BHUWALKA SALES CORPORATION,BANGALORE vs. ACIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘ A ’ BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. A. No.1436/Bang/2013 (Assessment Year : 2009-10) M/s. Bhuwalka Sales Corporation, No.5, Walker Lane, Bhuwalka Landmark, Langford Road, Richmond Town, Bangalore-560 025 …. Appellant. PAN AAIFB 0063G Vs. Asst. Commissioner of Income Tax, Circle 1(1), Bangalore. ….. Respondent. Appellant By : Shri K. Seshadri, C.A. Respondent By : Shri P. Dhivahar, JCIT (D.R). Date of Hearing : 2.2.2015. Date of Pronouncement : 1.4.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dt.12.8.2013 for Assessment Year 2009-10. 2. The facts of the case, briefly, are as under :- 2.1 The assessee, in the business of trading in rolled products, filed the return of income for Assessment Year 2009-10 on 26.9.2009 declaring income of Rs.49,25,026. The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was taken up for scrutiny. The assessment was completed under Section 143(3) of the Act vide

2 ITA No.1436/Bang/2013 order dt.26.12.2011 wherein the income of the assessee was determined at Rs.1,74,25,026 in view of an addition of Rs.1,25,00,000 under Section 2(22)(e) of the Act. 2.2 Aggrieved by the order of assessment for Assessment Year 2009-10 dt.26.12.2011, the assessee preferred an appeal before the CIT (Appeals) – I, Bangalore. The learned CIT (Appeals) dismissed the assessee's appeal vide the impugned order dt.12.8.2013. 3.1 Aggrieved by the order of the CIT (Appeals) – I, Bangalore for Assessment Year 2009-10 dt.12.8.2013, the assessee has preferred this appeal before the Tribunal raising the following grounds :- “ 1. DISCOVERY OF NEW SOURCE OF INCOME BY CIT (APPEALS) Learned CIT (Appeals) ought to have noted that invoking section 68, after deleting the addition under Section 2(22)(e) with respect to the same time, amounted to discovery of new source not permissible under Section 251(1)(a) read with several Supreme Court and High Court judgments including that of the Hon'ble Karnataka High Court. 2. SECTION 68 Learned CIT (Appeals) erred in invoking section 68 with respect to the credit of Rs.1.25 Crores shown in the balance sheet of the appellant firm as - 2.1 None of the requirements of section 68 are met in this case. 2.2 The party’s name (Deccan Alloys Private Limited) PAN and address and the cheque particulars were furnished by the appellant and the nature and source of credit were not contradicted either by the learned A.O. or the learned CIT (Appeals). 2.3 The item was substantiated before the learned A.O. and the learned CIT (Appeals) with the original unpresented stale cheque and books and records of both the appellant and Deccan Alloys Pvt. Ltd. 2.4. There was no physical receipt of money by the appellant as the cheque was not encashed and remained unpresented, reflected in the bank reconciliation statements of both the parties and reversed in a subsequent financial year. 2.5 Genuineness of Deccan Alloys Pvt. Ltd. was clearly established considering the fact that appellant’s substantial purchase (Rs.11.13 Crores) and Sale (Rs.4.42 Crores) with it were found acceptable by the departmental authorities. 2.6 The cheque dated 27 December 2008 became stale on 27 June 2009 only and the audited accounts had been signed / finalized on 4 May 2009 itself and therefore

3 ITA No.1436/Bang/2013 contrary to the claims of the CIT (Appeals), the cheque was not stale and could not have been reversed in the audited accounts / books. 3. UNPRESENTED CHEQUE APPERING IN BOOKS. 3.1 Conclusion of learned CIT (Appeals) that an unpresented cheque cannot be recorded in books of account is contrary to rules of accounting. 3.2 Learned CIT (Appeals) erred in stating that the appearance of the unpresented cheque in bank reconciliation statement is immaterial. 4. SECTION 68 Vs. Section 2(22)(e). Learned CIT (Appeals) having deleted the addition of Rs.;1.25 Crores made under Section 2(22)(e) in the assessment order erred in invoking section 68 with respect to the same item as : 4.1 Application of section 2(22)(e) implies that appellant’s explanation on the source and nature of credit is satisfactory. 4.2 The very same explanation, on source and nature of credit found adequate in the context of section 2(22)(e) cannot be treated as inadequate for purposes of section 68. 5. That the appellant craves leave to add, alter, amend, substitute and forgo, any or all the grounds of appeal and adduce additional evidence before or at the time of the hearing. 6. For these grounds which are without prejudice to each other and other grounds which may be urged at the time of hearing, this appeal may be allowed and justice rendered.” 3.2.1 From a perusal of the grounds raised, it is seen that all of them challenge the action of the CIT (Appeals) in invoking the provisions of section 68 of the Act with respect to the credit of Rs.1.25 Crores shown in the balance sheet of the assessee after deleting the addition made by the Assessing Officer of the same amount under Section 2(22)(e) of the Act. It is contended that this amounted to the discovery of a new source of income by the learned CIT (Appeals) which is not permissible under Section 251(1)(a) read with several judicial decisions. The learned Authorised Representative was heard in support of the grounds raised.

4 ITA No.1436/Bang/2013 3.2.2 The learned Authorised Representative further submitted that the learned CIT (Appeals) was wrong in invoking section 68 of the Act with respect to the credit of Rs.1.25 Crores appearing in the assessee's balance sheet as on 31.7.2009. The learned Authorised Representative contends that the identity and existence of the creditor i.e. M/s. Deccan Alloys Pvt. Ltd. is established by furnishing of name, address, PAN details, the details of cheques, books of account, etc which establish the nature and source of credit of the concerned sum of Rs.1.25 Crores. It was submitted that the cheque dt.27.3.2008 issued by Deccan Alloys P. Ltd., advancing this amount to the assessee was not encashed and was rendered stale on 27.6.2009 which was after the date of finalization of accounts on 4.5.2009 and this fact is reflected in the bank reconciliation statement in the subsequent year. The learned Authorised Representative further submitted that when the Assessing Officer applied section 2(22)(e) of the Act, it implies that the assessee's explanation of the source and nature of the credit of Rs.1.25 Crores is satisfactory, then how can the very same explanation of the source and nature of the credit be found inadequate for the purposes of section 68 of the Act. It is prayed by the learned Authorised Representative that while the learned CIT (Appeals) has deleted the addition under Section 2(22)(e) of the Act, the addition by the learned CIT (Appeals) of Rs.1.25 Crores as unexplained credit under Section 68 of the Act by invoking the provisions of section 251(1) of the Act, however, was not warranted in the facts and circumstances of the case and ought to be deleted or at the least is required to be set aside for de novo adjudication so that this issue can be entirely re-examined.

5 ITA No.1436/Bang/2013 3.3.1 Per contra, the learned Departmental Representative supported the impugned order of the learned CIT(A) in invoking the provisions of section 251(1) of the Act to make the addition of the sum of Rs.1.25 Crores as unexplained cash credit under Section 68 of the Act on the grounds that the power conferred on the appellate authority by Section 246 r.w.s. 250 of the Act indicates an amplitude and width which is co-terminus with that of the Assessing Officer. It is submitted that the appellate authority could substitute the order of the Assessing Officer by his own; and direct the Assessing Officer what to do; as has been held by the various judicial pronouncements cited at para 3.12 of the impugned order. 3.3.2 The learned Departmental Representative further contends that the learned CIT(A) in para 3.11 of the impugned order has answered the query raised by the assessee in this appeal about the issue of new source of income and as to how can section 68 of the Act be invoked to treat the very credit, the source and nature of which was found satisfactory when invoking the provisions of section 2(22)(e) of the Act, to be unsatisfactory now. It was contended that since the disputed amount of Rs.1.25 Crores is mentioned in the assessee's return of income, and was considered by the Assessing Officer in the order of assessment it cannot be considered as a new source of income and the learned CIT(A) has therefore correctly invoked his power of enhancement under Section 251(1) of the Act. It was submitted by the learned Departmental Representative that at the appellate stage, additional evidence may be taken and further enquiry can be made by the learned CIT(A). In view of the above, it is submitted that the impugned order of the learned CIT(A) in invoking the provisions of section 68 of the Act to bring to tax

6 ITA No.1436/Bang/2013 the unexplained credit of Rs.1.25 Crores in the assessee's books of accounts is in order and ought to be upheld. 3.4.1 We have heard both parties and perused and carefully considered the material on record. The facts of the matter as emanate from the record are that in the course of assessment proceedings, the Assessing Officer on examination of the financial statements balance sheet as on 31.3.2009 filed along with the return of income, observed that the assessee has shown unsecured loans of Rs.2,50,00,000. On examination of the details called for in this regard, it was noticed that the assessee is said to have received a sum of Rs.1.25 Crores from its sister concern, M/s. Deccan Alloys Pvt. Ltd. in which it was a share holder to the extent of 58.8%. The Assessing Officer on further examination of the matter was of the view that since the assessee is having a beneficiary share holding in excess of 10% in the aforesaid sister concern, the advance / loan of Rs.1.25 Crores taken by the assessee from M/s. Deccan Alloys Pvt. Ltd. is to be treated as deemed dividend as per the provisions of section 2(22)(e) of the Act and is exigible to tax in the assessee's hands as the said dividend will not be exempt under Section 10(34) of the Act since it was not subjected to tax as per the provisions of section 115- O of the Act. 3.4.2 On appeal, before the learned CIT(A), the assessee came up with additional evidence and a new claim that the cheque of Rs.1.25 Crores received from M/s. Deccan Alloys Pvt. Ltd. dt.27.12.2008 was not encashed and had become stale. In the remand report furnished in this regard, the Assessing Officer observed that if the submission of the assessee is to be taken at face value, then the assessee ought to explain the sources for this excess asset over liability to

7 ITA No.1436/Bang/2013 the extent of Rs.1.25 Crores. Taking note of the Assessing Officer remand report, the learned CIT(A) issued notice under Section 251(1)(a) of the Act calling upon the assessee to show cause why the addition of Rs.1.25 Crores should not be made as unexplained credit under Section 68 of the Act, instead of deemed dividend under Section2(22)(e) of the Act. 3.4.3 After rejecting the technical objections raised by the assessee questioning his power to invoke the provisions in paras 3.11 to 3.15 of the impugned order by discovery of a new source of income under Section 68 of the Act in place of deemed dividend u/s.2(22)(e) of the Act, the learned CIT (Appeals) on the merits of the issue, at para 3.16 of the order, held that the addition of Rs.1.25 Crores is to be made as unexplained cash credit u/s.68 of the Act instead of the addition as deemed dividend under Section 2(22)(e) of the Act which is extracted hereunder :- “ 3.16 The facts narrated above, it is apportionate to examine the merit of the issue as below :- i) The appellant furnished a copy of balance sheet as on 31.3.2009 and from it statement of account for the financial year 2008-09 disclosed as under :- BHUWALKA SALES CORPORATION BALANCE SHEET AS AT 31ST MARCH, 2009. (AMOUNT IN INDIAN RUPEES) Particulars Sch. No. As at 31.3.09 As at 31.3.08 I.Source of funds 1. Share Holder Funds 200,00.00 200,000.00 a. Capital Account 5,864,844.72 2498,015.07 b. Current Account 01 2. Loan Funds : 02 58,213,410.42 62,965,037.22 3. Unsecured Loan 03 25,00,000.00 II. Application of funds 1.Fixed Asset: 66,439.00 66,070.00 Gross Block Depreciation 5A 9,969.00 3,694.00

8 ITA No.1436/Bang/2013 NET BLOCK 56,470.00 57,376.00 2. Investments 04 10,000.00 10,000.00 3. Current Assets, loans and 05 161,466,386.00 97,910,966.00 advances a. Sundry Debtors b.Cash & Bank Balances. 06 262,459.14 45,208,083.29 c.Loans & Advances 07 4,037,631.00 653,526.00 166,036,476.14 143,772,575.29 Less : Current liabilities & 08 76,824,691.00 78,176,899.00 Provisions. Net Current Assets 89,211,785.14 65,595,676.29 Total : 89,278,255.14 65,663,052.29 Schedules 1 to 14 forms an integral part of this accounts.

ii) As seen that unsecured loan appears for Rs.2,50,00,000 and same claimed to have been borrowed from the following parties :- M/s. Deccan Alloys Pvt. Ltd. : Rs.1,25,00,000 M/s. Bhuwalka Alloys Pvt. Ltd. : Rs.1,25,00,000 Total : Rs.2,50,00,000 iii) M/s. Deccan Alloys Pvt. Ltd. (DAPL) issued a cheque bearing No.971151 dated 27.12.2008 for Rs.1,25,00,000 and the same has been shown as unsecured loan in the balance sheet as on 31.3.2009. Further, it is also stated that the said cheque has not been encashed even as on date and the amount appears in the Bank Reconciliation Statement of the aforesaid entities. iv) The contention of the AR of the appellant is that since the appellant has received cheque from M/s. DAPL and valid for six months even after expiry of relevant accounting year i.e. 31.3.2009, therefore shown as loan in the appellant’s books, fallacious statement. It may be mentioned that the cheque is a means of negotiable instrument of transaction through banks and it will be finally settled if so much amount is debited from the drawer’s payer’s account and credit in drawee’s/receiver’s account. In the instant case neither drawer’s account debited nor drawee’s account credited. Despite of these facts remain appears in the balance sheet as loan. v) Reconciliation of bank statement is immaterial since these are merely adjustment entries in order to equalize both liabilities and assets at the end of the year. The AR of the appellant furnished the reconciliation statement as under :-

9 ITA No.1436/Bang/2013 Balance as per Bank Book as on 31.3.2009 Rs.5,82,13,410. Less : Charges issued, but not presented for payment. Rs.20,15,22,369. Add : Cheques deposited but not yet claimed as on 31.3.2009. Rs.15,40,73,536 Balance as per pass sheet. Rs.1,07,64,576.

vi) Cheque for Rs.1,25,00,000 issued on 27.12.2008 and date of validity for encashment expired on 26.5.2009 whereas the appellant filed its return of income on 29.9.2009. Even appellant have sufficient time to reconcile its books of account, but shown as outstanding loan. Under the provisions of section 78 states that where any sum is found credited in the books of an assessee maintained for any previous year and the as offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the Assessing Officer satisfactorily the sum so credited may be charged to income tax as the income of the assessee of that previous year. Moreover, no explanation has been offered, merely stating that they reconciled the bank balance. It is clearly established that the appellant failed to prove loan credit in the books of account and therefore it is to be considered as deemed income under Section 68 of the Act. The Assessing Officer is accordingly directed to make an addition of Rs.1,25,00,000 under Section 68 of the Act instead of section 2(22)(e) of the Act.”

3.4.4 On a careful and considered perusal of the findings of the learned CIT(A) extracted above (supra)and specifically sub-paras (iii), (iv) and (v) thereof, we find that these issues have never been before the Assessing Officer either in the course of assessment proceedings or were raised or considered or addressed by him in remand proceedings. We also find that not all the issues raised by the assessee in the grounds raised in this appeal (supra) appear to have been raised before the learned CIT(A) or considered or addressed by the learned CIT(A) in the impugned order. In this factual and legal matrix of the matter, we are of the view that in the interest of equity and justice, the issue of the unsecured loan of Rs.1.25 Crores taken by the assessee from M/s. Deccan Alloys Pvt. Ltd. requires to be examined and adjudicated afresh in

10 ITA No.1436/Bang/2013 respect of the application and invocation of the provisions of section 68 of the Act after affording the assessee adequate opportunity of being heard and to file details / submissions required. It is ordered accordingly. 4. In the result, the assessee's appeal for Assessment Year 2009-10 is treated as allowed for statistical purposes. Order pronounced in the open court on 1st April, 2015.

Sd/- Sd/- (P. MADHAVI DEVI) (JASON P BOAZ) Judicial Member Accountant Member

*Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore