal purposes. No prudential

person will buy such heavy machinery and keep them idle. It is also

clear fact that all these items are not included in the balance sheet of

M/s. Deccan Constructions as on 31.03.2009. It is only during the

current financial year 2009-10, relevant to the current A.Y. 2010-11,

these assets are brought into the books (balance sheet) of M/s

Deccan Constructions, by consolidation. This fact clearly goes to

prove that the assessee has some more activities, which are

independent and separate from that of M/s. Deccan Constructions.

6.5 He also observed that some of the fixed assets (now

consolidated with M/s. Deccan Constructions) like flat at Alwarpet

(?.22,34,600/-), plant and machinery (vibrators and mixing

machines), etc. mentioned above, were not purchased/acquired :- 11 -: I.T.A.No.84/Mds/2015

during the financial year 2009-10, relevant to the current A.Y 2010-

11. They were acquired in the financial years prior to the F.Y 2009-

10. Hence, these assets were clearly outside the scope of the

provisions of section 68 (unexplained cash credits) or 69

(unexplained investments) of the Act.

6.6 The Commissioner of Income Tax (Appeals) further

observed that the above facts and details clearly established

that the assessee has activities - one undertaken under the

name and style of M/s. Deccan Construction (a proprietary

concern), and the others one under his own name (i.e.

without any specific name) - up to the end of 31.03.2009.

Also, it was evident that the business affairs or the statement

of affairs (like assets and liabilities) of the individual capacity

were not mixed or consolidated with those of M/s. Deccan

Constructions, upto the financial year 2008-09. On the other

hand, the assessee's capital balance in the Deccan

Constructions has been reflected in the statement of affairs of

individual capacity in the form of investment in M/s. Deccan

Constructions in all the years. Therefore, the Assessing

Officer was not justified in coming to the conclusion that the :- 12 -: I.T.A.No.84/Mds/2015

assessee failed to establish that the additions to the capital

account in the balance sheet of M/s. Deccan Constructions, was

on account of transfer of various assets from the assessee's

individual balance sheet (statement of affairs).

6.7 The other argument of the assessee was that the

addition to the capital account in the balance sheet of M/s.

Deccan Constructions was not the actual capital (credits)

introduced during the year. What was introduced into the

business of M/s. Deccan Constructions, was various assets like

debtors, fixed assets, etc. transferred from the individual

balance sheet to the balance sheet of M/s. Deccan

Constructions. As a result of the net increase in the assets

over liabilities in the balance sheet of M/s Deccan

Constructions (i.e. equivalent to the amount of assets

transferred from individual balance sheet), being the

balancing amount, is considered and added to the capital

account. However, the Assessing Officer treated the increase

in the capital account as unexplained cash credits u/s.68 of

the Act and brought to tax.

:- 13 -: I.T.A.No.84/Mds/2015

6.8 According to Commissioner of Income Tax (Appeals) the

provisions of section 68 of the Act are with reference to any

amount found credited into the books of account, for which

the assessee fails to furnish any satisfactory explanation. The

provisions of section 68 of the Act are as under

Cash credits.

Sec.68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory. the sum so credited may be charged to income-tax as the income of the assessee of that previous year

6.9 According to Commissioner of Income Tax (Appeals) for the

purpose of invoking section 68, the words "any amount found

credited into the books of account' should not be read in isolation.

Here one has to see whether the 'amount credited' is a first degree

entry in the books or consequential to some other transaction, That

is, if the amount (by way of cash or otherwise) is first brought into

the books by way of credit, and then followed by application, it will

amount to first degree entry of 'credit', where the provisions of

section 68 can be invoked. On the other hand, if there is any

transaction resulting in creation of any asset on the asset (debit) side

of the balance sheet, such transaction will have a consequential credit

entry in the liabilities side of the balance sheet. Such credits, where a :- 14 -: I.T.A.No.84/Mds/2015

preceding debit entry is available, should not be considered as

'unexplained credits' under section 68 of the Act. In such cases, the

proper and right approach will be to examine the assets so brought

into the books, by invoking the provision of section 69 of the Act, etc.

6.10 He observed that in the instant case, as stated earlier, the

assessee transferred certain assets (amounting to ?3,57,70,446/ -)

from his individual balance sheet to the balance sheet of M/s. Deccan

Constructions, during the financial year 2009-10, relevant to the

current assessment year 2010-11. Thus, in the books of M/s. Deccan

Constructions, it is the creation (introduction) of the assets which has

taken place first. Only the corresponding value of the assets so

introduced has been taken to the liabilities side, as a balancing act,

and credited into the capital account. Hence, the first degree

transaction in the present case is the introduction of assets

(?3,57,70,443/-) and the corresponding credit into the capital account

is only a consequential entry. Therefore, if at all, the transactions are

to be explained, it is the sources for' acquiring the above assets of

?3,57,70,443/- so introduced during the year. As far as the 'credit

entry' in the capital account is concerned, the source for such credit

entry is the introduction (transfer) of the above assets from the :- 15 -: I.T.A.No.84/Mds/2015

individual balance sheet into the balance sheet of M/s. Deccan

Constructions. Therefore, the Assessing Officer's action of invoking

the provisions of section 68 of the Act and treating the amount of

?3,57,70,443/- as unexplained cash credit is not justified.

6.11. Regarding the applicability of the provisions of section 69 of

the Act to the above assets of Rs.3,57,70,443/- introduced into the

books of M/s. Deccan Constructions, he observed that as per the

provisions of section 69 of the Act, if the assessee is found to have

invested any amount in any assets and the assessee fails to offer any

satisfactory explanations regarding the sources for acquiring such

assets, the same can be considered as unexplained investments

u/s.69 of the Act and brought to tax.

The relevant provisions of section 69 of the Act are as under:

Unexplained investments:

Section.69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

:- 16 -: I.T.A.No.84/Mds/2015

6.12 According to Commissioner of Income Tax (Appeals) assets are

claimed to have been transferred from the assessee's individual

balance sheet to the balance sheet of M/s Deccan Constructions.

Further, as discussed in detail, all these assets were reflected in the

personal balance sheets of the assessee and most of them were the

brought forward amounts (assets) from the earlier years. Further,

some of the assets like land and buildings, plant and machinery were

purchased in the years 2005-05 and 2004-05 05, respectively, and

these facts are verifiable facts. The some of the other assets included

in the sundry debtors were also the opening balances of assets in the

individual balance sheet of the assessee. In other words, most of the

above assets of Rs. 3 ,57,70,443/ -, which were claimed to have been

transferred from the individual balance sheet to M/R. Deccan

Constructions, were the opening balances of the assets coming from

the earlier financial years. Most of these assets were not acquired or

generated during the financial year 2009-10) relevant to the

assessment year 2010-11, under consideration. Therefore, even the

provisions of section 69 of the Act have no application to the facts of

the case, as the provisions of this section are applicable to the assets

acquired (investments made) during the previous year relevant to the

assessment year, only.

:- 17 -: I.T.A.No.84/Mds/2015

6.13 Further, the Commissioner of Income Tax (Appeals) observed

that there is another reason for transferring the above assets from

the personal balance sheet to the balance sheet of M/s. Deccan

Constructions. During the year, the assessee was trying to obtain

higher loan / cash credit limits from Canara Bank For this purpose,

the assessee was required to show higher net worth. Therefore, the

assessee transferred all the assets from the individual balance sheet

to the balance sheet of M/s. Deccan Constructions. In this process,

the assessee transferred all the assets from his individual balance

sheet into the balance sheet of M/s. Deccan Constructions. Such

consolidation of assets or balance sheets is a routine practice to suit

the business requirements and in any case, has no impact as far as

the liability under the provisions of I.T. Act is concerned. As long as

all the transactions of the assets and liabilities are explained, no

adverse inference can be drawn, on account of consolidation of the

assets or balance sheets.

6.14 According to Commissioner of Income Tax (Appeals) in view

of the above reasons, the Assessing Officer is not justified in treating

the increase of ?3,57,70,443/- in the capital account in the balance

sheet of M/s. Deccan constructions, which is a balancing entry on :- 18 -: I.T.A.No.84/Mds/2015

account of the assets of ?3,57,70,443/- transferred from the

individual balance sheet, as unexplained cash credit within the

provisions of section 68 of the Act. The addition of ?3,57,70,443/-

made by the Assessing Officer is, therefore, deleted by the

Commissioner of Income Tax (Appeals). Aggrieved, the Revenue is in

appeal before us.

7. We have heard both the parties and perused the material on

record. In this case, the assessee has consolidated two balance

sheets, one is maintained for business and other is for individual. The

assessee consolidated the balance sheet by giving credit to the capital

account and corresponding debit to the various assets by passing

journal entry that resulted in increase in capital asset by a sum of

?3,57,70,443/-. The assessee had properly explained the reasons for

increase in capital account of the assessee in his balance sheet. The

Commissioner of Income Tax (Appeals), after satisfying the

explanation offered by the assessee, deleted the addition. However,

the ld. Departmental Representative alleged admitting fresh evidence

when there was no occasion to the Assessing Officer to consider the

same. In our opinion, this argument of the ld. Departmental

Representative is misplaced. The assessee has filed all the documents :- 19 -: I.T.A.No.84/Mds/2015

before the Commissioner of Income Tax (Appeals) which were placed

before the Assessing Officer. This is evident from the last para of page

no.4 of the assessment order. In our opinion, the Commissioner of

Income Tax (Appeals) has not committed any error in accepting the

explanation given by the assessee in reconciliation of the same with

the books of accounts of the assessee. Accordingly, in our opinion, the

deletion of addition made by the Commissioner of Income Tax

(Appeals) is justified. This ground of the Revenue is dismissed.

8. In the result, the appeal of the Revenue in ITA No.84/Mds/2015

is dismissed.

Order pronounced on Friday, the 22nd day of May, 2015, at Chennai.

Sd/- Sd/- (वी. दग ु ा" राव) (चं पज ू ार ) V. DURGA RAO (CHANDRA POOJARI) या#यक सद य / JUDICIAL MEMBER लेखा सद य/ ACCOUNTANT MEMBER चे"नई/Chennai. #दनांक/Dated:22.05.2015. KV

आदे श क त&ल'प अ(े'षत/Copy to: 1. अपीलाथ /Appellant 2. यथ / Respondent 3. आयकर आयु*त (अपील)/CIT(A) 4. आयकर आयु*त/CIT 5. 'वभागीय त न-ध/DR

6. गाड फाईल/GF.

:- 20 -: I.T.A.No.84/Mds/2015