ORDER
T. A. BUKTE, J.M. :
This is an appeal by the assessee against the order of the CIT, Central-II, Bombay, passed under s. 263 of the IT Act, 1961 on 28th March, 1994, holding that the assessment as framed by the AO was erroneous insofar as it was prejudicial to the interests of the Revenue, on the following two grounds :
(i) that the claim of the assessee for bad debts of Rs. 28,77,420 was allowed by the AO without proper scrutiny and without looking into the conditions prescribed under cl. (i) of sub-s. (2), of s. 36, of the IT Act, 1961; and
(ii) the AO also completed the assessment without making enquiries about the source of funds for the amount of Rs. 8,35,000 given by the assessee to his wife, Smt. Harvinder Singh Kaur.
2. It would be necessary to reproduce para 6 of the assessment order in this connection :
'6. Assessee has claimed bad debt of Rs. 28,77,420 along with the details of the bad debt. It is stated that he sold the above goods to Shri Bhagwandas Aggarwal whose office is on Aaram Hotel, Chowpatty, Bombay and who was residing at BMC Building, No. 6, Clock Road., Haji Ali, Bombay. He has given date-wise sale of the said goods to the above party, furnished photocopies of delivery challans. He has also given photocopies of 4 letters issued by him to the party. As to reasons for claiming it as a bad debt, it is contended by him that Shri Bhagwandas Aggarwal had left Bombay and his whereabouts are not known. The ward inspector visited the office and residential premises and found that Shri Bhagwandas Aggarwal had left and his whereabouts are not known. Assessee has filed copy of account of the above party recorded in his books of accounts. The conditions laid down in s. 36(vii) r/w sub-s. (2) seems to have been fulfilled. Therefore, the claim of the assessee is allowed. As and when he recovers the payment, the same will be subjected to tax.'
3. On the basis of the CITs holding that the assessment order was erroneous and prejudicial to the interests of the Revenue, on the aforesaid two points and para 6 of the assessment order, the only question which has arisen for our consideration is whether the AO failed and neglected to make the required and necessary investigation in respect of the bad debt and the loan advanced by the assessee to his wife.
4. The assessee was engaged in the business of re-sale of imported defective CRCA sheets. Action under s. 132 of the Act was carried out in the godown of M/s Western India Steel Traders where the goods belonging to the assessee were kept in the name of Ambassador Industrial Corporation, M/s Kai International, M/s Aashish Enterprises. As there was a search and seizure operation under s. 132 of the Act, the assessee offered for taxation a sum of Rs. 92,50,000 to cover up any omission or error in taxing the income given by the assessee during the period relevant to the asst. yr. 1990-91, the year under consideration. The search operation was carried out on 13th January, 1990. Subsequent to the said operation, the assessee, vide his letter dt. 27th March, 1990 filed details of the working of business transactions and also the working of peak in support of the offer for taxing the sum of Rs. 92,50,000. Besides, various other relevant details were also filed before the AO.
5. At the time when the search was conducted, the assessee had not recorded his transactions in any books of accounts since the transactions carried out by him on which he offered for tax was kept outside the books of accounts.
6. The return of income was filed on 30th November, 1990 in response to the notice issued under s. 148 of the Act and in the said return of income, the assessee returned an income of Rs. 64,35,580. The income so declared represented income from salary and business. The return was filed after the books were prepared and were produced for scrutiny before the AO. The assessee, in the statement of P&L; a/c, had claimed the bad debt of Rs. 28,77,420 and supporting proof in respect of the claim was also filed before the AO. The claim of bad debts related to sale of goods to one Bhagwandas Agarwal, whose office, at the time of the transactions, was at Aaram Hotel Building, Chowpatty, Bombay and he was residing at BMC Building No. 6, Clock Road, Haji Ali, Bombay. The details regarding the sale of goods to the party were also furnished along with photocopies of delivery challans. In addition, the assessee also filed photocopies of four letters issued to the said party, Bhagwandas Agarwal.
7. As regards the cash sales, there was no dispute since the amount due was fully recovered against delivery. In respect of certain credit sales with M/s Bhagwandas Agarwal at the time when the books were drawn, the assessee had no hope of recovering the said sum of Rs. 28,77,420 and, hence, he claimed the same as bad debt. An entry to that effect was also made in the books of accounts, prepared later on. The AO allowed the claim after satisfying himself that the provisions of s. 36(2)(vii) have been complied with. For arriving at this finding, he also deputed an inspector who submitted his report to the effect that the party was not traceable. The assessment was, therefore, completed by the AO under s. 143(3), of the Act, after examining the details and the income for the year under consideration was computed at Rs. 1,00,03,020. It included an addition of Rs. 23,84,743 being the value of defective CRCA sheets, estimated interest of Rs. 88,685 on interest-free loans advanced to the wife, and the difference in value of CRCA sheets of Rs. 10,94,012. Against the said additions, the assessee preferred an appeal and the CIT(A) by his order dt. 1st October, 1992, deleted certain additions and also set aside the addition with specific directions relating to the addition of Rs. 28,84,743, being the value of defective CRCA sheets. Against the said order of the CIT(A), the Department had preferred an appeal before the Tribunal, and the same is pending.
8. The notice under s. 263 of the Act was issued by the CIT, Central II, Bombay, on 13th January, 1994. In the said notice, the CIT considered the two points as already mentioned.
9. In response to the said notice, the assessees representative filed full detailed submissions on 9th February, and 15th February, 1994. During the course of the hearing on 9th February, 1994 the CIT had called for some more details and the representative for the assessee, by letter, made detailed submissions on the issues raised. It was also submitted that the action under s. 263 of the Act was not warranted in this case, since all the relevant enquiries were made by the AO at the time of finalisation of the order under s. 143(3) of the Act. It was also submitted that the AO had also examined thoroughly the books of accounts before finalising the assessment. In support of this contention, reliance was also placed on the decision of the Bombay High Court in the case of CIT vs . Gabriel India Ltd. : [1993]203ITR108(Bom) . In spite of the detailed submissions made, the CIT set aside the entire assessment order on the ground that the AO had made the assessment overlooking the evidence on record and also without making proper enquiries regarding the source of funds available with the assessee for the money in his bank account which were relevant for the purpose of determining the correct income of the assessee for the year under consideration. While setting aside the assessment, the CIT directed that the de novo assessment should be completed after indepth examination and investigation into the assessees case and after making various enquiries which were required to be made as per the observations made in the order under s. 263 of the Act. Feeling aggrieved, the assessee is in appeal before us.
10. During the course of the hearing, Sri A. V. Sonde, the learned counsel for the assessee, contended that the order passed by the CIT is bad in law since he had traversed beyond the terms of notice issued under s. 263 of the Act wherein he had indicated that only certain specific issues were to be treated as prejudicial to the interests of the Revenue. The notice issued does not empower the CIT to set aside the entire assessment, moreso in view of the fact that some of the issues were considered in appeal by the CIT(A) against which the Department itself is in appeal before the Tribunal. He also drew our attention to the order under s. 143(3) of the Act passed by the AO, wherein he had clearly recorded that all the relevant details necessary for finalising the assessment were furnished and it was, therefore, incorrect on the part of the CIT to take a different view that the AO failed to examine all the relevant details while finalising the assessment order. In respect of the allowance of bad debts, it was submitted that the AO in his order had clearly recorded that the assessee filed the copy of the account recorded in the books of accounts relating to the transactions with M/s Bhagwandas Agarwal and, after making thorough enquiries by deputing the inspector, the claim was allowed since the provisions of s. 36 of the Act were satisfied in the instant case.
11. In respect of the advances given to the assessees wife, Smt. Harvinder Singh Kaur, the learned counsel drew our attention to para 8 of the assessment order. It was vehemently urged by him that the source of the fund was not only examined by the AO but also by the officer assessing Smt. Harvinder Singh Kaur. In fact, information about the advances of loan to his wife by the assessee was received by the AO on the basis of communication issued by the AO to Smt. Harvinder Singh Kaur. It was further pointed out, that while deleting the notional interest of Rs. 88,635, the CIT(A) has also accepted the genuineness of the advances given to the wife by the assessee. Sri Sonde further drew our attention to the observations made by the AO before finalising the assessment and urged that there is no clue in the assessment order to the effect that the order passed by the AO is erroneous and prejudicial to the interests of the Revenue. Further, it was brought to our notice that the assessee had made detailed submissions vide their letters dt. 9th February, and 15th February, 1994, to dispel the belief of the CIT that the order passed by the AO was erroneous and prejudicial to the interests of the Revenue. He also placed reliance on various rulings to show that once relevant details were filed and the AO, before finalising the assessment had carried out relevant enquiries, it would not be proper for the CIT to hold that the order so passed by the AO is erroneous and prejudicial to the interests of the Revenue.
12. Relying on the aforesaid decision of the Bombay High Court in CIT vs. Gabriel India Ltd. (supra) and other judgments, Sri A. V. Sonde contended that the order passed by the CIT under s. 263 of the Act is bad in law. He also urged that the CIT was not competent to comment on the validity of the return once the order under s. 143(3) of the Act was passed and against that order, an appeal was also pending before the Tribunal, the appeal having been preferred by the Department. According to the learned counsel, the CIT, therefore, cannot at this stage hold that the return was invalid and if that be the case, the consequent action taken in pursuance to the return will also not be bad.
13. The learned counsel, therefore, submitted that he observations made by the CIT in his order is outside the power conferred upon him by virtue of the provisions of s. 263(1) of the Act. He also submitted that finding the challans in serial number does not mean that the same should be disbelieved. The copy of the detailed reply, dt. 15th February, 1994 is available at pp. 34 to 39 of the paper-book. A copy of the trading account is at p. 23 of the paper-book and the bad debt written off amounting to Rs. 28,77,420 finds a place in the same. The details of the aforesaid sum of Rs. 28,77,420 appear on p. 22 of the paper-book, which is Bhagwandas Agarwals account. Further relevant details on the score are available at p. 21 of the paper-book. Sri Sonde also submitted that the said Bhagwandas Agarwal having found untraceable and left to Nepal, there was no other alternative to the assessee except to treat the credit sales, as per p. 21 of the compilation, as bad. It was further contended that as a prudent businessman, the assessee was entitled to take his own decision without adopting any other recourse and methods to waste good money after bad money. Therefore, according to Sri Sonde, the decision taken by the assessee could not be discarded or should not be attributed to as one having been taken with ulterior motive.
14. The learned Departmental Representative, Sri R. G. Sharma, on the other hand, justified the order of the CIT. He placed reliance on the said order. According to him, the assessee had not maintained the books of accounts and, therefore, filing the statements of accounts would not be justifiable. He pointed out to question No. 7 and the reply thereto given by the assessee. According to him, after offering an income of Rs. 92,50,000, the assessee claimed bad debt of Rs. 28,77,420 and, therefore, the CIT has rightly invoked the provisions of s. 263 of the Act. He read over para 6 of the order of the CIT(A) and according to him, there was one-sided evidence which could not have been accepted by the AO. According to Sri Sharma, no transport receipts for the goods were produced. For this reasons also, he submitted, that it could be inferred that no proper enquiry was made by the AO before finalising the assessment and, therefore, the CIT was justified in his action.
15. In reply, Sri Sonde pointed out to the commentary from Vol. 2 of Chaturvedi & Pithisarias Income-tax Law, p. 1386. According to him, the assessee took a bona fide decision to write off the claim on account of credit sales as bad debts and the same cannot be challenged or examined further. In this connection, reliance was placed on the following rulings :
(i) Lords Dairy Farm Ltd. vs. CIT : [1955]27ITR700(Bom) ;
(ii) CIT vs. R. K. Metal Works (1977) 112 ITR 445 (P&H;);
(iii) Jethabhai Hirji & Jethabhai Ramdas vs. CIT : [1979]120ITR792(Bom) ;
(iv) CIT vs. Goyal Private Family Specific Trust : [1988]171ITR698(All) ;
(v) CIT vs. Kanda Rice Mills ;
(vi) Coromandal Steels Ltd. vs. ITO (1991) 39 TTJ (Mad) 151 : (1991) 36 ITD 216 (Mad) and
(vii) BBC Brown Boveri & Co. Ltd. vs. ITO (1989) 34 TTJ (Bom) 424 : (1989) 31 ITD 408 (Bom).
16. We have heard the rival submissions and the material available on record. We have also gone through the various case laws cited at the Bar. In our opinion, there is considerable force in the arguments advanced on behalf of the assessee, so far as the bad debts of Rs. 28,77,420, interest-free loans of Rs. 8,35,000 given by the assessee to his wife as also so far as the defective return are concerned. Sec. 263 of the Act empowers the CIT to call for and examine the record of any proceedings under this Act and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case may justify.
17. It would be apposite to make a reference to the decision of the jurisdictional High Court in the case of CIT vs. Gabriel India Ltd. (supra). In the said case the Court observed that s. 263 of the Act is in the nature of supervisory jurisdiction and can be exercised only if the circumstances specified therein exist. Two circumstances, the Court said, must exist to enable the CIT to exercise the power of revision under this section, viz., (i) the order should be erroneous; and (ii) by virtue of the order being erroneous, prejudice must have been caused to the interests of the Revenue. An order cannot be termed as erroneous unless it is not in accordance with law. The Court said that if an ITO acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. This section, according to the Court, does not visualise a case of substitution of the judgment of the CIT for that of the ITO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the ITO, while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimates himself. The Court further said that the CIT, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and the CIT would have estimated the income at a higher figure than the one determined by the ITO. According to the Court that would not vest the CIT with the power to re-examine the accounts and determine the income himself at a higher figure due to the fact that the ITO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. The Court further held that the aforesaid two conditions should invariably and simultaneously be satisfied so as to enable the CIT to exercise the jurisdiction under s. 263 of the Act. As a matter of fact, the Court found in the said case, as we find in the instant case, that the AO had made enquiries in regard to the claim of the assessee. The assessee had also given detailed explanation in that regard by way of letters and all these were part of the record of the case. In the instant case, the claim of the assessee for bad debt and interest-free loan was accepted by the AO on being satisfied about the genuineness of the same by himself and through the enquiries made by the ward inspector. The fact that the AO had made necessary enquiries becomes abundantly clear from a perusal of para 6 of the assessment order insofar as the claim for bad debt is concerned. The said portion has already been extracted above.
18. So far as the claim for interest-free loan of Rs. 8,35,000, the following statement by the AO in para 8 of his order may be reproduced :
'8. Information was received from the AO assessing Smt. Harvinder Singh Kaur, wife of the assessee that he had advanced interest-free loan of Rs. 8,35,000 to her during this year on which she had earned interest income of Rs. 88,685. The AO had assessed the said interest income on protective basis in her hands. Assessee was asked to explain on this point. He had given the details of the interest-free loan advanced to his wife from which it is seen that all the amounts have gone from his bank account and is properly explained. However, since his wife has earned interest out of the said loan, interest is directly attributable to the assessee. The sum of Rs. 88,625, therefore, will be added in the hands of the assessee.'
19. From the aforesaid discussion given by the AO, it becomes crystal clear that he has made detailed enquiries on this point as well and has arrived at his decision judiciously. Such a decision in our opinion, cannot fall within the ambit of the provisions of s. 263 by the CIT only for the reason that the CIT would have taken a different decision.
20. The other case law relied upon by the assessee in support of the claim that the CIT has exceeded his jurisdiction by invoking the provisions of s. 263 of the Act, in our considered opinion, are also squarely applicable to the facts and circumstances of the case.
21. Upon the whole, in our opinion, it would be correct to say that the assessment order should be considered objectively and not subjectively. As rightly urged by Sri Sonde, the CIT had no power to look into the matter subjectively and such an order, cannot hold good. There is no infirmity in the order passed by the AO under s. 143(3) of the Act, as it was passed after conducting detailed enquiries and investigations by himself and through his ward inspector. The relevant paras 6 and 8 of the assessment order, reproduced by us above, would be sufficient enough to establish that necessary enquiries and investigations were made by the AO and he has not lacked in his duties to make such enquiries and investigations. The AO has adopted proper procedure to make the enquiries so as to find out the truth. He could not have gone out of the limit or he could not have himself traced out the said Bhagwandas Agarwal so as to take a subjective view in the matter.
22. In view of all the facts and circumstances explained above, we find that the order passed by the CIT under s. 263 of the Act is bad in law and applying the aforesaid case law, particularly CIT vs. Gabriel India Ltd. (supra), we set aside the impugned order and restore that of the AO.
23. The appeal is allowed.
PRADEEP PARIKH, A.M. : 5th December, 1994
I have gone through the order proposed by my learned brother. I have not been able to pursuade myself to agree with certain observations and the conclusion arrived at by him and, hence respectfully proceed to make this separate order.
2. The assessee is in appeal before us challenging the validity of the order under s. 263 on the following four grounds :
'1. The CIT erred in setting aside the assessment made by the Asstt. CIT without considering the legal and factual submissions made at the time of hearing. The CITs action in setting aside the original assessment is bad in law since no prima facie, case was made out for applying the provisions of s. 263.
2. The CIT erred in holding that the AO was not right in allowing the claim of bad debts and also in respect of interest free loans advanced to wife even though the claim was allowed by the AO on the basis of evidence adduced and was also considered by CIT(A) in appellate proceedings.
3. The CIT erred in setting aside the order under s. 143(3) even though the said order had merged with the CIT(A)s order and thereby the provisions of s. 263 are not applicable.
4. Without prejudice to the above, the CIT, Bombay (Central)-II, erred in setting aside the entire order and thereby traversed beyond the grounds raised in the notice under s. 263.'
3. Grounds No. 5 and 6 being general in nature, are not reproduced.
4. Since one of the grounds urged (Ground No. 3) is that the order under s. 143(3) had merged with the CIT(A)s order and, hence, s. 263 would not be applicable, we deal with this ground first, because if this ground does not survive, then only the need to go into other grounds would remain.
5. For this it would be proper to take note of cl. (c) of the Expln. to sub-s. (1) of s. 263 which is as follows :
'Sec. 263(1)(c). - Where any order referred to in this sub-section and passed by the AO had been the subject-matter of any appeal (filed on or before or after the 1st day of June, 1988), the powers of the CIT under this sub-section shall extend (and shall be deemed always to have extended) to such matters as had not been considered and decided in such appeal.'
6. Thus from the above, it is clear that the CIT can exercise jurisdiction under s. 263 only on those matters which were not considered and decided by the first appellate authority. In other words, matters which are not considered and decided by the first appellate authority shall be subject to revision under s. 263, whereas the remaining part of the assessment order shall be deemed to have merged into the order of the first appellate authority.
7. Now, we shall see on what grounds did the learned CIT treated the order under s. 143(3) as erroneous and prejudicial to the interest of the Revenue and whether they were before the first appellate authority or not. They are as follows :
'1. The claim of the assessee for bad debts of Rs. 28,77,420 was allowed by the AO without proper scrutiny and without looking into the conditions prescribed under cl. (i) of sub-s. (2) of s. 36 of the IT Act, 1961.
2. The AO also completed the assessment without making enquiries about the source of funds for the amount of Rs. 8,35,000 given by the assessee to his wife, Smt. Harvinder Singh Kaur.'
8. The notice under s. 263 was dt. 13th January, 1994 whereas the order of the learned CIT(A) was dt. 1st October, 1992.
9. As per the grounds of appeal on record, raised before the learned CIT(A), we observe that none of the above grounds are there. In fact, it would have been ridiculous to find them there as the AO has allowed the assessees claim for bad debt and as regards the second ground no addition has been made. The AO has made an addition of interest amount only on the loan given by the assessee to his wife. The ground contesting the addition of the said interest was raised before the learned CIT(A), but it is quite distinct from the ground relating to genuineness of the loan transaction.
10. The above discussion will answer ground Nos. 2, 3 and 4 raised by the assessee in this appeal.
11. Ground No. 2 is rejected insofar as that the two matters mentioned therein were never a subject-matter of consideration before the learned CIT(A).
12. Ground No. 3 is also rejected insofar as that as per cl. (c) of the Expln. to s. 263(1), the entire order under s. 143(3) has not merged with the CIT(A)s order.
13. Ground No. 4 is upheld insofar as that the learned CIT was wrong in setting aside the entire order made under s. 143(3). The order under s. 263 passed by the learned CIT is, therefore, cancelled to that extent but I uphold his jurisdiction over the matters raised by him in his notice dt. 13th January, 1994 as they have not been matters of consideration by the learned CIT(A).
14. In the foregoing paras, as the jurisdiction of the learned CIT has been upheld over the two grounds on which he held the AOs order to be erroneous and prejudicial to the interest of the Revenue, we proceed to Ground No. 1 of this appeal to determine whether there was a prima facie case for applying the provisions of s. 263 or not.
15. Search operations under s. 132 were carried out on some warehouses to unearth unaccounted imported CRCA sheets on the basis of the information received by the Intelligence Wing of the Department. One such warehouse searched belonged to one M/s Western India Steel Traders and the action took place on 12th January, 1990. During the search, stocks of CRCA sheets and coils worth Rs. 1.45 crores were found and placed under constructive seizure. Subsequently the assessee owned up part of the goods and admitted that they were purchased by him out of his current years income. Statement of the assessee under s. 131 was recorded on 20th February, 1990 and under s. 132(4) was recorded on 21st February, 1990. As per these statements, he declared an income of Rs. 92,50,000.
16. The assessee then filed his return of income for asst. yr. 1990-91 on 31st October, 1991 declaring total income of Rs. 64,35,580. Besides salary income, business income of Rs. 92,50,000 offered for taxation under s. 132(4) was also shown. However, from the business income of Rs. 92,50,000 the assessee claimed a deduction of Rs. 28,77,420 on account of bad debt. After allowing this claim of bad debt and after making some other additions, the total income was determined at Rs. 1,00,03,020.
17. The Departments contention is that this claim has been allowed by the AO without proper verification whereas, it was contended on behalf of the assessee that all the details for proper verification were before the AO and, hence the claim was rightly allowed.
18. Certain facts emerging from the material on record are very pertinent.
19. In reply to Question No. 5 mentioned in the statement recorded on 20th February, 1990, the assessee has clearly replied that he does not maintain any books of account or other records for steel trading business.
20. Further, in reply to Question No. 3 in the statement recorded on 21st February, 1990, the assessee has mentioned that he has gone through his statement under s. 131 dt. 20th February, 1990 carefully and confirmed that the same had been correctly recorded.
21. Still further, as a part of his answer to Question No. 7 in the statement under s. 132(4), he mentioned that the income of Rs. 92,50,000 was being offered under s. 132(4) after considering and taking into account the profit and loss made thereon. Then he has given the break-up as to how these Rs. 92,50,000 stand invested. As per the break-up the various items of stocks amounts to Rs. 55,33,488 and other investments and assets amount to Rs. 37,16,512.
Then Question Nos. 3 and 11 and the respective replies are as under :
'Q. 8. Where have you invested the amount of Rs. 37,16,512, kindly state specifically what do you mean by other investment and assets ?'
A. 8 'Out of the amount of Rs. 37,16,512 very small portion is lying in the form of cash and major amount in the form of sundry debtors, to whom I have sold the materials on credit through broker at Delhi one Shri Indira Dev and advance against the goods.'
'Q. 11. Do you want to say anything ?'
'A. 11. I agree to pay tax on income of Rs. 92,50,000 offered under s. 132(4) before due date and I request you not to bring any interest or not to initiate any penalty or prosecution proceedings. I further wish to state that the figures have been worked on estimate basis and hence, any minor modification in the figure may be treated a part and parcel of this statement given under s. 132(4).'
22. It is not ascertainable from the material placed before us as to when the AO took up the case for assessment. But, it must be either in January, 1992 or earlier as it is evident from his letter dt. 21st January, 1992 (p. 13 of the paper-book), which reminds the assessee to rectify the defects in his return and to file certain documents and details. These include, inter alia, tax audit report, balance sheet and details of bad debts claimed.
23. It is important to note that till as late as at least 21st January, 1992, the assessee had not filed the balance sheet though the return was filed on 31st October, 1991. Further, as regards tax audit report, the assessee vide his letter dt. 18th March, 1992 (p. 14 of the paper-book), replies that since the income is declared under s. 132(4) which is not recorded in the books of account, 'the requirement of audit under s. 44AB cannot be complied and need not be complied'. Regarding the claim of bad debts, the assessee replied that the details are under compilation (p. 15 of the paper-book).
24. The assessee, then, vide his letter dt. 23rd March, 1992 (p. 19 of the paper book) replied to the AO regarding the claim of bad debts. The AO is informed that the goods were sold to one Shri Bhagwandas Agarwal. His office and residential addresses are given and then it is stated that the said Shri Bhagwandas totally vanished and ran away after purchasing the goods and is most probably at Nepal. He also mentioned that all his efforts to collect the money have gone in vain and, hence, wrote it off as bad.
25. The assessee also submitted a statement purported to be a copy of the ledger account of Shri Bhagwandas Agarwal and also a copy of bad debt account. He also furnished photocopies of delivery challans as also of four letters written by him to the party. Based on this information, the AO granted the claim of the assessee as regards bad debt.
26. As regards the allowability of bad debts, what s. 36(1)(vii) requires is that the debt must have been written off in the accounts of the assessee of the previous year. Thus, as per the provisions, mere write off of the debt in the accounts is sufficient and nothing more. Thus, two things ought to have existed while claiming the deduction of bad debt-one, the existence of the debt and two, the existence of books of accounts where it can be written off as bad.
27. Now, the question is that, in the backdrop of the factual scenario given in paras 18 to 24 above, did the AO conduct proper enquiry in order to satisfy himself of the assessees claim or not.
28. Shri Arvind Sonde, the learned counsel for the assessee pleaded, he did. No-where in his order, the AO has mentioned that he has verified the books of account or even a finding that the books were produced for verification. He has merely recorded that 'the assessee filed copy of account of the above party recorded in his books of account'. This, no way goes to prove that the assessee has written the books particularly so, in context of the facts mentioned earlier. As mentioned earlier, the goods were seized from the warehouses of Western India Steel Traders. The AO examined the books of account of the said Western India Steel Traders, but not of the assessee. It had been pleaded before the learned CIT and also before us that the books were written up later, after the search had taken place. But they were not produced before us even when specifically asked for.
29. In absence of any record, the AO should have doubted the very existence of this particular debt. Mere delivery challans cannot be considered as a conclusive evidence that the goods are sold. Other circumstantial evidences also should have prompted the AO to call for the books and other records and verify them. As per the delivery challans, the first sale made to Shri Bhagwandas was on 16th December, 1989 and the last sale was on 11th January, 1990 totalling to Rs. 28,77,420 and the entire debt is written off as bad on 31st March, 1990, that is, within a period of less than three months. As per his reply to Question No. 8 in his statement under s. 132(4), reproduced at para 21 above, it has been stated by the assessee that goods have been sold on credit through broker at Delhi. It is somewhat incomprehensible that goods are sold in Bombay through a broker at Delhi. He has also stated that major portion of Rs. 37,16,512 shown as other assets is in the form of sundry debtors. If we try to break-up this amount as per the details available on record, Rs. 28,77,420 are due from Shri Bhagwandas, Rs. 7,00,000 are advances given to Shri Inder Dev Vij (p. 18 of paper book) and cash balance is Rs. 40,000 (p. 23 of the paper-book). The balance left is only Rs. 98,092. Since he has stated that major amount is in the form of sundry debtors to whom the materials are sold on credit through the broker at Delhi, it can be inferred that if at all there was a sale to Shri Bhagwandas of Bombay, it was through Shri Inderdev Vij of Delhi and this appears to be somewhat incomprehensible-though not wholly impossible but should have certainly prompted the AO to call for details which can prove the existence of the debt. But he failed to do so.
30. Further, for not getting the accounts audited under s. 44AB, the assessee seeks shelter of unaccounted income and for claim of bad debt he says the AO has examined the books. This is not permissible.
31. The sending of the ward inspector by the AO at the address given by the assessee to trace the said Shri Bhagwandas was a futile exercise as the very claim of the assessee for allowance of bad debt was his alleged flight from Bombay. Considering the facts of the case, the AO, instead of going for the so-called verification of the bad debt, should have first satisfied himself of the existence of the particular debt and that is where he failed to conduct the relevant enquiries.
32. As regards the amount of Rs. 8,34,000 advanced by the assessee to his wife, the observation of the AO at para 8 of his order is very vague. Here also lack of enquiry on the part of the AO, made the learned CIT assume jurisdiction under s. 263.
33. At para 17 of his order, my learned brother has discussed at length the decision of the Bombay High Court in CIT vs. Gabriel India Ltd. case (supra). With reference to the observations made therein, I may mention that in the appeal before us, it is not at all the Departments case that the order of the AO is not elaborate. The learned CIT also has at no place in his order given any indication that he proposes to substitute his judgment over that of the AOs, and in my opinion also, it cannot be the case as this is not the case of estimation of any figure. What the learned CIT is dissatisfied about is the lack of enquiry on the part of the AO considering the facts of the case, the material on record and the lack of objectively evaluating these materials on record.
34. I also rely on Gabriel's case (supra), wherein their Lordships held that in order to exercise power under sub-s. (1) of s. 263 of the Act there must be material before the CIT to consider that the order passed by the AO was erroneous insofar as it was prejudicial to the interests of the Revenue. In the instant case, the facts narrated by me at paras 18 to 24 form part of the material which was before him as well as the AO. The AO did ask for explanation, but the explanation was not in conformity with the material on record and consequently the order passed by him was, in the opinion of the learned CIT, erroneous and prejudicial to the interest of the Revenue.
35. If the AO had considered the background of the case and the material on record which clearly indicate the non-existence of the books, the learned CIT rightfully believes that he would not have passed an erroneous order causing prejudice to the interest of the Revenue. I agree with the learned counsel Shri Sonde that the learned CIT should consider the assessment order objectively and not subjectively. But, the assessee took months together to complete the data of alleged bad debts in respect of the alleged sales made to a single party involving merely eight transactions. The so-called compiled data involving merely eight delivery challans and four letters were submitted not before 23rd March, 1992, when it was already written off as bad on 31st October, 1990.
36. Similar is the case with respect to the alleged loan advanced by the assessee to his wife. Information was received from the AO assessing the wife of the assessee that he had advanced Rs. 8,35,000 to her. In respect of this, the AO simply mentions that the details given by the assessee are checked and that the amounts have gone from the bank account and is properly explained. Here again, I repeat, the issue is not of elaboration but it should have occurred to the AO that the declared income is Rs. 92,50,000, the break-up given by the assessee of this Rs. 92,50,000 does not reflect the amount advanced to his wife, nor does the balance sheet reflect this amount. Thus, the source from where he got this amount remains unknown. In this sense that though the material on record reflect something else, the order passed by the AO becomes erroneous which has caused prejudice to the interest of the Revenue.
37. In view of the above position, I uphold the action of the learned CIT in assuming jurisdiction under s. 263.
38. In the result, the appeal is partly allowed.
REFERENCE UNDER S. 255(4) OF THE IT ACT, 1961
T. A. BUKTE, J.M. :
20th December, 1994
Since we have differed in our conclusion in the above appeal, the following point is hereby referred under s. 255(4) of the IT Act, 1961, for the decision of a Third Member :
'Whether the claim of the assessee for bad debts of Rs. 28,77,420 and the explanation offered by the assessee for advancing the loan of Rs. 8,35,000 to his wife are acceptable ?'
PRADEEP PARIKH, A.M. :
20th December, 1994
Since we have differed in our conclusion in the above appeal, the following point is hereby referred under s. 255(4) of the IT Act, 1961, for the decision of a Third Member :
'On the facts and in the circumstances of the case, was the learned CIT justified in holding that the order of the AO was erroneous insofar as it was prejudicial to the interest of the Revenue, for want of proper enquiry on the part of the AO in respect of the claim of the assessee with regard to bad debts amounting to Rs. 28,77,420 and the advancing loan of Rs. 8,35,000 to his wife ?'
B. M. KOTHARI, A.M. (AS THIRD MEMBER)
On a difference of opinion between the learned Members of the Bench, the case was referred to me by the Honble President, Tribunal, for expressing my opinion after hearing the parties under s. 255(4) of the IT Act, 1961, (hereinafter referred to as 'the Act') on the following points of difference :
Point of difference as referred under s. 255(4) by Shri T. A. Bukte, the learned J.M. :
'Whether the claim of the assessee for bad debts of Rs. 28,77,420 and the explanation offered by the assessee for advancing the loan of Rs. 8,35,000 to his wife are acceptable ?'
Point of difference as referred under s. 255(4) by Shri Pradeep Parikh, the learned A.M. :
'On the facts and in the circumstances of the case, was the learned CIT justified in holding that the order of the AO was erroneous insofar as it was prejudicial to the interest of the Revenue, for want of proper enquiry on the part of the AO in respect of the claim of the assessee with regard to bad debts amounting to Rs. 28,77,420 and the advancing of loan of Rs. 8,35,000 to his wife ?'
2. It would be imperative to state the facts so far as those relate to the aforestated points of difference.
2(a) On the basis of information received by the Intelligence Wing of the IT Department that number of parties were storing their unaccounted imported CRCA sheets in certain warehouses, action under s. 132 of the Act was taken in respect of few warehouses. The warehouses of Western India Steel Traders was also covered under the said section on 12th January, 1990. Stock of CRCA sheets and coils valued at Rs. 1.45 crores were found in the warehouses and those were placed under constructive seizure.
(b) Thereafter the appellant sent letter dt. 23rd January, 1990 and 29th January, 1990 to the ADIT, Unit II(2), Bombay, (refer Question No. 4 statement under s. 131 of the appellant dt. 20th February, 1990) in which he admitted that the stock of CRCA sheets coils found at the warehouse of M/s Western India Steel Traders and lying there in the name of M/s Kai International, M/s Ashish Enterprises and M/s Ambassador Industrial Corporation belong to him which he intends to offer under s. 132(4) as his unexplained investment.
(c) The statement of the appellant was recorded under s. 131 of the Act on 20th February, 1990 in which he inter alia, admitted that the entire stock of CRCA sheets/coils kept in the warehouse of M/s Western India Steel Traders and M/s Union Fabricators in the name of M/s Kai International, M/s Asish Enterprises, M/s Ambassador Industrial Corporation and M/s Hindustan Exports belong to him. The appellant also admitted that he did not maintain any books of accounts or other records for steel trading business (Ans. to Q. No. 5). In reply to Q. No. 7 he stated that the goods were purchased through broker Shri Mahendrabhai. In reply to Q. No. 6 he stated that goods were transported to the aforesaid warehouses by Haribhai Kukaria Transport Contractors. In Q. No. 13, the ADI referring to his reply to Q. No. 5 asked that you have stated that you do not maintain any records relating to business of trading in steel than what kind of evidence you can produce to support your contention. In reply, the appellant stated that he will try to recollect from his memory and will let them know tomorrow. The appellant admitted that he has no direct evidence. The appellant further stated in reply to Q. No. 14 that he will work out the peak of his stock after taking into consideration the sales and purchases and offer the peak as his income during the current financial year 1989-90, i.e., asst. yr. 1990-91.
(d) On 21st February, 1990, statement of the appellant was recorded under s. 132(4) of the Act during the course of search proceedings at Western India Steel Traders Warehousing Co., BPT Hospital Road, Walala (E), Bombay. In this statement, the appellant after going through his statement recorded under s. 131 on 20th February, 1990 once again confirmed that the same was correctly recorded. The appellant admitted that his total investment in the material kept in the warehouses of Western India Steel Traders and M/s Union Fabricators in the name of M/s Kai International, M/s Ambassador Indl. Corporation, M/s Asish Enterprises, M/s Hindustan Exports belonging to him would be approximately Rs. 92,50,000 (Ninety two lakhs fifty thousand). He further stated that considering the peak statement, as he got the material from time to time and invested the sale proceeds in acquiring the same, he will furnish a detailed statement giving therein the details of purchases and sales and working of the peak investment of Rs. 92,50,000 tomorrow in the office of the ADIT. The statement of facts annexed with the assessees appeal inter alia, shows that the appellants Chartered Accountant Shri Vinod S. Mehta vide his letter dt. 27th March, 1990 filed the details of working of business transactions as well as working of peak in support of the offer of taxing Rs. 92,50,000 along with certain enclosures containing the following :
(i) Peak of cash rotation statement;
(ii) Details of purchases and sales otherwise;
(iii) Reconciliation peak - Profit and stock, investment and assets;
(iv) Quantity account of stock (statement of sales and purchases).
In the aforesaid statement dt. 21st February, 1990, the appellant in reply to Q. No. 6 has admitted that initially he invested his unaccounted income from brokerage for purchasing such CRCA sheets/coils. Subsequently, the profits earned on sale and purchase of CRCA sheets/coils were invested in acquiring the aforesaid stock of Rs. 92,50,000 (peak). All the sales and purchases were effected in unaccounted terms during the current financial year 1989-90.
The appellant in answer to Q. No. 7 offered an income of Rs. 92,50,000 as his income under s. 132(4) for the current financial year 1989-90, i.e., asst. yr. 1990-91 and further stated that the said income has not been disclosed to the Department so far as the same has not been recorded anywhere in his records. The said income has been earned by him out of his unaccounted trading in CRCA sheets/coils (defective) and brokerage. The said income of Rs. 92,50,000 is being offered under s. 132(4) after considering and taking into account dealings in defective CRCA sheets/coils, profit and loss made thereon, peak of rotation of money. The appellant in the said statement further stated that the said income of Rs. 92,50,000 offered under s. 132(4) for asst. yr. 1990-91 stands invested as under :
Rs.
1.
87 M. Tons of defective CRCA sheets/coils in the name of M/s Kai International in the warehouse of M/s Western India Steel Traders at the rate of Rs. 17,000 (seized Dept.)
14,05,050
2.
50 M. Tons of defective CRCA sheets/coils in the name of M/s Asish Enterprises in the warehouse of Western India Steel Traders at the rate of Rs. 13,750 (seized Dept.)
6,53,125
3.
195 M. Tons of defective CRCA sheets/coils in the name of M/s Ambassador Indl. Corporation at Western India Steel Traders at the rate of Rs. 13,750 (seized. by the Dept.)
25,47,188
4.
59 M. Tons of defective CRCA sheets/coils in the name of M/s Hindustan Exports (P) Ltd. at Union Fabricators at the rate of Rs. 16,500 per M. Ton [kept under s. 132(3) order by Dept.]
9,28,125
5.
Other investment and assets
37,16,512
92,50,000
In reply to Q. No. 8, the appellant further stated that out of the aforesaid amount of Rs. 37,16,512 very small portion is lying in the form of cash and major amount in the form of sundry debtors, to whom the material was sold by him on credit through broker at Delhi one Shri Indira Dev and advances against the goods.
In reply to Q. No. 11, the appellant stated that he agrees to pay tax on income of Rs. 92,50,000 offered under s. 132(4).
(e) It appears from the copy of fresh assessment order, dt. 29th March, 1995, furnished by the appellant at pp 87 to 97 of the paper book at internal p. 9 of the said assessment order that statement of the appellant was recorded under s. 131 of the Act on 10th December, 1990. In response to Q. Nos. 15 to 21 of the said statement, Shri Makkar has stated the following facts :
(a) Purchase and sale are in cash only.
(b) Dealings are only through brokers.
(c) Delivery is only against cash payment.
The reply to Q. No. 21 is reproduced below :
'I purchase the goods in cash against delivery and in sale delivery is given against cash only.'
(f) The return of income was due to be filed under s. 139(1) on 31st October, 1990, but the appellant did not voluntarily file the return before the aforesaid due date. A notice under s. 148 of the Act, dt. 16th May, 1991 was served on the assessee. Reminders, dt. 8th July, 1991, 31st July, 1991, and 9th August, 1991 were issued asking him to file the return of income.
(g) The assessee ultimately filed the return of income on 31st October, 1991 declaring income of Rs. 64,35,580 computed as below :
Rs.
Rs.
Salary
70,000
Less : Standard deduction under s. 16
12,000
58,000
Directors Fees
5,000
Business income offered under s. 132(4)
92,50,000
Bad debts
28,77,420
63,72,580
64,35,580
(h) It appears that effective assessment proceedings for the year under consideration asst. yr. 1990-91 commenced when the AO issued a letter, dt. 21st January, 1992 to the assessee requiring him to rectify the defects in the return and furnish the : (i) statutory audit report, (ii) copy of balance sheet, (iii) details of all loans advanced/received along with confirmation letters, (iv) sources of loan of Rs. 8,35,000 advanced to assessees wife and why it should not be added as undisclosed investment and (v) details of bad debts claimed and why the said claim should not be disallowed in the absence thereof. The reply was required to be furnished on 31st January, 1992.
The appellant submitted letter, dt. 18th March, 1992. The reply relating to the disputed points are reproduced hereunder :
'I hereby confirm that I have given a loan of Rs. 8,35,000 including the loan of Rs. 3,30,000 was outstanding as on 1st April, 1989 and during the year I have further advances Rs. 5,05,000 since these advances are given to my wife. I have not charged any interest. There is no law by which the assessee can be forced to charge any interest and that too to his wife. It is also pertinent to note that I am not paying any interest to the outsiders.
Regarding claim of bad debts details are under compilation.'
The appellant submitted for the first time his explanation with regard to claim of bad debts of Rs. 28,77,420 vide his letter dt. 23rd March, 1992, which contained the following submissions :
'I have sold goods to one Shri Bhagwandas Agarwal, known in the market as Bhagubhai. The details of the goods sold and the value of the goods are given in the enclosed statement. The office and residential addresses of Shri Bhagwandas Agarwal is as under :
Office : Above Aram Hotel, Chowpatty, Bombay.
Residential : BMC Building No. 6, Near Lajpat Rai College, Clark Road, Hazi Ali, Bombay.
After purchasing the goods, this gentleman totally vanished and ran away. Since I have also come to know that this gentleman is most probably at Nepal and is not going to return as like me, he might have done business with others also.
All my efforts to locate the person and the money have gone in vain. As I had no hope of collecting the money, I have written off the amounts as bad debts.
In any event, if I recover any money, same will be treated as my income.'
The details of sales on credit made to the aforesaid party, copy of account of Shri Bhagwandas Agarwal, copy of bad debts account, Trading and P&L; a/c and balance sheet (copies placed at pp 21 to 23 of paper-book) were also stated to have been furnished before the AO.
A perusal of the account of debtor Shri Bhagwandas Agarwal (sundry debtors) shows the following details :
21-12-89
To sales
1,08,050.00
31-3-1990 J (Bad debts)
28,77,420.00
22-12-1989
To Sales
8,29,150.00
23-12-1989
To Sales
2,16,300.00
5-1-1990
To Sales
2,07,480.00
8-1-1990
To Sales
1,03,740.00
9-1-1990
To Sales
2,07,480.00
10-1-1990
To Sales
3,80,380.00
11-1-1990
To Sales
1,03,740.00
28,77,420.00
28,77,420.00
(i) The AO passed the assessment order on 7th May, 1992. The findings given by the AO in the said assessment order with regard to the two disputed items are reproduced hereunder :
'Para 6 of assessment order, dt. 7th May, 1992 :
Assessee has claimed bad debt of Rs. 28,77,420 along with the details of the bad debt. It is stated that he sold the above goods to Shri Bhagwandas Agarwal whose office is on Aaram Hotel, Chowpatty, Bombay and who was residing at BMC Bldg. No. 6, Clock Road, Haji Ali, Bombay. He has given date-wise sale of the said goods to the above party, furnished photocopies of delivery challans. He has also given photocopies of 4 letters issued by him to the party. As to reasons for claiming it as a bad debt, it is contented by him that Shri Bhagwandas Agarwal had left Bombay and his whereabouts are not known. The ward inspector visited the office and residential premises and found that Shri Bhagwandas Agarwal had left and his whereabouts are not known. Assessee has filed copy of account of the above party recorded in his books of accounts. The conditions laid down in s. 36(vii) r/w sub-s. (2) seems to have been fulfilled. Therefore, the claim of the assessee is allowed. As and when he recovers the payment, the same will be subjected to tax.'
'Para 8 of assessment order, dt. 7th May, 1992 :
Information was received from the AO assessing Smt. Harvinder Singh Kaur, wife of the assessee that he had advanced interest-free loan of Rs. 8,35,000 to her during this year on which she had earned interest income of Rs. 88,685. The AO had assessed the said interest income on protective basis in her hands. Assessee was asked to explain on this point. He had given the details of the interest-free loan advanced to his wife from which it is seen that all the amounts have gone from his Bank account and is properly explained. However, since his wife has earned interest out of the said loan, interest is directly attributable to the assessee. The sum of Rs. 88,685, therefore, will be added in the hands of the assessee.'
3. The learned CIT (Central)-II, Bombay, issued a show-cause notice under s. 263 on 13th January, 1994 requiring the assessee to explain as to why the assessment order, dt. 7th May, 1992 be not set aside as being erroneous in so far as it is prejudicial to the interest of Revenue for the following reasons :
(1) The claim of the assessee for bad debts of Rs. 28,77,420 was allowed by the AO without proper scrutiny and without looking into the conditions prescribed under cl. (i) of sub-s. (2) of s. 36 of the IT Act, 1961.
(2) The AO also completed the assessment without making enquiries about the source of funds for the amount of Rs. 8,35,000 given by the assessee to his wife, Smt. Harvinder Singh Kaur.
The CIT after considering the submissions made on behalf of the appellant inter alia gave the following findings :
'The decision of the Bombay High Court in CIT vs. Gabriel India Ltd. (supra) does not at all apply to the facts of the assessees case. It has only been laid down by the Bombay High Court in the decision that a CIT cannot revise an order merely because he disagrees with the conclusion arrived at by the ITO. In the assessees case, on the other hand, as per the various facts and circumstances of the case and as is clear from the evidence available on record, the assessment made by the AO clearly emerges as erroneous and prejudicial to the interest of Revenue, inasmuch as the AO has made the assessment overlooking the evidence on record and also without making enquiries regarding the source of funds available with the assessee for the monies in the assessees bank account, which fact is relevant for the purpose of determining the correct income of the assessee for the asst. yr. 1990-91. In view of these circumstances of the case, the Supreme Court decision in Smt. Tara Devi Agarwal vs. CIT : [1973]88ITR323(SC) , squarely applies and as laid down in the decision, if there are materials before the CIT to justify the finding that an order of assessment is erroneous insofar as it is prejudicial to the interests of Revenue, the CIT has full and complete jurisdiction to invoke and apply the provisions of s. 263 .........................
Having observed that the assessee had stated in no uncertain terms in the statement given under s. 132(4) that he was not maintaining any books of accounts or other records in respect of his business, the AO chose to admit and consider and also allow the claim of the assessee in respect of bad debts of Rs. 28,77,420 and while allowing such a claim the AO in para 6 of the order .......................
Thus the AO has chosen to accept the assessees claim that the bad debt of Rs. 28,77,420 had actually been written off in the books of the assessee and, therefore, the conditions laid down in s. 36 are fulfilled. It is obvious from the decision of the AO that he has not at all cared to verify as to how the assessee could claim that the books of accounts existed and that the bad debt had actually been written off in the books of accounts. Insofar as the AO allowed the bad debt claim for a substantial amount, without verifying the veracity of the assessees claim that the bad debt had been actually written off in the books of accounts, especially when the AO know that the assessee had not maintained the books of accounts, it clearly follows that the decision of the AO in having allowed the assessees claim in this respect is wholly erroneous and prejudicial to the interests of Revenue ...........................
From the facts narrated in the foregoing paras of this order, it is clear that the AO had not completed the enquiries in regard to the various bank accounts operated by the assessee through Punjab & Sind Bank about which the information was available to the AO, and further the AO also did not enquire into the source of funds in the personal bank account of the assessee through which the assessee had advanced monies to his wife. Apart from this, several other irregularities have also been committed and the assessment had been completed in a manner wholly prejudicial to the interests of Revenue. I, therefore, hold that the assessment requires to be made afresh after in-depth examination and investigation into the assessees case and after making various enquiries which are required to be made as per the various observations in this order. To enable the AO to do so, the assessment made by the then Asstt. CIT, Cent. Circle 30 in the assessees case for the asstt. yr. 1990-91 on 7th May, 1992 is set aside, and the assessment should be made afresh according to law.'
The learned CIT has given elaborate reasons in the order passed by him to support the conclusions arrived at by him.
4. The appellant preferred this appeal against the said order passed by the CIT under s. 263 before the Tribunal. The learned Judicial Member in view of reasons recorded by him in the order has held that the order passed by the CIT under s. 263 of the Act is bad in law. He has also observed that the relevant paras 6 and 8 of the assessment order would be sufficient enough to establish that necessary enquiries and investigations were made by the AO and he has not lacked in his duties to make such enquiries and investigations. The learned Judicial Member has accordingly held that the claim of the assessee for bad debts of Rs. 28,77,420 and the explanation offered by the assessee for advancing the loan of Rs. 8,35,000 to his wife was rightly accepted by the AO.
4.1 The learned Accountant Member (AM) in view of elaborate discussions made in his separate order has arrived at the conclusion that in the backdrop of the factual scenario given in his order, the AO had failed to conduct proper enquiries before accepting the aforesaid two claims in the original assessment order. The learned AM has accordingly held that the CIT was justified in holding that the order of the AO was erroneous in so far as it was prejudicial to the interests of Revenue, for want of proper enquiry on the part of the AO in respect of the claim of the assessee with regard to bad debts amounting to Rs. 28,77,420 and the advancing of loan of Rs. 8,35,000 to his wife.
5. The hearing of the aforesaid case was fixed before me (as Third Member) at Bombay on 7th January, 1997.
6(a). The learned counsel for the assessee submitted that the order under s. 263 passed by the CIT is patently invalid. The learned Judicial Member (JM) has rightly set aside the impugned order. He strongly supported the order passed by the learned JM and relied upon the elaborate reasons given in his order.
(b). The learned counsel further argued that the learned AM has partly accepted the arguments submitted on behalf of the assessee by holding that the CIT was wrong in setting aside the entire order made under s. 143(3). The learned AM has, however, upheld the order of the CIT in relation to the two matters raised by the CIT in his notice, dt. 13th January, 1994. He submitted that an order under s. 263 cannot be sustained in part.
(c). The learned counsel submitted that the learned AM has grossly erred in holding that the AO had accepted the claim of bad debts of Rs. 28,77,420 and the explanation submitted by the assessee for explaining the sources of advancing the loan of Rs. 8,35,000 without making proper enquiries and investigation.
(d). As regards claim for bad debts of Rs. 28,77,420 is concerned, the learned counsel invited my attention towards para 6 of the original assessment order. He pointed that the AO had specifically required the assessee to submit details and evidence in support of such a claim. The assessee submitted detailed letter in response to the said query letter and submitted all the relevant details and evidence. The assessee had duly submitted full address of the said customer Shri Bhagwandas Agarwal, to whom the goods were sold on credit. The copy of debtors account, copy of bad debt account, copy of P&L; a/c in which such amount of bad debt was written off were also submitted. The assessee also submitted photocopies of delivery challans, and the copies of 4 letters sent by the assessee to the said party. The AO thereafter deputed the ward inspector to conduct necessary enquiries. The ward inspector had gone at the office address and the residential address of the said debtor and found that Shri Bhagwandas (the debtor) had left and his whereabouts are not known. The AO had thus accepted the assessees claim after making proper enquiries and after his satisfaction about the reality and correctness of such a claim made by the assessee. The learned counsel submitted that the learned AM was wrong in holding that the order of the AO in this regard was erroneous and prejudicial to the interest of Revenue.
The learned counsel further submitted that a fresh assessment was made by the AO on 29th March, 1995 in which he disallowed the claim of bad debts of Rs. 28,77,420. The assessee preferred an appeal against that order before the CIT(A). The CIT(A) vide his order dt. 5th August, 1996 has allowed the claim of bad debt. The copies of these orders have been submitted by the assessee at pp 87 to 120 of the paper-book. The learned counsel submitted that the subsequent order of the CIT(A), dt. 5th August, 1996, further exposes the invalidity of the order under s. 263 made by the CIT in relation to this item.
(e). As regards the second item relating to advancing of loan of Rs. 8,35,000 by the assessee to his wife, the learned counsel drew my attention to para 8 of the original assessment order. He submitted that the AO had raised a specific query relating to the aforesaid loan. The assessee vide his reply, dt. 18th March, 1992 had explained the relevant facts. The AO accepted the sources of advancing the aforesaid loan after considering the assessees reply and after necessary verification of the facts from the bank pass-books of the assessee. He submitted that the learned AM has clearly erred in holding that the assessees contentions were accepted by the AO without making proper enquiries.
(f). The learned counsel placed heavy reliance on the judgment of Honble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (supra) to support his contention that the CIT cannot revise the order made by the AO merely because he happens to form a different opinion than the conclusions arrived at by the AO after making necessary enquiries and investigation. The CIT cannot substitute his judgment over that of the AO in cases where the claim was accepted by the AO after making full and proper enquiries.
The learned counsel further placed reliance on the judgments reported in (1) CIT vs. Smt. Milanben S. Parikh : [1995]215ITR81(Guj) ; (2) Rampyari Devi Saraogi vs. CIT : [1968]67ITR84(SC) and (3) Smt. Tara Devi Aggarwal vs. CIT : [1973]88ITR323(SC) to support his contention that both the conditions prescribed in s. 263, namely, that the order was erroneous and that such erroneous order caused prejudice to the interest of Revenue, should co-exist and should be cumulatively satisfied. He submitted that in the instant case, the order was passed by the AO after making due and proper enquiries and hence, that cannot be regarded as an erroneous order.
The learned counsel thus strongly supported the order of the learned JM and submitted that he has rightly set aside the impugned order under s. 263 passed by the CIT.
7(a). The learned Departmental Representative strongly supported the order passed by the learned AM and relied upon the reasons mentioned in the order passed by the learned AM as well as in the impugned order under s. 263 passed by the CIT.
(b). The learned Departmental Representative submitted that the Honble AM has very aptly observed in the order passed by him that as per the provisions of s. 36(1)(vii) r/w s. 36(2) two things ought to have existed while claiming the deduction of bad debt - one, the existence of bad debt and two, the existence of books of accounts where it can be written off as bad debts. He submitted that till submission of letter, dt. 18th March, 1992 the assessee had not even given the address of the debtor to the Department. In letter, dt. 18th March, 1992 the assessee simply stated as under :
'Regarding claim of bad debts details are under compilation.'
The assessee did not disclose the fact of such credit sales made to Shri Bhagwandas in his statements recorded during the course of search and for a long time thereafter from the date of search conducted on 12th January, 1990 till the date of aforesaid letter dt. 18th March, 1992. The assessee in his various above referred statements had clearly admitted that no books of accounts or any other records were maintained by him. In these statements, he had offered an income of Rs. 92,50,000 after taking into consideration the entire dealings in defective CRCA sheets/coils, profit and loss made thereon and offered to pay tax thereon. The facts and circumstances elaborately mentioned in the order under s. 263 and in the order of the learned AM clearly indicate that the aforesaid claim required an in-depth examination and investigation, which were not made by the AO. He simply deputed the ward inspector to go at the address of the debtor given by the assessee, which was a futile exercise, as the facts and circumstances of the case strongly justifies an honest belief that the assessee has at a later point of time after a gap of 2 years of the raid and after offering Rs. 92,50,000 as income liable to tax, has prepared bogus challans and bogus letters in the name of a bogus customer showing a bogus address with a view to make such a false claim of bad debt.
The learned Departmental Representative further submitted that the learned AM has given a specific findings of fact that the AO has nowhere in the order passed by him has mentioned that he has verified the books of accounts or even a finding that the books of accounts were produced for verification. The AO has merely recorded that 'the assessee had filed copy of account of the above party recorded in his books of accounts'. This, in no way goes to prove that the assessee has written the books, particularly so, in the context of the facts mentioned in the statements recorded during the course of search. The learned AM has also recorded a firm finding of fact that the books of accounts were not produced before the Tribunal even when specifically asked for.
The learned Departmental Representative further submitted that the AO in para 26 of the original assessment order concluded by saying that 'The conditions laid down in s. 36(vii) r/w sub-s. (2) seems to have been fulfilled'. The use of expression 'seems to have been fulfilled' by the AO clearly indicates that he did not have adequate material on record to arrive at a firm and final satisfaction as to the fulfilment of various conditions precedent for allowing the bad debt in question. He placed reliance on the judgment of Honble Delhi High Court in the case of Gee Vee Enterprises vs. Addl. CIT : [1975]99ITR375(Delhi) to support his contention that facts and circumstances of the present case should have provoked the AO to make further enquiries and investigation before accepting such a claim of bad debt.
The learned Departmental Representative drew my attention to p. 2 of order of the CIT where extracts from statement dt. 20th February, 1990 under s. 132(4) have been reproduced to show that the assessee clearly admitted that no books of accounts or any other records for steel trading business were maintained. He submitted that without keeping or maintaining 'any other records' whatsoever, it is impossible to prepare correct and reliable books of accounts at a later point of time. The learned Departmental Representative further drew my attention to various other contents of statements of the assessee recorded under ss. 131 and 132(4) of the Act to further support his argument that the AO ought to have conducted a thorough, complete and deep investigation in the present case before accepting such a claim of bad debt. The CIT had, therefore, rightly assumed jurisdiction under s. 263 in relation to this item.
The learned Departmental Representative further contended that the assessee in his statement under s. 132(4) dt. 21st February, 1990 had inter alia, stated that working of peak statement showing peak of investment of Rs. 92,50,000 offered by him as income liable to tax, will be submitted tomorrow. The said peak statement, which is alleged to have been filed along with letter dt. 27th March, 1990 to the ADI does not find any mention in the original assessment order. The AO has completely failed to scrutinise the said peak statement both with regard to quantity and rate of various purchases and sales with a view to ensure as to whether the claim of bad debt of Rs. 28,77,420 can be said to be a part of the income of Rs. 92,50,000 offered in the statement dt. 21st February, 1990. This also shows complete failure on the part of the AO to make proper enquiries and investigation.
The learned Departmental Representative further contended that no reliance can be placed on the order of the CIT(A), dt. 5th August, 1996, against the fresh order, as that order is the subject-matter of the Revenues appeal before the Tribunal against that order.
(c). The learned Departmental Representative also drew my attention towards the judgments reported in :
(1) Addl. CIT vs. Mukur Corpn. : [1978]111ITR312(Guj) ;
(2) CIT vs. Gabriel India Ltd. (supra);
(3) Venkatakrishna Rice Co. vs. CIT : [1987]163ITR129(Mad) ; and
(4) Indequip Ltd. vs. CIT : [1993]202ITR917(Ker) .
(d). As regards the second item of loan of Rs. 8,35,000 advanced by the assessee to his wife, the learned Departmental Representative submitted that the AO in para 8 of the assessment order has observed 'Intimation was received from the AO assessing Smt. Harvinder Singh Kaur, wife of the assessee that he had advanced interest-free loan of Rs. 8,35,000 to her during this year on which she had earned interest income of Rs. 88,685'. A perusal of assessees reply, dt. 18th March, 1992 (p. 14 of paper-book) reveals that the said amount of Rs. 8,35,000 included the opening balance of Rs. 3,30,000. Fresh loan advanced during this year was Rs. 5,05,000 only. The AO did not even notice the said opening balance outstanding against assessees wife. This shows total non-application of mind by the AO.
The learned Departmental Representative further pointed out that the AO vide his letter dt. 21st January, 1992 (copy at p. 13 of paper-book) required the assessee to explain the source of loan of Rs. 8,35,000, advanced to his wife. In reply, dt. 18th March, 1992 the assessee has not stated a single word about the sources. He has simply stated that there is no law by which the assessee can be forced to charge any interest from his wife. The AO added only the interest income of wife to the tune of Rs. 88,685 and did not make any addition of the unexplained sources of advancing such loan. The AO has observed that it is seen that all the amounts have gone from assessees bank account and is properly explained. There is no material on records to show which were those bank accounts and whether the sources of deposits in those bank accounts were examined or not. The learned Departmental Representative further pointed out that the loan given to wife was not reflected in the balance sheet. The learned AM has also given a firm finding that the break-up of income of Rs. 92,50,000 offered by the assessee does not reflect the said loan given to wife nor does the balance sheet reflect this amount. Thus, the sources from where the assessee gave such a loan to his wife remains unknown.
The learned Departmental Representative submitted that the order of the learned JM is patently wrong. The order of the learned AM is based on sound, convincing and valid reasons. He, therefore, urged that I shall follow the view taken by the learned AM.
8. The learned counsel in the rejoinder submitted that the books of accounts were prepared after the search. These books of accounts have again been produced before the AO in the course of fresh assessment proceedings. All the relevant details relating to claim of bad debt and the loan given to wife, all bank pass-books were duly produced during original assessment proceedings. The balance sheet placed at page 23 of the paper-book is the balance sheet pertaining to steel business. The loan given to wife was duly reflected in a separate balance sheet, which were duly produced during the course of original assessment proceedings. He repeated the various arguments advanced earlier.
9. I had requested the learned counsel for the assessee to let me know as to whether the books of accounts, the said separate balance sheet claimed to have been furnished before the AO are available and can be produced. Initially the instant reply of the learned counsel was that the books of accounts and the balance sheets, etc., are available and these can be produced today, i.e., on 7th January, 1997. But after talking to the person sitting by his side, the learned counsel expressed his inability to produce the same on that date on the ground that the appellant was out of station. He requested for grant of time for this purpose and relied upon the decision of Honble Supreme Court in the case of ITAT vs. Dy. CIT : [1996]218ITR275(SC) . The learned counsel was well aware of the fact that I had come on tour to Bombay from Delhi only and exclusively for hearing this one single appeal, as Third Member. The manner in which the briefing gentleman and the learned counsel conversed with each other and their facial expressions during such conversation gave me an impression that they want to avoid production of the books of accounts before me. However, in the interest of justice and with a view to provide a last and final opportunity to the assessee, the learned counsel for the assessee was required to produce the following on the next day, i.e., on 8th January, 1997 vide order sheet entry, dt. 7th January, 1997 :
(i) Assessee to produce the books of accounts, in which the bad debt is claimed to have been written off. The assessees Authorised Representative was required to produce the same today but he expressed his inability to produce the same. The Authorised Representative is given a final opportunity to produce the same tomorrow;
(ii) Copy of balance sheets furnished before the AO prior to completion of original assessment and
(iii) Copy of statement, dt. 10th December, 1990 referred to in the fresh assessment order.
Hearing was adjourned for this purpose on 8th January, 1997. The aforesaid requirements made vide order sheet, dt. 7th January, 1997 was duly noted by the learned counsel on 7th January, 1997.
On 8th January, 1997, the learned counsel submitted a letter, dt. 7th January, 1997 signed by Shri Vinod S. Mehta, Chartered Accountant. It was stated in the said application that the books cannot be produced immediately as the assessee was out of town. The books of accounts, the balance sheet and the copy of statement shall be produced on the next date of hearing. A request for adjournment of hearing was made on that basis.
I had clearly indicated to the learned counsel for the assessee while granting him one more days time on 7th January, 1997 to produce the books of accounts and other required documents on 8th January, 1997 that no further time will be allowed. In spite of this, the assessee has not chosen to avail of this last and final opportunity granted to him for this purpose. It will be imperative to repeat that the said books of accounts were not produced before the regular Bench of the Tribunal in spite of specific requirement made by the Bench, as has been clearly and specifically mentioned in the order passed by the learned AM. Even if it is assumed that the books of account in fact exist, and even if it would have been produced before me, there still remains a uncontroverted fact that there is no material on records to show that those books of accounts were produced before the AO or that the AO had examined those books of accounts before completing the original assessment. In view of the foregoing reasons and in view of the fact that I have fully heard the learned representatives of both sides at considerable length, I did not find any merit in the assessees request for allowing further time as mentioned in their letter, dt. 7th January, 1997 submitted on 8th January, 1997. The learned counsel for the assessee was duly informed during hearing on 8th January, 1997 that such request for allowing further time for this purpose cannot be accepted. This was duly noted by the learned counsel on the bottom of the said application.
10. After my return to Delhi, I received one more letter, dt. 9th January, 1997 from Shri Vinod S. Mehta, Chartered Accountant on 14th January, 1997 stating that the books of accounts are available and can be produced at any place and at any time in the next week. The sending of such an application once again after rejection of a similar request made during hearing on 8th January, 1997 after considering the submissions made by the learned representatives of both sides and after conclusion of the hearing is improper. In view of the facts and reasons discussed in the preceding para, I do not find any merit in the request so made in the aforesaid letter. I will, therefore, proceed to give my findings in relation to the points of difference referred to me.
11. I have considered the submissions made by the learned representatives of both sides and have perused the order of the Departmental authorities and all other documents to which my attention was drawn during the course of hearing. I have also gone through all the decisions referred to by the learned representatives of the parties. I have also carefully gone through the dissenting orders passed by my esteemed learned brothers Shri T. A. Bukte, J.M. and Shri Pradeep Parikh, A.M.
12(a). The entire relevant facts have been discussed hereinbefore. It is an undisputed fact that the appellant had derived substantial unaccounted income from unaccounted transactions of purchase and sale of CRCA sheets/coils, which could be discovered as a result of proceedings of search conducted at the warehouses of Western India Steel Traders in the month of January, 1990. The assessee admitted in the various statements that the stock of CRCA sheets/coils found or kept in the warehouses of M/s Western India Steel Traders and M/s Union Fabricators in the different names, viz., M/s Kai International, M/s Asish Enterprises, M/s Ambassador Indl. Corporation and M/s Hindustan Exports belong to him and represent his undisclosed, unexplained and unaccounted stocks. The appellant offered a sum of Rs. 92,50,000 as an income liable to tax in his hands in the statement recorded under s. 132(4). In the statements of appellant recorded on 20th February, 1990 and 21st February, 1990, he had categorically and clearly admitted that the entire sales and purchases were effected in unaccounted terms during the financial year 1989-90. The said income has not been disclosed to the Department and the same was not recorded anywhere in his records. He had further specifically admitted in the above referred statements that he did not maintain any books of accounts or other records for such steel trading business.
(b). In the statement of fact annexed with the present appeal, the appellant has inter alia, mentioned that 'at the time of search, the books of accounts were not properly written and the transactions on which the amount was offered for taxation were kept outside the books of accounts. Subsequent to the search, the return of income was filed on 31st October, 1991 declaring income of Rs. 64,35,580 .......... The books of accounts were ready before filing the return and were produced for scrutiny before the AO. In the return filed, the appellant had claimed bad debts of Rs. 28,77,420 and the details in support of the claim filed'.
(c). The appellant has failed to adduce any evidence that the books of accounts containing entries relating to unaccounted purchases and sales resulting in unaccounted income of Rs. 92,50,000 were produced before the AO or that the AO had examined those books of accounts before completing the original assessment. I have carefully gone through the original assessment order. The AO has nowhere mentioned in the assessment order that such books of accounts were produced before him and/or that he had examined those books of accounts. On the other hand, the AO has observed in the assessment order that the statement annexed with the return of income disclosed the turnover at Rs. 1.50 crores but the assessee did not file statutory audit report under s. 44AB either with the return or till completion of the assessment. The AO, therefore, initiated penalty proceedings under s. 271B of the Act. The AO vide letter, dt. 21st January, 1992 required the assessee to inter alia, file the statutory audit report and copy of balance sheet. The assessee submitted reply, dt. 18th March, 1992 (copy placed at p. 14 of paper book). The contents of para 1 of said reply is reproduced hereunder :
'The income of Rs. 92,50,000 was offered under s. 132(4) as a result of seizure and search procedure initiated under s. 132. The income was offered during search and said income was not accounted in the books. Similarly all the transactions relating to income were not recorded in the books of accounts. Provisions under s. 132(4) are special provisions wherein the assessee can offer only income which is not recorded in the books of accounts. In such case, the requirement of statutory audit under s. 44B cannot be complied and need not be complied. The very s. 132(4) prerequisite the condition that the income which is not recorded in the books of accounts only can be declared under s. 132(4). Such being the case, I have to request you to not to initiate any penalty provision arising on account of s. 44B.'
(d). The aforesaid reply also clearly indicates that the aforesaid income of Rs. 92,50,000 was not recorded in any books of accounts till that date also. The contents in the statement of fact that the assessee had filed the details in support of the claim for bad debt also appears to be incorrect. The AO vide letter, dt. 21st January, 1992 had also required the assessee to file details of bad debts. In the reply, dt. 18th March, 1992, the assessee submitted as under :
'Regarding claim of bad debt, details are under compilation.'
(e). The assessee disclosed the address of the debtor and furnished certain details for the first time vide latter, dt. 23rd March, 1992, the contents of which has already been reproduced in the earlier part of their order. The appellant gave office and residential address of the said debtor Shri Bhagwandas Agarwal and furnished details of alleged goods sold to him on credit, and stated that the debtor has vanished and ran away. All efforts to locate the person failed and hence the amount was written off as bad debt. It appears that assessee also submitted a copy of debtors account, copies of challans bearing S. Nos. 101 to 110 alleged to have been issued to Shri Bhagwandas and copies of certain letters purported to have been sent to Shri Bhagwandas. The AO deputed the ward inspector who had gone at the addresses given by the assessee and reported that Shri Bhagwandas had left and his whereabouts are not known. The AO accepted the claim of bad debt without making any further enquiries and investigation.
(f). In my view, the AO failed to apply his mind on the various vital facts and circumstances, such as the following, on the basis of which any AO, with ordinary prudence, could entertain an honest and reasonable belief that there exist strong probability that the assessee has made a bogus and false claim in respect of such bad debt of Rs. 28,77,420 with a view to reduce his tax liability on the unaccounted and undisclosed income of Rs. 92,50,000 surrendered in the statements recorded under ss. 131 and 132(4) during the preceding of search, and that there is an imperative need to make thorough inquiries and deep investigation :
(g). The AO ought to have conducted a deep investigation and found out as to : (i) whether any such credit sales, in fact were made to Shri Bhagwandas Agarwal or not, (ii) whether any such person namely Bhagwandas Agarwal ever carried on any such business from the given business address and whether any such person was residing at the given residential address, (iii) whether such person/concern existed at the contemporary period, when such credit sales were alleged to have been made to him, (iv) whether such buyer carried on business on such a large scale that he could buy goods aggregating to Rs. 28,77,420 in a short period of 21 days from 21st December, 1989 to 11th January, 1990 from one single party. In the normal course a person carrying on business on such large scale, must be a dealer registered under the provisions of State ST laws and, hence, AO should have found out whether such buyer was registered under the relevant provisions of sales-tax laws or not The burden of proving the claim for bad debts lies on the assessee. The AO could require him to prove all these facts or he could make independent inquiries from the owners, present occupiers, neighbours of the given addresses of business premises and residential premises and from the ST authorities rather than simply relying on the inspectors brief and cryptic report.
(h). The assessee in his statement recorded under s. 132(4) on 21st February, 1990 while surrendering unaccounted income of Rs. 92,50,000 had given the details of investment apart from unaccounted stocks of Rs. 55,33,488 found during search in the warehouses, a sum of Rs. 37,16,512 consisted of 'other investment and assets'. Then he was asked to state specifically what he means by 'other investment and assets'. In reply to Q. No. 8 he stated 'that out of Rs. 37,16,512 very small portion is lying in the form of cash and major amount in the form of 'Sundry Debtors', to whom I have sold the materials on credit through broker at Delhi one Shri Indira Dev and 'advances against the goods.' (p. 11 of paper-book).
(i) During the course of hearing, the learned counsel with reference to statement of facts annexed with the appeal submitted that a letter, dt. 27th March, 1990 was submitted to the ADI along with various enclosures. Unsigned and unauthenticated typed copies of the enclosures of the said letter were submitted. The learned counsel was required to give a certificate under the signature of the authorised person that these papers are the true copies of enclosures of letter, dt. 27th March, 1990. The learned counsel refused to certify or sign those papers, on the ground that the appellant was out of town. One of those enclosures marked as 'reconciliation peak-profit and stock investment and assets' is reproduced hereunder :
Rs.
Rs.
Rs.
Peak offered
91,09,627
Stock
55,33,488
Profit
2,86,220
Sundry debtors
28,77,420
Less :
Advances
7,00,000
Expenses
1,45,847
1,40,373
Cash
1,39,092
92,50,000
92,50,000
(j) The details of advances of Rs. 7,00,000 were later on given in the course of assessment proceedings. As per details furnished at p. 18 of the paper-book, such advances was given to Shri Inder Dev of Ghaziabad.
(k) At the fag end of the assessment proceedings, the assessee for the first time gave the address and other details of bad debts along with letter, dt. 23rd March, 1992. The assessee now claimed that credit sales were made to one Shri Bhagwandas Agarwal on various dates in the month of December, 1989 and January, 1990 aggregating to Rs. 28,77,420, which turned out to be irrecoverable and was written off as bad debt. The first credit sale was made to him on 21st December, 1989 and the last sale on 11th January, 1990.
(l). The AO should have appreciated that if the assessee would have genuinely made such credit sales to Shri Bhagwandas Agarwal from December, 1989 to 11th January, 1990 aggregating to Rs. 28,77,420 and that would have been the only outstanding unrealised sale proceeds, the appellant would not have given such a statement on oath under s. 132(4) at a contemporary period on 21st February, 1990 that a major amount is lying in the form of 'Sundry Debtors' to whom the material was sold on credit. He would have instantly and spontaneously stated that credit sale was made to only one customer Shri Bhagwandas Agarwal against whom such substantial amount is outstanding. The AO should have conducted further investigation keeping in view the aforesaid statement. The appellant in the aforesaid statement also stated that major amount was lying invested in the form of 'Sundry Debtors' to whom the material was sold on credit through broker at Delhi one Shri Indira Dev. The AO should have required the assessee to produce Shri Indira Dev or should have examined him, which would have exposed the truth or falsity of the assessees contentions. It is highly improbable that the credit sale to Shri Bhagwandas Agarwal of Bombay was made through the abovenamed broker of Delhi.
(m) The assessee in his aforesaid statement under s. 132(4) has inter alia, also stated that the 'other investment and assets of Rs. 37,16,512 also include advances against the goods'. During the course of search proceedings or subsequent proceedings the appellant never contended that the said advance was given to Shri Indira Dev as an advance against the goods. Shri Indira Dev was not the supplier of goods nor the buying agent. In statement, dt. 20th February, 1990 under s. 131, the assessee stated that goods have been purchased locally through broker Mahendrabhai and he does not know the names of the sellers. If the fact of 'advances against the goods' is taken into consideration in addition to Rs. 7,00,000 given to Shri Indira Dev and the amount of cash in hand and stock shown in the statement of investments of income of Rs. 92,50,000, reproduced in earlier part of this order, the balance amount will not be adequate enough to cover the alleged balance of Rs. 28,77,420 outstanding against Shri Bhagwandas Agarwal.
(n). The AO should have also considered the well-known commercial practice that any trade before making sales of goods on credit of such large amount to any buyer will gather necessary information about the financial capacity of the customer, his reputation in the market and the volume of customers business. Normally, the dealer after making first credit sale may be reluctant to again sell the goods on credit to the same party without realising the amount of earlier bill or without obtaining proper securities or guarantee bonds or without satisfying himself about the reliability of the outstanding sale proceeds. The AO ought to have examined the appellant on all such points.
(o) The AO has also failed to take into consideration the statement of the appellant recorded on 10th December, 1990 in which the assessee inter alia, stated that 'purchases and sales are in cash only' and 'Delivery is only against cash payment'. Such a vital and relevant evidence already existing on records was not at all considered by the AO at the time of passing the original assessment order.
(p). The AO has also not examined the correctness or otherwise of the various documents claimed to have been submitted by the assessee along with letter, dt. 27th March, 1990.
(q). The AO has failed to appreciate that the alleged sale of goods on credit to Shri Bhagwandas Agarwal is claimed to have been made in the month of December, 1989 and January, 1990. The assessee did not disclose this fact that credit sales were made solely to one single customer in his statements recorded in the month of February, 1990. The income of Rs. 92,50,000 was offered for tax in the said statements after considering profit and loss made in such transactions. The assessee did not express even a word that the income of Rs. 92,50,000 surrendered by him under s. 132(4) is likely to be reduced on account of possible non-recovery of unpaid sale price outstanding against the said one single customer. The alleged write off of the debt only after one months time thereafter on 31st March, 1990 raises strong probability of such a claim of bad debt being bogus. The aspect also needed further enquiries and investigation.
(r) The assessee has claimed certain expenses including transportation expenses. In the statements the appellant also stated that goods were transported to the warehouses by Haribhai Kukaria Transport Contractor. The AO should have also enquired as to through which transport company goods were sent to Shri Bhagwandas Agarwal. He also ought to have examined those transporters and their records.
(s). The AO should have called for the books of accounts and ought to have examined all the entries of purchases, sales, transportation expenses, etc. The AO should have kept in mind the fact that the appellant in the statements, dt. 20th February, 1990 and 21st February, 1990 had categorically and specifically admitted that he did not maintain any books of accounts or other records for the unaccounted transactions of steel trading business. It is indeed strange that without maintaining 'any other records' whatsoever, how books of accounts could be prepared at a later point of time after the search. It is beyond comprehension that a person can prepare reliable and correct books of accounts pertaining to several transactions of purchases, sales, expenses, which took place prior to the date of search after a gap of long period after the search. In case the books of accounts were subsequently prepared on the basis of certain other primary records not shown during search, the AO should have called for such primary records and ought to have carefully examined the same. The AO has completely failed to verify the existence of a real debt, the existence of the books of accounts and also the reliability and correctness of the entries recorded in such books of accounts claimed to have been prepared after the search.
(t). The provisions of s. 36(2) inter alia, provides that no deduction for a bad debt shall be allowed unless such debt has been taken into account in computing the income of the assessee of the previous year. It was, therefore, necessary on the part of assessee to prove that the claim of bad debt of Rs. 28,77,420 formed part of the unaccounted income of Rs. 92,50,000. The AO ought to have made a careful scrutiny of all the relevant entries forming the basis of computing aforesaid unaccounted income admitted by the appellant at Rs. 92,50,000 and should have verified the fact whether the claim of bad debt of Rs. 28,77,420 was a part of the said income of Rs. 92,50,000. The AO has not examined and considered this vital aspect.
(u). The AO did not even verify the entry of write off of such entry of bad debts in the books of accounts, as the books of accounts were neither produced before him nor those were examined by him.
(v). It also appears from the statements of the appellant and discussions in the assessment order that the assessee carried on business of dealing in unaccounted imported CRCA sheets/coils. Whether it amounts to violation of the provisions of Customs Duty Act The AO in para 7 of the assessment order while dealing with a different addition has mentioned that the customs authorities were requested to give a copy of statement of the assessee and Shri A. R. Gupta. It is not known whether those statements or any other material existing in the proceedings before the custom authorities in any manner relate to the question relating to the impugned unaccounted transactions of purchase and sale of CRCA sheets/coils. Whether the appellant was required to give names and addresses of the suppliers and customers. The relevance and necessity of obtaining copies of all relevant documents from the custom authorities also ought to have been examined by the AO before allowing the said bad debt.
In view of the foregoing discussions, I am of the view that the AO had erroneously accepted the claim of bad debt of Rs. 28,77,420 without making necessary enquiries and investigation.
13. Now, I will deal with the other point relating to sources of advancing of loan of Rs. 8,35,000 by the assessee to his wife.
(a). The facts relating to this point has also been discussed in detail in the earlier part of this order. The AO vide letter, dt. 21st January, 1992 required the assessee to explain the sources of advancing the said loan. The assessee vide reply dt. 18th March, 1990 gave details of opening balance and further loan advanced to her during the year under consideration and stated that law does not oblige him to charge interest from his wife particularly when the assessee has not paid interest to the outsiders. The AO simply observed that the assessee has given the details of interest-free loan advanced to his wife and all the amounts have gone from his bank account and is properly explained.
(b). There is no material on records that the assessee produced the copy of his saving bank account No. 4335 with New Bank of India before the AO. The AO also did not call for the copy of bank pass-books of the said account and did not examine the sources of deposits made in the said bank account. The AO made addition of interest of Rs. 88,685 earned by his wife on the said amount but did not make any addition in respect of fresh loan advanced during the year without considering the sources of advancing such loan. The explanations submitted by the assessee vide letter dt. 18th March, 1990 does not contain even a word for explaining the sources of loan advanced to wife. The assessee did not produce any evidence to support the sources of advancing the said loan to wife.
It is clear from the aforestated facts that the AO has erred in accepting the aforesaid loan as properly explained without conducting proper enquiries and investigations.
14(a). The learned counsel for the assessee had placed reliance on several judgments. I have carefully gone through all those judgments and find that facts of all those cases are totally different and are clearly distinguishable from the facts of the present case. It is well settled law that each case has to be seen in the light of the facts of that case. A decision has to be understood in the context of the facts in which the decision is rendered.
(b). The learned counsel had placed strong reliance on the judgment of Honble Bombay High Court in the case of CIT vs. Gabriel India Ltd. (supra). The facts of that case are that the assessee-company had claimed deduction of Rs. 99,326 described as 'plant re-layout expenses'. On a query being made by the AO it was explained by the assessee by its letter dt. 19th September, 1975 that it had been incurred in connection with the merger of two existing plants for the manufacturing of shock absorbers, which were located side by side at its factory at Mulund. The case of the assessee was that as the layout of the two plants was not conducive, the management decided to merge those two plants and re-layout the same according to the flow of operations conducive to more production. The expenses incurred for that purpose was allowed as a business expenditure after considering the explanations submitted by the assessee.
The CIT after issuing a show cause notice under s. 263 and after considering the submissions made on behalf of the assessee observed that the order of the ITO did not contain discussion in regard to allowability of the claim for deduction which indicated non-application of mind. According to the CIT, the claim of the assessee required examination as to whether the expenditure in question was a revenue or capital expenditure. In that view of the matter, he cancelled the order of the ITO in this regard and directed him to make a fresh assessment on the lines indicated by him.
On these facts, the Honble Bombay High Court after discussing the principles of law relating to scope of s. 263 laid down in various judgments, gave the following decision :
'We may now examine the facts of the present case in the light of the powers of the CIT set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the CIT himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the CIT, only after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interests of the Revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the CIT did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.'
It is clear from the aforesaid judgment that further inquiry and/or fresh determination can be directed by the CIT after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interest of Revenue.
In the present case, the CIT has given elaborate and convincing reasons while holding that the original assessment order passed by the AO was erroneous and prejudicial to the interest of Revenue in so far as the AO had erroneously accepted the claim of bad debts and treated the loan advanced to his wife as properly explained without making proper and necessary inquiries and investigation. The facts of the present case are totally different and distinguishable from the facts in the case of Gabriel India Ltd. (supra).
15. In the present case, it is obvious from the detailed discussions made hereinbefore that the AO had committed an error in not making necessary enquires and deep investigation as regards both these points and such error on the part of the AO had resulted in prejudice to the interest of Revenue and in consequence whereof the State has been deprived of its right to realise the lawful revenue. The facts and circumstances of this case fully justifies the need of further enquiry and investigation.
16. In view of the aforesaid discussions, I am of the clear opinion that the AO committed an error in accepting to the claim of the assessee for bad debts of Rs. 28,77,420 and the explanation offered by the assessee for advancing the loan of Rs. 8,35,000 to his wife without making proper and necessary enquiries. I am, therefore, of the considered view that learned CIT was justified in holding that the order of the AO was erroneous insofar as it was prejudicial to the interest of the Revenue, for want of proper enquiry on the part of the AO in respect of the claim of the assessee with regard to bad debts amounting to Rs. 28,77,420 and the advancing of loan of Rs. 8,35,000 to his wife.
I accordingly agree with the findings given by learned AM Shri Pradeep Parikh and with utmost respect I am unable to find myself in agreement with the findings given by the learned JM.
17. The case will now go back to the regular Bench for disposal of the appeal in accordance with the opinion of the majority.