2015 (10) TMI 2682 - AT - Income Tax

Appeals Allowed: Cash Credits Deemed Capital Receipts.

Kundles Loh Udyog Versus Income-Tax Officer

The Tribunal allowed the appeals for the assessment years 2006-07 and 2007-08, setting aside the lower authorities' decisions and deleting the additions ... Addition on account of unexplained credit - treating the sum as unexplained money of the assessee partnership firm - non commencement of business - AY 2006-07 - Held that:- In the cases of 35 persons, loans have been returned after TDS and in some cases, Form 15H was filed where no tax have been deducted. Since no business activity has commenced in the year under consideration and the commercial production started on April 11, 2006 would clearly prove on record that the assessee was at pre-operative stage, i.e., for installing the plant for the purpose of manufacturing. Therefore, both the decisions in the cases of CIT v. Bharat Engineering and Construction Co. [1971 (9) TMI 14 - SUPREME Court] and Roshan Di Hatti v. CIT [1977 (3) TMI 3 - SUPREME Court] would squarely apply in favour of the assessee and would prove that the assessee has not earned any undisclosed income so as to make addition under section 68 of the Income-tax Act. As regards the addition on account of 11 creditors it is clear that no addition on account of unexplained credit could be made against the assessee of the aforesaid sum because the assessee was in the process of installing the plant and has not commenced any business activities. Therefore, there is no need to discuss all the evidences in detail on record for the purpose of examining the creditworthiness of the creditors and genuineness of the transaction in the matter in the light of the case law relied upon by learned counsel for the assessee. No justification to sustain the addition under section 68 of the Income-tax Act as is made by the Assessing Officer and confirmed by CIT(Appeals). We, accordingly, set aside the orders of the authorities below and delete the additions of ₹ 1,00,10,664 and ₹ 19,55,000. - Decided in favour of assessee. For assessment year 2007-08 held that the issue is same as have been considered in preceding assessment year 2006-07, except that in the year under consideration, the assessee started commercial production of the unit and has therefore, started business activities on April 11, 2006. The assessee has taken loans from April, 2006 to October, 2006 as per the summary of the loan filed by learned counsel for the assessee and reproduced above. The same is supported by the complete details of loans received date-wise in the year under consideration. It is, therefore, clear that the assessee has raised the above loans during six months from the date of commencement of the production and business, i.e., from May, 2006 to October, 2006. In the case of CIT v. Bharat Engineering and Construction Co. [1971 (9) TMI 14 - SUPREME Court] the loans/cash credits were taken after commencement of the business in May, 1943 up to March 15, 1944, i.e., 11 months and additions have been deleted. - Decided in favour of assessee. Issues Involved:1. Addition under Section 68 of the Income-tax Act on account of unexplained credits/loans for the assessment years 2006-07 and 2007-08.2. Condonation of delay in filing the appeal.3. Examination of creditworthiness and genuineness of the creditors.4. Failure of the Assessing Officer to summon creditors under Section 131.5. Pre-operative expenses and their treatment.Detailed Analysis:I. T. A. 133 of 2010: Assessment Year 2006-07Condonation of Delay:- The appeal was time-barred by one day due to a miscalculation of days. The delay was supported by an affidavit from a partner of the assessee-firm. The Tribunal accepted the explanation and condoned the delay.Unexplained Credits/Loans:- The assessee, a partnership firm, filed a return declaring 'nil' income and was in the process of installing a plant. The Assessing Officer noted unsecured loans amounting to Rs. 1,38,81,722 from 68 persons. The assessee provided affidavits, copies of Income-tax returns, and bank statements, but the creditworthiness of the creditors was found doubtful.- The Assessing Officer held a camp at Bhiwani to examine the creditors. Out of 68, 53 creditors were produced, and their statements were recorded. However, the creditworthiness of some creditors could not be proved, and 11 creditors could not be produced due to various reasons.- The Assessing Officer made additions of Rs. 1,00,10,664 and Rs. 19,55,000, respectively, for the unexplained credits.Commissioner of Income-tax (Appeals):- The Commissioner found that while the identity of the creditors was proved, the creditworthiness and genuineness of the transactions were not. Reasons included meager income of creditors, returns filed below taxable limits, lack of bank accounts, cash deposits before advances, and petty sources of income for female creditors.Tribunal's Findings:- The Tribunal noted that the assessee was in the pre-operative stage and had not commenced business activities. It relied on the Supreme Court's decisions in CIT v. Bharat Engineering and Construction Co. [1972] 83 ITR 187 (SC) and Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC), which held that cash credits at the initial stage of business could be considered capital receipts.- The Tribunal held that since the assessee was installing a plant and had not started commercial production, it was improbable for the assessee to have earned huge profits. Thus, the cash credits represented capital receipts.- Regarding the 11 creditors who were not examined, the Tribunal cited the Madhya Pradesh High Court's decision in CIT v. Ramesh Chander Shukla and the Allahabad High Court's decisions, stating that the Assessing Officer should have issued summons under Section 131.Conclusion:- The Tribunal set aside the orders of the authorities below and deleted the additions of Rs. 1,00,10,664 and Rs. 19,55,000. The appeal for the assessment year 2006-07 was allowed.I. T. A. 463 of 2011: Assessment Year 2007-08Unexplained Credits/Loans:- The assessee filed a return declaring 'nil' income. The Assessing Officer noted unsecured loans of Rs. 2,14,90,869 from 87 persons. The explanation was found unsatisfactory, leading to additions of Rs. 1,40,83,465 under Section 68.- The Commissioner of Income-tax (Appeals) confirmed the addition based on the same reasoning as in the preceding year.Tribunal's Findings:- The Tribunal found that the assessee had started commercial production on April 11, 2006, and had taken loans from April to October 2006. It relied on the Supreme Court's decisions in CIT v. Bharat Engineering and Construction Co. [1972] 83 ITR 187 (SC) and Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC), which held that cash credits shortly after the commencement of business could be considered capital receipts.- The Tribunal noted that it was improbable for the assessee to have earned such large profits within a few months of starting production.Conclusion:- The Tribunal set aside the orders of the authorities below and deleted the addition of Rs. 1,40,83,465. The appeal for the assessment year 2007-08 was allowed.Final Judgment:- Both appeals of the assessee for the assessment years 2006-07 and 2007-08 were allowed, and the respective additions under Section 68 were deleted.