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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI G.S. PANNU, HONBLE & SHRI C.N. PRASAD, HONBLE
PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals) – 9, Mumbai dated 25.02.2013 for the Assessment Year 2009-10.
The First ground of appeal of the assessee is in respect of confirming the action of the Assessing Officer in rejecting the Books of 2 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. Accounts u/s. 145(2) of the Act and making an addition by estimating the Gross Profit.
3. Briefly stated the facts are that, the assessee engaged in the business of manufacturing and trading of Cotton Gray Fabric filed return of income on 27.09.2009 declaring loss of ₹.2,22,79,852/-. The assessment was completed u/s. 143(3) of the Act on 29.12.2011 determining the total income of the assessee at ₹.6,05,66,170/-. While completing the assessment the Assessing Officer rejected the Books of Accounts and estimated the Gross Profit at ₹.1,10,11,921/- applying the Gross Profit ratio of 8.28% of the immediately preceding Assessment Year i.e. 2008-09 as the assessee could not produce the Books of Accounts. On appeal the Ld.CIT(A) sustained the action of the Assessing Officer in rejecting the Books of Accounts and estimating the Gross Profit holding that when the Books of Accounts are not properly maintained and the opening stock, purchases, sales and closing stock are not capable of independent verification there is justification for rejection of Books of Accounts.
Ld. Counsel for the assessee before us vehemently submits that assessee is maintaining Books of Accounts in Tally software, the auditor has audited the accounts in the computer itself, there was no physical
3 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. ledger or register of any account maintained by the assessee separately. The Ld. Assessing Officer has not asked the assessee to produce the copies of the bills, invoices for the whole year. The assessee maintained stock register in the computer itself. Therefore, it was not possible to produce stock register signed by the stock/godown in-charge. Learned Counsel for the assessee submits that all the purchases were routed through PEC. Therefore, the addition on account of rejection of Books of Accounts and estimation of Gross Profit is not justified. Learned Counsel for the assessee further submits that due to various market conditions during this Assessment Year assessee incurred loss as against the profit shown in the immediately preceding Assessment Year. Therefore, there is no justification in estimating the Gross Profit on the basis of the profit shown in the immediately preceding Assessment Year.
Ld.DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. On a reading from the Assessment Order, we find that the Assessing Officer vide order sheet entry dated 09.11.2011 asked the assessee to furnish the reasons for loss incurred by the assessee by 14.11.2011 and simultaneously summons were issued u/s. 131 of the Act to one of the Director’s Mr Prasanth Boorugu who has attended the office
4 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. of the Assessing Officer on 25.12.2011 and a statement was recorded on oath u/s. 131 of the Act. A question was asked by the Assessing Officer to produce all the Books of Accounts with supporting’s and the Director stated that they are in the process of the shifting the registered Office at Mumbai to Bangalore for operational convenience and requested to grant 15 days’ time to produce Books of Accounts. It was also stated that the concerned accountant had gone on long medical leave and expected to report for duty in the first week of January, 2012. The Assessing Officer however rejected the request of the assessee and proceeded to complete the assessment on 29.12.2011 as it is time barring. He rejected the Books of Accounts and estimated Gross Profit.
Ld.CIT(A) called for remand report on the contentions raised by the assessee and the Assessing Officer stated in the remand report that the assessee has not produced physical Books of Accounts, vouchers were not produced, stock registers were not produced. Based on the submissions of the Assessing Officer in the remand report the Ld.CIT(A) sustained the rejection of Books of Accounts by the Assessing Officer and estimation of the Gross Profit. Before us it is the submission of the assessee that it is maintaining Books of Accounts in the Tally Package and the same were audited. Assessing Officer has not asked for the 5 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. vouchers. Stock registers are available. Therefore, there is no justification in rejection of Books of Accounts.
As stated earlier the assessment was taken up at the fag end of the year and there was no sufficient opportunity provided to the assessee to produce the Books of Accounts. The Assessing Officer also did not ask for the form in which the books have to be produced i.e. physical form or electronic form. The contention of the assessee is that it is maintaining the Books of Accounts mostly in the electronic form. Simply because the books were not produced in physical Form the same cannot be rejected especially when the books were audited and the assessee is a limited company. Therefore, taking the totality of facts and circumstances into consideration, we are of the considered view that this issue is to be restored to the file of the Assessing Officer and the assessee should be given one more opportunity to produce the Books of Accounts before the Assessing Officer to substantiate its claim for the loss incurred during the current Assessment Year. Thus we set-aside this issue to the file of the Assessing Officer who shall examine afresh in accordance with the law after providing adequate opportunity of being heard to the assessee. This ground is allowed for statistical purpose.
6 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. 9. The Next ground of appeal is in respect of confirming the action of the Assessing Officer in disallowing finance expenses of ₹.36,94,584/-.
10. The Assessing Officer while completing the assessment noticed that assessee had made investment in share application money in various group companies and related parties and had incurred finance expenses for its business activities. Assessee was asked to justify as to why the finance expenses should be allowed as the funds were invested in share application money of other related parties. The assessee appears to have sent its explanation dated 14.11.2011 through DTDC Courier and it was delivered to Assessing Officer on 15.11.2011. However, the Assessing Officer disallowed the finance expenses observing that there is no commercial expediency in investing huge amounts without any interest receipt from certain parties, particularly when the assessee is short of funds. Ld.CIT(A) also sustained this disallowance observing that assessee could not prove that the investments in share application money were made from interest free funds.
Before us Ld. Counsel for the assessee submits that the finance charges consists of normal bank charges, normal interest, and bank charges for PEC, LC opening charges and usance interest of PEC LC and none of these charges are paid on any borrowals and therefore there
7 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. is no justification in disallowing the said finance charges. He submits that the disallowance made and sustained by the Ld.CIT(A) without properly appreciating the submissions of the assessee.
Ld.DR vehemently supported the orders of the authorities below.
We have perused the orders of the authorities below and also the submissions made by the assessee before the Ld.CIT(A). It has been submitted before the Ld.CIT(A) that none of these charge includes any interest on borrowals. We also find that all the charges appears to have been paid towards regular Bank Charges, Interest, Overdue Interest on PEC LC, Bank LC charges etc., and it appears that none of these charges relates to any interest on borrowals. In such circumstances there should not have been any disallowance by the Assessing Officer. Therefore, we are of the view that the Assessing Officer shall examine this issue with reference to the submissions made by the Ld. Counsel for the assessee and therefore we set-aside this issue to the file of the Assessing Officer for adjudicating this issue in accordance with the law after providing adequate opportunity of being heard to the assessee. This ground is allowed for statistical purpose.
8 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. 14. The last ground of appeal of the assessee is in respect of confirming the action of the Assessing Officer in treating the investment made in land as unexplained investment u/s. 69 of the Act.
15. The Assessing Officer while completing the assessment noticed that the assessee has purchased land worth of ₹.5,04,99,110/- from various persons and assessee was required vide order sheet entry dated 09.11.2011 to justify the sources of funds for purchase of agricultural land with confirmation of copies, copy of sources of funds. On 14.11.2011 assessee has submitted that one of the Directors Shri Suresh Babu entered into agreement in November, 2007 with the vendors for purchase of land. However, subsequently it came to know that one of the Director Shri Prasanth Boorugu personally came to know that the vendors owe some money to his Father-in-law Shri G. Eswara Rao and Shri Prasanth Boorugh suggested that the lands be transferred to the assessee company and accordingly agreement was entered into by the company and the total dues payable to the vendors were adjusted out of the money receivable by Shri G. Eswara Rao from the vendors. However, the submissions were not accepted by the Assessing Officer.
16. Assessing Officer also issued notice u/s. 133(6) of the Act to various parties and got confirmations who has stated that consideration is 9 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. received in the form of shares in the company by name M/s. Sarita Sugars Pvt. Ltd. from Shri G. Eswara Rao. However, the Assessing Officer concluded that the assessee has failed to explain the nature of sources of investment or explanation submitted by the assessee is not satisfactory and therefore he has treated the investment as unexplained investment u/s. 69 of the Act. On appeal the Ld.CIT(A) sustained the addition ignoring the submissions of the assessee.
17. Ld. Counsel for the assessee at the outset submitted that section 69 of the Act apply only to the cases where the assessee has made investments which are not recorded in the Books of Accounts, if any, maintained by him for any source of income. Learned Counsel for the assessee submits that in this case the purchase of land was fully and properly recorded in the Books of Accounts therefor section 69 of the Act could not have been applied in the first instance. It was further submitted that assessee had fully and properly given particulars of payment made and the sources of all the payments is within Books of Accounts only and thus there is no scope for the Assessing Officer for not being satisfied about the nature of source of investments, as the assessee company is concerned. Ld. Counsel for the assessee placed reliance on the decision of the Hon'ble Orissa High Court in the case of Aurobindo Sanitary Stores v. CIT [276 ITR 549] in support of the above contentions.
10 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd.
Ld. Counsel for the assessee further referring to the Page No. 384 of the Paper Book which is the ledger account of G. Eswara Rao in the books of the assessee company submits that assessee company owes money to G. Eswara Rao who is the Father-in-Law of one of the Directors Shri Prasanth Boorugu, and Shri G. Eswara Rao had sold his shares in another company namely M/s. Sarita Sugars Pvt. Ltd. to one group of persons belonging to Mr. Rajgopal Reddy and the consideration for the same was payable to Shri G. Eswara Rao by them. Since the assessee company owe certain money to Shri G. Eswara Rao; Shri G. Eswara Rao in-turn had asked Mr.Rajgopal Reddy and others to sell the lands belonging to them in favour of the assessee company for settling the consideration for the acquisition of shares in M/s. Sarita Sugars Pvt. Ltd.. Therefore, it was submitted by the Ld. Counsel for the assessee that instead of registering the said lands in favour of Shri G. Eswara Rao the same were transferred by Mr. Rajagopal Reddy and others to assessee Company by way of sale agreement to assessee company. It was contended that all these documents had already been submitted to the Assessing Officer on 09.11.2011 by the assessee company vide letter dated 08.01.2011, therefore, Learned Counsel for the assessee submits that the sources for acquisition of the land has been explained properly by 11 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. the assessee company and therefore the provisions of section 69 cannot be invoked.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below and the case law relied on. It is the preliminary contention of the assessee that section 69 of the Act applies only to the cases where the assessee has made investments which are not recorded in the Books of Accounts, if any, maintained by him for any source of income. The contention of the assessee is that the purchase of land was fully and properly recorded in the Books of Accounts therefore section 69C of the Act could not have been applied in the first instance. This submission of the assessee is supported by the decision of the Hon'ble Orissa High Court in the case of Aurobindo Sanitary Stores v. CIT (supra) wherein their lordships held as under: - “13. Section 69 provides that where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is, in the opinion of the assessing officer, not satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. Thus, for applying section 69 of the Act, the assessing officer must first come to a finding that the assessee has made investments which are not recorded in the books of account and thereafter call for an explanation from the assessee about the nature and source of the 12 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. investments and if he finds that no such explanation is furnished by the assessee or the explanation offered by him is not satisfactory, he can treat the value of the investments to be the income of the assessee of the financial year in which he has made the investments. It appears from the impugned assessment order that the assessing officer has sought to come to a finding that the appellant has during the financial year 1988-89 previous to the assessment year 1989-90 made an investment to the tune of Rs. 2,70,421/- only on the basis of the differences in the figure of liabilities towards sundry creditors shown in the party ledgers seized from the custody of Sri R.N. Bhol, partner of the appellant-firm and the figure of liabilities towards sundry creditors in the balance sheet filed by the appellant-firm pursuant to the letter dated 14-9-1989 at the time of original assessment. ….. ….. We do not agree with the aforesaid conclusion of the Tribunal because section 69 of the Act by a deeming provision provides for treating an unexplained investment made by an assessee during a financial year to be income of the assessee of the financial year for the purpose of assessment and unless the requirements of the section 69 are strictly satisfied by a finding by the assessing officer on relevant materials that the appellant has actually made some unexplained investments in stock-in-trade during the financial year 1988-89 to the tune of Rs. 2,70,421/- section 69 cannot be applied to treat the said sum of Rs. 2,70,421/- as income of the appellant for the assessment year 1989-90. In the facts and circumstances of the case, therefore, the addition of Rs. 2,70,421/- by applying section 69 of the Act is not legal and justified. The second question of law is accordingly answered in favour of the appellant-assessee.”
The Hon'ble High Court also held that an investment made in a particular Financial Year, the same, cannot be treated as unexplained investment in the subsequent Financial Year. In other words, it should be treated as investment in the year in which it is recorded in the Books of Accounts relevant to that particular Financial Year. As could be seen form
13 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. the above the Hon'ble High Court held that for applying section 69 of the Act the Assessing Officer must first come to a finding that the assessee has made investments which are not recorded in the Books of Accounts and thereafter call for an explanation from the assessee about the nature and source of investments. In the case on hand the Assessing Officer without examining the Books of Accounts properly and without giving a finding that the transactions occurred outside the Books of Accounts invoked provisions of section 69C of the Act. We also find that the transaction happened in the Financial Year 2007-2008 relevant to the Assessment Year 2008-09 as the sale agreement entered into is in the Financial Year 2007-08 and in such circumstances, whether the addition can be made in the Assessment Year 2009-10 is also not examined by the Assessing Officer.
Further, the contention of the assessee is that, assessee company owes money to Shri G. Eswara Rao who is the Father-in-Law of one of the Directors and Shri G. Eswar Rao sold certain shares to the vendors and this resulted in transferring the lands in the name of the assessee company for discharging the liability of Shri G. Eswara Rao by the company in its Books of Accounts. This aspect has not been examined by the Assessing Officer or by the Ld.CIT(A). Since all these contentions have to be looked and examined with reference to documents and Books
14 ITA.No.2341/MUM/2013 (A.Y: 2009-10) M/s. Sathidham Syntex Ltd. of Accounts maintained by the assessee and since the aspect of rejection of Books of Accounts and examining the documents has already been restored to the file Assessing Officer for fresh adjudication since the contention of the assessee was that the Books of Accounts were properly maintained and they were audited, we are of the considered opinion that this issue is to be examined afresh by the Assessing Officer in the light of our above observations and in accordance with the law after providing adequate opportunity of being heard to the assessee. In the circumstance we restore this issue to the file of the Assessing Officer for fresh examination in accordance with the law. This ground is allowed for statistical purpose.
In the result, appeal of the assessee is allowed for statistical purpose.
Order pronounced in the open court on the 19th January, 2018.