Bombay High Court
Tthe C.I.T.B.C-I vs M/S. Likproof India Pvt. Ltd on 23 December, 2016
Bench: M.S. Sanklecha
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Sbw
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX REFERENCE NO.392 OF 1999
The Commissioner of Income Tax
Bombay City-I, Bombay. ..Applicant
Versus
M/s. Likproof India P. Ltd. ..Respondent
...........
Mr. Suresh Kumar for the Applicant.
Mr. Atul Jasani for the Respondent.
...........
CORAM: M. S. SANKLECHA &
A. K. MENON, JJ.
RESERVED ON : 5TH DECEMBER, 2016
PRONOUNCED ON : 23RD DECEMBER, 2016
JUDGMENT (PER A.K. MENON,J.)
1. By this Reference, the Income Tax Appellate Tribunal (Tribunal) have
referred the following question of law for our opinion:-
"Whether on the facts and in the circumstances of the case, the
Tribunal was right in law in holding that the amount of
Rs.1,00,000/- cannot be assessed as 'undisclosed' income of the
assessee?
2. Brief facts of the case are as follows:-
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The assessee company is a sister concern of one Hindustan Hotels Limited, Goa
(HHL). The assessee and HHL have common Directors. HHL had undertaken a
hotel project and entered into a construction contract with the assessee. In
1995 HHL abandoned the hotel project. The building which was still under
construction was then sold to one Peerless Finance in April/May 1995 for a
consideration of Rs.11 crores.
3. Meanwhile it transpires that the assessee was in need of finance and had
planned to increase its share capital and had approached HHL to contribute.
HHL paid to the assessee a sum of Rs.1 crore vide two cheques. The first cheque
for Rs.50 lakhs was dated 23rd June, 1995 and the second cheque also for Rs.50
lakhs was dated 31st March, 1996. HHL had disclosed the sum of Rs.1 crore as
"share application money". The assessee had also treated the aforesaid sum as
share application money at the material time which became evident from a
resolution recorded in the Minutes Book and which was seized during a search
operation was carried out at the assessee's office premises and the residence of
the Managing Director on 27th March, 1996. It however appears that in the
bank pay-in-slip prepared by the assessee's staff, the narration was given as
"cheque received from them against our work at Goa " and in respect of the
second cheque the narration mentioned " cheque received against business
compensation".
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4. Subsequently on 2nd September, 1996 the company filed a return of
income declaring undisclosed income amounting to Rs.2,34,000/-. During the
search it was noticed from the bank slips that Rs.1 crore was received by the
assessee as compensation from HHL. In the statement of the Managing Director
of the assessee he contended that the amount of Rs.1 crore received from HHL
'might be on account of loan or on some other account '. Scrutiny of the books
of HHL revealed that amounts of Rs.50 lakhs each was paid on 23 rd June, 1995
and 30th September, 1995 and they were described as " amount paid to Likproof
for compensation of loss of finishing work ". The Managing Director in his
statement under Section 132(4) dated 23 rd September, 1996 stated as follows:-
"It is not compensation but could be a loan ".
5. In yet another statement of the Managing Director recorded on 4 th April,
1996 he stated that it is a payment by HHL towards share capital. He also
admitted that he did not know whether any Board Resolution had been passed.
The record reveal that 3500 shares of the assessee were allotted to HHL at the
rate of Rs.2857/- per share. The assessee contended that there was no
compensation received from HHL and the sum of Rs.1 crore could not be
treated as compensation. The Assessing Officer did not accept the contention
of the assessee and treated the sum of Rs.1 crore as compensation.
6. In appeal, the Tribunal after considering the rival contentions held that
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the nature of the sum of Rs.1 crore had to be decided on the basis of entries in
the books of account and the records and not on the basis of notings or
narrations by the assessee's staff. The Tribunal concluded that the amount of
Rs.1 crore was to be treated as share application loan.
7. We have heard Mr. Suresh Kumar, the learned counsel for the Revenue
and Mr. Atul Jasani, the learned counsel appearing for the respondent.
According to Mr. Suresh Kumar the Tribunal was not right in concluding that
no compensation was received by the assessee. According to him the fact that
the assessee was engaged for the purpose of constructing the building would
mean that the assessee would have been entitled to some compensation. If the
construction was to be completed the assessee's stood to gain but since the
project was abandoned, the assessee was deprived from earning its profits and
viewed from this aspect the likelihood assessee having received compensation
was much higher. He relied upon the fact that entries in the bank's pay in slips
clearly indicate why the amounts received. The fact that the assessee's bank
records indicated that the amount was received as compensation could not be
overlooked specially when the Managing Director's statements were vague and
contradictory.
8. Mr. Jasani, on the other hand, supported the decision of the Tribunal and
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contended that entries made in the bank pay-in-slips cannot be determine the
nature of the payment and the treatment of the amounts in the books of the
company is what was material. This statement of the Managing Director
though vague, they could not be relied upon by the revenue since at one stage
he clearly admitted that he did not know whether it was a compensation or
loan. He also admitted that he was unaware whether there was a board
resolution passed in respect of the issuance of capital.
9.
In our view the statements recorded of the Managing Director of the
company are not reliable. We find that the consideration by the Tribunal of the
records was appropriate. The conclusion drawn by the Assessing Officer that
the amount received was compensation and amount which was undisclosed
income of the assessee cannot be sustained since the treatment of the receipts in
the books of account of the company should prevail being maintained in the
usual course of business. There is nothing on record to establish the contrary
and beyond reasonable doubt. Equally there is nothing on record to establish
that the entries made in the books of account cannot be relied upon. It is
pertinent to mention that the Revenue had not brought on record any material
indicating that the amount received by the assessee was by way of
compensation. On the other hand, the employees of the assessee were cross
examined in respect of the entries made in the pay-in-slips and this cross
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examination had revealed that narrations in the pay-in-slips accompanying
the two cheques of Rs.50 lakhs each were made by them on their own without
any directions or instructions from the assessee. Considering the overall picture
we are of the view that the order of the Tribunal cannot be faulted. However,
we are in agreement with the view taken by the Tribunal to the effect that the
entry made in the pay-in-slips cannot prevail over the entry in the books of
account since the books of account would reflect the appropriate record
wherein treatment of receipts would be found. In the circumstances, we have
no hesitation coming to our conclusion and as a result we find that the
Tribunal was justified in holding that the amount of Rs.1 crore cannot be
assessed as undisclosed income. In the result, the question referred to us for
our opinion is answered in the affirmative i.e. in favour of the assessee and
against the Revenue.
12. Reference is accordingly disposed of. No order as to costs.
(A. K. MENON, J.) (M. S. SANKLECHA, J.)
Wadhwa
