The DCITAnand Circle, Anand V. M/s. Flovel Valves Pvt.Ltd., Anand

ITA 2304/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6198 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 28-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHAUDHRY
• Assessee Lawyers: K I THAKKAR
• Keywords: Unexplained cash credit; Business expenditure; Set aside
• Section: 143(2); 68; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'A' BEFORE SHRI D K TYAGI,JM & SHRI A N PAHUJA, AM ITA NO.2304/AHD/2009 (ASSESSMENT YEAR:-2006-07) DEPUTY COMMISSIONER OF INCOME-TAX, ANAND CIRCLE, ANAND V/S M/S FLOVEL VALVES PVT. LTD., PLOT NO. 1201, GIDC ESTATE, V U NAGAR, ANAND PAN: AAACF 9489 K [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI M R CHAUDHRY, DR ASSESSEE BY:- SHRI K I THAKKAR, AR O R D E R A N PAHUJA: THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATE D 1- 05-2009 OF THE LD. CIT(APPEALS)-IV, BARODA, FOR THE ASSESSMENT YEAR 2006-07, RAISES THE FOLLOWING GROUNDS:- [1] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED CIT(A) ERRED IN DELETING RS.9,89,460/- ON ACCO UNT OF UNEXPLAINED CASH CREDIT BY ADMITTING FRESH EVIDENCE IN CONTRAVENTION TO RULE 46A, WITHOUT AFFORDING ANY OPPOR TUNITY TO THE AO TO EXAMINE THE EVIDENCE PRODUCED BEFORE THE APPELLAT E AUTHORITY. [2] ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN ALLOWING THE INTEREST DISALL OWANCE OF RS.75,083/- OVERLOOKING THE FACT THAT EXPENSES WERE IN T HE NATURE OF PENALTY AND ALSO IN ENTERTAINING FRESH EVIDENCE IN CONTRA VENTION OF RULE 46A. [3] THE APPELLANT CRAVES LEAVE TO ADD, TO AMEND OR ALTE R THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. RELIEF CLAIMED IN APPEAL. THE ORDER OF THE CIT(A) ON THE ISSUES IN THE AFORESAID GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. 2. FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS.890/- FILED ON 30-12-2006 BY THE ASSES SEE, MANUFACTURING INDUSTRIAL VALVES, WAS SELECTED FOR S CRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE INCOME-TAX AC T, 1961 [HEREINAFTER REFERRED TO AS THE ACT] ON 24-10-200 7. THE ASSESSEE- 2 ITA NO.2304/AHD/2009 COMPANY WAS INCORPORATED FROM 19-12-2005. DURING TH E COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE WAS PARTNER IN THE TWO FIRMS NAME LY, M/S FLOVEL VALVES AND M/S ARPITA ENTERPRISES UP TO 14-02-2006. SHRI BIJU J THAKKAR AND PARESHBHAI THAKKAR WERE COMMON PARTNERS IN THESE TWO FIRMS. ON 14-02-2006 BOTH THE PARTNERS RETIRED AND THE BUSINESS OF THESE FIRMS WAS TAKEN OVER BY THE ASSESSEE COMPA NY WITH THE ISSUE OF SHARES OF RS.1,15,00,000/- TO THE PARTNERS AGAINST THEIR CAPITAL BALANCE I.E. 5,75,000 SHARES OF RS.10/- EAC H. THE AO FURTHER NOTICED THAT DURING THE YEAR UNDER CONSIDERATION, T HE ASSESSEE REPAID LOAN OF RS.9,89,460/- TO ARTEE ROADWAYS PVT. LTD. THROUGH ADJUSTMENT ENTRY OF SHARE APPLICATION MONEY WHILE I N THE BALANCE SHEET NO BALANCE UNDER THE HEAD SHARE APPLICATION M ONEY WAS SHOWN. THE BALANCE SHEET OF FLOVEL VALVES AS ON 14- 02-2006 REVEALED BORROWINGS OF RS.5,03,200/- FROM M/S ARPIT A ENTERPRISES BESIDES UNSECURED LOAN OF RS.9,89,460/-. THESE LIAB ILITIES WERE TAKEN OVER BY THE ASSESSEE COMPANY. TO A QUERY BY T HE AO, THE ASSESSEE EXPLAINED THAT UNSECURED LOAN OF RS.9,89,00 0/- OF M/S. ARTEE ROADWAYS PRIVATE LIMITED (WHICH WAS' ORIGINALLY TAKEN O VER FROM ARPITA ENTERPRISE, PARTNERSHIP FIRM AT THE TIME OF ABSORPTIO N OF THE FIRM IN THE COMPANY) WAS ADJUSTED AGAINST SHARE APPLICATION MONEY' ACCOUNT IN THE BOOKS OF THE COMPANY, THE MANAGEMENT HAVING ALLOTTED ITS EQUITY SHARES TO THE TWO DIRECTORS IN EQUAL PROPORTION OF RS.4,94,500/- EACH. HOWEVER, T HE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE SAID ADJ USTMENT OF RS.9,89,460/- AGAINST SHARE APPLICATION MONEY WAS NOT M ENTIONED IN THE BALANCE SHEET AND THAT THE TWO PROMOTERS COULD NOT TAKE OVER COMPANY'S LIABILITY AS THEIR PERSONAL LIABILITY ,LEAVING ASIDE THE INCREASE IN THE LI ABILITY UNDER ANY OF THE HEAD. ACCORDINGLY, THE AO ADDED THE AMOUNT OF RS.9,89,460/- TO THE TOTAL INCOME OF THE ASSESSEE AS UNEXPLAINED CASH CREDIT. 3. ON APPEAL, THE LEARNED CIT(A) DELETED THE ADDITI ON IN THE FOLLOWING TERMS:- 3 ITA NO.2304/AHD/2009 2.1 BEFORE ME, APPELLANT REITERATED THAT UNSECURED L OAN LIABILITY OF THE ERSTWHILE FIRM WAS REPAID BY THE APPELLANT COMPANY THROU GH BOOK ENTRY BY TRANSFERRING IT AS PERSONAL LIABILITY OF THE PROMOTER DIRECTORS IN LIEU OF ALLOTMENT OF SHARES TO THEM. APPELLANT FILED COPY OF L ETTER DATED 10-2-2006 OF M/S. ARTEE ROADWAYS P. LTD, ANAND ADDRESSED TO THE TW O PROMOTEE DIRECTORS ASKING THEM EITHER TO REPAY THE UNSECURED LOAN OR ACCEPT IT IN THEIR PERSONAL CAPACITY, AS THE MANAGEMENT OF THE APPEL LANT COMPANY WAS TO BE CHARGED. COPY OF JOINT REPLY OF THE TWO PROMOT ER DIRECTORS OF THE APPELLANT COMPANY CONFIRMING ACCEPTANCE OF UNSECURED LOAN LIABILITY IN PERSONAL CAPACITY AS AGAINST ALLOTMENT OF SHARES OF THE APP ELLANT COMPANY WAS ALSO FILED. THE APPELLANT FURTHER FILED LEDGER A BSTRACT OF 'SHARE APPLICATION MONEY' ACCOUNT SHOWING DATEWISE SHARE ALLOTM ENT ENTRY INCLUDING SHARE ALLOTMENT OF RS.9,89,000/- TO THE TWO PROMOTEE DIRECTORS AGAINST ACCEPTANCE OF UNSECURED LOAN LIABILITY TOWARDS ARTEE ROADYWAYS P. LTD IN THEIR PERSONAL CAPACITY. BREAKUP OF SHARE APPL ICATION MONEY, LEDGER ABSTRACT OF LOAN ACCOUNT OF ARTEE ROADWAYS P LTD AND PERSONAL BALANCE SHEET OF THE TWO PROMOTER DIRECTORS WERE FILED TO EXPLAIN THE TRANSACTION. 2.2 I HAVE CONSIDERED THE MATTER. THE ADDITION WAS MAD E BY THE A.O ON THE GROUND THAT IN THE BALANCE SHEET OF THE APPELLAN T COMPANY AS ON 31-3- 2006, THERE WAS NO ENTRY OF RS.9,89,000/- AS SHARE APPLI CATION MONEY. NEXT REASON FOR WHICH THE ASSESSING OFFICER MADE THE ADDIT ION IS THAT THE PROMOTER DIRECTORS CANNOT TAKE OVER COMPANY'S LIABILITY AS TH EIR PERSONAL LIABILITY. ASSESSING OFFICER'S VIEW THAT PROMOTER DIRECTORS CA NNOT TAKE OVER LIABILITY OF THE COMPANY AS THEIR PERSONAL LIABILITY IS WI THOUT BASIS. THE LIABILITY WAS OF ERSTWHILE PARTNERSHIP FIRM, IN WHICH TH E PROMOTER DIRECTORS OF THE APPELLANT COMPANY WERE PARTNERS AND AS DESIRED BY T HE LENDER, ARTEE ROADWAYS P. LTD, THEY TOOK OVER THE LIABILITY AS THEIR PER SONAL LIABILITY, IN LIEU OF WHICH SHARES WERE ALLOTTED BY THE APPELLANT COMP ANY TO THEM. REGARDING A.O'S OBSERVATION THAT SHARE APPLICATION MONE Y ACCOUNT OF RS.9,89,460/- DID NOT APPEAR IN THE BALANCE SHEET OF T HE APPELLANT COMPANY AS ON 31-3-2006, FROM THE BREAKUP OF THE SHARE CAPITAL OF RS.1,15,00,000/- ALLOTTED DURING THE YEAR, IT IS SEEN T HAT THE SAME INCLUDES ALLOTMENT OF SHARE CAPITAL OF RS.9,89,000/- ON 16-2- 2006 BY PASSING ADJUSTMENT ENTRIES TOWARDS LOAN OF ARTEE ROADWAYS P. L TD. THE TRANSACTION THEREFORE STANDS EXPLAINED AND THERE IS NO BA SIS FOR MAKING ADDITION OF RS.9,89,460/- AS UNEXPLAINED CASH CREDIT. TH E SAME IS DELETED. 4. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASS ESSEE SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 4 ITA NO.2304/AHD/2009 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. INDISPUTABLY, THE LIABILITY OF RS.9,89,00 0/- TOWARDS M/S AARTEE ROADWAYS P LTD. WAS BROUGHT FORWARD ON 1.4.1 2005 IN THE BOOKS OF THE FIRM M/S FLOVEL VALVES. THE SAID FIRM WAS TAKEN OVER BY THE ASSESSEE COMPANY AND THE AMOUNT OF RS. 9,89,000 /- WAS ADJUSTED ON 16-2-2006 TOWARDS SHARE APPLICATION MO NEY. THUS, THE SAID LIABILITY DID NOT APPEAR IN THE BALANCESHEET O F THE ASSESSEE AS ON 31.3.2006. THE LD. CIT(A) CONCLUDED THAT THE AO' S VIEW THAT PROMOTER DIRECTORS CANNOT TAKE OVER LIABILITY OF TH E COMPANY AS THEIR PERSONAL LIABILITY, IS WITHOUT ANY BASIS. THE LIABI LITY WAS OF ERSTWHILE PARTNERSHIP FIRM, IN WHICH THE PROMOTER DIRECTORS O F THE ASSESSEE COMPANY WERE PARTNERS AND AS DESIRED BY THE LENDER, ARTEE ROADWAYS P. LTD, THEY TOOK OVER THE LIABILITY AS TH EIR PERSONAL LIABILITY, IN LIEU OF WHICH SHARES WERE ALLOTTED BY THE ASSESSEE COMPANY TO THEM. THIS AMOUNT ,IN OUR OPINION, CANN OT BE TREATED AS UNEXPLAINED CASH CREDIT AND DID NOT FALL WITHIN THE PURVIEW OF PROVISIONS OF SEC. 68 OF THE ACT. THE LD. DR APPEAR ING BEFORE US DID NOT EXPLAIN AS TO WHICH SPECIFIC DOCUMENT WAS ADMIT TED BY THE LD. CIT(A) IN CONTRAVENTION OF RULE 46A OF THE IT RULES ,1962. THE PAGE 22 OF THE PAPERBOOK WAS IN SUPPORT OF THE FACTS, WH ICH WERE ALREADY ON RECORD EITHER IN THE CASE OF THE ASSESSEE OR IN THE CASE OF THE FIRM AND, THEREFORE, STRICTLY SPEAKING IT WAS NOT A DDITIONAL EVIDENCE BUT ADDITIONAL INFORMATION AS HELD IN CIT VS. SHR I RAM ENTERPRISES,182 TAXMAN 170(ALL.) AS CONCLUDED BY TH E LD. CIT(A) SINCE BREAKUP OF THE SHARE CAPITAL OF RS.1,15,00,00 0/- ALLOTTED DURING THE YEAR, INCLUDED ALLOTMENT OF SHARE CAPITA L OF RS.9,89,000/- ON 16-2-2006 BY PASSING ADJUSTMENT ENTRIES TOWARDS LOAN OF ARTEE ROADWAYS P. LTD., THE TRANSACTION STOOD EXPLAINED A ND THUS, THERE WAS NO BASIS FOR TREATING THE AMOUNT AS UNEXPLAIN ED CASH CREDIT. IN THE FACE OF THESE UNDISPUTED FACTS, ESPECIALLY WHEN THE REVENUE HAVE NOT POINTED OUT AS TO WHICH SPECIFIC DOCUMENT WAS ENTERTAINED BY THE LD. CIT(A) IN VIOLATION OF RULE 46A OF THE I T RULES, 1962, WE 5 ITA NO.2304/AHD/2009 ARE NOT INCLINED TO INTERFERE. IN THESE CIRCUMSTANC ES, GROUND NO.1 IN THE APPEAL IS DISMISSED. 6. GROUND NO.2 IN THE APPEAL RELATES TO DISALLOWAN CE OF INTEREST OF RS.75,083/-. THE AO NOTICED THAT AN AMOUNT OF RS .75,083/- WAS DEBITED AS INTEREST PAID FOR LATE PAYMENT OF INSTAL LMENTS. ACCORDING TO THE AO, SINCE THE INTEREST WAS PAID IN CONTRAVEN TION OF THE ASSESSEE'S STATUTORY LIABILITY TO MAKE TIMELY PAYME NT AGAINST LOAN BORROWED BY IT AND THUS BEING IN THE NATURE OF PEN ALTY, WAS NOT IN THE NATURE OF BUSINESS EXPENDITURE. ACCORDINGLY, TH E AO DISALLOWED THE CLAIM OF RS.75,083/-. 7. ON APPEAL, THE LEARNED CIT(A) DELETED THE DISALL OWANCE IN THE FOLLOWING TERMS:- 3.2 I HAVE CONSIDERED THE MATTER. THE A.O HAS RECORDED IN THE ASSESSMENT ORDER THAT INTEREST OF RS.75,083/- WAS DEBITED AS INTEREST PAID FOR LATE PAYMENT OF INSTALLMENT. HOW THE A.O REACHED THE CONCLUSION THAT THE INTEREST PAID WAS IN CONTRAVENTION OF APPELLANT'S ST ATUTORY LIABILITY IS NOT UNDERSTOOD, WHEN THE LEDGER ACCOUNT OF M/S. SHRI HANS AL LOYS LTD. WAS FILED BEFORE THE A.O BY THE APPELLANT. INTEREST OF RS. 75,083/- WAS NORMAL BUSINESS EXPENDITURE, PAYABLE BY THE APPELLANT DUE TO M AKING OF PAYMENT AGAINST SOME OF THE PURCHASE BILLS LATE. THERE IS NO BASI S FOR DISALLOWANCE OF RS.75,083/-, WHICH IS CANCELLED. 8. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED DR SUPP ORTED THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASS ESSEE SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. INDISPUTABLY, I NTEREST OF RS.75,083/- WAS PAID TO M/S SHRI HANS ALLOYS LTD., A RAW MATERIAL SUPPLIER, ON ACCOU NT OF LATE PAYMENT OF THEIR DUES. IT IS SETTLED BEYOND DISPUTE THA T INTEREST ON LATE PAYMENT OF DUES OF A SUPPLIER IS NOT IN THE NATURE OF A PENAL TY, AND IS, THUS, CLEARLY DEDUCTIBLE AS GENERAL BUSINESS EXPENDITURE UNDER SECTION 37 OF THE ACT. MOREOVER, THE REVENUE HAVE NOT PLACED BEFORE US ANY MATERIAL SO AS TO ENABLE 6 ITA NO.2304/AHD/2009 US TO TAKE A DIFFERENT VIEW IN THE MATTER. IN THESE CIRCUMSTANCES, WE HAVE NO HESITATION IN UPHOLDING THE FINDINGS OF THE LD. CIT(A ). THEREFORE, GROUND NO.2 IN THE APPEAL IS DISMISSED. . 10. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF RESIDUARY GROUND NO. 3 IN THE APPEAL, ACCORDINGLY, THIS GROUND IS DISMISSED. 11. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 15-07-2011 SD/- SD/- ( D K TYAGI ) JUDICIAL MEMBER ( A N PAHUJA ) ACCOUNTANT MEMBER DATED : 15-07-2011 COPY OF THE ORDER FORWARDED TO: 1. M/S FLOVEL VALVES PVT. LTD., PLOT NO. 1201, GIDC ESTATE, V U NAGAR, ANAND 2. DY. COMMISSIONER OF INCOME-TAX, ANAND CIRCLE, AN AND 3. CIT CONCERNED 4. CIT(A)-IV, BARODA 5. DR, ITAT, AHMEDABAD BENCH-A, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD