Whether income from 'deposits in current account' can be construed as trading receipt even if such deposits are admitted by Director of assessee-company as unexplained - NO: HC

Income tax - Whether income from 'deposits in current account' can be construed as trading receipt even if such deposits are admitted by Director of assessee-company as unexplained - NO: HC 

CHENNAI : THE issue before the Bench is - Whether income from "deposits in the current account" in Indian Overseas Bank can be treated as trading receipt, even if such deposits are accepted by the
Directors of the Company as unexplained. NO is the answer.

Facts of the case

The assessee is a public limited company dealing in medical equipments. It is a joint venture company with Electronics Corporation of Tamil Nadu Limited (ELCOT) holding shares in the assessee company. The assessee filed its return declaring total income of Rs.30,50,272/-. Subsequently, it had filed a revised return declaring income of Rs.34,95,540/-. The AO however completed the assessment by making addition on account of "income of Electro Medical Maintenance Centre" at Rs.4,61,642/-, income from "service charges received" at Rs. 24,08,748/-, and income from "deposits in the current account in the Indian Overseas Bank" at Rs.7,44,340/-. On appeal, the CIT(A) deleted the addition of Rs.4,61,642/- holding that the profit from the project could be ascertained correctly and finally only on completion of the project. Similarly, with regard to the advances received from the customers representing service charges, the CIT(A) deleted the addition of Rs.24,08,748/- and directed the AO to ensure that the said sum was properly accounted for in the relevant A.Y. With regard to the last addition made towards deposits in the current account, the CIT(A) remitted the matter to the AO for determining the quantum of unexplained expenses related to earning unexplained deposit of Rs.7,44,340/-. On further appeal, the Tribunal restored the addition made by the AO at Rs.4,61,642/-. With regard to the second issue on the deletion of addition of Rs.24,08,748/- being service charges receipts, the Tribunal held that once the assessee was following mercantile system of accounting, the service charges having accrued and received by the assessee in the present A.Y would relevant. Hence, the Tribunal set aside order of the CIT(A) on this ground also. Lastly, with regard to the deletion of addition of Rs.7,44,340/- under the head 'deposit in current account' considered as unexplained, the Tribunal held that the said income had not been offered as income in the original return as well as in the revised return, hence liable to be set aside.

Having heard the parties, the High Court held that,

++ it is seen from the order of the Tribunal that the AO had made three additions to the income of the assessee, which was confirmed by the Tribunal. On the first issue, namely, addition of Rs.4,61,642/-, the Tribunal upheld the order of AO primarily on the plea that assessee's counsel had agreed for the inclusion of income and therefore, the CIT(A) was not correct in deleting the addition. On the next issue relating to service charges of Rs.24,08,748/-, the assessee claimed that they have received this amount from three customers representing service charges. Their plea was that the warranty condition was not terminated and therefore, it cannot be offered as income for that year and the AO however, took the view that on installation and commission of the equipment, service charges become due and has to be therefore brought to income for the A.Y 1996-97. On appeal by the assessee, the CIT(A) deleted the addition. The Tribunal however reversed the order of the CIT(A) on the ground that the assessee was following mercantile system of accounting and the service charges that had accrued and received by the assessee for the relevant year should be added to income. On the third issue relating to unexplained deposit of Rs.7,44,340/- in current account, the Tribunal came to hold that once it is accepted as unexplained income and it is not in relation to the trading receipt and offered as income for the A.Y 1996-97 coupled with the statement of the Directors of the company, who agreed for this, there was nothing illegal in the order of AO, and the CIT(A) was not correct in ordering remand to exclude the unexplained expenses. As regards first issue, it is found that the assessee has now produced the assessment order for the A.Y 1998-99 wherein the assessee had offered the amount of Rs.4,61,642/- as income and was assessed accordingly. Insofar as the second issue, the sum of Rs.29,39,092/-, which is part of Rs.24,08,748/-, which was omitted to be included in the original return, was offered as income in the A.Y 1997-98 by the assessee. Therefore, both these issues are remanded back to the AO to verify and pass appropriate orders;

++ as regards the third issue relating to addition of Rs.7,44,340/-, as has been clearly recorded by the AO that this amount does not reflect as a trading receipt, but only as unexplained deposit coupled with the statement of Directors in the presence of Chartered Accountant that it was not offered as income of the said year, the Tribunal was justified in upholding the order of the AO. The CIT(A) was not correct in ordering remand for considering the issue, since it was neither canvassed by the assessee nor was the issue before the CIT(A). The reasoning of the Tribunal which is based on material, which the AO found on verification of the bank statement and other records for the relevant A.Y, is correct. The Tribunal has also found that the income has not been offered in the original return as well as in the revised return. Therefore, the CIT(A) has no reason to order remand, and the order of Tribunal is accordingly confirmed.