DCIT, CHENNAI vs. V.V.D.MURALI, CHETTUR

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER This appeal by Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-II, Chennai, dated 04.09.2014 for the assessment year 2010-2011.

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(i) audit fee : � 50,000/- (ii) interest payments : �1,74,000/- ---------------- Total: �2,24,000/- ---------------- The assessee has not deducted/remitted any TDS on these expenses.

The Assessing Officer invoked the provisions of section 40(a)(ia) of the Act and disallowed the same. Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). On appeal, the Commissioner of Income Tax (Appeals) allowed the appeal of the assessee. Against this, the Revenue is in appeal before us.

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6.1 On appeal, the Commissioner of Income Tax (Appeals) observed from the details furnished by the assessee, before the Assessing Officer as well as before him, that the assessee has been doing business of civil constructions/contracts under two categories/divisions - one under the name and style of M/s. Deccan Constructions (proprietary concern) and the other in his own name (i.e. without forming any concern). The proprietary concern M/s.

Deccan Constructions has been floated by the assessee mainly for the purpose of obtaining civil construction contracts from the CPWD.

Accordingly, the assessee registered the proprietary concern, M/s.

Deccan Constructions with the CPWD. All the contract works awarded by the CPWD are being carried out by the assessee under the name of M/s. Deccan Constructions and all the expenses and receipts in relation to the CPWD contracts are, therefore, included in the books of I.T.A.No.84/Mds/2015 :- 6 -: accounts of the Deccan Constructions. As the annual turnovers of M/ s.

Deccan Constructions are more than Rs.40,00,000/-, the assessee has been subjecting the accounts (of M/s. Deccan Constructions) to compulsory audit u/s.44AB of the Act and enclosing the necessary audit report in Form No.3CD, along with the returns of income.

6.2 In addition to the CPWD contracts etc, the assessee's family also owns agricultural lands for which it purchased tractors etc.

The assessee also purchased several plant and machinery, vehicles, other assets etc in various earlier financial years which were not included in the balance sheet of M/s Deccan Constructions. Instead, these items were lying his personal account statement of affairs (balance sheet), thought most of these items are being used for the construction works, undertaken under the name Deccan Constructions. However, for the purpose of filing the return of income, the assessee has been including the various incomes derived under the personal capacity and offering to tax, in addition to the profits derived from the proprietary concern M/s. Deccan Constructions. In fact, this fact can be evidenced from the details contained in the computation of taxable income statement enclosed along I.T.A.No.84/Mds/2015 :- 7 -: with returns of income. The details of net business incomes offered by the assessee under "Deccan Constructions" name and individual name, in the returns of income filed are as under:-

Assessment Net income Other incomes Total income Year from Deccan (including agr. of the year Constructions Income)

2009-10 �9,37,117 �11,44,960 �20,82,077 2008-09 �20,01,197 �10,39,340 �30,40,537 2007-08 �15,33,934 �9,37,092 �24,71,026 6.3 The Commissioner of Income Tax (Appeals) also observed that the assessee in support of his claim of business activities undertaken at his individual level(name), the assessee, before the Assessing Officer, has also filed the detail like receipts and payment account, statement of affairs, capital account of the business activities carried on by him, for various financial years. The details of assets, liabilities, capital account, etc., of the assessee, at his individual level on 31.03.2009, (i.e. before merging with those of the Deccan Constructions ) are as under:-

Details of Personal Accounts

Receipts & Payments Account for the year ended 31.03.2009.

Opening Balance 26,489 Repayment of Canara 1,57,966 Bank Housing Loan Withdrawals from Deccan 10,35,080 Interest payment on 1,10,034 constructions Housing loan I.T.A.No.84/Mds/2015 :- 8 -:

Dividend from Canara 44,960 Household expenses 1,50,000 Bank Amount from HUF- 11,00,000 Amount due from 88,80,697 Agriculture Income sundry debtors Amount due to Sundry 54,85,762 Creditors Advances from Customers 13,27,803 Closing Balance 2,139 ----------- ------------- 90,20,094 90,20,094 ------------- -------------

Statement of Affairs as at March 31, 2009.

Capital Account 66,78,081 Cash etc 2,139 Creditors for Finance 83,15,000 sundry debtors 2,37,70,675 Housing Loan from 9,07,741 Investment in 37,36,867 Canara Bank Deccan constructions Sundry creditors for 1,75,67,901 Investment in 1,40,500 Business shares Advances from 39,16,936 Fixed assets 97,16,220 Customers ---------------- --------------- 3,73,85,659 3,73,85,659 ----------------- --------------- Capital Account of V.V.D Murali,

Opening Balance 59,56,037 Income from Contracts 9,37,117 Dividend from Canara 44,960 Bank Difference in roeunding 1 Off Drawings for household 1,50,000 expenses Intrest payment on 1,10,034 housing Loan -------------- ---------------- 2,60,034 69,38,115/- ------------ ---------------- Closing Credit Balance 66,78,081 I.T.A.No.84/Mds/2015 :- 9 -:

-------------- The year-wise details of important assets, Capital accounts of the assessee in his individual capacity, for various financial years are as under:-

For the Financial years ending on Particulars 31.03.09 31.03.08 31.03.07 31.03.06 31.03.05 Capital account 66,78,081 59,59,037 41,81,804 28,33,381 22,53,200 Important Assets 1 Sundry debtors 2,37,70,675 1,51,89,978 95,78,206 59,92,751 44,22,742 2. Fixed Assets 97,16,220 97,16,220 84,06,220 76,41,280 52,01,680 3. Inv. In Deccan 37,36,867 38,34,829 27,80,985 13,50,884 8,97,075 constructions 4. Inv. In Margadarshi Chits -- -- -- -- -- 6.4 Thus from the above details, it is clear that there were other activities carried on by the assessee, in addition to the business activities carried on in the name of M/s Deccan Constructions. The above details also goes to prove that there were assets and liabilities in the hands of the assessee in his individual name (capacity). In other words, the audited balance sheet and (and statement) of M/s.

Deccan Constructions is only a part of the assessee's overall affairs.

Further analysis of the assets shown by the assessee, in his individual name, some of these assets are clearly verifiable in nature. For example, the fixed assets shown at Rs.97,16,220/- as on 31.03.2009 included a flat at Alwarpet (an immovable property) purchased in F.Y.

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2005-06 for Rs.22,34,600/- and a vacant site at Kadapakkam purchased prior to 31.03.2004, for Rs.4,39,655/-. Similarly. the plant and machinery, which are included in the fixed assets also included vibrators and mixing machines worth Rs.5,76,000/- andRs.7,55,800/-, respectively, which were purchased in the financial year 2004-05 in the individual name. It was also mentioned that the vibrators and mixing machines are clear machinery to be used in the construction business. It cannot be used for any personal purposes. No prudential person will buy such heavy machinery and keep them idle. It is also clear fact that all these items are not included in the balance sheet of M/s. Deccan Constructions as on 31.03.2009. It is only during the current financial year 2009-10, relevant to the current A.Y. 2010-11, these assets are brought into the books (balance sheet) of M/s Deccan Constructions, by consolidation. This fact clearly goes to prove that the assessee has some more activities, which are independent and separate from that of M/s. Deccan Constructions.

6.5 He also observed that some of the fixed assets (now consolidated with M/s. Deccan Constructions) like flat at Alwarpet (�.22,34,600/-), plant and machinery (vibrators and mixing machines), etc. mentioned above, were not purchased/acquired I.T.A.No.84/Mds/2015 :- 11 -: during the financial year 2009-10, relevant to the current A.Y 2010-

6.6 The Commissioner of Income Tax (Appeals) further observed that the above facts and details clearly established that the assessee has activities - one undertaken under the name and style of M/s. Deccan Construction (a proprietary concern), and the others one under his own name (i.e. without any specific name) - up to the end of 31.03.2009. Also, it was evident that the business affairs or the statement of affairs (like assets and liabilities) of the individual capacity were not mixed or consolidated with those of M/s. Deccan Constructions, upto the financial year 2008-09. On the other hand, the assessee's capital balance in the Deccan Constructions has been reflected in the statement of affairs of individual capacity in the form of investment in M/s. Deccan Constructions in all the years. Therefore, the Assessing Officer was not justified in coming to the conclusion that the I.T.A.No.84/Mds/2015 :- 12 -: assessee failed to establish that the additions to the capital account in the balance sheet of M/s. Deccan Constructions, was on account of transfer of various assets from the assessee’s individual balance sheet (statement of affairs).

6.7 The other argument of the assessee was that the addition to the capital account in the balance sheet of M/s. Deccan Constructions was not the actual capital (credits) introduced during the year. What was introduced into the business of M/s. Deccan Constructions, was various assets like debtors, fixed assets, etc. transferred from the individual balance sheet to the balance sheet of M/s. Deccan Constructions. As a result of the net increase in the assets over liabilities in the balance sheet of M/s Deccan Constructions (i.e. equivalent to the amount of assets transferred from individual balance sheet), being the balancing amount, is considered and added to the capital account. However, the Assessing Officer treated the increase in the capital account as unexplained cash credits u/s.68 of the Act and brought to tax.

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6.8 According to Commissioner of Income Tax (Appeals) the provisions of section 68 of the Act are with reference to any amount found credited into the books of account, for which the assessee fails to furnish any satisfactory explanation. The provisions of section 68 of the Act are as under Cash credits. Sec.68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory. the sum so credited may be charged to income-tax as the income of the assessee of that previous year 6.9 According to Commissioner of Income Tax (Appeals) for the purpose of invoking section 68, the words “any amount found credited into the books of account’ should not be read in isolation.

Here one has to see whether the ‘amount credited’ is a first degree entry in the books or consequential to some other transaction, That is, if the amount (by way of cash or otherwise) is first brought into the books by way of credit, and then followed by application, it will amount to first degree entry of 'credit', where the provisions of section 68 can be invoked. On the other hand, if there is any transaction resulting in creation of any asset on the asset (debit) side of the balance sheet, such transaction will have a consequential credit entry in the liabilities side of the balance sheet. Such credits, where a I.T.A.No.84/Mds/2015 :- 14 -: preceding debit entry is available, should not be considered as 'unexplained credits' under section 68 of the Act. In such cases, the proper and right approach will be to examine the assets so brought into the books, by invoking the provision of section 69 of the Act, etc.

6.10 He observed that in the instant case, as stated earlier, the assessee transferred certain assets (amounting to �3,57,70,446/ -) from his individual balance sheet to the balance sheet of M/s. Deccan Constructions, during the financial year 2009-10, relevant to the current assessment year 2010-11. Thus, in the books of M/s. Deccan Constructions, it is the creation (introduction) of the assets which has taken place first. Only the corresponding value of the assets so introduced has been taken to the liabilities side, as a balancing act, and credited into the capital account. Hence, the first degree transaction in the present case is the introduction of assets (�3,57,70,443/-) and the corresponding credit into the capital account is only a consequential entry. Therefore, if at all, the transactions are to be explained, it is the sources for’ acquiring the above assets of �3,57,70,443/- so introduced during the year. As far as the ‘credit entry’ in the capital account is concerned, the source for such credit entry is the introduction (transfer) of the above assets from the I.T.A.No.84/Mds/2015 :- 15 -: individual balance sheet into the balance sheet of M/s. Deccan Constructions. Therefore, the Assessing Officer’s action of invoking the provisions of section 68 of the Act and treating the amount of �3,57,70,443/- as unexplained cash credit is not justified.

6.11. Regarding the applicability of the provisions of section 69 of the Act to the above assets of Rs.3,57,70,443/- introduced into the books of M/s. Deccan Constructions, he observed that as per the provisions of section 69 of the Act, if the assessee is found to have invested any amount in any assets and the assessee fails to offer any satisfactory explanations regarding the sources for acquiring such assets, the same can be considered as unexplained investments u/s.69 of the Act and brought to tax.

The relevant provisions of section 69 of the Act are as under:

Unexplained investments:

Section.69. 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 not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

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6.12 According to Commissioner of Income Tax (Appeals) assets are claimed to have been transferred from the assessee's individual balance sheet to the balance sheet of M/s Deccan Constructions.

Further, as discussed in detail, all these assets were reflected in the personal balance sheets of the assessee and most of them were the brought forward amounts (assets) from the earlier years. Further, some of the assets like land and buildings, plant and machinery were purchased in the years 2005-05 and 2004-05 05, respectively, and these facts are verifiable facts. The some of the other assets included in the sundry debtors were also the opening balances of assets in the individual balance sheet of the assessee. In other words, most of the above assets of Rs. 3 ,57,70,443/ -, which were claimed to have been transferred from the individual balance sheet to M/R. Deccan Constructions, were the opening balances of the assets coming from the earlier financial years. Most of these assets were not acquired or generated during the financial year 2009-10) relevant to the assessment year 2010-11, under consideration. Therefore, even the provisions of section 69 of the Act have no application to the facts of the case, as the provisions of this section are applicable to the assets acquired (investments made) during the previous year relevant to the assessment year, only.

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6.13 Further, the Commissioner of Income Tax (Appeals) observed that there is another reason for transferring the above assets from the personal balance sheet to the balance sheet of M/s. Deccan Constructions. During the year, the assessee was trying to obtain higher loan / cash credit limits from Canara Bank For this purpose, the assessee was required to show higher net worth. Therefore, the assessee transferred all the assets from the individual balance sheet to the balance sheet of M/s. Deccan Constructions. In this process, the assessee transferred all the assets from his individual balance sheet into the balance sheet of M/s. Deccan Constructions. Such consolidation of assets or balance sheets is a routine practice to suit the business requirements and in any case, has no impact as far as the liability under the provisions of I.T. Act is concerned. As long as all the transactions of the assets and liabilities are explained, no adverse inference can be drawn, on account of consolidation of the assets or balance sheets.

6.14 According to Commissioner of Income Tax (Appeals) in view of the above reasons, the Assessing Officer is not justified in treating the increase of �3,57,70,443/- in the capital account in the balance sheet of M/s. Deccan constructions, which is a balancing entry on I.T.A.No.84/Mds/2015 :- 18 -: account of the assets of �3,57,70,443/- transferred from the individual balance sheet, as unexplained cash credit within the provisions of section 68 of the Act. The addition of �3,57,70,443/- made by the Assessing Officer is, therefore, deleted by the Commissioner of Income Tax (Appeals). Aggrieved, the Revenue is in appeal before us.

Order pronounced on Friday, the 22nd day of May, 2015, at Chennai.