The Commissioner of Income Tax-III vs. M/s.Visakha Industries Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE V.G.ARUN TUESDAY,THE 18TH DAY OF JUNE 2019 / 28TH JYAISHTA,1941 ITA.No.283 of 2010 AGAINST THE ORDER IN ITA 858/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 10-03-2010 APPELLANT: THE COMMISSIONER OF INCOME TAX (CENTRAL), COCHIN. BY ADV. SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES) RESPONDENTS: 1 SHRI.T.B.KUNHIMAHIN HAJI THEKKIL PO, KASARAGOD-671 541 ADDL.R2 TO R7 IMPLEADED 2 S.L.P KUNHIBI W/O. SHRI. KUNHIMAHIN HAJI, PADOOR HOUSE, CHETTANCHAL POST.,THEKKIL VILLAGE, KASARAGOD DISTRICT. 3 K.M. THAHIRA, AGED 48 YEARS D/O SHRI. T.B. KUNHIMAHIN HAJI, -DO-DO- 4 K.M. MOHAMMED SHEREEF, AGED 46 YEARS, S/O SHRI. T. B. KUNHIMAHIN HAJI, -DO - DO- 5 K.M. MOIDEEN KUNHI, AGED 44 YEARS S/O. SHRI. T.B. KUNHIMAHIN HAJI, -DO- DO-

ITA.No.283 of 2010 2 6 K.M. AHAMMED NIZAR, AGED 39 YEARS, S/O. SHRI. T.B. KUNHIMAHIN HAJI, -DO- DO- 7 K.M. ARIFA, AGED 37 YEARS, D/O. SHRI. T.B. KUNHIMAHIN HAJI -DO - DO - BY ADVS. SRI.ANIL D. NAIR SMT. ARYA ANIL SMT. NILOOFAR O. NIZAM SMT.NIVEDITA A.KAMATH SRI.SREEJITH R.NAIR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 10.04.2019, THE COURT ON 18.6.2019 DELIVERED THE FOLLOWING:

ITA.No.283 of 2010 3 JUDGMENT Arun.J The appeal is filed by the Revenue, aggrieved by the decision of the Commissioner of Income Tax (Appeals), as confirmed by the Income Tax Appellate Tribunal. By the impugned orders, appeal filed by the assessee was allowed and the addition of an amount of Rs.2,67,99,547/- to the income of the assessee, treating it to be unexplained cash credit, deleted. The assessee is the Managing Partner of Chandragiri Construction, Kasaragode. The assessee had filed return of income for the assessment year 2004-05, showing a total income of Rs.11,14,080/- and agricultural income of Rs.12,44,850/-. On receipt of notice issued under Section 143(2), the assessee appeared and filed cash flow statement in support of the return of income filed. The cash flow statement submitted by the assessee showed credit of Rs.2,67,99,547/- as NRI receipts. This amount was

ITA.No.283 of 2010 4 seen credited in the capital account of the assessee with the Chandragiri Construction Company. On being asked to furnish details regarding the cash credits, the assessee explained that the receipt was from his son- in-law, Dr.K.P.Ali, who is a practicing Doctor at Dubai. In support of his explanation the assessee produced confirmation letter from Federal Bank, Kasaragode and a letter from Dr.K.P.Ali confirming that he had advanced Rs.2,67,99,547/- to his father-in-law, the assessee. Dr.K.P.Ali claimed his source of income to be from the three clinics and four pharmacies run by him at Dubai, details of which were also produced. Relying on Commissioner of Income Tax v P.Mohanakala (2007)291 ITR 278) and other decisions, the Assessing Officer held that the assessee had not discharged his onus of proving the genuineness of the receipts, by establishing the identity and capacity of the creditor and the genuineness of the transaction. Based on the said finding, the Assessing Officer came to the following conclusion:

ITA.No.283 of 2010 5 “The assessee has not proved the credit by producing satisfactory evidence for the capacity of the remitter to advance the money. Following the settled law as stated above the amount of Rs.2,67,99,547/-, credited in the capital account is treated as income of the assessee and is added as income from other sources.” 2. The assessee challenged the assessment order in appeal successfully. The appeal was allowed by the CIT(Appeals) finding that no undisclosed source of income for the assessee had been identified at any time in the income tax assessments. It was observed that the assessment of genuine remittances in the account of the assessee, by his son-in-law from Dubai, should not be suspected as credits to account and cover up any undisclosed income. The First Appellate Authority took note of the fact that the remittance received by the assessee from Dr.K.P.Ali through the Federal Bank had been confirmed by the bank. The details of the clinics and business concerns, from which source amounts were remitted to India, was furnished

ITA.No.283 of 2010 6 to the Assessing Officer by Dr.K.P.Ali, along with his confirmation of the remittances. The fact that in the previous assessment year Rs.2,22,13,020/- was remitted by Dr.K.P.Ali in the account of the appellant and the same was accepted after verifying the confirmation, credit worthiness and genuineness of the transaction was given due credence. It was found that no reason was given for disbelieving the receipts from Dr.K.P.Ali during the assessment year in question. The First Appellate Authority found that all conditions as laid down by various court decisions to prove the remittance as genuine are satisfied and hence, the assessment of the amount received from Dr.K.P.Ali as income under other sources is not justified. Consequently, the assessment of Rs.2,67,99,547/- as income from other sources was cancelled. 3. The revenue filed appeal against the order of the First Appellate Authority, but without success. In addition to the finding of the CIT(Appeals), the Tribunal took note of a decision of the Settlement Commission,

ITA.No.283 of 2010 7 wherein a credit of Rs.43,54,482/- in the capital account of the assessee with Chandragiri Construction Company was dealt with by the Settlement Commission and held that the amount was received by the assessee through proper banking channel. The Tribunal held that Section 68 will be attracted only when the assessee offers no explanation or the explanation so offered is not satisfactory to the Assessing Officer. It was found that in the present case assessee had established the identity of the creditor, the source for the credit and the genuineness of the transaction and had thereby discharged the initial burden in the manner required by law. It was also found that the department had accepted the assesses explanation regarding the remittance, in the previous assessment year. Based on the said findings, the Tribunal refused to interfere with the order of the First Appellate Authority and dismissed the appeal filed by the Revenue. 4. In this appeal the Revenue has raised the

ITA.No.283 of 2010 8 following substantial questions of law: 1. Whether on the facts and in the circumstances of the case and also for the reasons noted in the statement of the case and the grounds raised- i. The Tribunal is right in law in deleting the unexplained cash credits of Rs.2,67,99,547/- said to have been received from an NRI on seven different dates without indicating the nature of receipts ie, whether the amounts are received as loan or gift? ii. Tribunal is right in law and fact in relying on the order of Settlement Commission in support of the genuineness of the credit (from the same person during the year prior to 2002-2003) since being prima facie satisfied that the assessee had obtained the Settlement dated 4.3.2008 under Sec. 245D(4) by fraud and misrepresentation, the Settlement Commission had issued notice dated 8.2.2010 under Sec. 245D(6) of the Act to the assessee to show cause as to why the said Settlement should not be declared as void. 2. Whether, on the facts and in the circumstances of the case does the withdrawals in total noted at page 12 of the order of ITAT runs to more than Rs.4 crores? and is not the calculation factually wrong and does the same (even if correct) have any relevance, in the absence of proof satisfying all the

ITA.No.283 of 2010 9 three ingredients as laid down by the Supreme Court in the case of P.Mohanakala and nexus with the assessee? 3. Whether, on the facts and in the circumstances of the case as a result of search on 21.6.2001, the assessee of this group were found to be operating a large number of undisclosed bank accounts through which among others, undisclosed contract receipts and undisclosed investments were routed and the admission of the same before the same, should not the ITAT have taken the above fact of admission into consideration? 4. Whether on the facts and in the circumstances of the case should not the ITAT have considered the case in the light of fraud and misinterpretation alleged in the notice by the settlement commission and the 'admission' of operating a large number of undisclosed bank account in the earlier year's dealings and in the light of the observation of the Supreme Court: “Neither law nor human experience guarantees that an assessee who has been dishonest in one assessment year is bound to be honest in a subsequent assessment year” (123 ITR 457 at 463 [SC])? and is not the order of the ITAT perverse and an affront to ordinary human intelligence? 5.Whether, on the facts in the

ITA.No.283 of 2010 10 circumstances of the case- a) did the assessee discharge the burden that lay on him, b) reasons stated in the ground the Tribunal is right in law in relying on the order for the earlier asst.year? 6. Whether, on the facts and in the circumstances of the case and for the reasons stated in the statement of the case is not the deletion of the addition perverse against all canons of law and procedure?

ITA.No.283 of 2010 11 explanation offered by the assessee for the cash credits received from Dr.K.P.Ali was accepted is not a relevant factor. It is further contended that the Assessing Officer had made the addition in accordance with section 68 as the assessee had failed to offer proper explanation for the NRI receipts. 6. The learned counsel for the assessee contended that no question of law, let alone any substantial question of law, arises for consideration in the appeal. It is contended that the CIT Appeals and ITAT having found that the explanation offered by the assessee for the remittances in his account to be satisfactory, no interference is warranted on those findings of fact. 7. A reading of Section 68 of the Income Tax Act makes it clear that the section would come into operation when there is credit of amounts in the books maintained by an assessee during the previous year and the assessee offers no explanation about the nature and source of such credit; or, the explanation

ITA.No.283 of 2010 12 offered by the assessee, in the opinion of the Assessing Officer, is not satisfactory. In Mohanakala's case, the Hon'ble Supreme Court elaborately dealt with the onus of the assessee to dispel any doubt regarding the genuineness of the transaction, to the satisfaction of the Assessing Officer. The relevant portion of the judgment is as under : “ The question is what is the true nature and scope of section 68 of the Act? When and in what circumstances would section 68 of the Act come into play? A bare reading of section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income- tax as the income of the assessees of that previous year. The expression “the assessees offer no explanation” means where the assessees offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessees. It is true the opinion of

ITA.No.283 of 2010 13 the Assessing Officer for not accepting the explanation offered by the assessees as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material

available

record. Application of mind is the sine qua non for forming the opinion. It is true that even after rejecting the explanation given by the assessees if found unacceptable, the crucial aspect whether on the facts and circumstances of the case it should be inferred the sums credited in the books of the assessees constituted income of the previous year must receive the consideration of the authorities provided the assessees rebut the evidence and the inference drawn to reject the explanation offered as unsatisfactory. We are required to notice that section 68 of the Act itself provides, where any sum is found credited in the books of the assessees for any previous year the same may be charged to income tax as the income of the assessees of the previous year if the explanation offered by the assessees about the nature and source of such sums found credited in the books of the assessees is in the opinion of the Assessing Officer not satisfactory. Such opinion formed itself constitutes a prima facie

ITA.No.283 of 2010 14 evidence against the assessees, viz., the receipt of money, and if the assessees fail to rebut the said evidence the same can be used against the assesses by holding that it was a receipt of an income nature.” 8. On facts, the Apex Court found that the authority had concurrently found the explanation offered by the assessee to be unacceptable. That, the assessee had not taken the plea that even if the explanation is not acceptable, the materials and attending circumstances available on record do not justify the sum found credited in the books to be treated as receipt of an income nature. It was in those circumstances that the appeal filed by the revenue was allowed finding that the High Court had misdirected itself and committed an error in disturbing the concurrent findings of fact. 9. As far as the case at hand is concerned the assessee as well as the creditor had offered their explanations. The creditor had explained his source of income, the transactions were effected through bank,

ITA.No.283 of 2010 15 which fact was substantiated by producing a certificate from the bank. It was in such circumstances that the CIT (Appeals) and the ITAT found that the assessee had established the identity of the creditor, source for the credit and genuineness of the transaction. The fact that the Department had accepted a similar explanation offered in the previous assessment year assume relevance in the above context. Further, the Settlement Commission had also held similar cash transactions during the previous years to be genuine. On the contrary, the finding of the Assessing Officer is that the assessee had not proved the credits by producing satisfactory evidence regarding the capacity of the remitter to advance the money and that the wife of the remitter being a partner in Chandragiri Construction, the proper course was to credit the amount in the capital account of the wife or to show the same as a loan from the creditor. A careful reading of the decision in Mohanakala shows that even after rejecting the explanation given by the assessee, the

ITA.No.283 of 2010 16 assessing authority should consider the crucial aspect as to whether on the facts and circumstances of the case it could be inferred that the sums credited in the books of the assessee constituted income of the previous year.

ITA.No.283 of 2010 17 the genuineness of the cash credits in his account by providing confirmation from the creditor regarding remittance and the source of funds and certificate from the assessee's bank. The explanation offered by the assessee, coupled with the fact that a similar explanation regarding remittances during the previous year was accepted by the Assessing Officer and similar remittances during the period prior had been accepted by the Settlement Commission, had weighed with the CIT(Appeals) and the ITAT. Such conclusion being possible in the facts and circumstances, no question of law arises for consideration. Consequently, the Appeal is dismissed. K.VINOD CHANDRAN, JUDGE V.G.ARUN,

JUDGE cms

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