TMI Blog2014 (12) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... m the prospective patients under the promotional scheme floated by the assessee - the assessee has given copies of all deposits, details of patients, amount received, copies of dental record to the AO - the AO has proceeded to assess the amount under the impression that the assessee is not liable to repay the security deposit received by it - assessee has refunded the security deposit to the patients - CIT(A) was justified in holding that there is no cessation of liability in respect of the security deposits - Since the assessee is liable to repay the security deposit, the question of assessing the same u/s 28(iv) also does not arise – the order of the CIT(A) is upheld – Decided against revenue. Unexplained investment u/s 69 – Held that:- CIT(A) rightly held that the assessee has accounted for the deposit of ₹ 3.70 crores paid to M/s Royal Dental Clinic Pvt. Ltd. in its books of account but the same was netted of against the security deposit while preparing the balance sheet - CIT(A) has given clear finding that the assessee has accounted for the investment made in M/s Royal Dental clinic Pvt Ltd in books of account, and since the assessee has followed a particular method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. The first issue relates to rejection of books of account and estimation of profit. The assessee is a private limited company and it has got its account audited under the provisions of Companies Act, 1956. The assessee has stated that it was following cash system of accounting. However the AO took the view that the assessee, being a private limited company, is required to follow mercantile system of accounting in accordance with Companies Act. Since the assessee had followed cash system of accounting and since the same is against the mandate of provision of Companies Act, the AO took the view that the books of accounts of the assessee are not reliable. Further, citing some more reasons, the rejected the books of account and estimated the net profit of the assessee @ 15% of the turnover of the assessee company. 5. In the appellate proceedings, the assessee submitted before the ld. CIT(A) the profit declared by it including the amount of depreciation works out to 10% of the turnover during the year under consideration and also in the immediately preceding year. It was also submitted that the assessee is following consistently cash system of accounting and since there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the case of A.O. that assessee has maintained its books on hybrid system which has been done away with, by the Income Tax Act 1961. Further, assessee has not changed its method of accounting since inception. Therefore, this is no ground for rejection of books of account. In any event, even after rejecting of the books of accounts A.O. could not have assessed net profit @15% on turnover without any verifiable evidence in possession. There is no basis for the same. As a matter of fact, if any assessee company invests and expands its business, the depreciation would increase and if a fixed net profit is assessed, the entire provisions of allowing depreciation would become meaningless. I am therefore of the opinion that the amount of ₹ 20,41,386/- added by Assessing Officer to assesses higher income, on this ground being unsubstantiated, is deleted 6. We have carefully considered the reasoning given by the First Appellate Authority. The First Appellate Authority has held that the assessee, under the provisions of Income Tax Law, can maintain its books of accounts either on Cash Basis or Mercantile basis. He has further held that the AO has not properly analyzed the ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar Sons, the liability had ceased and the assessee therein had taken the amount to its Profit and Loss account. The assessee, on the contrary, relied upon the following decisions and contended that the deposits cannot be assessed as its income. a) Liquidator, Mysore Agencies P. Ltd V/s CIT (1978) 114 ITR 853 (Karn); b) CIT V/s Indian Research Institure Pr. Ltd (1979) Tax LR (NOC) 66 (Cal),; c) K V MoosaKoya Co V/s ITO (1989) 175 ITR 120, 124 (Ker) and d) Bombay Dyeing and Mfg Co.Ltd V/s State of Bombay (1958) SCR 112,1135= AIR 1958 SC 328, Accordingly, the assessee contended that there is no cessation of liability as presumed by the AO. Further, the assessee also contended that it has not received any benefit like perquisite and hence the provisions of section 28(iv) also will not apply. 9. The ld. CIT(A) considered the entire spectrum of facts and noticed that the assessee has received the security deposit from the prospective patients under the promotional scheme floated by the assessee. The ld. CIT(A) also noticed that the ITAT in assessee s own case, vide its order dated 4.2.2004, in ITA No.3367/Mum/1998 relating to the assessment year 1998-99 and also in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losure of the Security Deposit account and the amount given to M/s Royal Dental Clinic Pvt. Ltd is extracted by Ld CIT(A) as under : a. from banks b.from others NIL 7941700.00 Security deposits from patients Opening balance During the year (846 x 15000) Refund during the year (3 x 15000, 25 x 2400) Royal Dental Opening balance During the year 32406700.00 12690000.00 (-)105000.00 44991700.00 (-)24465000.00 (-)12585000.00 (-)37050000.00 7941700.00 Accordingly, the ld. CIT(A) held that the assessee has in fact, accounted for the deposit of ₹ 3.70 crores paid to M/s Royal Dental Clinic Pvt.Ltd in its books of account but the same was netted of against the security deposit while preparing the balance sheet. Accordingly, the ld. CIT(A) deleted the addition made by the AO with the observations that there is no justification in making this addition. Since, the ld. CIT(A) has given clear finding that the assessee has accounted for the investment made in M/s Royal Dental clinic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33(6) and confirmed the aforesaid entries with required evidences including the ROl, the balance sheets of the relevant year as well of the previous year etc. in my opinion, appellant had discharged its onus of proving the identity, capacity and genuineness of the transaction. Dr.Arun Chamaria has explained before me and confirmed the aforesaid transactions duly supported by the trial balance of assessee company which shows that the entry of Share Application was squared off during the same year. I am, therefore, of the opinion that the addition made by A.O. of ₹ 20,00,000/- u/s.68 of I.T. Act 1961 is not sustainable, hence deleted. We notice that Dr.Arun Chamaria is also assessed by the same officer and upon examination of his assessment record only, the AO has come to know of the fact that the assessee has received the share application money ₹ 20 lakhs from Dr.Arun Chamaria. The reasons for not disclosing the same in the balance sheet has been duly explained by the assessee before ld. CIT(A) and the same has been found to be correct by the first appellate authority also. Under these set of facts, we are of the view that there is no ground to suspect the genuinene ..... X X X X Extracts X X X X X X X X Extracts X X X X
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