Commissioner of Income Tax vs S.K. Banerjee J.V. Transport Plaza

This appeal is filed by the Appellant against the order of the Tribunal, Nagpur Bench, Nagpur.

In exercise of powers u/s 68 of the IT Act, the assessment officer found that an amount of Rs. 1,71,78,161 was unexplained cash credit in the form of work-in-progress in the books of the Assessee firm.

The facts which gave rise to the order u/s 68 of the IT Act, 1961 are that the work of Transport Plaza for the Nagpur Improvement Trust was undertaken by M/s S.K. Banerjee Firm. This firm transferred the entire work to a new firm known as "M/s S.K. Banerjee J.V. Transport Plaza" (hereinafter referred to as "J.V. Firm" for short), which was formed for completion of job of Transport Plaza allotted to M/s S.K. Banerjee Firm by addition of two additional partners, namely, Shri Surendra Golechha and Shri Abhishek Golechha. The entire expenditures incurred for purchase of materials etc. up to 4th Dec, 2004 for Rs. 1,71,51,161 were transferred to M/s S.K. Banerjee J.V. Transport Plaza i.e., the Assessee firm and the amount was credited to the current capital account of the partner of M/s S.K. Banerjee and debited to different accounts. The transfer was at the cost price and no depreciation has been taken into account. However, the AO found what appears to be irregularities in the books of account of the old firm and that of M/s G&B Infrastructure & Developers which was a sub-contractor of the old firm. The AO noted several items, which according to the AO, were not properly explained and therefore, the said amount is found as unexplained in the accounts of the new firm i.e. J.V. Firm. Since the assessment officer made the addition of the aforesaid amount, the matter was carried in appeal before the CIT(A). The CIT(A) went into all the alleged irregularities found by the assessment officer, and after examining evidence, the case in the assessment order, remand report, the submissions of the Appellant and after appreciation of the evidence came to the conclusion that the amount is not unexplained at all as contemplated by Section 68 of the IT Act. The appellate authority came to the conclusion that appropriate books of account have been maintained by the S.K. Banerjee Firm and every item of transfer is supported by purchase bills, delivery memos etc. The CIT(A) also observed that the items of fixed assets transferred from M/s G&B are supported by purchase bills and no depreciation has been claimed either by M/s S.K. Banerjee or M/s G&B Infrastructure on the same. The depreciation has been claimed only for six months, on these fixed assets. The CIT(A) further found at the time of transfer of the project by M/s S.K. Banerjee to the Assessee, credit was given by a journal entry in the books of the Assessee firm to the capital account of M/s S.K. Banerjee and simultaneously, the entire expenditure transferred was debited to the respective accounts in the books of Assessee. The audited balance sheet, as on 31st March, 2005 was also perused and CIT(A) found that the amount of Rs. 1,71,78,161, which is an investment in new partnership firm, is duly reflected in Sch. ''D'' of debtors and advances in the name of M/s S.K. Banerjee (Transport Plaza) in the balance sheet of the partner. As regards the relationship of M/s G&B Infrastructure, which was a subcontractor of the old firm, the CIT(A) has observed as follows:

On the basis of facts available on record I have also examined the role of M/s G&B which has been the bone of contention for the AO. It is an indisputable finding of fact that M/s G&B procured material on behalf of M/s SKIS and made payments to the parties. Since the materials are purchased on behalf, subsequently the debit notes were raised by M/s G&B to M/s SKB on the basis of which M/s SKB recorded the expenditure on Transport Plaza in its books of account. The payments were made by M/s SKB to M/s G&B. This, according to the Assessee was a mutual arrangement in between the two firms i.e. M/s S.K.B. and M/s G.B. The Assessee has further claimed that the construction at site was given on labour contracts basis to M/s G&B which the AO has doubted on the basis that it is an afterthought. However, on perusal of the various documents including the return of income of M/s G&B, balance sheet, P&L a/c, TDS certificates and other records, I find that the labour work was provided by M/s G&B and TDS has been deducted at the time of payment which event occurred even before the issue of notice u/s 143(2) in the case of Assessee for asst. yr. 2005-06. The bills for labour charges were raised in the subsequent years i.e. asst. yr. 2006-07 according to the arrangements between the parties.

The CIT(A) thus came to the conclusion that there is no transfer of funds involved from the incoming partner of M/s S.K. Banerjee and the credit is raised in the partners capital account by way of a journal entry and that the AO has misinterpreted the entry in the books of account made on 31st Dec, 2004 and held that debit note in respect of transfer of material by the partner of M/s S.K. Banerjee is without actually receiving the material i.e. physical form, from the partner. The CIT(A) has observed that the finding of the assessment officer is contrary to his own finding of fact and misleading about the nature of transfer. These reasons are discussed in details in para 3.7 of the order of the CIT(A). In conclusion the CIT(A) observed as follows:

The corresponding credit entry in the capital account is substantiated from the books of M/s SKB with corresponding debit entry in their books of account. Thus when it is found that the credit entry in the partners capital account is also reflected as debit outstanding in the partners own books of account, then in such circumstances no doubt can be raised on such credit. In the instant case the credit entry in the capital account of partner has been satisfactorily explained and the onus which lies on the Assessee has been properly discharged.

The CIT(A) has also observed that the assessment officer has not applied his mind to the documents referred to and therefore, came to the conclusion that the addition of Rs. 1,71,78,161 as bogus cash credit, is not justified on the basis of the lack of factual integrity on record. In appeal, the income tax appellate authority has approved the order of the CIT(A) and held that once it is established that the amount has been invested by a particular person, he being a partner or an individual, then the responsibility of the Assessee firm is over and that in the instant case the Assessee has successfully established the source of credit entry in the partners capital account. Accordingly, it has been held that the burden of the Assessee has been fully discharged and dismissed the appeal.

Mr. Parchure, learned advocate for the Appellant, submitted that the addition is contrary to Section 68 of the IT Act which reads as follows:

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 AO, satisfactory, the sum so credited may be charged to income tax as the income of the Assessee of that previous year.

We find that the Section 68 of the IT Act empowers the AO to charge income tax for the sum found to be credited in the books of an Assessee for previous year and for which there is no explanation offered or the explanation offered is not found to be satisfactory. In the present case, the source of the amount of Rs. 1,71,78,161, found in the books of the Assessee has been found to have been properly explained by the CIT(A), which has given reasons for the said finding. The amount has been found to be credited in the name of the Assessee by way of a journal entry by which the WIP (work-in-progress) was transferred from old firm to new firm i.e., M/s S.K. Banerjee to S.K. Banerjje J.V. Firm.

Mr. Thakkar, learned advocate for the Assessee, relied on the decision of this Court in Commissioner of Income Tax Vs. Tania Investments P. Ltd., where the Division Bench held that u/s 68 an Assessee has to establish (i) the identity of the party, (ii) capacity and (iii) genuineness of the transaction. In the present case, we find that the identity of the party is well established due to the fact that one partner of the old firm is common with new firm i.e. J.V. Firm and that the amount is credited to his account. The authorities have concluded on facts that there is only a transfer of WIP (work-in-progress) from the earlier firm to the Assessee and that there is no reason to either doubt the genuineness of the transaction or the capacity. We see no reason to disagree with the finding of facts which are based on evidence. There is no error of law. Hence appeal is dismissed.