2018 (1) TMI 456 - HC - Income Tax

Addition u/s 69 - addition based on book entries as unexplained investments - Tribunal sustaining the addition based on notional/ artificial book entries on the mis-construction of Section 69 - Held that - Before the Tribunal, the assessee took the very same stand as was taken before the Assessing Officer as well as the Commissioner of Income Tax (Appeals) by stating that the recipients had no corresponding credits in their bank accounts. This issue was examined by the Tribunal and on facts, it was ultimately found that the balance sheet of the assessee reflected investments made by the assessee in two companies, which were group companies of the assessee, namely M/s.Sri Padmabalaji Steels Private Limited and M/s.Suryabalalji Steels Private Limited and that these two companies were again private limited companies. The assessee did not dispute that the said two companies were subjected to statutory audit under the Companies Act and that in the auditor s report of the assessee company, it was certified by the Chartered Accountant that the balance sheet and profit and loss account were prepared as per the books of accounts and reflected true and correct working of the assessee company. Thus, the Tribunal held that when both the balance sheets of the assessee company and the balance sheets of the companies, in which, the assessee had invested, reflected the amounts of investments and are correctly tallied, neither the accounts nor the auditor s report could be brushed aside. - Decided against assessee

Summary

Issues:
1. Interpretation of Section 69 of the Income Tax Act.
2. Application of the principle of 'substance over form' in determining unexplained investments.

Issue 1: Interpretation of Section 69 of the Income Tax Act

The judgment revolves around the appeal against the order of the Income Tax Appellate Tribunal for the assessment year 2012-13. The appellant raised substantial questions of law regarding the correctness of sustaining additions based on notional/artificial book entries and unexplained investments under Section 69 of the Income Tax Act. The High Court, after examining the orders of the Commissioner of Income Tax (Appeals) and the Tribunal, concluded that the questions raised were not substantial legal issues but rather an attempt to re-evaluate the factual position. The Commissioner had highlighted discrepancies in the explanation provided by the assessee regarding a loan amount from a bank and corresponding investments, as well as unexplained investments linked to a bogus liability. The Tribunal found that the balance sheets of the assessee and the companies in which investments were made were in order, certified by a Chartered Accountant, and reflected accurate financial positions. Therefore, the High Court dismissed the appeal, stating that no grounds were presented to challenge the factual findings.

Issue 2: Application of the principle of 'substance over form'

Regarding the application of the principle of 'substance over form' in determining unexplained investments, the Tribunal's examination revealed that the investments made by the assessee in two group companies were accurately reflected in the balance sheets of both the assessee and the invested companies. The Tribunal emphasized that the accounts and auditor's reports were in agreement, and since the investments were correctly tallied, the questions raised by the appellant did not hold legal significance. The High Court concurred with the Tribunal's findings and upheld the dismissal of the appeal, as the factual position was adequately supported by the financial documentation and audit reports. The principle of 'substance over form' was implicitly applied in this context to validate the legitimacy of the investments and dismiss the challenge raised by the appellant.

This judgment from the Madras High Court clarifies the importance of factual accuracy and financial documentation in tax assessment cases, emphasizing the need for proper explanation and justification for financial transactions. It also highlights the significance of adhering to accounting standards and principles in determining the legitimacy of investments and financial entries.