CHANDRAKANT LAVJIBHAI MANDANKA,VADODARA vs. TEH ITO, WARD-2(2), VADODARA

At the outset, it was stated that the sole issue in the present appeal pertained to addition made to the income of the assessee on account of unexplained credit under section 68 of the Act amounting to Rs.46,62,373/-. The ground reads as under:

“1. On the facts and circumstances of the case, the ld.AO is not justified both in law and on facts in invoking section 68 of 2 the IT Act and making addition of Rs.42,62,373/- to the total income.

As transpires from orders of the Revenue authorities, the assessee was a partner in three firms viz. Krushnam Infrastructure, Sun Corporation and Amar Developers. During assessment proceedings, the assessee had filed copies of his financial statements and profit &loss account and balance sheet as on 31.3.2010 i.e. end of the preceding financial year i.e. F.Y.2009-10 and the AO noted therefrom that while his capital stood at Rs.34,19,190/-, but in the impugned year i.e. financial year 2010-11, the assessee has made certain adjustment to his capital and increased it to Rs.96,00,966/-. The assessee was specifically asked to explain this increase on account of two journal entries in the names of Sun Corporation and Amar Developers as above.

We have noted from order of the authorities below that the consistent explanation of the assessee for this increase in capital was on account of adjustment of the capital balance of the assessee in the accounts of these two firms and as that reflected in his own books, which had remained unreconciled since 2007. The assessee had repeatedly stated that being an individual he was earlier not maintaining any books of accounts and started maintaining books of accounts only from 2007 -08 and since then, the balance reflected as invested in these two firms remained un-reconciled and it was only after 2010 that the assessee realised the same and since it was unable to reconcile its difference, the capital adjustment to these accounts was made by way of journal entries resulting in increase to his capital account accordingly. The assessee had repeatedly asserted that this difference in the investment in the said two firms related to period prior to 2007 and being unable to find reasons for the difference, the assessee has passed the impugned journal entries. This contention of the assessee finds mention at para 6 of the CIT(A)’s order as under:

The ld.counsel for the assessee stated that he had substantiated his explanation that the entry pertained to unreconciled balance of his capital in M/s Amar Developers and M/s Sun Corporation and that in his own books, by filing a detail showing his capital account balances as reflected in the books of the said two firms right from year ending 2002 onwards to the current year and also the balance as reflected in his books from year ending 2007 onwards clearly bringing out the difference in the capital as reflected in the two set of books as on 01-04 2007 ,which was adjusted by way of journal entry in the impugned year. Copies of ledger account of the assesses capital in the books of the said two firms as also their Balance Sheets and copies of capital account of the assessee in its Books were filed to substantiate the amount reflected in the detail. The same were also filed before us in paper book as under:

Copy of Capital account of the appellant form the Books of M/s Amar Developers from F.Y 2000-2001 to F.Y.2006-2007 Balance as on 31.03.2007 Rs. 87906/- 4. Copy of Capital account of the appellant form the Books of M/s Sun corporation from F.Y 2002-03 to F.Y.2006-2007 Balance as on 31.03.2007 Rs. 417767/- 5. Appellant's trial Balances 01.04.2007 to 31.03.2008 showing balances taken of M/s Amar Developers and M/s Sun corporation and Balance sheet as at 31.03.2008 6. Appellant's Capital Account and Balance sheet from 01.04.2010 to 31.03.2011.

Referring to the detail at P.B 8 he pointed out the difference in capital account as reflected in the Books of the two firms and in the Books of the assessee from year ending 2007 as under: