2017 (3) TMI 93 - HC - Income Tax

Unexplained credits - Held that - Though the assessee had claimed that the said credit balance was from its Nepal company, despite various requests and opportunities provided, the assessee did not produce copies of audited accounts of the Nepal company for each of the years falling in the block period. Despite that, both the first appellate authority and the Tribunal erroneously proceeded on the basis that the assessee had produced audited accounts of Nepal company. Insofar as this case is concerned, a reading of the order passed by the Tribunal itself would show not only that the Tribunal and the first appellate authority had not even examined whether the assessee has established these three essential conditions, on the other hand, a reading of the order passed by the Tribunal would show that the Tribunal has given undue importance to its erroneous assumption that the assessee has produced audited accounts. Further, the Tribunal has also swayed by the fact that the mode of transaction of funds was transparent, ignoring the fact that even if the money came by way of bank cheques and was paid through the process of banking transaction that by itself is of no consequence. - Decided against assessee Additions towards service charges from sister concern at Nepal and the service charges from students - Held that - As is evident from the orders impugned before us, it is the mercantile system which has been following by the Nepal company whereas the assessee was following cash system. The justification assigned by the Tribunal for upholding the cash system of accounting adopted by the assessee is the uncertainty involved in realisation of the amounts due. According to us, even if it is later realised by the assessee that some of the receivables as per mercantile system were not actually realised, the remedy available to the assessee, is to seek rectification. This has been recognised in judgment in C.I.T. v. United Provinces Electric Supply Co. 2000 (4) TMI 5 - SUPREME Court . For these reasons, we are unable to sustain this finding of the Tribunal as well. - Decided in favour of the revenue

Summary

Issues:
1. Deletion of unexplained credit of 1,17,33,055/-
2. Deletion of additions for service charges from sister concerns at Nepal and students

Analysis:

Issue 1: Deletion of unexplained credit of 1,17,33,055/-
The case involved appeals by the Revenue against the Tribunal's order regarding additions made to the income of a private limited company for unexplained credits. The Tribunal had deleted the additions, prompting the Revenue's appeal. The Tribunal wrongly assumed that audited accounts of the Nepal company were produced by the assessee, leading to the deletion of the credits. However, the Tribunal failed to assess whether the essential requirements of Section 68 were met by the assessee, shifting the burden of proof entirely to the Revenue. The Tribunal's emphasis on transparent fund transactions and the mode of banking transactions was considered erroneous. The Court held that the Tribunal's decision to delete the addition based on the Revenue's burden of proof was unsustainable.

Issue 2: Deletion of additions for service charges
Regarding the additions for service charges from sister concerns at Nepal and students, the Tribunal upheld the deletion based on the dual method of accounting followed by the company and the assessee. The Tribunal justified the cash system of accounting adopted by the assessee due to uncertainties in realization. However, the Court referred to the mercantile system of accounting, emphasizing that profits accrued or arisen are liable for income tax, regardless of actual receipt. The Court found the Tribunal's justification for upholding the cash system inadequate, as the remedy for discrepancies under the mercantile system would be rectification. Citing relevant case law, the Court concluded that the Tribunal's decision to delete the additions for service charges was unsustainable.

In conclusion, the Court set aside the Tribunal's orders, ruling in favor of the Revenue and disposing of the appeals.