Initial burden on assessee to show that transactions in loose sheet were not in the nature of undisclosed investments

DCIT Vs Geneva Industries Ltd. (ITAT Bangalore)

The assessing officer found certain incriminating material suggesting payments outside books of account. The assessee was confronted with this information, the Managing Director of the assessee-company denied having made any undisclosed Investments but the assessing officer had drawn adverse inference from the conduct of the assessee and held that it is unexplained investment. On appeal before the learned Commissioner (Appeals) this came to be deleted by holding that the assessing officer was not justified in bringing to tax based on the loose scribbling found in the loose sheets. In the backdrop of these facts, we are required to adjudicate whether addition of Rs. 183 lakhs was justified under section 69 of the Act. It is trite law that the initial burden of proving is always on the assessee to show that the transactions in loose sheets are not in the nature of income and reliance in this regard can be placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC). In the present case, the assessee merely denied it without tendering any credible explanation. In our considered opinion, this does not amount to due discharge of initial burden on the part of assessee and therefore the assessing officer was justified in drawing adverse inference and making addition of Rs. 183 lakhs.

FULL TEXT OF THE ITAT JUDGMENT

These cross appeals filed by the assessee-company as well as revenue directed against the order of the learned Commissioner (Appeals)-I, Bengaluru, dated 30-8-2013 for the assessment year 2009-10.

2. Briefly, facts of the case are as under :–

The assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of making of sheet metal, medical equipments and accessories. The return of income for the assessment year 2009-10 was filed on 30-9-2009 declaring total income of Rs. 20,33,52,160. Against the said return of income, the assessment was completed by the Deputy Commissioner of Income Tax, Circle 11(3), Bengaluru vide order dated 30-12-2011 passed under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’ for short] at total income of Rs. 42,97,10,412. While doing so, the assessing officer made several disallowances. One of the disallowances relates to the sale of the building, plant and machinery, factory situated at Whitefield, Bangalore. The factory building was sold on 10-9-2008 for total consideration of Rs. 59,52,07,380. The assessing officer had computed the short-term capital gains on sale of factory building and arrived at a figure of Rs. 97,87,164 and in respect of land the assessing officer arrived at long-term capital gains of Rs. 50,30,93,552. The assessing officer denied exemption of the claim under section 54G of the Act on the ground that the assessee-company has not shifted the factory building from specified urban area to non-urban area. The assessing officer had come to the conclusion based on the report submitted by the Inspector of the Department that the assessee-company had not set up any factory to carry on industrial activity. The facts on this issue are set out by the assessing officer from page 3 onwards and up to 10. The assessing officer also made addition based on the papers seized during the course of survey operations wherein it was shown that an amount of Rs. 183,00,000 was invested. When the assessee company was confronted with this evidence it could not explain the nature of the transaction to the satisfaction of the assessing officer therefore the assessing officer drew adverse inference and treated unexplained investment and brought to tax Rs. 183,00,000. The assessing officer also disallowed commission payment of Rs. 10 lakhs on the ground that no TDS was deducted at source.

3. Being aggrieved, an appeal was preferred before the learned Commissioner (Appeals) who vide impugned order, allowed deduction to the extent investment in land and building of Rs. 19 crores and the balance was confirmed. The relevant finding of the learned Commissioner (Appeals) is as follows :–

6.8 Following the decision of the Hon’ble ITAT, Mumbai cited above, the amounts utilised for acquisition of assets for the purpose of its business should qualify for the purpose of exemption under section 54G as there is no requirement that the land and building or plant and machinery be used for the purpose of the business of industrial undertaking. As already discussed, the gains arising on sale of land was invested by the appellant in acquisition of land and new machinery costing Rs. 7,79,79,624 and Rs. 6,37,00,109 totalling Rs. 14,16,79,733 whereas the investment claimed is of Rs. 19,74,46,141. The remaining amount of Rs. 5,57,66,408 is stated to be paid as advance for purchase of the asset. The appellant furnished ledger extract and scrutiny of the same reveals that the amount was deposited in MD’s personal account. Under sub-section (2) of section 54G, if the amount of capital gains is not appropriated by the appellant towards cost and expenses incurred in relation to all or ‘any of the purpose’ mentioned in clauses (a) to (d) of sub-section (1) would have been deposited in the Capital Gains Deposit Account Scheme before furnishing the return of income. No evidence has been produced to show that the unutilised amount has been deposited in the specified bank account. Therefore, the long-term capital gains amounting to Rs. 36,14,13,819 (Rs. 50,30,93,552 – Rs. 14,16,79,733) is taxable during the year under consideration. Therefore, the addition of the difference, to the extent of Rs. 5,55,91,360 (Rs. 36,14,13,819 – Rs. 30,58,22,459) is confirmed.

4. Being aggrieved, the assessee is in appeal inITA No. 1628/2013 and the revenue is in appeal in ITA No. 1560/Bang/2013.

5. Now we shall take up the revenue up inITA No. 1560/Bang/2013. The revenue raised the following grounds of appeal :–

“The order of the learned Commissioner (Appeals) is opposed to law and the fact and circumstances of the case.

2. The Commissioner (Appeals) erred in holding that the assessing officer was not justified in adding the sum of Rs 1,83,00,000 without examining the claim of the assessee that the figure reflected on a sheet of paper impounded during the course of survey were estimates of production and not unexplained expenditure as held by learned assessing officer.

3. The Commissioner (Appeals) erred in allowing the assessee’s claim of indexation of cost of improvement of Rs. 19,84,150 with the cost of acquisition from the year in which the asset were purchased without appreciating the fact that the indexation with respect to cost of improvement has to be allowed only from the year in which the cost of improvement was incurred.

4. The Commissioner (Appeals) erred in allowing the deduction under section 54G without appreciating (he fact that all the 4 conditions laid down in the section should be satisfied compositely and as the industrial undertaking had not been shifted to a non urban area, being one of the conditions, the assessee was not eligible for deduction under section 54G.

5. For these and such other grounds that may be urged at the time of hearing, in humbly prayed that the order of the Commissioner (Appeals) be reversed and that of the assessing officer be restored.

6. The appellant craves leave to add, to alter, to amend or delete any of the ground, that may be urged at the time of hearing of the appeal.”

6. Ground Nos. 1 to 5 are general in nature and do not require any adjudication.

7. Ground No. 2 challenges the findings of the learned Commissioner (Appeals) in deleting addition made under section 69 of the Act.

7.1 The facts leading to the above addition are set out by the assessing officer vide pages 10 to 12 wherein the assessing officer had confronted the assessee with seized material found during the course of survey operations indicating some undisclosed investment, the MD of the assessee company merely denied having made any undisclosed investment.

7.2 In appeal before the learned Commissioner (Appeals), the learned Commissioner (Appeals) deleted addition holding that the assessing officer, without bringing any corroborative evidence, cannot make any addition based on merely impounded papers. To come to this conclusion, the Commissioner (Appeals) had placed reliance on certain judicial pronouncement of the Tribunal.

7.3 Being aggrieved, the revenue is in appeal. The revenue has raised the following grounds of appeal:

7.4 We heard rival submissions and perused the material on record. The assessing officer found certain incriminating material suggesting payments outside books of account. The assessee was confronted with this information, the Managing Director of the assessee-company denied having made any undisclosed Investments but the assessing officer had drawn adverse inference from the conduct of the assessee and held that it is unexplained investment. On appeal before the learned Commissioner (Appeals) this came to be deleted by holding that the assessing officer was not justified in bringing to tax based on the loose scribbling found in the loose sheets. In the backdrop of these facts, we are required to adjudicate whether addition of Rs. 183 lakhs was justified under section 69 of the Act. It is trite law that the initial burden of proving is always on the assessee to show that the transactions in loose sheets are not in the nature of income and reliance in this regard can be placed on the decision of the Hon’ble Supreme Court in the case of CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC). In the present case, the assessee merely denied it without tendering any credible explanation. In our considered opinion, this does not amount to due discharge of initial burden on the part of assessee and therefore the assessing officer was justified in drawing adverse inference and making addition of Rs. 183 lakhs. The ground appeal filed by the revenue is allowed.

8. Ground Nos. 3 and 4 challenge the finding of the learned Commissioner (Appeals) granting deduction under section 54G of the Act. It is the case of the assessee that it shifted the industrial unit situated in urban area, i.e., Whitefield to non-urban area and investment of a sum of Rs. 19,84,150 towards purchase of land was made. The capital gains arising on sale of undertaking was claimed as deduction under section 54G as the same was used for purchase of new land plant and machinery and the same was allowed as deduction by the learned Commissioner (Appeals) by holding that if the amount is utilised for the purpose of purchase of new plant and machinery and land it satisfies the conditions stipulated under section 54G of the Act. For better appreciation, the provisions of section 54G are extracted hereunder :–

54G. Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area.–(1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situate in an urban area, effected in the course of, or in consequence of, the shifting of such industrial undertaking (hereafter in this section referred to as the original asset) to any area (other than an urban area) and the assessee has within a period of one year before or three years after the date on which the transfer took place, —

(a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted;

(b) acquired building or land or constructed building for the purposes of his business in the said area;

(c) shifted the original asset and transferred the establishment of such undertaking to such area; and

(d) incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section,

then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say, —

(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost shall be nil; or

(ii) if the amount of the capital gain is equal to, or less than, the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost shall be reduced by the amount of the capital gain.

Explanation.–In this sub-section, “urban area” means any such area within the limits of a municipal corporation or municipality as the Central Government may, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, by general or special order, declare to be an urban area for the purposes of this sub-section.

(2) The amount of capital gain which is not appropriated by the assessee towards the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within one year before the date on which the transfer of the original asset took place, or which is not utilised by him for all or any of the purposes aforesaid before the date of furnishing the return of income under section 139, shall be deposited by him before furnishing such return [such deposit being made in any case not later than the due date applicable in the case of the assessee for furnishing the return of income under sub-section (1) of section 139] in an account in any such bank or institution as may be specified in, and utilised in accordance with, any scheme which the Central Government may, by notification in the Official Gazette, frame in this behalf and such return shall be accompanied by proof of such deposit; and, for the purposes of sub-section (1), the amount, if any, already utilised by the assessee for all or any of the purposes aforesaid together with the amount, so deposited shall be deemed to be the cost of the new asset:

Provided that if the amount deposited under this sub-section is not utilised wholly or partly for all or any of the purposes mentioned in clauses (a) to (d) of sub-section (1) within the period specified in that sub-section, then, —

(i) the amount not so utilised shall be charged under section 45 as the income of the previous year in which the period of three years from the date of the transfer of the original asset expires; and

(ii) the assessee shall be entitled to withdraw such amount in accordance with the scheme aforesaid.

8.1 The Parliament has enacted the provisions of section 54G with the intention of promoting de-congestion of urban area and also to balance regional growth by exempting capital gains arising on the transfer of plant and machinery and building used for the purpose of industrial undertaking and the capital gains are exempt from tax to the extent capital gains are utilised in acquiring new plant and machinery and building for the purpose of business of undertaking in the area to which it is shifted plus incurring expenses in the purchase of the new plant and machinery etc. Explanation to sub-section (1) of section 54G authorizes the Central Government to declare the areas to be urban area for the purpose of provisions of 54G. In exercise of this power conferred, the Central Government issued first Notification No. 9489 on 23-2-1994 and the second notification was issued on 2-4-1996 and third notification was issued on 20-12-1999 which are reproduced hereunder :–

“I. In exercise of the powers conferred by the Explanation below sub-section (1) of section 54G of the Income Tax Act, 1961 (43 of 1961), the Central Government, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, hereby declares the areas falling within the limits of Municipal Corporation or municipality, as the case may be, mentioned in column (3) of the schedule hereto annexed and situated within the State shown in column (2) thereof, as urban areas for the purposes of sub-section (1) of section 54G of the Income Tax Act, 1961 (43 of 1961).

SCHEDULE

2. This notification shall come into force on the date of its publication in the Official Gazette.”

“II. In exercise of the powers conferred by the Explanation below sub-section (1) of section 54G of the Income Tax Act, 1961 (43 of 1961), the Central Government, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, hereby declares the areas falling within the limits of Municipal Corporation or municipality, as the case may be, mentioned in column (3) of the Schedule hereto annexed and situated within the State shown in column (2) thereof, as urban areas for the purpose of sub-section (1) of section 54G of the Income Tax Act 1961 (43 of 1961) :–

SCHEDULE

III. In exercise of the powers conferred by the Explanation below sub-section (1) of section 54G of the Income Tax Act, 1961 (43 of 1961) the Central Government, having regard to the population, concentration of industries, need for proper planning of the area and other relevant factors, hereby declares the areas falling within the limits of Municipal Corporation mentioned in column (3) of the Schedule hereto annexed and situated within the State shown in column (2) thereof, as urban areas for the purposes of sub-section (1) of section 54G of the Income Tax Act, 1961 (43 of 1961) —

SCHEDULE

2. This notification shall come into force on the date of its publication in the Official Gazette.”

8.2 It is undisputed fact that factory building sold by the assessee company is not situated in the notified urban area. From the above notifications, it is clear that Whitefield is not one of the notified urban areas which is eligible for deduction under section 54G. Thus, assessee-company had failed to satisfy the condition that unit sold was situated within notified urban areas. Therefore the assessee-company is not eligible for deduction under section 54G. The learned Commissioner (Appeals) had failed to consider the relevant provisions of the statute in proper perspective and granted relief. Therefore, we reverse the finding of the learned Commissioner (Appeals) on this issue and the grounds of appeal filed by the revenue are allowed.

9. In the result, the appeal filed by the revenue is allowed.

10. The assessee-company is in appeal inITA No. 1628/Bang/2013 challenging the finding of the learned Commissioner (Appeals) restricting deduction to the extent of only Rs. 14,16,79,733 as against the claim of Rs. 19,74,46,141 under the provisions of section 54G of the Act. Since in the revenue’s appeal (ITA No. 1560/Bang/2013) we held that the assessee is not eligible for deduction under section 54G therefore, further relief on this count is not allowable.

11. In the result, the appeal filed by the assessee is dismissed and the appeal filed by the revenue is allowed.