2008-VIL-413-ITAT-DEL

Equivalent Citation: [2008] 26 SOT 541 (DELHI)

Income Tax Appellate Tribunal DELHI

IT APPEAL NO. 4549 (DELHI) OF 2004

Date: 19.09.2008

INCOME-TAX OFFICER, WARD 39(2), NEW DELHI

Vs

SHYAM SUNDER JAJODIA

BENCH

DEEPAK R. SHAH AND RAJPAL YADAV, JJ.

JUDGMENT

Rajpal Yadav, Judicial Member. - The revenue is in appeal before us against the order of learned CIT (Appeals) dated 18-8-2004 passed for assessment year 2001-02. The first grievance of the revenue is that learned CIT (Appeals) has erred in deleting an addition of Rs. 2,06,83,349 which was added by the Assessing Officer in the value of closing stock on the ground that assessee has made unexplained investment in the stock hypothecated to the bank and not disclosed in the books of account.

2. The brief facts of the case are that the assessee has filed his return of income on 31-10-2001 declaring an income of Rs. 2,70,078. The assessee was engaged in the business of plastic dana and was working as an agent of Reliance Industries for sale of plastic dana. The learned Assessing Officer on scrutiny of the account found that assessee has shown the total sales of Rs. 1,80,93,419 and has shown payment of commission at Rs. 22,03,901. On further probe, the learned Assessing Officer found that assessee had overdraft account with the Syndicate Bank, Azadpur, Delhi. He has shown the liability of O.D. Account at Rs. 99,51,933 as on 31-3-2001. The learned Assessing Officer called for information about the stock of hypothecation with the bank under section 133(6) of the Act. The bank in response to the Assessing Officer’s query submitted that M/s. Standard Plastic for the month of March, 2001 has shown the value of stock hypothecated with the bank as on 31-3-2001 at Rs. 2,06,80,349. Whereas in the account, the assessee has shown purchases in the month of March 2001 at Rs. 8,03,275 and sales at Rs. 8,07,263. The value of closing stock alleged to have been hypothecated with the bank was not appearing in the closing stock disclosed by the assessee for the purpose of the Income-tax Act, 1961. Therefore, learned Assessing Officer confronted, the assessee as to why he has not disclosed the value of stock hypothecated with the bank in the books of account. In response to the query of Assessing Officer, assessee has filed detailed submissions. It was contended that during financial year 1999-2000, the assessee was appointed as the DEL CRE DRE Agent of M/s. Reliance Industries. As per the terms of the agency agreement, the assessee has to comply with certain terms and conditions. Two main conditions are that he has to make a deposit of Rs. 38,50,000 as security and the second is the bar on trading in reliance products. The assessee was functioning mainly on borrowed funds his own capital as on 1-4-2000 was Rs. 4,66,479. He had to borrow the money to make a security deposit with the Reliance Industries. Under the pressure of the lenders, assessee approached the Syndicate Bank for credit facility of Rs. 50 lakhs. The bank insisted for hypothecation of the stock. Faced with this commercial exigency, assessee agreed to offer stock as security which in fact he never had. He was assured by his banker that security would be converted from stock to book debt. Assessee had adopted a modus operandi that he filed an artificial balance sheet with the bank wherein a artificial closing stock of Rs. 2,06,80,349 was declared. Simultaneously he enhanced the sundry creditors by the same amount to balance the balance sheet. The purchases were enhanced by exactly the similar amount. Purchases were shown in the bank while actually there were no purchases. The assessee has filed a chart exhibiting the details of individual and entities from whom he alleged to have made artificial purchases. These purchases were shown with a view to inflate closing stock/balance sheet and there was no actual closing stock at all. The assessee emphasized the real and actual creditor as declared for the income-tax purpose in the balance sheet as on 31-3-2001 were only of Rs. 2,82,936. The assessee has filed a separate chart demonstrating the debtor creditor and closing stock, etc. It was also contended that the bank has sanctioned the over draft facility keeping in view the personal guarantee given by the assessee and his conduct. The banker has never verified the financial stock with the assessee. They have accepted whatever has been given by him in the paper.

3. Learned Assessing Officer after putting reliance on the judgments of Hon’ble Mumbai High Court in Ramlal Kacharulal Tejmal v. CIT [1979] 116 ITR 368 (sic ), Jai Chand Kanji & Co. v. CIT [1986] 157 ITR 451  (Raj.) and CIT v. G. Anandarajan [1997] 228 ITR 664 (Ker.) rejected the contention of the assessee and recorded a finding that assessee has reported a higher stock to the bank authority which has been insured by him with the Insurance Company by making a payment of Rs. 5,030. In the opinion of the Assessing Officer, assessee has suppressed the stock value and, therefore, he made an addition of Rs. 2,06,80,349.

4. On appeal, learned CIT (Appeals) appreciated the contention and deleted the addition. The relevant observations of learned CIT (Appeals) read as under:

"I have carefully gone through the judgments cited by both the appellant and the Assessing Officer in support of their stands.

I find that the facts and circumstances of the appellant’s case squarely fit into and are identical to the facts considered by their Lordships of the Madras High Court in their decision in the case of CIT v. Sri Padmavathi Cotton Mills 236 ITR 340. Here their Lordships upheld the decision of the Tribunal. The Tribunal came to the conclusion that the closing stock declared in the return filed by the assessee was based on the books of account and it should be accepted rather than the closing stock as declared to the bank which was made for the purpose of securing a loan. The Tribunal followed the decision of the Madras High Court in the case of CIT v. Ramakrishna Mills (Coimbatore) Ltd. 93 ITR 49 wherein it was held that the books of account of the assessee should be taken into consideration for the purpose of ascertaining the correct closing stock and the consequent gross profit.

Another similarity between the case discussed above and the appellant’s case is that the books of account of the appellant have not been rejected in both cases.

From the submissions of the appellant it is amply clear that the stock value was enhanced for the purposes of obtaining a higher loan from the bank. It has been shown by the appellant that the accounts of the appellant are the same before the bank and the Income-tax Authorities except for the heads under which they have been deliberately enhanced to the exact amount which is the exact amount of difference between the closing stock value before the income-tax authorities and the bank. In the charts filed by the appellant it is seen that the difference in purchases, sundry creditors and closing stock is exactly 206,80,349. Therefore, it is readily plausible that there is truth in the submissions of the appellant in this regard. This cogent evidence as presented cannot be so easily denied and set aside. The fact that all other heads in accounts remain the same also show that the appellant has engaged in specific inflation in order to obtain a higher loan from the bank."

5. Before us, learned DR relied upon the order of the Assessing Officer and submitted that the stock statement submitted to the bank clearly indicates that books of account of the assessee are not reliable. He has not only disclosed higher stock to the bank rather that stock was insured with the Insurance Company. All these facts do indicate that assessee was having higher stock with him which has not been disclosed to the department. He further contended that learned CIT(Appeals) has unnecessarily given importance to the explanation of the assessee that he has demonstrated the statement given to the bank was not exhibiting true affairs. On the other hand, learned counsel for the assessee relied upon the order of the CIT(Appeals). He pointed out that the stock statement submitted to the bank was not a genuine stock statement. This statement was submitted with a view to avail over draft facilities from the bank. He also took us through page No. 160 of the paper book wherein the copy of the written submissions submitted by the assessee to the Assessing Officer is available. He relied upon these submissions. He further contended that assessee has filed trading account, profit and loss account, balance sheet audit report obtained under section 44AB of the Act along with the return. The Assessing Officer was unable to point out any defect in the details maintained by the assessee. He simply relied upon the statement of the stock given to the Bank. The assessee took a plea before the Assessing Officer that this statement is a manipulated one, it does not reflect its true affairs and, therefore, it should not be relied upon. The assessee has submitted the list of creditors and debtors appearing in the balance sheet prepared for the purpose of bank and submitted to the bank authority. If the Assessing Officer has to reject the contentions of the assessee that stock statement submitted to the bank was not genuine then he should have verified from the creditors, etc. Assessing Officer did not take step in that direction. He has not pointed out any defect in the books of account submitted by the assessee. He simply rejected the book results and accepted the bank statement as genuine one.

6. We have duly considered the rival contentions and gone through the records carefully. Section 145 has a direct bearing on the controversy, therefore, it is salutary upon us to take note of this provision.

"145(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.

(2) The Central Government may notify in the official gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.

(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144."

7. From the bare reading of this section, it would reveal that it provides the mechanism how to compute the income of the assessee. According to sub-clause (i), the income chargeable under the head "Profits and gains of the business or professions or income from other sources" shall be computed in accordance with the method of accountancy employed by an assessee regularly subject to the sub-section (2) of section 145 of the Act. Sub-section (2) provides that the Central Government may notify in the Official Gazette from time to time the accounting standard required to be followed by any class of assessee in respect of any class of income. Thus, it indicates that income has to be computed in accordance with the method of accountancy followed by an assessee, i.e., cash or mercantile. Such method has to be followed keeping in view the accounting standard notified by the Central Government from time to time. Sub-clause (3) provides a situation, i.e., if the Assessing Officer is unable to deduce the true income on the basis of method of accountancy followed by an assessee then he can reject the book results and assess the income according to his estimate or according to his best judgment. The Assessing Officer in that case is required to point out the defects in the accounts of assessee and require to seek explanation of the assessee qua those defects. If the assessee failed to explain the defects then on the basis of the book results, income cannot be determined and Assessing Officer would compute the income according to his estimation keeping in view the guiding factor for estimating such income. Where a stock account is not maintained and reconciliation is not possible in between the aggregate of stock on opening date and stocks purchased with the aggregate of stock sold and available in closing stock, in such cases if the gross profit is low in comparison with past years or in competitive business, then Assessing Officer can reject the book results and estimate the income. Similarly, if discrepancies between the stock as per stock register and as per declaration given to the bank are established and assessee failed to explain such discrepancies then Assessing Officer would be in his realm of powers to reject the book results and estimate the income. Thus, in case of a discrepancy between the stock statement furnished to the bank and the one available in the books of account for the purpose of Income-tax Act, 1961 then the assessee is required to show that the book figure represent the true stock position with him which are to be relied upon. In the present case, from the very beginning the assessee has taken a plea that he was facing financial difficulty. He has to deposit a sum of Rs. 38,50,000 as security with the Reliance Industries for the agency he has taken. He was not having capital and, therefore, he approached the bank for extending over draft facility to him. To comply with the bank requirements he has shown an artificial stock position available with him. In order to balance that stock position in the balance sheet, he has introduced the sundry creditors as well as bogus purchases. This stand was taken by the assessee before the Assessing Officer and he emphasized that whatever appearing in his books of account is the only true stock available with him which can be made basis for computing the income of the assessee. The assessee also contended that he has not pledge the stock with the bank. It was under hypothecation. It means that alleged stock was in possession of the assessee and not in the possession of the bank. Bank has not verified the stock physically. The assessee has also filed the details of the alleged sundry creditors and pointed out that Assessing Officer can verify whether he has made any purchases from these concerns but Assessing Officer has not verified this aspect.

8. Section 34 of Evidence Act provides that entries in books of account regularly kept in the course of a business are relevant whenever they referred to a matter into which the court has to inquire. But such statement shall not alone be sufficient evidence to charge any person with liability. According to this section, entries made in the books of account maintained in the ordinary course of business would be relevant evidence. But such entries alone would not be either to charge a person with the liability or to exonerate him. It will be a corroborative piece of evidence. It means that entry appearing in the books maintained in the ordinary course of business in a way to some extent carries with them a presumption of truth. The assessee has been maintaining the books of account. Those books have duly been audited as required under section 44AB of the Act. Along with the books, assessee has filed the relevant details. The Assessing Officer neither inquired into the genuineness of the transactions appearing in the books nor pointed out any defects on those details. He simply harp upon the information supplied by the bank and substituted them over the books as if those statements are only to be relied upon as an alternative of the assessee’s books of account. Had the assessee not disclosed the details of alleged bogus sundry credits, alleged purchases and his stand that statement given to the bank was a manipulated one? We could appreciate the stand taken by the Assessing Officer also but instead of verifying the explanation of the assessee, he straightway rejected it. There can be truth in the explanation of the assessee. The action on the part of assessee in manipulating the stock statement while disclosing it to the bank may be branded as a immoral or may be infringing any other law. But can substandard moral activity denude the assessee to say that he has no closing stock in his accounts for the purpose of making a disclosure under the Income-tax Act, 1961. It is the Assessing Officer who has to demonstrate that assessee has an income chargeable to tax. The learned Assessing Officer miserably failed in that area. He without taking note of fact straightway took cognizance of the information supplied by the bank make reference of 4-5 judgments and then made the addition. On the other hand, learned 1st Appellate Authority appreciated the controversy in right perspective and evaluated whether any income in the shape of unexplained investment in stock in real sense has arisen to assessee or not. The learned CIT(Appeals) recorded a finding that, in fact, there was no closing stock with the assessee whose value can be added. Even for the sake of argument, we accept the stand of the Assessing Officer then this closing stock would become opening stock of the next assessment year and he has to give the credit of that in the next assessment year. In case, the assessee will not be able to realize that stock because it was an artificial one, then what would be the situation in that next assessment year. It has to be allowed to the assessee. In view of the above discussion, we do not find any merit in the first round of appeal, it is rejected.

9. In the next ground of appeal, the grievance of the revenue is that learned CIT (Appeals) has erred in deleting the addition of Rs. 29,51,556 added by the Assessing Officer by making a disallowance out of commission payment.

10. The brief facts of the case are that the assessee has claimed a deduction of Rs. 36,75,054 on the ground that he has paid commission to 12 parties. The learned Assessing Officer issued notice under section 133(6) of the Act to all the parties and called for information. All the persons responded to the query of the Assessing Officer. Some of the recipients have disclosed the services provide to the assessee, i.e., they have introduced certain parties for the purpose of sale of plastic dana. The learned Assessing Officer rejected the claim of assessee by observing that there was no agreement for the payment of commission. He also observed that assessee failed to give evidence exhibiting the nature of services rendered by the person to whom commission was paid. The Assessing Officer further observed that assessee failed to prove that expenditure was incurred wholly and exclusively for the purpose of business. On appeal, learned CIT (Appeals) reappreciated the controversy and deleted the addition.

11. The learned DR while impugning the order of the CIT (Appeals) contended that as far as identity of the recipient is concerned, it may not be in doubt. Mode of payment may also not be in doubt. The grievance of the Assessing Officer is that the assessee failed to provide evidence exhibiting the nature of service rendered by the recipient. He, therefore, contended that learned CIT (Appeals) has erred in deleting the disallowance. On the other hand, learned counsel for the assessee relied upon the order of the CIT (Appeals). He pointed out that the assessee is in the business of purchase and sale of plastic dana. He was working as an agent of Reliance Industries. These persons have introduced the clients to whom sales have been made. Such type of commission was paid in earlier years and it was allowed to him. The commission was paid in the subsequent years also. This has also been allowed to the assessee.

12. We have duly considered the rival contentions and gone through the records carefully. In order to claim any expenditure not being expenses described in sections 30 to 36 and not being in the nature of capital expenses or personal expenses laid out and spent wholly and exclusively for the purpose of business, one’s claim has to be examined under the residuary provision of section 37. Hence in order to be eligible for an expenses under this section one has to fulfil the conditions: (i) the expenditure must not be governed by the provisions of sections 30 to 36, (ii) expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee, (iii) the expenditure must not be personal in nature, (iv) the expenditure must not be capital in nature. The expression "wholly" employed in section 37 refers to the quantum of expenditure, while the word "exclusively" refers to the motive, objective and purpose of the expenditure. The Hon’ble Delhi High Court in the case of CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377  while evaluating the approach required to be adopted for appreciating the nature of expenses has observed as under:

"An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular items of expenditure. The term ‘commercial expediency’ is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the revenue [see CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC); J.K. Woollen Mfrs. v. CIT [1969] 72 ITR 612 (SC); Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 (SC) and CIT v. Panipat Woollen & General Mills Co. Ltd. [1976] 103 ITR 66 (SC)."

13. In the light of the above authoritative pronouncement of Hon’ble jurisdictional High Court, if we examine the facts of the present case then it would reveal that assessee has established that payment was made thorough banking channel. All the payees responded to the query of the Assessing Officer and some of them supplied the information about the services rendered by them. The commission have been allowed in the earlier years and in the subsequent years on similar lines. All the payees are assessed to tax. Their PANs have also been disclosed to the Assessing Officer. The objection of the Assessing Officer is that there was no agreement for payment of commission. We are of the view that it is for the assessee to carry out his business. If he has an understanding with certain person then it may not be very much necessary to enter into an agreement. The assessee as well as the payees are withstanding to their stand. There is no variance in their conduct. As far as the allegation of failure to produce demonstrative evidence against the assessee is concern, one has to see the nature of business. The assessee is in the business of sale of plastic dana. The agents are required to send customer for purchase of dana. They can be introduced on phone also. There may not be any demonstrative evidence in certain circumstance but that does not mean that expense are not incurred. The assessee has shown commission income on sale of plastic dana, it suggest that he has carried on business. Thus, all these circumstances are to be seen before making the disallowance. In such circumstances, the disallowance cannot be made. The learned 1st Appellate Authority has appreciated the facts and circumstances and deleted the disallowances. We do not find any merit in this ground of appeal also. It is rejected.

14. In the next ground of appeal, the grievance of the revenue is that learned CIT(Appeals) has erred in deleting an addition of Rs. 1 lakh. The brief facts of the case are that assessee has introduced a sum of Rs. 1 lakh in his capital account and alleged that this sum was taken as a loan from Anand Plastics. This was taken through account payee cheque. The proprietor of Anand Plastics had died and his business is closed. The assessee could not file confirmation from the Anand Plastics because no one was available at the business premises. The wife of the proprietor expressed her inability to say anything on this transaction. Learned Assessing Officer rejected the contention of the assessee and made the addition. Before the learned CIT (Appeals), it was contended that Anand Plastics was a regular customer and assessee has a ledger account with it. The amount was taken through banking channel and, therefore, it should not be added under section 68 of the Act. Learned CIT (Appeals) accepted the contentions and deleted the addition.

15. With the assistance cf learned representatives, we have gone through the record carefully. It is true that assessee has proved the identity of the payer and genuineness of the transaction but creditworthiness of the creditor is not proved. No evidence has been filed in that connection. On our query, whether this amount has been repaid or adjusted against any purchases made by the creditor during the year or in the subsequent period, the learned counsel for the assessee expressed his inability. If it is repaid subsequently, then it can show that this amount must have been taken from M/s. Anand Plastics. It will rule out the possibility of introduce- tion of assessee’s own money through M/s. Anand Plastics. Therefore, we set aside this issue to the file of the Assessing Officer for verification and readjudication. In the result, this ground of appeal is allowed for statistical purposes.

16. In the next ground of appeal, the grievance of the revenue is that the learned CIT (Appeals) has erred in deleting the addition of Rs. 50,587 and Rs. 9,375 which have been added by the Assessing Officer after making a disallowance out of car expenses and telephone expenses.

17. The brief facts of the case are that the assessee has debited a sum of Rs. 1,18,760 as car expenses and a depreciation of Rs. 1,84,767 was claimed on the cars. The learned Assessing Officer made the disallowance at 1/6th of these expenses on the ground that assessee must have used the car for his personal benefit also. Learned CIT (Appeals) deleted the disallowance simply for the reasons that disallowance has been made on an ad hoc basis without pointing out any reason. Similarly, 1/6th of the phone expenses has also been disallowed on the ground that personal user of the telephone cannot be ruled out. In the absence of any log book, exhibiting the user of car exclusively for the purpose of business possibility of its personal user cannot be ruled out and, therefore, Assessing Officer has rightly made the disallowance. Taking into consideration this aspect, we set aside the order of learned CIT (Appeals) on this issue and restore the addition. Adopting similar yard stick with respect to telephone expenses, we set aside the order of learned CIT (Appeals) and restore the addition made by the Assessing Officer.

18. In the result, the appeal filed by the revenue is partly allowed.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.