Ita/104/2013 Of The Commissioner Of Income Tax -I, Cochin v. Ms.universal Empire Educational Society

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU WEDNESDAY, THE 25TH DAY OF JANUARY 2017/5TH MAGHA, 1938 ITA.No. 104 of 2013 ----------------------- AGAINST THE ORDER IN ITA 61/2006 of I.T.A.TRIBUNAL,COCHIN BENCH DATED10-08-2012 --------- APPELLANT/APPELLANT: --------------------------- THE COMMISSIONER OF INCOME TAX -I, COCHIN BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/RESPONDENT:--------------------------------- M/S.UNIVERSAL EMPIRE EDUCATIONAL SOCIETY MERCY ESTATE, KOCHI-35. R1 BY ADV. SRI.S.ARUN RAJ R1 BY ADV. SRI.S.VINODKUMAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 25-01-2017, ALONG WITH ITA. 210/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ANTONY DOMINIC & DAMA SESHADRI NAIDU, JJ. ------------------------------------------------ I. T. Appeal Nos.210 of 2010 & 104 of 2013 ------------------------------------------------Dated this the 25[th] day of January, 2017 JUDGMENT Antony Dominic, J. 1. aThese appeals filed by the Revenue are directedagainst the order passed by the Income Tax AppellateTribunal in I.T. (S&S) A. No.07/Coch/2005 and I.T. (S&S)A. No.61/Coch/2006 concerning the block period 01.04.1996to 11.06.2002. The assessee is a private limited company. Asearch operation under Section 132 of the Income Tax Actwas carried out on 11.06.2002 and consequently noticeunder Section 158BC of the Income Tax Act, 1961 wasserved on the assessee on 20.03.2003 requiring it to filereturn in Form 2B. The assessee filed return on 05.05.2003declaring “nil” undisclosed income. In the assessment thatwas completed, apart from other additions, the unexplained I. T. Appeal Nos.210 of 2010 & 104 of 2013 -2- credit for ₹1,17,33,055/-, ₹10,88,212/- being servicecharges from sister concern of the assessee at Nepal and₹22 lakh, being service charges from students were alsoadded towards the income of the assessee. The firstappellate authority, after retaining certain additions madeby the assessing officer, deleted the aforesaid threeadditions. This was impugned by the revenue before theTribunal. By the order impugned, Tribunal confirmed theorder of the first appellate authority. It is this order which isimpugned before us by the revenue and the questions of lawframed are the following: “1.a) Whether on the facts and in thecircumstances of the case and also in the light ofthe materials and documents relied on in theassessment order the ITAT is right in law and factin deleting the addition of Rs. 1,17,33,055/- madeof unexplained credits? b) did the assessee legally and factuallyprove the ingredients necessary to prove thecredits? c) did the assessee discharge the burden ofproof that lay on him? I. T. Appeal Nos.210 of 2010 & 104 of 2013 -3- 2.a) Whether on the facts and in thecircumstances of the case and also in the light ofthe materials and documents relied on in theassessment order the ITAT is right in law an factin deleting the additions made of Rs. 10,88,212/-and Rs. 22,00,000/- towards service charges fromsister concerns at Nepal and from students? b) is the finding of the ITAT that “in thepresent case, accrual itself is doubtful” baseless,perverse and against law and logic? 3. Whether, on the facts an in the circumstances of the case is not the order of the Tribunaldeleting all the additions based on thesubmissions of the assessee without putting theassessee to proof and hence vitiated?” 2. We heard the Senior Counsel for the revenue andthe learned counsel appearing for the assessee. 3. Insofar as the deletion of the unexplained credit of b) is the finding of the ITAT that “in thepresent case, accrual itself is doubtful” baseless,perverse and against law and logic? 3. Whether, on the facts an in the circumstances of the case is not the order of the Tribunaldeleting all the additions based on thesubmissions of the assessee without putting theassessee to proof and hence vitiated?” 2. We heard the Senior Counsel for the revenue andthe learned counsel appearing for the assessee. 3. Insofar as the deletion of the unexplained credit of ₹1,17,33,055/- is concerned, a reading of the assessmentorder itself would show that though the assessee hadclaimed that the said credit balance was from its Nepalcompany, despite various requests and opportunitiesprovided, the assessee did not produce copies of audited I. T. Appeal Nos.210 of 2010 & 104 of 2013 accounts of the Nepal company for each of the years falling in the block period. Despite that, both the first appellateauthority and the Tribunal erroneously proceeded on thebasis that the assessee had produced audited accounts ofNepal company. 4. Insofar as unexplained credits are concerned, a reading of Section 68 shows that the conditions that arerequired to be established by the assessee are the identityof the creditor, genuineness of the transactions and thecredit worthiness of the creditor. Once these three essentialrequirements are prima facie proved by the assessee, thenthe onus would shift to the Department. Law is trite thatmerely by establishing the identity of the creditor or anyoneof the other conditions, the assessee cannot claim to havedischarged its burden. Insofar as this case is concerned, areading of the order passed by the Tribunal itself wouldshow not only that the Tribunal and the first appellateauthority had not even examined whether the assessee has I. T. Appeal Nos.210 of 2010 & 104 of 2013 established these three essential conditions, on the other hand, a reading of the order passed by the Tribunal wouldshow that the Tribunal has given undue importance to itserroneous assumption that the assessee has producedaudited accounts. Further, the Tribunal has also swayed bythe fact that the mode of transaction of funds wastransparent, ignoring the fact that even if the money cameby way of bank cheques and was paid through the processof banking transaction that by itself is of no consequence.[See in this connection CIT v. P. Mohanakala (SC)[2007] 291 ITR 278 (SC)]. Thus it is essentially byputting the burden of proof entirely on the revenue that theTribunal has sustained to the deletion of the addition madeby the Assessing Officer towards unexplained credits of₹1,17,33,055/-. For the aforesaid reasons, we are not in aposition to sustain this conclusion of the Tribunal. 5. Insofar as the deletion of the additions towardsservice charges from sister concern at Nepal and the service I. T. Appeal Nos.210 of 2010 & 104 of 2013 -6- charges from students is concerned, a reading of the impugned orders would show that while the company hadinitially was following the mercantile system of accounting,the assessee was following cash system, it is by upholdingthis dual method of accounting that the first appellateauthority has deleted the additions and the Tribunal hasconfirmed it. In the judgment in Keshav Mills Ltd. v.Commr. of Inc.-Tax [1953] ITR 230, the Apex Court hasexplained the mercantile system of accounting at page 239which reads as follows: 5. Insofar as the deletion of the additions towardsservice charges from sister concern at Nepal and the service I. T. Appeal Nos.210 of 2010 & 104 of 2013 -6- charges from students is concerned, a reading of the impugned orders would show that while the company hadinitially was following the mercantile system of accounting,the assessee was following cash system, it is by upholdingthis dual method of accounting that the first appellateauthority has deleted the additions and the Tribunal hasconfirmed it. In the judgment in Keshav Mills Ltd. v.Commr. of Inc.-Tax [1953] ITR 230, the Apex Court hasexplained the mercantile system of accounting at page 239which reads as follows: “The mercantile system of accounting or what isotherwise known as the double entry system isopposed to the cash system of book keepingunder which a record is kept of actual cashreceipts and actual cash payments, entries beingmade only when money is actually collected ordisbursed. That system brings into credit what isdue, immediately it becomes legally due andbefore it is actually received and it brings intodebit expenditure the amount for which a legalliability has been incurred before it is actuallydisbursed. The profits or gains of the businesswhich are thus credited are not realised buthaving been earned are treated as receivedthough in fact there is nothing more than an I. T. Appeal Nos.210 of 2010 & 104 of 2013 -7- accrual or arising of the profits at that stage. Theyare book profits. Receipt being not the sole test ofchargeability and profits and gains that haveaccrued or arisen or are deemed to have accruedor arisen being also liable to be charged forincome-tax the accessability of these profits whichare thus credited in the books of account arisesnot because they are received but because theyhave accrued or arisen.” 6. As is evident from the orders impugned before us, it is this system which has been following by the Nepalcompany whereas the assessee was following cash system.The justification assigned by the Tribunal for upholding thecash system of accounting adopted by the assessee is theuncertainty involved in realisation of the amounts due.According to us, even if it is later realised by the assesseethat some of the receivables as per mercantile system werenot actually realised, the remedy available to the assessee,is to seek rectification. This has been recognised by theApex Court in its judgment in C.I.T. v. United ProvincesElectric Supply Co. (S. C.) [Vol.244 ITR 764]. For thesereasons, we are unable to sustain this finding of the Tribunal I. T. Appeal Nos.210 of 2010 & 104 of 2013 -8- as well. In such circumstances, setting aside the orders passedby the Tribunal and answering the question of law in favourof the revenue, these appeals are disposed of. Sd/- JUDGE ANTONY DOMINIC Sd/- JUDGE DAMA SESHADRI NAIDU kns/- //TRUE COPY// P.S. TO JUDGE