Loading judgment…
Facts
The assessee, engaged in civil construction, filed a return for AY 2017-18 declaring Rs. 20.08 lakhs income. The AO, under Section 143(3), made additions totaling over Rs. 2 crores, including Rs. 1.39 crores for sundry debtors and Rs. 10.50 lakhs for stock, both treated as unexplained capital transferred from personal books to the proprietorship concern. The CIT(A) subsequently deleted both additions, leading the revenue to appeal before the Tribunal.
Held
The Tribunal upheld the CIT(A)'s deletion of the Rs. 1.39 crore addition related to sundry debtors, finding that the transfer was a mere journal entry supported by sufficient documentary evidence. However, it reversed the CIT(A)'s decision regarding the Rs. 10.50 lakh addition for stock, as the assessee failed to provide any documentary evidence to substantiate the stock holding, thereby upholding the AO's addition for stock.
Key Issues
The key legal issues were whether the transfer of sundry debtors and stock from the assessee's personal books to his proprietorship concern, without fresh infusion of funds or adequate supporting evidence, constituted 'unexplained capital' under Section 68 of the Income Tax Act.
Sections Cited
143(3), 143(2), 142(1), 68, 115BBE, 194C
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI & SHRI PARESH M. JOSHI
आदेश/ O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by order of first appeal dated 07.03.2024 passed by learned Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 22.12.2019 passed by learned DCIT/ACIT 3(1), Indore [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2017-18, the revenue has filed this appeal.
Page 1 of 10 assessee-individual is engaged in civil construction (contract) business under the name and style of M/s Saiji Constructions, a proprietorship concern. For AY 2017-18, the assessee filed his return declaring total income of Rs. 20,08,360/-. The case was selected under scrutiny and notices u/s 143(2)/142(1) were issued which were complied by assessee.
Ultimately, the AO passed assessment-order u/s 143(3) determining total income at Rs. 2,22,99,719/- after making certain additions. Aggrieved, the assessee carried matter in first-appeal and got full relief. Now, the revenue has come in next appeal before us assailing the order of CIT(A).
The grounds raised by revenue are as under:
“1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in deleting the addition of Rs. 1,39,01,463/- u/s 68 of the Act made by AO without appreciating the facts that assessee failed to prove the identity, creditworthiness, and genuineness of the introduction of capital out of Debtors.
On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law in deleting the addition of Rs. 10,50,410/- u/s 68 of the Act made by AO without appreciating the facts that the assessee failed to furnish any documentary evidences for e.g. stock register, sales register, purchase register, sales of stock register for purchase, transportation of bills etc. in support of his submission during assessment and appeal proceedings.” Ground No. 1:
In this ground, the revenue is claiming that the CIT(A) has erred in deleting the addition of Rs. 1,39,01,463/- made by AO u/s 68 on account of unexplained capital in the form of sundry debtors.
Page 2 of 10 Precisely the issue is such that during assessment-proceeding, the AO observed that the assessee has increased opening capital as on 01.04.2016 by Rs. 1,39,01,463/- by transfer of sundry debtors as on 31.03.2016 from his personal books to proprietorship concern and show-caused assessee to explain the same. In response, the assessee submitted that in order to show a better picture of proprietorship concern and obtain contracts from government, he has transferred business debtors standing in his personal statement of affairs to proprietorship concern. The assessee also filed Balance Confirmations Letters of three debtors, namely (i) M/s Dilip Buildcon Ltd – Rs. 1,32,13,943/-, (ii) M/s Gayatri Projects Ltd. – Rs.
4,96,217/-, and (iii) M/s IVRCL Ltd. – Rs. 1,91,304/- from whom aggregate amount of Rs. 1,39,01,484/- was receivable as on 31.03.2016. However, the AO rejected assessee’s submission and treated the increase in capital as unexplained and made addition u/s 68 r.w.s. 115BBE.
During first-appeal, the assessee made same submission to CIT(A) and filed the same documents as filed to AO. The CIT(A) considered assessee’s submission supported by documents and deleted addition.
At first, we reproduce below the order passed by CIT(A) reading as under:
“Ground No.2:- The ground of appeal is directed against addition of Rs. 1,39,01,463/- u/s 68 of the Act by the Ld. AO. During the course of assessment proceedings, the Ld. AO had sought the detailed documentary evidences and reasons for the increase in the capital of the assessee. The Ld.
Page 3 of 10 AY 2017-18 AO could give the finding that the identity, creditworthiness and genuineness of the introduction of capital out of debtors of previous years shown to be transferred from individual books and shown as net of receipts by assessee is not genuine and no justification hence was put forth by the assessee. Consequently, an addition of Rs.1,39,01,463/- was made to the total income of the assessee u/s 68 r.w.s. 115BBE of the Act. As on 31.03.2016, a total of INR 1,39,01,464/- sundry debtors were outstanding in the personal books which were added back by the Ld. AO as below:-
Name of debtor Amount due M/s Dilip Buildcon Ltd. INR 132,13,943/- M/s Gayatri Projects Ltd. INR 4,96,217/- M/s IVRCL Ltd. INR 1,91,304/- Total INR 1,39,01,484/-
The appellant has filed confirmation letters from his debtors namely M/s Dilip Buildcon Limited, M/s Gayatri Projects Limited and M/s IVRCL Limited alongwith bank statements showing these business transactions during assessment proceedings itself. From the perusal of Form 26AS for AY 2017-18, it can be seen that TDS u/s 194C of the Act has been duly deducted by 2 out of the 3 Debtors viz. Dilip Buildcon Ltd and Gayatri Projects Ltd. The Ld. AO in his remand report has commented that no adverse inference can be drawn from these documentary evidences. It is pertinent to mention that the appellant had transferred his personal assets in the beginning of A.Y.2017-18 in order to increase net worth of the proprietary firm. The appellant has submitted the Audited Balance Sheet and P&L Account to substantiate his claims. In view of the same, the business debtors and stock-in-trade that were outstanding in the personal books as on 31.03.2016 (i.e. at the end of previous F.Y.) were now in the books of his sole proprietorship firm namely M/s Saiji Construction. From the submissions made by the assessee before the Ld. AO, it is seen that the appellant had submitted not only details of names of debtors but also the balance confirmation letters from the parties in question. It is further seen that transfer of outstanding debtors from the individual books to the books of his sole proprietorship firm is merely a journal entry and this increase in capital does not represent any fresh infusion of funds which may form the definition of cash credits u/s 68 of the Act. Hence, the Ld. AO was not correct in invoking the provision of section 68 of the Act as the source of the Page 4 of 10 AY 2017-18 funds were well explained by the assessee and he had to only rely and tally the books of accounts of the assessee. Reliance is placed on the order of Hon'ble ITAT Pune in the case of ITO vs. Hindustan Breweries and Bottling Pvt. Ltd. in dated 01.06.2023 wherein the Hon'ble ITAT was examining the case of the assessee having received fresh share capital amounting to Rs. 6.00 crore through journal entries. The Hon'ble Tribunal noted that the said entries merely represented a transformation of unsecured loans into equity share capital. It was observed that the credit to share capital was only through these journal entries and not by actual monetary transaction. Furthermore, the Hon'ble ITAT dismissed the addition of Rs. 6.00 crore made by the AO u/s 68, emphasizing that a mere journal entry does not necessitate an addition under this section. This ruling reinforced that, unless there is tangible evidence of actual monetary transaction, a mere transfer entry should not trigger addition u/s.68 of the Act. In view of the facts and the circumstance as stated above, the addition of Rs.1,39,01,464/- made by Ld. A.O. u/s 68 of the Act is hereby deleted. The ground of appeal no.2 is allowed.”
8. During hearing before us, Ld. AR for assessee referred following documents filed in Paper-Book qua the three debtors:
(i) Page 10 of Paper-Book – Copy of Balance Confirmation Letter dated
11.12.2019 issued by M/s Dilip Buildcon Limited on their letter head, duly sealed and signed by their authorized signatory, showing credit balance of Rs. 1,32,13,943/- payable to assessee as on 31.03.2016; (ii) Page 8 – 9 of Paper-Book – Copies of two Balance Confirmations
Letters dated 14.12.2019 issued by M/s Gayatri Projects Ltd. on their letter head, duly sealed and signed by their Manager - Accounts, showing credit balance of Rs. 79,600/- (+) Rs. 4,16,617/- =
4,96,217/- payable to assessee as on 31.03.2016.
(iii) Page 11 – 17 of Paper-Book – Copies of documents of claim lodged by assessee as ‘operational creditor’ to NCLT for recovery of sum of Rs.
Page 5 of 10 corporate insolvency resolution process. At Pages 15-17 of Paper-Book, the assessee has attached a copy of Ledger A/c extracted from books of account of M/s IVRCL Ltd. for the period 01.04.2011 to 31.03.2013 showing a credit balance of Rs. 1,33,052.73 payable to assessee as on 30.06.2012. Ld. AR narrated that the assessee is claiming due of Rs.
1,31,034/- from M/s IVRCL Ltd. whereas M/s IVRCL Ltd. is showing a sum of Rs. 1,33,052/- payable to assessee, the small difference is on account of some accounting adjustments.
Thus, Ld. AR submitted, the amounts receivable by assessee from all three debtors is fully evidenced by above documents. Ld. AR submitted that the outstanding debtors as on 31.03.2016 were only transferred to the books of proprietary concern of assessee as on 01.04.2016 by way of transfer entry by crediting assessee’s capital a/c. Ld. AR further submitted that the assessee has also filed Ledger A/c of M/s Dilip Buildcon Limited at Pages 40-46 of Paper-Book and Ledger A/c of M/s Gayatri Projects Ltd. at Pages 48-50 of Paper-Book for the financial year 2016-17 from which it is clearly discernible that those debtors were subsequently recovered through banking channel and there is no cash receipt. So far as M/s IVRCL is concerned, the assessee has only filed claim before NCLT and there is no recovery. Ld. AR thus submitted that the impugned debtors as on 31.03.2016/01.04.2016 are fully supported by evidences and the AO’s order treating the same as unexplained and making addition u/s 68 is bad. Ld. AR submitted that the Page 6 of 10 assessee and there is no error or perversity in CIT(A)’s order, hence the same must be upheld.
Ld. DR for revenue only relied upon AO’s order.
We have considered rival submissions of both sides and carefully perused the orders of lower authorities as well as the documents narrated above to which our attention has been drawn. The dispute here is qua the addition of Rs. 1,39,01,463/- made by AO but deleted by CIT(A) in first- appeal. Admittedly, the assessee has passed a journal entry in the books of his proprietorship concern M/s Saiji Construction on 01.04.2016 by bringing outstanding debtors from his personal books to the books of proprietorship concern and thus increased his capital in the books of proprietorship concern. The assessee has not filed ‘Statements of Affairs as on 31.03.2016’ or ‘personal books of financial year 2015-16’ to Income-tax Department and hence it has given rise to a controversy as to whether the debtors of Rs. 1,39,01,463/- being claimed by assessee as on 31.03.2016 are genuine or not. The assessee has, however, given the names of three debtors from whom the total sum of Rs. 1,39,01,463/- was receivable and also filed supporting evidences to AO. The evidences were also filed to CIT(A).
The assessee has also filed evidences in Paper-Book which are in the form of Balance Confirmation Letters of M/s Dilip Buildcon and M/s Gayatri Projects and documents of claim lodged before NCLT against M/s IVRCL Ltd. Thus, there are sufficient documentary evidences to prove the assessee’s
Page 7 of 10 made addition but the CIT(A) reversed AO’s action on a vehement consideration of assessee’s documents. In the situation, we do not find any error, illegality or perversity in CIT(A)’s order. Hence, the impugned order passed by CIT(A) deleting the addition is upheld. Ground No. 1 of revenue is accordingly rejected.
Ground No. 2:
In this ground, the revenue is claiming that the CIT(A) has erred in deleting the addition of Rs. 10,50,410/- made by AO u/s 68 on account of unexplained capital in the form of stock.
We have considered submissions of both sides and perused the orders of lower-authorities qua this issue. The AO has made this addition vide Para No. 6 of assessment-order. He has noted that the assessee has increased opening capital as on 01.04.2016 by claiming transfer of stocks of Rs. 10,50,410/- from his personal books to proprietorship concern. The AO show-caused assessee to explain the same. The assessee filed a reply but the AO, on consideration, found that the assessee has not filed any detail or evidence of stock holding. Accordingly, the AO rejected asessee’s submission and made addition. During first-appeal, the CIT(A) has deleted addition and granted relief to assessee although there was no detail or document of stock before him. During hearing before us also, the position of assessee remains same. Ld. AR for assessee expressed in open court assessee’s inability to file
Page 8 of 10 on 31.03.2016 except relying upon the “Statements of affairs as on 31.03.2016” filed by assessee to lower authorities. Here is it a fact that the said ‘Statement of Affairs’ was never filed to income-tax department in earlier financial year 2015-16. Furthermore, the assessee is not having any detail or evidence whatsoever to support the holding of stock. Being so, the assessee’s claim of holding of stock remains unsubstantiated. We therefore agree with AO’s action. The CIT(A)’s order is, in our view, not correct in so far this issue is concerned. Therefore, we uphold the addition made by AO.
The Ground No. 2 raised by revenue is allowed.
Resultantly, this appeal is partly allowed.
Order pronounced in open court on 17/06/2025