The ACIT, Circle-5(1)., Visakhapatnam V. M/s Kalathil Brothers., Visakhapatnam

ITA 292/VIZ/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 0660 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 4 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 31-05-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 27-06-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBRATA SARKAR
• Assessee Lawyers: C V S MURTHY

Judgement Text

ITA NO. 292/VIZAG/2006 KALATHIL BROTHERS, VIZAG PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 292/VIZAG/2006 ASSESSMENT YEAR: 2000-01 ACIT CIRCLE-5(1), VISAKHAPATNAM KALATHIL BROTHERS, VISAKHAPATNAM (APPELLANT) VS. (RESPONDENT) PAN NO: AAEFK 4336 P APPELLANT BY: SHRI SUBRATA SARKAR, CIT(DR) RESPONDENT BY: SHRI C.V.S. MURTHY, CA ORDER PER SHRI B. R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 21.3.2006 PASSED BY LD. CIT(A-1), VISAKHAPATNAM AND IT RELATES TO THE ASSESSMENT YEAR 2000-01. 2. THE GROUNDS RAISED BY THE REVENUE GIVE RISE TO A SINGLE ISSUE VIZ., WHETHER THE LEARNED CIT(A) IS JUSTIFIED IN DELETING THE ADDITION OF RS.52,18,983/-, BEING THE DIFFERENCE IN CAPITAL BA LANCE BROUGHT FORWARD FROM IMMEDIATELY PRECEDING YEAR. 3. THE FACTS RELATING TO THE ISSUE ARE STATED I N BRIEF. THE ASSESSEE FIRM IS IN THE BUSINESS OF EXECUTION OF MECHANICAL AND ELEC TRICAL CONTRACTS. THE RETURN OF INCOME FILED BY THE ASSESSEE WAS INITIALL Y PROCESSED U/S 143(1). SUBSEQUENTLY, IT WAS NOTICED THAT THE CAPITAL BALAN CE OF PARTNERS OF THE FIRM AS ON 1.4.99 WAS SHOWN AT RS.55,47,337/- WHILE THE SAME WAS SHOWN AT RS.3,28,354/- AS ON 31.3.99 IN THE BALANCE SHEET FI LED WITH THE RETURN OF INCOME OF THE IMMEDIATELY PRECEDING YEAR, I.E. ASST . YEAR 1999-2000. THUS ITA NO. 292/VIZAG/2006 KALATHIL BROTHERS, VIZAG PAGE 2 OF 5 THERE WAS A DIFFERENCE OF RS.52,18,983/-. HENCE TH E ASSESSING OFFICER REOPENED THE ASSESSMENT OF THE ASSESSMENT YEAR 2000 -01 AND ADDED THE ABOVE SAID DIFFERENCE IN THE CAPITAL BALANCE TO THE TOTAL INCOME OF THE ASSESSEE. HOWEVER WHILE ADDING THE SAID AMOUNT, IT WAS ERRONEOUSLY TAKEN AS RS.53,28,987/-. THE SAID ADDITION WAS DELETED B Y LEARNED CIT(A) IN THE APPEAL PREFERRED BY THE ASSESSEE. INSTEAD, THE LEA RNED CIT(A) REJECTED THE BOOK RESULTS AND ESTIMATED THE INCOME OF THE ASSESS EE. AGGRIEVED BY THE ORDER OF LEARNED CIT(A) IN DELETING THE ADDITION RE LATING TO THE DIFFERENCE IN CAPITAL BALANCES, THE REVENUE IS IN APPEAL BEFORE U S. 4. WE HAVE HEARD THE PARTIES AND CAREFULLY PERU SED THE RECORD. ACCORDING TO THE ASSESSEE, THE ACCOUNTS OF THE ASSE SSEE WERE PREPARED BY AN ACCOUNTANT UP TO 31.3.99. AFTER HIS DEMISE, A C HARTERED ACCOUNTANT FIRM BY NAME M/S JOSE & CO., MUMBAI WAS ENTRUSTED WITH T HE JOB OF PREPARING AND AUDITING THE ACCOUNTS. THE NEW AUDITORS HAVE N OTICED THAT THE ACCOUNTS OF EARLIER YEARS WERE DEFECTIVE. HENCE THE NEW AUDITORS HAVE CONSTRUCTED A FRESH BALANCE SHEET AS ON 31.3.99 AND THE SAME WAS ADOPTED AS THE OPENING BALANCE AS ON 1.4.99 FOR THE FINANCI AL YEAR RELEVANT TO THE ASSESSMENT YEAR 2000-01. IN THE RECONSTRUCTED BAL ANCE SHEET, THE DIFFERENCE BETWEEN THE ASSETS AND LIABILITIES WAS T AKEN AS THE CAPITAL OF THE PARTNERS. THUS THE CONTENTION OF THE ASSESSEE IS T HAT THE INCREASE IN THE CAPITAL ACCOUNT OF THE PARTNERS IS NOT DUE TO BRING ING IN ANY FRESH CAPITAL, AS ASSUMED BY THE ASSESSING OFFICER. THE INCREASE IN THE CAPITAL ACCOUNT WAS ONLY DUE TO RECONSTRUCTION OF BALANCE SHEET BY REST ATING THE ASSETS AND LIABILITIES BALANCES AS ON 31.3.99, WHICH WAS ADOPT ED ON 1.4.99. ACCORDING TO THE LEARNED A.R, THE SAID INCREASE DOES NOT WARR ANT AN ADDITION DURING THE ASSESSMENT YEAR 2000-01. 5. THE FACTS WHICH ARE UNDISPUTED WITH REGARD T O THE ISSUE BEFORE US ARE AS UNDER:- ITA NO. 292/VIZAG/2006 KALATHIL BROTHERS, VIZAG PAGE 3 OF 5 (A) IN THE BALANCE SHEET AS AT 31.3.99 (OLD), A SUM OF RS.35,82,350/- WAS SHOWN AS THE LOAN TAKEN FROM M/S STATE BANK OF INDIA. THE ASSESSING OFFICER HAS VERIFIED THE BANK STATEME NTS AND HAS ACCEPTED THE FACT THAT THE ASSESSEE HAS NOT TAKEN ANY LOAN F ROM STATE BANK OF INDIA. (B) THE SUNDRY CREDITORS AND SUNDRY DEBTO RS THAT WERE SHOWN IN THE OLD BALANCE SHEET AS ON 31.3.99 WERE NOT SHOWN IN T HE NEW BALANCE SHEET. (C) DURING ASSESSMENT PROCEEDINGS, THE A SSESSEE HAS FILED AN ACCOUNT COPY OF THE ASSESSEE AS MAINTAINED IN THE S UNDRY DEBTORS BOOK NAMED M/S MUKUND ENGINEERING LTD. AS PER THE SAID ACCOUNT THE ASSESSEE IS ENTITLED TO RECEIVE A SUM OF RS.6,06,918.07 AS O N 1.4.99. THE SAID PARTY WAS SHOWN AS A DEBTOR IN THE NEW BALANCE SHEET PREP ARED BY THE ASSESSEE. (HOWEVER, WHILE EXTRACTING THE BALANCE SHEET AS ON 1.4.99 IN THE ORDER OF LEARNED CIT(A) AT PAGE 7, CERTAIN ITEMS IN THE ASSE T SIDE OF BALANCE SHEET HAVE BEEN ERRONEOUSLY OMITTED, WHICH, INTER ALIA, I NCLUDE THE NAME OF M/S MUMUND ENGINEERING LTD.) THUS IT IS CLEAR THAT THE BALANCE SHEET AS ON 31.3. 99, WHICH WAS ATTACHED WITH THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 1 999-2000 IS A DEFECTIVE ONE AND HENCE MUCH RELIANCE CANNOT BE PLACED UPON I T FOR DECIDING THE ISSUE IN THE SUCCEEDING YEAR. 6. NORMALLY THE CLOSING BALANCES SHOWN IN THE B ALANCE SHEET PREPARED AS AT THE END OF ANY FINANCIAL YEAR CONSTITUTE THE OPE NING BALANCES OF THE NEXT FINANCIAL YEAR. IT IS A KNOWN FACT THAT THE BUSINE SS CARRIED ON BY ANY PERSON IS A CONTINUOUS PROCESS OF REPETITION OF A SERIES O F BUSINESS TRANSACTIONS. SINCE THE PROCESS IS A CONTINUOUS ONE, IT IS IMPERA TIVE FOR ANY BUSINESS MAN TO ASCERTAIN THE WORKING RESULTS OF HIS BUSINESS EN TERPRISE AND HENCE THE CONCEPT OF CUT OFF DATE WAS ADOPTED. ON THE CUT OFF DATE, THE BOOKS OF ACCOUNTS ARE CLOSED IN ORDER TO ASCERTAIN THE PROFI T/LOSS OF THE BUSINESS CONCERN OF THE PERIOD BETWEEN TWO CUT OFF DATES OR FROM THE STARTING OF BUSINESS TO THE CUT OFF DATE. THIS EXERCISE NECESS ITATED THE PRACTICE OF PREPARATION OF PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. THE TERM BALANCE SHEET IS DEFINED IN ACCOUNTING TERMINOLOG Y AS A RECORD OF THE FINANCIAL SITUATION OF AN INSTITUTION ON A PARTICUL AR DATE BY LISTING ITS ASSETS ITA NO. 292/VIZAG/2006 KALATHIL BROTHERS, VIZAG PAGE 4 OF 5 AND THE CLAIMS AGAINST THOSE ASSETS. WHILE THE PRO FIT AND LOSS ACCOUNT DEPICTS THE WORKING RESULTS OF THE BUSINESS ENTERPR ISE FOR A PARTICULAR SPAN OF PERIOD, THE BALANCE SHEET DEPICTS THE FINANCIAL STATUS OF THE BUSINESS ENTERPRISE AS ON A PARTICULAR DATE BY LISTING THE A SSETS AND LIABILITIES OF THAT ENTERPRISE ON THAT DATE. 7. IT IS ALREADY NOTICED THAT THE BALANCE SHEE T OF THE ASSESSEE AS ON 31.3.99 DID NOT DEPICT THE CORRECT PICTURE OF THE A SSETS AND LIABILITIES BELONGING TO THE ASSESSEE. IN THAT KIND OF SITUATI ON, IT BECOMES IMPERATIVE FOR A PERSON TO RECONSTRUCT BALANCE SHEET BY CORREC TING ALL ERRORS, DEFECTS AND DEFICIENCIES. THE NEW AUDITORS HAVE TAKEN UP THE SAID EXERCISE OF RECONSTRUCTION OF THE BALANCE SHEET BY ASCERTAINING THE CORRECT VALUES OF VARIOUS ASSETS AND LIABILITIES. IN THAT PROCESS, T HE DIFFERENCE BETWEEN THE ASSETS AND LIABILITIES WAS SHOWN AS THE CAPITAL OF THE PARTNERS. THOUGH THE NEW BALANCE SHEET IS DATED AS 01.4.1999, IT ACTUALL Y DEPICTS THE RECORD/DETAILS, I.E. THE ASSETS AND LIABILITIES OF THE ASSESSEE FIRM AS ON 31.3.1999 ONLY HAVE BEEN RESTATED IN THE NEW BALANC E SHEET. 8. THE ASSESSING OFFICER HAS PRESUMED THAT THE INCREASE IN THE CAPITAL OF PARTNERS AS INTRODUCTION OF FRESH CAPITAL, WHICH IS NOT CORRECT FOR THE REASONS STATED ABOVE. IT IS A KNOWN FACT THAT ANY INTRODUC TION OF FRESH CAPITAL SHALL NORMALLY REFLECT IN THE FORM OF CASH/BANK BALANCES AND/OR ASSETS. AS OBSERVED BY LEARNED CIT(A), THE INCREASE IN THE CA PITAL IS DUE TO OMISSION OF THE STATE BANK OF INDIA LOAN AND ALSO DUE TO THE DIFFERENCE IN THE NET CURRENT ASSETS. 9. WE HAVE ALREADY STATED THAT THE BALANCE SHE ET AS ON 1.4.99 ACTUALLY REPRESENTS THE BALANCES OF ASSETS AND LIABILITIES A S ON 31.3.99. THAT IS, IT IS THE BALANCE SHEET AS ON 31.3.99, WHICH IS ACTUALLY RECONSTRUCTED AND DESCRIBED AS THE OPENING BALANCE SHEET AS ON 1.4.99 . THUS THE INCREASE IN THE CAPITAL ACCOUNT OF THE PARTNERS HAS OCCURRED ON 31.3.99 AND NOT ON ITA NO. 292/VIZAG/2006 KALATHIL BROTHERS, VIZAG PAGE 5 OF 5 1.4.99 AS PRESUMED BY THE AO. HENCE THE ENQUIRY AB OUT THAT INCREASE AND THE CONSEQUENTIAL ADDITION, IF ANY, CAN BE MADE ONL Y IN THE ASSESSMENT YEAR 1999-2000 AND NOT IN THE YEAR UNDER CONSIDERATION. ACCORDINGLY, WE ARE OF THE VIEW THAT THE LEARNED CIT(A) HAS RIGHTLY DELETE D THE IMPUGNED ADDITION. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON 30.06.2010. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM, DATE: 30 TH JUNE, 2010 COPY TO 1 THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-5(1) , RANGE-5, II FLOOR, DIRECT TAXES BUILDING, SECTOR-8, MVP COLONY, VISAKH APATNAM 17 2 M/S KALATHIL BROTHERS 23-64-7 B.C. ROAD, GAJUWAKA , VISAKHAPATNAM 3 4. THE CIT 1, VISAKHAPATNAM THE CIT(A)-!, VISAKHAPATNAM 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM