CIT v. Makal Suta Cotton Co. (P) Ltd. ()

INCOME TAX

--Appeal (High Court)----SUBSTANTIAL QUESTION OF LAWRevision under section 263--The AO found certain entries in assessee s book in respect of share application money and unsecured creditors, etc. The AO called upon the assessee to produce the creditors shown under the heads of share applicants, unsecured loans and trade creditors for examination. The assessee accordingly produced the applicants for shares, unsecured creditors and trade creditors except one trade creditor and one share applicant. The AO, therefore, did not accept the credits relating to the said creditor and share applicant and added a sum of Rs. 10,500 and Rs. 19,200, respectively (which were shown as amounts received from them), to the income of the assessee. In regard to two other persons, namely B and R and who were produced for examination, the AO found that they either did not own any land or owned a very small land and therefore, found it improbable that a sum of Rs. 19,000 and Rs. 15,000 would be due to them for supplies. As a consequence, he also added the said amounts to the income. In regard to the other credits, the AO was satisfied with the evidence produced, i.e., the statement of creditors who appeared before him. Accordingly, he concluded the assessment, accepting the credits as disclosed, except to the extent discussed above. Being satisfied with the explanation of the assessee, the AO made assessment under section 143(3). The CIT invoked section 263 and set aside the assessment. The Tribunal recorded a finding that assessment order was neither erroneous nor prejudicial to interest of the revenue. Held: No substantial question of law arose from the order of the Tribunal recording a clear finding that lenders/creditors were genuine, the transactions were genuine and creditworthiness of the creditors/lenders were not in doubt and as such order of AO was not erroneous and prejudicial.

Income Tax Act, 1961 s.260A

Income Tax Act, 1961 s.263

CIT v. Makal Suta Cotton Co. (P) Ltd.

In the Madhya Pradesh High Court R.V. Raveendran C.J. & Shantanu Kemkar J.

M.A.I.T. No. 76 of 2004 29 October 2004.

Counsel: Rohit Arya & Mohan Sousarkar, for the Assessee Sumit Nema & Mukesh Agarwal, for the Revenue.

JUDGMENT

R.V. Raveendran C.J.

This appeal by the revenue under section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') is against the order of the Income Tax Appellate Tribunal, Indore Bench, dated 26-3-2004, in I.T.A. No. 502/Ind of 2003 relating to the assessment year 1998-99.

The business of the respondent-assessee consists of purchasing raw cotton, processing such cotton by ginning and pressing, and then selling the processed cotton. The assessee filed its return of income on 27-11-1998, declaring a loss of Rs. 1,11,870. The case was selected for scrutiny and notices under sections 143(2) and 142(1)(ii) were issued. The assessee commenced its business transactions in August, 1997, and processing activities in November 1997. The assessing officer (Income Tax Officer, Itarsi) found that the balance-sheet showed Rs. 7,52,000 as paid up capital and Rs. 6,61,000 as share application money received pending allotment. The assessee's accounts also showed unsecured loans aggregating to Rs. 33,75,665 and Rs. 41,42,606 as the amount due to the suppliers of raw material (i.e, agriculturists). The assessing officer, not being satisfied with these entries, called upon the assessee to prove the genuineness of the said entries and also prove the identity and creditworthiness of the creditors.

The assessee filed an application dated 20-12-2000, under section 144A before the Joint Commissioner of Income Tax, Bhopal Range, seeking a direction to the assessing officer to accept the credits in question. The learned joint Commissioner passed an order on the said application with the following directions to the assessing officer :-

'to take into account the documentary evidence submitted by counsel for the assessee before him and after giving proper opportunity make disallowances only after giving proper opportunity made disallowance only in respect of those creditors which do not fulfil the criteria for the genuineness of the creditors, debtors and share applications money. The assessing officer should ask the assessee to produce creditors/debtors and share money applicants in his office for enabling him to examine the genuineness. Further in respect of the creditors the assessing officer has reported that the same pertains to the remaining unpaid amount to the suppliers of the cotton, i.e., the agriculturists, and that the amount was paid at the time of the transactions effected through Mandi Samiti. In view thereof, the remaining balances in the books of account in the name of such agriculturists does not appear to be genuine. The assessing officer may examine this aspect before completing the assessment.'

Thereafter, the assessing officer called upon the assessee to produce the creditors shown under the heads of share applicants, unsecured loans and trade creditors for examination. The assessee accordingly produced the applicants for shares, unsecured creditors and trade creditors except Kailash Bhikamchand (trade creditor) and Devi Singh (share applicant). The assessing officer, therefore, did not accept the credits relating to the said creditor and share applicant and added a sum of Rs. 10,500 and Rs. 19,200, respectively (which were shown as amounts received from them), to the income of the assessee. In regard to two other persons, namely, Bhikaji Dhanna Lal and Radheshyam. Laxmi Singh, who were produced for examination, the assessing officer found that they either did not own any land or owned a very small land and therefore, found it improbable that a sum of Rs. 19,000 and Rs. 15,000 would be due to them for supplies. As a consequence, he also added the said amounts to the income. In regard to the other credits, the assessing officer was satisfied with the evidence produced, i.e., the statement of creditors who appeared before him. Accordingly, he concluded the assessment by order dated 30-3-2001, accepting the credits as disclosed, except to the extent shown above.

The Commissioner of Income Tax, Bhopal, being of the view that the said order of assessment was erroneous and prejudicial to the revenue, after issuing notice, passed an order dated 28-3-2003, under section 263 of the Act setting aside the order of assessment dated 30-3-2001, and directing the assessing officer to make a fresh assessment after making proper enquiries and investigation. The Commissioner of Income Tax was of the view that the assessing officer has accepted the following credits without proper enquiry and investigation resulting in under assessment of income with consequential revenue loss:

(a) Rs. 13,93,800 (credits of share capital and share application money);

(b) Rs. 33,43,286 (unsecured loans);

(c) Rs. 41,42,606 as (trade creditors -agriculturists).

The said order was challenged by the assessee before the Tribunal. The Tribunal after exhaustive reference to the evidence came to the conclusion that there was no basis for the Commissioner of Income Tax to hold that the order of the assessing officer was erroneous or prejudicial to the interests of the revenue. The Tribunal, therefore, allowed the appeal and quashed the order dated 28-3-2003, passed by the Commissioner of Income Tax. Feeling aggrieved, the revenue has filed this appeal contending that the following substantial questions of law arise on the facts and circumstances of the case for consideration:

(i) Whether the Income Tax Appellate Tribunal was justified in law in quashing the order passed by the Commissioner of Income Tax under section 263 of the Income Tax Act, 1961 ?

(ii) Whether the Income Tax Appellate Tribunal was justified in law in holding that the order passed by the assessing officer cannot be said to be erroneous as well as prejudicial to the interests of the revenue in view of the detailed reasoning given by the Commissioner of Income Tax, while passing order under section 263 ?

(iii) Whether the Income Tax Appellate Tribunal was justified in law in giving findings that the assessing officer had made proper investigations as can be expected from a prudent person, particularly when the assessing officer has not examined the case with regard to the liabilities in respect of agriculturists keeping in view the provisions of the M.P. Krishi Upaj Mandi Act, 1972 ?

We have gone through the orders of the assessing officer, the Commissioner of Income Tax and the Tribunal. The position in regard to each of the three heads is as follows:

The Tribunal found that the persons who had paid the share application money were all regular income-tax assessees and their PAN numbers were disclosed and money had been received through account payee cheques. The Tribunal also found that the persons who had paid share application money were produced before the assessing officer and their statements were recorded. The Tribunal also referred to the decisions of the Supreme Court in CIT v. Steller Investment Ltd. (2001) 251 ITR 263 confirming the decision of the Delhi High Court in CIT v. Stellar Investment Ltd. (1991) 192 ITR 287, wherein it had been held that even if it be assumed that the subscribers to the capital were not genuine, under no circumstances the amount of share capital could be regarded as undisclosed income of the company, if the identity of the shareholder was proved. In short, the Tribunal found that having regard to the fact that the persons who had deposited the share application money were examined and found to be income-tax assessees with PAN numbers, the order of the assessing officer accepting the credits in this behalf was correct. The Tribunal thus found that the evidence that was made available to the assessing officer in regard to the credits was satisfactory and therefore, there was no justification to direct a re-examination and investigation.

The Tribunal found that out of the said loans of Rs. 33.43 lakhs considered by the assessing officer, Rs. 30 lakhs were received either from the directors of the assessee (Gopal Das Agrawal and Vishwanath Agrawal) or from the sister concern of the assessee (Ganpat Pannalal) who were regular income-tax assessees. They had filed their confirmations and also furnished the PANS. They were also called before the assessing officer and examined and they had confirmed that loans, as disclosed in the books of account of the assessee, were advanced by them. In regard to other unsecured creditors (in regard to about Rs. 3 lakhs), their affidavits were filed and they were also produced and examined by the assessing officer and their statements recorded. Therefore, the Tribunal found that there was no need to further investigate into the matter.

These were trade creditors, i.e., the farmers who had supplied the cotton. Here again the Tribunal found that all the trade creditors who had supplied cotton and to whom the amounts were due, were produced before the assessing officer and were examined. The Tribunal also found that where there was doubt about the genuineness of such farmers, the assessing officer had rejected the claim of the assessee. The Tribunal found that the trade credits were accepted only where the farmers were produced and their evidence was found to be satisfactory and, therefore, the order of the assessing officer was neither erroneous nor prejudicial to the interests of the revenue.

We find that the findings of fact recorded by the Tribunal, do not suffer from any infirmity and do not give rise to any question of law. It is true that the assessing officer has not discussed every item of credit separately. He has referred to the total amounts under each head in regard to which proof/evidence was sought. He has referred to the evidence that was let in. Wherever the evidence was satisfactory he has not discussed the evidence. Wherever the evidence was not satisfactory, he has given reasons for adding the amounts to the income. It is true that the assessing officer could have said in regard to other credits that the evidence was satisfactory and acceptable, to avoid any doubt. But the mere fact that the assessing officer did not say so, is not sufficient for us to interfere with the order of the Tribunal, as the Tribunal has independently referred to the evidence pointed out by the assessee and found that the order was not prejudicial to the revenue.

Learned counsel for the appellant referred to the reasoning given by the Commissioner of Income Tax and contended that the assessing officer and the Tribunal ought not to have accepted the evidence of the farmers. It was contended that under the Krishi Upaj Mandi Adhiniyam and the Rules thereunder contemplated that the farmers should be paid on the day of sale and, therefore, it was inconceivable that the credits to an extent of more than Rs. 40 lakhs could be permitted to exist in the case of the assessee. The assessee had just started the business and, therefore, could have requested for time for payment for supplies. The Tribunal has referred to the newspaper reports and other documents which showed that the farmers were not being paid on the dates of sale. It was also found that the assessee had in fact obtained the produce in respect of which payments were due by it, as mentioned in the books of account. Even assuming there was any technical violation of the provisions of the Agricultural Produce Marketing Act, in not paying the amount on the date of sale, that does not in any way affect the genuineness of the transactions which were duly proved.

We have referred to the matter in detail only to show that all the aspects have been considered in detail and no question of law arises for consideration. The Tribunal found that lenders/creditors were genuine, the transactions were genuine and the financial capacity/supplies were not open to doubt. In the circumstances, the mere fact that a search was conducted in the premises of the assessee-company and its directors on 27-11-2001, or that some documents were seized, is not sufficient to disbelieve the clear and cogent evidence produced. The matter is purely one of fact and does not give rise to any substantial question of law. Hence the appeal is dismissed as having no merit.

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