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Income Tax Appellate Tribunal, DELHI BENCH “SMC-I”: NEW DELHI
Before: SHRI VIJAY PAL RAO
O R D E R This appeal of the assessee is directed against the order 18.12.2012 of ld. CIT(A), Muzzaffarnagar for the Assessment Year 1996-97. 2. The assessee has raised the following grounds:-
1. That the learned CIT[A), on the basis of facts and law and basis adopted went wrong to treat the contribution towards share capital amounting to Rs.7,77,030/- as deemed income u/s 68 in the hands of the appellate company. Adverse findings and consequent addition of Rs 7770307 deserve to be quashed and deleted being void, illegal and without jurisdiction.
2. That the Ld CIT(A) had been unfair in not accepting the explanations and case laws justifying the binding nature of the orders passed by the higher authorities as cited by the appellant in the rejoinder dated 17.12.2012.
3. That the adjudication and conclusion drawn and the finding recorded by the Ld CIT(A) as contained in paragraph 7 of the appellate order were illegal and unjustified.
4. That the Ld CIT(A) had been brutal in not applying reliance on the decisions of the higher authorities which are binding in nature. The rule of average was applied by Honorable ITAT in AY 97.98 and subsequently followed by CIT(A) for the AY 96-97. The decision of High Court or The Tribunal certainly constitutes a binding precedent and when once it is accepted in the case of the parties involved therein, the same should be accepted and followed in the other cases also without deviation in order to assure consistency, equality, non- Page No. 2 prejudice. But the Ld CIT(A) has been out of jurisdiction in deciding the case in the above.”
3. The assessee company is engaged in the business of manufacturing and sale of centrifugal pumps, valves and castings. This was the first year after the incorporation of the assessee company. The assessee filed its return of income declared NIL income by stating that no activity was carried out during the year under consideration and therefore no such activity was disclosed in the books of account. Thus, the assessee claimed that it was under the installation for during the year under consideration. During the assessment proceedings the AO noted that a large number of persons subscribed to the share capital and also advanced money to the assessee company as share application money. The AO noted that an enquiry was conducted in respect of the share capital investment from 429 persons during the assessment proceedings for the Assessment Year 1997-98. The statements of some persons were recorded in order to verify the genuineness of the share application/ share application contribution. The AO has given the name of nine persons in the assessment order whose statement were recorded during the assessment proceedings for the Assessment Year 1997-98 out of total 429 persons. Thus on the basis of the statement recorded of those 9 persons the AO disallowed a sum of Rs.7,15,030/-. Apart from this the AO has also disallowed a sum of Rs.62,000/- in respect of 6 other persons, who made investment during the year under consideration and not connected to the assessment year 1997-98. Thus, the AO made a total addition of Rs.7,77,030/-.
4. The assessee challenged the action of the AO before the learned Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals), Muzzafarnagar restricted the addition to Rs.35,750/- out of total Rs.7,15,030/- by following the decision of this Tribunal in assessee’s own case for the Assessment Year 1997-98. Thus, the learned Commissioner of Income-tax (Appeals) granted relief of Rs.6,79,280/- vide order dated 04.11.2003. The revenue carried the matter to this Tribunal and this tribunal set aside the order of the learned Commissioner of Income-tax (Appeals) and remanded the same to the record of the learned Commissioner of Income-tax (Appeals) for fresh consideration. It appears that the matter was again carried out to this tribunal and it was again set aside to the record of the learned Commissioner of Income-tax (Appeals) vide Page No. 3 order dated 21st August 2009. In the fresh round of litigation the learned Commissioner of Income-tax (Appeals) confirmed the addition made by the AO. Thus, the assessee filed the present appeal before this Tribunal. The ld AR of the assessee has submitted that as per the balance sheet as on 31.03.1996 no activity except receipt of share capital and construction of factory building was carried out by the assessee. He has referred to the assessment order and submitted that the return of income was filed declared as NIL income and therefore the AO has not disputed the fact that no business activity was carried out during the year under consideration. Only in the Assessment Year 1997-98 the company started the production and addition on account of share capital has been made for Rs.50,30,030/- by the AO which has been reduced by this Tribunal to Rs.2,21,000/- in the order dated 05.09.2001. The Tribunal while restricting the disallowance/ addition made on account of share application money has applied the rule of average. Thus, the ld AR has submitted that since the assessee has not started its business activity during the year under consideration, therefore, no addition can be made u/s 68 of the Act prior to start of business of the assessee. In support of this contention he has relied upon the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Bharat Engineering & Construction Co. (1972) 83 ITR 0187 and submitted that the Hon’ble Supreme Court has held that the addition for cash credit cannot be made as construction company took time to earn profit and it could not be earned huge profit within a few days after commencing of its business. He has also relied upon the following decisions:- i. CIT v. Stellar Investment Ltd . (2001) 251 ITR 263 (SC) ii. Five Vision Promoters Pvt. Ltd. Vs. CIT, dated 27.11.2015, in Delhi High Court.
5. The ld AR submitted that even on merits the issue was dealt with by the Tribunal for the Assessment Year 1997-98, wherein 429 persons made the investment out of which 118 were picked up for enquiry and 111 confirmed the investment in the share application money. The tribunal has restricted the addition by taking the rule of average and only 7 persons denied to have made the investment. For the year under consideration the AO has followed his finding for the Assessment Year 1997-98, therefore the addition if any on account of share application money, the Page No. 4 same has to be added on the basis of rule of average as followed by the Tribunal for the Assessment Year 1997-98. On the other hand the ld DR has submitted that the addition has been made by the AO in respect of investment and enquiry from the persons it was found that it was a bogus transaction shown by the assessee. Therefore for the purpose of addition u/r 68 of average cannot be arrived. She has also relied upon the orders of the authorities below and submitted that the learned Commissioner of Income-tax (Appeals) also issued a remand order wherein the AO further conducted the enquiry. During the enquiry it was found that majority of the share applicants are agriculturist and had not produced any single document to support their creditworthiness. The assessee failed to prove the identity and creditworthiness of the share applicants as well as genuineness of the transaction because the invest was made in cash. Thus the addition was made by the AO was on the basis of specific enquiry conducted by examining the persons/ share applicants.
6. Rival submission as well as relevant material on record have been considered. The assessment order under consideration was completed u/s 147. The AO has recorded in the assessment order that in the return of income the assessee had declared NIL income. It is also recorded that during the year the assessee company had shown no activity in the books of account and therefore it indicates that the assessee was under the installation and only share capital money was received during the year consideration from different persons. Thus, the AO has not disputed the fact that during the year under consideration there was no business activity carried out by the assessee. The assessee was still under the process of installation and construction of factory building. Only during the Assessment Year 1997-98, the assessee has started its business activity and shown the income from business activity. Thus the assessee has raised a legal issue whether the addition in account of cash credit u/s 68 can be made when there was no business activity by the assessee and it was still under the process of installation and construction of the factory. The ld AR relied on the judgment of Supreme Court in the case CIT Vs. Bharat Engineering & Construction Co (supra), wherein the Hon’ble Supreme Court held in para 2 and 3 as under:- “2. The assessee-company is an engineering construction company. It commenced business in May, 1943. In their account books, there are several Page No. 5 cash credit entries in the first year of its business. We are concerned with only five of those cash credit entries. On June 1, 1943, there is a cash credit entry of Rs.1,00,000. On July 6, 1943, there is a cash credit entry of Rs. 50,000. On August 30, 1943, there is a cash credit entry of Rs. 50,000. On December 2, 1943, there is a cash credit entry of Rs. 15,000 and on March 15, 1944, there is a cash credit entry of Rs. 35,000. These cash credit entries total up to Rs. 2,50,000. The Income-tax Officer called upon the assessee to explain those cash credit entries. The explanation given by the assessee was found to be false by the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal. But, all the same, the Tribunal felt that these cash credit entries could not represent the income or profits of the assessee-company as they were all made very soon after the company commenced its activities. In our opinion, though the order of the Tribunal is not happily worded, its finding appears to be that in the very nature of things the assessee could not have earned such a huge amount as profits very soon after it commenced its activities. A construction company takes time to earn profits. It could not have earned a profit of Rs.1,00,000 within a few days, after the commencement of its business. Hence, it is reasonable to assume that those cash credit entries are capital receipts though for one reason or other the assessee had not come out with the true story as regards the person from whom it got those amounts. It is true that in the absence of satisfactory explanation from the assessee the Income-tax Officer may assume that cash credit entries in its books represent income from undisclosed sources. But what inference should be drawn from the facts proved is a question of fact and the Tribunal's finding on that question is final.
The High Court alter careful examination of the various findings reached by the Tribunal has come to the conclusion that the Tribunal's findings are findings of fact. We agree with that conclusion.”
In the case in hand the assessee company is as manufacturing company and therefore, until and unless the process of installation of factory building is completed no activity can be carried out by the assessee. The undisputed facts recorded by the AO clearly establish that the assessee did not earn any income from its business activity as it had not started business during the year under consideration. In these facts and circumstances the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Bharat Engineering & Construction Co. (supra) is applicable. The ld AR of the assessee has also placed reliance on the order of the Agra Bench dated 20th April 2012 in the case of the DCIT vs. M/s. Sugandhi Cold Storage (P) Ltd. in wherein the bench has dealt with this issue in para 6 and 6.1 as under:- “6. We have considered the rival submissions and the material on record and we do not find any justification to interfere with the order of the ld. CIT(A) in deleting the entire addition. It is admitted fact that all the depositors have Page No. 6 filed their confirmations accepting therein that they have given loan to the assessee through banking channels. The copies of the bank statements are filed, which support the contention of the assessee that the depositors had sufficient balance in their bank accounts to give loans to the assessee. All the creditors are assessed to tax and even one of the director of the depositor company was examined in which he has confirmed giving of loans to the assessee. The overwhelming evidences on record clearly prove that the initial onus upon the assessee is discharged by proving identity of the creditors, their creditworthiness and genuineness of the transaction in the matter. The assessee is able to prove the existence of the creditors. On going through the copies of bank accounts of the creditors, we do not find if any substantial cash is deposited in their accounts for giving any loan to the assessee. Rather, there are transfer entries through banking channels to prove that they have sufficient funds available with them to give loan to the assessee. Further, the parties have stated before us that the assessee company was incorporated on 03.09.2002 relevant to assessment year under appeal, i.e., A.Y. 2003-04 and no income has been shown to have earned by the assessee. Even the AO has not assessed any business income and only addition was made in the assessment order u/s. 68 of the IT Act for unexplained cash credits in a sum of Rs.48,00,000/-. Hon’ble Supreme Court in the case of CIT vs. Bharat Engineering and Construction Co., 83 ITR 187 held –