ITO, WARD-24(1), NEW DELHI vs. SUN-NEW CREATIONS AND MARKETIGN PVT. LTD., NEW DELHI

1. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 3,83, 10,500/- u/s 68 of IT Act'1961 being cash deposit in bank during demonetisation period.

2. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 1,45,00,000/-u/s 68 of IT Act 1961 in the hand of M/s PPR marketing P. Itd. by applying same logic as did in the case of M/s Sun New Creations and Marketing P. Ltd..."

3. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 8,34,700/- u/s 68 of IT Act' 1961 by treating as unexplained income being cash in nature.

4. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the disallowance of cash expenses amounting to Rs. 38,51,535/-." 5. The Ld. CIT(A) erred in giving relief by holding that books of accounts were not rejected as he failed to appreciate that instructions issued by CBDT in this regard were only to help assessing officer in OCM cases and were advisory in nature." 6. The Ld. CIT(A) has failed to appreciate the bogus nature of transactions as there were no business activity during the year against huge cash deposited during the demonetization period in the form of Specific Bank Notes(SBNs). Further, the assessee company did not provide relevant documents before AO to establish the genuineness of the transactions so undertaken." 7. The Ld.CIT(A) failed to called remand report from assessing officer before adjudication."

8. The appellant craves to amend, modify, alter, ad or forego any grounds) of appeal at any time before or during the hearing of this appeal.”

“The present electronically filed appeal is directed against assessment order dt. 30.12.2019 passed u/s 143(3) of Income Tax Act (in short - The Act) by ITO, Ward-24(3), New Delhi. The appellant company filed its return of income on 03.07.2017 declaring income of Rs. 21,63,410/-. The case was taken up for scrutiny. During the course of assessment proceedings, the AO received an order dated 13.09.2019 of the Hon’ble National Company Law Tribunal. Through this order the Hon'ble NCLT has approved the amalgamation of two companies viz., M/s PPR Marketing Pvt Ltd and M/s Valleria Marketing Pvt Ltd with the assessee company w.e.f 01.04.2016. As such, all the financials of these two companies stands merged with the financials of the appellant company w.e.f. 01.04.2016. Accordingly keeping in view the fact, enquires were given to the appellant company by the AO to explain the financials as well as income of these two companies. In this case, the assessment u/s 143(3) of the Act was completed by assessing officer (in short - the AO) vide order dated 30.12.2019, assessing total income at Rs.5,74,93,085/- of M/s Sun New Creations And Marketing Pvt Ltd (after taking the date of appointment of scheme of amalgamation as 01.04.2016, thereby including the total income of M/s PPR Marketing Pvt Ltd and M/s Valleria Marketing Pvt Ltd) by making additions as follows : - (i) Addition i.r.o M/s Sun New Creations And Marketing Pvt Ltd - a. Addition of Rs. 3,83,10,500/- on account of cash deposit in the bank account during the period of demonetization. b. Addition of Rs. 8,34,700/- as unexplained cash credit u/s 68 r.w.s 115 BBE of the Act.

(ii) Addition i.r.o M/s PPR Marketing Pvt Ltd – a. Addition of Rs. 1,45,00,000/- on account of cash deposit in the bank account during the period of demonetization. iii) Disallowance under chapter VIA i.r.o M/s Valleria Marketing Pvt. Ltd.”

“10.8 The AO should have examined the transaction of sales of Rs. 3,83,10,500/- (in case of 'Sun-New') and Rs.1,45,00,000/- (in case of 'PPR') keeping in view the reality and specialty of the situation, which ne failed to do so. In fact his action of making addition of the said amount is based on purely theoretical aspect. He totally ignored on the business aspect of the transactions of sales, purchases, stocks as a whole. The reality of the situation is the appellant company did do expenditure on purchases and other administrative expenditures for earning Rs. 3,83,10,500/- (in case of 'Sun-New') and Rs. 1,45,00,000/-(in case of 'PPR'). Meaning thereby that sales of Rs. 3,83,10,500/- (in case of 'Sun-New') and Rs.1,45,00,000/- (in case of 'PPR') is not the real income of the appellant company. Keeping in view the facts of the case as discussed in details in various paras of my order I hold that there is no real income of Rs. 3,83,10,500/- (in case of 'Sun-New') and Rs. 1,45,00,000/- (in case of 'PPR') earned by the appellant company. As the appellant company has already declared the income earned on sales/ resultant cash deposits after deducting the cost of purchase and incidental expenditure thereto, there is no rationale of making addition of Rs. 3,83,10,500/- (in case of 'Sun-New') and Rs. 1,45,00,000/- (in case of 'PPR') again.” 11.6 /n the case of the appellant company, the fact is that an amount of (a) | Rs. 3,83,10,500/- (in case of 'Sun-New'); (b) Rs. 1,45,00,000/- in case of 'PPR') was deposited in the regular business bank accounts and (c) Rs.8,34,700/- is declared as Commission/service income and thus credited to profit & loss account. It is an admitted fact and also evident from the records of the appellant company that the amount of Rs.3,83,10,500/- (in case of 'Sun-New'); Rs.1,45,00,000/- in case of 'PPR') relates to cash sales of stock in trade and Rs.8,34,700/- relates to Commission/Service income received in cash which is nothing but the business activity of the appellant company. Cash sales/Service Income were made by the appellant company during the course of carrying on the trading/service activities and recorded in the audited books of accounts. Therefore, source of the same stood duly explained by the appellant company as being from its business. No other source of income of the appellant company is there on records, pointed out by the AO. The preponderance of probability therefore is that cash deposited in regular bank accounts during the demonetization period was sourced from the business of the appellant company. Unless and. until in this respect, the AO locate any particular source of income, the above said receipts/sales amount has to be treated as business receipts of the appellant company and nothing else. Therefore, there is no question of treating it as deemed income u/s 68 and same is held to be business income of the appellant company. Having held so the same is assessable under the head business or profession. Therefore, the AO's contention of treating the same as deemed income us. 68 is rejected. In this connection it is relevant to rely upon the views of Hon'ble Supreme Court in the case of Laxmichand Baijnath vs. CIT (1959) 35 ITR 416, wherein it was held:-

Lastly, the question was sought to be raised that even if the credits aggregating to Rs. 2,30,346 are held to be concealed income, no levy of excess profits tax can be made on them without a further finding that they represented business income, and that there is no such finding. When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business. It is unnecessary to pursue this matter further, as this is not one of the questions referred under section 66(2).

11.7 While pursuing the assessment order, I find that the AO holds cash sales/service income as unexplained due to various reasons given by him in the impugned order. Admittedly, these are trade credits and not cash credits because the appellant company had deposited the cash in its trading bank account out of the proceeds of sales, service income although doubted. It means that these have relation with trading/services rendering entries and these are not independent cash credits. On the other hand the AO himself has accepted the books of accounts and trading results as declared by the appellant company. I find from the above facts in entirety that the AO cannot blow hot and cold at the same time for the reason he has made addition in respect of trading results i.e. treating the cash sales/service income as cash credit and adding the same u/s 68. Once, the AO has accepted the books of accounts and trading results (gross profits) and net profits which had arisen out of the said books of accounts and which have been computed after taking into consideration the cash sales/service income, there is no rationale of treating cash sales/service income as cash credit u/s 68. This sort of approbation and reprobation is not permissible. Moreover, the AO did not point out that the appellant company has any other source of income other than what has been declared by the appellant company in its books of accounts etc. and in fact the AO has accepted this position.

11.8 I have carefully pursued the views of Hon'ble Calcutta High Court in the case of: (i) Mansfield & Sons v. CIT(1963] 48 ITR 254 (Cal), wherein, it was held that where an unexplained cash credit is found in the business accounts of an assessee, such amount is taken to he income from an undisclosed source and the same can be treated as business income if the assessee has no other source of income, and taken into account as business income for purposes of excess profits tax.

(ii) Daulalram Rawatmull v. CIT[1967] 64 ITR 593 (Cal) wherein, it was held that the concealed income in the form of fixed deposits entered in the account books was all income from the assessee's very business disclosed, as the assessee was :found to have no other source of income. It was observed at page 618 thus: "There is nothing on record to show that the ,firm had any source of income other than business. Thereji»-e, in our opinion, it is not unreasonable to hold that any amount representing secret income arose out of the business of the firm. We, therefore, hold that the fixed deposits represented income from business and that they were assessable......"

11.9 Yn my considered view, the action of addition of cash credit of Rs. 3,83,10,500/- (in case of Sun-New') and Rs.1,45,00,000/- in case of ('PPR') and Rs.8,34,700/- as commission/service income made by the AO treating the same as unexplained cash credit u/s. 68 which had arisen out of the trading/services entries i.e. cash sales made by the appellant company cannot be sustained.

11.10 Therefore, keeping in view the facts of the case and the provisions of law relating to the issue, Rs3,83,10,500/- (in case of 'Sun-New') and Rs. 1,45,00,000/- in case of 'PPR') deposited by the appellant company in its regular bank accounts and Rs.8,34,700 as income from commission/services. I hold the same are assessable as business income. Further, the same has already been declared and accounted for by the appellant company in its ITR for the AY. 2017-18. Therefore, by any stretch of imagination Rs. 3,83,10,500/- and Rs.8,34,700/- (in case of "Sun-New') and Rs.1,45,00,000/- in case of 'PPR') which has already been declared in the Audited Books of Accounts, Statement of Affairs and ITRs, can be treated as unexplained cash credits and thus cannot be added again in the returned income.”

11.9 Yn my considered view, the action of addition of cash credit of Rs. 3,83,10,500/- (in case of Sun-New') and Rs.1,45,00,000/- in case of ('PPR') and Rs.8,34,700/- as commission/service income made by the AO treating the same as unexplained cash credit u/s. 68 which had arisen out of the trading/services entries i.e. cash sales made by the appellant company cannot be sustained.

11.10 Therefore, keeping in view the facts of the case and the provisions of law relating to the issue, Rs3,83,10,500/- (in case of 'Sun-New') and Rs. 1,45,00,000/- in case of 'PPR') deposited by the appellant company in its regular bank accounts and Rs.8,34,700 as income from commission/services. I hold the same are assessable as business income. Further, the same has already been declared and accounted for by the appellant company in its ITR for the AY. 2017-18. Therefore, by any stretch of imagination Rs. 3,83,10,500/- and Rs.8,34,700/- (in case of "Sun-New') and Rs.1,45,00,000/- in case of 'PPR') which has already been declared in the Audited Books of Accounts, Statement of Affairs and ITRs, can be treated as unexplained cash credits and thus cannot be added again in the returned income.”

“10.1 (i) Sun New' - as per audited Balance Sheets of the appellant company-, as on 31.03.2016 net worth was Rs.10,89,26,384/-which stood increased to Rs.11,07,91,521/- as on 31.03.2017. Addition of Rs. 18,65,136/- which had arisen due to ploughing back of the income (after income tax) into the business of the appellant company. As per ITR for the AY. 2017-18, due income tax on the said income has already been paid.

10.2 (ii) 'PPR' -as per audited Balance Sheets of the 'PPR'-, as on 31.03.2016 net worth was Rs.11,63,66,857/- which stood increased to Rs.11,65,01,876/- as on 31.03.2017. Addition of Rs.1,35,019/- which had arisen due to ploughing back of the income (after income tax) into the business of the appellant company. As per ITR for the AY. 2017-18, due income tax on the said income has already been paid.

10.3 Various observations given in the impugned order speaks of AO's pre- meditated mind for making addition of the 'SBN's deposited in its bank account during the demonetization period by the appellant company. Reasoning given by the AO are entirely based on his suspicion, conjecture and surmises. It is settled legal position that in respect of income tax proceedings, although strict rules of Evidence Act do not apply, however, assessment proceedings cannot be made on the basis of imagination and suspicion. Dhakeshwari Cotton Mills Ltd (1954) 26 ITR 775 (SC). Although the AO is not fettered by technical rules of evidence and he is entitled to act on material which may not be accepted as evidence in Court of Law but he is not entitled to make a pure guess and make an assessment without reference to any evidence or material at all, which he did in the case of the appellant company. In this respect, it is relevant to refer the views of Hon'ble Supreme Court in the case of S S Gadgil v. Lal and Co.

(1964) 53 ITR 231 has held that "a proceeding for assessment is not a suit for adjudication of a civil dispute. That an income-tax proceeding is in the nature of a judicial proceeding between contesting parties, is a matter which is not capable of even a plausible argument. The income-tax authorities who have power to assess and recover tax are not acting as judges deciding a litigation between the citizen and the State: they are administrative authorities whose proceedings are regulated by statute, but whosefunction is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate. Tax legislation necessitates the setting up of machinery to ascertain the taxable income, and to assess tax on the income, but that does not impress the proceeding with the character of an action between the citizen and the State. While making the impugned assessment order and computing the income, he did not act honestly and fairly.

10.4 The AO has failed to prove that the appellant company had earned Rs. 3,83,10,500/- (in the case of 'Sun-New') and Rs. 1,45,00,000/- (in the case of 'PPR') in addition to the income already declared by it, in its audited books of accounts and ITR for the AY. 2017-18. In fact AO has totally ignored the concept of real income and accounting principles of calculating the income. As per accounting principles, the following items appear on the debit side and credit side of the profit and loss account:-

On the debit side: * Stock on hand at the commencement of the period, * Total purchases made during the period, less returns outwards. * Direct charges, i.e. such expenses as add directly to the cost of the goods purchased, such as freight, duty, clearing charges, dock dues, carriage inwards and cartage.

On the credit side: * Total sales made during the period, less the value of returns inwards. * Stock in hand at the end of the period. * The excess of the credit total over the debit is called the profit."

10.5 However, the AO had made addition of Rs. 3,83,10,500/- (in the case of 'Sun-New') and Rs.1,45,00,000/- (in the case of 'PPR') which had arisen out of cash sales and declared on the credit side of the profit and loss account. He did not deduct the amount of purchases of the goods and the amount of opening stock, which were used for making the above-said sales. This is not at all proper as per accounting principles. In fact, the appellant company has already offered the sales amount of Rs.3,83,10,500/- (in the case of 'Sun-New') and Rs. 1,45,00,000/- (in the case of 'PPR') in its profit and loss account and profit earned on said sales has already been taxed. The appellant company has maintained its books of accounts under mercantile system. The same have not been challenged. After giving due weight to various evidences and reasons, I hold that appellant company had sufficient reasons to possess as part of its business cash balance about of Rs. 3,85,00,000/- (in case of 'Sun-New) and Rs. 1,49,00,000/- in case of 'PPR') in the shape of high denomination notes on 08.11.2016 when the ordinance was issued. The burden of showing that the appellant company. had undisclosed income of Rs. 3,83,10,500/- in the case of 'Sun-New') and Rs. 1,45,00,000/- (in the case of 'PPR') was on the AO. After carefully pursuing the various observations and reasons given by the AO in the impugned order for making additions of Rs.3,83,10,500/- (in the case of 'Sun- New') and Rs.1,45,00,000/- in the case of 'PPR'), it comes out that he liberally applied the concepts of probabilities and possibilities which is not permitted under the law. Parimisetti Seetharamammav vs. CIT [1965] 57 ITR 532 (SC). Various explanations made by the appellant company during the assessment/appellate proceedings are not absurd and had been rejected without making any proper enquiry. The AO merely disbelieved but not disproved the facts stated by the appellant company in respect of cash sales. It is settled law that an explanation prima facie reasonable cannot be rejected on arbitrary and imaginary ground which the AO did in the case of the appellant company. Orissa Corporation Pvt. Ltd. 159 ITR 78.

10.6 It is settled law that income tax is levy on income. If income does not result at all there cannot be a tax. In the cast, of the appellant company there is a total sales of textile goods of Rs.4,03,11,723/- including cash sales of Rs.3,83,10,500/- (under dispute) which was received in the appellant company's books of accounts and deposited in the bank account of the appellant company, against which the appellant company had booked expenditure on account of purchases of textile goods of Rs:3,65,31,715/- which stood paid from the regular bank accounts of the appellant company. Similarly, there is a total sales of textile goods of Rs.1,49,65,361/-including cash sales of Rs.1,45,00,000/- (under dispute) which was received in the PPR's books of accounts and deposited in its bank account, against which the 'PPR' had booked expenditure on account of opening stock of Rs. 23,10,632/- and purchases of textile goods of Rs.93,36,304/- which stood paid from the regular bank account of the 'PPR'. Therefore, the AO's action of levying tax on Rs. 3,83,10,500/- (in case of Sun-New) and Rs. 1,45,00,000/- (in case of 'PPR') without taking into consideration the cost of purchases, opening stock and other administrative expenditures etc. incurred by the appellant company/PPR is unjustified and cannot be sustained. Because by stretch of any imagination, it cannot be said that the appellant company had earned Rs. 3,83,10,500/- (in case of Sun-New') and Rs. 1,45,00,000/- (in case of 'PPR') in addition to what the appellant company has already declared in its audited books of accounts, balance sheets and ITRs. 10.7 Income has to be determined from the point of view of real income taking the probability or improbability of realization in a realistic manner. Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC), which AO in this case has miserably failed to do so.”