TMI Blog2008 (6) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... for the respondent. JUDGMENT The judgment of the court was delivered by D.A.MEHTA J. - At the time of admission on 14-06-2000, the following question of law was formulated by this Court: "Is the Tribunal right in holding that liability to pay tax in respect of the unexplained deposits of Rs. 1,61,895/- did not arise on the ground that the company was incorporated on 14-02-85 while the cash credits were shown to have been introduced in the books of accounts of the company on 16-01-1985, and in relying upon the decision of the Supreme Court in CIT Vs. City Mills Distributors (P) Ltd., reported in [1996] 219 ITR 1, and not taking into account the aspect of ratification by the company of the deposits in question, the genuinene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on 16-01-1985 while it is undisputed that the Assessee-Company was incorporated on 14-02-1985. That, prior to 14-02-1985, the entity, in whose case the credits were introduced, was a different and distinct entity from that of the Assessee-Company. Hence, in light of the ratio of the Apex Court decision in case of "Commissioner of Income Tax Vs. City Mills Distributors (P.) Limited, [1996] 219 ITR 1, the Company becomes a legal entity in the eye of law when it is incorporated and, therefore, the income earned by the promoters cannot be taxed in hands of the Assessee-Company. 5. The learned Standing Counsel for the appellant-Revenue submitted that the Tribunal has failed to consider the fact that this was the first return of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e restored after setting aside the impugned order of Tribunal. 6. The learned Counsel for the respondent-assessee has placed reliance on the Apex Court's decision in case of Commissioner of Income Tax Vs. City Mills Distributors (P.) Limited [1996] 219 ITR 1, and supported the impugned order of the Tribunal. 7. Section 68 of the Act provides for a deeming fiction of treating the sum found credit in the books of an assessee maintained for any Previous Year being charged to income tax as the income of the assessee of that Previous Year, provided (i) the assessee offers no explanation as to the nature and source of the credits, or (ii) the explanation offered by the assessee is not, in the opinion of the Assessing Officer, satisfac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business which was conducted by the predecessor entity was transferred as a going concern to Assessee-Company and all assets and liabilities of the previous entity were taken over by the Assessee-Company. 10. Thus, on 14-02-1985, the liabilities existing in the books of the predecessor entity were transferred as the existing liabilities in hands of the Assessee-Company. In other words, what came in the books of account of the Assessee-Company were not credits, namely, credits in the books during the Previous Year, but credits in the form of liabilities in the hands of the predecessor entity came in the books of Assessee-Company for the Previous Year relevant to the Assessment Year in question. 11. In the circumstances, the positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax; that is not in issue before us and we do not express any view in that behalf." 12. The Tribunal was, therefore, right in law in applying the aforesaid ratio of the Apex Court decision to the facts of the present case. Even if the credits in the books of account are deemed income, they cannot be deemed to be income in the hands of the Assessee-Company prior to its incorporation, as the Company simply does not exist. The Company could have entered into an agreement of obtaining loan only after its incorporation. Merely because the Company decides to accept the business carried on by the promoters as its own business, it cannot be presumed therefrom that the transaction on the appropriation of the income earned by the predecessor ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he credits in question was or was not established before the Revenue authorities does not survive as the Revenue could not have treated the credits in question as being relatable to the Previous Year relevant to the Assessment Year in question, namely, Assessment Year 1987-88 for the reasons stated hereinabove. 15. The Tribunal was, therefore, justified in holding that the liability to pay tax in respect of unexplained deposits of Rs. 1,61,895/- did not arise as the Company was incorporated only on 14-02-1985 while the credits were shown to have been introduced in the books of account of the predecessor of the Company on 16-01-1985. The question is, therefore, answered in the affirmative i.e. in favour of the assessee and against t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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