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Facts
The appellant, Acres Buildwell Pvt. Ltd., engaged in construction, filed a return for AY 2017-18 declaring taxable income of Rs.5,42,690/-. The AO assessed the income at Rs.74,42,690/-, making additions of Rs.35 lakhs for cessation of liability u/s 41(1), Rs.15 lakhs for prior period commission expenses, and Rs.19 lakhs for unexplained cash credits u/s 68. The CIT(A) partly allowed the appeal, confirming the Rs.35 lakhs addition (converting it to u/s 68) and sustaining the Rs.15 lakhs commission expense addition.
Held
The Tribunal held that the addition of Rs.35 lakhs under Section 68 was erroneous as it involved only book entries adjusting existing liabilities without any actual receipt or flow of funds. It further ruled that the Rs.15 lakhs commission expense, though incurred in the prior year, was rightfully capitalized as work-in-progress and allowable in the current assessment year when the project commenced. Both key additions challenged by the assessee were deleted.
Key Issues
Whether book entries adjusting existing liabilities without actual flow of funds attract addition under Section 68 of the Income Tax Act; and whether commission expenses capitalized as work-in-progress in a prior year can be claimed as allowable expenditure in the year the project commences.
Sections Cited
Section 143(3), Section 41(1), Section 68, Section 143(2), Section 250, Section 115BBE, Section 269T, Section 69
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Income Tax Appellate Tribunal, DELHI BENCHES : A : NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI ANUBHAV SHARMA
ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Assessee against the order dated 18.08.2022 of the Commissioner of Income Tax (Appeals)-30, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal No.10389/2019-20 arising out of the appeal before it against the order dated 10.12.2019, passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the ITO, Ward-1(3), Delhi (hereinafter referred to as the Ld. AO).
The appellant is engaged in the business of construction activities and had filed the return declaring taxable income of Rs.5,42,690/- which was revised declaring the taxable income of Rs.5,42,690/- for the reason that there were correction in the MAT calculation, however, resulting in no impact on the taxable income and tax. The AO had assessed the income of the assessee at Rs.74,42,690/-, after making an addition on account of cessation of liability u/s 41(1) of Rs.35 lakhs, then made addition on account of commission expenses being prior period expenses of Rs.15 lakhs, and third one on account of unexplained cash credits u/s 68 of Rs.19 lakhs.
2.1 The CIT(A), partly allowed the appeal and confirmed the addition of Rs.35 lakhs made by the AO u/s 41(1) of the Act, converting the same as u/s 68 of the Act and the addition of Rs.15 lakhs on account of commission was sustained for which the assessee is in appeal raising the following grounds:- “
1. On the facts and circumstances of the case, the order passed by the Ld. Commissioner of Income Tax (Appeals)[CIT(A)] is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the assessment order passed under Section 143(3) of the Act is bad and liable to be quashed as the same is passed without issue of statutory notice under Section 143(2) of the Act within the time limit prescribed under the Act.
3. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in passing the order in physical mode despite there being a complete bar on such proceeding, the order had to be passed by the National Faceless Appeal Centre. 4(i) On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in confirming the addition of Rs.35,00,000/- made by the Ld. Assessing Officer (AO) under Section 41(1) of the Act converting the same having been made under Section 68 of the Act. (ii) That the Ld. CIT(A) has erred both on facts and in law in introducing a new source of income which is in excess of his jurisdiction under Section 250 of the Act.
5. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in making addition of Rs.35,00,000/- under Section 68 of the Act despite the fact that all the documents and explanation to prove the identity, creditworthiness and genuineness of the transaction were there on record.
6. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in invoking the provision of section 68 ignoring the fact that the amount has not actually been received by the assessee in the year under consideration, it was transferred from one account to another through book entry only.
7. On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in drawing the adverse inference against the assessee ignoring the fact that entries in the books of accounts are not sacrosanct for drawing such inference. 8. (i) On the facts and circumstances of the case, the Ld. CIT(A) has erred, both on facts and in law, in confirming disallowance of Rs.15,00,000/- made by the Ld. AO on account of commission paid treating the same to be a prior period expense. (ii) That the Ld. CIT(A) has confirmed the disallowance arbitrarily rejecting the contention of the assessee that the expenses incurred in earlier year were capitalized in that year and in fact charged to the profit and loss account in the year under consideration as the project was in the pre-commencement stage in the earlier year and as the project was completed in the year under consideration it was charged to the profit and loss account.
9. The applicant craves leave to add, amend, or alter any of the grounds of appeal.”
3. Heard and perused the record. At the time of argument, the ld. counsel submitted that ground No.1 is general in nature while grounds No.2 and 3 are not being pressed.
4. We have given thoughtful consideration to the submissions and the material on record. Ground-wise findings are as follows.
5. Grounds No. 4 and 5 are taken up together as they arise out of same set of facts. The ld. AR has primarily contended that it is mere case of journal entries made for adjustments of loan taken in earlier year. In this regard it comes up that during the year ending 31st March, 2017 an amount of Rs. 9,15,520 was receivable from Vrinda Developers Private Limited, and on the other side, appellant was liable to repay Rs. 30,00,000 and Rs. 5,00,000 to Amaya Overseas Private Limited and SNB Realtors Private Limited respectively, towards repayment of Unsecured Loan. Appellant claims that it was not having an active communication from, the said creditor parties (Amaya Overseas Private Limited and SNB Realtors Private Limited) at that time. So the appellant company and M/s. Vrinda Developers Private Limited, mutually decided, that Vrinda Developers will repay both the Unsecured Loans to both the parties on behalf of appellant. Thus, unsecured loan of Rs. 35,00,000 which was earlier standing in the name of Amaya Overseas Pvt. Ltd (Rs. 30,00,000) and SNB Realtors Pvt Ltd (Rs. 5,00,000) stood credited in the name of Vrinda Developers Pvt. Ltd. of Rs. 25,84,480 (being Net of Receivable from Vrinda (Dr.) 4 Rs.9,15,520 and Unsecured Loan from Vrinda (Cr.) Rs.35,00,000 ), in the books of Appellant Company. As per ld AR unsecured loan is still standing in the books of Appellant Company, only the parties have changed. Ld. AR contends that only because the party to whom said loan is repayable has changed, one cannot say that liability has ceased to exist. It was pointed out that the loan still exists and appears at Note No.2.2.1 to Financial Statements as at 31.03.2017. Thus it was contended that since no liability has ceased to exist Section 41(1) of the Act should not apply.
5.1 It was further submitted that the Revenue has not challenged the conclusion of the CIT(A) that additions made by the AO u/s 41(1) are not maintainable. It was further submitted that as there were only book entries without there being any money coming into the accounts of the assessee, provisions of section 68 are not applicable. The ld. AR has relied following judgements to support the case of the assessee that unless there is introduction of funds through the accounts, addition u/s 68 of the Act cannot be made:-
(i) Anil Mithas vs. DCIT, dated 31.05.2022 (ii) DCIT vs. NCR Business Park Pvt. Ltd., ITA No. 6646/Del/2018 dated 15.06.2022 (iii) ITO vs. Hindustan Breweries and Bottling Ltd., ITA No. 1673/Pun/2019 dated 01.06.2023
(iv) ITO vs. Pansu Commercial Pvt. Ltd., dated 08.05.2019 (v) V.R. Global Energy Pvt. Ltd. vs. ITO, 2018 407 ITR 1545 (Mad.), SLP dismissed by the Hon’ble Supreme Court in SLP No. 7079/2019 dated 05.11.2019 (vi) Jatia Investment Co. vs. CIT, (1994) 206 ITR 718 (Cal.) (vii) ITO vs. Bhagwat Marcon Pvt. Ltd., ITA No. 2236/Kol/2017 dated 31.07.2019 (viii) ACIT vs. Suren Goyal, ITA No. 1767/Del/2011 dated 01.12.2011 (ix) DCIT vs. Glass Tech India, ITA 6241/Del/2017, dt. 25.03.2022 5.2 The ld. DR has, however, countered the same by submitting that in section 68 what is required is that if there is any sum credited in the books of account and does not mention of any ‘cash’ being credited.
We have given thoughtful consideration to the matter on record and we observe that CIT(A) in para 12.4, while making the addition u/s 68, has observed as follows:-
“…..It is evident from the ledger account submitted, by the appellant at page No. 45 and 46 of the paper book that M/s. SNB Realtors Pvt. Ltd. and M/s. Amaya Overseas Pvt. Ltd. have been re-paid Rs. 5,00,000/- and Rs. 30,00,000/- by passing a journal entry and the equal amount has been shown credited in the name of M/s. Vrinda Developers Pvt, Ltd. It is not in dispute that the above two companies (SNBRPL and AGPL) are paper companies and their whereabouts are not known to the appellant. These companies have also been de-registered; therefore transaction with them remains unverified and unexplained. It is also noted that Rs.35,00,000/- has been credited in the books of the appellant during the year under consideration from M/s. Vrinda Developers Pvt. Ltd. The source of the credit shown as unsecured loan, received from M/ s. Vrinda Developers Pvt. Ltd. remains unexplained and therefore, it attracts provisions of Section 68 of the Act. The appellant failed to explain the source of funds credited during the year in the name of M/s. Vrinda Developers Pvt. Ltd, Accordingly, Rs.35,00,000/- is added u/s. 68 of the Income Tax Act in respect of which tax is to be charged as per the provisions of section 115BBE of the Income Tax Act. It is also pertinent to mention here that the loan received by the appellant from M/s. SNB Realtors Pvt. Ltd. amounting to Rs. 5,00,000/- and M/s. Amaya Overseas Pvt. Ltd. amounting to Rs.3,00,000/- have been repaid in contravention of the provisions of Section 269T of the Act. Accordingly, the Assessing Officer is, therefore, advised to take appropriate action.”
We are of the considered view that for the purpose of section 68 of the Act, the conclusion drawn by the CIT(A) was erroneous because on the one hand, without there being any actual receipt of money, a mere journal entry was passed during the year in regard to entries of borrowed funds standing as unsecured loan and amount receivable from two different set of parties. On the other hand, the CIT(A) has doubted the identity of two lenders on the basis that companies are deregistered and their whereabouts are not known. However, the addition is made on the basis that source of credit shown as unsecured loan received from M/s Vrinda Developers Pvt. Ltd., remains unexplained. The journal entry only shows cessation of liability towards the two companies - SNB Realtors Pvt. Ltd. and M/s Amaya Overseas Private Ltd. on the basis that these liabilities are taken over by M/s Vrinda Developers Pvt. Ltd. Thus, the conclusion of failure to explain the source of funds credited during the year in the name of M/s Vrinda Developers Pvt. Ltd. is an erroneous finding.
7.1 The journal entry had the debit effect on the bank account with the increase in the bank balance and credit effect on the loan account. The assessee has explained that no entry in this regard was effected in the P&L Account as a credit effect on the unsecured loan account was reflected in the balance sheet only. As for the purpose of section 69 of the Act, it is imperative for the Revenue that there was cash involved in the transaction. The present journal entry is merely adjustment of accounts by way of set-off entries. We are of the considered view that the opening balances on account of unsecured loans of the two parties and certain amount receivable from M/s Vrinda Developers Pvt. Ltd., being in the background of journal entry, then for the purpose of section 68 of the Act, it cannot be said to be an unexplained cash credit. The fictitious cash entry in the bank account without any real credit of cash to the cash book cannot give rise to inclusion of the amount of the entry increasing bank balance as unexplained cash credit.
7.2 The judgment to which the ld. AR has relied for the proposition of law that without there being physical transfer of money, the provisions of section 68 cannot be invoked are applicable to the issue before us. In fact, in ACIT vs. Shri Suren Goel (supra) the Revenue has challenged before the Tribunal the deletion made by the CIT(A). In that case, the balance sheet of the assessee as on 31.03.2007 has revealed that liability increased by Rs.25 lakhs towards Pritam Goel. The assessee has explained that to maintain credit returns enjoyed by the partnership firm, a journal entry was passed in the books of account of the partnership firm M/s Lyra Industrials wherein assessee’s capital account was credited and father Shri Pritam Goel’s capital account was debited by an equal amount. The fact of journal entry passed in the books of the firm was duly incorporated in the books of the assessee. The AO had made addition of Rs.20 lakhs which was deleted by CIT(A) by observing that: “In the case of book entries/adjustments, there is no question of mode of payment or actual receipt of money from one party to another. Book entry transfer lets transfer only through the respective accounts in the books of the concerns.” Accordingly, the deletion was made which was sustained by the Tribunal further observing that since there was no physical transfer of money from the account of Shri Pritam Goel and only a journal entry was passed, the findings of the AO that transaction was sham is baseless.
7.3 A coordinate Bench at Delhi in the case of DCIT vs. M/s Glass Tech India Ltd., (supra) on which one of us (Judicial Member) was a party, while dealing with the provisions of section 68, has held that it is not just an entry of cash credit in the books of account that would create liability of explanation from the assessee, but, there should be an actual flow of funds. Once the flow of funds is established, then, the question of explanation from the assessee actually arises. Thus, we are inclined to allow these grounds of the assessee.
In regard to grounds No.7 and 8, the ld. AR has submitted that the CIT(A) has failed to take into consideration the fact that the assessee had capitalized the said expenses and transferred the same to work-in-progress in the last year and since the project had started in the year under consideration, the expenses were claimed by the assessee in the year under consideration.
8.1 The ld. DR has, however, relied the orders of the tax authorities below.
In regard to ground No.8, the contention of the assessee before the Ld. CIT(A) was that in the earlier year i.e. A.Y. 2016-17 M/s. Vrinda Developers Pvt. Ltd., acting as an agent, has been helping the assessee to get the contracts from M/s. Splendor Epitome in Gurgaon, arranging meetings between both the parties, documents and related things. M/s. Vrinda Developers Pvt. Ltd. charged commission from the assessee amounting to Rs.15,00,000/- vide its invoice dated 31.03.2016. This commission payable directly related to the project which had not yet started and was in progress till A. Y. 2016-17. The assessee capitalized the said commission expenses and transferred the same to work-in- progress in last year and since the project had started in the year under consideration the expenses were claimed by the assessee in the year under consideration.
9.1 Now the journal voucher placed at PB Pg. 42-43 it can be seen that this amount of Rs. 15,00,000/-was capitalized under work-in-progress in the last year. The copy of invoice from M/s Vrinda Developers Pvt. Ltd. is placed at PB Pg. 44 and the ledger account of work-in-progress is placed in PB Pg.
The copy of the balance sheet for the year ending 31.03.2016 placed at PB Pg. 48 shows that the amount of Rs. 15,00,000/- was considered as capital work-in- progress. Copy of the ledger account of brokerage placed at PB Pg. 59 shows that this amount has been transferred from the work-in-progress account. Further the sanction for additional place of business on account of the project Splendor Epitome from CBEC are placed at PB Pg. 60-65 which are dated 29.04.2016 and 12.08.2016 which pertains to the year under consideration.
9.2 These evidences make it clear that though the invoice for commission was raised by M/s Vrinda Developers Pvt. Ltd. in the last year, however, the expenditure being related to the project which had started in the year under consideration, the same is allowable in the year under consideration. In the light of the aforesaid, this ground is decided in favour of the assessee.