M/S. Sri Balamurugan Textile Processing Ltd v. The Assistant Commissioner Of Income Tax,Company Circle I (1),Coimbatore

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED :15.07.2019 CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No. 344 of 2009 M/s. Sri Balamurugan Textile Processing Ltd,126, Arts College Road,Coimbatore – 641 018. .. Appellant Vs. The Assistant Commissioner of Income tax,Company Circle I (1),Coimbatore. .. Respondent Prayer :Tax Case Appeal filed under Section 260-A of the IncomeTax Act, 1961, against the order of the Income Tax AppellateTribunal Madras 'D' Bench, Chennai, dated 05.12.2008 inI.T.A.No. 1859 of 2007 for the Assessment years 2004-05I.T.A.No.1859/2007 against the order of the Commissioner ofIncome Tax (Appeals)I Coimbatore in P.A. No. AAECS5448M for theAssessment year 2004-2005 against the Assistant Commissioner ofIncome Tax, Company Circle I(1) Coimbatore in P.A. No./GIR No.AAECS5448M for the Assessment year 2004-2005. For Appellant: Mr. R.V. Easwar Senior Counsel for J. Balachandar For Respondent : Mr.T.R.Senthil Kumar Senior Standing CounselJUDGMENT[Judgment was delivered by T.S.Sivagnanam, J.] This appeal by the assessee filed under Section 260-A of the'Income Tax Act, 1961' (hereinafter referred to as 'the Act') isdirected against the order dated 05.12.2008 passed by the IncomeTax Appellate Tribunal Madras 'D' Bench in ITA.No.1859 of 2009for the Assessment year 2004 -2005. https://hcservices.ecourts.gov.in/hcservices/ 2. The appeal has been admitted on the following substantialquestions of law: “(i) Whether, on the facts and circumstancesof the case, the Appellate Tribunal was right inlaw in holding that the difference ofRs.2,44,96,054 in the sundry creditors accountis unaccounted income invested in assets out ofunaccounted income as determined by theAssessing Officer is to be assessed asunexplained cash credit under Section 68 of theIncome Tax Act, 1961, as held by the learnedCommissioner of Income Tax (Appeals)? And (ii) Whether on the facts and circumstancesof the case, the Appellate Tribunal was right inlaw in holding that by mere passing of Journalentries in the books of accounts without anycash inflow whether the said sum is assessableas unexplained cash credits under Section 68 ofthe Income Tax Act, 1961 ?” 3. The assessee is a wholly owned subsidiary of ShriKannapiran Mills Ltd, (hereinafter referred to as 'holdingcompany'). The assessee filed its return of income for theAssessment year 2004-05 on 29.10.2004, admitting a total incomeof Rs.44,43,890/-. The assessment was completed by issuance ofintimation under Section 143(1) of the Act dated 21.02.2005.Subsequently, notice dated 17.08.2005 was issued under Section143(2) of the Act and the assessment was taken up for scrutiny.The Assessing Officer issued notice to the assessee andconducted several hearings during which the assessee furnishedbooks of accounts, bills and vouchers and other relevant detailscalled for by the Assessing Officer, stated to have offerednecessary explanation to the queries raised by the AssessingOfficer, furnished the list of creditors, etc. Upon receipt ofall the records and documents, the Assessing Officer issued showcause notice dated 20.12.2006, stating that there existsdifference of balance with creditors. 4. In this case, we are concerned about two of the creditorsnamely Raksha's Enterprises and Sri Ganesh Traders. The assesseefiled its reply dated 22.12.2006 explaining difference betweenthe balance as per books of the assessee and that of theparties. The assessee by letter dated 23.12.2006 explainedjournal entries made in the books of accounts of the assesseeand holding company to show that there was no inflow of funds byvirtue of journal entries passed in the books of accounts of https://hcservices.ecourts.gov.in/hcservices/ 4. In this case, we are concerned about two of the creditorsnamely Raksha's Enterprises and Sri Ganesh Traders. The assesseefiled its reply dated 22.12.2006 explaining difference betweenthe balance as per books of the assessee and that of theparties. The assessee by letter dated 23.12.2006 explainedjournal entries made in the books of accounts of the assesseeand holding company to show that there was no inflow of funds byvirtue of journal entries passed in the books of accounts of https://hcservices.ecourts.gov.in/hcservices/ both the companies. Further in the letter dated 23.12.2006, theassessee brought out that the journal entries were immediatelyrectified in the next month in the books of accounts of both thecompanies, which falls in the next financial year, assessablefor the Assessment Year 2005-06. The assessee explained bystating that the holding company made the journal entries on theassumption that purchases made by it pertains to the subsidiarycompany(assessee company) and later on, when, it was found thatthe purchases were not for the subsidiary (assessee), theholding company passed a reversal journal entries and theassessee company passed necessary journal entries incorporatingthe same. 5. Further the assessee's case is that the assessment forthe holding company for the relevant Assessment year was anassessment passed under Section 143(3) of the Act and for thenext Assessment Year, where the reversal journal entries weremade, was also accepted by the Department in the hands of theholding company as the assessments were completed under Section143(3) of the Act and the books of accounts and other relevantrecords were duly examined by the very same Assessing Officernamely the respondent. 6. Further, the assessee's case is that the journal entriesat any point of time did not yield any increase or decrease inprofits/asset or reduction of over all liabilities of both thecompanies. Similarly, the reversal of original journal entriesmade on 31.03.2004, which was reversed on 30.04.2004, did notchange or affect the over all liabilities/assets or profits ofboth the companies. The Assessing Officer completed theassessment by order dated 28.12.2006 and came to the conclusionthat the difference of Rs.2,44,96,054/- represents investment inassets out of unaccounted income and hence the differencebetween the creditors confirmation letter and the account of thecreditors in the books of account is treated as unaccountedincome without any legal or factual basis. 7. Aggrieved by such order, the assessee preferred anappeal before the Commissioner of Income Tax (Appeals)-I,Coimbatore (CIT(A)). The appeal was dismissed by an order dated25.06.2007, against which the assessee preferred an appealbefore the Tribunal, which was dismissed by the impugned order. 8. We have heard Mr.R.V.Eswar, learned Senior Counsel forMr.J.Balachandar, learned counsel for the appellant and https://hcservices.ecourts.gov.in/hcservices/ Mr.T.R.Senthil Kumar, learned Senior Standing Counsel for therevenue. 9. Dispute, which the Tribunal, adjudicated was with regardto confirmation of addition amount of Rs.2,44,96,054/- underSection 68 of the Act. The Tribunal after considering thesubmissions on either side, took note of the decisions, moreparticularly, the decisions in the case of Sree Lekha BanerjeeVs. CIT [reported in 49 ITR 112 (SC)] and CIT Vs. P.Mohanakala[reported in (2007) 291 ITR 278 (SC)] and proceeded to rejectthe assessee's case with the following observations: 8. We have heard Mr.R.V.Eswar, learned Senior Counsel forMr.J.Balachandar, learned counsel for the appellant and https://hcservices.ecourts.gov.in/hcservices/ Mr.T.R.Senthil Kumar, learned Senior Standing Counsel for therevenue. 9. Dispute, which the Tribunal, adjudicated was with regardto confirmation of addition amount of Rs.2,44,96,054/- underSection 68 of the Act. The Tribunal after considering thesubmissions on either side, took note of the decisions, moreparticularly, the decisions in the case of Sree Lekha BanerjeeVs. CIT [reported in 49 ITR 112 (SC)] and CIT Vs. P.Mohanakala[reported in (2007) 291 ITR 278 (SC)] and proceeded to rejectthe assessee's case with the following observations: “19. In the case before us, no explanationis forthcoming why this wrong entry was made bythe subsidiary company. It is further notclarified why identical entry has been made bythe holding company by debiting assessee andcrediting which accounts, we do not know. But,most probably, letters of credit accounts whichmeans the liability from bank has beenoverstated in the case of holding company. Thesefacts are not clear.”10. We have to test the correctness of the above finding andanswer the substantial questions of law framed forconsideration. 11. The entire case revolves around the interpretation ofSection 68 of the Act, which reads as follows: “68. Where any sum is found credited in thebooks of an assessee maintained for any previousyear, and the assessee offers no explanationabout the nature and source thereof or theexplanation offered by him is not, in theopinion of the Assessing Officer, satisfactory,the sum so credited may be charged to income-taxas the income of the assessee of that previousyear.” 12. In terms of the above provision where any sum is found https://hcservices.ecourts.gov.in/hcservices/ credited in the books of an assessee and the assessee offers noexplanation about the nature and source thereof or theexplanation offered by him is not in the opinion of theAssessing Officer satisfactory, the sum so credited may becharged to income-tax as the income of the assessee of thatprevious year. The Hon'ble Supreme Court in the case ofP.Mohanakala explained the true scope of Section 68 of the Act,as follows: “16.....”The question whether the source of theinvestment should be treated as income or notunder Section 69 has to be considered in thelight of the facts of each case. The contentionof Shri Iyer was that the ratio of the decisionwould equally be applicable to interpret Section68 of the Act. There is no dispute about thesame but the assessees in no manner raised anyplea that even if their explanation is notacceptable the same cannot be treated as anincome in their hands. In cases where theexplanation offered by the assessee about thenature and source of sums found credited in thebooks is not satisfactory there is, prima facie,evidence against the assessee viz., the receiptof money, the burden is on the assessee to rebutthe same, and if he fails to rebut it can beheld against the assessee that it was a receiptof an income nature. The alternative submissionmade by Shri Iyer before us would not help theassessees in this case in hand.” 13. From the above decision, the two factors are clear thatthere should be actual receipt of cash/money and mere journalentries would not fall within the mischief of Section 68 of theAct. This aspect has been well explained in the case ofP.Mohanakala (supra) by observing that it is only when the sumsso credited may be charged to income tax as income of theassessee of the previous year. Therefore, we are required totake note of the keywords in Section 68 of the Act namely “anysum found to be credited” “nature and source thereof”, if thesetwo basic parameters are satisfied then Section 68 of the Actcould be invoked. At that stage, the onus is on the assessee tooffer an explanation with regard to such sum which was found tobe credited in the books of account by offering an explanationabout the nature and source thereof. If the assessee does notoffer any explanation then the Assessing Officer would be welljustified in applying Section 68 of the Act. However, if theassessee offers an explanation then the Assessing Officer hasto come to a conclusion that the explanation offered by theassessee is satisfactory or not. 14. We have to, thus, see in the instant case, whether atthe first instance, the Assessing Officer recorded any suchsatisfaction to invoke Section 68 of the Act. On a carefulreading of the assessment order, we find that the AssessingOfficer has misdirected himself in assuming that the assesseehad letter of credit, when the fact remains that the assessee,in his letter, has specifically stated that it is the holdingcompany, which had issued the letter of credit. Therefore, theAssessing Officer proceeded on a wrong direction by seekinginformation from the bankers of the assesee and observed thatthe assessee does not have any letter of credit facility. To benoted, it was never the assessee's case that they had availedany letter of credit facility. Consequently, the AssessingOfficer proceeded to observe that there was no reason todisbelieve that the audited annual accounts of the two companieswere audited by two qualified Chartered Accountants. Therefore,the Assessing Officer held that the explanation offered is notsatisfactory. 15. In our considered view, recording of satisfaction by theAssessing Officer to invoke Section 68 of the Act is primordialand the satisfaction to be recorded should be with the reasonsto state as to why the assessee's explanation is not found to besatisfactory. In the absence of any such finding, invokingprovision of Section 68 of the Act has to be held to beperverse. One more important aspect is that though the AssessingOfficer admits that the assessee, through authorizedrepresentative, were heard on several occasions, documents andrecords were produced, while completing the assessment makes anobservation that the total liability towards purchase made byboth the holding company and subsidiary company was notreconciled. This is clearly an erroneous finding as thedocuments and reconciliation statement were placed before theAssessing Officer and have also been filed before us as a paperbook. Therefore, we have no hesitation to hold that the findingof the Assessing Officer was factually incorrect. Before the CIT(A), the assessee had specifically reiterated the standregarding the book entries which were made by the assessee andthe holding company. The CIT(A) did not make an endeavour toexamine as to whether the reconciliation offered by the assesseewas a satisfactory explanation or not. On the contrary, the CIT(A) had faulted the auditors of the assessee and came to aconclusion that the finding of the Assessing Officer is welljustified. When the assessee came before the Tribunal, they onceagain placed all materials and stated that it was a case ofwrong entry which have been duly rectified as on 30.04.2004 andthe assessement for the holding company was completed on29.03.2006 under Section 143(3) of the Act and therefore, there is no case of unexplained credit or any sum or money flowingthere from. As observed by us earlier, the Tribunal noted thedecision in the cases of Sree Lekha Banerjee and P.Mohakala.However, the Tribunal did not give a categorical finding thatthe explanation offered by the assessee was not satisfactory. 16. The Tribunal states that the facts are not clear. Insuch circumstances, one of the modes available to the Tribunalwas to call for information from the assessee or to remand thematter for fresh consideration either to the Assessing Officeror to the CIT(A). However, no such attempt was made by theTribunal and the Tribunal has dismissed the appeal onprobabilities, which is not the proper approach. 17. One more issue, which falls for consideration is whethermere book entries or journal entries by itself can be taken tohave resulted in income for the assessee. This issue wasexplained by the Hon'ble Supreme Court in the case of CIT,Bombay City I Vs. Messrs. Shoorji Vallabhdas And Company[reported in 46 ITR 144] stating that no doubt, the Income-taxAct takes into account two points of time at which the liabilityto tax is attracted, viz., the accrual of the income or itsreceipt; but the substance of the matter is the income. Ifincome does not result at all, there cannot be a tax, eventhough in book-keeping, an entry is made about a "hypotheticalincome", which does not materialise. Where income has, in fact,been received and is subsequently given up in such circumstancesthat it remains the income of the recipient, even though givenup, the tax may be payable. 18. Mr.T.R.Senthil Kumar, learned Senior Standing Counselreferred to the decision in the case of Shri Narendra KumarSakaria Vs. Assistant Commissioner of Income Tax [TCA.No.1600 of2008 dated 14.12.2018]. In the said case, the assessee contendedthat the remittance made by the nephew of the assessee who was anon resident Indian was a proper explanation and the same shouldhave been accepted as a satisfactory explanation. The assesseein the said case placed reliance on the decision inP.Mohanakala. The Court after taking into consideration thefactual aspect and the legal principle held that the explanationoffered by the assessee was not acceptable as the assesseefailed to establish through material that the donor who extendmonies to the assessee had the wherewithal to fund the assesseewho himself was a big business man operating several companies.Therefore, we find that the decision will be of no assistance tothe revenue. 19. In the light of the above discussion, we are of theview that the order passed by the Tribunal is absolutelyperverse. Thus, for all the above reasons the assessee isentitled to succeed. In the result, the appeal is allowed andsubstantial questions of law are answered in favour of theassessee. No costs. s/d- Assistant Registrar(CS VI) True Copy Sub-Assistant Registrarmp/skaTo1.The Income Tax Appellate TribunalBench “ B” Chennai2.The Assistant Commissioner of Income tax,Company Circle I (1),Coimbatore.3.The Commissioner of Income Tax (Appeals)ICoimbatore+1 CC to Mr.J.Balachandar, Advocate sr 59819+1 CC to Mr.T.R.Suresh Kumar , Advocate sr 60561.Tax Case Appeal No. 344 of 2009SP(27/09/2019)