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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL,
Before: MANISH AGARWAL
IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE BEFORE SHRI GEORGE MATHAN, JUDICIAL JUDICIAL MEMBER AND MANISH AGARWAL MANISH AGARWAL, ACCOUNTANT MEMBER , ACCOUNTANT MEMBER Assessment Year : 2011-12 Scan Ispat Limited, 22 Scan Ispat Limited, 22-KM Vs. Dy. Dy. Commissioner Commissioner of of Stone, Village, Punjipathra, Stone, Village, Punjipathra, Income Income Tax, Tax, Rourkela Rourkela Gharghora Gharghora Road, Road, Circle, Rourkela. Circle, Rourkela. Chhattisgarh. Chhattisgarh. PAN/GIR No PAN/GIR No.AAJCS 0967 Q (Appellant (Appellant) .. ( Respondent Respondent) Assessee by : Shri S.S.Poddar, CA S.S.Poddar, CA Revenue by : Dr. Abani Kanta Nayak, CIT : Dr. Abani Kanta Nayak, CIT DR Date of Hearing : 26/0 06/2024 Date of Pronouncement : 26/0 /06/2024 O R D E R Per Bench This is an appeal filed by the assessee against the order of the ld This is an appeal filed by the assessee against the order of the ld This is an appeal filed by the assessee against the order of the ld CIT(A), A), NFAC, NFAC, Delhi Delhi dated dated 31.7.2023 in in Appeal Appeal No. No.CIT(A), Sambalpur/10065/2014 Sambalpur/10065/2014-15 for the assessment year 2011 2011-12.
2. Shri S.S.Poddar, S.S.Poddar, ld AR appeared for the assessee and Dr. Abani Kanta Nayak, Dr. Abani Kanta Nayak, Ld CIT DR appeared for the revenue. DR appeared for the revenue.
Ld AR has filed written Ld AR has filed written submission, as follows:
P a g e 1 | 25 “ BEFORE THE INCOME TAX APPELLATE TRIBUNAL CUTTACK BENCH, CUTTACK. In the matter of SCAN ISPAT LIMITED [AAJCS0967Q] 22-KM Stone, Village. Punjipathra Gharghora Road, Raigarh Chhattisgarh-496 001. In the matter of IT. Appeal No. 278/CTK/2023 for the Assessment Year 2011-12 In the matter of Written Submission With due respect the appellant through its authorized representative do hereby state as under: I. Facts of the Case:
That the appellant company was incorporated under the Companies Act, 1956 on 18-03-2004 vide Certificate of Incorporation No.15-07539 of 2003-04 issued by the Registrar of Companies, Orissa. That the appellant company was engaged in the business of manufacturing of Sponge Iron in the relevant assessment year. A copy of Certificate of Incorporation and Memorandum & Articles of Association are placed at Page No.1 and 2-9 of the P/B respectively.
2. That due to substantial growth the appellant company was in need of funds for investment from banks for which the banks were insisting upon additional margin money. That Directors/friends/relatives were approached for funds out of which 2 persons assured to provide funds shortly amounting to RS.9 crore [Rs.4.50 crore + Rs.4.50 crore] before 31/03/2011 and accordingly the company received 2 undated cheques with condition that the same are to be presented on getting their confirmation only. The photocopies of such undated cheques are enclosed as Annexure-1 & 2 respectively [Page No.11-l2] That the above amount of Rs.9 crore was accounted/credited as Share application money by debiting cheque in hand (Payment to P a g e 2 | 25 creditors) and cheque in hand (Advance to suppliers) for Rs.9 crore each. A copy of the Journal Voucher is placed at Page No.70 of the P lB. That at the year end as the cheques were in hand and not lodged in the bank, the same was appearing in Bank Reconciliation Statement as on 31/03/2011, a copy of Bank Reconciliation Statement is placed at Page No.l08 of the P /B. 3. That subsequently, the parties expressed their inability to provide the funds; accordingly, cheques were returned back and the above accounting entry was reversed in the books of account on 02/04/2011. A copy of the Journal Voucher is placed at Page No.71 of the P /B. Further, the Audited Balance Sheet of the Company as at 31/03/2012, placed at Page No.16 of the P /B, clearly shows "Share Application Money Pending Allotment" as NIL. Further, your honour's attention is drawn to the Cash Flow Statement for the Financial Year 2011-12(subsequent to the year under consideration) wherein, the cash flow from financing activity are appearing as under:
SCAN ISPAT LIMITED ROURKELA CASH FLOW STATEMENT APPENDIX-1 [PARTICULARS Year ended Year ended on 31.3.2012 31.3.2011 (C) CASH FLOW FROM FINANCING ACTIVITIES:- (i) Increase! (Decrease) of Secured Loan :(524,907) (30.985,291 (ii) Increase/ ( Decrease) of Unsecured Loan 0 1,873,052 (iii) Interest & Financial Expenses (41,613,682) (36,237,244 (iv) Issue of Shares 21,000,000 - (v) Share Application Money ( 94,000,000) 93,000,00 Subtotal (C) (115,138,589) 27,650,517
P a g e 3 | 25
4. That it may be appreciated from the above that fund was never moved/received in the bank accounts of the appellant company i.e., "any sum was never credited". In this regard an affidavit from the assessee company affirming that funds never moved/received in the Bank Account as well as a certificate from a Chartered Accountant certifying the same are placed at Page No. 72-73 and 74 of the P /B respectively.
5. That as additional Share Capital could not be mobilised, finally the Loan Accounts with the Bank became NPA and the same was recalled and the demand notice u/s.13(2) of the SARFAESAI Act, 2002 was issued. Subsequently, the possession notice was also issued and possession was taken. Subsequently, E-Auction Sale Notice was issued and finally the properties were sold vide Sale Certificate under Rule (6). In this regard the relevant documents are enclosed as Annexure-3 [Page No.13-24]. 6. That the appellant filed its Return of Income for the assessment year 2011-12 on 30/09/2011 for a taxable income of Rs.25,21,540/-. The total income tax liability was calculated at Rs.57 ,46, 701/- U/s.115JB of the Income Tax Act, 1961 (Act). A photocopy of the Acknowledgement of Income Tax Return filed is placed at Page No.51 of the P /B. A copy of Audited Financial Statements for the Financial Year 2010-11 duly filed with the Registrar of Companies, Orissa and subsequently submitted during the course of assessment proceedings u/s.143(3) of the Act is placed at Page No.29-50 of the P/B. 7. That subsequently, the case was selected for scrutiny and notices were issued u/s.143(2) and 142(1) of the Act, which were compiled from time to time. The assessment was completed u/s.143(3) of the Act vide order dated.31/03/2014. The total income was assessed at Rs.9,28,25,380/- by making an addition of Rs.9,OO,OO,OOO/- towards unexplained share application money u/s.68 of the Act, which was never received by the appellant and disallowance of Rs.3,03,846/- u/s40(a)(ia) of the Act. The total income tax liability was calculated at Rs.57,46,701/- U/s.115JB of the Act. A copy of the assessment order is placed at Page No.55-58 of the P /B. 8. That the addition was made by invoking section 68 of the Act irrespective of the fact that fund was never moved/nor any sum has ever credited in the bank accounts of the appellant company. This fact was brought to the notice of the LAO during the course of assessment proceedings u/s.143(3) of the Act as acknowledged at P a g e 4 | 25 Para-6 of the Assessment Order, placed at Page No.s6 of the P /B. The relevant transaction with respect to share application money amounting to Rs.9,00,00,000/- in the FY-2010-11 was only a book entry and the same was reversed in the F.Y.2011-12 i.e., "any sum was never credited". II. GROUND WISE SUBMISSION: Ground No.2: That the authorities below have not provided sufficient/proper opportunity to the assessee to present its case with all evidences thereby violating the principle of Natural Justice. Not pressed. Grounds No.l,3 & 4 1. That the assessment order passed by the Learned Assessing Officer u/s.143(3) of the Income Tax Act, 1961 as well as the appellate order passed by the Learned CIT(Appeals), NFAC is unjustified, arbitrary" excessive, contrary to evidences and bad in law.
3. That on the facts and in the circumstances of the case the authorities below have erred in making/upholding the addition of Rs.9,00,00,000/- towards Share Application money u/s.68 of the Act, on an incorrect factual assumption that the share application money was received by the appellant during the financial year 2010-11 relevant to assessment year 2011-12.
4. That the authorities below have erred in law and fact in invoking section 68 of the Act irrespective of the fact that fund/money was never credited /received by the appellant towards Share Application Money is in gross violation of provisions of section 68 as well as settled position of law. That before going in to detailed submission, we like to draw your honour's kind attention towards the relevant portion of the assessment order for your consideration: Section 68 of the 1. T. Act. 1961 states that while any sum is. found credited in the hooks of the assessee, and the assessee offers no explanation about [he nature and source thereofor the explanation offered is not satisfactory, the sum so credited may be charged to income tax as the income of the assessee,
P a g e 5 | 25 There is credit of Rs.9,00,00,000 by way of share application money for which source was not explained by the assessee. Therefore. it is treated as un explained money u/s 68 of the l. T. Act. 1961 and added to total income. In this regard it is respectfully submitted as under:
9.1. It will be pertinent to reproduce the provisions of section 68 of the Income Tax Act, 1961 here under: Cash credits.
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: Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10. 9.2. That the provisions of section 68 of the Act have four limbs:
P a g e 6 | 25
1. Any sum.
The sum is to be found credited in the books of account for that year. 3. Explanation about nature and source thereof. 4. Substantiating the identity of the creditor, genuineness of the transaction and credit worthiness of the creditor. The aforesaid provision was introduced for the first time in the Income Tax Act, 1961 (Act No.43 of 1961). These provisions come into play when there is a receipt of money in the books of account of the assessee as even the name suggests "Cash Credits". 9.3. That as explained at Para-2 to 5 above, in the present case the amount of Rs.9 crore credited as Share Application Money was only a book entry and does not constitute any sum of money received from anyone i.e., any sum of money is not credited, therefore, provisions of section 68 are not applicable. In this regard an affidavit from the assessee company affirming that funds never moved/received in the Bank Account as well as a certificate from a Chartered Accountant certifying the same are placed at Page No. 72-73 and 74 of the P/B respectively. Moreover, it was also acknowledged by the Ld. AO that "The Authorized Representative of the assessee explained that there is no actual receipt of share application money". 10. That the legislative intent behind introduction of section 68 of the Act was to curb the prevalent method adopted by the assessees to employ in their business their concealed profits; but in the present case no amount was introduced/employed/received in the business at all, hence, application of section 68 of the Act is bad in law. 11. It has been held by many courts/authorities that the provisions of section 68 can be applied if there is an actual receipt of money by the assessee whether by cash or the same is credited in the bank account during the accounting year relevant to the assessment year under consideration. It has been clearly held that when cash did not pass at any stage and when the respective parties did not receive cash nor did pay any cash, there was no real credit of cash in the cash book and, therefore, the question of inclusion of the amount of the entry as unexplained cash credit u/s. 68 could not arise. It would be pertinent here to refer to the decision of Hon'ble Supreme Court in the case of Shri H.H. Rama Varma vs. CIT reported in 187 ITR 308 (SC) wherein it was held that 'any sum' means 'sum
P a g e 7 | 25 of money'. Therefore, the phrase "ANY SUM" employed in section 68 of the Act cannot be extended to include any book entry, notional adjustments, payment in kind, etc.
12. That the Jaipur Bench of the Tribunal in the case of ACIT vs. Mahendra Kumar Agrawal [23 Taxmann.com 285] has held that in provisions of section 68, the words used are "where any sum is found credited in the books of an assessee." In this connection, the word 'sum' is of paramount importance. The words "any sum" cannot be taken as parallel to "any entry." "The journal entry has no consequence as far as application of s. 68 is concerned. In order to attract the provisions of s. 68 of IT Act it is primary condition that the appellant should have received amount in his books which obviously should have been paid by the creditor. If such credit is considered as unexplained then only it can be a case of making addition under s. 68 of IT Act as unexplained cash credit." [Refer Page N.38 & 40 of WS.] A copy of the judgement is enclosed as Annexure-4 [Page No.25-40].
That the Hon'ble High Court of Madras in the case of V. R. Global Energy Pvt. Ltd. vs. ITO, 407 ITR 145 (Madras) held that provisions of section 68 of the Act does not apply to any and every credit entry in the books of account inter-alia including book entries, barter transactions. Since the cash credits towards share capital were only by way of book adjustment and not actual receipts, therefore, the same could not be treated as receipt towards share subscription money. Since no cash was involved in transaction of said allotment of shares, conversion of these liabilities into share capital and share premium could not be treated as unexplained cash credits I u/s 68 of the IT Act. The Revenue challenged this decision of the Hon'ble Madras High Court before the Hon'ble Supreme Court and the Hon'ble Supreme Court dismissed the SLP filed by the Revenue reported in 268 taxmann.com 392.
That the authorities below have also contended that the source of the credit entry was not explained by the assessee. That in this regard it is respectfully submitted as under: 14.1. That there is a legal fiction created under Section 68 of the Act and on the basis of such legal fiction an entry in the books of accounts is deemed to be income of the assessee chargeable to tax in the event the assessee fails to discharge the onus imposed upon it under Section 68 of the Act i.e.,
P a g e 8 | 25 toexplain the nature and source of any sum found credited in the Books of Account. That such legal fiction can be applied in the case of actual transactions incorporated in the books and by any stretch of imagination it cannot be applied on the transaction which is merely book entry and the actual transaction never happened. 14.2. That is a settled legal position that the question of identity, creditworthiness of the parties and genuineness of transaction arises where there is a real transaction, then the assessee is under the obligation to discharge the onus imposed under Section 68 of the Act. Once it has been established beyond doubt that impugned cash credit entries represent a mere book entry in the accounts, then in such a situation, the question of discharging the onus as imposed under Section 68 of the Act does not arise. 14.3. Further, it is also a well settled legal position that an obligation gets discharged due to impossibility of performance. The law of impossibility of performance does not necessarily require absolute impossibility, but also encompass the concept of severe impracticability. In our humble submission, the doctrine of impossibility of performance applies in this case. Due to uncontrollable circumstances, the performance of the obligation as specified under Section 68 of the Act is impossible to perform for the assessee. The impossibility of performance releases the assessee from its obligation for the non-compliance of the conditions imposed under Section 68 of the Act. A default occurs only when an obligation is not performed. Thus, when the relevant transaction was not based on substance, the question of discharging the onus imposed under Section 68 of the Act does not arise and thus it cannot be held a defaulter. In this regard your honour's kind attention is drawn towards the judgement of Hon'ble Apex Court in the case of Krishna Swamy S. PD. & ANR Vs. Union of India & others reported in 281 ITR 305 wherein it was held that: "The other relevant maxim is, lex non cogitadimpossibilia-thelaw does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disc/aim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. [See: U.P.S.R. T.C. vs. Imtiaz Husseih 2006 (1) SCC 380,Shaikh Salim Haji Abdul Khayumsab vs. P a g e 9 | 25 Kumar & Ors. 2006 (1) SCC 46, Mohammod Gazi vs. State of M.P. &Ors. 2000 (4) SCC 342 and Gursharan Singh vs. New Delhi Municipal Committee 1996 (2) SCC 459]." [Refer Page No.46 of the WS]. A copy of the judgement is enclosed as Annexure-5 [Page No.41-48]. 14.4. That further reliance is also being placed on the latest judgement of Hon'ble Tribunal, Ahmedabad in the case of Rich Paints Ltd. v. ITO (2021) 186 ITD 425 (Ahd) (Trib.) which is squarely applicable to the instant case. The Hon'ble Tribunal held as under: "Held that, a legal fiction is created under section 68 on basis of which an entry in books of account is deemed to be income of assessee chargeable to tax in event assessee fails to discharge onus imposed upon it u/s 68. However, such legal fiction could be applied only in case of actual transactions incorporated in books, therefore, transactions were fictitious/ bogus, did not involve real cash inflow, and it was impracticable for assessee to discharge onus of establishing identity and creditworthiness of parties and genuineness of transaction, hence s.68 was not invocable. (ITA No.186 to 188/ AHD/2015 dated.29/10/2020) (AY. 1995-96 to 1997- 98)". [Refer Para No.31 at Page No.96 of the P/B.] It was further held relying on judgement of Hon’ble Supreme Court in the case of Krishna Swamty S.PD and Anr vs Union of India & Otrs as given herein above at para 14.3 "34. It is well-settled that an obligation gets discharged due to impossibility of performance. The law of impossibility of performance does not necessarily require absolute impossibility, but also I encompass the concept of severe impracticability. In our humble opinion, the doctrine of impossibility of performance applies in this case. Due to uncontrollable circumstances, the performance of the obligation as specified under Section 68 of the Act became impossible to perform for the assessee. The impossibility of performance releases the assessee from its obligation for the non- compliance of the conditions imposed under Section 68 of the Act. A default occurs only when an obligation is not performed. When the assessee is released from the obligation, it cannot be said that it is in default. Thus, when the transaction in dispute was not based on substance, the question of discharging the onus imposed under Section 68 of the Act does not arise and thus it cannot be held a defaulter. We also find support from the legal maxim "lex non cogit
P a g e 10 | 25 ad impossibilia" meaning thereby that the law does not compel a man to do what he cannot possibly perform.” A copy of the judgement is placed at Page No.86-9.9 of the P /B.
That the Ld. CIT(A) has misguided himself to conclude on the basis of Cash Flow Statement only that there was an increase in Share Application money, hence, funds have been received. In this regard it is respectfully submitted as under: 15.1. That as per principles of preparation of Cash Flow Statement, cheques/draft in hand are also considered as Cash & Cash Equivalents as clarified in Schedule III (see section 129(1))- Financial Statements for a Company whose Financial Statement are required to comply with the Companies (Accounting Standards) Rule, 2006. The same is placed at Page No.154-155 of the P/B. Accordingly, the same was considered as part of Cash Flow Statement for the year ended on 31.03.2011 as cash flow from financing activity-proceeds from issue of shares [Please refer Page No.49 of the P/B] and accordingly, the reversal entry was also considered as negative inflow under the head Share Application Money in the Cash Flow Statement of F.Y.2011-12 [please refer Page No.27 of the P 18] and the same is once again reproduced hereunder: SCAN ISPAT LIMITED ROURKELA CASH FLOW STATEMENT APPENDIX-1 [PARTICULARS Year ended Year ended on 31.3.2012 31.3.2011 (C) CASH FLOW FROM FINANCING ACTIVITIES:- (i) Increase! (Decrease) of Secured Loan :(524,907) (30.985,291 (ii) Increase/ ( Decrease) of Unsecured Loan 0 1,873,052 (iii) Interest & Financial Expenses (41,613,682) (36,237,244 (iv) Issue of Shares 21,000,000 - (v) Share Application Money ( 94,000,000) 93,000,00 Subtotal (C) (115,138,589) 27,650,51 P a g e 11 | 25 Moreover, from the Cash Flow Statement for the F.Y.2011-12 having figures for the previous year 2010-11 also, it is clear that in the previous year there was positive share application money and on reversal it was negative share application money in F.Y. 2011-12 . 15.2. The CIT(A) has concluded on the basis of Cash Flow Statement only that there was an increase in Share Application money, hence, funds have been received. Whereas, the cheques were held in hand and not lodged with the bank at the year end and to comply with the requirement of Schedule-III to Companies Act, 2013, it was considered as inflow in Cash Flow Statement during financial year 2010-11. That on return of cheques it was considered as negative inflow in Cash Flow Statement during financial year 2011-12, without any movement of fund. 15.3. That the Ld. CIT(A) conveniently overlooked the real nature of transaction and considered the book/adjustment entry for making addition u/s.68 of the Act. It is a settled position of law as held by the Hon'ble Supreme Court in the case of TAPARIA TOOLS Vs. JCIT' (2015) 372 ITR 605 (SC) that merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act. 15.4. Moreover, the appellant submitted an affidavit with the Ld. CIT(A) affirming that funds never moved/received in the Bank Account as well as a certificate from a Chartered Accountant certifying the same, which are placed at Page No. 72-73 and 74 of the P /B respectively. It is a well settled legal position that in the case where affidavit has been filed and the contents thereof have not been rebutted, the facts mentioned therein have to be read as the facts binding upon the Income Tax authorities. In this regard reliance is place on the following judgements: • Mehta Parikh & Company Vs CIT 30 ITR, 181 (SC) • Indo Malwa United Mill Liikmed Vs State of MP 60 ITR 41 (SC) • CIT Vs Daulat Ram Rawat Mull 87 ITR 349.
P a g e 12 | 25 • Union of India Vs Kamalaxmi Finance Corporation 92 Taxmann 43. • Labh Chand Bohra Vs ITO 219, CTR 571 (Raj). • CTO Vs Kewal Ram Sumnomal Cavanduspur 92 STC 629 (Raj). • Hari Iron Trading Co. v. CIT [2003] 263 ITR 437 (P&H).
Ground No.5 That the Ld. Assessing Officer has further erred in initiating "the penalty proceedings uls. 271(1)(c) of the I. T. Act, 1961. In this regard it is respectfully submitted as under: 16. That while passing the assessment order u/s.143(3) of the act the LAO has also initiated penalty proceedings u/s.271(1)© of the Act as under: 8. I am convinced that the assessee has, prima fade! committed a default as envisaged u/s 271 (1){c) of 1. T. ACT, 1961 by disclosing inadequate particulars in respect of the income assessee, Penalty proceeding under section 271(1)(c), therefore being initiated by issue of a show cause notice as per requirement of section 274 of the I.T.act. That in this regard the provisions of section 271(1)© are reproduced below for your ready reference: [Failure to furnish returns, comply with notices, concealment of income, etc. 271. (1) If the 80 [Assessing] Officer or the [***] 82 [Commissioner (Appeals)] 83 [or the Commissioner] in the course of any proceedings under this Act, is satisfied that any person- (c) has concealed the particulars of his income or 88 [* * *] furnished inaccurate particulars such income, or] That the Ld. AO has initiated the penalty proceedings for disclosing inadequate particulars which is not found in the provisions of section 271(1)© as given above, hence, the penalty proceedings are bad in law.
P a g e 13 | 25 That in light of the above discussion it is crystal clear that in the present case fund/money was never received/credited, hence, addition made u/s.68 of the Act is unjustified and bad in law. Hence, your honour is requested to kindly allow full relief by deleting the addition u/s.68 of the Act and for such act of kindness the appellant shall remain ever obliged. “
It was further submitted by ld AR that the assessee was a sinking company and for arrangement of funds, the assessee had obtained two cheques of Rs.4,50,00,000/- each one from M/s Sadasiva Tripathy and another from Scan Spong Iron Limited. The copy of cheques was shown at page 11 & 12 of written submission and the same is made part of this order.
P a g e 14 | 25 It was the submission that as the assessee had the said un-dated cheques, the assessee had passed necessary entries in its books by showing share application money, which was shown at page 70 of PB, which is the journal entry , which read as follows:
“Scan Ispat Limited 10-11 Hospet Road, Village Ginigera, Tal:Dist:Kopal Journal voucher No. dated 31-Mar-2011 Particulars Debit Credit Cheque in Dr.4,50,00,000 Hand(advance to supplier) cheque in Hand Dr.4,50,00,000 (Payment to creditor) To share application 9,00,00,000 money 9,00,00,000 On account of: Being application money 9,00,00,000 received Authorised signatory
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It was further submitted by ld AR that as the said cheques could not be encashed, same were returned and the corresponding entry was passed on 2nd April, 2011, wherein, the said share application money account was reversed by showing cheques issued to advance to suppliers and payment to creditors. Same is attached as follows:
““Scan Ispat Limited 10-11 Hospet Road, Village Ginigera, Tal:Dist:Kopal E-mail .scanispats@gmail.com Journal voucher No. dated 2nd April, 2011 Particulars Debit Credit share application money Dr.9,00,00,000 to cheque in 4,50,00,000 hand/advance to suppliers To cheque in 4,50,00,000 hand/payment to creditors 9,00,00,000 9,00,00,000 Authorised signatory
It was the submission that in the course of assessment, the Assessing Officer questioned this share application money of Rs.9,00,00,000/- and consequently added the said amount as unexplained cash credit by invoking the provisions of section 68 of the Act. It was the P a g e 16 | 25 submission by ld AR that admittedly, the said amount of Rs.9,00,00,000/- has never been received by the assessee. It was categorically admitted by ld AR that the amount has never entered in the bank account of the assessee nor has the cheque been encashed. It was the further submission that on appeal, the ld CIT(A) went into the cash flow of the assessee, which was part of the audit report, which reads as follows:
“
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It was the submission that the ld CIT(A) took the stand that as the amount of Rs.9 crores has been routed through the cash flow, therefore, the assessee should be deemed to have received the money and the assessee was duty bound to explain the entries in regard to amount of Rs.9 crores and consequently, upheld the addition made by the Assessing Officer in regard to cash credit made u/s.68 of the Act. It was further submitted by ld AR that the assessee was in possession of two cheques from two well wishers. The assessee had primarily entered the same in its account and when it is found that the cheques were not encashable, reversed the entries. The assessee having not received the cash nor funds in any manner whatsoever, the provisions of section 68 of the Act would not apply insofar as the words used in the provisions of section 68 of the Act were receipt of any sum. For this proposition, ld AR placed reliance on the decision of the Co-ordinate Bench of this Tribunal Jaipur bench ‘B’ in the case of Mahendra Kumar Agarwal, 142 TTJ 35 (Jaipur), wherein, there is a finding that in the provisions of section 68, the words used are “ Where any sum is found credited in the books of an assessee”. The words “ any sum” cannot be taken as parallel to ‘any entry’. The journal entry has no consequence as far as section 68 is concerned. In order to attract the provisions of section 68 of the Act, it is primary condition that the appellant should have received the amount in his books which obviously should have been paid by the creditor. If such credit is considered as unexplained, then
P a g e 18 | 25 only it can be a case of making addition under section 68 of the Act as unexplained cash credit. Admittedly, this has not been brought out by ld AR in its written submission. It was also submitted that the legal fiction u/s 68 of the Act can be applied in the case where the transaction is incorporated in the books and by no stretch of imagination, it can be applied on transactions which are merely book entry and where actual transaction never happened. It was the submission that he has no objection if the issues in this appeal are restored to the file of the Assessing Officer for verification as to whether the assessee has actually received the said amount or not.
In reply, ld CIT DR drew our attention to cash flow statement, which has been extracted earlier. It was the submission that in the year ended as on 31.3.2011, the assessee had net profit after taxation of Rs.1.46 crores, the assessee has shown in his cash flow statement of receipt of Rs.9.30 crores as share application money and the assessee has shown cash and cash equivalent at the end of the year at Rs.24.51 lakhs. This figure is also found in the balance sheet as on 31.3.2011 under the head “current assets loans and advance” at Rs.24.51 lakhs and the same is also correspondingly shown in Schedule -6 sub-clause (c) as cash in hand as certified by management at Rs.21.96 lakhs and balance with schedule bank in current account at Rs.2.55 lakhs. Ld CIT DR further drew our attention to said cash flow statement, wherein, for the year ended on 31.3.2012, the assessee has P a g e 19 | 25 shown net profit after taxation at a loss of Rs.9.92 crores, whereas cash generation from operation was shown at Rs.11.28 crores and the repayment of share application money at Rs.9.40 crores. It was the submission that this clearly showed that the amount of Rs.9 crores which has been shown by the assessee as share application money was actually used in the business of the assessee and these are nothing but entries made to defraud the revenue as also the financial institutions. It was the submission that the addition as made by the Assessing Officer and as confirmed by ld CIT(A) is liable to be upheld. It was the submission by ld CIT DR that the issues should not be restored to the file of the Assessing Officer. Ld CIT DR further drew our attention to Account Standard (AS)- 3 & 4, which are mandatory in the case of a company. It was the submission that the fact that the amount of Rs.9.3 crores has been utilized in cash flow for the year ending 31.3.2011 as presented in the Financial Statements, would clearly show that the entry on 2nd April, 2011 is false and the cash generated during the year ended 31.3.2012 was only Rs.11.28 crores and, therefore, the assessee had utilized the said cash flow as on 31.3.2012 to repay the amount of Rs.9.30 crores and thus, it has to be accepted that the cash has been received by the assessee and it has been used in the business of the assessee and it has been regenerated and removed from the business.
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We have considered the rival submissions. The facts in the present case clearly show that the assessee was a sinking company. Being the company, the assessee is to follow mercantile system of accounting. The primary concept of mercantile system of accounting is that when the amount is liable to be received then it has to be entered in the books. Similarly, when the amount is liable to be paid, whether it is paid or not , the entries should be in the books. Now, coming to the AS-4, it requires that the event which has occurred after the balance sheet date but before the date of preparation of audit report and financial accounts pertaining to such year and financial implications, necessary entries are to be made to give true and fair picture of the current affairs of the company which is also certified by the Auditor as well as the management of the company. A perusal of two cheques which have been received for Rs.4.50 crores each shows that they are un-dated. There is no information available to show when the said cheques were received. A perusal of the said two cheques also clearly shows that both the cheques have been signed by same person. There is no evidence produced to show whether the said persons are capable of generating or has the capacity to generate such funds. The corresponding share application forms are also not available. Surprisingly, the assessee company decided to make the entry of this amount of share application money on 31.3.2011. Further, surprisingly, the assessee company decided to reverse the entry on 2.4.2011, in a short period of 3
P a g e 21 | 25 days. The audit of the assessee company for the year ended 31.3.2011 was completed on 23.7.2011. Thus, the basic concept of accounting principles has also been thrown out the window. The concept of mercantile system of accounting is nowhere shown. The Accounting Standards which are compulsorily to be followed have been completely violated. Now coming to the cash flow, a perusal of the cash flow statement clearly shows that it is after considering Rs.9.3 crores as share application money, the assessee is showing a cash equivalent at the end of the year at Rs.24.51 lakhs. This amount is shown in the balance sheet, which is also supported by Schedule-6 to the accounts. If the amount of Rs.9.30 crores is removed from the cash flow, obviously this figure would change. If cash flow is modified, obviously, balance sheet figure itself will change. Thus, the façade of true and fair picture of the current affairs of the company will itself crumble.
It is also pertinent to mention here that by making the debit entry in the sundry creditor’s account of Rs.4.5 crores, the assessee had tried to reduce the amount shown payable to creditors so that at the end of the year i.e. 31.3.2011, the figure appeared on the face of the balance sheet as reduced by this amount. The AO could not take any view about the genuineness of such sundry creditors. Moreover, it is also an admitted fact that the cheques made by the assessee against such outstanding creditors P a g e 22 | 25 were kept by the assessee itself and they were not transferred to the respective parties. Thus, the account of the assessee in their books of account i.e. creditors also does not match. So the doubts have been raised about the genuineness of those creditors which had been reduced/manipulated through journal entries, same also in regard to advance for materials and these have direct effect on the current ratio of the company, which entail the company to present a better financial picture before the financial institutions and banks. This misrepresentation of the figures, the accounts has ultimately suffered. The consequence of this entry also get reflected in the financial position in the next year and it will cause question into the financial integrity of the accounts maintained by the assessee for the subsequent years and this had affected the financial affairs of the assessee and in a period of 2 years, the bank has auctioned the assets of the company.
We are live to the fact that the assessee is making claim that the assessee has not received such amount and, therefore, the provisions of section 68 cannot be applied. We are also live to the decision relied upon by ld AR, which has been proposed to say that the sum referred to in section 68 of the Act means a sum which is received by the assessee. Taking such a view that the word ‘sum’ used in section 68 would require the physical movement of funds would not, in our view, be justifiable and would make the provisions of section 68 otiose and redundant. This is because,
P a g e 23 | 25 the physical movement of funds is known only to the assessee. The entries in the books are also those made by the assessee. The assessee has used the said entries for preparing its fund flow. If the claim of the assesse that he has not received the money is accepted, then the books of account of the assessee itself would have to be discarded. The assessee has not given any ground for discarding the books of account. Till such time there is no evidence found that the entries in the books of account are erroneous, such books of account cannot be thrown out. It is the assessee who is maintaining its funds and it is the assessee who used the funds in its business and how the entries are passed and entries in the books are generated are normally accepted to be true, unless and until they are found to be erroneous. This is the main reason why the Accounting Standards are prescribed. In this case, the assessee has shown receipt of share application money, then it is for the assessed to prove why it decided to bring the same into it”s accounts when it claims that it did not receive the fund and it also thought it fit to violate the mandatory Accounting Standard 4. In the present case, the assessee has failed to dislodge any of the findings as arrived at by the AO and ld CIT(A). In these circumstances, we are not inclined to interfere with the order of ld CIT(A) on this issues.
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In the result, appeal of the assessee stands dismissed.
Order dictated and pronounced in the open court on 26/06/2024.
Sd/- sd/- (Manish Agarwal) (George Mathan) ACCOUNTANT MEMBER JUDICIAL MEMBER Cuttack; Dated 26/06/2024 B.K.Parida, SPS (OS) Copy of the Order forwarded to : 1. The Appellant : Scan Ispat Limited, 22-KM Stone, Village, Punjipathra, Gharghora Road, Chhattisgarh 2. The Respondent: Dy. Commissioner of Income Tax, Rourkela Circle, Rourkela 3. The CIT(A)- NFAC, Delhi 4. Pr.CIT, Sambalpur 5. DR, ITAT, 6. Guard file. //True Copy// By order
Sr.Pvt.secretary,I ITAT, Cuttack
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