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IT-Discrepancy in inventory valuation allowed as deduction as assessee was following same method consistently
IT : Diminution in valuation of closing stock on account of impairment and defect is allowable, if same method of valuation is consistently followed
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[2013] 33 taxmann.com 95 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax,Delhi-IV
v.
Hughes Communication India Ltd.*
BADAR DURREZ AHMED AND R.V.EASWAR, JJ.
IT Appeal Nos.383 & 385 of 2012†
MARCH 7, 2013
Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock [Diminution in value] - Assessment year 2004-05 - Assessee reduced a sum of Rs. 90 lakhs from value of closing stock on account of impairment and defect - Whether, where same method of valuation of stock was consistently followed by assessee, resulting in no distortion of profit, any alleged difference or discrepancy such as diminution in valuation of closing stock on account of impairment and defect could be allowed - Held, yes [Para 7][In favour of assessee]
FACTS
| ■ | The assessee reduced a sum of Rs. 90 lakhs from the value of closing stock on account of impairment and defects. | |
| ■ | The claim was made on the footing that 'net realizable value' of the stock had fallen below the cost price. | |
| ■ | The Assessing Officer rejected the assessee's claim. | |
| ■ | The commissioner (Appeals) restricted the addition to 50 per cent on ground that there was some diminution in the value of inventory. | |
| ■ | Both revenue and assessee filed cross appeals before the Tribunal. The Tribunal allowed the appeal of the assessee on grounds that: |
| - | The claim of the assessee was supported by the report of its technical department. | |
| - | The method of valuing closing stock at 'cost or Net Realizable Value (NRV) whichever is lower' is a recognized and accepted method. | |
| - | The above method of valuation was consistently followed by the assessee and same had been accepted by the Assessing Officer in earlier years. | |
| - | No defect or irregularity in the details submitted by the assessee had been pointed out. |
HELD
| ■ | The revenue fairly stated that the assessee can value the stock at the lower of the cost or the net realizable value as it is a recognized and accepted method. | |
| ■ | The contention of the revenue that the claim of the assessee remains unsupported was unacceptable. It is also to be noted that on a question of valuation of the closing stock, any alleged difference or discrepancy tends to balance itself out over a period of years if the same method is consistently followed. This is because the closing stock of one year becomes the opening stock of the succeeding year and any addition made to the valuation of the closing stock to increase the profits for that year automatically gets neutralized when the same figure of closing stock is taken as the opening stock of the succeeding year. | |
| ■ | What is, therefore, more important to be seen is whether the same method of valuation of stock is followed consistently by the assessee so that there is no distortion of profit. | |
| ■ | There is also no finding to the effect that the true profits of the business cannot be determined having regard to the method of valuation of stock employed by the assessee. | |
| ■ | It may be noted that in India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (Mad.) the Madras High Court noted that the method of valuing the slow moving and obsolescent stock at a price below the cost was a recognized method in other countries and can be properly followed in India too. [Para 7] | |
| ■ | In view of foregoing discussion, the appeals are accordingly dismissed. [Para 8] |
CASE REVIEW
India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (para 7) followed.
CASES REFERRED TO
India Motor Parts & Accessories (P.) Ltd. v. CIT[1966] 60 ITR 531 (Mad.) (para 7).
Sanjeev Sabharwal for the Appellant. Ajay Vohra and Ms. Kavita Jha for the Respondent.
JUDGMENT
R.V. Easwar, J. - These are appeals filed by the revenue under section 260A of the Income Tax Act, 1961 and they are directed against the order dated 26.12.2011 passed by the Income Tax Appellate Tribunal ('Tribunal', for short) in respect of the assessment year 2004-05. The order of the Tribunal is a common order passed in cross-appeals.
2. The following questions stated to be substantial questions of law have been proposed by the revenue: -
"2.1 Whether learned ITAT erred in deleting the addition of Rs. 90,35,298/- made by the Assessing officer on account of provisions for impairment of stock?
2.2. Whether learned ITAT/CIT (A) erred in deleting the addition of Rs. 5,00,00,000/- made by the Assessing officer on account of Sales of VSAT equipment?"
3. We may straightaway say that so far as the second question is concerned, the learned standing counsel for the revenue fairly stated that the addition was made on the basis of the sales tax assessment and that the Tribunal deleted the addition on the basis of the order passed by the Joint Commissioner of Sales Tax (U.P.) on 22.12.2006 in appeal by the assessee. The appellate authority by the aforesaid order had deleted the addition. The Tribunal, therefore, held that the addition made in the income tax assessment can no longer survive. It further noted that the assessing officer had no case that the service charges for installation and/ or de-installation of VSATs were not declared by the assessee in its books of accounts. In other words, it was the view of the Tribunal that the amount of Rs. 5 crores cannot also be added as service charges. Having regard to the stand taken by the standing counsel for the revenue and also having regard to the fact that the findings of the Tribunal are factual we do not think that the second question can be admitted.
4. So far as the first question is concerned, it relates to the valuation of the closing stock. The assessee carries on the business of installation of VSAT equipment. The stock consists of two categories; (i) old and used stock which is categorized as defective but repairable, (ii) demo stock. In its accounts the assessee reduced a sum of Rs. 90,35,298/- from the value of the stock on account of impairment and defects. The claim was made on the footing that the "net realizable value" of the stock had fallen below even the cost price. In support of the valuation, the assessee submitted the basis of the estimate which was prepared by its technical department. Certain details were also submitted regarding certain items of stock together with their realisable rate as on 31.03.2003 and 31.03.2004. The assessing officer rejected the assessee's claim for reduction in the value of the closing stock made on the basis of the net realizable value being less than the cost and made an addition of Rs. 90,35,298/- to the business profits.
5. On appeal the CIT (Appeals) noted that though the assessee was right that there was some diminution in the value of inventory, complete details were not available. He, therefore, restricted the addition to 50% i.e. Rs. 45,17,649/-.
6. Both the revenue and the assessee filed cross-appeals before the Tribunal. The Tribunal recorded the following findings: -
| (a) | The claim of the assessee that the value of the stock had diminished below the cost is supported by the report submitted by the technical division of the assessee; | |
| (b) | The details of the valuation were placed before the assessing officer under cover of the letter dated 27.12.2006. These details show that the diminution in the value of the old/ unused stock of the demonstration stock, which came to Rs. 7,93,97,719/- was dealt with in the following manner: (a) Rs. 6,60,92,399/- was debited in the earlier years till the year ended 31.03.2003; (b) an amount of Rs. 42,70,022/- was claimed as consumables in the current year and; (c) the balance of Rs. 90,35,298/- was claimed as diminution in the valuation of the stock below the cost price for the year under appeal; | |
| (c) | The method of valuing the closing stock at "cost or net realisable value, whichever is lower" is a recognised and accepted principle of accounting; | |
| (d) | The above method was consistently followed by the assessee. In the other years in which the assessee adopted the same method, the assessing officer has accepted the same; | |
| (e) | No defect or irregularity in the details submitted by the assessee has been pointed out. The assessing officer has also not been able to show that the figure of net realisable value shown by the assessee was wrong. |
In the light of the above findings the Tribunal dismissed the appeal of the revenue and allowed the appeal of the assessee.
7. The findings recorded by the Tribunal are not challenged. In fact the learned standing counsel fairly stated that the assessee can value the stock at the lower of the cost or the net realisable value as it is a recognised and accepted method. He, however, submitted that the claim of the assessee was not supported by any details. But this submission is contrary to the finding of the Tribunal which has referred to the assessee's letter dated 27.12.2006 submitted before the assessing officer along with the necessary details in support of the valuation. These details have also been extracted by the Tribunal in para 11 of its order. We are, therefore, unable to accept the contention of the revenue that the claim of the assessee remains unsupported. It is also to be noted that on a question of valuation of the closing stock, any alleged difference or discrepancy tends to balance itself out over a period of years if the same method is consistently followed. This is because the closing stock of one year becomes the opening stock of the succeeding year and any addition made to the valuation of the closing stock to increase the profits for that year automatically gets neutralised when the same figure of closing stock is taken as the opening stock of the succeeding year. What is, therefore, more important to be seen is whether the same method of valuation of stock is followed consistently by the assessee so that there is no distortion of profit. There is also no finding to the effect that the true profits of the business cannot be determined having regard to the method of valuation of stock employed by the assessee. It may be noted that in India Motor Parts & Accessories (P.) Ltd. v. CIT [1966] 60 ITR 531 (Mad.) the Madras High Court noted that the method of valuing the slow moving and obsolescent stock at a price below the cost was a recognised method in other countries and can be properly followed in India too.
8. In view of the foregoing discussion we do not think that any substantial question of law arises for our consideration. The appeals are accordingly dismissed.
Esha A trust can't be penalized for being profit oriented; surplus in one year not a ground for its denial of registration
IT : Mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA and also grant of approval for exemption under section 80G
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[2013] 33 taxmann.com 113 (Lucknow - Trib.)
IN THE ITAT LUCKNOW BENCH 'B'
Kanchan Singh Bhuli Devi Shiksha Prasar Samiti
v.
Commissioner of Income-tax - I, Kanpur*
Sunil Kumar Yadav, JUDICIAL MEMBER
AND S.V. MEHROTRA, ACCOUNTANT MEMBER
AND S.V. MEHROTRA, ACCOUNTANT MEMBER
IT APPEAL NOS. 706 & 707 (Luck.) OF 2010
JUNE 26, 2012
Section 12AA, read with section 80G, of the Income-tax Act, 1961 - Charitable or religious trust - Registration procedure [Surplus earned by trust] - Whether mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA and also grant of approval for exemption under section 80G - Held, yes [Para 17] [In favour of assessee]
FACTS
| ■ | The assessee-society was engaged in providing education by running educational institution. It filed an application seeking registration under section 12A. | |
| ■ | The Commissioner finding that assessee-society had earned surplus from its activities in financial years 2006-07 to 2008-09, rejected assessee's application. | |
| ■ | On appeal: |
HELD
| ■ | Nothing has been brought on record except surplus generated during financial years 2006-07 to 2008-09 that the assessee was ever engaged in the activities other than educational activities. Since it has been repeatedly held by various High Courts and different Benches of the Tribunal that mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA and also grant of approval for exemption under section 80G, impugned order passed by the Commissioner is not proper. Therefore, the order of the Commissioner is set aside and he is directed to grant registration under section 12AA and approval under section 80G(5) to the assessee-society. [Para 17] | |
| ■ | In the result, appeals of the assessee stand allowed. [Para 18] |
CASES REFERRED TO
Municipal Corpn. of Delhi v. Children Book Trust[1992] 63 Taxman 385 (SC) (para 3), CIT v. Red Rose School [2007] 163 Taxman 19 (All.) (para 5), Pinegrove International Charitable Trust v. Union of India [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.) (para 5), City Montessori School v. Union of India [2009] 315 ITR 481/[2010] 191 Taxman 208 (All.) (para 5), Vanita Vishram Trust v. CIT [2010] 327 ITR 121/192 Taxman 389 (Bom.) (para 5), Raebareily Polytechnic Association v. CIT [2010] 48 DTR 1 (para 5), Dr. Virendra Swarup Educational Foundation v. CIT [2010] 43 DTR 267 (para 5), CIT v. Gaur Brahmin Vidya Pracharini Sabha [2011] 203 Taxman 226/15 taxmann.com 250 (Punj. & Har.) (para 5), ITO(E) v. Dharamshila Cancer Foundation and Research Centre [2010] 8 taxmann.com 285/[2011] 128 ITD 1 (Delhi) (para 5), St. Lawrence Educational Society v. CIT [2011] 197 taxman 504/9 taxmann.com 233(Delhi) (para 5), American Hotel and Lodging Association Educational Institute v. CBDT [2008] 301 ITR 86/170 Taxman 306 (SC) (para 5), Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) (para 14) and Aditanar Educational Institution v. Addl. CIT[1997] 224 ITR 310/90 Taxman 528 (SC) (para 14).
Swaran Singh for the Appellant. K.C. Meena for the Respondent.
ORDER
Sunil Kumar Yadav, Judicial Member - These appeals by the assessee are directed against the respective order of the ld. Commissioner of Income-tax refusing registration under section 12AA(1) and exemption under section 80G(5) of the Income-tax Act, 1961 (hereinafter called in short "the Act").
2. The facts in brief borne out from the record are that the assessee-society was registered with the Registrar of Societies, Kanpur on 13.12.2001. The assessee-society is engaged in providing education by running educational institution in the name of M/s Kanchan Singh Bhooli Devi P.G. College at Village Bhikhanpur, Sarwankhera, Kanpur. The assessee-society is providing education to about 2900 children by various education degrees like B.A., B.Sc., B.Ed., B.P.Ed. etc. and charging fees from the students. The assessee-society has applied for registration under section 12AA(1) of the Act and a report was called for by the ld. Commissioner of Income-tax. The ld. Commissioner of Income-tax noticed the financial position of the assessee-society for the last three years which are as under:-
| Sl. No. | F.Y. | Gross Receipt | Profit/Surplus |
| 1 | 2006-07 | 76,78,873.00 | 29,84,250.45 |
| 2 | 2007-08 | 99,16,083.54 | 45,53,345.38 |
| 3 | 2008-09 | 1,65,34,914.83 | 54,57,083.52 |
3. From the aforesaid financial position, the ld. Commissioner of Income-tax observed that the assessee-society is carrying on its activities in such a manner that it is in the nature of a commercial enterprise and not for charitable purpose. The assessee-society stated that it is engaged in the charitable activities like conducting combined marriage of poor girls and charge subsidized fees from students. From the perusal of the balance sheets, the ld. Commissioner of Income-tax observed that the assessee-society is not spending money on charitable purposes. Relying upon the judgment of the Hon'ble Apex Court in the case of Municipal Corpn. of Delhi v. Children Book Trust [1992] 63 Taxman 385, the ld. Commissioner of Income-tax denied registration to the assessee-society under section 12AA(1) of the Act.
4. Following his order refusing registration under section 12AA(1) of the Act, the ld. Commissioner of Income-tax also rejected the application for grant of exemption under section 80G of the Act.
5. Against both the orders, the assessee-society has preferred appeals before the Tribunal with the submission that the assessee-society is engaged in charitable activities by imparting education in various courses. The ld. Commissioner of Income-tax has denied registration under section 12AA and exemption under section 80G of the Act without bringing anything on record that the assessee-society was ever engaged in commercial activities. The surplus formed in a particular year cannot be the basis for denial of registration under section 12AA of the Act. What is to be seen while granting registration under section 12A of the Act and approval under section 80G of the Act is only the objects of the society/trust and its activities. If anything is found contrary to the charitable objects of the society/trust, the ld. Commissioner of Income-tax is required to examine that aspect and make out a case that the society/trust was engaged in the activities other than charitable. It was further argued by the ld. counsel for the assessee that grant of registration under section 12A of the Act does not entitle the assessee-society to claim exemption under section 11 of the Act. This exemption can only be allowed subject to fulfillment of prerequisite conditions enshrined in section 13 of the Act. Grant of registration under section 12A of the Act is a first step towards the claim of exemption under section 11 of the Act. In support of his contention, the ld. counsel for the assessee has placed reliance upon various judgments of the jurisdictional High Court and other High Courts and also of the Tribunal. The same are as under:-
| 1 | CIT v. Red Rose School | [2007] 163 Taxman 19 (All.) |
| 2 | Pinegrove International Charitable Trust v. Union of India | [2010] 327 ITR 73/188 Taxman 402 (Punj. & Har.) |
| 3 | City Montessori School v. Union of India | [2009] 315 ITR 481/[2010] 191 Taxman 208 (All.) |
| 4 | Vanita Vishram Trust v. CIT | [2010] 327 ITR 121/192 Taxman 389 (Bom.) |
| 5 | Raebareily Polytechnic Association v. CIT | [2010] 48 DTR 1 |
| 6 | Dr. Virendra Swarup Educational Foundation v. CIT | [2010] 43 DTR 267 |
| 7 | CIT v. Gaur Brahmin Vidya Pracharini Sabha | [2011] 203 Taxman 226/15 taxmann.com 250 (Punj. & Har.) |
| 8 | ITO(E) v. Dharamshila Cancer Foundation and Research Centre | [2010] 8 taxmann.com 285/[2011] 128 ITD 1 (Delhi) |
| 9 | St. Lawrence Educational Society v. CIT | [2011] 197 taxman 504/9 taxmann.com 233 (Delhi) |
| 10 | American Hotel and Lodging Association Educational Institute v. CBDT | [2008] 301 ITR 86/170 Taxman 306 (SC) |
6. The ld. D.R., on the other hand, has submitted that the assessee- society has been charging substantial fee from the students resulting into surplus profit and this fact is evident from the financial statements of the assessee-society. Therefore, the assessee-society is not engaged in charitable activities. Nothing is placed on record to show that at any point of time the assessee had imparted education at free of cost to the poor and needy. Since the assessee has been running the society for earning profit and also in the nature of commercial enterprise, the ld. Commissioner of Income-tax has rightly denied registration under section 12AA of the Act and approval for exemption under section 80G of the Act.
7. Having given a thoughtful consideration to the rival submissions and from a careful perusal of the order of the ld. Commissioner of Income- tax, we find that on the basis of financial statements furnished by the assessee-society, the ld. Commissioner of Income-tax has made out a case that in each financial year there was surplus fund/profit with the assessee-society. Besides, he has not brought anything on record to fortify his conclusion that the assessee-society is engaged in commercial activities by imparting education in various courses. Under these circumstances, the moot question arises before us is i.e. whether registration under section 12A of the Act can be denied when the assessee has substantial surplus/profit in a particular financial year. This aspect was examined at different points of time by various High Courts and also by various Benches of the Tribunal.
8. In the case of Red Rose School (supra), their Lordships of jurisdictional High Court has examined the scope of enquiry while granting registration under section 12A of the Act and held that while considering the application for registration under section 12AA of the Act, the ld. Commissioner of Income-tax was empowered only to see the genuineness of the trust or institution and its object and the scope of enquiry could not be stretched to the misuse of the funds or earning of profit. That will be taken care of by sections 11 and 12 of the Act while granting exemption under the said sections. The relevant observations of their Lordships are extracted hereunder:-
"Mere registration under section 12AA would not, in itself, be a ground, much less a conclusive proof, for excluding such income from the total income of the person/assessee or trust from income of the previous year. But the provisions of section 12A, which is under the heading (conditions as to registration of trusts etc.), disentitles any trust or institution from claiming any benefit of the provisions of section 11 and section 12, in relation to its income, unless, the person in receipt of the income, has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Commissioner before the 1-7-1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under section 12AA. Rest of the provisions of section 12A. [Para 18] section 12A thus, prescribed conditions for registration of trusts and obligates the trust or the institution to seek registration under section 12AA, if such trust or institution intends to have the benefit of the provisions of section 11 and section 12. [Para 19] These provisions thus, make it clear that if the trust or the institution is not registered under section 12AA, it would not be able to claim any exemption or exclusion of its income from the total income of the previous year, even if such income is otherwise liable to be excluded under any of the clauses of section 11 or section 12. [Para 20] Thus, in a case where registration is refused, the trust or the institution would not be allowed to claim any such exemption or exclusion of its income from the total income of the previous year. [Para 21] The provision of section 12AA confers power on the CIT while considering the application for registration of a trust or institution made under clause (a) of section 12A to call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution, and also to make such inquiries as he may deem necessary in this behalf and after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he shall pass an order in writing registering the trust or institution and if he is not satisfied, he would refuse the registration. [Para 23] Sub-section (3) inserted with effect from 1-10-2004, gave power of cancellation of registration to the Commissioner, if subsequently he finds and is satisfied that activities of such trust or institution are not genuine [Para 24] Power of cancellation of registration has been conferred with a view to ensure that if once a registration has been granted under section 12AA, the trust or the institution may not take liberty of misusing the provision and consequently go haywire in furthering the object of the trust or its activities do not remain genuine any further. [Para 25] On a reading of provisions of sub-clauses (a) and (b) of section 12AA, it makes clear that the Commissioner has to satisfy himself about the genuineness of the activities of the trust or institution and also about the objects of the trust or the institution. [Para 30] On being satisfied about the genuineness of the activities of the trust or the instruction and also about its objects, the Commissioner would either grant the certificate or would reject the prayer. In order to satisfy himself about the genuineness of the activities of the trust or the institution, he can call for such documents or information from the trust or the institution, as he thinks necessary and he is also empowered to make such enquiries as he may deem necessary in this behalf. [Para 31] The objects of the trust can be had from the bye-laws or the deed of trust, as the case may be and unless, of course, the objects of the trust apparently make out that they were not in consonance with the public policy or that they were not the objects of any charitable purpose, registration cannot be refused accordingly on this ground. [Para 32] In regard to the genuineness of the activities of the trust or the institution, whose objects do not run contrary to public policy and are, in fact, related to charitable purposes, the Commissioner is again empowered to make enquiries as he thinks fit. In case the activities are not genuine and they are not being carried out in accordance with the objects of the trust/society or the institution, of course, the registration can again be refused. But on mere presumptions and on surmises that income derived by the trust or the institution is being misused or that there is some apprehension that the same would not be used in the proper manner and for the purposes relating to any charitable purpose, rejection cannot be made. [Para 33] Section 12 AA, which lays down the procedure tor registration, does not speak anywhere that the Commissioner, while considering the application for registration, shall also see that the income derived by the trust or the institution is either not being spent for charitable purpose or such institution is earning profit. The language used in the section only requires that activities of the trust or the institution must be genuine, which accordingly would mean, they are in consonance with the objects of the trust/institution, and are not mere camouflage but are real, pure and sincere, nor against the proposed objects. The profit earning or misuse of the income derived by charitable institution from its charitable activities, may be a ground for refusing exemption only with respect to that part of the income but cannot be taken to be a synonym to the genuineness of the activities of the trust or the institution. [Para 34] A cumulative reading of the provisions leaves no manner of doubt that exemption under the aforesaid provisions can be claimed with respect to the income derived by the trust or the institution, which is being run for a charitable purpose and, therefore, while considering the registration under section 12AA, the scope of enquiry of the Commissioner, would be limited to the aforesaid extent. [Para 42] Since in the absence of such registration, the trust or the institution would not be entitled to claim any exemption of the income derived, though it is being run for charitable purposes, the registration has to be considered in the light of the specific provisions aforesaid and in the manner that it furthers the object of the scheme of registration and, of course, exemption of the entire income or the part of the income, as the case may be, of a charitable trust or institution has to be considered during assessment proceedings. [Para,43]. It is significant to mention that registration under section 12AA, does not necessarily entitle the assessee to get the income excluded from the income of the previous year for the purpose of determination of tax liability but it only entitles the assessee to claim such exemption, which otherwise could not be claimed in the absence of registration. The enquiry by the Commissioner shall remain restricted to the examination, as to whether the assessee, who has moved the application for registration under section 12A, is actually in the activities which are genuine. Genuineness of the activities of the trust or the institution has to be seen, keeping in mind the objects thereof, which necessarily means that the Commissioner shall satisfy himself about the fact that the activities are genuine and in consonance with the objects of the trust or the institution. In other words, if establishing and running a school is the object of the Society, as given in its bye-laws, it has to be satisfied that the Society has established the school, where education is being imparted as per rules and the factum of establishment and running school is a genuine activity. The enquiry regarding genuineness of the activities cannot be stretched beyond this. [Para 44] Sufficient safeguards having been given in sections 11, 12 and 13 for assessing the income which has not been applied to the purpose of the trust or the Institution, the intention of the law maker and the scope and purport of the provision is apparent while considering the question of registration. [Para 45] The Tribunal has rightly found that the objects show that none of the objects were against public policy and the main activity of the said Society was to provide education to children from Primary section to Degree level and to improve the mental, social and other development of the students. [Para 47] A provision has also been made with respect to under-privileged children providing for their protection and rehabilitation and also physical development through exercise and sports, besides providing library and reading room for the development of the students. The objects, therefore, cannot be said to be the objects, which run against public policy or do not fall within the category of activities, which are for charitable purposes. Education in itself is a charitable purpose and activities related thereto, which include, both physical and mental development and also instilling of a feeling of self-confidence through exercise, sports and extensive reading of good books, cannot, in any manner, be described as a non-charitable purpose or much less a non-educational activity. Education a means and includes not only knowledge of text books or prescribed educational courses but overall development of the child, which includes personality development and his physical fitness, apart from his capacity to analyse things and reach to logical conclusion on a given issue. Schools may, for the purpose, organize various cultural and educational entertainment programmes, sports meet, debates and seminars etc. and all such activities shall form part of education. [Para 48] Thus the objects of the Society were well in consonance with the scheme of the Act. [Para 49] The purchase of books worth Rs. 1 lakh in the name of NCK has been found to be shady, firstly because these books were of a very high standard, not meant for the students up to XII class and secondly they were purchased in the name of NCK, which is a separate Society. [Para 52] The Tribunal has rightly found that NCK is a Society, which has been formed for maintaining the library for the benefit of the students, being run by the assessee Society and if the books of high standard have been purchased, it cannot be presumed that no purchase was made nor it is the case of the revenue that books worth the amount were not purchased or the payments were not made. It has also not been disputed by the revenue that NCK, a Society which has been formed only for running the library for the institution, is not running the library. [Para 53] The plea of the revenue that some funds have been given to Nav Chetna Kendra, which casts doubt about the genuineness of the activities of the assessee institution, is also of no substance, as admittedly the object of the Nav Chetna Kendra Society, is not against any public policy and it has also been brought on record that the amount advanced by the assessee to the Nav Chetna Kendra was not for any other object, except that mentioned in the objects of that Society. There is nothing on record to show that money so advanced was for personal benefit of any office bearers of the assessee Society or any other person. It not being in dispute that NCK Society runs the library of the institution, an object related to charitable purpose, where the money has been advanced by the assessee society in furtherance of the said object, i.e. for running a library, which is again an educational purpose, it cannot be a ground for refusing registration of the assessee society. [Para 54] There is no finding that the aforesaid activities of the society were not genuine. The Tribunal has also considered that the balance sheet could not be reconciled as earlier the balance sheet was not audited and the audited balance sheets, which were filed before the CIT, did not show any discrepancy. [Paras 55 & 56] So far the non-deduction of provident fund from the salary paid to certain employees is concerned, that in itself again would not constitute a ground for rejection, as no such requirement stands spelt out from provisions of section 12AA nor it makes the activities of the institution as non-genuine. In case the institution has defaulted or defaults in the matter of deposing, contributions of the employees provident fund, the Act concerned shall take care of such default but in no case it can be a ground for refusal of registration. [Para 57] So far the charge of fee is concerned, it was on record that the fee was being charged, which was prevailing in other schools and tuition fee etc. ranged from Rs.225 to Rs.700, excluding conveyance allowance, which cannot be said to be arbitrary and excessive. [Para 59] The objects of the assessee Society undoubtedly are for charitable purposes and not against public policy. The genuineness of its activities is proved by the aforesaid facts, which conclusively show that the Society has established a school for the children in the year 1982 and thereafter it has opened its two more branches raising the standard of the school up to CBSE, Delhi Board and subsequently up to Class XII, with a large number of students and sufficient staff to whom salary is being paid. [Para 16] The activities aforesaid cannot be doubted nor can be said to be non-genuine within the meaning of the provisions of section 12AA. [Para 61] The scheme of section 12A and section 12AA does not allow any person/trust or institution to take benefit of the provisions of section 11, section 12, as the case may be, unless registration under section 12AA is obtained and that sub-clause (3) of section 12AA puts complete control over the activities of the trust or the institution and if it is found at any subsequent stage, that its activities are not being carried as per the objects or they do not remain genuine, action for cancellation of registration can be taken. [Para 62] For the reasons stated above, there is no illegality or infirmity in the order passed by the Tribunal. [Para 63]"
9. Similar views were expressed by Hon'ble Punjab & Haryana High Court in the case of Pinegrove International Charitable Trust (supra). While dealing with the issue of withdrawal of exemption under section 10(22) of the Act, their Lordships have held that as long as an institution exists solely for educational purposes, it would qualify for grant of exemption under section 10(23C) (vi) of the Act. Merely because the profits have resulted from the activity of imparting education that would not change the character of the institution existing solely for educational purpose.
10. Again in the case of City Montessori School (supra), their Lordships of Hon'ble jurisdictional High Court have held that the word "education" used in section 2(15) of the Act means systematic instruction, schooling or training given to the young in preparation for the work of life. Similarly, extending financial assistance, scholarship, etc., to students for their educational purpose would fall within the connotation of "education".
11. In the case of Vanita Vishram Trust (supra), their Lordships of Hon'ble Bombay High Court have observed while dealing with the issue of rejection of approval under section 10(23C) of the Act that though the Memorandum of Association contains varied objects, so long as the record demonstrates that the assessee only conducts educational institutions, it must be regarded as existing solely for the purpose of education. No other activity is carried on. Secondly the fact that a surplus may incidentally arise from the activities of the trust after meeting the expenditure incurred for conducting educational activities would not disentitle the trust of the benefit of the provisions of section 10 (23C) of the Act.
12. An identical issue came up for consideration before the Lucknow Bench of the Appellate Tribunal in the case of Raebareily Polytechnic Association (supra) in which substantial surplus amount/profit was generated in two financial years i.e. 2004-05 and 2005-06 at Rs. 10,88,741 and Rs. 12,09,095 respectively. The registration under section 12A of the Act was denied by the ld. Commissioner of Income-tax after having observed that the assessee-society is being run on commercial line for the purpose of profit without there being any basis to hold so or there being any material or information on record that the appellant is not carrying out any charitable activity. While dealing with the issue, the Tribunal has discussed the scope of enquiry at the time of registration under section 12A of the Act and finally concluded that the presence of profit in the financial statement referred to by the ld. Commissioner of Income-tax is not a disqualification for the purpose of granting registration under section 12A of the Act. The Tribunal accordingly directed the ld. Commissioner of Income-tax to issue a formal certificate granting registration under section 12AA of the Act as requested for by the assessee. The relevant observations of the Tribunal mentioned in the Head Note are extracted hereunder:-
"Registration under section 12A. Scope of enquiry by CIT--A plain reading of section 12A goes to show that, at the time of granting registration what the CIT is required to examine is as to whether the objects of the applicant are of charitable nature or not, i.e., as to whether the objects are covered by the definition of charitable purposes as given in section 2(15) or not, and secondly that the activities being carried on or are to be carried on are genuine, i.e., are for achieving the objects, for which he can make enquiries, as are necessary. However, his discretion to make such enquiries as he may deem necessary is also limited to satisfy himself about the genuineness of the activities of the trust or institutional, as stands clarified by the phrase in this behalf appearing in the said clause itself. Presence of surplus as a result of such activities and whether exemption under section 11 can become available to such surplus, are the subject-matter of assessment, i.e., it is the AO who is required to examine at the time of making assessment such issues. The CIT, at the time of granting registration under section 12A, is not required to go into these aspects. So far as the issue relating to one having income or surplus is concerned, the provision itself envisages the availability of the income/surplus otherwise, the provisions of sections 11, 12 and 13 become redundant. The only exception is that such income/surplus must be applied, either in that very year or in subsequent year, for charitable purposes. Thus, presence of income in the case of an institution existing for charitable purposes (education included therein) is envisaged by the legislation and to grant exemption of such income from taxation, the legislature itself has provided an elaborate code as has been laid down in section 11 and rules made thereunder. In case presence of income in a particular year is treated as disqualification for the purposes of registration under section 12A, the provision of section 11 granting exemption of income shall be rendered as otiose, which is not the intention of law. Accordingly, presence of profit in the financial statements referred to by the CIT is not a disqualification for the purposes of granting registration under section 12A. The view to the contrary is liable to be rejected and, therefore, rejection of assessee's claim of registration on this ground was illegal and bad in law.
Reason which is based on fact of there being huge profit is absolutely irrelevant for the purposes of deciding the appellant's claim for registration under section 12A. A plain reading (sic-of) to section 12A goes to show that, at the time of granting registration what the CIT is required to examine is as to whether the objects of the applicant are of charitable nature or not, i.e., as to whether the objects are covered by the definition of charitable purposes as given in section 2(15) or not and secondly that the activities being carried on or are to be carried on are genuine, i.e., are for achieving the objects, for which he can make enquiries, as are necessary. However, his discretion to make such enquiries as he may deem necessary is also limited to satisfy himself about the genuineness of the activities of the trust or institution, as stands clarified by the phrase in this behalf appearing in the said clause itself. Presence of surplus as a result of such activities and whether exemption under section 11 can become available to such surplus, are the subject-matter of assessment, i.e., it is the AO who is required to examine at the time of making assessment such issues. The CIT at the time of granting registration under section 12A, is not required to go into these aspects, [Para 8.4] So far as the issue relating to one having income or surplus is concerned, the provision itself envisages the availability of the income/surplus otherwise, the provisions of sections 11,12 and 13 become redundant. The only exception is that such income/surplus must be applied, either in that very year or in subsequent year, for charitable purposes. [Para 8.7] Thus, presence of income in the case of an institution existing for charitable purposes (education included therein) is envisaged by the legislation and to grant exemption of such income from taxation, the legislature itself has provided an elaborate code as has been laid down in section 11 and rules made thereunder. [Para 8.8] If such an income can be treated as exempt under section 11, then it cannot be held to be disqualification for the purposes of registration under section 12A, which has been brought on the statute book simply for laying down a procedure for claiming such an exemption, and view expressed by the CIT and sought to be supported by the Departmental Representative, is wholly fallacious at the very face of it. In case presence of income in a particular year is treated as disqualification for the purposes of registration under section 12A, the provision of section 11 granting exemption of income shall be rendered as otiose, which is not the intention of law. Further, the ten words reading as not involving the carrying on of any activity for profit occurring at the end of section 2 (15) had been omitted by the Finance Act, 1983 with effect from 1-4-1984 and such an omission, continues to remain so omitted (as proviso below section 2(15) by the Finance Act, 2008 also does not cover education or activities connected with the education. This analysis itself goes to nullify the view taken by the CIT in the order under challenge. Accordingly, presence of profit in the financial statements referred to by the CIT is not a disqualification for the purposes of granting registration under section 12A. The view to the contrary is liable to be rejected and, therefore, rejection of assessee's claim of registration on this ground was illegal and bad in law. [Para 8.9] It is clear that there is a judicial consensus to the effect that an educational institution cannot be said to be existing for the purposes of profit if surplus earned by it from educational and other related activities has been utilised for the purposes of educational activities only. [Para 8.11] Although there was huge surplus (so to say) for the years ending on 31-3-2005 and 31-3-2006, the same has been applied in creating necessary infrastructure during the subsequent years ending on 31-3-2007 and 31-3-2008 as is clear that investment on building alone meant for educational purposes during subsequent years has been claimed to be as under: Financial year 2006-07 Rs. 2,02,46,637; Financial year 2007-08 Rs. 1,11,87,490. [Para 8.12] The CIT is directed to issue a formal certificate granting registration under section 12AA as requested for by the assessee subject, however, to that as a result of amendment made in clause (a) of subsection (1) of section 112A by the Finance Act, 2007 with effect from 1-6-2007, as a result of which the CIT,s power to condone the delay beyond the first day of the financial year in which the application has been made, has been taken away, the present assessee is entitled to registration only with effect from 1-4-2008 (application of registration is told to have been filed only on 26-12-2008). Consequently, the certificate to be issued by the CIT will have effect of registration only with effect from 1-4-2008. [Para 8.13]"
13. Similar view was again expressed by the Lucknow Bench of the Appellate Tribunal in the case of Dr. Virendra Swarup Educational Foundation (supra) while dealing with an issue of denial of approval under section 80G(5) of the Act and the Tribunal again reiterated that generation of surplus or profit on various educational activities cannot be a ground for denial of approval under section 80G(5) of the Act. The relevant observations of the Tribunal are extracted hereunder:-
"Recognition under section 80G(5) - Charitable purpose of education vis-a-vis profit motive - The assessee-society was carrying on the activity of running various educational institutions. Assessee had been granted registration under section 12A and was also granted exemption under section 80G from 1-4-2007 to 31-3-2009, for the assessment year 2010-11, CIT denied the approval under section 80G(5) to assessee for the reason that there was huge surplus available with assessee and a commercial institution. On the other hand, AO in the assessment orders for the assessment years 2005-06 to 2007-08 passed under section 143(3) clearly stated that the surplus was nil after considering the provisions of sections 11 and 11(2). It had categorically been stated in the said assessment orders that the income applied was more than 85 per cent of the gross receipts as per the provisions of the Act. As such the assessment was completed on nil income, therefore, this cannot be a ground to deny the exemption under section 80G that assessee was having surplus. Furthermore, the approval for exemption under section 80G(5) was granted to assessee upto 31-3-2009, however without bringing any material on record that there was a change in the facts for the year under consideration vis-a-vis the earlier years, the approval for the year under consideration under section 80G(5) had been denied. In the instant case nothing was brought on record that the education in the institutes run by assessee was on commercial lines. Therefore, merely on this basis that there was a surplus, which was utilized as per the provisions contained in section 11 approval under section 80G(5) cannot be denied. Considering the totality of the facts assessee was entitled to renewal of approval under section 80G.
The CIT denied the approval under section 80G(5) to the assessee for the reason that there was huge surplus available with the assessee. On the other hand, the AO in the assessment orders for the assessment years 2005-06 to 2007-08 passed under section 143(3) clearly stated that the surplus was nil after considering the provisions of section 11 and 11(2). It had categorically been stated in the said assessment orders that the income applied was more than 85 per cent of the gross receipts as per the provisions of the Act. As such the assessment was completed on nil income, therefore, this cannot be a ground to deny the exemption under section 80G that the assessee was having surplus. Furthermore, the approval for exemption under section 80G(5) was granted to the assessee up to 31-3-2009, however without bringing any material on record that there was a change in the facts for the year under consideration vis-a-vis the earlier years the approval for the year under consideration under section 80G(5) had been denied. If there is no material change in the facts in the year under consideration vis-a-vis the earlier years, then keeping in view the principle of consistency, the assessee was eligible for approval of registration under section 80G. In the instant case nothing is brought on record to substantiate that the assessee received any capitation fees from the students and donation from anyone or hefty amount was received from the students on account of fees/funds. Therefore, merely on this basis that the assessee was having surplus, the approval under section 80G cannot be denied particularly when the assessee was having similar surplus in the earlier years, i.e., prior to 31-3-2009 for which the approval for exemption under section 80G has been granted to the assessee. [Para 6] In the instant case nothing is brought on record that the education in the institutes run by the assessee was on commercial lines. Therefore, merely on this basis that there was a surplus, which was utilized as per the provisions contained in section 11 approval under section 80G(5) of the facts as discussed hereinabove, the assessee was entitled to renewal of approval under section 80G. In that view of the matter, the impugned order of the CIT is set aside and he is directed to grant the approval under section 80G (5). [Para 6.2]"
14. Hon'ble Punjab & Haryana High Court in the case of Gaur Brahmin Vidya Pracharini Sabha (supra) in Income Tax Appeal No.759 of 2010 vide its judgment dated 3.10.2011 has categorically held that mere making of profit cannot be a ground to deny registration once the objects of the society are of charitable nature and especially in the present case where five educational institutions are being run by the respondent which is registered on 29.9.1980 under the Societies Registration Act and solely because the respondent was charging fees and was getting surplus would not be the reason to deny registration in view of the judgment of this Court in the case of Pinegrove International Charitable Trust (supra). While dealing with the issue, their Lordships have also followed the judgments of Hon'ble Apex Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) and Aditanar Educational Institution v. Addl. CIT[1997] 224 ITR 310/90 Taxman 528 (SC) and held that merely if an institution is making a profit it would not render itself ineligible for registration under the provisions of section 10(23C)(vi) of the Act. The said principle can also be fully applied to the facts and circumstances of the present case. Merely because there are some surplus with the respondent, this should not be a ground to deny the registration under section 80G(5)(vi) of the Act.
15. Similar views were expressed by the Delhi Bench of the Appellate Tribunal in the case of Dharamshila Cancer Foundation and Research Centre (supra).
16. Similar views were also expressed by Hon'ble Delhi High Court in the case of St. Lawrence Educational Society & Another (supra) in writ petition No.1254/2010 vide its order dated 4.2.2011 holding therein that the Chief Commissioner has erred in assuming that for exemption there should not be any surplus, otherwise the institution society exists for profit and not charity i.e. education in the present case.
17. Turning to the facts of the present case, nothing has been brought on record except surplus generated during financial years 2006-07 to 2008-09 that the assessee was ever engaged in the activities other than educational or the objects of the society. Since it has been repeatedly held by various High Courts and different Benches of the Tribunal that mere generation of surplus/profit in a particular year cannot be a ground for denial of registration under section 12AA of the Act and also grant of approval for exemption under section 80G of the Act, denial of registration under section 12A of the Act and refusal of grant of approval under section 80G(5) of the Act by the ld. Commissioner of Income-tax is not proper and we therefore set aside the orders of the ld. Commissioner of Income-tax and direct him to grant registration under section 12AA of the Act and approval under section 80G(5) of the Act to the assessee-society.
18. In the result, appeals of the assessee stand allowed.
IT : Where sizeable amounts were deposited in cash in account of depositors only before their withdrawal through cheques in favour of assessee, addition was justified
■■■
[2013] 32 taxmann.com 366 (Gujarat)
HIGH COURT OF GUJARAT
Blessing Construction
v.
Income-tax Officer*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 16 of 2013†
MARCH 13, 2013
Section 68 of the Income-tax Act, 1961 - Cash credits [Burden of proof] - Assessment year 2005-06 - In case of all depositors, their bank accounts contained meager balance - Sizeable amount of Rs. 1 lakh or above were deposited in cash in accounts of depositors and immediately entire amounts were withdrawn through issuance of cheques in favour of assessee - Further, depositors, capacity to raise such cash amount was also not established - Whether this was a case where Revenue made addition on assessee failing to establish source of source and, therefore, addition was justified - Held, yes [Para 7] [In favour of revenue]
FACTS
| ■ | The assessee obtained unsecured loan amounts from different individuals totalling to 13 lakhs. The Assessing Officer observed that there was cash deposits in the accounts of the depositors just before the loan was given. The Assessing Officer added the loans as unexplained credits under Section 68 holding that the assessee could not prove the genuineness of the transaction and creditworthiness of the depositors. | |
| ■ | The case of the assessee was that by establishing the identity of the depositors, some of whom even appeared before the Assessing Officer, the assessee established the genuineness of the transaction. It was further contended that under Section 68, the Assessing Officer was not competent to enquire further about the source of source of the loans. | |
| ■ | On appeal, the Commissioner (Appeals) observed that the availability of funds in the hands of the depositors were manipulated by depositing cash in their bank accounts just before they advanced the loan to the assessee. The Commissioner (Appeals) confirmed the addition to the extent of 10 lacs and held that only one loan of 3 lacs could be explained satisfactorily. | |
| ■ | On second appeal, the Tribunal confirmed the holdings of the Commissioner (Appeals). | |
| ■ | On appeal: |
HELD
| ■ | The legal contention that the Revenue cannot insist on assessee supplying the source of source is impeccable. However, the facts of the present case are vastly different. It is of course true that some of the observations made by the Tribunal may suggest that the Tribunal did concern itself with the source of the source. However, such observations cannot be picked in isolation as to treat that as the conclusion of the Tribunal. When one reads the orders of the Assessing Officer, Commissioner (Appeals) and the Tribunal, the inescapable conclusion one arrives at is that the entire transaction was not genuine. [Para 7] | |
| ■ | There was sufficient evidence on record to suggest that in case of all the depositors, their bank accounts contained meager balance shortly before sizable amount of Rs. 1 lakh and upward were given to the assessee through such account. In such bank accounts, cash amounts were credited and immediately entire amounts were withdrawn through issuance of such cheques in favour of the assessee. It was noticed that such creditors did not maintain any books of account. Nowhere their capacity to raise such amount for drawing cheque of sizable amounts was established. In short, therefore, the very genuineness of the transaction was not established. [Para 7] | |
| ■ | This is not a case where the Revenue makes addition on the assessee failing to establish source of the source. All issues are essentially based on facts and appreciation of evidence on record. No question of law arises. [Para 7] |
CASES REFERRED TO
CIT v. Jay Dee Securities and Finance Ltd.[2013] 32 taxmann.com 91 (All.) (para 6), Nemi Chand Kothari v. CIT[2003] 264 ITR 254/[2004] 136 Taxman 213 (Gau.) (para 6) and S. Hastimal v. CIT[1963] 49 ITR 273 (Mad.) (para 6).
Udayan P. Vyas for the Appellant.
ORDER
Akil Kureshi, J. - Assessee is in appeal against the judgement of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 29.12.2011 raising following questions for our consideration :
| (1) | Whether on the facts and circumstances of the case, the Tribunal has erred in law in confirming the additions of unsecured loans as unexplained cash credit under section 68 of the Income Tax Act, 1961 on the ground that assessee has failed to discharge the onus of proving the source of source or origin of the cash credits? | |
| (2) | Whether, on the facts and circumstances of the case, the Tribunal is justified in law in applying against the assessee the fact of not satisfying the authorities as to the source from which the depositors derived the money while confirming the addition as unexplained cash credit under Section 68 of the Income Tax Act, 1961? |
2. The issue pertains to a sum of Rs. 13 lakhs treated as cash credit under section 68 of the Income Tax Act, 1961 by the Assessing Officer. Such assessment was confirmed by the CIT(Appeals) as well as by the Tribunal.
3. During the course of assessment, it was noticed that the assessee had received unsecured loans from 8 different individuals totalling to Rs.13 lakhs. The Assessing Officer questioned the assessee with respect to such amounts received during the year relevant to the assessment year 2005-2006. It was pointed out that such loans were received through individuals from Account Payee cheque. Their details were also supplied. Some of them also presented themselves before the Assessing Officer upon inquiry. The Assessing Officer however, held that the capacity and creditworthiness of the depositors was not proved. It was observed that there is no such type of cash deposits before or after the cash transactions in case of such depositors other than loan amounts, as appeared in their account. He concluded that the assessee did not prove the genuineness of the transaction as also the capacity and creditworthiness of the creditors.
4. The assessee carried the issue in appeal. The Commissioner(Appeals) re-examined the entire issue at length. He observed as under :
"5. I have carefully considered both the positions. I have also examined the relevant documentary evidences furnished by the AR including account confirmations, copies of Income-tax returns of the depositors, their balance-sheets, P & L accounts, and capital accounts as also their bank statements. The first depositor was Shri Hasmukh R. Mehta, against whom the loan of Rs.3 lakhs was shown. His bank statement with HDFC Bank shows, amongst other transactions, a deposit of Rs. 3 lakhs on 29.6.2006 by cheque. The loan was given to the Assessee by cheque on 4.7.2006. It cannot therefore be said that unexplained cash was deposited in the account of Shri Hasmukh R. Mehta before giving the said loan to the Assessee. The next depositor was Shri Jimit M. Mehta, his bank account showed a deposit of Rs.1,50,000/- in cash on 24.3.2005. On the very next day, he issued a cheque of Rs.1,50,000/- to the assessee. Prior to the said deposit, his balance was only Rs. 2,056.20 with no major credits. The extract of his cash book shows no cash balance prior to depositing such cash into his bank account. Next was Smt. Kokilaben M. Mehta; a loan of Rs. 1,50,000/- was showed in her name. On 6.11.2004 the said sum was deposited in cash in her bank account with Bank of baroda. On 8.11.2004 the cheque was issued to the assessee. The balance in her account prior to this transaction was only Rs.1,444.95. Her cash book shows capital buildup from stitching and embroidery income every month. The return of the income filed by her for the A.Y. 2005-06 declared an income of only Rs.51,904/-. It is a clear case of accommodation entry being provided to the assessee. She simply did not have the requisite creditworthiness to give the loan.
6. Coming to M/s. Nirav Gems, who claimed to have given a loan of Rs.1,50,000/- the situation was exactly the same. Cash of Rs. 1,50,000/- was deposited on 8.11.2004 and the loan was given on the very next day. Before the deposit, the balance in its account with Dena Bank, Rampura Branch was only Rs. 4,008.87. He also build up his capital by showing diamond brokerage income of approximately Rs. 3,000 per month. Once again, this is another case of accommodation entry being provided to the assessee. Shri Nirav M Mehta who claimed to have given a loan of Rs. 1 lakh to the assessee, cash was deposited on 6.11.2004 in his bank account with Dena Bank and the loan was given to the assessee on 9.11.2004. His account shows similar transactions of rotating money at regular intervals. The average balance prior to the said deposit was approximately Rs. 2,000-Rs. 3000. Shri Sevantilal A. Mehta had a balance of Rs. 5557 before depositing cash of Rs 1 lakh on 15.1.2005 and giving the said sum as a loan to the assessee on 18.1.2005. Smt. Sushilaben R. Sanghvi had a balance of Rs. 550.05 before cash of Rs. 1,50,000 was deposited in her account and a cheque of the said sum issued to the assessee on 18.1.2005. Smt. Taraben A. Mehta had a balance of Rs. 2,557.35 as on 9.11.2004. On 24.1.2005, i.e. more than two months later, with no transaction in between, sums of Rs. 3000 and four installments of Rs.49,000 each were deposited in cash in her bank account on 24.1.2005 creating the necessary fund for giving the loan of Rs.2 lakhs the very next day i.e. 25.1.2005.
6.1 The aforesaid facts clearly show that the availability of funds in the hands of the depositors were manipulated by depositing cash in their bank accounts except for Shri Hasmukh R. Mehta. Even though four of the depositors may have appeared before the Assessing Officer and confirmed the loans, even then the loans did not stand satisfactory explained, especially in relation to the creditworthiness of the alleged depositors. The identities of four depositors were established only by their personal appearance. However, the returns of income cannot be treated as a conclusive evidence of genuine identity or even the bank accounts, especially when it is considered that a large number of bogus returns and bank accounts are opened for providing such entries, the practice of which in Surat is almost an industry, apart from the textile and diamond industries. On the face of it the transactions were made look absolutely genuine as the loans were taken by account-payee cheques, the depositors had filed their returns of income, had prepared their accounts, had their own bank accounts and four of them had even appeared before the Assessing Officer. Unfortunately, a deep scrutiny into the pile of documents furnished by the AR and the assessee, both in asst. proceedings and in appellate proceedings clearly reveal that the manipulations, the manner in which cash was deposited in the bank accounts of seven of the alleged depositors immediately prior to issuing the cheques to the assessee. It may be alright to contend by relying on Court decisions that the Assessing Officer was not competent to enquire into the source of source of the loans yet, the Courts have also held that the creditworthiness of the depositors/lenders have to be necessarily established. Though this is clearly a contradictory and dichotomous situation yet, the necessity of enquiries regarding the creditworthiness of the alleged depositors cannot simply be wished away. In the case of the assessee, such enquiries have clearly revealed that, apart from Shri Hasmukh R. Mehta, the remaining seven alleged depositors simply did not have the funds available to give the loans to the assessee. The funds were available by surreptitious means which was not explainable. Given such facts and circumstances of the case, I hold that of the unexplained loans of Rs. 13 lakhs, only the loans of Rs. 3 lakhs in the name of Shri Hasmukh R. Mehta, stood satisfactorily explained. The remaining loans of Rs. 10 lacs represented absolutely bogus accommodation entries. The addition to the extent of Rs. 10 lakhs under the provisions of sec. 68 of the IT Act is sustained."
5. Not satisfied with such conclusions, assessee approached the Tribunal. The Tribunal concurred with the view of the Revenue authorities and dismissed the assessee's appeal. It was noticed that cash was deposited in the accounts of such depositors shortly prior to giving such loans. There were no other transactions between the said two parties either before or after giving of such loans. It was noticed that after giving the loan, very small amounts remained in the account of depositors. Depositors had not maintained any books of accounts. Though all creditors were maintaining their book accounts, nothing has come on record why the transactions were conducted in cash. Tribunal therefore, held that the evidence produced by the assessee should not be accepted in view of surrounding circumstances and natural probabilities. The Tribunal therefore, came to the conclusion that assessee could not establish the creditworthiness of the depositors and genuineness of the transactions.
6. Learned counsel for the appellant vehemently contended that the Revenue authorities as well Tribunal committed serious error in inquiring with the assessee the source of the income of the creditors. He contended that while examining the question of addition under section 68 of the Act, assessee cannot be expected to establish source of the source. In this context, he placed heavy reliance on the following decisions :
| (1) | CIT v. Jay Dee Securities & Finance Ltd.[2013] 32 taxmann.com 91 (All.) | |
| (2) | Nemi Chand Kothari v. CIT[2003] 264 ITR 254/[2004] 136 Taxman 213 (Gau.). | |
| (3) | S. Hastimal v. CIT[1963] 49 ITR 273 (Mad.) |
6.1 Counsel further submitted that assessee had not only established the identity of the depositors, had received the amount through cheque. Genuineness of the transaction therefore, could not have been doubted. The creditworthiness of the depositors also was sufficiently established. Assessee thereafter, could not have been asked to establish the source of the income of such creditors.
7. With respect to the legal contention that the Revenue cannot insist on assessee supplying the source of source is impeccable. However, the facts of the present case are vastly different. It is of-course true that some of the observations made by the Tribunal may suggest that the Tribunal did concern itself with the source of the source. However, such observations cannot be picked in isolation as to treat that as the conclusion of the Tribunal. When one reads the order of the Assessing Officer, that of the Commissioner(Appeals) and also of the Tribunal, inescapable conclusion one arrives at is that the Revenue authorities as well as the Tribunal found the entire transaction not genuine. There was sufficient evidence on record to suggest that in case of all the depositors, their bank accounts contained meager balance shortly before sizable amount of Rs. 1 lakh and upward were given to the assessee through such account. In such bank accounts, cash amounts were credited and immediately entire amounts were withdrawn through issuance of such cheques in favour of the assessee. It was noticed that such creditors did not maintain any books of account. Nowhere their capacity to raise such amount for drawing cheque of sizable amounts was established. In short therefore, the V very genuineness of the transaction was not established. This therefore, is not a case where the Revenue makes addition on the assessee failing to establish source of the source. All issues are essentially based on facts and appreciation of evidence on record. No question of law arises. Tax Appeal is dismissed.
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