Income Tax Appellate Tribunal - Jodhpur
Bhaval Synthetics (India) Ltd. vs Commissioner Of Income Tax on 28 March, 2003
Equivalent citations: (2004)82TTJ(JODH)336
ORDER
S.R. Chauhan, J.M.
1. This appeal by assessee for asst. yr. 1996-97 is directed against the revisional order of CIT, Udaipur dt. 12th March, 2001 under Section 263, IT Act, 1961.
2. We have heard the arguments of both the sides and also perused the records including the written statement of learned authorised representative of the assessee furnished on record before us.
3. The assessee-appellant has raised three grounds of appeal before the Tribunal. Ground No. 2 has not been pressed before us. Ground No. 3 is general. Thus, the only substantive ground that remains before us to be considered is ground No. 1 which disputes the learned CIT's revisonal order passed under Section 263 setting aside the assessment order dt. 30th Nov., 1998, treating the same to be erroneous and prejudicial to the interest of Revenue. The learned authorised representative of assessee has contended that the assessee, is a limited company which was incorporated on 3rd Feb., 1995. He has contended that this asst. yr. 1996-97, under appeal is the first year of assessee-company and that only construction of factory was under process during this year. He has contended that the assessment was completed under Section 143(3) on 30th Nov., 1998 (pp. 14, 15 of paper book). He has contended that the learned CIT issued show cause notice under Section 263 on 4th May, 2000 (pp. 16 and 17 of paper book), wherein the learned CIT raised the two points as under :
(i) interest earned on FDRs (which were deposited as margin money), amounting to Rs. 9,31, 572,
(ii) share capital and share application money aggregating to Rs. 9,42,89,000.
He has contended that during the assessment proceedings the assessee furnished more than 500 pages including pp. 21 to 72, being the bank statement of assessee-company to show that all payments of share capital received by assessee were through account payee cheque. He has contended that the assessee furnished the list of shareholders as placed on pp. 73 to 113 with their names along with full address and distinctive numbers of the shares. He has contended that the assessee also furnished confirmations from majority of the shareholders and share applicants, as placed on pp. 114 to 273 paper book. He has contended that the confirmations from shareholders of 84 per cent of the share capital, and share applicants of 62 per cent of the share application money were filed. He has contended that the learned CIT's observation that nothing has been done regarding share application money is not correct in as much as the assessee has filed the confirmations of 62 per cent of the share applicants. He has contended that the assessment order dated 30th Nov., 1998 impugned herein, is not a cryptic one, nor is a stereotype one. He has contended that the AO has passed her assessment order after taking various details/explanations from the assessee.
4. He has contended that the assessee is a company and has to collect papers from persons scattered all over the country. He has contended that the books of accounts were produced before AO, and other details (pp. 21 to 273 paper book) were produced before AO, and the same were examined and test checked, by AO. He has contended that the AO had specifically called upon the assessee to furnish confirmations of shareholders which were furnished by assessee in all major cases covering 84 per cent of the share capital which are placed on record on pp. 114 to 273 of paper book. He has contended that the confirmation of 62 per cent of the share applicants were also furnished before AO. He has contended that the AO even called upon the assessee for bank statements of individual shareholders on random basis covering major portion of subscribed capital. He has contended that it was after calling for host of details, including of construction activities, examining them and applying test checks, the AO passed the assessment order, so the same cannot be termed as not in conformity with law. He has contended that when whatever details were called upon by AO from assessee the same were furnished, and the same having been examined and test checked by AO, the assessment order cannot be termed as erroneous or prejudicial to the interest of Revenue simply because, the AO has not made any addition and accepted the evidence produced by assessee, after examining the same. It has been contended that the AO thus conducted deep enquiries to the extent practicable and possible by sending notices to the share applicants directly and calling for information/confirmation thereof. It has been contended that it is practically not possible to make enquiries in 100 per cent of share applicants. It has been contended that the AO is a quasi-judicial authority and learned CIT(A) cannot substitute his own opinion. He has cited Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) contending that an order may be prejudicial to the interest of Revenue but if it is not an erroneous order, proceedings under Section 263 are not attracted: He has also cited in the case of CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom) contending that it has been held therein that CIT cannot direct AO to make roving and fishing inquiries,
5. The learned authorised representative of assessee has contended that an assessment order passed by AO as per Section 143(3) after going through the material on record including the evidence furnished by assessee together with such further evidence as the AO required the assessee to produce on specific points, as also other relevant material gathered by AO, and after considering the explanation of assessee, cannot be termed as erroneous. In this regard he has relied on CIT v. Girdharilal. He has contended that in the instant case also the assessment order has been passed by AO after going through the evidence produced by assessee as also the further evidence as was required by AO which the assessee furnished together with the other relevant material gathered by AO like cross-examination of some of the shareholders by AO by writing letters to them who submitted their replies to AO. He has contended that thus it cannot be said that the AO did not conduct enquiry/investigation about genuineness/creditworthiness of the shareholders. He has contended that the assessment cannot be said to have been made without proper enquiry or without application of mind.
6. Regarding the interest earned on FDRs of margin money, the learned authorised representative of assessee-appellant has contended that the said interest earned on margin money deposit in banks is non-taxable. He has relied on the following decisions:
(i) CIT v. Bokaro Steel Ltd (1999) 236 ITR 315 (SC)
(ii) Bangaigaon Refinery & Petrochemicals Ltd v. CIT (2001) 251 ITR 329 (SC)
(iii) CIT v. Karnal Co-op. Sugar Mills Ltd. (2000) 243 ITR 2 (SC)
7. He has contended that the decisions referred to by learned CIT in his order are distinguishable on facts as in those cited cases it was the surplus money which was deposited in the banks for short-term and the interest was earned such deposits on surplus funds, whereas in the instant case it is not a deposit simpliciter but a deposit by way of margin money for opening letters of credit, bank guarantee, etc. directly linked with the setting up of plant and machinery of the assessee-company and thus directly connected with the formation of assessee-company's business.
8. As regards the share capital, the learned authorised representative of assessee has relied on a number of decisions including the following : -
(i) CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del)
(ii) CIT v. Steller Investment Ltd. (2001) 251 ITR 263 (SC)
(iii) Standard Cylenders (P) Ltd. v. ITO (1998) 24 ITD 504 (Del)
(iv) Shree Bharka Synthetics Ltd. v. Asstt. CIT. (2002) 75 TTJ (Jd) 1
(v) CIT v. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB)
(vi) CIT v. Active Traders (P) Ltd. (1995) 214 ITR 583 (Cal)
(vii) Rasbihari Tobacco Processors Ltd. v. Dy. CIT (1997) 57 TTJ (And) 120 (viii) Asstt. CIT v. Anima Investment Ltd. (2000) 68 TTJ (Del)(TM) 1 8A. The learned authorised representative of assessee-petitioner has also contented that the AO's order was in the light of law prevailing at the time of passing the subjected assessment. He has contended that at that time two judgments were available which are as under:
(i) National Thermal Power Corporation Ltd. v. Union of India and Ors. (1991) 192 ITR 187 (Del)
(ii) (1994) 205 ITR 98 (Del)(FB) (supra) He has contended that in the light of the above two judgments the AO has not committed any error. He has cited CIT v. G.M. Mittal Stainless Steel (P) Ltd. and contended that if AO's assessment is in accordance with judgments of some High Court then it cannot be treated to be erroneous even though that High Court judgment might be reversed by Supreme Court. He has contended that here rather the judgment of Hon'ble Delhi High Court in (1991) 192 ITR 187 (Del) (supra) stands confirmed by the Hon'ble Supreme Court in (2001) 251 ITR 263 (SC) (supra), He has contended that there has been complete application of mind by AO on the issues involved in the matter. He has also cited in the case of CIT v. Arvind Jewellers. (2003) 259 ITR 502 (Guj)
9. As against the above the learned Departmental Representative of Revenue has contended that the expenditure incurred by assessee-company have been treated as capital expenditure. He has contended that the pre operative administrative expenses or general expenses i.e. expenses other than capital expenses alone are allowable as deduction. He has contended that as the entire expenditure has been claimed by assesses as capital expenditure, so it could not have been set off because expenditure other than capital expenditure alone can be set off. He has contended that the set off allowed by AO is quite wrong. He has contended that the assessee is claiming set off of entire pre-operative expenses whereas this could have been set off only against losses, whether current or brought forward. He has contended that the assessee has filed return of nil income and no loss has been shown. He has contended that the interest income of assessee is taxable as income and in this regard he has based reliance on Tuticorin Alkali Chemicals & Fertilizer Ltd. v. CIT (1997) 227 ITR 172 (SC). He has contended that it does not make any difference regarding the taxability of the interest income even if the interest is earned on deposit made as margin money, and the same cannot be set off until and unless there is loss.
10. As regards the share capital and share application, money, the learned Departmental Representative of Revenue has contended that the Tribunal may consider the mistakes pointed out by CIT in his revisional order. He has thus relied on the orders of CIT.
11. We have considered the rival contentions, the relevant material on record, as also the cited decisions. From the perusal of record we find that the CIT has treated the assessment order dt. 30th Jan., 1998 as erroneous and prejudicial to the interest of Revenue on account of two reasons/counts detailed as below : .
(a) Interest earned on FDRs amounting to Rs. 9,31,572 has not been brought to tax/wrongly set off.
(b) The AO had failed to make due and proper enquiry as was warranted in the fact and circumstances of the case regarding share capital/share application money aggregating to Rs. 9,42,89,000.
12. As regards the chargeability of interest earned on FDR, the citations relied upon by the learned CIT are not relevant in the matter and do not extend any advantage to the Revenue for the reason that in all those decisions, the interest was earned on deposit of surplus funds. In the instant case, the position is somewhat different in as much as the deposits are not simplicitor but the deposits are as margin money required for obtaining letter of credit or bank guarantee, etc., The factum as to whether the deposits were made for the aforesaid margin money, has neither been disputed by AO nor by CIT. The accounts of assessee-company are audited and auditors have certified in the Schedule VII to the balance sheet that finance charges are net of Rs. 9,31,572, being interest on margin money deposits (p. 12 of paper book), In (1999) 236 ITR 316 (SC) (supra) the Hon'ble Supreme Court has held that interest on advances to contractors and other receipts like rent from quarters, let out to employees of contractor, hire charges on plant and machinery let out to contractors and royalty on stones removed from assessee's land are amounts being inextricably linked with the process of setting up of plant and machinery by assessee and are capital receipts and not income of assessee from any independent source, and such receipts will go to reduce the cost of its assets. It has been contended that these are capital receipts and cannot be taxed as income. In (2000) 243 ITR 2 (SC) (supra) the Hon'ble Supreme Court has held amounts deposited to open letter of credit for purchase of machinery for setting up plant and interest on such amounts is directly linked with and incidental to purchase and acquisition of plant and machinery and so such interest was material receipt. In the said decision the Hon'ble apex Court has distinguished (1997) 227 ITR 172 (SC) (supra) and held the same to be not applicable in such matters. Similarly, in (2001) 251 ITR 329 (SC) (supra) the Hon'ble Supreme Court has held that when the company was being set up and it was the period of formation of the company, the income from house property, guest house charges for equipment and recoveries from contractors for supply of water and electricity, received during the period of formation of company's main business are capital receipts and not taxable income but were to be adjusted against project cost. The earlier decision (1999) 236 ITR 315 (SC) (supra) has been followed. As such, considering all the facts and circumstances of the case, as also the legal position emanating from the above cited decision of the Hon'ble apex Court, together with the particular fact that the interest earned by assessee was on deposits against margin money required for obtaining letter of credit or bank guarantee, etc., we find that the interest income earned by assessee on the aforesaid FDRs was not taxable income but was capital receipt and, as such, the same could be adjusted against project cost for main business. Accordingly, the action of AO in allowing set off in respect of the aforesaid interest receipts by assessee being in conformity with the law laid down by Hon'able Supreme Court, can neither be treated as erroneous nor, in turn, prejudicial to the interest of Revenue.
13. As regards the share capital and share application money, we find from the perusal of record that the assessee produced books of accounts before AO and also furnished various other details, as placed on pp. 21 to 273 of paper book; and the same were examined and test checked by AO. The record also reveals that the AO had called upon assessee to furnish confirmations from shareholders and the assessee accordingly furnished confirmations from shareholders holding 84 per cent of share capital and the share applicants of 62 per cent of share application money. It is also revealed from record that the AO had called upon the assessee to furnish bank statements of individual shareholders on random basis covering major portion of subscribed capital and the assessee, in compliance thereof, furnished the same to AO. It is also revealed from record that the AO had written letters to some of the shareholders who, in turn, gave their replies to the AO. All the above material/evidence on record were duly considered by AO and thereafter she passed the assessment order dt. 30th Nov., 1998. It is also revealed from record that the assessee has furnished the list of shareholders alongwith their addresses and so if the AO had any doubt regarding identity of or investment by shareholders/share applicants, the AO could have issued summons under Section 131 of the IT Act 1961, but considering the material available on record the AO did not feel any such necessity. There is no material on record to raise doubt or suspicion regarding the identity of or investment by shareholders/share applicants. Undeniably, it is the settled legal position that the learned CIT cannot substitute his opinion in place of that of AO, particularly when the AO has passed the assessment order after detailed consideration of the entire relevant material on record, and the view so taken by AO is also one of the legally possible views. As such, considering all the facts and circumstances of the case, as also the legal position, and taking a circumspect view of the entire fact-situation, we are of the view that it cannot be said that the AO has passed the assessment order dt. 30th Nov., 1998 without conducting enquiry or for that matter, without conducting proper enquiry, or without applying mind, nor can it accordingly be said that the said assessment order dt. 30th Nov., 1998 is erroneous in law, nor that the same, in turn, is prejudicial to the interest of Revenue, and so the learned CIT's impugned revisional order setting aside the assessment and directing the AO to make fresh assessment is found to be not justified and uncalled for.
14. In the result, the revisional order of learned CIT passed under Section 263 of IT Act, 1961, is cancelled.