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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Income Tax Officer, Ward 9(3)(4) Room No.216B, 2nd floor, Aayakar Bhavan, M K Road, Mumbai-400020 Vs. M/s Royal Health Care Pvt.Ltd., 21, Diamond Plaza, Laxminarayan Shopping Center, Poddar Road, Malad (E), Mumbai-400097
December, 11th 2014
                     ,   "" 
      IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI

BEFORE HON'BLE S/SHRI H.L. KARWA, PRESIDENT AND B.R.BASKARAN (AM)
           .. ,    .. ,   

                      ./I.T.A. No.119/Mum/2013
                   (   / Assessment Year : 2009-10)

  Income Tax Officer,                  / M/s Royal Health Care Pvt.Ltd.,
  Ward 9(3)(4)                             21, Diamond Plaza,
                                       Vs.
  Room No.216B, 2nd floor,                 Laxminarayan Shopping Center,
  Aayakar Bhavan, M K Road,                Poddar Road,
   Mumbai-400020                           Malad (E),
                                           Mumbai-400097
         ( /Appellant)                 ..  (  / Respondent)
              . /   . / P AN/GIRNo.: AAACR2225D

              / Appellant by : Shri Neil Philip
              /Respondent by Dr.Arun Chamaria in person

               / Date of Hearing
                                                   : 30.10.2014
              /Date of Pronouncement : 10.12.2014.

                                      / O R D E R

 Per B.R.BASKARAN, Accountant Member:

         The appeal filed by the Revenue is directed against the order dated
 22.10.2012 passed by Ld CIT(A)-20, Mumbai and it relates to the assessment
 year 2009-10.


 2.      The Revenue is in appeal against the decision rendered by Ld CIT(A) in
 respect of the following issues:
      a) Rejection of books of accounts and estimation of net profit;
      b) Assessment of security deposit at Rs.2,06,31,700/-;
      c) Assessment of investment u/s 69 of the Income Tax Act, 1961 (the Act)
         amounting to Rs.3,70,50,000/- and ;
      d) Assessment of Rs.20,00,000/- u/s 68 of the Act.


 3.      The facts relating to the case are stated in brief. The assessee company
 is running a dental clinic.   The return of income for the year under consideration
                                                                    ITA No.119//M/2012
                                         2


was taken for scrutiny and the AO determined the total income at
Rs.6,24,01,765/- by making various types of additions. It is pertinent to note
that the AO, inter alia, rejected the books of account maintained by the assessee
and accordingly estimated the income from profession. The appeal filed by the
assessee before the ld. CIT(A) challenging the various additions made by the
AO was partly allowed. Aggrieved by the decision of the ld. CIT(A), the revenue
has filed this appeal before us.


4.     We have heard both the parties and perused the record. The first issue
relates to rejection of books of account and estimation of profit. The assessee is
a private limited company and it has got its account audited under the provisions
of Companies Act, 1956.        The assessee has stated that it was following cash
system of accounting.    However the AO took the view that the assessee, being
a private limited company, is required to follow mercantile system of accounting
in accordance with Companies Act.        Since the assessee had followed cash
system of accounting and since the same is against the mandate of provision of
Companies Act, the      AO took the view that the books of accounts of the
assessee are not reliable. Further, citing some more reasons, the rejected the
books of account and estimated the net profit of the assessee @ 15% of the
turnover of the assessee company.





5.     In the appellate proceedings, the assessee submitted before the ld. CIT(A)
the profit declared by it including the amount of depreciation works out to 10% of
the turnover during the year under consideration and also in the immediately
preceding year. It was also submitted that the assessee is following consistently
cash system of accounting and since there is no change in it, the AO was not
justified in rejecting the books of account maintained by the assessee, more
particularly, in view of the fact that the AO did not find any defect or fault in the
books of accounts. The ld.CIT(A) was convinced with the contentions of the
assessee and accordingly set aside the decision of the AO relating to rejection
of the books of account and consequently the estimation of income also. The
relevant observations made by the ld. CIT(A) in this regard are extracted below,
for the sake of convenience:
                                                                   ITA No.119//M/2012
                                        3


      "5.3 I have considered rival submission and finding of the A.O carefully.
      I find that A.O. has wrongly rejected the veracity of books of accounts on
      the basis of his presumption which is not at all justifiable. The AO has
      rejected the books of accounts on the basis of five grounds and it is found
      that none of the ground is maintainable. Contrary to the presumption of
      the AO, it is found from the record itself that AO has not properly analysed
      the veracity of the books of accounts nor has properly appreciated the
      various facts. It is wrong to believe that the assessee has not shown
      security deposit of Rs.3,70.50,000/-. This issue shall be further discussed
      in respect of individual grounds of appeal based on this addition. As
      regards sub point No.2 of para 9 of the assessment order, it is worthwhile
      to mention that if there is any defect in audit report that does not mean
      that books of accounts of the appellant is defective. The logic of Assessing
      Officer is baseless, similarly interest income has been properly shown in
      the accounts of Mr. A.K. Chamaria, proprietor of J.P. Dental. It appears
      that AO has not properly scrutinized the           record.    Similarly    an
      amount of Rs.1,26,90,000/-, it appears that AO has not properly
      scrutinized records of both the companies duly assessed by him viz. M/s
      Royal Dental Clinic Pvt. Ltd. and Royal Health Care Pvt. Ltd. This finding
      further gets support while deciding the individual grounds of appeal.
      Similarly, I do not find any merit in sub point 5 of para 9. Only on the basis
      of debit of depreciation in profit & loss account, veracity of books of
      accounts cannot be challenged. The arguments of AO is found to be
      baseless.

              I have gone through the rival submissions and am of the opinion
      that as per Income Tax Law, assessee can maintain its books of accounts
      on Cash Basis or Mercantile basis. It is not the case of A.O. that assessee
      has maintained its books on hybrid system which has been done away
      with, by the Income Tax Act 1961. Further, assessee has not changed its
      method of accounting since inception. Therefore, this is no ground for
      rejection of books of account. In any event, even after rejecting of the
      books of accounts A.O. could not have assessed net profit @15% on
      turnover without any verifiable evidence in possession. There is no basis
      for the same. As a matter of fact, if any assessee company invests and
      expands its business, the depreciation would increase and if a fixed net
      profit is assessed, the entire provisions of allowing depreciation would
      become meaningless. I am therefore of the opinion that the amount of
      Rs.20,41,386/- added by Assessing Officer to assesses higher income, on
      this ground being unsubstantiated, is deleted"



6.    We have carefully considered the reasoning given by the First Appellate
Authority. The First Appellate Authority has held that the assessee, under the
provisions of Income Tax Law, can maintain its books of accounts either on Cash
Basis or Mercantile basis. He has further held that the AO has not properly
analyzed the veracity of books of account nor has he properly appreciated
various facts. The Ld CIT(A) has also held that the various other reasons given
                                                                    ITA No.119//M/2012
                                          4


by the AO in support of his decision to reject the books of account are, in fact,
trivial in nature, which does not warrant such a decision. Accordingly, the ld.
CIT(A) has came to the conclusion that the rejection of books of account of the
assessee and consequently estimation of net profit is not justified. Thus, we
notice that the ld. CIT(A) has properly analyzed the facts prevailing in the
instance case and has taken conscious decision on this matter. Further, it is
seen that the AO has not found any defect in the books of account. At the time
of hearing, the ld. DR could not file any material to controvert the findings given
by the ld. CIT(A). Hence, we do not find any reason to interfere with the decision
arrived at by the ld. CIT(A) on this issue. The grounds relating to this issue are
rejected.


7.     The next issue relates to the assessment of security deposit received by
the assessee. The facts relating to the said issue are stated in brief.          The
assessee had floated promotional health scheme and accordingly received
deposits from the prospective patients.       The Security Deposits account had a
opening balance of Rs.79,41,700/-.              Further, during the year under
consideration, the assessee had received a sum of Rs.1,26,90,000/- under the
scheme.     The AO took the view that the opening balance of security deposit of
Rs.79,41,700/- plus the amount received during the             year amounting to
Rs.1,26,90,000/-    should be taxed in the hands of the assessee either as
cessation of liability u/s 41 (1) of the Act or as perquisites u/s 28(iv) of the Act,
since the AO took the view that the assessee has received the deposits in the
course of carrying on the business.     In this regard, the AO took support of the
decision rendered by Hon'ble Supreme Court in the case of TVS Sundaram
Iyengar & Sons, 222 ITR 344 (SC). Accordingly, the AO assessed the above
said amounts as income in the hands of the assessee.


8.     Before the ld. CIT(A), the assessee contended that the ratio of decision of
TVS Sundaram Iyengar & Sons (supra) is not applicable, since the facts
prevailing in the instant case are different, i.e., the assessee submitted that the
liability has not ceased to exist in its case, where as in the case of T.V. Sundram
Iyengar & Sons, the liability had ceased and the assessee therein had taken the
amount to its Profit and Loss account. The assessee, on the contrary, relied
                                                                    ITA No.119//M/2012
                                          5


upon the following decisions and contended that the deposits cannot be
assessed as its income.
a)       Liquidator, Mysore Agencies P. Ltd V/s CIT (1978) 114 ITR 853 (Karn);
b)       CIT V/s Indian Research Institure Pr. Ltd (1979) Tax LR (NOC) 66 (Cal),;
c)       K V MoosaKoya & Co V/s ITO (1989) 175 ITR 120, 124 (Ker) and
d)       Bombay Dyeing and Mfg Co.Ltd V/s State of Bombay
         (1958) SCR 112,1135= AIR 1958 SC 328,
Accordingly, the assessee contended that there is no cessation of liability as
presumed by the AO.        Further, the assessee also contended that it has not
received any benefit like perquisite and hence the provisions of section 28(iv)
also will not apply.


9.       The ld. CIT(A) considered the entire spectrum of facts and noticed that the
assessee has received the security deposit from the prospective patients under
the promotional scheme floated by the assessee.        The ld. CIT(A) also noticed
that the ITAT in assessee's own case, vide its order dated 4.2.2004, in ITA
No.3367/Mum/1998 relating to the assessment year 1998-99 and also in ITA
No.880/Mum/1998, vide its order dated 14.7.2003, relating to the assessment
year 1992-93 has held that the deposits received by the assessee under the
promotional scheme are refundable and hence it cannot be perceived that such
liability is not longer payable. The ld. CIT(A) also noticed that the assessee has
given copies of all deposits, details of patients, amount received, copies of dental
record to the AO. The Ld CIT(A) also noticed that the assessee has refunded
some deposits during the instant year. Accordingly, the ld. CIT(A) held that the
AO was wrong in presuming that there was cessation of liability within the
meaning of section 41(1) of the Act and accordingly, directed the AO to deleted
this addition.


10.      We notice that the AO has proceeded to assess this amount under the
impression that the assessee is not liable to repay the security deposit received
by it.   On the contrary, the Tribunal, in the assessee's own case, referred above
has given findings that the security deposit are repayable as per the scheme
floated by the assessee. The ld. CIT(A) has also given a finding that the
assessee has refunded the security deposit to the patients. Hence, in our view,
                                                                  ITA No.119//M/2012
                                         6


the ld. CIT(A) was justified in holding that there is no cessation of liability in
respect of the security deposits.      Since the assessee is liable to repay the
security deposit, the question of assessing the same u/s 28(iv) also does not
arise.   Under these set of facts, we are of the view that the ld. CIT(A) was
justified in deleting this addition.


11.      The next issue relates to the assessment of Rs.3,70,50,000/- under
section 69 of the Act.       The assessee is having a sister concern named M/s
Royal Dental Clinic Pvt Ltd. From the balance sheet of M/s Royal Dental
Clinic Pvt Ltd., the       AO noticed that the assessee has paid a sum of
Rs.3,70,50,000/- to M/s Royal Dental Clinic Private Limited. However, the AO
noticed that the said payment was not reflected in the balance sheet of the
assessee and hence the AO assessed the above said amount as unexplained
investment in the hands of the assessee under section 69 of the Act.





12.      The ld. CIT(A) noticed that the assessee has clubbed together the
Security Deposit account and the M/s Royal Dental Clinic (P) Ltd, while preparing
the Balance Sheet and accordingly the net amount only was disclosed in the
balance sheet.      The manner of disclosure of the Security Deposit account and
the amount given to M/s Royal Dental Clinic Pvt. Ltd is extracted by Ld CIT(A)
as under :
   a. from banks                                                                NIL
   b.from others                                                       7941700.00
   Security deposits from patients
   Opening balance                           32406700.00
   During the year (846 x 15000)             12690000.00
   Refund during the year                    (-)105000.00
   (3 x 15000, 25 x 2400)
                                             44991700.00
   Royal Dental
                                         (-)24465000.00
   Opening balance
                                         (-)12585000.00
   During the year
                                         (-)37050000.00
                                                                       7941700.00
                                                                      ITA No.119//M/2012
                                          7



.Accordingly, the ld. CIT(A) held that the assessee has in fact, accounted for the
deposit of Rs.3.70 crores paid to M/s Royal Dental Clinic Pvt.Ltd in its books of
account but the same was netted of against the security deposit while preparing
the balance sheet. Accordingly, the ld. CIT(A) deleted the addition made by the
AO with the observations that there is no justification in making this addition.
Since, the ld. CIT(A) has given clear finding that the assessee has accounted for
the investment made in M/s Royal Dental clinic Pvt Ltd in books of account,
and since the assessee has followed a particular method for grouping the
account s and presented only the net balance in the balance sheet, in our view,
it cannot be held that the assessee has not accounted for the investment of
Rs.3.70 crores made with M/s Royal Dental Clinic Pvt.Ltd. Accordingly, we are
of the view that the ld. CIT(A) was justified in deleting this addition.


13.    The next issue relates to addition of Rs.20 lakhs made u/s 68 of the Act.
The AO, on perusal of the account of M/s J P Dental Clinic (Prop.Dr.Arun
Chamaria who is the director of the assessee company), noticed that Dr. Arun
Chamaria has made payments of Rs.20 lakhs to the assessee company towards
share application money.     However, the AO found that the said receipt was not
reflected in the balance sheet of assessee company. Accordingly, he assessed
Rs.20 lakhs as income of the assessee u/s 68 of the Act. The ld. CIT(A) noticed
that the assessee had actually accounted for the application money of Rs.20
lakhs received from Dr. Arun Chamaria . At the same time, Dr Arun Chamaria
had a debit balance of an equal amount.       Since the assessee company did not
issue shares to him, the share application money of Rs.20 lakhs was adjusted
against the debit balance by passing a journal entry in April 2008.        Hence the
share application account was showing nil balance and it was not reflected in the
Balance sheet.     It was also submitted before he ld.        CIT(A) that      Dr.Arun
Chameruia has also maintained regular books of account and these transactions
have been duly reflected in his books also. Accordingly, it was contended that
the assessee has proved identity and capacity of the creditor as well as
genuineness of transaction relating to share application. The ld. CIT(A) was
convinced    with the explanation of the assessee and accordingly deleted he
addition of Rs.20 lakhs with the following observations :
                                                                      ITA No.119//M/2012
                                          8



                "8.3 I have considered the rival submissions of the appellant and
               finding of the Assessing Officer, carefully. I find that Ld. Assessing
               Officer has wrongly made the addition u/s.68. Since the entry of
               Share Application money was squared off during the same year it
               would not appear in the balance sheet. Further, the creditor Dr.
               Arun Chamria, in his individual capacity had personally appeared
               before the A.O. in response to notice u/s.133(6) and confirmed the
               aforesaid entries with required evidences including the ROl, the
               balance sheets of the relevant year as well of the previous year etc.
               in my opinion, appellant had discharged its onus of proving the
               identity, capacity and genuineness of the transaction. Dr.Arun
               Chamaria has explained before me and confirmed the aforesaid
               transactions duly supported by the trial balance of assessee
               company which shows that the entry of Share Application was
               squared off during the same year. I am, therefore, of the opinion
               that the addition made by A.O. of Rs.20,00,000/- u/s.68 of I.T. Act
               1961 is not sustainable, hence deleted."

We notice that Dr.Arun Chamaria is also assessed by the same officer and upon
examination of his assessment record only, the AO has come to know of the
fact that the assessee has received the share application money Rs.20 lakhs
from Dr.Arun Chamaria. The reasons for not disclosing the same in the balance
sheet has been duly explained by the assessee before ld. CIT(A) and the same
has been found to be correct by the first appellate authority also.      Under these
set of facts, we are of the view that there is no ground to suspect the
genuineness of receipt of Rs.20 lakhs and also to suspect about the
creditworthiness of Dr.Arun Chamaria. Hence, in our view, the ld. CIT(A) was
justified in deleting this addition.


14.    In the result, the appeal filed by revenue is dismissed.


       The above order was pronounced in the open court on 10th Dec, 2014.

             10th Dec, 2014    

            sd                                           sd


(.. / H.L. KARWA)                          (..  ,/ B.R. BASKARAN)
  / PRESIDENT                                   /Accountant Member

  Mumbai: 10th Dec,2014.

                                            ITA No.119//M/2012
                            9



. ../ SRL , Sr. PS

        /Copy of the Order forwarded to :
1.  / The Appellant
2.     / The Respondent.
3.     () / The CIT(A)- concerned
4.      / CIT concerned
5.      ,     ,  /
     DR, ITAT, Mumbai concerned
6.
       / Guard file.


                                  / BY ORDER,

       true copy                  (Asstt. Registrar)
                               ,  /ITAT, Mumbai

 
 
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