Case Law Details
ITO Vs Sporting Pastime India Ltd. (ITAT Chennai)
ITAT Chennai held that addition of unexplained income unsustainable as source of money including identity of the creditors is duly explained by the assessee and further the amount has been transferred through proper banking channel only.
Facts-
The assessee company is engaged in project of developing golf course and related works in East Coast Road of Chennai. During the course of assessment proceedings, AO on the basis of information furnished by the assessee opined that the assessee has derived benefit in the form of cessation of liability towards amount received from M/s. M/s.Cheran Holdings Pvt Ltd. upon takeover company by M/s. KCP Ltd. and thus, made additions of Rs.25 crores as unexplained income of the assessee.
CIT(A) after considering the relevant facts deleted the additions. Being aggrieved, revenue has preferred the present appeal.
Conclusion-
Held that it is very clear that source of money has been explained by the assessee, including identity of the creditors and further said amount has been transferred through proper banking channel only. The learned CIT (A), after considering relevant facts held that the assessee has identified creditors and hence, deleted additions made by the Assessing Officer towards amount received from M/s. Cheran Holdings Pvt Ltd. as unexplained income of the assessee.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals)-V, Chennai dated 08.09.2006 and pertains to assessment year 2005-06.
2. The Revenue has raised following grounds of appeal:-
“1. The order of the learned CIT(A) is contrary to law and facts of the case.
2.1 The learned CIT(A) erred in deleting the disallowance of Rs.22,36,02,749/- on account of remission of liability u/s.41 (1) on three counts:
(i) The transaction between two share holders cannot in anyway affect the capital base of a company nor it can give rise to a remission of liability by a shareholder with regard to the assessee company.
(ii) The aggregate value of the liability did not change only the value of the liability got regrouped under some other heads.
(iii) M/s. Kasturi & Sons Ltd. has entered the incurred loss in books of account only as a provision for a loss on sale of investments and has not claimed any long term capital loss in its I.T .return for the a-y 2005-06.
2.2. Having regard to the decision of the Hon’ble Supreme Court in the case of Union of India v. J.K.Synthetics Ltd.(199 ITR 14), wherein the ratio that a cessation of liability for the purposes of Sec.41(1) would mean irrevocable cessation, so that there is no possibility of the liability being revived in future was upheld, the learned CIT(A) ought to have upheld the action of the assessing officer. In the Instant case, the learned CIT(A) ought to have seen that there is no possibility of the liability being revived in future.
2.3. The learned CIT(A) ought to have seen that the assessee had stood to gain by conversion of a debt into equity (in a way, converting a creditor into a proprietor of the company), certain advantages being:
(I) In a debt, the company have to pay interest to the creditor whether it earns profit or not, while in an equity, the company pays dividend to the shareholders, only when there is a profit. Thus, the interest liability on a debt is a charge against the profits while the dividend liability arising out of an equity share is an “appropriation of profits”.
(ii) Further, in case, the company is unable to pay its debt to its creditors, compulsory winding up of the company may take place, whereas in the case of an equity shareholder, such a contingency does not arise.
2.4. The learned CIT(A) failed to appreciate that merely because M/s. Kasturi & sons Ltd.(KSL) had not claimed the Long Term Capital Loss in its I. T.return for the a-y 2005-06, cannot be said that the amount cannot be assessed u/s.41(1) of the I.T. Act, in the hands of the assessee company.
3.1. The learned ClT(A) erred In deleting the addition of Rs.25 crores made towards unexplained cash credit u/s.68 of the I.T.Act, on the ground that the source being from the bank account of M/s.Cheran Holdings Pvt. Ltd. (CHPL) through a cashier’s cheque to the bank account of the assessee company, the source of the cash credit stood explained.
3.2. The learned ClT(A) failed to appreciate the decision of the Hon’ble Kerala High court in the case of ITO v. Diza Holdings P. Ltd. (225 lTR 573), wherein it had been held that the mere fact that payment was received by way of account payee cheque Is not conclusive for explaining cash credits.
3.3. The learned ClT(A) failed to see that the prime Investor M/s.OARC had allowed M/s.CHPL to retain Its funds for Investment in sectors like telecom, SEZ/1.T.Park, resorts, hotels, etc. The earned CIT(A) failed to appreciate the fact that the assessee company is only engaged in a single project of developing a golf course and related works on the ECR of Chennai, as per the recording of the CIT(A) himself in para 3 (page 2) of his order. The learned ClT(A) failed further to note that when the assessee company is not covered by any of the specified sectors like sectors stipulated by M/s.OARC, how a huge investment of Rs.25 crores could have been made by M/s. CHPL in the assessee company which itself would indicate that the cash credit of Rs.25 crores is nothing but the unexplained funds of the assessee, attracting the provisions of Sec.68 of the I.T.Act.
4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Learned CIT(A) may be set aside and that of the Assessing officer restored.”
2. Brief facts of the case are that the assessee company is engaged in project of developing golf course and related works in East Coast Road of Chennai. M/s. Sporting Pastime India Ltd., is 100% subsidiary of M/s.Kasturi & Sons Ltd. M/s. Kasturi & Sons Ltd. has transferred M/s. Sporting Pastime India Ltd., to M/s.KCP Ltd. & its group vide agreement dated 19.07.2004, subject to certain conditions. M/s.KCP failed to perform its part of agreement and hence, M/s.Kasturi & Sons Ltd has to pay guarantors, whose liabilities were agreed to be settled by M/s.KCP Ltd. Since, M/s.KCP Ltd. failed to perform its part of agreement, M/s.Kasturi & Sons Ltd., in terms of agreement invoked arbitration clause. The arbitral award was passed in favour of M/s.Kasturi & Sons Ltd., whereby M/s.Kasturi & Sons Ltd. took over the assessee company. In the meanwhile, the assessee company had certain financial commitments on account of borrowings effected by it and demands for repayment thereof and it had sought certain financial assistance and accordingly, the company has received a sum of Rs.25 crores by way of loan from a company known as M/s.Cheran Holdings Pvt Ltd. M/s.Cheran Holdings Pvt.Ltd earlier belonged to one M/s.Data Access India Ltd. M/s. DAIL has received funds from its parent company situated in USA. M/s. DAIL subsequently transferred money to M/s.Cheran Holdings Pvt.Ltd. and immediately M/s. CHPL transferred money to M/s.KCPAHPL, M/s.CEPL & the assessee company M/s. SPIL.
3. During the course of assessment proceedings, the Assessing Officer on the basis of information furnished by the assessee opined that the assessee has derived benefit in the form of cessation of liability towards amount received from M/s. M/s.Cheran Holdings Pvt Ltd. upon takeover company by M/s. KCP Ltd. and thus, made additions of Rs.25 crores as unexplained income of the assessee.
4. The learned A.R for the assessee submitted that so called unaccounted income assessed by the Assessing Officer in the hands of the assessee is money received from M/s.DAIL through various layer of transactions and upon prolonged legal battle, the Hon’ble Delhi High Court has finally ordered all beneficiaries of funds received from M/s.Cheran Holdings Pvt Ltd. to transfer said amounts to Canara Bank in terms of order dated 18.11.2005. Therefore, question of taxing said money received by the assessee company from M/s.Cheran Holdings Pvt Ltd as unexplained income does not arise. In this regard, the learned AR for the assessee took us to various documents, including court orders directing parties to return money received from Canara Bank, New Delhi branch to transfer it back to Canara Bank in terms of court order. The learned AR further referring to various documents submitted that source of money has been explained and also genuineness of payment is not in doubt, because money has been transferred from bank account to the assessee. Further, so called money received from M/s.Cheran Holdings Pvt Ltd. is not belonged to the assessee and thus, same cannot be added in the hands of the assessee. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer and their order should be upheld.
5. The learned DR, on the other hand, submitted that the Assessing Officer has brought out clear facts to the effect that the assessee has derived benefit out of amount received from M/s.Cheran Holdings Pvt Ltd. upon takeover of assessee company by M/s. KCP group and thus, said benefit has been treated as cessation of liability in terms of section 41(1) of the Income Tax Act, 1961. The learned CIT(A) without appreciating above facts has simply deleted additions made by the Assessing Officer.
6. We have heard both the parties, perused material available on record and gone through orders of the authorities below. As per facts brought on record alleged unexplained income assessed by the Assessing Officer in the hands of the assessee towards amount received from M/s.Cheran Holdings Pvt Ltd. for Rs.25 crores is originally belonged to one Data Access (India) Ltd., which in turn has received money from M/s.Data Access America Inc. Further, on 19th August, 2004 Data Access (India) Ltd. transferred an amount of Rs.78.45 crores to M/s. Cheran Holdings Pvt Ltd. On 18.10.2004, out of amount received from M/s.DAIL, M/s. Cheran Holdings Pvt Ltd. transferred a sum of Rs.25 crores to M/s.SPIL , the assessee company. M/s. DAIL went for winding up, wherein several parties filed their claim both as secured and unsecured creditors. The Canara Bank as creditor of M/s.DAIL filed recovery suit before the Hon’ble Delhi High Court and the Hon’ble Court vide their order dated 23.11.2004 passed an order restraining from dealing with amount received from Data Access America in bank account maintained by the assessee company with ABN Amro bank, Chennai. Further, Canara Bank has filed Civil Appeal before the Hon’ble Delhi High Court and the Hon’ble High Court has passed order on 18.11.2005 and directed all parties, including income-tax department to remit amount received from M/s.Data Access India Ltd. to Canara Bank account. From the above, it is very clear that amount received by the assessee from M/s. Cheran Holdings Pvt Ltd. does not belong to the assessee, in view of the specific order of the Hon’ble Delhi High Court and thus, it cannot be said that it is unexplained income of the assessee. Further, from the above details it is very clear that source of money has been explained by the assessee, including identity of the creditors and further said amount has been transferred through proper banking channel only. The learned CIT(A), after considering relevant facts held that the assessee has identified creditors and hence, deleted additions made by the Assessing Officer towards amount received from M/s.Cheran Holdings Pvt Ltd. as unexplained income of the assessee. Hence, we are inclined to uphold findings of the learned CIT(A) and reject ground taken by the Revenue.
7. In the result, appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 21st September, 2022
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