Kalidindi Madu, Hyderabad v. ACIT, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI G.C. GUPTA VICE PRESIDENT AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER ITA NO. 809/H/2009 ASSESSMENT YEAR 2004-05 SHRI KALIDINDI MADHU RR DISTRICT (PAN ADOPK 6010 H) VS THE ACIT CENTRAL CIRCLE-6 HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI S. RAMA RAO RESPONDENT BY: SMT. K. KAMAKSHI O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTE D AGAINST THE ORDER PASSED BY THE CIT(A)I DATED 13.5.2009 AND PE RTAINS TO THE ASSESSMENT YEARS 2004-05. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: 1. THE CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER OF RS.1 89 93 450/- 2. THE CIT(A) ERRED IN OBSERVING THAT THE ASSESSEE HER EIN DID NOT DISPUTE THAT THE LIABILITIES TO THE EXTENT OF RS.1 89 93 450/- WAS MET BY THE ASSESSEE HEREIN WHEREAS THE ASSESSEE WA S CONSISTENTLY PLEADING THAT THE LIABILITIES WERE NOT CLEARED BY HIM. 3. THE CIT(A) ERRED IN CONFIRMING THE ASSESSMENT MADE BY THE ASSESSING OFFICER ON A TOTAL INCOME OF RS.2 03 87 4 00/- WITHOUT CONSIDERING THE EXPLANATION THAT THE PROVISIONS OF SEC.68 OR SEC.69 HAVE ANY APPLICATION TO THE FACTS OF THE CAS E. ITA NO.809/H/2009 SHRI KALIDINDI MADHU RR DISTT . 2 2 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE WAS A DIRECTOR IN M/S NCL INDUSTRIES LTD. AND M/S NCL HOMES LTD. COMP ANIES OF THE SAME GROUP. THERE WAS A SEARCH IN THE CASE OF THE ASSES SEE AND THE GROUP OF COMPANIES IN CONSEQUENCE TO WHICH PROCEEDINGS U/S 1 53A WAS INITIATED BY THE DEPARTMENT. DURING THE ASSESSMENT PROCEEDINGS OF M/S NCL HOMES LTD. IT WAS NOTICED BY THE ASSESSING OFFICER THAT 16 CREDITORS OF THE COMPANY M/S NCL HOMES LTD. WHO WERE STATED TO HAV E SUPPLIED GOODS ON CREDIT TO THAT COMPANY WERE PAID BY THE ASSESSE E SRI K. MADHU FOR AMOUNTS TOTALING RS.1 89 93 450/- IN THE FINANCIAL YEAR 2003-04. THIS FACT WAS NOTICED FROM THE AFFIDAVITS FILED BY THESE 16 PERSONS WHO CLEARLY STATED THAT SHRI K. MADHU HAD PAID AMOUNTS TO THEM UPTO 31.3.2004. IN RESPONSE A LETTER DATED 14.12.2006 SIGNED BY THE MANAGING DIRECTOR OF M/S NCL HOMES LTD. SHRI P.S. RAJU WAS FILED IN WHI CH IT WAS STATED THAT THE SAID AMOUNTS WERE PAID OUT OF FUNDS AVAILABLE W ITH M/S NCL INDUSTRIES LTD. FOR DISCHARGING THE LIABILITIES OF M/S NCL HOMES LTD. THE ASSESSING OFFICER ANALYZED THE CONTENTION OF THE AS SESSEE IN DETAIL W.R.T. THE FACTS AVAILABLE IN THE CASES OF THE GROUP AND REJE CTED THE CONTENTION OF THE ASSESSEE THAT THE PAYMENTS TO THE 16 CREDITORS WERE MADE OUT OF FUNDS SIPHONED OFF FROM M/S NCL INDUSTRIES LTD. THE ASSE SSING OFFICER TREATED THE EXPLANATION AS AN AFTERTHOUGHT OBSERVING THAT NO SUCH EXPLANATION WAS GIVEN EITHER BEFORE THE INVESTIGATION WING OR D URING THE INITIAL STAGES OF ASSESSMENT PROCEEDINGS. THE ASSESSING OFFICER ALSO MENTIONED THAT IN THEIR SUBMISSIONS BEFORE THE INVESTIGATING WING MA DE IN APRIL 2005 SHRI K. RAVI AND SHRI K. MADHU DID NOT MAKE ANY CLAIM RE GARDING DISCHARGING OF LIABILITIES OF THESE CREDITORS OUT OF THE SIPHON ED OFF FUNDS OF M/S NCL INDUSTRIES. IN VIEW OF THIS THE ASSESSING OFFICER HELD THAT THE CREDITORS WERE PAID BY THE ASSESSEE FROM UNEXPLAINED SOURCES ONLY AND ACCORDINGLY HE TAXED THE AMOUNT OF RS.1 89 93 450/- U/S 69 OF T HE IT ACT IN THE HANDS OF THE ASSESSEE. ITA NO.809/H/2009 SHRI KALIDINDI MADHU RR DISTT . 3 3 4. ON APPEAL THE CIT(A) CONFIRMED THE ORDER OF T HE ASSESSING OFFICER. AGAINST THIS THE ASSESSEE IS IN APPEAL BE FORE US. 5. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THERE WAS AN OUTSTANDING AMOUNT OF R S.1 89 93 450/- PAYABLE TO 16 PERSONS. THEY HAVE SUPPLIED MATERIAL TO M/S NCL HOME LTD. THEY RECEIVED PAYMENT FROM NCL HOMES LTD. SI NCE THEY HAVE APPROACHED THE ASSESSEE WHO IS THE DIRECTOR OF THE COMPANY AND ALSO THE PROMOTER OF THE GROUP OF COMPANIES THE ASSESSEE MA DE PAYMENT TO THESE PARTIES THROUGH NCL HOMES LTD. IN SUPPORT OF THIS HE DREW OUR ATTENTION TO THE AFFIDAVITS FILED BY THE 16 CREDITORS. ACCOR DING TO HIM THE M/S NCL INDUSTRIES LTD. HAVE NOT SUFFICIENT CASH BALANCE A ND THE SAME MONEY WAS DRAWN FROM M/S NCL INDUSTRIES LTD. UNDER THE HEAD TRANSPORT CHARGES AND FREIGHT ADVANCES AND VASU ACCOUNT. THE AMOUNT WAS DRAWN WAS AVAILABLE WITH THE CONCERNED M/S NCL INDUSTRIES LTD . AND WHEN THE PERSONS WERE CONTACTING THE MEMBERS OF THE GROUP T HE SAID COMPANY M/S NCL INDUSTRIES LTD. DISCHARGED THE LIABILITY OF M/S NCL HOMES LTD. AND THE ASSESSEE HAS NOT PERSONALLY DISCHARGED ANY LIAB ILITY FROM HIS OWN FUNDS AND THERE WAS NO EVIDENCE FOUND DURING THE CO URSE OF SEARCH REGARDING THE PAYMENT OF CREDITORS BY THE ASSESSEE. FURTHER HE SUBMITTED THAT EVEN THE SAID CREDITORS WERE ACTUALLY APPEARED IN THE BOOKS OF ACCOUNT OF M/S NCL HOMES LTD. AND ACCORDING TO THE PROVISIO NS OF SECTION 68 OF THE ACT THEIR CREDIT HAS TO BE TREATED AS DEEMED IN COME ONLY IN THE ASSESSMENT OF THE PERSONS IN WHOSE BOOK SUCH AN ENT RY IS MADE. SO FAR AS THE ASSESSEE IS CONCERNED NO SUCH ENTRY IS MADE IN THE BOOKS. THEREFORE THE PROVISIONS OF S.68 HAVE NO APPLICATION. IN SO FAR AS S.69 IS CONCERNED THERE SHOULD BE EVIDENCE TO SHOW THAT AN INVESTMENT IS MADE OR EXPENDITURE INCURRED BY THE ASSESSEE DURING THE PRE VIOUS YEAR RELEVANT TO THE ASSESSMENT YEARS. SINCE THERE WAS NO EVIDENCE FOUND DURING THE ITA NO.809/H/2009 SHRI KALIDINDI MADHU RR DISTT . 4 4 COURSE OF SEARCH REGARDING PAYMENT BY ASSESSEE IT C ANNOT BE TREATED AS UNEXPLAINED INVESTMENT IN THE HANDS OF THE ASSESSEE . 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT THE ARGUMENTS OF THE ASSESSEE THAT PAYMENTS TO THE CRED ITORS WERE MADE OUT OF THE FUNDS AVAILABLE WITH M/S NCL INDUSTRIES LTD. IS NOT BORNE OUT OF RECORDS. THERE IS NO EVIDENCE IN THE FORM OF ENTRI ES IN THE BOOKS OF ACCOUNT OF M/S NCL INDUSTRIES LTD. TOWARDS PAYMENT TO CREDITORS. AS SUCH IT CANNOT BE ACCEPTED. REGARDING APPLICATION OF SECTION 68 SHE SUBMITTED THAT THE ASSESSING OFFICER HAS NOT INVOKE D THE PROVISION OF SECTION 68. REGARDING THE APPLICATION OF SECTION 6 9 SHE SUBMITTED THAT THE RELEVANT FACTS SUGGESTING THE DISCHARGE OF CREDITOR S OF M/S NCL HOMES LTD. BY THE ASSESSEE HAVE BEEN NOTICED DURING THE ASSESS MENT PROCEEDINGS U/S 153A OF THE ACT IN CASE OF M/S NCL HOMES LTD. IN W HICH THE ASSESSEE IS A DIRECTOR. IN THE REPLY FILED BEFORE THE ASSESSING OFFICER THE MD NCL HOMES LTD. SHRI P. SATYANARAYANA RAJU STATED THAT THESE LIABILITIES WERE DISCHARGED BY SHRI K. MADHU DIRECTOR OF THE COMPAN Y WHO IS THE ASSESSEE HEREIN. THE FACT THAT THE LIABILITIES WER E MET BY SHRI K. MADHU THE ASSESSEE BY WAY OF PAYMENTS TO THE CREDITORS IN THE FINANCIAL YEAR 2003-04 TO THE EXTENT OF RS.1 89 93 450/- HAS NOT B EEN DISPUTED BY THE ASSESSEE EITHER DURING THE ASSESSMENT PROCEEDINGS O R DURING THE APPELLATE PROCEEDINGS HENCE IT IS TO BE PRESUMED THAT THE AS SESSEE DISCHARGED THE CREDITORS. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS ADMITTED FACT THAT THE RE WAS AN ACCOUNT IN THE BOOKS OF ACCOUNTS OF M/S NCL INDUSTRIES LTD. UNDE R THE HEAD FRIEGHT ADVANCE AND VASU AND THIS ACCOUNT HAS BEEN SET OFF BY PASSING ENTRIES OF ACQUIRING FIXED ASSETS AND TRANSPORT CHARGES. F INALLY THE DEPRECIATION HAS BEEN CLAIMED ON ALL THE NON EXISTING ASSETS. HOWEVER ACTUALLY THIS ITA NO.809/H/2009 SHRI KALIDINDI MADHU RR DISTT . 5 5 ACCOUNT HAS BEEN USED AS A CONDUIT TO TRANSFER THE FUNDS TOWARDS UNSECURED LOANS IN THE NAME OF ABOVE 16 CREDITORS. THE FACT OF AVAILABILITY OF CASH BALANCE WITH M/S NCL INDUSTRIES LTD. AND TR ANSFERRING THE FUNDS UNDER THE HEAD FREIGHT ADVANCE AND VASU ACCOUNT BY M/S NCL INDUSTRIES LTD. HAS NOT BEEN DISPUTED BY THE REVENU E AUTHORITIES. THE FUNDS AVAILABLE UNDER THESE HEAD WERE USED FOR DISC HARGING THE LIABILITIES TOWARDS IMPUGNED SUNDRY CREDITORS IN THE BOOKS OF M /S NCL HOMES LTD.. THE DEPARTMENT ALSO NOT BROUGHT ON RECORD TO SHOW T HAT THE AMOUNT MENTIONED UNDER HEAD FREIGHT ADVANCE AND VASU ACCO UNT ACTUALLY REPRESENTS AMOUNT INCURRED BY M/S NCL INDUSTRIES L TD. UNDER THESE ACCOUNTS. BEING THERE IS NO EVIDENCE REGARDING THE ACTUAL PAYMENT OF FREIGHT ADVANCE OR VASU ACCOUNT THEN WE HAVE TO AC CEPT THE CONTENTIONS OF THE ASSESSEE THAT THESE TWO COMPANIES I.E. M/S N CL HOMES LTD & M/S NCL INDUSTRIES LTD. UNDER THE SAME MANAGEMENT THOU GH THEY ARE DIFFERENT ASSESSEES USED THE FUNDS OF M/S NCL INDUS TRIES LTD. TO DISCHARGE THE LIABILITIES OF M/S NCL HOMES LTD. SINCE THE AM OUNT INCURRED BY M/S NCL INDUSTRIES LTD. TOWARDS THE LIABILITIES OF M/S NCL HOMES LIMITED WHICH WERE REFLECTED UNDER THE HEAD FREIGHT ADVANC E AND VASU ACCOUNT THERE IS NO FURTHER ENTRIES HAVE BEEN PASSED IN THE BOOKS OF M/S NCL HOMES LTD. IN SO FAR AS M/S NCL: HOMES LIMITED IS CONCERNED SINCE THE PAYMENTS HAVE BEEN MADE BY M/S NCL INDUSTRIES LTD. NO ENTRIES FOR PAYMENT OF CREDITORS HAVE BEEN MADE IN ITS BOOKS OF ACCOUNT AND THE BALANCE HAS BEEN SHOWN AS OUTSTANDING IN RESPECTIVE CREDITORS NAME. IN OUR OPINION THESE KINDS OF INTER COMPANY ADJUSTMEN TS WHEN THE COMPANIES ARE UNDER SAME MANAGEMENT IS NOT UNCOMMON . SINCE SHRI K. MADHU THE PRESENT ASSESSEE IS HAVING CONTROLLING I NTEREST OVER THESE COMPANIES AND USED HIS INFLUENCE TO FLOW BACK THE F UNDS OF M/S NCL INDUSTRIES LTD. TO MAKE PAYMENTS TO THE IMPUGNED 16 CREDITORS. THE PAYMENTS WERE NOT MADE FROM SHRI K. MADHU FROM HIS POCKET DIRECTLY THERE IS NO NECESSITY OF SHOWING THESE PAYMENTS IN HIS BOOKS OF ACCOUNT ITA NO.809/H/2009 SHRI KALIDINDI MADHU RR DISTT . 6 6 AND ACCORDINGLY NOT REFLECTED IN HIS CASH FLOW STAT EMENT. TO SUM UP THE AVAILABILITY OF FUNDS WITH M/S NCL INDUSTRIES LTD. AND UTILIZATION OF FUNDS IN ANY OTHER WAY THAN PAYMENT TO THE SUNDRY CREDITO RS NOT IDENTIFIED BY THE DEPARTMENT. IN SUCH CIRCUMSTANCES DUE CREDIT HAS TO BE GIVEN FOR THE UTILIZATION OF FUNDS TOWARDS THE DISCHARGE OF THE L IABILITIES IN THE NAME OF 16 CREDITORS TO THE TUNE OF RS.1 89 93 450/- AND IN OUR OPINION THE ADDITION MADE BY THE ASSESSING OFFICER ONLY ON THE BASIS OF SURMISE AND CONJECTURE WITHOUT BRINGING ANY EVIDENCE ON RECORD TO SHOW THAT THE ASSESSEE HAS INDIVIDUALLY DISCHARGED THE CREDITOR S. MORESO THE PROVISIONS OF SEC.69 CANNOT BE APPLIED IN THIS CASE WITHOUT BRINGING ANY EVIDENCE ON RECORD TO SHOW THAT THE PAYMENTS WERE M ADE BY THE ASSESSEE HIMSELF. THERE BEING ENOUGH CASH BALANCE AVAILABL E WITH M/S NCL INDUSTRIES LTD. WHICH HAS BEEN TRANSFERRED TO FICTI TIOUS ACCOUNT UNDER THE HEAD FREIGHT CHARGES AND VASU ACCOUNT AND THE EXP LANATION GIVEN BY THE ASSESSEE IS ONE OF THE PROBABLE EXPLANATION AND THE SAME IS TO BE ACCEPTED AS BONA FIDE. ACCORDINGLY WE ARE INCLINED TO DELE TE THE ADDITION OF RS.1 89 93 450/- MADE BY THE LOWER AUTHORITIES. 8. IN THE RESULT THE APPEAL OF THE ASSESSEE IN ITA NO.809/H/2009 IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 25.2.2011 SD/- SD/- G.C. GUPTA CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED THE 25 TH FEBRUARY 2011 ITA NO.809/H/2009 SHRI KALIDINDI MADHU RR DISTT . 7 7 COPY FORWARDED TO: 1. SHRI S. RAMA RAO ADVOCATE FLAT NO.103 H.N.3-6 -542/4 INDIRADEVI NILAYAM ST.NO.7 HIMAYATNAGAR HYDERABAD -29 2. THE ACIT CIRCLE-6 HYDERABAD 3. CIT(A)- I HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP