[aaykarbhavan] Judgments

 

 

 

 

 

 

 

2013-TIOL-346-ITAT-DEL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'G' NEW DELHI

ITA No.551/Del./2013
Assessment Year: 2009-10

LATE SHRI SUDHIR JAIN
(THROUGH SON & LEGAL HEIR SHRI RAHUL JAIN)
4, UNDER HILL ROAD, CIVIL LINES, DELHI-110054
PAN NO:AAPPJ2083L

Vs

ASSTT COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-9, NEW DELHI

ITA No.552/Del./2013
Assessment Year: 2009-10

SHRI VIRENDARA KUMAR GUPTA
1, SHANKARACHARYA MARG
CIVIL LINES, DELHI-110054
PAN NO:AAAPG6040N

Vs

ASSTT COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-9, NEW DELHI

ITA No.553/Del./2013
Assessment Year: 2009-10

SHRI SHARAD JAIN
D-6, 13B, VASANT VIHAR
NEW DELHI
PAN NO:AAIPJ3610P

Vs

ASSTT COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-9, NEW DELHI

U B S Bedi, JM and B C Meena, AM

Dated: April 30, 2013

Appellants Rep by: Shri K Sampath, Adv. & Shri Raj Kumar, Adv.
Respondent Rep by: Smt Renuka Jain Gupta, Sr. DR

Income Tax - Sections 132(4), 263, 264, 271(1)(C), 271AAA - Whether when Department has taken a view that surrendered income belongs to the members individually and not to AOP, can a different view be taken in the case of AOP by taking the same amount again on the ground that the assessee himself had originally filed the return in the hands of AOP - Whether penalty u/s 271(1)(C) is warranted, when the assessee has disclosed on affidavit the undisclosed income and the manner it was earned during a search operation u/s 132.

A search and seizure operation was carried out on the Group of Gupta & Company Pvt. Ltd. at the various residential and business premises on 10.02.2009. The statement was recorded u/s 132(4) of Shri Virendara Kumar Gupta, one of the Directors of Gupta & Company Pvt. Ltd. He has disclosed Rs.20 crores in the statemen, details of which have been given in answer to the queries sought by the Department. The cheques were also issued by him for the tax liability which has also been recorded in answer to questions as a part of the statement. An affidavit was filed by one of the Group persons, Shri Sharad Jain, wherein the disclosure of Rs.20 crores was substantiated. Rs.7.5 crores was made towards the discrepancy in the inventory prepared on 10.02.2009 at the premises of Gupta & Company Pvt. Ltd. and Rs.12.50 crores was for a joint enterprise of Shri Virendara Kumar Gupta, Shri Sudhir Jain and Shri Sharad Jain compendiously as Sugandh Sansar. The AO did not accept the AOP concept and made the assessment of Rs.12.50 crores in the individual hand of these three members of AOP. There was no further addition to the income declared of Rs.12.5 crores. The declaration of Rs.12.5 crores in the name of Sugandh Sansar was trifurcated in three names. The Commissioner of Income-tax on the application made by AOP of Sugandh Sansar has directed to adjust the taxes paid in the hands of AOP in the hands of individuals also were Members of AOP. In this order, it has also been recorded that there are no words in the Income-tax Act, which empower the Income-tax Officer or give him an option to tax either AOP or its Members individually.

The AO also initiated penalty proceedings. On appeal, while the CIT(A) agreed that the income should be taxed only in the hands of the individuals, but sustained the penalty proceedings.

Aggrieved, the assessee filed this appeal before the Tribunal.

Having heard the parties, the Tribunal held that,

++ in the present case, the Department has taken a view that surrendered amount of Rs.12.50 crores belongs to the members individually and not to AOP, hence no different view can be taken in the case of AOP by taking the same amount again on the ground that the assessee himself had originally filed the return in the hands of AOP. The appeal of individual cases is pending before the CIT (A) and these assessees have given an undertaking that in case the relief is allowed to the AOP "Sugandh Sansar", all the members will withdraw the appeals from CIT (A);

++ thus, the CIT has considered the issue and has finally agreed that the income should be taxed in the hands of the individuals. The taxes had been paid along with the interest in all these individual hands. Since a statement was given during the course of search u/s 132 of Income-tax Act, 1961 admitting the undisclosed income of Rs.20 crores of the Group, the quantum of disclosure of income was affirmed by an affidavit by other person of the Group. The manner was also stated in the statement by which such income was earned. In our considered view, the Group has also substantiated the manner in which this undisclosed income was derived. In the statement recorded u/s 132(4) of the Act and in an affidavit dated 15.05.2009, the disclosure was maintained. The assessees of the Group have also paid the taxes applicable along with interest. In such a situation, the CIT (A) was not justified in sustaining the penalty u/s 271(1)(c) of the Act levied by the Assessing Officer. Considering all these facts and circumstances, we set aside the orders of the authorities below and direct to delete the penalty u/s 271AAA.

Assessee's appeal allowed

ORDER

Per: B C Meena:

All these three appeals are directed against the three orders made by CIT (Appeals)-XXXII, New Delhi on 22.11.2012.

2. All the appellants are individuals and were Directors in Gupta & Company Private Limited. A search operation was conducted on 10.02.2009 on "Gupta & Company Pvt. Ltd. Group". All these three assessees were Directors in Gupta & Company Pvt. Ltd. A statement u/s 132(4) of Incometax Act, 1961 was recorded during the search operation of Shri Virendara Kumar Gupta in which in answer to question nos.18 & 19, the following answer was made :-

"Q.18 Do you want to say anything?

Ans. Considering the position declared above I as director of M/s. Gupta & co. (P) Ltd. declared Rs.20 Crores (Twenty Crore) as additional income for the F.Y. 2008-09 relevant to A.Y. 2009-10. The additional incomes declare of Rs.20 Crores is over and above the regular income of M/s. Gupta & Co. (P) Ltd.

The additional Income declared above includes the following heads:-

i. Amount receivable on a/c of sales made outside the books of accounts based on Annexure A-3 & A-5 as mentioned in reply to Q.No.14 & 15. Further I want to state that Annexure A-3 & A-5 represents the sale of 3 months only and in order to buy peace of mind I as director of M/s. Gupta & Co. (P) Ltd. and with the consent of other directors want to extra polate the sales amount receivable out of books for the current F.Y. i.e. 2008-09. The exact calculation on this a/c shall be submitted shortly. Further on behalf of the company it is clarified that the purchases pending to the said sales are also out of books. Further the sum has been received by making sales by the directors in the F.Y. 08-09 relevant to A.Y.09-10, the amount will be specified shortly and that may be treated as part of additional income declared of Rs.20 crores. Further the excess amount of physical stock over the closing stock as per the books of a/c amounting to Rs.7,63,95,003/- may be treated as past of Rs.20 Crores which has been declared income as stated above.

It may be stated that this additional income of Rs.20 Crores has been declared to buy peace of mind and further no penalty/prosecution will be levied or mistake against the directors and the company.

Q.19 How do you want to pay the tax due on the additional income as declared above?

Ans. For covering the tax liability. 1 offers the following cheques:-

S.NO.	CHEQUE NO.	DATE	AMOUNT
1.	617973	01.03.09	1 Crore
2.	617974	02.04.09	1 Crore
3.	617975	01.05.09	1 Crore
4.	617976	01.06.09	1 Crore
5.	617977	01.07.09	1 Crore
6.	617978	01.08.09	1 Crore
7.	617979	31.08.09	60 Lacs

Further this tax is in additional to the tax on the regular income of the company for i.e. F.Y. 08-09 relevant to A.Y. 09-10."

In answer to question nos.14 & 15, the reply was as under :-

"Q.14 I am showing you Annexure A-3 seized from your room. Please comment upon the nature of entries in it?

Ans. There are the sales made by M/s. Gupta & Co. (P) Ltd. out of books.

Q.15 I am showing you Annexure A-5 which consists of a Diary (black colour). Please explain the nature of entries in it?

Ans. These represents the sell accounts of various parties. These accounts are based on the sale transaction contained in Annexure A-3 as mentioned in Answer No.14."

Thus, there was a disclosure of Rs.20 crores by the Group in the statement recorded u/s 132(4) of the Income-tax Act, 1961 during the search operation. The statement recorded u/s 132(4) was started on 10.02.2009 and completed on 12.02.2009. Thereafter, an affidavit by Shri Sharad Jain was also filed on 05.05.2009 wherein the disclosure of Rs.20 crores was maintained and details of Group history were provided. The disclosure was bifurcated in the following manner :-

		Rs. in Crores
a)	Effect of discrepancies in the inventory prepared by the Authorised officers on 10.02.2009 at the business premises of M/s Gupta & Company Pvt. Ltd., with the clarification submitted from time to time.	7.50
b)	Income earned through the joint enterprise of Shri Virendara Kumar Gupta, Shri Sudhir Jain and Sharad Jain (the deponent here) compendiously known as "Sugandh Sansar" as per the Agreement dated 09.01.1998.	12.50
	Total -	20.00

As per this affidavit, Rs.12.5 crores was stated to be belonging to Sugandh Sansar, which was a joint enterprise of these three assessees and was compendiously known as "Sugandh Sansar" as per agreement dated 09.01.2008. The return of income of "Sugandh Sansar" was filed for the Assessment Year 2009-10 on 30.10.2009 declaring income of Rs.11 crores under the head "Income from business and profession" after claiming operational expenses of Rs.1.5 crores from the surrendered amount of Rs.12.5 crores. The credit for taxes paid was claimed in the following manner :-

1)	Cash seized during search, requested to be treated as advance tax paid	Rs.1,46,46,900/-
2)	Self assessment tax paid	Rs.1,58,68,840/-
3)	Self assessment tax of Rs.1,05,00,000/- (35 lac x 3) paid by all the three members of AOP equally	Rs.1,05,00,000/-
		Rs.4,10,15,740/-

This return was revised by claiming that income declared was under the head "Income from other sources" instead of "Income from business and profession". There was no change in the tax liability as income remains the same. The assessment was made in the hands of three Members of Association of Persons (AOP) u/s 143(3) read with sections 153A & 153C on 31.12.2010. Assessing Officer chose to tax declared income of Rs.12.5 crores in the individual hands of members. The income of Rs.12.5 crores was assessed in the individual hands of the Members of AOP and no relief was granted for operational expenditure. The entire income of Rs.12.5 crores was divided equally in three heads. The assessment was made in individual hands of members of AOP, the credit for taxes paid by AOP was not accorded in their individual hands. On the application by the AOP before the CIT-VII, Delhi, an order u/s 264 of the Income-tax Act, 1961 was passed on 18.06.2012. The relevant para of this order is reproduced as under :-

"6. I have given a careful consideration to the case law cited by the assessee and am of the view that the relief may be allowed to the assessee. This reminds me the judgement of Supreme Court in the case of ITO vs Ch. Atchaiah (218 ITR 239) = (2002-TIOL-799-SC-IT) wherein it is held that the income has to be assessed in the hands of "right person" alone. By "right person" is meant the person who is liable to be taxed, according to law, with respect to a particular income. There are no words in the Income Tax Act, which empower the Income Tax Officer or give him an option to tax either the AOP or its members individually. If it is the income of the AOP in law, the association of persons alone has to be taxed; The members of the AOP cannot be taxed individually in respect of the income of the AOP. Consideration of the interest of the revenue has no place in this scheme. In the present case, department has taken a view that the surrendered income of Rs.12.5 crore belongs to the members individually and not to the AOP hence, no different view can be taken in the case of AOP by taxing the same amount again on the ground that the assessee himself had originally filed the return offering the surrendered amount in the hands of AOP. Hence the 2nd revised return filed by the assessee on 08.01.2011 requires consideration. The revisional powers of the Commissioner u/s 264 of the Income Tax Act 1961, has all the trappings of a judicial power. Jurisdictional High Court in the case of Aparna Ashram vs Director of Income Tax (258 ITR 401), after relying upon the judgement of Supreme Court in the case of Dwarka Nath vs ITO (57 ITR 349) have held that the jurisdiction conferred u/s 264 is a judicial one. The nature of the jurisdiction and the rights decided carry with them necessarily the duty to Act judicially in disposing of the revision. The revisional power has to be exercised on an objective consideration of the facts and circumstances of the case. The power is coupled with a duty to be exercised in the interest of doing real justice between the parties, particularly when under the Act the order passed u/s 263 is final. The assessee's claim has substantial merit. Assessment at Rs.22 crore made in the intimation u/s 143(1) requires to be set aside and the income has to be determined at "Nil".

7. It was specifically asked to the assessee as to what happened to the cash of Rs.1,46,46,900/- seized during search which was requested to be treated as advance tax and also to the sum of Rs.1,05,00,000/- (Rs.35 lac x 3) paid by all the 03 members of AOP equally as self assessment tax as the relief has been claimed only with respect to a sum of Rs.1,58,68,840/- paid by the AOP as self assessment tax. It has been explained by the assessee that the cash seized during search is already considered in the hands of persons from whom the same was seized. Similarly, amount of Rs.35 lac paid by each member as self assessment tax (total Rs.1,05,00,000/-) has been considered in the hands of each member and therefore, relief is claimed only with respect to a sum of Rs.1,58,68,840/-. I am of the view that when the sum of Rs.1,46,46,900/- and Rs.1,05,00,000/- has been considered in the hands of members then the relief may also be granted to the assessee with respect to self assessment tax of Rs.1,58,68,8401- and the same be considered in the hands of all the 03 members of AOP equally as self assessment tax paid by them with respect to the surrendered amount of Rs.12.5 crore.

8. In view of the fact that the appeals in the individual cases of the members of the AOP namely Shri V.K. Gupta, Shri Sudhir Jain and Shri Sharad Jain are still pending before CIT(A), the assessee was asked to clarify its position with regard to these appeals. The assessee has filed an undertaking from all the three members of the AOP pointing out that the appeal have been filed against the additions made of the same amount which had been offered to tax by the assessee AOP M/s Sugandh Sansar. Further it has been stated that in case the relief allowed to the AOP M/s Sugandh Sansar, all the three members of the AOP undertake to withdraw their appeals from the CIT(A). In view of his undertaking, it is further held that the relief granted in the preceding para will be effective only after the appeals have been withdrawn in the case of members of the AOP and the same have become final."

While making the assessment in the hands of individual penalty proceedings u/s 271AAA of the Income-tax Act, 1961 was initiated. The Assessing Officer has levied the penalty with the prior approval of Addl.CIT, Central Range 4, New Delhi on 27.06.2011. The assessee went in appeal and the CIT (A) has confirmed the penalty. Now all these three assessees are in appeal before us by taking following grounds of appeal :-

"1. The order of the Ld. CIT (Appeals) XXXII, New Delhi is bad in law and on facts.

2. The Ld. CIT (Appeals) XXXII has erred in confirming the penalty order of ACIT, CC-9, New Delhi wherein Ld. ACIT imposed penalty u/s 271AAA of the Act amounting to Rs.41,66,666/-.

3. The Ld. CIT (A) erred in overlooking / summarily rejecting the detailed submissions made by the appellant on the issue of applicability of section 271 AAA and thereupon levying of penalty under the section.

4. The Ld. CIT (Appeals) XXXII has erred in ignoring the fact that the questioned addition to the assessee's income was already a disclosed income to which provisions of Section 271 AAA (1) has no applicability.

5. The Ld. CIT (Appeals) XXXII has erred in not considering the true facts 111 his order and denying the benefit of provisions of Section 271AAA (2) of the Act.

6. The Appellant craves leave to add, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other."

3. While pleading on behalf of the assessee ld. AR submitted that as per the provisions of section 271AAA, the Assessing Officer can direct the assessee to pay by way of penalty, in addition to tax, if any, payable by him, a sum computed @ 10% of the undisclosed income of the specified previous year. This provision is not applicable where the assessee in the course of search, in a statement under sub-section (4) of section 132, admits the undisclosed income and specifies the manner in which such income has been derived, substantiates the manner in which the undisclosed income was derived and pays the tax, together with interest, if any, in respect of the undisclosed income.

In the case under consideration, a statement u/s 132(4) was recorded during the search and seizure operations. In the statement recorded u/s 132(4), Shri Virendara Kumar Gupta, Director on behalf of Gupta & Company Group, a disclosure of Rs.20 crores was made. Recording of the statement was commenced on 10.02.2009 and it was continued up to 12.02.2009. The panchnama shows that the search commenced on 10.02.2009 and continued up to 12.02.2009 at 4.50 AM. Thereafter, this disclosure was confirmed by an affidavit of Shri Sharad Jain in which the discrepancies found during the search and the total background of the Group has been narrated on oath.

The disclosure remained at Rs.20 crores only by the Group, there was no reduction in the disclosure. Rs.7.5 crores were disclosed towards the discrepancy in inventory and Rs.12.5 crores was disclosed in the joint enterprise of Shri Vurebdara Jynar Gupta, Shri Sudhir Jain and Shri Sharad Jain compendiously known as Sugandh Sansar as per the agreement dated 09.01.1998. The assessment has been made of Rs.12.50 crores in the individual hands of the Members of AOP. There are no further addition in the declare income.

The income of Rs.12.50 crores has been trifurcated. Thus, the amount of disclosure of the Group remains the same which was disclosed during the search operation. It is also a fact that in a continuous search operation for 3 days, no person shall be able to give the exact figures of the disclosure, however, in the case under consideration, even the stock inventory was duplicated and it was of lesser amount and even then for the peace of mind, the disclosure kept in the same level which was disclosed at the time of search operation.

The assessee has also narrated the manner in which the income was derived and it has substantiated the manner in which the undisclosed income was derived whenever the assessee was asked to substantiate the same. The assessee has paid the taxes together with interest in respect of this undisclosed income declared in the statement recorded under sub-section (4) of section 132 of the Income-tax Act, 1961. Therefore, the assessee should not be visited by penalty u/s 271AAA of the Income-tax Act, 1961.

4. On the other hand, the ld. DR relied on the orders of the authorities below and also pleaded that during the search, recording of statement under sub-section (4) of section 132, the assessee has not disclosed the name of Sugandh Sansar for which the disclosure was made. She also pleaded that Sugandh Sansar was not having any visible operation for earning such income.

5. We have heard both the sides on the issue. The search and seizure operation was carried out on the Group of Gupta & Company Pvt. Ltd. at the various residential and business premises on 10.02.2009. the statement was recorded u/s 132(4) of the Income-tax Act, 1961 of Shri Virendara Kumar Gupta, one of the Directors of Gupta & Company Pvt. Ltd. He has disclosed Rs.20 crores in the statement. Details of which have been given in answer to question no.18. The cheques were also issued by him for the tax liability which has also been recorded in answer to question no.19 of the statement. An affidavit was filed by one of the Group persons, Shri Sharad Jain, wherein the disclosure of Rs.20 crores was substantiated. Rs.7.5 crores was made towards the discrepancy in the inventory prepared on 10.02.2009 at the premises of Gupta & Company Pvt. Ltd. and Rs.12.50 crores was for a joint enterprise of Shri Virendara Kumar Gupta, Shri Sudhir Jain and Shri Sharad Jain compendiously as Sugandh Sansar. Assessing Officer did not accept the AOP concept and made the assessment of Rs.12.50 crores in the individual hand of these three members of AOP. There is no further addition to the income declared of Rs.12.5 crores. The declaration of Rs.12.5 crores in the name of Sugandh Sansar was trifurcated in three names. The Commissioner of Income-tax on the application made by AOP of Sugandh Sansar has directed to adjust the taxes paid in the hands of AOP in the hands of individuals also were Members of AOP. In this order, it has also been recorded that there are no words in the Income-tax Act, which empower the Income-tax Officer or give him an option to tax either AOP or its Members individually. In the present case, the Department has taken a view that surrendered amount of Rs.12.50 crores belongs to the members individually and not to AOP, hence no different view can be taken in the case of AOP by taking the same amount again on the ground that the assessee himself had originally filed the return in the hands of AOP. The appeal of individual cases is pending before the CIT (A) and these assessees have given an undertaking that in case the relief is allowed to the AOP "Sugandh Sansar", all the members will withdraw the appeals from CIT (A). Thus, the CIT has considered the issue and has finally agreed that the income should be taxed in the hands of the individuals. The taxes had been paid along with the interest in all these individual hands. Since a statement was given during the course of search u/s 132 of Income-tax Act, 1961 admitting the undisclosed income of Rs.20 crores of the Group, the quantum of disclosure of income was affirmed by an affidavit by other person of the Group. The manner was also stated in the statement by which such income was earned. In our considered view, the Group has also substantiated the manner in which this undisclosed income was derived. In the statement recorded u/s 132(4) of the Act and in an affidavit dated 15.05.2009, the disclosure was maintained. The assessees of the Group have also paid the taxes applicable along with interest. In such a situation, the CIT (A) was not justified in sustaining the penalty u/s 271(1)(c) of the Act levied by the Assessing Officer. Considering all these facts and circumstances, we set aside the orders of the authorities below and direct to delete the penalty u/s 271AAA.

7. In the result, all the three appeals of assessees are allowed.

(Order pronounced in open court on this 30.4.2013.)

2013-TIOL-338-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A' AHMEDABAD

ITA No.2319/AHD/2009
Assessment Year: 2006-07

INCOME TAX OFFICER
WARD-2(3), AAYAKAR BHAVAN
BHAVNAGAR

Vs

M/s SWASTIK ENGINEERING STORES
STATION ROAD, SIHOR
DISTRICT BHAVNAGAR-364240
PAN NO:AAHFS5005J

G C Gupta, VP and Anil Chaturvedi, AM

Dated: February 15, 2013

Appellant Rep by: Mr Rahulkumar, Sr.DR
Respondent Rep by: Mr S N Soparkar, Sr.Adv.

Income Tax - Sections 143(3), 145(3) - Whether the CIT(A) has erred in deleting the addition made by the A.O. on account of unexplained investment in stock when the observation of the CIT (A) that the declaration of higher stock to bank was out of business expediency was not supported by any material on record.

The assessee was a firm engaged in the business of diesel engines, gear box, spare parts of diesel engines and steel on wholesale/retail basis particularly with the manufacturer of three wheelers. The assessee assessment was framed u/s. 143(3) by making various additions/disallowances. The CIT (A) allowed the appeal of the assessee. With respect to addition of Rs.30,92,616./- on account of unexplained. The CIT (A) deleted the addition.

On Appeal before the Tribunal the DR submitted the assessee could not reconcile the difference of stock by bringing any tangible material on record. He further submitted that CIT (A) while deleting the addition has given a general statement without bringing any material on record in support of his observation that the stock statements submitted to banks are generally exaggerated. The A.R. on submitted that the books of accounts of assessee were audited and the A.O. has not found any error in the books of accounts of the assessee and no defects have been observed in the books of accounts and the A.O. has also not invoked the provisions of Sec. 145 (3). He further submitted that if the impugned addition is made, G.P. will work out to 10% which is highly improbable in the line of business of the assessee.

Having heard the parties, the Tribunal held that,

++ the assessee is required to explain its stock position, however, there may be difference in valuation but here the contention of the assessee is that before bank valuation of stock was based on the weight is incorrect. No material has been brought on record to substantiate that the limit granted by bank to assessee were fully exhausted. Further the observation of the CIT (A) that the declaration of higher stock to bank is out of business expediency and not an offence is not supported by any material on record. The matter should once again be examined by the A.O;

++ with respect to the addition of Rs.22,660/- on account of interest expenses, the advance given by the firm was for the business expediency. These facts could not be controverted by the Revenue by bringing any material on record. No reason to interfere with the order of CIT (A) and thus uphold his order.

Revenue's appeal partly allowed

ORDER

Per: Anil Chaturvedi:

This appeal is filed by the Revenue against the order of Ld. CIT (A)- XX, Ahmedabad dated 9-6-2009 for the assessment year 2006-07.

2. The assessee is a firm engaged in the business of diesel engines, gear box, spare parts of diesel engines and steel on wholesale/retail basis particularly with the manufacturer of three wheelers. The assessee filed its return of income on 26-12-2006 declaring total loss of Rs. 17,609/-.The case was selected for scrutiny and vide order dated 23-12-2008 assessment was framed u/s. 143(3) of the Act and total income was determined at Rs.30,97,670/- by making various additions/disallowances. Aggrieved by the order of the A.O. assessee carried the matter before the CIT (A).

3. CIT (A) vide its order dated 9-6-2009 allowed the appeal of the assessee. It is against the aforesaid order of CIT (A), the Revenue is now in appeal before us.

4. Before us the Revenue has raised the following grounds:-

"1. The Ld. CIT(A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.30,92,616/- made by the A.O. on account of unexplained investment in stock, without properly appreciating the facts of the case and the material brought on record by the A.O.

1.2. In doing so, the Ld CIT(A)-XX, Ahmedabad has erred in law and on facts in not appreciating that the said excess stock appearing in the bank statement furnished by the assessee was also physically verified by the bank and in the additional statement submitted by the assessee to the bank in connection with the physical verification of stock by the bank authority, the assessee had also admitted the physical possession of the said excess stock shown to the bank.

1.3. In doing so, the Ld. CIT (A)-XX, Ahmedabad has erred in law and on facts in not appreciating the ratio of the following decisions of the Hon'ble High Courts:

i) 207 ITR 909 (Kerala)

ii) 201 ITR 191 (Gauhati) and

iii) 125 ITR 33 (Allahabad)

2. The Ld. CIT (A)-XX, Ahmedabad has erred in law and on facts in deleting the addition of Rs.22,660/- made by the A.O. by disallowing a part of the interest expenses claimed by the assessee, without properly appreciating the facts of the case and the material brought on record by the Assessing Officer.

2.2. In doing so, the Ld. CIT (A)-XX, Ahmedabad has erred in law and on facts in not appreciating that no commercial expediency was involved in giving the loan of Rs.1,51,067/- by the assessee firm to the son of a partner without charging any interest on the said loan."

5. Ground No.1 addition its sub grounds are with respect to addition of Rs.30,92,616./- on account of unexplained investment in stock.

6. During the course of assessment proceedings A.O. observed that the assessee has availed secured loan by hypothecating stock from Sihor Mercantile Co-operative Bank and the balance outstanding as on 31-3- 2006 was Rs.14,36,506. The A.O. issued a notice u/s.133 (6) to the Bank and interalia asked for details of credit facilities, stock statements and the facilities extended to the assessee. On verification of the stock statement that was submitted by the assessee to Bank A.O. noticed that physical verification of stock was carried out by Bank on 22-3-2006 and the value of stock of godown as admitted by the partner of the assessee firm on the date of verification was Rs.34,03,218/-. A.O. further observed that in the statement of stock of hypothecated goods as on 31-3-2006, the assessee has shown the value of stock at Rs.39,97,454/- but the value of closing stock shown in the assessee's balance sheet as on 31-3-2006 was only Rs.9,04,838/-. The assessee's explanation with respect to the difference in stock between the books and as shown to the Bank was that on account of the weak financial position of the firm and in order to obtain bank finance, excess stock was shown and declared to the Bank. The submissions of the assessee were not found acceptable to the A.O. He thus, determined the difference in the value of stock of Rs.30,92,616/- (Rs.39,97,754 less Rs. 9,04,838) which according to the A.O. was unaccounted stock as on 31-3- 2006. He accordingly concluded that the assessee was in possession of undisclosed stock of Rs.30,92,616/- as on 31-3-2006 which was shown to the bank but was not recorded in the books of accounts. He accordingly made the addition of Rs.30,92,616/- as undisclosed income representing unaccounted stock.

7. Aggrieved by the action of A.O. the assessee carried the matter before the CIT (A).

8. CIT (A) after considering the submissions made by the assessee deleted the addition by holding as under:-

"3.1. I have gone through the facts of the case and also the contentions raised by the A.R. in his written submission. The A.O. during the course of assessment proceedings, observed difference in the value of closing stock as per appellant's books and that as per stock statements submitted to the bank as on 31-3-2006.It is a known factor that such statements have to be mandatorily furnished to banks in order to procure or enhance cash credit facilities, without which there will be a dearth in the working capital flow. Therefore, it is very clear that such statements are usually exaggerated to procure maximum benefits from the bank. On the other hand, there is nothing on record nor has the A.O. highlighted any instances to prove that the appellant had made unexplained investment in stock. The A.O. has not pointed out any defects in the books of account which could prove that the books of accounts and entries therein are not reliable. The A.O. has made the addition u/s. 69B of the Act as unexplained investment. The basic condition to be satisfied under this section is that the A.O. should find that the amount expended on making such investment exceeds the amount recorded in this behalf in the books of account. It is therefore necessary to prove that the appellant made the payments for such investments over and above those reflected in the books of account. In the present case the A.O. has nowhere established that the appellant made excess payments for purchasing the stock. The only thing that has been discovered by the A./O. is that the quantity of stock reflected in the stock statement give to bank is more than the stock position in the books of account. This difference itself does not automatically attract the deeming provisions of Sec.69B of the Act. As a matter of fact, there is substantive force in the appellant's argument that since its limit facility had exhausted and if it failed to offer stock for hypothecation, the working capital would be affected which would even result in closure of business.

3.2. Thus considering the fact that the appellant has been maintaining books of account according to recognized accounting principle in the ordinary course of its business. Thus, entries so made carry with them presumption of truth unless proved otherwise. If it came to the notice of A.O. that excess stock has been shown to the bank even in terms of quantity, then ipso facto addition should not be the result. It is also fact that the appellant's stock was hypothecated and not pledged. In the case of pledge, stock remains under the lock and key of the bank authorities; whereas in the case of hypothecation, such goods remain in the custody of the assessee. The Hon'ble ITAT Ahmedabad Bench in the case of ITO vs. Mapin Publishing (P) Ltd. 96 TTJ (Ahd) 990 supports the above finding. Therefore, this make shift arrangement is nothing but a business exigency and cannot be termed as an offence, particularly when the benefit of such an arrangement is quite known and very limited. Hence, in the absence of any evidence revealing appellant's involvement in making unexplained purchases in investment, the addition made merely on the basis of a bank statement cannot be upheld. As such, the addition is directed to be deleted."

9. Aggrieved by the order of CIT (A), the Revenue is now in appeal before us.

10. Before us, the Ld. D.R submitted that the stock position of godown of the assessee was physically checked by bank on 22-3-2006 and the partner of the assessee firm in his statement submitted to the Bank admitted the value of stock to be of Rs.34,02,218/-. He further submitted that the assessee's stock statement was received by A.O. from bank in pursuance of the notice u/s. 133 (6). The Ld. D.R. further submitted that the assessee could not reconcile the difference of stock by bringing any tangible material on record. He further submitted that CIT (A) while deleting the addition has given a general statement without bringing any material on record in support of his observation that the stock statements submitted to banks are generally exaggerated. Thus, D.R. supported the order of A.O and also relied on the decision of the Hon'ble Gauhati High Court in the case of Dhansiram Agarwalla vs. CIT (1993) 201 ITR 192 (Gau.),wherein Hon'ble High Court had concluded that when assessee has not put-forward any explanation as regards the discrepancy in the value of stock as disclosed to the Bank and shown in the balance sheet addition u/s. 60B was justified.

11. He further relied on the decision of Punjab and Haryana High Court in the case of B. T. Steels Ltd. vs. CIT (2010) 328 ITR 471 (P & H) where the assessee neither denied the statement made to Bank nor furnished any valid explanation about the discrepancy and on verification from Bank showed that the assessee had excess stock addition made by the Revenue was confirmed. He thus relied on the aforesaid decisions and urged that the action of the A.O. be confirmed.

12. Ld. A.R. on the other hand submitted that the books of accounts of assessee are audited and the A.O. has not found any error in the books of accounts of the assessee and no defects have been observed in the books of accounts and the A.O. has also not invoked the provisions of Sec. 145 (3). He further pointed out that the assessee's Gross Profit during the year was 3.87% as compared to 4.38% in the immediately preceding year. If the impugned addition of Rs.30.93 lacs is made, G.P. will work out to 10% which is highly improbable in the line of business of the assessee. Before us the Ld. A.R. further submitted that the stock statement given to the bank cannot be compared with the stock as on the balance sheet date for the reason that in the stock statement submitted to the bank, assessee has disclosed the stock in Kilograms whereas in the closing stock statement which was part of tax audit report and copy of which was placed at page 17 of paper book, the quantity was in numbers. He further placed reliance on the decision of Gujarat High Court in the case of CIT vs. Arrow Exim (P) Ltd., (2010) 230 CTR 293 (Guj.), CIT vs. N. Swamy (2000) 241 ITR 363 (Mad.) and the decision of Rajasthan High Court in the case of CIT vs. Relaxo Footwear 259 ITR 744 (Raj.). He thus, supported the order of CIT (A).

13. We have heard the rival submissions and perused the material on record. It is an undisputed fact that physical verification of stock was carried out by the Bank on 22-3-2006 and further as admitted by the partner of the firm the value of the stock on the date of verification was Rs.34,03,218/-. As per the statement of hypothecated stock as on 31-3-2006 that was submitted to bank, the value of stock was stated to be Rs. 39,97,454/- but the value of stock as per balance sheet was stated to be Rs.9,04,838/-. Before us the Ld. A.R. submitted that in the stock statement of hypothecated goods submitted to the bank, the quantity of stock is shown in kilograms whereas in the tax audit report placed at page-17 of paper book the quantity of stock it is shown in numbers. It is an undisputed fact that the assessees is engaged in the business of diesel engines, gear box and spare parts of diesel engine and the sale of goods are in numbers and not on the basis of weight. It does not sell the diesel engine spares on the basis of weight. The assessee has not produced a single invoice before us to demonstrate that the sales are made on the basis of weight and not on the basis of numbers. Even in the stock statement which forms part of tax audit report, the assessee has shown the quantitative stock in numbers and not in kilos. Nothing has been brought on record by the assessee to substantiate its stand that though the unit of measurement of its sale/purchase is number but for the purpose of submission of stock statement to bank the quantity is reported in kilograms. The explanation of the assessee also seems improbable in view of the fact that a trader is required to disclose the quantitative details of stock by using the same unit of measurement in which it generally deals. Before us the assessee has not brought on record any copies of the purchase or sales bills or the stock statement submitted to bank for the earlier period where the unit of measurement used for submission of quantitative information was kilos and not numbers. We further find that though in paragraph 6.1 of the assessment order the A.O. has stated that the reply of the Bank dated 29-9-2008 and hypothecated stock memo for the month of March, 2006 forming part of the assessment order is enclosed as Annexure-A, but the same are not available before us in the documents filed by both the parties. We further find that CIT (A) while deleting the addition has held that declaration of higher stock to Bank is nothing but business expediency and cannot be termed as an offence particularly when the benefit of such arrangement is quite known and very limited. CIT (A) has further accepted the assessee's argument that since its limit facility had exhausted and if the assessee failed to offer stock for hypothecation, the working capital would have affected which would have resulted in closure of business. We cannot uphold the view of Ld. CIT (A), as same is against the settled position of law. The assessee is required to explain its stock position, however, there may be difference in valuation but here the contention of the assessee is that before bank valuation of stock was based on the weight is incorrect. No material has been brought on record before us to substantiate that the limit granted by bank to assessee were fully exhausted. Further the observation of the CIT (A) that the declaration of higher stock to bank is out of business expediency and not an offence is not supported by any material on record. In view of these facts, in the present case, we therefore, feel that to meet the ends of justice the matter should once again be examined by the A.O. and he should bring on record the correct factual position that whether the sales made by assessee is on the basis of weight or numbers, whether the stock submitted to the Bank was in Kgs. or in numbers and whether the assessee has been submitting higher stock figures as compared to its book stock to bank in the past and for earlier months in the year under appeal. We therefore, remit the issue to the file of A.O. with a direction to him to decide the matter afresh after considering the relevant material and aforesaid facts and after giving a reasonable opportunity of hearing to the assessee. Thus this ground of the Revenue is allowed for statistical purposes.

Ground No.2 is with respect to the addition of Rs.22,660/- on account of interest expenses.

14. During the course of assessment proceedings A.O. observed that assessee has granted loan to Shri Jayantibhai Maniar of Rs.1,51,067/- out of interest bearing funds of the firm. In reply to the show cause notice of the A.O. the assessee submitted that the borrower is a son of another partner and is also Manager of the firm. The amount was borrowed for the purpose of business. A.O. was of the view that when assessee accepts loan on interest from outside parties and also gives interest on the capital to the firm, interest must be charged from partner's son. He accordingly calculated the interest @ 15% of Rs.1,51,067/- and added Rs.22,660/- as the income of the assessee. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A).

15. CIT (A) after considering the submissions of the assessee deleted the addition by holding as under:-

"4.1. I have gone through the facts of the matter, as narrated by the A.O. in the assessment order and as argued by the A.R. of the appellant. It is seen that, though Shri Jayantibhai Maniar was son of one of the partner, it can also not be ruled out that he was also an employee of the firm, functioning in managerial capacity. It is not a case where such loan has not been advanced or benami advance has been made. It is only that the A.O. was of the view that the appellant being a good business concern, ought not to have advanced loan without charging any interest. The beneficiary of the loan is one of the key employees of the appellant firm. The appellant knows the prudence of helping its employees in their crisis, for which a long bonding relationship amongst them is developed. The A.O. cannot deny such an unseen benefit derived by the appellant in standing beside his key person during his difficult times. In cases where notional interests are proposed to be taxed, the circumstantial evidences are also required to be considered. The A.O. cannot merely brush aside the appellant's contention in this regard. Therefore, the addition of notional interest is directed to be deleted."

16. Aggrieved by the action of CIT (A), Revenue is now in appeal before us.

17. Before us the Ld. D.R. relied on the order of the A.O. and also placed reliance on the decision of Delhi High Court in the case of Punjab Stainless Steel Industries vs. CIT 324 ITR 396 = (2010-TIOL-347-HC-DEL-IT), the Ld. A.R. on the other hand submitted that the funds were give for the purpose of business as Shri Jayantibhai Maniar was also an employee of the firm and functioning as a Manager. He thus supported the order of CIT (A).

18. We have heard the rival submissions and perused the material on record. We find that CIT (A) while deleting the addition has given finding that Shri Jayantibhai Maniar was the son of another partner and was also an employee of the firm. The A.O. has made an addition as the assessee had advanced interest free loan out of the interest bearing funds. The advance given by the firm was for the business expediency. These facts could not be controverted by the Revenue by bringing any material on record. In the case of Punjab Stainless Steel Industries (supra) the facts were "that the assessee did not claim before the A.O., that the advances were actuated by way of commercial expediency. The plea of commercial expediency was not set up before the Commissioner (Appeals) as well. The plea of commercial expediency in advancing the loan was set up for the first time before the Tribunal. The assessee, however, failed to make out a case of commercial expediency before the Tribunal. The assessee was required not only to claim commercial expediency but also to establish it from the material available to the A.O. It had not even made such an attempt." Thus the facts of the case relied by Ld. D.R. are distinguishable and cannot be applied to the facts of the present case.

19. In view of these facts we find no reason to interfere with the order of CIT (A) and thus uphold his order. Thus this ground of the Revenue is dismissed

20. In the result, appeal of the Revenue is partly allowed.

(Order pronounced in Open Court on 15.2.2013.)

2013-TIOL-343-ITAT-INDORE

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH, INDORE

ITA No.602 & 603/Ind/2012
Assessment Years: 2004-05 & 2005-06

ASSTT COMMISSIONER OF INCOME TAX
1(1), BHOPAL

Vs

M/s S K JAIN, BHOPAL

Joginder Singh, JM and R C Sharma, AM

Dated: March 22, 2013

Appellant Rep by: Smt Mridula Bajpai, CIT-DR
Respondents Rep by: Shri H P Verma & Pankaj Shah, Advs.

Income tax - Sections 153A, 271(1)(c) - Whether when estimated addition is confirmed by ITAT but no incriminating evidence was found/seized either in kind or in coin to substantiate that the income assessed and ultimately sustained on estimations, was, the concealed income earned by the assessee, penalty u/s 271(1)(c) is not sustainable.

Assessment was made u/s 153A making addition by estimating higher net profit rate, which was substantially reduced by CIT (A) and the order of CIT (A) was confirmed 

CIT (A) deleted the penalty observing that the estimated addition was made when books of account etc. could not be produced before the AO in assessment proceedings. Where the income was substituted for the returned income, in my considered view, it is not a case of addition or disallowance to warrant penalty since the substitution for the returned income, was based on estimations only. This is a case where the addition sustained was based purely on estimations and no suppression in receipts was detected. Penalty should not be exigible merely because income was estimated due to the inability of the appellant to prove its income. The tax payers who file the return necessarily deserves better treatment than those who do not file the returns at all. Penalty proceedings are distinct from assessment proceedings and as such, before imposing penalty u/s 271(1)(c), a heavy burden was cast upon the AO to conclusively prove beyond all shadows of doubt that the addition ultimately sustained on estimations with reference to which the impugned penalty was imposed, was the income earned by the assessee from sources undisclosed to the department. This essential ingredient was not proved by the AO against the appellant, to justify the impugned levy. Penalty was imposed simply because the addition made was sustained in appeal. Unless there is a categorical finding of fact, based on evidence to be brought on record against the appellant to this effect, imposition of penalty u/s 271(1)(c) in respect of such addition made, and sustained in appeals without proving falsity in the explanation submitted and without bringing any evidence against the appellant, was unjustified. It is settled law that where an explanation offered by the assessee has not been accepted, it is open to the Revenue to treat a particular sum as income from undisclosed sources. But from the mere fact that the explanation of the taxpayer has not been accepted, it cannot necessarily be inferred that the amount ultimately sustained on estimations as in the case of the appellant, under consideration, constituted concealed income which would attract penalty u/s 271(1)(c). Even under Explanation 1, initial burden is on the Department to prima facie record concealment. The whole idea behind the Explanation I is that the assessing authority has to first record reasons for arriving at a conclusion that there is a failure on the part of the assessee. The initial burden is on the Department to prima facie record that there was concealment and thereafter explanation is to be sought and in case the explanation is found to be false, then to the extent the income is found to have been concealed and the explanation is found to be false, then the authority can proceed against the assessee. The Statute has clearly drawn a distinction between a deliberate false explanation furnished by the assessee and an explanation, which may not be false.

After hearing both the parties, the ITAT held that,

++ AO has estimated net profit rate at 8% which was reduced to 5.18% and the order of CIT (A) was confirmed by Tribunal. In the instant case, a categorically finding has been recorded by the CIT(A) to the effect that despite extensive search operation, nothing incriminating was found/seized either in kind or in coin to substantiate that the income assessed and ultimately sustained on estimations, was, the concealed income earned by the assessee, since this was not conclusive and independently proved against the assessee on the strength of any evidence. Therefore, there is no reason to interfere in the order of CIT (A) deleting the penalty.

Revenue's appeal dismissed

ORDER

Per: R C Sharma:

These are the appeal filed by the Revenue against the order of CIT(A) for the assessment year 2004-05 and 2005-06 in the matter of imposition of penalty u/s 271(1)(c) of the Income-tax Act, 1961.

2. Rival contentions have been heard and records perused. Facts in brief are that while framing assessment u/s 153A read with Section 143(2), additions were made by estimating higher net profit rate, which was substantially reduced by the ld.CIT(A) and the order of CIT(A) was confirmed by the Tribunal. The impugned penalty was imposed with respect to the addition so retained with respect to estimated net profit rate applied on the contract receipts. By the impugned order, the CIT(A) deleted the penalty after having the following observations :-

"1.4. The rival submissions have been carefully considered with reference to the facts obtaining from the record. There is no dispute with regard to the fact that the AO estimated the NP @ 8% and this estimation was reduced to 5.18% in the first appeal and the ITAT upheld the estimation of NP @ 5.18%, as made by the first appellate authority and dismissed the appeals of the appellant and the Department The impugned penalty was with reference to the estimated addition sustained in first and second appeals. In the circumstances in which the appellant was then, books of account etc. could not be produced before the AO in assessment proceedings and this led to determination of appellant's income by estimation of NP. That estimate made by the AO, being on the higher side, the same was reduced in first appeal and the ITAT upheld the order of the (CIT Appeals) on this issue. In my considered view, this was a case of non-acceptance of the circumstances explained by the appellant for not producing the books of account etc. in the proceedings before the AO.

The genuineness and bona fides in the stated circumstances have to be proved as a fact like any other fact on preponderance of probabilities uninfluenced by any rule of presumption. There cannot be any presumption against bona fides. While all official acts are presumed to be done bona fide, there appears to be no reason to assume that could not be rejected merely it was not supported. Grounds for penalty are not the same as for addition. Where the income was substituted for the returned income, in my considered view, it is not a case of addition or disallowance to warrant penalty since the substitution for the returned income, was based on estimations only. This is a case where the addition sustained was based purely on estimations and no suppression in receipts was detected. III such circumstances, there could be no penalty since the AO failed to bring on record something more to indicate and establish that there has been concealment on the part of the appellant [CIT v. Dhillon Rice Mills (2002) 256 ITR 447 (P&H) and CIT v. Metal Products of India (1984) 150 ITR 714 (P&H)]. In my considered view, penalty should not be exigible merely because income was estimated due to the inability of the appellant to prove its income. The tax payers who file the return necessarily deserves better treatment than those who do not file the returns at all. My proposition that penalty could not be imposed since the impugned addition ultimately sustained was based merely on estimate, finds further support from the decision of the P&H High Court in Harigopal Sigh v. CIT (2002) 258 ITR 85 (P&H). In Bansal Brothers v. ACIT (2011) 17 ITJ 241 (Indore ITAT) addition was made by estimating higher rate of profit. Penalty was levied with reference to the said estimated addition. The jurisdictional Bench of the ITAT held that: The addition having been made only by estimating profit rate, penalty u/s 271 (1)(c) was not leviable. The penalty imposed was accordingly deleted. Penalty proceedings are not mechanical but the same were quasi-criminal and hence, penalty could not be levied in case of estimation of income. The AO had not brought any evidence on record to prove conscious concealment on the part of the appellant nor had he brought any evidence to justify that the appellant furnished inaccurate particulars of its income. In the given facts and circumstances of the case, respectfully following the decision in Nai Dunia v. ACIT (2008) 10 ITJ 162 (ITAT Indore), the impugned penalty imposed by the AO is held unsustainable. In A.T.Associates v. JCIT (2005) 4 IT] 390 (Nag. ITAT) net profit was assessed on estimate basis by applying section 145 of the Act. Penalty was imposed for concealment of income. In first appeal the quantum of penalty was reduced but levy was confirmed. When the matter went before the ITAT, it was held that: Provisions of section 271(1)(c) were not attracted where the income of an assessee was assessed on estimate based is and additions were made therein. By observing as above, penalty imposed by the Assessing Officer u/s 271(1)(c) was deleted. It is undisputed that penalty proceedings are distinct from assessment proceedings and as such, before imposing penalty u/s 271(1)(c), a heavy burden was cast upon the AO to conclusively prove beyond all shadows of doubt that the addition ultimately sustained on estimations with reference to which the impugned penalty was imposed, was the income earned by the appellant during the relevant previous year from sources undisclosed to the department. In the case of the appellant, under consideration, this essential ingredient was not proved by the AO against the appellant, to justify the impugned levy.

1.5. As already stated, the impugned penalty was imposed simply because the addition made was sustained in appeal. No evidence whatsoever was independently brought against the appellant to prove beyond all shadows of doubt that the impugned sum ultimately sustained on estimations was the appellant's income from undisclosed sources earned during the relevant previous year. Unless there is a categorical finding of fact, based on evidence to be brought on record against the appellant to this effect, imposition of penalty u/s 271(1)(c) in respect of such addition made, and sustained in appeals without proving falsity in the explanation submitted and without bringing any evidence against the appellant, was unjustified. Reliance for this proposition is placed on the decision of the MP HC in CIT vs. Chirag Ingots (P) Ltd. (2005) 25 ITR 310 (MP) wherein it was held that the ITAT was justified in holding that in order to impose penalty U/S 271(1)(c) in respect of addition made in assessment, there must be a categorical finding of fact, which was necessarily to be recorded and proved by the A.O., on the strength of substantiating evidence, that the impugned claim of the appellant, was bogus. In the case of the appellant, under consideration, despite extensive search operation nothing incriminating was found/seized either in kind or in coin to substantiate that income assessed and ultimately sustained on estimations, was in fact the concealed income earned by the appellant during the relevant previous year and since this was not conclusively and independently proved against the appellant, on the strength of substantiating evidence, in the impugned penalty proceedings, the penalty imposed u/s 271(1)(c) is unsustainable on facts and in law.

1.6 In Durga Kamal Rice Mills v. CIT, (2003) 130 Taxman 553 (Cal) 265 ITR 25 (Cal), it was held that for the purpose of quantum proceedings, it might attract a particular provision for addition to the income of the appellant. But when it comes to the question of imposition of penalty, then independent of the findings arrived at in the quantum proceedings, the authority has to find out conclusively that the appellant owned and concealed the amount in question. In DCIT v. Royal Metal Printers P. Ltd. (2005) 93 TTJ (Mum.) 119, the penalty imposed u/s 271(1)(c) was held not justified. Reliance was placed on the decisions of the ITAT Bangalore Bench in Bangalore Steel Distributors v. ITO (1995) 124 Taxman 94 (Bang. Trib.), wherein it was held that though addition made in the assessment order constituted material for the purpose of penalty proceedings, for the imposition of penalty, the A.O is required to bring cogent material on record on the basis of which it could be established that the appellant had concealed the particulars of income or had furnished inaccurate particulars thereof: No such material had been brought on record to justify the imposition of penalty u/s 271(1)(c) in the present case. Hence, the levy of penalty was held unjustified.

1.7. Mere addition to the assessee's income could not by itself prove concealment of income by the assessee and the Revenue could not impose penalty without proving the concealment of income by the assessee. CIT vs. Steel Rolling Mills of Hindustan (P) Ltd. (1983) 143 ITR 933 (Cal.); CIT vs. Murlidhar Chiranjilal, (1980) 121 ITR 528. It is the duty of the A.O. to establish by evidence that there was concealment of income and the amount deemed and added represented the assessee's undisclosed income [CIT vs. M.P. Narayanan (1998) 149 CTR (Mad.) 1]. Intention to conceal the income is necessary to be established. [Amuldas vs. CIT (1983) 144 ITR 848 (MP)]. It is settled that the assessment and the penalty proceedings are independent of each other and the imposition of the penalty does not automatically follows as a matter of course if an addition has been made on the quantum side [CIT v. Ganga Coal Storage (1995) 125 Taxation 4,5 (AIl.)]. The burden is on the Department to prove that a particular amount is a Revenue receipt. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is not acceptable does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding in the assessment proceeding for computing tax is conclusive for levy of penalty. Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars [CIT vs. Anwar Ali (1970) 76 ITR 696 - 701 (SC)] = (2002-TIOL-190-SC-IT)and [CIT vs. Khoday Eswara and Sons (1972) 83 ITR 369 (SC)]. It is not in every case where an addition is upheld that penalty becomes eligible, as held by the Ker, HC in CIT vs, Kerala Spinners Ltd. (200 I) 247 ITR 541 (Ker.), which had followed the decision of SC in en vs. Mussadilal Ram Bbarosa (1987) 165 ITR 14 (SC).

1.8. Mere non-acceptance of explanation does not justify necessary inference of concealment: It is settled law that where an explanation offered by the assessee has not been accepted, it is open to the Revenue to treat a particular sum as income from undisclosed sources. But from the mere fact that the explanation of the taxpayer has not been accepted, it cannot necessarily be inferred that the amount ultimately sustained on estimations as in the case of the appellant, under consideration, constituted concealed income which would attract penalty u/s 271(1)(c). The burden of proving that the assessee was guilty of offence is upon the Department. If apart from pointing out the falsity of explanation, or from rejecting the explanation, no material is brought in evidence by the A.O. to prove concealment, it was to be held that the onus resting on the Department has not been discharged.

1.9. As the proceedings for imposition of penalty and assessment proceedings are two separate and independent proceedings, separate and distinct provisions have been enacted in the Statute for initiation of the same. Therefore, the findings recorded by the authorities in the quantum appeal cannot be said to be decisive and conclusive factor in the penalty proceedings [CIT v. J.K. Synthetics Ltd. (1966) 219 ITR 267, 270 (Del.)].

1.10. Even under Explanation 1, initial burden is on the Department to prima facie record concealment - As per Explanation 1, if the assessing authority or the concerned authority, on the material before it, finds that the explanation offered by the assessee is false, then penalty can be levied on the amount which is found to be concealed. Therefore, the whole idea behind the Explanation I is that the assessing authority has to first record reasons for arriving at a conclusion that there is a failure on the part of the assessee. Hence, after seeking an explanation if the authority comes to a conclusion that it is false, then the authority can proceed to levy penalty. Therefore, this Explanation 1 which has been inserted by the Amending Act of 1975 w.e.f. April 1, 1976, has cast a duty on the A.O. that he should first record reasons that there has been concealment of income and then the explanation is sought These are the basic requirements for natural justice desired by the Legislature for providing this Explanation. Therefore, the initial burden is on the Department to prima facie record that there was concealment and thereafter explanation is to be sought and in case the explanation is found to be false, then to the extent the income is found to have been concealed and the explanation is found to be false, then the authority can proceed against the assessee. Therefore, this Explanation does not change the position and absolve the Department just to issue notice for giving false explanation and proceeding against him. Before this, much has to be done by the Department under this Explanation [CIT v. Ganesh Prasad Badriprasad & Co. (1998) 231 ITR 951,953-954 (MP)].

1.11. The Statute has clearly drawn a distinction between a deliberate false explanation furnished by the assessee and an explanation, which may not be false but is not accepted because the assessee was not able to substantiate it While there is no relaxation in the rigour of the Explanation in raising a presumption against the assessee in the former case, in the latter class of cases, the Statute itself relaxes its rigour by directing that where in respect of any amount, added or disallowed and any explanation is offered by such person which is not accepted because the assessee has failed to substantiate the same, but such explanation is bonafide and all the facts relating to the same and material to the computation of the total income have been disclosed by him, the Explanation shall not apply [Shiv Lal Tak v . CIT (2001) 251 ITR 373, 379-80 (Raj.)].

1.12. In CIT vs. H.M. Lalwani (2003) 22 SITC 112 (Raj. HC) it was held that the word "may" having been used, by the law framers in the charging section which is penal in character a significant amount of discretion has been vested with the A.O. to inflict or not to inflict penalty. Such discretion has to be exercised judiciously. This is more so because penalty is not a source of revenue to the Govt. and it should not be imposed merely because it is lawful to do so unless the contumacious conduct on the part of the assessee is established beyond all shadows of doubt. In the instant case, under consideration, the impugned penalty was imposed simply because the addition was upheld in quantum appeal without proving contumacious conduct on the part of the assessee. The word "concealment" as appearing in Section 271(1)(c) inherently carries element of mens rea, as held by the All. H.C. in Bharat Rice Mill v CIT (2005) 278 ITR 599 (ALL) = (2007-TIOL-331-HC-P&H-IT). In the case of the assessee under consideration, the impugned penalty was imposed without establishing mens rea. Hence the same is unsustainable on facts and in law.

1.13. In CIT vs. V.S.K. Adi Chetty Suravel Chetty (2002) 254 ITR 633 (Mad.), it was held that the A,O, has discretion u/s 271(1)(c) whether or not to initiate penalty proceedings. The word used in the section is "may" and not "shall" and hence significant amount of discretion is vested in the A.O. which should be judiciously exercised. (SC decision in 237 ITR 570) = (2002-TIOL-785-SC-IT) in CIT v. Smt. P.K. Noorjahan. The SC in the case of Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 = (2002-TIOL-148-SC-CT), had laid down that the penalty will not be imposed merely because it is lawful to do so where a discretion is given to the authority. In the case of the assessee, under consideration, such discretion does not seem to have been judiciously exercised. Since the AO failed to bring on record evidence to corroborate that the impugned sum ultimately sustained on estimations, was the income earned by the appellant during the relevant previous year from sources undisclosed to the department.

1.14. In Charan Bros. vs. ITO (2002) 120 Taxrnan 25 (Hyd.), it was held that the expression 'concealed' in Section 271(1)(c) imports the concept of mens rea or guilty mind in the section and, consequently" the intention of the Legislature appears to be that an assessee is not to be penalized unless the necessary mental element could be spelt out in his act from the material on record. The deletion of the word "'deliberately' from the text of section 271(1)(c) by the Finance Act, 1964 does not seem to seriously alter the law on the point as till the expression 'concealment' would require the mental element to be established. The word 'concealed' would itself import this requirement. In the case of the assessee, under consideration, the mental element of the assessee to dodge the Revenue was not established. Hence the penalty imposed is unsustainable on facts and in law.

1.15. The SC has reiterated its view in CIT vs. Mukundray K. Shah (2007) 290 ITR 433 = (2007-TIOL-57-SC-IT) and Dilip N. Shroff vs. 11. CIT (2007) 291 ITR 519 (SC) =(2007-TIOL-96-SC-IT) and in T. Ashok Pai vs. CIT, (2007) 292 ITR 11 (S.C.) = (2007-TIOL-98-SC-IT) again after an elaborate review of the law on the subject, as a law, which has always been part of the jurisprudence relating to penalty proceedings. It was pointed out that the meaning of expression "conceal" is of great importance. Jurisdiction for penalty proceedings precedes the rule of evidence incorporated in Explanation, so that there can be no valid initiation of proceedings, unless there is prima facie concealment It was pair-ted out that the Hon'ble Supreme Court in K.C. Builders v. Asstt CIT (2004) 265 ITR 562 (SC)= (2004-TIOL-13-SC-IT) had held that deliberateness is implied in the concept of concealment. Further, it has always been the law that penal provisions have to be construed "strictly and narrowly and not widely" as pointed out in Virtual Soft Systems Ltd. vs. CIT (2007) 289 ITR 83 (SC) = (2007-TIOL-18-SC-IT). The sum and substance of these precedents is that the concept mens rea stands restored as a pre-requisite for jurisdiction. Explanation to section 271(1)(c), it may be pointed out, is not adverse to this inference, but only strengthens it inasmuch as penalty will be exigible under this provision, where there is no explanation at all or explanation furnished is false. Even where assessee was not able to substantiate his explanation, penalty will not be exigible under the Explanation, if assessee's explanation is bonafide and assessee places all the facts and material available with him before the A.O. In the case of the assessee, under consideration, the bonafide explanation submitted with circumstantial evidence was not proved as false. Before imposition of the impugned penalty, mens rea which was a pre-requisite for assumption of jurisdiction was not established on the strength of evidence brought on record against the assessee.

1.16. The law that assessments and penalty proceedings are different and that penalty does not become exigible, merely because the addition was partly sustained or had become final is well-settled. It was in this context, the High Court in CIT v. Mata Prasad (2005) 278 ITR 354 (All.) found no merit in departmental appeal questioning the deletion of penalty on the ground, that the Tribunal itself having upheld the addition, could not have deleted the penalty. The HC found that the decision rendered by the Tribunal did not suffer from any factual or legal infirmity and that the Tribunal was well within its jurisdiction in coming to the conclusion that penalty was not leviable, though addition was justified.

1.17. In the light of all that has been enumerated above, the impugned penalty imposed, is unsustainable on facts and in law because no positive evidence of concealment has been brought on record against the assessee, to prove the charge of concealment. For the reasons enumerated above, the impugned penalty imposed by the Assessing Officer, in my considered view, is unsustainable. The same is, therefore, deleted. The appellant accordingly gets relief of Rs. 13,10,000/- for the assessment year 2005-06."

2. Against the above order of CIT(A), the Revenue is in appeal before us. It was contended that by the ld. Sr. D.R. that penalty has been imposed on the enhancement finally determined by the Tribunal, therefore, there is no reason to delete the same.

3. On the other hand, the ld. Authorized Representative submitted that enhancement in income was made merely by estimating net profit rate, which was substantially reduced by the ld.CIT(A) and finally confirmed by the Tribunal. Our attention was invited to various judicial pronouncements dealt with by CIT(A) in his order, according to which in case of estimation of income, no penalty is to be levied.

4. We have considered the rival submissions and have gone through the orders of the authorities below and found from record that while making assessment, the Assessing Officer has estimated net profit rate at 8%. In an appeal filed by the assessee in the quantum proceedings, the CIT(A) reduced the net profit rate from 8% to 5.18% and the order of CIT(A) was confirmed by Tribunal. The Assessing Officer has imposed penalty with reference to difference in estimated net profit rate sustained resulting into addition in income. While deleting the penalty, the ld. CIT(A) has categorically recorded a finding to the effect that no independent evidence was brought on record to prove beyond all shadows of doubt that the impugned sum ultimately sustained on estimations was the assessee's income from undisclosed sources earned during the relevant previous year. As per CIT(A) unless there is a categorical finding of fact based on evidence to be brought on record against the assessee to this effect, the imposition of penalty u/s 271(1)(c) in respect of such addition made, without proving falsity in the explanation submitted and without bringing any evidence against the assessee was not justified. For this purpose reliance was also placed on the verdict of jurisdictional High Court in the case of Chirag Ingots, 275 ITR 310, wherein it was held that categorical finding is required to be recorded to prove the claim of the assessee as bogus while levying the penalty u/s 271(1)(c). In the instant case, a categorically finding has also been recorded by the CIT(A) to the effect that despite extensive search operation, nothing incriminating was found/seized either in kind or in coin to substantiate that the income assessed and ultimately sustained on estimations, was, in fact, the concealed income earned by the assessee, since this was not conclusive and independently proved against the assessee on the strength of any evidence. We found that CIT(A) has dealt with various judicial pronouncements to arrive at a conclusion that it was not a fit case for levy of penalty. The detailed finding recorded by the ld.CIT(A) as reproduced above have not been controverted. Accordingly,, we do not find any reason to interfere in the order of CIT(A) deleting the penalty imposed u/s 271(1)(c) of the Income-tax Act, 1961.

5. Facts and circumstances in the assessment year 2004-05 are pari materia, wherein penalty of Rs. 3 lakhs imposed by the Assessing Officer was deleted by the ld.CIT(A) after recording the same reasoning. In view of our discussion hereinabove, we confirm the order of CIT(A) for deleting the penalty.

6. In the result, both the appeal of Revenue are dismissed.

(This order has been pronounced in the open court on 22.3.2013.)

2013-TIOL-329-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' AHMEDABAD

ITA No.1582/Ahd/2010
Assessment Year: 2005-06

ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, 3rd FLOOR, AAYAKAR BHAVAN
RACE COURSE CIRCLE, BARODA

Vs

M/s ISHAN DYES & CHEMICALS LTD
TALUKA BORSAD, DISTRICT ANAND
PAN NO:AAACI4911R

ITA No.1862/Ahd/2010
Assessment Year: 2005-06

M/s ISHAN DYES & CHEMICALS LTD
TALUKA BORSAD, DISTRICT ANAND
PAN NO:AAACI4911R

Vs

ASSTT COMMISSIONER OF INCOME TAX
CIRCLE-3, 3rd FLOOR, AAYAKAR BHAVAN
RACE COURSE CIRCLE, BARODA

Mukul Kr Shrawat, JM and Anil Chaturvedi, AM

Dated: January 4, 2013

Appellant Rep by: Mr T Shankar, Sr. DR
Respondent Rep by: Mr B T Thakkar

Income Tax - Sections 40(a)(ia), 145(3) - Whether AO can make addition by applying GP rate without rejecting the books or even findign any instance of bogus expenditure - Whether the expenditure on which TDS is deducted and paid after the due date but deposited before filing of return calls for disallowance in view of the provisions of Sec. 40(a)(ia).

The Assessee was engaged in the business of manufacturing of chemicals. On perusing the Profit and loss account, the A.O. observed that there was fall in sale as compared to that of immediately preceeding year. He further observed that despite there being no change in the line of activity of the assessee nor there being any change in products being manufactured, there has been change in G.P. which according to him should not have happened. He further observed that there was increase in power and fuel cost and other manufacturing expenses when compared to the immediately preceding year. The AO made addition by holding that a lump sum addition of Rs.61 lakhs was made on the total sales of Rs.122.49 lakh by applying G.P. rate of 5%.The CIT (A) granted partial relief.

The AO observed that assessee had made payments of Rs.60,47,992/- to contractors on which the TDS though deducted, but was not paid within due date as prescribed u/s. 200 (i). He was thus of the view that payment in respect of which TDS was paid late was not admissible as deduction in view of provision of Sec.40(a)(ia) and accordingly disallowed the amount of Rs.60,47,992/-. The CIT (A) confirmed the disallowance.

On Appeal the A.R. submitted that the books of the assessee were audited and A.O. In the absence of any defects, the A.O. was not justified in rejecting the book results. He further submitted that the A.O. has no where rejected the books of accounts by invoking the provisions of Sec. 145(3). Unless and until the book results are rejected by invoking the provisions of Sec. 145(3), no estimate of profits can be made.

Having heard the parties, the Tribunal held that,

++ the A.O. had disallowed the expenses on adhoc basis. He has not pin pointed a single instance of bogus expenditure as to why the expenses should be disallowed. Further, he has also not rejected the book results by invoking the provisions of Sec. 145(3). In the present case the A.O. was not right in making addition. Thus this ground of the assessee is allowed and that of Revenue is dismissed;

++ no disallowance is called for in the present case since the TDS has been deposited before filing of return. In the present case, it is also a fact that the A.O. has not examined the issue of disallowance u/s. 40(a)(ia) in light of the aforesaid decision of coordinate Bench. In the interest of justice the issue be remanded to the file of A.O. for verification.

Revenue's appeal dismissed & Assessee's appeal partly allowed

Cases followed:

Jay Pulse Mills v/s ITO (ITA No.1317 -1319/Ahd/2004 

Paras Dyes and Printing Mills (ITA No.512/Ahd/2007) 

CIT vs. Vikram Plastic (239 ITR 161) (Guj)

Alpha Projects Society Ltd.( ITA No.2869/Ahd/2011).

ORDER

Per: Anil Chaturvedi:

These two appeals are filed against the order of Ld. CIT (A)-V, Baroda dated 29-3-2010 one filed by the Revenue and other by the assessee for the assessment year 2005-06.

2. The ground raised by the Revenue reads as under.

"1. On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in restricting the addition on account of G.P. @ 5% to 2% on the ground that the turnover for the year has been reduced compared to preceding year. The CIT (A) erred in not appreciating the fact that the G.P. for the immediately preceding year was 10.84% and that the substantially increased figures show by the assessee in manufacturing expenses like power, fuel addition other expenses has resulted the G.P. in negative figure."

3. Ground raised by the assessee reads as under:-

" The Ld. CIT (A)-V, Baroda erred in law addition on facts in partly confirming the addition on account of gross profit. The confirmation of such addition of Rs.24.50 lakhs being unjust and unlawful be deleted now."

4. Assessee has also raised additional ground as under:-

"The Ld. CIT(A) erred in law and on facts in confirming disallowance, made by ITO u/s. 40(a)(ia) of the Act of Rs.60,27,878/-."

5. Since 1st Ground of assessee's appeal and 1st ground of Revenue are inter-connected, both are considered together.

6. The facts as culled out from the orders of authorities below are as under.

7. Assessee is a company engaged in the business of manufacturing of chemicals. It filed its return of income on 31-10-2005 declaring total loss of Rs.38,08,629/-. The case was selected for scrutiny and thereafter the assessment was framed u/s.143(3) vide order dated 24-12-2007 and the total income was determined at Rs.1,10,24,060/- after making various additions/disallowances.

8. Aggrieved by the order of A.O., assessee carried the matter before CIT (A). CIT (A) vide his order dated 29-3-2010 partly allowed the appeal of the assessee. It is against the aforesaid order of CIT (A), the assessee and Revenue are now in appeal before us. 1st Ground of the Revenue and assessee relates to the addition on account of Gross Profit.

9. On perusing the Profit and loss account, the A.O. observed that there was fall in sale as compared to that of immediately preceeding year. He further observed that despite there being no change in the line of activity of the assessee nor there being any change in products being manufactured, there has been change in G.P. which according to him should not have happened. He further observed that there was increase in power and fuel cost and other manufacturing expenses when compared to the immediately preceeding year. The assessee was asked to justify the fall in G.P. The assessee interalia submitted that it was facing financial difficulties due to which the assessee could not manufacture the goods and therefore the assessee had started to function as job worker which was not very profitable and therefore there was fall in G.P. The explanation of assessee was not found acceptable to A.O. He made addition by holding as under:-

" The comparative sales and manufacturing expenses for the A.Y. 2005-06 and 2004-05 is as under:-

Asst. Year	2005-06	2004-05
Sales	122492506	173082338
Power & Fuel	27204843 [22.20%]	30055755 [17.36%]
Other Mfg.Exp.	9865405 [8.05% ]	11010356 [6.36%]

From the above it can be clearly seen that though the assessee is carrying out same business as in preceding year, the ratio of power and fuel expenses with that sales has increased from 17.36% in the preceding year to 22.20% during the year under consideration. Similarly the ratio of Mfg. expenses with that of sales has increased from 6.36% to 8.05%.The assessee has not brought anything on record to justify the negative GP ratio except for the general argument of increase in material cost and constant sale price.

The second argument of assessee is fluctuation in raw material price. This argument is of very general nature. Assessee has not produced any evidence in support of this argument. Further, it is well accepted business principle that whenever there is increase in input cost, the sale price also goes up and this does not affect the profit margin of assessee. The assessee's plea on this account is without any force and cannot be accepted.

Here it is pertinent to note that during the course of assessment proceedings for the assessment year 2004-05, the assessee could not justify the fall in GP rate as compared to the preceding year and the assessing Officer had added the GP difference while finalizing the assessment.

In absence of any specific justification towards the increase in manufacturing cost, I am of the opinion that during the year the assessee has not declared a correct GP by inflating the expenses. Accordingly, in view of above background of the case, it is clear that the assessee could not prove its claim of negative G.P. ratio. The reasons put forth by assessee are not acceptable in light of above discussion. The assessee is not in position to substantiate its own claim. I am unable to accept claim of assessee. In the earlier assessment proceedings for A.Y. 2002-03 and 2004-05 to meet the ends of justice and a lump sum addition was made to compensate fall in G.P. ratio. I have no reason to differ from my predecessor and in all fairness a lump sum addition of Rs.61 lakhs is made on the total sales of Rs.122.49 lakh by applying G.P. rate of 5%."

10. Aggrieved by the order of A.O., assessee carried the matter before CIT (A).CIT (A) granted partial relief by holding as under:-

"6.3. I have carefully considered the facts of the case, the submissions of the appellant and the assessment order. It is observed that the turnover has reduced as compared to the preceding year i.e. it has decreased from 1.73 crores to Rs.1.22 crores. Though in percentage terms the expenses on power and fuel has increased in comparison to the earlier year, but in the context of the reduced turnover in the current year, the increased expenditure partly explains the negative GP during the year. However, I am in part agreement with the A.O. that the drastic fall in GP is not fully explained. The appellant could not produce any evidence to support his contention that one of the reasons for the fall in GP was also fluctuation in raw material prices. Considering all the facts and circumstances, in my view, it would be reasonable to adopt GP rate of 2% on total sales of Rs.122.49 lakhs thereby restricting the addition to Rs.24.5 lakhs. Ground No.3 is partly allowed."

11. Aggrieved by the order of CIT (A), assessee as well as Revenue is now in appeal before us.

12. Before us, the Ld. A.R. submitted that the books of the assessee are audited by Chartered Accountants and A.O. has not pointed out any defects in the books of accounts. In the absence of any defects, the A.O. was not justified in rejecting the book results. He further submitted that the A.O. has no where rejected the books of accounts by invoking the provisions of Sec. 145(3). Unless and until the book results are rejected by invoking the provisions of Sec. 145(3), no estimate of profits can be made. For this proposition he relied on the decision of Hon'ble Gujarat High Court in the case of Vikram Plastic 239 ITR 161, decision of Ahmedabad Tribunal in the case of Jay Pulse Mills vs. ITO (ITA No.1317, 1319/Ahd/2004, ITA Mo.1370/Ahd/2004, 1419 & 1420/Ahd/2004 & ITA No.818/Ahd/2006 dated 7-5-2010) and in the case of DCIT vs. Paras Dyg & Printing Mills Pvt. Ltd., (In ITA No.512/AHD/2007 dated 26-2-2010). He thus submitted that in view of the aforesaid decisions, the addition made by the A.O. be deleted. On the other hand the Ld. D.R. supported the order of A.O.

13. We have heard the rival submissions and perused the material on record. On perusing the assessment order it is seen that the A.O. had disallowed the expenses on adhoc basis. He has not pin pointed a single instance of bogus expenditure as to why the expenses should be disallowed. Further, he has also not rejected the book results by invoking the provisions of Sec. 145(3).

14. In the case of Jay Pulse Mills v/s ITO (ITA No.1317 -1319/Ahd/2004 order dated 7-5-10, the Co-ordinate Bench held as under:-

"7. ……The assessee has produced the complete books of account before the Assessing Officer including bills and vouchers audited by the Chartered Accountant. The assessee has also maintained the stock register and after going through the assessment orders in these seven assessment years, we find that there is no whisper about the defects in the books of accounts. Even the A.O. has not invoked the provisions of Sec.145A of the Act and has not rejected the book results. Once the book results are not rejected, the A.O. has no alternative except to accept the book results. In the present case, the A.O. has not rejected the book results and found no defects in the books of accounts of the assessee for all the seven assessment years. In such a situation, the question arises is whether, the A.O. in exercise of his powers u/s.145(1) of the Act, is whether can make estimates without rejecting the book results and without finding fault in the books of account. We are of the view that the A.O. has to give a finding of fact i.e. whether or not income can properly be deduced from the accounts maintained by the assessee, even if the accounts are correct and complete to the satisfaction of the A.O. and the income has been computed in accordance with the method of accounting regularly employed by the assessee. What is to be determined by the A.O. in exercise of his power is a question of fact i.e. whether or not income chargeable under the Act can properly be deduced from the books of account, and he must decide the question with reference to the relevant material and in accordance with the correct principles. We are of the view that the A.O. has to examine the accounts of assessee and has to consider the following questions:-

(i) Whether the assessee has regularly employed a method of accounting?

(ii) Even if regular adoption of a method of accounting is there, whether the annual profits can properly be deduced from the method employed?

(iii) Whether the accounts are correctly maintained?

(iv) Whether the accounts maintained are complete in the sense that there is no significant omission therein?

In that event, if the A.O. finding on all four counts is in the affirmative, the assessee's profit is to be computed on the basis of these accounts. We find that the first proviso to Sec. 145 (1), or section 145(2), can be invoked only if and where the elements attracting either of those provisions are found to exist. A clear finding to that effect, along with the materials on which such finding is based, has to be made out and give by the A.O. No assessment under the first proviso to section 145(1) or under section 145(2) can be sustained if the A.O. has not considered and recorded a finding against the assessee as to whether he has been regularly employing a method of accounting or whether his income, profits or gains can properly be deduced from his method of accounting if he has been regularly employing a method of accounting or whether the accounts are correct and complete. In the absence of these findings, the A.O. cannot make assessment by invoking the provisions of Sec. 145(1) or 145 (2) of the Act."

15. In the case of Paras Dyes and Printing Mills (ITA No.512/Ahd/2007 order dated 26-2-10) the co-ordinate Bench has held as under:-

"5…. Low profit in a particular year in itself cannot be a ground for invoking the powers of best judgment assessment without support of any material on record. The Hon'ble Gujarat High Court in the case of CIT vs. Amitbhai Gunwatbhai 129 ITR 573 held that if there was no challenge to the transactions represented in the books then it is not open to Revenue to contend that what is show by the entries is not the real state of affairs. Secondly, even if for some reason, the books are rejected it is not open to the A.O. to make any addition on estimate basis or on pure guess work. No specific discrepancies or defects in the books of account of the assessee have been pointed out before us nor was any material brought to our notice to establish that purchases were inflated or receipts suppressed."

16. In the case of CIT vs. Vikram Plastic (239 ITR 161) (Guj), the Hon'ble High Court has held as under:-

" Held, dismissing the application for directing reference (i) that in view of the finding reached by the Tribunal that there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained addition also on the finding that there was no material brought on record to establish that purchases or expenses were inflated or sales suppressed and also in view of the finding that it was not the case that there was no method of regular accounting employed, the Tribunal was fully justified in coming to the conclusion that the provisions of Sec. 145(2) of the Income Tax Act,1961, could not be invoked. This conclusion was based on a finding of fact and raised no question of law."

17. In the present case the books of accounts have not been rejected by A.O. nor has any defect been pointed out in the books of accounts. CIT (A) though has granted partial relief to the assessee has held that in the context of reduced turnover in the current year, increased expenditure partly explains the negative G.P. during the year. Considering the aforesaid factual position and in the light of aforesaid decisions, of High Court and Co-ordinate Bench of Tribunal, we are of the view that in the present case the A.O. was not right in making addition. Thus this ground of the assessee is allowed and that of Revenue is dismissed.

18. In the result, the appeal of the assessee is allowed and the ground of the Revenue is dismissed.

19. Second ground of assessee's appeal relates to disallowance u/s. 40(a)(ia) of the Act.

20. Assessing Officer observed that assessee had made payments of Rs.60,47,992/- to contractors on which the TDS though deducted, but was not paid within due date as prescribed u/s. 200 (i) but was paid in April, 2005. He was thus of the view that payment in respect of which TDS was paid late was not admissible as deduction in view of provision of Sec.40(a)(ia). He accordingly disallowed the amount of Rs.60,47,992/-. Aggrieved by the action of A.O., assessee carried the matter before CIT (A). CIT (A) confirmed the disallowance by holding as under:

"4.3. I have carefully considered the facts of the case, the submissions of the appellant, the assessment order and the remand report. I have also called for the assessment records and examined them. On perusal of the computation of income filed along with the return, it is noticed that the appellant had suo moto added back the expenditure of Rs.39,69,318/- and Rs.4,75,904/- for non deposition of TDS. Although the basis for figure of Rs.60,47,992/- was not apparent from records, on deeper examination of the documents in the assessment records, it is gathered that the appellant had deducted TDS of Rs.2,09,462/- during the year which broadly corresponds to receipts of Rs.1,04,73,100/- (TDS rate of 2%) and after allowing for the suo moto adding back by the appellant of Rs.44,45,222/-, the rest of the disallowance would be Rs.60,27,878/-. It is also noticed that the TDS of Rs.2,09,462/- was deducted but was not paid and that TDS of Rs.1,14,422/- which was paid in the next financial year also related to the contractual payments for months earlier than March, 2005. Accordingly, the disallowance by A.O. u/s. 40(a)(ia) of the Act of Rs.60,27,878/- is confirmed. Ground No. 1 is partly allowed."

21. Aggrieved by the order of CIT (A), assessee is now in appeal before us.

22. Before us, the Ld. A.R. submitted that it had deposited the TDS in the account of Government before filing of the return of income. He placed on record the copy of statement in support of his contention that the TDS has been deposited before filing the Return of income He further submitted that since the TDS has been deposited before filing of return there cannot be disallowance u/s. 40(a)(ia) and therefore the entire addition made by A.O. be deleted. He also relied on the decision of Ahmedabad Tribunal In the case of Alpha Projects Society Ltd.( ITA No.2869/Ahd/2011 order dated 23- 3-2012).

23. The Ld. D.R. on the other hand supported the order of A.O.

24. We have heard the rival submissions and perused the material on record. The dispute in the present case is whether the expenditure on which TDS is deducted and paid after the due date as prescribed u/s. 200, calls for disallowance in view of the provisions of Sec. 40(a)(ia)?

25. The co-ordinate Bench in the case of Alpha Projects (supra) relying on the decision in the case of Virgin Creators has held as under:-

"7. We have heard both the parties and perused the materials available on record and orders passed by the authorities below. The issue involved in the present appeal has now been decided by the Hon'ble Calcutta High Court in the case of CIT vs. Virgin Creators in GA No.3200/2011 dated 23-11-2011 = (2012-TIOL-181-HC-KOL-IT) against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai in the case of Bharati Shipyard Ltd. vs. DCIT in ITA No.2404/Mum/2009 in order dated 12-9-2011 = (2011-TIOL-560-ITAT-MUM-SB) has taken a view that the amendment is prospective in nature addition would apply accordingly. Respectfully following the decision of Hon'ble Calcutta High Court in the case of Virgin Creators (supra) the order of Ld. CIT (A) is not sustainable. Hence, this ground of assessee's appeal is allowed. The Assessing Officer is directed to delete the disallowance of Rs.3,69,568/- as made u/s. 40(a)(ia) of the Act."

26. In the present case the return of income was filed by assessee on 31- 10-2005 but as per assessee the TDS was deposited in the account of Government in April, 2005. Respectfully following the decision of coordinate Bench, we are of the view that no disallowance is called for in the present case since the TDS has been deposited before filing of return. In the present case, it is also a fact that the A.O. has not examined the issue of disallowance u/s. 40(a)(ia) in light of the aforesaid decision of coordinate Bench. We therefore feel that in the interest of justice the issue be remanded to the file of A.O. for verification. We accordingly direct the A.O. to examine as to whether the assessee had paid the TDS to the account of Government, before filing of Return of income. If the assessee has deposited the TDS before filing of Return of Income the deduction be allowed following the aforesaid decision of Co-ordinate Bench. By this order, we also direct the assessee to furnish all the information required by the A.O. to decide the issue. The A.O. shall also grant an opportunity of being heard to the assessee. Thus this ground of the assessee is allowed for statistical purposes.

27. In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.

(Order pronounced in Open Court on 4.1.2013.)

 

2013-TIOL-363-ITAT-DEL

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'G' NEW DELHI

ITA No.3792/Del/2011
Assessment Year: 2005-06

INCOME TAX OFFICER
WARD-2, ROHTAK

Vs

SHRI SATYA PARKASH AGGARWAL & SONS (HUF)
C/O M/s LAXMI OIL MILLS, JHAJJAR ROAD, ROHTAK
PAN NO:AAEHS8081B

Cross-objection No.458/Del/2012
Assessment Year: 2005-06

SHRI SATYA PARKASH AGGARWAL & SONS (HUF)
C/O M/s LAXMI OIL MILLS, JHAJJAR ROAD, ROHTAK
PAN NO:AAEHS8081B

Vs

INCOME TAX OFFICER
WARD-2, ROHTAK

G D Agrawal, VP and I C Sudhir, JM

Dated: February 15, 2013

Appellant Rep by: Shri S K Upadhaya, Sr.DR
Respondents Rep by: Shri Umang Agarwal & Shri Bharat Bhushan, Advs.

Income Tax - Sections 147, 148 - Whether reopening of assessment on the basis of audit objection is valid.

The AO initiated reassessment proceedings u/s 148 on the basis of audit objection on the observation that the assessee was not having any capital of his own, but had provided interest free loans & advances to his relatives & others by arranging the borrowed fund for their use and claimed deduction of interest by way of debit in the profit and loss account. Since the entire borrowings were diverted by providing as interest free loan to others deductions as interest paid was not admissible. Under the provisions of section 36(1)(iii), deduction of interest on borrowed funds is admissible provided the funds so raised are utilized for business purposes of the assessee.

On Appeal before the Tribunal the AR submitted that the reasons recorded for reopening of assessment are identical to the audit objection. He further stated that in the reasons recorded, the AO has held the escapement of income on the ground that borrowed money has been diverted for non business purposes and, therefore, interest should be disallowed. However, in the assessment order, no such finding was recorded. Therefore, when no addition/disallowance is made on the basis of which assessment was reopened, reopening of assessment is invalid. The DR stated that the reopening of assessment had been made by the AO because there was escapement of income. Original assessment was completed under Section 143(1) accepting the returned income. After the audit objection, the AO has duly applied his mind and since he fully agreed with the views expressed by the audit party, he recorded the same as the reasons for reopening of assessment. 

Having heard the parties, the Tribunal held that,

++ it is evident that the AO simply in verbatim copied the audit objection in the form of reasons recorded for reopening of assessment u/s 148. Thus, it is obvious that there was no independent application of mind by the AO. The audit objection is based upon the legal opinion expressed by them and not pointing out any factual error or omission. The reopening of assessment was not valid. The same is quashed.

Revenue's Appeal dismissed & Assessee's cross-objection allowed

Cases followed:

Indian and Eastern Newspaper Society Vs. CIT, New Delhi (2002-TIOL-870-SC-IT-LB)

Xerox Modicorp Ltd. Vs. DCIT (2013-TIOL-25-HC-DEL-IT)

Air India Vs. V.K.Srivastava, CIT & Others – 213 ITR 739 (Bombay).

ORDER

Per: G D Agrawal:

This appeal by the Revenue is directed against the order of learned CIT(A), Rohtak dated 3rd June, 2011 for the assessment year 2005-06.

2. At the time of hearing before us, it was stated by the learned counsel for the assessee that in the cross-objection, the assessee has challenged the validity of reopening of assessment and, therefore, the cross-objection should be adjudicated first. The learned DR also agreed with the submission of the assessee's counsel. We, therefore, proceed to adjudicate the cross-objection.

3. In the cross-objection, following grounds are raised:-

"1. That the learned authorities below have erred in law as well as on facts of the case in holding the initiation of reassessment proceedings u/s 147 of the I.Tax Act as valid though the appellant has disclosed all relevant particulars in the return of income which is on record. Thus the initiation of proceedings u/s 148 merely for making fishing enquiries are totally wrong and illegal.

2. That the learned authorities below have not interpreted the provisions of section 148/147 of I.Tax Act properly as no new information has come to the knowledge of Assessing Officer after filing of return except the audit objection raised by audit party. The authorities below have wrongly ignored the Hon'ble Supreme Court and High Court decisions that no valid initiation of reassessment proceedings can be made on the basis of audit objection. Thus the assessment order framed on invalid proceedings is totally wrong, illegal and void ab initio.

3. That the authorities below have not dealt the objections raised by the appellant against initiation of reassessment proceedings by a speaking order. Even the Assessing Officer has not applied his mind independently that particulars of income has escaped assessment and has merely followed audit objections raised by audit party. Thus, the initiation of reassessment proceedings u/s 148 of the I.T. Act is totally wrong, illegal and void ab initio."

4. At the time of hearing before us, the learned counsel for the assessee referred to page 1 of the assessee's paper book which is reasons recorded for reopening of assessment. Then he referred to pages 2 & 3 of the assessee's paper book which is the audit objection. He pointed out that the reasons recorded for reopening of assessment are identical to the audit objection. Even the wordings are same. He, therefore, stated that the Assessing Officer has reopened the assessment simply on the basis of audit objection without independent application of mind. The same is invalid and, therefore, the reopening of assessment should be quashed. He further stated that in the reasons recorded, the Assessing Officer has held the escapement of income on the ground that borrowed money has been diverted for nonbusiness purposes and, therefore, interest should be disallowed. However, in the assessment order, no such finding is recorded. On the other hand, all the expenses have been disallowed on the ground that the assessee's business in the name of M/s Satya Parkash & Sons HUF is discontinued. Therefore, when no addition/disallowance is made on the basis of which assessment was reopened, reopening of assessment is invalid. He further submitted that in the immediately preceding year, on identical facts, in the assessment order passed under Section 143(3), the Assessing Officer allowed the expenses of Satya Parkash Aggarwal & Sons, HUF. He, therefore, submitted that the reopening of assessment is not valid. In support of this contention, he relied upon the following decisions:-

(i) Indian and Eastern Newspaper Society Vs. CIT, New Delhi – 119 ITR 996 (SC)= (2002-TIOL-870-SC-IT-LB).

(ii) Delhi High Court decision dated 2nd January, 2013 in Xerox Modicorp Ltd. Vs. DCIT in W.P.(C) Nos.8483/2010, 8485/2010 & 8486/2010 = (2013-TIOL-25-HC-DEL-IT).

(iii) Air India Vs. V.K.Srivastava, CIT & Others – 213 ITR 739 (Bombay).

(iv) Transworld International Inc. Vs. JCIT – 273 ITR 242 (Delhi) = (2004-TIOL-28-HC-DEL-IT).

5. The learned DR, on the other hand, stated that the reopening of assessment had been made by the Assessing Officer because there was escapement of income. Original assessment was completed under Section 143(1) accepting the returned income. After the audit objection, the Assessing Officer has duly applied his mind and since he fully agreed with the views expressed by the audit party, he recorded the same as the reasons for reopening of assessment. He also stated that while judging the validity of reopening of assessment, sufficiency of material cannot be examined. If there is a prima facie case of escapement of income, reopening of assessment is valid. In this case, assessee claimed the deduction for interest which was not permissible, therefore, certainly, there was escapement of income. Therefore, the assessment was validly reopened and the same should be sustained. In support of this contention, he relied upon the following decisions:-

(i) CIT Vs. (1) Kelvinator of India Ltd. & (2) Eicher Ltd. – 320 ITR 561 (SC) =(2010-TIOL-06-SC-IT).

(ii) Raymond Woollen Mills Ltd. Vs. ITO & Others – 236 ITR 34 = (2002-TIOL-864-SC-IT).

(iii) CIT Vs. P.V.S. Beedies Pvt.Ltd. – 237 ITR 13 (SC).

(iv) CIT Vs. Usha International Ltd. – 348 ITR 485 (Delhi) = (2012-TIOL-764-HC-DEL-IT-LB).

6. We have carefully considered the arguments of both the sides and perused the material placed before us. The reasons recorded for issue of notice under Section 148 read as under:-

"The assessee is the owner of two concerns styled as (i) M/s Rishi Ship Breakers (ii) M/s Satya Prakash & Sons (HUF), Rohtak. In the profit & loss account of M/s Rishi Ship Breakers, the assessee had claimed deduction of Rs.2495407/- and in M/s Satya Prakash & Sons, of Rs.4337681/- on account of interest paid on borrowed funds. Scrutiny of profit and loss account and balance sheet of M/s Satya Prakash & Sons (HUF) revealed that the unit of the assessee is not carrying out any business, and had shown profit of Rs.619758/- on the sale of shares assessable under head capital gains and Rs.11469/- as interest and Rs.3593795/- as money forfeited assessable under head other sources only. Details of own capital, borrowings and its utilization as per balance sheet were as under:-

In the books of M/s Satya Prakash & Sons

Own capital (5613779-1133240) (credit balance Rs.5613779)	Rs.4480539/-
Less : Balance under Rishi Ship Breakers	Rs.1133240/-
Personal investments : own car, flat & shares : 1195025 + 1452568 + 2235688	Rs.4883281/-
Loans/borrowings from banks and others	Rs.12041369/-
Loans & advances granted by the assessee	Rs.12784203/-

From the above it was obvious that the assessee was not having any capital of his own, but had provided interest free loans & advances of Rs.12784203/- to his relatives & others by arranging the borrowed fund for their use and claimed deduction of interest of Rs.4337681/- by way of debit in the profit and loss account of M/s Satya Prakash & Sons. Since the entire borrowings were diverted by providing as interest free loan to others deductions of Rs.4337681/- as interest paid was not admissible. Under the provisions of section 36(1)(iii) of I.T.Act 1961, deduction of interest on borrowed funds is admissible provided the funds so raised are utilized for business purposes of the assessee."

The audit objection dated 24th June, 2008 reads as under:-

"Under the provisions of section 36(1)(iii) of the Act, deduction of interest on borrowed funds is admissible provided the funds so raised are utilized for the business purposes of the assessee.

Assessee is owner of two concerns styled as (i) M/s Rishi Ship Breakers Mumbai (ii) M/s Satya Parkash & Sons (HUF) Rohtak. In profit & loss account of M/s Rishi Ship Breakers, assessee had claimed deduction of Rs.2495407 and in M/s Satya Parkash & sons, of Rs.4337681 on account of interest paid on borrowed funds. Scrutiny of profit & loss account and the balance sheet of M/s Satya Parkash & Sons (HUF) revealed that this unit of the assessee was not carrying out any business, and had shown profits of Rs.619758 on sale of shares assessable under capital gains and of 11469 as interest and Rs.3593795 as money forfeited assessable under other sources only. Details of own capital, borrowings and its utilization as per balance sheet were as under:

In the books of M/s Satya Parkash & Sons

Own capital (5613779-1133240)	= Rs.4480539
(Credit balance) : Rs.5613779 Less minus balance under Rishi Ship Breakers	= Rs.1133240
Personal investment: own car, flat & shares : 1195025+1452568+2235688	= Rs.4883281
Loans/borrowings from bank & others :	= Rs.12041369
Loans & advances granted by assessee:	= Rs.12784203

From the above, it was obvious that the assessee was not having any capital of his own, but has provided interest free loan & advances of Rs.12784203 to his relatives and others by arranging the borrowed funds for their use and claimed deduction of interest of Rs.4337681 by way of debit in the profit & loss account of M/s Satya Prakash & Sons. Since the entire borrowings were diverted by providing as interest free loans to others, deduction of Rs.4337681 as interest paid was not admissible. Omission to do so resulted in under assessment of income of Rs.4337681 involving tax effect of Rs.1593317 as under:"

7. From a perusal of above audit objection and reasons recorded, it is evident that the Assessing Officer simply in verbatim copied the audit objection in the form of reasons recorded for reopening of assessment under Section 148. Thus, it is obvious that there is no independent application of mind by the Assessing Officer and simply on the basis of audit objection, reopening of assessment has been made. The learned DR tried to justify the in verbatim copy of the audit objection on the ground that since the Assessing Officer after application of mind entirely agreed with the audit objection, he recorded the same words, which were in audit objection as his reasons for reopening of assessment. We are not impressed with this argument of the learned DR. If there is an application of mind, it should be apparent from the material placed before us. When the reasons recorded are in verbatim copy of the audit objection, the only inference which can be drawn by us is that there was no independent application of mind by the Assessing Officer and he simply on the basis of audit objection proceeded to reopen the assessment.

8. With this factual background, let us now examine the legal position about the validity of reopening of assessment on the basis of audit objection. Both the parties have relied upon a large number of decisions. However, in the following decisions, the aspect of validity of reopening of assessment on the basis of audit objection has been considered. Therefore, we shall deal with only those cases.

9. In the case of Indian and Eastern Newspaper Society (supra), the Hon'ble Apex Court held as under:-

"The opinion of an internal audit party of the income-tax department on a point of law cannot be regarded as "information" within the meaning of s. 147(b) of the I.T.Act, 1961, for the purpose of reopening an assessment."

10. In the case of Air India (supra), Hon'ble Bombay High Court held as under:-

"That the reopening of the assessment based on the audit objection was without jurisdiction. The Commissioner of Income-tax had failed to exercise jurisdiction by placing blind reliance upon the opinion expressed by the Ministry of Law. It was not permissible to reopen the completed assessment in pursuance of an audit objection and, consequently, the issue whether the chef was a technician or not could not have been examined. The order passed by the Commissioner of Income-tax was liable to be quashed."

11. In the case of P.V.S. Beedies Pvt.Ltd. (supra) relied upon by the learned DR, Hon'ble Apex Court held as under:-

"Held, allowing the appeal of the Department, that the internal audit party had merely pointed out a fact which had been overlooked by the Income-tax Officer in the assessment. The fact that the recognition granted to the charitable trust had expired on September 22, 1972, was not noticed by the Income-tax Officer. This was not a case of information on a question of law. The internal audit party was entitled to point out a factual error or omission in the assessment. Reopening of a case on the basis of a factual error pointed out by the audit party was permissible under law. Therefore, the reopening of the assessment was valid."

12. Hon'ble Jurisdictional High Court in a recent decision dated 2nd January, 2013 in W.P.(C) Nos.8483 to 8486/2010 in the case of Xerox Modicorp Ltd., held at paragraph 17 of the decision as under:-

"17. It is difficult to sustain the notice issued u/s. 148. The audit objection is only an inference that the royalty payment resulted in a capital benefit; such an opinion expressed by the audit cannot constitute tangible material on the basis of which the assessment can be reopened. In the case of Indian Eastern and Newspaper Society v. CIT, (1979) 119 ITR 996 = (2002-TIOL-870-SC-IT-LB) the Supreme Court expressed the view that information as to correct legal position must come from a formal source or body which is competent to pronounce upon the issue and that revenue audit is not competent to pronounce on issues of law. There is no averment that the revenue audit only pointed out to any factual aspect or material or primary fact that was omitted to be disclosed by the petitioner."

13. Let us apply the ratio of the above decision to the facts under appeal before us. Hon'ble Apex Court in the case of P.V.S. Beedies Pvt.Ltd. (supra) have held that when the internal audit party pointed out a fact that was overlooked by the Income Tax Officer in the assessment, then the reopening on the basis of such factual error pointed out by the audit party was permissible under the law. However, as per the decision of Hon'ble Apex Court in the case of Indian Eastern and Newspaper Society (supra), the opinion of an internal audit party on a point of law cannot be regarded as information for the purpose of reopening of assessment. Hon'ble Bombay High Court In the case of Air India (supra) has taken a view that reopening of assessment based on the audit objection is without jurisdiction. Hon'ble Jurisdictional High Court in the recent decision in the case of Xerox Modicorp Ltd. (supra) has expressed the view that it is difficult to sustain notice under Section 148 issued on the basis of audit objection. While taking the said view, they have relied upon the decision of Hon'ble Apex Court in the case of Indian Eastern and Newspaper Society (supra).

14. In the case under appeal before us, from a perusal of the audit objection, it is evident that audit party has not pointed out any factual error or omission but has expressed the opinion on the analysis of the balance sheet of one of the two concerns of the assessee that the interest paid by the assessee needs to be disallowed because the borrowed funds were diverted by providing interest free loans to others. The audit objection is based upon the legal opinion expressed by them and not pointing out any factual error or omission and, therefore, on these facts, the decision of Hon'ble Jurisdictional High Court in the case of Xerox Modicorp Ltd. (supra), of the Hon'ble Bombay High Court in the case of Air India (supra) and of Hon'ble Apex Court in the case of Indian Eastern and Newspaper Society (supra) would be applicable. The decision of Hon'ble Apex Court in the case of P.V.S. Beedies Pvt.Ltd. (supra) relied upon by the learned DR would not be applicable to the facts of the assessee's case because in that case, there was only a factual error. In that case, the recognition granted to the charitable trust had expired on 22nd September, 1972 which was not noticed by the Income-tax Officer. This factual error was pointed out by the audit party and, therefore, on these facts, Hon'ble Apex Court had held the reopening of assessment to be valid. However, in the case under appeal before us, the audit party had expressed the legal opinion that interest on the borrowed money should be disallowed because, in their opinion, borrowed money has been diverted for interest free loans and advances and, therefore, not used for the purpose of the business.

15. In view of the above, respectfully following the decision of Hon'ble Jurisdictional High Court in the case of Xerox Modicorp Ltd. (supra), of the Hon'ble Bombay High Court in the case of Air India (supra) and of Hon'ble Apex Court in the case of Indian Eastern and Newspaper Society (supra), we hold that the reopening of assessment was not valid. The same is quashed and the cross-objection of the assessee is allowed.

16. Since while disposing of the assessee's cross-objection, we have already quashed the reopening of assessment, therefore, when the impugned assessment order does not survive, the Revenue's appeal has been rendered infructuous. Accordingly, the same is dismissed.

17. In the result, the appeal of the Revenue is dismissed while the cross-objection of the assessee is allowed.

(Decision pronounced in the open Court on 15.2.2013.)

--

2013-TIOL-359-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' MUMBAI

ITA No.2481/Mum/2011
Assessment Year: 2005-06

M/s R R HOSIERY
SHRI LAXMI WOOLEN MILLS ESTATE
OFF DR E MOSES ROAD
MAHALAXMI, MUMBAI-400011
PAN NO:AAAFR1054R

Vs

ASSTT COMMISSIONER OF INCOME TAX
18(2), MUMBAI

B R Mittal, JM and P M Jagtap, AM

Dated: December 14, 2012

Appellant Rep by: Shri Vijay Mehta
Respondent Rep by: Shri A B Koli

Income Tax - Sections 10(38), 54D, 271(1)(c) - Whether penalty u/s 271(1)(c) can be imposed in respect of claim of exemption u/s 10(38) when none of the two conditions stipulated u/s 10(38) were satisfied in the case of the assessee.

The assessee a partnership firm which was engaged in the business of trading in equity shares as well as carrying on investment and ware housing activities. The claimed exemption u/s 10(38) in respect of long term capital gain arising from sale of shares. Since the LTCG had arisen to the assessee from sale of shares made on 07-09-2004 and no STT was also paid on the said transaction, the AO held that the assessee was not entitled to claim exemption u/s 10(38). He also initiated penalty proceedings u/s 271(1)(c) in respect of the said addition as well as in respect of other addition made on account of unsecured loan u/s 68 treating the same as unexplained cash credit. Both these additions were confirmed by the CIT(A) .The Tribunal deleted the addition in respect of unsecured loan u/s 68.The CIT(A) deleted the penalty in respect of sec. 68. The addition made on account of long term capital gain, however, was not agitated by the assessee before the Tribunal.

On Appeal before the Tribunal the AR submitted that exemption in respect of long germ capital gain was claimed in the said computation u/s 54D which was not applicable. The AR submitted that all the other mistakes committed by the assessee in the computation of total income are sufficient to show that the mistake committed by it in claiming exemption u/s 10(38) in respect of long term capital gain was a bonafide and genuine mistake. He contended that other relevant details regarding the computation of long term capital gain, however, were fully and truly given by the assessee. The DR submitted that patently wrong claim was made by the assessee in the return of income for exemption u/s 10(38) which was detected by the AO. The DR submitted that the assessee, however, did not rectify the said mistake by filing the revised return and no basis whatsoever was given to justify the said claim made wrongly by the assessee. 

Having heard the parties, the Tribunal held that,

++ the provisions of section 10(38) in this regard are very plain and simple and since none of the two conditions stipulated therein was satisfied in the case of the assessee, it is difficult to accept the contention raised on behalf of the assessee that exemption under the said provision was wrongly claimed as a result of genuine and bonafide mistake. It is also observed that the entire long term capital gain earned by the assessee during the year under consideration was claimed to be exempt u/s 54D in the return of income and even the particulars relating to payment of Securities Transaction Tax, which were relevant to the assessee's claim for exemption u/s 10(38), had not been furnished by the assessee.

Assessee's appeal dismissed

ORDER

Per: P M Jagtap:

This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-29, Mumbai dated 18-01-2011 whereby he sustained the penalty imposed by the AO u/s 271(1)(c) to the extent it was in respect of addition of Rs.66,59,023/- made on account of long term capital gains.

2. The assessee in the present case is a partnership firm which is engaged in the business of trading in equity shares as well as carrying on investment and ware housing activities. The return of income for the year under consideration was filed by it on 27-10-2005 declaring total income of Rs.78,46,575/-. In the said return, exemption u/s 10(38) of the Act was claimed by the assessee in respect of long term capital gain of Rs.77,18,627/- arising from sale of shares of M/s Matrix Lab Ltd. During the course of assessment proceedings, the AO noticed that the said long term capital gain to the extent of Rs.75,20,351/- had arisen from shares sold by the assessee on 07-09-2004. He also noted that as per the provisions of section 10(38), the profit arising from the share transactions made only after 1st Oct., 2004 was eligible for exemption from tax if Securities Transaction Tax (STT) was paid thereon. Since the long term capital gain to the extent of Rs.75,20,351/- had arisen to the assessee from sale of shares made on 07-09-2004 and no STT was also paid on the said transaction, the AO held that the assessee was not entitled to claim exemption u/s 10(38). Accordingly, long term capital gain of Rs.75,20,351/- was brought to tax by the AO in the hands of the assessee in the assessment completed u/s 143(3) vide an order dated 26-12-2007. He also initiated penalty proceedings u/s 271(1)(c) in respect of the said addition made on long term capital gain as well as in respect of other addition of Rs.50 lakhs made on account of unsecured loan u/s 68 treating the same as unexplained cash credit. Meanwhile, both these additions were confirmed by the learned CIT(Appeals) vide his appellate order dated 07-08-2008 while disposing of the appeal filed by the assessee in the quantum proceedings. A fresh notice thereafter was issued by the AO requiring the assessee to show cause why penalty u/s 271(1)(c) should not be imposed in respect of the said two additions. Although the assessee offered its explanation in respect of addition made u/s 68, no explanation whatsoever was offered by the assessee during the course of penalty proceedings in respect of addition made on account of long term capital gain. The AO, however, did not find even the explanation offered by the assessee in respect of addition made u/s 68 to be acceptable and imposed a penalty of Rs.25,25,826/- u/s 271(1)(c) being 100% of the tax sought to be evaded by the assessee in respect of both the additions.

3. The penalty imposed by the AO u/s 271(1)(c) was challenged by the assessee in an appeal filed before the learned CIT(Appeals). The assessee had also filed an appeal before the Tribunal disputing the addition made u/s 68 to its total income on merit in the quantum proceedings. The said appeal was disposed of by the Tribunal vide its order dated 15-09-2010 deleting the addition made u/s 68 and taking note of the same, the learned CIT(Appeals) cancelled the penalty imposed by the AO u/s 271(1)(c) in respect of the said addition. The addition made on account of long term capital gain, however, was not agitated by the assessee before the Tribunal. In respect of the said addition, it was submitted on behalf of the assessee before the learned CIT(Appeals) that exemption u/s 10(38) was inadvertently claimed by it in respect of entire long term capital gain of Rs.77,18,627/- in the year under consideration which was the first year in which the said provision was introduced. It was submitted that the assessee, however, was eligible for the said exemption in respect of capital gain only to the extent of Rs.10,49,477/- on which STT was paid and there was a bonafide mistake in claiming exemption in respect of the balance amount of capital gain of Rs.66,59,023/- for which penalty u/s 271(1)(c) should not be imposed. The learned CIT(Appeals), however, did not find merit in the contention of the assessee and sustained the penalty imposed by the AO u/s 271(1)(c) to the extent it was in respect of addition of Rs.66,59,023/- made on account of capital gain for the following reasons given in paragraph No. 2.5 and 2.6 of his impugned order :

"2.5 I have considered the facts of the case, arguments of the Assessisng Officer and the written submissions of the Authorised Representative of the appellant. As per Explanation 1 to section 271(1)(c) if an addition is made to the total income of a person because of the fact that such person failed to offer an explanation with regard to any facts material to the computation of his total income or offered an explanation which is found by the Assessing Officer to be false then the amount so added shall be deemed to be the income in respect of which particulars have been concealed. This will also be applicable if such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. It means that the appellant is under obligation to offer bonafide explanation. In a land mark decision Hon'ble Supreme Court in the case of Union of India Vs. Dharmendra Textile Processors (2007) 166 Taxman 65 (SC) = (2007-TIOL-159-SC-CX)has even held that willful concealment is not an essential ingredient of penalty. If the explanation offered by the appellant is not bonafide, convincing or acceptable it will amount to furnishing of inaccurate particulars of income. In the case of Vidya Gowri Natverlal 238 ITR 91 (Guj), the Hon'ble Gujrat High Court held that mere disclosure does not save the appellant. If what is not allowable is claimed as an expenditure this will amount to furnishing of inaccurate particulars of income. Hon'ble Gujrat High Court in the case of Somnath Mills 214 ITR 32 has also held that findings in the assessment proceedings constitute good evidence of concealment.

2.6 I find that appellant filed inaccurate particulars of income to the tune of Rs.66,59,023/-. It was only after examination by the Assessing Officer that such a wrongful claim has been found out. But for the action of the Assessing Officer this amount could have escaped taxation. The claim that the mistake was bonafide cannot be also accepted. Admittedly inaccurate particulars of income to this extent has been filed by the Appellant and the Assessing Officer was duty bound to impose penalty. The penalty levied by the Assessing Officer is confirmed in respect of this amount."

Aggrieved by the order of the learned CIT(Appeals), the assessee has preferred this appeal before the Tribunal.

4. The learned counsel for the assessee, at the outset, invited our attention to the computation of total income of the assessee placed at page No. 3 of the paper book to show several mistakes made by the assessee in the working of long term capital gain given therein. He submitted that exemption in respect of long germ capital gain was claimed in the said computation u/s 54D which is not applicable. He submitted that long term capital gain for the period 1st October, 2004 to 31st March, 2005 was shown wrongly at Rs.1,98,276/- as against the correct figure of Rs.10,49,477/- and similarly long term capital gain for the period 1st April, 2004 to 30th Sept., 2004 was wrongly shown at Rs.75,20,351/- as against the correct figure of Rs.66,59,023/-. He submitted that all these other mistakes committed by the assessee in the computation of total income are sufficient to show that the mistake committed by it in claiming exemption u/s 10(38) in respect of long term capital gain for the period 01-04-2004 to 30-09-2004 was a bonafide and genuine mistake. He contended that other relevant details regarding the computation of long term capital gain, however, were fully and truly given by the assessee and it is thus not a fit case to impose penalty u/s 271(1)(c). He also contended that the series of mistake committed by the assessee in the computation of long term capital gains shows the bonafides of the assessee which is further supported by the fact that the said mistakes were accepted by the assessee in the letter dated 11th November, 2007 filed before the AO. He contended that the claim for exemption u/s 10(38) in respect of long term capital gain thus was inadvertently made by the assessee as a result of genuine and bonafide mistake and the disallowance of such claim cannot be treated as concealment to impose penalty u/s 271(1)(c). In support of this contention, he relied on the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Sidhartha Enterprises 322 ITR 80 = (2009-TIOL-349-HC-P-H-IT), the decision of Hon'ble Supreme Court in the case of Price water house coopers (P) Ltd. vs. CIT 253 CTR 1 = (2012-TIOL-84-SC-IT) and the decision of coordinate bench of this Tribunal dated 28th Sept., 2012 passed in the case of Asia Attractive Dividend Stock Fund in ITA No. 3908/Mum/2012.

5. The learned DR, on the other hand, strongly relied on the orders of the authorities below in support of the Revenue's case that it is a fit case to impose penalty u/s 271(1)(c). He submitted that patently wrong claim was made by the assessee in the return of income for exemption u/s 10(38) which was detected by the AO. He submitted that the assessee, however, did not rectify the said mistake by filing the revised return and no basis whatsoever was given to justify the said claim made wrongly by the assessee. He contended that there is nothing to support and substantiate the contention of the learned counsel for the assessee that the said claim was wrongly made as a result of genuine and bonafide mistake and in the absence of the same, penalty imposed u/s 271(1)(c) deserves to be confirmed.

6. We have considered the rival submissions and also perused the relevant material on record. It is observed that long term capital gain for the period April, 2004 to September, 2004 was claimed to be exempt by the assessee u/s 10(38) which clearly provides that any income arising from the transfer of long term capital asset, being equity share in a company, is exempt from tax where the transaction of sale of such equity share is entered into on or after 1st October, 2004 and such transaction is chargeable to Securities Transaction Tax. In the present case, the transactions of sale of shares giving rise to long term capital gain were entered into prior to 1st April, 2004 and the same were also not chargeable to Securities Transaction Tax. The assessee, therefore, was not entitled to claim exemption u/s 10(38), the provisions of which are very plain and simple in this regard. The exemption u/s 10(38) thus was wrongly claimed by the assessee which was detected by the AO during the course of assessment proceedings.

7. The learned counsel for the assessee in support of the assessee's case has contended that the exemption u/s 10(38) was inadvertently claimed by the assessee as a result of genuine and bonafide mistake. Nothing, however, has been brought on record before us to show as to how the so called mistake committed by the assessee in claiming wrong exemption u/s 10(38) was a result of genuine and bonafide mistake. Merely because there were certain other mistakes committed by the assessee in computing the long term capital gain, it cannot be concluded that the wrong claim of exemption made by the assessee u/s 10(38) was a result of bonafide and genuine mistake. As already noted by us, the provisions of section 10(38) in this regard are very plain and simple and since none of the two conditions stipulated therein was satisfied in the case of the assessee, it is difficult to accept the contention raised on behalf of the assessee that exemption under the said provision was wrongly claimed as a result of genuine and bonafide mistake. It is also observed that the entire long term capital gain earned by the assessee during the year under consideration was claimed to be exempt u/s 54D in the return of income and even the particulars relating to payment of Securities Transaction Tax, which were relevant to the assessee's claim for exemption u/s 10(38), had not been furnished by the assessee.

8. In support of the assessee's case, the learned counsel for the assessee has relied on certain judicial pronouncements. A perusal of the decisions cited by the learned counsel for the assessee, however, shows that the same are distinguishable on facts. In the case ofSidhartha Enterprises 322 ITR 80 (P&H) = (2009-TIOL-349-HC-P-H-IT) cited by the learned counsel for the assessee, the assessee had suffered a loss on sale of machinery which was duly disclosed in the statement of accounts filed along with the return. There was no allegation about the incorrectness of the said loss and the only mistake committed by the learned counsel for the assessee was that the same was adjusted against the profits of the business. When the AO pointed out that the loss suffered on sale of machinery was not allowable to be set off against the profits of business, the assessee on realizing the mistake committed by his counsel, accepted the decision of the AO in disallowing the loss. In these facts and circumstances of the case, the Tribunal held that the mistake having been committed by the counsel of the assessee and entire facts having been already disclosed by the assessee in the documents filed along with the return, there was no case of concealment of particulars of his income by the assessee or furnishing of inaccurate particulars of such income. This decision of the Tribunal was upheld by the Hon'ble Punjab & Haryana High Court holding that the view taken by the Tribunal could not be held to be perverse and the appeal filed by the Revenue was dismissed holding that the substantial question of law proposed in the said appeal did not arise for consideration. In the present case, the assessee has not been able to show that the mistake in claiming exemption u/s 10(38) was a genuine and bonafide mistake. Moreover, as already noted by us, the relevant fact regarding payment of STT was also not disclosed by the assessee. On the contrary, the exemption in respect of entire long term capital gain was claimed by the assessee u/s 54D in the computation of total income filed along with the return of income.

9. In the case of Asia Attractive Dividend Stock Fund (supra) decided by the Tribunal and cited by the learned counsel for the assessee, the assessee had worked out tax payable on short term capital gain at the rate of 10% as per section 111A of the Act instead of 30% and when he received a notice u/s 142(1), while preparing reply to the said notice, he noticed the said mistake. He, therefore, filed a letter before the AO suo motu bringing the said mistake to the notice of the AO. Along with the said letter, revised computation of income and tax payable thereon was also filed by the assessee and keeping in view these facts of the case as well as the fact that the assessee had furnished all the relevant particulars fully and truly in the return of income, penalty imposed u/s 271(1)(c) was held to be unsustainable by the Tribunal. In the present case, the assessee had initially claimed exemption in respect of entire long term capital gain u/s 54D of the Act and in the letter dated 11th November, 2007 filed at the fag end of the assessment proceedings, the assessee stated that the said exemption was wrongly claimed u/s 54D instead of u/s 10(38) due to clerical mistake. The AO, however, found that even the claim made by the assessee for exemption u/s 10(38) was wrong and when he disallowed the same, the assessee challenged the said disallowance unsuccessfully in the appeal filed before the learned CIT(Appeals). The facts involved in the case of the assessee thus are entirely different from the facts involved in the case of Asia Attractive Dividend Stock Fund (supra) relied upon by the learned counsel for the assessee.

10. Similarly the facts involved in the case of Pricewaterhousecoopers (P) Ltd. (supra) cited by the learned counsel for the assessee are found to be different from the facts of the assessee's case inasmuch as the basis on which the computation error made in its return of income was explained by the assessee by way of an affidavit and on the basis of assertions made in the said affidavit, the computation error made by the assessee was found to be bonafide. Moreover, in the tax audit report filed along with the return of income, it was unequivocally stated that the relevant provision made for payment of gratuity was not allowable u/s 40A(8) of the Act and on the basis of these contents of the tax audit report, the Hon'ble Supreme Court held that there was no question of the assessee concealing the particulars of such income attracting levy of penalty u/s 271(1)(c). We, therefore, find that none of the case laws relied upon by the learned counsel for the assessee in support of the assessee's case is applicable being distinguishable on facts and the reliance of the assessee thereon is clearly misplaced.

11. As already discussed, the assessee has not been able to show satisfactorily that the so called mistake committed by him while making a wrong claim for exemption u/s 10(38) is a bonafide and genuine mistake and the assessee having not disclosed fully and truly all the material facts relevant to the said claim, we are of the view that it is a fit case to impose penalty u/s 271(1)(c). In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) confirming the penalty imposed by the AO u/s 271(1)(c) and dismiss this appeal of the assessee.

12. In the result, the appeal of the assessee is dismissed.

(Order pronounced Court on this 14.12.2012.)

 

2013-TIOL-335-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL 
BENCH 'B' AHMEDABAD

ITA No.2616/AHD/2012 
Assessment Year: 2008-09

OM FINANCE 
20,OLD MARKET YARD, HIMATNAGAR, 
DIST SABARKANTHA 
PAN: AAAPO 2653B

Vs

DEPUTY COMMISSIONER OF INCOME TAX, 
SABARKANTHA CIRCLE, HIMATNAGAR

G C Gupta, VP And Anil Chaturvedi, AM

Dated: April 4, 2013

Appellant Rep by: Mr.S N Divatia 
Respondent Rep by: Mr Y P Verma, Sr. D R

Income Tax - Sections 41(1), 143(3), 250 - Whether when assessee has transferred the money taken on interest from its sister concern in P&L account, and the sister concern has dissolved without receiving either the interest or principal sum nor has it demanded from the assessee, such sum warrants addition u/s 41(1) in the hand of the assessee - Whether the nature of receipt, which was capital in the beginning, can undergo a change with influx of time and the same can become revenue receipt.

Assessee , a firm, is engaged in the business of shroff and cheque discounting. It takes money on interest and advances the same on interest to others. It filed its ROI for A.Y. 2008-09 showing total income of Rs.79 ,960 /-. During assessment, AO determined the income at Rs.9 ,02,690 /- and noticed that the assessee had taken unsecured loan of Rs.8,22,726/- from Om Traders. On perusing the details it was further observed that the firm Om Traders had been dissolved on 31-3-2006. It was also observed that till date the loan had not been squared up and further no interest was paid during the year on the aforesaid loan. It was further noticed that as per dissolution deed, the firm was dissolved after squaring up the accounts. It was further noted that the dissolution deed stated that the Bank account shall be closed after squaring up the accounts of receivable and payable and the bank account of Om Traders was also closed. AO thus held that the loan from "Om Traders" was not proved to be genuine. AO was further of the view that as per the provisions of the Limitation Act loan liability was barred by limitation. It was therefore, concluded that the assessee was not required to pay the liability of Om Traders and therefore, the liability had ceased to be operative. AO held that the liability as cession and accordingly added Rs.8 ,22,726 /- to the income.

On appeal, CIT( A) upheld the order of AO and held that the appellant had submitted that AO had stated that at the time of dissolution of the firm on 31-3-2006 that the accounts had been squared up but it was not correct. The appellant had further submitted that the deposit received from the customers were time barred but in the case of appellant the creditors payment were not time barred because it was shown as a liability in the accounts and therefore, all the partners were agreed to it and it was automatically renewed for the further period. If an amount was received in course of trading transaction, even though it was not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the appellant's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands the amount should be treated as income of the appellant. In the instant case, the amounts were taken as loan from M/s. Om Traders (firm.). The loans were not repaid and kept with the appellant and it was to be noted that the firm M/ s.Om Traders (Firm) was already dissolved in 2006.The loans were taken in course of the trade. Although the amounts received originally were not of income nature, the amounts remained with the appellant for a long period unclaimed by the trade parties. By lapse of time, the claim of the loan became time barred and the amount attained a totally different quality. It became a definite trade surplus. In the instant case, the loans were received by the appellant in course of carrying on his business. Although it was treated as loans and was of capital nature at the point of time it was received, by influx of time the money had become the appellant's own money. What remains after adjustment of the deposits had not been claimed by the customers. The claims of the customers had become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profits and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. Thus, the aforesaid liability of loan of Rs.8 ,22,726 /- was barred by limitation would mean that the appellant was not required to pay the liability to M/s. Om Traders (Firm). Therefore, the liability of Rs.8 ,22,726 /- was treated as cessation of liability u/s. 41(1) and therefore, the addition made by the A.O. was confirmed.

Having heard the matter, Tribunal held that,

++ nothing has been brought on record to demonstrate that the aforesaid loan has been repaid till date. Further the assessee has placed on record the copy of bank statement of Om Traders for the period 1-1-2012 to 31-8-2012 to prove its contention that the bank account has not been closed. However, the bank statement reveals no transactions during the period so as to demonstrate that the assets / liabilities have been settled during the period. Further nothing is on record to prove that what were the assets and liabilities of Om Traders as on the date of dissolution and whether the assets have been recovered and liabilities been repaid from the date of dissolution till date and what is its status as on date. We are of the view that the ratio of the aforesaid decision of Gujarat HC are distinguishable and cannot be applied to the facts of the present case for the reason that in that case, it was not a case where the firm to whom the amount was payable was no more in existence and had ceased to exist. In the case of CIT vs. Agarpara Co. Ltd. the HC has held that assuming that there can be a cessation only on bilateral act by both the creditor and debtor such acts may be inferred from the conduct of the debtor and creditors;

++ in the case of CIT vs. Chipsoft Technology (P) Ltd. (2012-TIOL-565-HC-DEL-IT), HC has held that t wo aspects are to be noticed in this context. The first is that the view that liability does not cease as long as it is reflected in the books, and that mere lapse of the time given to the creditor or the workman, to recover the amounts due, does not efface the liability, though it bars the remedy. This view, with respect is an abstract and theoretical one, and does not ground itself in reality. Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law permits the debtor to take all defences , and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assessee's contention is unacceptable is because with effect from 1-4-1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to Section 41 which spells out that "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause." The expression "include" is significant' Parliament did not use the expression "means". Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/ assessee would therefore qualify as a cessation of liability, albeit by operation of law.";

++ i n the case of CIT vs.T.V . Sundaram Iyenger & Sons Ltd. (2002-TIOL-239-SC-IT) SC observed that if a commonsense view of the matter is taken, the assessee , because of the trading operation, had become richer by the amount which it transferred to its profit and loss account, The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, it was pointed out that in Morely's case, no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee ;

++ in the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital in nature at the point of time it was received, by influx of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profits and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as pointed out that what the assessee did was the commonsense way of dealing with the amounts. Thus in the present case considering the fact that the firm is a sister concern of assessee , has dissolved w.e.f . 31-3-2006, no interest paid during the year under review, no material on record to prove that it has demanded the repayment of amount at any time nothing on record to demonstrate that assessee has paid the amount till date, and relying on the aforesaid decisions, we are of the view that on the facts and circumstances of the present case, the A.O's action of making addition u/s. 41(1) cannot be faulted. We thus dismiss the assessee's ground.

Assessee's appeal dismissed

Cases followed;

CIT vs.T.V. Sundaram Iyenger & Sons Ltd. (2002-TIOL-239-SC-IT)

CIT vs. Chipsoft Technology (P) Ltd. (2012-TIOL-565-HC-DEL-IT)

ORDER

Per: Anil Chaturvedi:

This appeal is filed by the assessee against the order of Ld. CIT (A)- VIII, Ahmedabad dated 18-9-2012 for the assessment year 2008-09.

2. The facts as culled out from the orders of the lower authorities are as under.

3. Assessee is a firm doing business of shroff and cheque discounting. It takes money on interest and advances the same on interest to others. It filed its return of income for A.Y. 2008-09 on 16-12-2008 showing total income of Rs.79,960/-.The case was selected for scrutiny and thereafter the assessment was framed u/s. 143(3) vide order dated 27-12-2010 and the total income was determined at Rs.9,02,690/-. Aggrieved by the order of the A.O. the assessee carried the matter before the Ld. CIT (A). CIT (A) vide order dated 18-9-2012 dismissed the appeal of the assessee. Aggrieved by the order of the CIT (A), the assessee is now in appeal before us and has raised following grounds.

"1.1 The order passed u/s. 250 on 18-9-12 for A.Y. 2008-09 by CIT (A)-VIII, Ahmedabad on 18-9-12 upholding the addition of Rs.8,22,726/- made u/s. 41(1) as cessation of liability is wholly illegal, unlawful and against the principles of natural justice.

1.2. The Ld. CIT (A) has grievously erred in not considering fully and properly the evidence produced and explanation furnished with regard to the impugned addition.

2.1. The Ld. CIT (A) has erred in law and on facts in upholding that there was cessation of liability in view of dissolution of the partnership firm and getting time barred so that it was liable to tax u/s. 41(1) of the I. T. Act.

2.2. That in the facts and circumstances of the case as well as in law, the Ld. CIT (A) ought not to have upheld that there was cessation of the liability of Rs.8,22,726/- to M/s. Om Traders so that it was chargeable to tax u/s. 41(1)."

Since all the grounds raised relates to addition u/s. 41(1) and are interconnected, all are considered together for disposal.

4. During the course of assessment proceedings Assessing Officer on perusing the balance sheet of the assessee noticed that the assessee had taken unsecured loan of Rs.8,22,726/- from Om Traders. On perusing the details he further observed that the firm Om Traders has been dissolved on 31-3-2006. He also observed that till date the loan has not been squared up and further no interest was paid during the year on the aforesaid loan. He further noticed that as per dissolution deed, the firm was dissolved after squaring up the accounts. He further noted that the dissolution deed stated that the Bank account shall be closed after squaring up the accounts of receivable and payable and the bank account of Om Traders was also closed. He thus held that the loan from "Om Traders" was not proved to be genuine. He was further of the view that as per the provisions of the Limitation Act loan liability was barred by limitation. He therefore, concluded that the assessee was not required to pay the liability of Om Traders and therefore, the liability has ceased to be operative. He relying on the decision of CIT vs. T.V. Sunderam Iyenger & Sons Ltd., 222 ITR 344 = (2002-TIOL-239-SC-IT)held that the liability as cession and accordingly added Rs.8,22,726/- to the income.

5. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A). CIT (A), upheld the order of A.O. by holding as under:-

"2.3. I have gone through the assessment order and the submission of the appellant carefully. The A.O. has made an addition of Rs.8,22,726/- as a cessation of liability u/s. 41(1) of the I.T. Act. The appellant has submitted that in clause No.1 of the A.O. has stated that at the time of dissolution of the firm on 31-3-2006 that the accounts have been squared up but it is not correct. The appellant has further submitted that the deposit received from the customers are time barred but in the case of appellant the creditors payment are not time barred because it was shown as a liability in the accounts and therefore, all the partners are agreed to it and it is automatically renewed for the further period. So the decision cited by the Ld. Assessing Officer in the case of CIT vs. T.V. Sundaram Iyenger & Sons Ltd. reported in 222 ITR 344 = (2002-TIOL-239-SC-IT) is not applicable to this case.

The arguments of the appellant have been considered but the facts and the legal position in these aspects are totally different from what the appellant is putting up. If an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the appellant's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands the amount should be treated as income of the appellant.

In the instant case, the amounts were taken as loan from M/s. Om Traders (firm.). The loans were not repaid and kept with the appellant and it is to be noted that the firm M/s.Om Traders (Firm) is already dissolved in 2006.The loans were taken in course of the trade. Although the amounts received originally were not of income nature, the amounts remained with the appellant for a long period unclaimed by the trade parties. By lapse of time, the claim of the loan became time barred and the amount attained a totally different quality. It became a definite trade surplus. In the instant case, the loans were received by the appellant in course of carrying on his business. Although it was treated as loans and was of capital nature at the point of time it was received, by influx of time the money had become the appellant's own money.

The Hon'ble Supreme Court in the case of CIT vs. T.V. Sundaram Iyenger & Sons Ltd. reported in 222 ITR 344 = (2002-TIOL-239-SC-IT) has held as under:-

"The principle laid down by Atkinson J applies in full force to the facts of this case. if a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account, The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, Atkinson J. pointed out that in Morely's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee.

23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profits and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J pointed out that what the assessee did was the commonsense way of dealing with the amounts."

On the basis of above discussion and the facts of the case that the aforesaid liability of loan of Rs.8,22,726/- is barred by limitation would mean that the appellant was not required to pay the liability to M/s. Om Traders (Firm). In view of the above, I hold the liability of Rs.8,22,726/- as cessation of liability u/s. 41(1) of the I. T. Act and therefore, the addition made by the A.O. is confirmed. The ground of the appeal is dismissed."

6. Aggrieved by the aforesaid order of CIT (A), the assessee is now in appeal before us.

7. Before us, the Ld. A.R. submitted that though the firm was dissolved the accounts were not squared up and even the Bank account continued. He further submitted that the outstanding debtors and creditors of the firm were to be settled and the bank account was to be continued till then. He further submitted that assessee has not transferred the impugned account to Profit and loss account nor treated it as cessation of liability. He therefore submitted that provisions of Sec.41(1) and the ratio of decision of Hon'ble Supreme Court in the case of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. (222 ITR 344) = (2002-TIOL-239-SC-IT)(supra) are not applicable to the facts of case. He further placed reliance on the decision of Hon'ble Gujarat High Court in the case of CIT vs. Miraa Processors (P) Ltd. (2012) 208 Taxman 93 (Guj.) = (2012-TIOL-289-HC-AHM-IT) & CIT vs. Nitin S. Garg (2012) 208 Taxman 16 (Guj.) = (2012-TIOL-294-HC-AHM-IT). He thus urged that the addition made by A.O. u/s. 41(1) be deleted.

8. On the other hand, Ld. D.R. submitted that the firm to whom the amount was payable has already been dissolved since 31-3-2006 and the assessee has not refunded the amount till date. He further submitted that assessee had also not paid any interest during the year under review. He thus supported the order of A.O. & CIT (A).

9. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the assessee has obtained loan from Om Traders (a sister concern of assessee) in earlier years and the assessee has not paid during the year under review any interest on the aforesaid loan. It is also a fact that the assessee continues to show the unsecured loan as its liability in its balance sheet. It is also an undisputed fact that the firm (Om Traders) has been dissolved w.e.f. 31-3-2006 and the partners of the firm have given authority to settle the accounts and for that purpose to operate the account, to one of its partners. It is a fact that though the firm has been dissolved on 31-3-2006 there is nothing on record to prove that the aforesaid firm had at any time demanded the repayment of loan and demanded the interest on it. Further nothing has been brought on record to demonstrate that the aforesaid loan has been repaid till date. Further the assessee has placed on record the copy of bank statement of Om Traders for the period 1-1-2012 to 31-8-2012 to prove its contention that the bank account has not been closed. However, the bank statement reveals no transactions during the period so as to demonstrate that the assets / liabilities have been settled during the period. Further nothing is on record to prove that what were the assets and liabilities of Om Traders as on the date of dissolution and whether the assets have been recovered and liabilities been repaid from the date of dissolution till date and what is its status as on date. Assessee has relied on the decision of CIT v/s. Nitin Garg (supra). We are of the view that the ratio of the aforesaid decision of Gujarat High Court are distinguishable and cannot be applied to the facts of the present case for the reason that in that case, it was not a case where the firm to whom the amount was payable was no more in existence and had ceased to exist. Similarly the decision of Miraa Processors (supra) are also distinguishable and therefore have no application to the facts of the assessee.

10. In the case of CIT vs. Agarpara Co. Ltd. (1986) 27 Taxman186 (Cal.) the Hon'ble High Court has held as under. "Assuming that there can be a cessation only on bilateral act by both the creditor and debtor such acts may be inferred from the conduct of the debtor and creditors."

11. In the case of CIT vs. Chipsoft Technology (P) Ltd. (2012) 26 Taxman.com. 109 (Del ) =(2012-TIOL-565-HC-DEL-IT) , Hon'ble High Court has held as under:-

"9. Two aspects are to be noticed in this context. The first is that the view that liability does not cease as long as it is reflected in the books, and that mere lapse of the time given to the creditor or the workman, to recover the amounts due, does not efface the liability, though it bars the remedy. This view, with respect is an abstract and theoretical one, and does not ground itself in reality. Interpretation of laws, particularly fiscal and commercial legislation is increasingly based on pragmatic realities, which means that even though the law permits the debtor to take all defences, and successfully avoid liability, for abstract juristic purposes, he would be shown as a debtor. In other words, would be illogical to say that a debtor or an employer, holding on to unpaid dues, should be given the benefit of his showing the amount as a liability, even though he would be entitled in law to say that a claim for its recovery is time barred, and continue to enjoy the amount. The second reason why the assessee's contention is unacceptable is because with effect from 1-4-1997 by virtue of Finance Act, 1996 (No.2), an Explanation was added to Section 41 which spells out that "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof" shall include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause." The expression "include" is significant' Parliament did not use the expression "means". Necessarily, even omission to pay, over a period of time, and the resultant benefit derived by the employer/assessee would therefore qualify as a cessation of liability, albeit by operation of law."

12. In the case of CIT vs.T.V. Sundaram Iyenger & Sons Ltd. (1996) 222 ITR 344 = (2002-TIOL-239-SC-IT) Hon'ble Apex Court observed interalia that

"The principle laid down by Atkinson J applies in full force to the facts of this case. if a commonsense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account, The moneys had arisen out of ordinary trading transactions. Although the amounts received originally were not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, Atkinson J. pointed out that in Morely's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into automatically by operation of law, commonsense demanded that the amount should be entered in the profit and loss account for the year and be treated as taxable income. In other words, the principle appears to be that if an amount is received in course of trading transaction, even though it is not taxable in the year of receipt as being of revenue character, the amount changes its character when the amount becomes the assessee's own money because of limitation or by any other statutory or contractual right. When such a thing happens, commonsense demands that the amount should be treated as income of the assessee.

23. In the present case, the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money has become the assessee's own money. What remains after adjustment of the deposits has not been claimed by the customers. The claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profits and loss account. There is no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. In fact, as Atkinson J pointed out that what the assessee did was the commonsense way of dealing with the amounts."

13. Thus in the present case considering the fact that the firm is a sister concern of assessee, has dissolved w.e.f. 31-3-2006, no interest paid during the year under review, no material on record to prove that it has demanded the repayment of amount at any time nothing on record to demonstrate that assessee has paid the amount till date, and relying on the aforesaid decisions, we are of the view that on the facts and circumstances of the present case, the A.O's action of making addition u/s. 41(1)cannot be faulted. We thus dismiss the assessee's ground.

14. In the result, appeal of the assessee is dismissed.

(Order pronounced in Open Court on 5.4.2013)

2013-TIOL-334-ITAT-AHM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'D' AHMADABAD

ITA No. 1149/Ahd/2010
Assessment Year :2005-2006
&
ITA No. 1207/Ahd/2012
Assessment Year :2005-2006

NIYA FINSTOCK PVT LTD
NIRMA HOUSE,
ASHRAM ROAD, AHMEDABAD
PAN No. AAACN5205D

Vs

COMMISSIONER OF INCOME TAX,
AHMADABAD-III , AHMADABAD

COMMISSIONER OF INCOME TAX,
AHMADABAD-III, AHMADABAD.

Vs

NIYA FINSTOCK PVT LTD
NIRMA HOUSE,
ASHRAM ROAD, AHMEDABAD

Mukul Kr Shrawat, JM And T R Meena, AM

Dated: March 8, 2013

Appellant Rep by: Shri D. P. Gupta, CIT D.R.
Respondents Rep by: Shri S N Soparkar, Sr. Adv. With Shri Himanshu Shah

Income Tax - Sections 36(1)(iii), 37, 143(3), 263 - Indian Evidence Act - Section 114 - revisionary order - sick - erroneous - prejudicial - Whether when assessee had valid reason to waive off the interest income due from an outsider, the same can be included as income of the assessee.

Assessee is a Company, whose original assessment was completed by A.O. u/s.143(3). On appeal, CIT found the AO's order erroneous and prejudicial to the interest of revenue on the basis that bad debt of Rs.44,48,514/- wrongly allowed, Long Term Capital Loss of Rs.9,88,076/- was allowed, even there was no transfer of shares and the appellant had not charged interest on funds given to M/s. sunrise Fin Cap Ltd. of Rs. 1.5 crore and Satellite Management Service Pvt. Ltd. of Rs. 6,99,25,355/-. The CIT gave reasonable opportunity of being heard to the appellant which was responded by the appellant. After considering the assessee's reply, the CIT held that A.O. had failed to make proper inquiry. The appellant was following mercantile system of accounting and no interest had been charged on the fund given to above companies. The appellant had written off interest on the basis of agreement made during the subsequent year. Further, notional loss on sale of shares has been claimed by the appellant at Rs.9,88,076/-. On this issue, CIT found the A.O's. order was erroneous and prejudicial purchaser to interest of Revenue. The A.O. raised query on bad debt, which was replied by the assessee and which had been considered by the A.O. and no addition had been made by the A.O. in income u/s.143(3). Thus, on this issue, the CIT order was tantamount to change of opinion. On this issue i.e. LTCL and disallowance of interest in case of Satellite Management Service Pvt. Ltd. of Rs. 6,99,25,355/-, the A.O. had not made assessment without proper inquiry, the order was erroneous and prejudicial to the interest of revenue, as held in case of Malabar Industries Co. Ltd. vs. CIT (2002-TIOL-491-SC-IT). Thus, CIT held that the revisionary order passed u/s. 263 was valid.

Before Tribunal, DR relied upon the order of the A.O. and contended that it was a diversion of income by the appellant to the sister concern. DR relied in case of K. Somasundaram & Brothers vs. CIT, (1999) 238 ITR 939 (Mad), wherein identical issue has been decided by the Madras HC against the assessee. He further argued that no evidence had been given before the A.O. that both the companies' financial position were bad and one of the company became sick for which he relied in case of CIT vs. Motor General Finance Ltd., (2003-TIOL-394-HC-DEL-IT), wherein it was held by the Delhi HC that as the assessee could not produce any document in this regard, adverse inference in terms of Section 114 of the Indian Evidence Act was drawn to the effect that these document had been produced the same would have gone against the interest of the assessee. Thus, the Tribunal was not right in deleting the addition of Rs.10 lacs made on account of interest free loan/ advance given by the assessee to the sister concern. It was further argued that the assessee company had share capital only Rs.18.25 lacs, all funds available with it, are from loans which had been mostly given by the appellant in form of advances to the sister concern. Therefore, DR requested to confirm the addition made by the A.O. On the other hand, AR contended that both the companies' financial positions were very bad. Because of this, the appellant and these companies made an agreement to settle the account. They promised to pay principal on the condition that the interest during year was to be waived. All the evidences for bad financial position of both companies had been given before the A.O. AR claimed that the appellant company was engaged in the financial business and the funds were borrowed for the purpose of business merely because certain loans were given as ICD and interest could not be earned the expenses cannot be disallowed. The borrowings taken were part of financial business. The interest expenses were incurred was also part of business. The appellant further claimed that there was no real income.

Having heard the matter, Tribunal held that,

++ we have heard the rival contentions and perused the material on record. The appellant had proved before the A.O. that financial position of both the sister concern to whom advances were given, for which agreement made with Sunrise Fincap Ltd. on 11.05.2005. The company had negative net worth. The income of the company was reducing day-by-day and the company had no concrete future business plan. It was agreed by the both that they are ready to forgo interest portion, if principal amount of Rs.1.5 crore is paid by the company on or before 15.05.2005. In case of Satellite Management Services Ltd., the company incurred losses Rs.2.46 crore as on 31.03.2005. Accordingly, this company was not in good position to repay the interest or principle amount. The company became sick. The assessee borrowed the fund for the business purpose and paid the interest on it which is allowable u/s. 37. The appellant had reason to no charge interest from two companies. Thus, we have considered view that no interference is required in the order of the CIT(A), we dismiss the appeal of the Revenue.

Assessee's appeal partly allowed; Revenue's appeal dismissed

ORDER

Per: T R Meena:

These are parallel appeals filed by the Assessee and Revenue in ITA Nos. 1149/Ahd/10 & 1207/Ahd/12 respectively which have emanated from the orders of CIT, Ahmedabad-III, Ahmedabad, dated 26.03.2010 and CIT(A)-XI, Ahmadabad, dated 23.03.2012 respectively for assessment year 2005-2006. Both appeals were heard together and are being disposed of by way of this common order for the sake of convenience. The sole ground of appeal of the appellant is against passing the order u/s.263 of the IT Act whereas Revenue's appeal is against deleting the disallowance of interest of Rs.1,10,40,296/- u/s. 36(1)(iii) of the IT Act.

2. The original assessment was completed by the A.O. in this case on 17.12.2007 u/s.143(3) of the IT Act. The ld. CIT-III, Ahmadabad found the above order erroneous and prejudicial to the interest of revenue for following reasons:

i. Bad debt of Rs.44,48,514/- wrongly allowed.

ii. Long Term Capital Loss of Rs.9,88,076/- was allowed, even there was no transfer of shares.

iii. The appellant had not charged interest on funds given to M/s. sunrise Fin Cap Ltd. of Rs. 1.5 crore and Satellite Management Service Pvt. Ltd. of Rs. 6,99,25,355/-.

The CIT gave reasonable opportunity of being heard to the appellant which was responded by the appellant. After considering the assessee's reply, the ld. CIT held that A.O. had failed to make proper inquiry. The appellant is following mercantile system of accounting and no interest had been charged on the fund given to above companies. The appellant had written off interest on the basis of agreement made during the subsequent year. Further, notional loss on sale of shares has been claimed by the appellant at Rs.9,88,076/-. On this issue, ld. CIT found the A.O's. order dated 17.12.2007 the erroneous and prejudicial purchaser to interest of Revenue. The A.O. raised query on bad debt vide letter dated 30.11.2007 which was replied by the assessee on 06.12.2007 which has been considered by the A.O. and no addition had been made by the ld. A.O. in income u/s.143(3) vide his order dated 17.12.2007. Thus, on this issue, the ld. CIT order is tantamount to change of opinion. On this issue i.e. Long Term Capital Loss and disallowance of interest in case of Satellite Management Service Pvt. Ltd. of Rs. 6,99,25,355/-, the ld. A.O. had not made assessment without proper inquiry, the order is erroneous and prejudicial to the interest of revenue, as held in case of Malabar Industries Co. Ltd. vs. CIT 343 ITR 83 (SC) = (2002-TIOL-491-SC-IT). Thus, we hold this revisionary order passed u/s. 263 is valid.

ITA No.1207/Ahd/2012 (Revenue's appeal)

3. The ld. A.O. passed the order u/s.143(3) r.w.s. 263 for A.Y. 05-06 on 15.12.2010 ad he made addition is as under:

i. Disallowance of bad debts	Rs.44,48,514/-
ii. Disallowance of interest expenses	Rs.1,10,40,296/-
iii. Disallowance of Long Term Capital Loss.	Rs.9,88,076/-

4. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had deleted all the additions and decided the appeal in favour of the appellant. When the matter is concluded at the level of A.O. as well as at the level of CIT(A), we are not commenting on the order passed u/s.263 by the CIT. We are deciding the Revenue's appeal on one issue raised by the Department. The A.O. observed that the appellant had advanced money to two companies (i) M/s. Sunrise Fincap Ltd. Rs.1.5 crore and (ii) M/s. Satellite Management Service Pvt. Ltd. Rs. 6.99 crore. The appellant debited a expenditure of Rs. 1,38,99,020 for payment of interest and credited interest of Rs.67,88,399/-. It was found that the assessee company had not charged any interest on the inter-corporate deposits of Rs. 1.5 crore and Rs.6,99,25,355/- with Sunrise Fincap Ltd. and Satellite Management Services Pvt. Ltd. respectively. The appellant paid interest ranging from 12% to 15% borrowings to other concerns. Therefore, relinquishment of interest chargeable on ICD of the above two companies amounted to diversion of interest bearing funds to non-interest bearing funds. The appellant submitted before the A.O. that interest had already been charged in earlier years has not chargeable and written off as bad debts, there was no question of charging interest during the year. The financial position of Sunrise Fincap Pvt. Ltd. became worse and precarious, therefore, it was not able to pay the principal amount and interest. Similarly, Satellite Management Services Ltd. was also not in a position to repay principal amount and interest as it became a sick company. The assessee had further contended that expenditure couldn't be disallowed merely because certain loss became bad and doubtful. The assessee's reply was not found convincing to the A.O. and held that relinquishment of interest chargeable ICD of above that companies mentioned to diversion of income bearing fund to non-interest bearing fund. Thus, he charged interest @ 13% on the two deposits totally to Rs.8,49,25,355/- which was worked out at Rs.1,10,40,296/- and addition was made by the A.O. in the income of the assessee.

5. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A), who had allowed the appeal in favour of the appellant, after considering the reply of the appellant and held as under:

"4.3 I have considered rival submissions. I have also perused various evidences furnished by the ld. A.R. It I seen that appellant has advanced following loans during the normal course of business.

Sunrise Fincap Pvt. Ltd.	1,50,00,000/-
Satellite Management Services Pvt. Ltd.	6,99,25,355/-

Since these concerns were financially weak and they were not in a position to repay interest, accordingly, appellant had not charged interest on these advances. The A.O. was of the view that appellant is maintaining its accounts on mercantile system and accordingly it was required to charge interest on these advances. In view of this, the A.O. held that this amounted to divergent of interest bearing funds to non interest bearing funds. He was of the opinion that interest @ 13% on the above deposits of Rs.1,10,40,296/- (8,49,25,355 x .13) should be disallowed.

4.4 It is seen that the A.O. has disallowed interest claimed u/s.36(1)(iii) of I.T. Act since entire dispute is in respect of interest expenses claimed u/s.36(1)(iii) of I.T. Act. It will be pertinent to discus provisions of this section. It is settled proposition of law that to claim allowable interest u/s.36(1)(iii), following conditions should be fulfilled.

(i) The Assessed must have borrowed money

(ii) The interest should have been payable

(iii) Borrowing should be made for the purpose of business.

4.5 Perusal of the assessment order reveals that the A.O. has not analyzed these conditions and the A.O. had miserably failed to bring any material on record to prove that above said conditions were not fulfilled. It is mentioned by the A.O. in the assessment order that relinquishment of interest on ICD amounted to diversion of interest bearing funds to sister concern as non-interest bearing funds. The methodology applied by the assessing officer does not warrant disallowance of interest u/s.36(1)(iii) of the IT Act. Since capital has been borrowed for the purpose of business and the interest expenses. Were duly claimed, accordingly I am of the considered view that interest of Rs.1,10,40,26/- should not be disallowed. This ground of appeal is allowed."

6. Now the Revenue is before us. Ld. CIT D.R. relied upon the order of the A.O. and contended that it was a diversion of income by the appellant to the sister concern. He relied in case of K. Somasundaram & Brothers vs. CIT, (1999) 238 ITR 939 (Mad), wherein identical issue has been decided by the Hon'ble Madras High Court against the assessee. He further argued that no evidence had been given before the A.O. that both the companies' financial position were bad and one of the company became sick for which he relied in case of CIT vs. Motor General Finance Ltd., [2002] 122 Taxman 447 (Delhi) = (2003-TIOL-394-HC-DEL-IT), wherein it was held by the Hon'ble Delhi High Court that as the assessee could not produce any document in this regard, adverse inference in terms of Section 114 of the Indian Evidence Act was drawn to the effect that these document had been produced the same would have gone against the interest of the assessee. Thus, the Tribunal was not right in deleting the addition of Rs.10 lacs made on account of interest free loan/ advance given by the assessee to the sister concern. He further drawn out attention on page no.22 of the paper book and argued that the assessee company had share capital only Rs.18.25 lacs, all funds available with it, are from loans which had been mostly given by the appellant in form of advances to the sister concern. Therefore, he requested to confirm the addition made by the A.O.

7. At the outset, ld. Counsel for the appellant contended that both the companies' financial positions were very bad. Because of this, the appellant and these companies made an agreement dated 11.05.2005 (page no.35 to 38) to settle the account. They promised to pay principal on the condition that the interest during year is to be waived. All the evidences for bad financial position of both companies had been given before the A.O. He filed a paper book and claimed that the appellant company is engaged in the financial business and the funds were borrowed for the purpose of business merely because certain loans were given as ICD and interest could not be earned the expenses cannot be disallowed. The borrowings taken were part of financial business. The interest expenses were incurred was also part of business. The appellant further claimed that there was no real income and relied in case of225 ITR 746 (SC) = (2002-TIOL-217-SC-IT), 98 ITR 415 (All.), 303 ITR 159 (Del) = (2007-TIOL-390-HC-DEL-IT) & 220 ITR 410 (Del) and requested to confirm the order of the CIT(A).

8. We have heard the rival contentions and perused the material on record. The appellant had proved before the A.O. that financial position of both the sister concern to whom advances were given, for which agreement made with Sunrise Fincap Ltd. on 11.05.2005. As per page no. 36 of paper book, the company had negative net worth. The income of the company was reducing day-by-day and the company had no concrete future business plan. It was agreed by the both that they are ready to for go interest portion, if principal amount of Rs.1.5 crore is paid by the company on or before 15.05.2005. In case of Satellite Management Services Ltd., the company incurred losses Rs.2.46 crore as on 31.03.2005 (page no.78 of the paper book). Accordingly, this company was not in good position to repay the interest or principle amount. The company became sick. The assessee borrowed the fund for the business purpose and paid the interest on it which is allowable u/s. 37 of the IT Act. The appellant had reason to no charge interest from two companies. Thus, we have considered view that no interference is required in the order of the CIT(A), we dismiss the appeal of the Revenue.

9. In the combined result, the assessee's appeal is partly allowed and Revenue's appeal is dismissed.

(Orders pronounced in open Court on 08.03.2013)

--
Regards,

Pawan Singla

BA (Hon's), LLB

Audit Officer