Of the two appeals, one is by the Revenue and the other is by the assessee.
2. The assessee is an individual with previous year ending on 31st March, 1984 relevant to the asst. yr. 1984-85. In response to a notice under S. 148 of the IT Act, 1961, the the assessee filed a return showing net taxable income of Rs. 4,26,210, besides agricultural income of Rs. 20,000. The income from business was arrived at after deducting a sum of Rs. 2,60,000 as bad debt arising from money-lending business.
This was disallowed by the ITO for the reason that the amount of Rs. 2,60,000 representing advances made by the assessee to Smrithi Extractions Ltd., can be taken only as investment and at the worst the loss can be treated only as a capital loss. It was the view of the ITO that none of the conditions laid down for allowing bad debt had been fulfilled in the case of the assessee. For one thing the assessee did not maintain books of accounts. For another the amount was not actually written off. Thus, the disallowance was made.
3. On appeal, CIT(A) rejected the contention of the assessee that the impugned amount should be allowed as a trading loss in the computation of income itself under S. 28 of the IT Act. The assessee is on appeal against this.
4. Sri C. Abraham, the learned Senior Departmental Representative submitted that the amount advanced to the company was in the nature of investment because the assessee had not accounted for any interest though the advances were made prior to the asst. yr. 1984-85. He had not written off the amount in the money lending books. In fact, no books of accounts were maintained for the money-lending business.
Therefore, the disallowance was justified. On the other hand, Sri R.Srinivasan, the learned Chartered Accountant submitted that the assessee used to offer interest income only on cash basis. Because no interest was received from the debtor it was not admitted. The adverse inference drawn by the Assessing Officer that it was not an advance but only an investment is based on no material. The company to which the advance was given was running into heavy losses. The State Bank of India initiated proceedings against the debtor-company. The Kerala Financial Corporation to whom the company owed huge amounts took over the assets of the debtor-company under S. 29 of the State Financial Corporation Act 1951 in August, 1983 and the company ceased to carry on business since then. The liabilities were not taken over by the Kerala Financial Corporation. The assessee is one of the promoters-cum-directors of the company and knowing the condition of the company he felt that nothing was recoverable and, therefore, the amount was deducted from the income from money-lending business. Though the deduction was claimed under bad debt by mistake the Revenue is not precluded from allowing it as a business loss incurred in the course of the money-leading business under S. 28 itself.
5. We have heard rival submissions and perused the materials on record.
Merely because the assessee did not admit any interest from such advance, the learned authorities inferred that the advance was in the nature of investment. As Sri Srinivasan rightly contended there is no material to warrant such an inference. Obviously, the assessee was not maintaining books of accounts and the assessment order does not indicate the method of accounting whether mercantile or cash. The search has not yielded any paper or slip regarding the receipt of interest on such advance. In the circumstances, merely because no interest was received it cannot be said that the advance was for purpose of investment. The schedule of unsecured loans forming part of the balance-sheet of the debtor-company describes the same only as an unsecured loan and not as an investment. Therefore, the inference of the ITO that the impugned amount represented investment is based on no material. In our considered opinion the mere fact that the assessee claimed the impugned amount as a bad dent is no bar for the claim being considered as business loss in the computation of the income under S.28 of the IT Act. Thus, though the conditions stipulated for allowing the same as bad debt are not fulfilled in this case, the claim should have been considered under S. 28 itself as a trading loss or a business loss. The crucial question is when did the trading loss occur? It is not in doubt that the debtor-company was running in to huge losses as seen from its profit and loss account and balance sheet as on 31st March, 1984. The accumulated loss in a sum of nearly Rs. 19.20 lakhs is far in excess of the paid up capital and reserves totalling Rs. 15.99 lakhs. In addition, the company had current liabilities which are immediately payable to the tune of Rs. 6.7 lakhs. The secured loans outweighed the unsecured loans and the assessees advance is one of the items of unsecured loans. The assessee is also one of the directors of the company and, therefore, he can be credited with the inside knowledge of the inherent financial and economic weakness of the company apart from the precarious condition of its existence as revealed in the balance-sheet. For one thing the debtor-company had not commenced production at all. For another, it was facing huge liabilities. Thirdly, its assets were taken over by one of the creditors, viz., the Kerala State Financial Corporation in August, 1982 with no commitment to liability. In such circumstances any prudent person can only consider the unsecured advance to the debtor-company as one having little chances of recovery. Sri Abraham relied on the appellate order of the CIT(A) in the case of M/s. Manickanamparambil Chitties for the asst. yr. 1986-87 wherein an advance of Rs. 5,00,000 made to the debtor-company was allowed as bad debt and submitted that the loss, if at all there was any, was incurred in the asst. yr.
1986-87 only. We are not persuaded by his argument. The assessees are different. M/s. Manickanamparambil Chitties claimed the advance as bad debt only for the asst. yr. 1986-87 after writing off the same in its books and it was that claim which was allowed. In the case of the assessee, the claim was made in 1983-84 assessment year itself though under bad debts. The CIT(A) in his appellate order while dealing with M/s. Manickanamparambil Chitties had adverted to the financial difficulties in which the debtor-company was placed and also the fact that Kerala State Financial Corporation has taken over the assets of the company in August, 1983 and, therefore, its claim for deduction of the bad debt for the asst. yr. 1986-87 should be allowed. Because the claim was made for the asst. yr. 1986-87 the CIT(A) had allowed it in that year, but the reasons for allowing such claim were traced to the financial conditions of the debtor-company and the take over of its assets by the Kerala State Financial Corporation. These two circumstances existed in the asst. yr. 1984-85 and if a different assessee on the basis of such circumstances considered the advance as a total loss his claim cannot be rejected in the year of account in which the company was taken over by the financial institution. For these reasons, we modify the order of the CIT(A), and hold that the sum of Rs. 2,60,000 is a valid deduction as a business loss under S. 28 itself.
6. The next point in dispute in the assessees appeal is against the addition of Rs. 75,000. This issue is related to ground No. 2 of the Revenues appeal in which the Revenue is aggrieved against the reduction of addition under other sources, from Rs. 6,07,611 to Rs. 75,000. Both the issues are taken together. The assessee had, suo motu, declared under other sources a sum of Rs. 4,82,000. The learned Assessing Officer computed the income from other sources as follows : (2) Peak amount of loan advanced to Sri Antony George as on 10th June, 1983.
7. The additions were made after considering the slips recovered in the course of the search resulting in estimate of household expenses and educational expenses of the children and also calculation of peak credits. The assessee appealed. IT was contended before the first appellate authority that the Assessing Officer erred in ascertaining the peak credits in each account without combining together all the accounts. IT was further stated that the assessee, on the other hand, had a comprehensive review of all the accounts and on that basis the peak credit was computed in a sum of Rs. 8,93,965 as on 27th March, 1984. From this the amount received from known sources and the amount of the opening balances were deducted. Such amounts totalled Rs. 4,12,005 consisting of the following : It was further stated that this amount of Rs. 4,12,005 was deducted from the peak of Rs. 8,93,965 leaving a balance of unaccounted income in a sum of Rs. 4,81,960, which was rounded off to Rs. 4,82,000 and this is how the assessee had offered the said sum for assessment under other sources. The CIT(A), on going through the manner in which the peak credit was worked out both by the assessee and by the Assessing Officer, accepted that the quantification as done by the assessee was reasonable and logical. Then he noticed that there was no dispute about the receipt of Rs. 15,000 from Smt. Thressiamma (sister) and, therefore, such receipt will go to reduce the unaccounted income. On this there is no grievance for the Revenue. The CIT(A) similarly accepted a sum of Rs. 2,00,000 received from V. P. George as fully explained and hence its deduction from the quantum of unaccounted income was in order. It may be pointed out that before accepting the receipt of Rs. 2,00,000 from V. P. George, the learned CIT(A) adverted to the reasons which prompted the Assessing Officer to reject this source, but did not uphold the addition for the reason that the loan was found recorded in the books of V. P. George and that V. P. George had withdrawn the amount from his bank account and, therefore, the credit should be accepted as genuine. The Revenue is aggrieved in ground No. 5 against the acceptance of Rs. 2,00,000 as loan from V. P.George.
8. We have heard rival submissions. Similar issue of computation on peak credit came before the Tribunal in the assessees own case for the asst. yr. 1983-84 in the order of the Tribunal dt. 31st March, 1993 in ITA No. 98(Coch) 88 and 232 (Coch) /88. The Tribunal had observed that the Assessing Officer had compartmentalised the various deposit accounts standing in the name of the assessee, his wife and children and computed the peak credits in each such account in order to arrive at the total of such peaks. For the impugned assessment year also it is seen that the Assessing Officer has adopted similar method of computation. In para-5 of the assessment order, he had stated that he had adopted the same basis as in the asst. yr. 1983-84. The Tribunal did not accept such mode of computation of peak credits in the assessment for 1983-84 for the reason that when the deposits in bank accounts of the assessee and others are taken together for assessment, the proper method would be to have a comprehensive review of all the transactions in a chronological order cancelling the effect of "transfer to" and "transfer from" such account and work out the peak credit on that basis. Such a computation has been given by the assessee before the CIT(A), a copy of which has been furnished by the Revenue before us. On going through the assessees computation, we concur with the view of the CIT(A) that the peak credit amounted only to Rs. 8,93,965 as on 27th March, 1984. From the peak credit thus arrived at, the assessee took credit for the opening balance of Rs. 1,97,005 which is the starting point of computation. This is because the opening balance was increased by further deposits from time to time resulting in the peak of Rs. 8,93,965. Hence the deduction of the opening balance is in order. The assessee also took credit for the amount received from Smt. Thressiamma of Rs. 15,000 as deduction from such peak credit. Smt.
Thressiammas loan is considered by the Assessing Officer as genuine and there is no controversy about the deduction of this amount. This leaves us to consider the deduction of the amount received from V. P. George in a sum of Rs. 2,00,000 from the peak. The Assessing Officer examined V. P. George and he was cross-examined by the assessee. In his deposition, he confirmed the transaction. However, the Assessing Officer disbelieved the version of V. P. George for the reason that whereas he was paying 18% interest per annum on the over-draft, he was not sure of the rate of interest on this loan. He had not taken any security from the assessee for the alleged loan. Further, he owed a sum of Rs. 1,40,000 to Manickanamparambil Chitties and that he was in the habit of taking loans from Manickanamparambil Chitties or Manickanamparambil Trust either in his name or in the name of his wife.
Therefore, he rejected the explanation of V. P. George. The learned CIT(A) noticed that the amount of loan is recorded in the books of V.P. George and that he had withdrawn by cheque a sum of Rs. 2 lakhs from his account with Union Bank of India, Thevara on 1st June, 1983 and according to his admission the said amount was deposited with the assessee. The mere fact that he had an over-draft account carrying 18% interest, or that he was taking loan from Manickanamparambil Chitties or Manickanamparambil Trust either in his own name or in the name of his wife and children are not relevant for deciding the issue when the creditor explained the proximate source of the advance made to the assessee and that source is found to be in order. We do not find any infirmity in the order of the first appellate authority. So long as the creditor has explained the source from which the advance was made and that source is found to be genuine, the transaction cannot be impeached on the ground that the creditor was in the habit of taking loans from others etc., Therefore, the CIT(A) is right in accepting the credit from V. P. George in a sum of Rs. 2,00,000. If these amounts are taken together for purpose of reducing the peak credit of Rs. 8,93,965 the balance would amount to Rs. 4,81,960 representing the unaccounted money with the assessee. This was rounded off to Rs. 4,82,000 and offered for assessment suo motu by the assessee under other sources, and thus the same is in order.
9. Sri C. Abraham, the learned Senior Departmental Representative, referred to the working as given in para 5 of the assessment order as to how the assessee had arrived at the sum of Rs. 4,81,960 which was rounded off to Rs. 4,82,000 as income from other source. Before the CIT(A) totally different workings were given and, therefore, the CIT(A) erred in accepting the same.
10. We have carefully considered the rival submissions. We do not find any inconsistency in the figures furnished before the Assessing Officer or before the CIT(A) and as rightly pointed out by Sri Srinivasan, the learned Chartered Accountant, the figures stand reconciled as follows : Figures furnished before the CIT(A) in different set of workings taking a comprehensive view of the transactions.
In view of the fact that the figures stand reconciled, we do not find any substance in the objection of the Revenue. The CIT(A) did not commit any error in accepting the version of the assessee.
11. However, after accepting the assessees version that the unaccounted income only came to Rs. 4,82,000 the CIT(A) sustained an addition of Rs. 75,000. According to the CIT(A), though the household expenses and educational expenses came to Rs. 91,164, the withdrawals from the firms, the agricultural income of Rs. 20,000 and interest income of Rs. 38,000 if put together would amount to only Rs. 67,873. Thus there was a difference of Rs. 23,291. Further, he was of the view that "in case like this there would always be a possibility of some items escaping as all the papers and items would not be disclosed by the appellant and accordingly I would make an addition of Rs. 75,000". The assessee is aggrieved against this conclusion. There is force in the contention of Sri Srinivasan, the learned Chartered Accountant, that having found that only a sum of Rs. 23,291 was not covered by any other income, the CIT(A) instead of upholding the addition to the extent required has sustained an addition of Rs. 75,000 on presumptive basis and that too without regard to the fact that the assessee might be having some cash balance with him representing past savings. In our considered opinion, where the assessees premises were searched the presumption is that the search was conducted in a thorough manner unless the contrary is proved. In our opinion, if the seized papers and slips on household expenses and educational expenses etc., justify only an addition of Rs. 23,291, to say that all the papers and other materials might not have surfaced in the course of the search and to make an addition on that basis, would militate against the very object of search conducted by the Revenue and would be in the realm of surmises and conjectures. The assessee is not a man of straw and can be credited with having some personal cash balance representing his past savings. Taking into consideration the totally of the circumstances of the case, we sustain and addition of Rs. 15,000 in the place of Rs. 75,000.
12. The Revenue is aggrieved that a sum of Rs. 1,32,731 was deleted by the CIT(A). The assessee had only shown an amount of Rs. 38,800 on receipt basis as income from interest on personal money-lending advances. He did not offer any income on the other advances made by him. It was the contention of the assessee that no income was received on other advances and the same had been accounted for on receipt basis in subsequent years. The Assessing Officer, however, computed the interest on accrual basis on the advances against the names found in the slips recovered in the course of search as under : The CIT(A) held that the amount of Rs. 3,11,380 noted against "Rush" was not an advance made by the assessee but only represented deposits received. He, therefore, excluded the said sum of calculation of interest. Whether the sum of Rs. 3,11,380 was really an advance made by the assessee or a deposit received came up for consideration before the Tribunal for the asst. yr. 1983-84 and the Tribunal by its order in ITA Nos. 98(Coch) /88 and 232(Coch) /88 dt. 31st March, 1993 upheld the view of the CIT(A) that it represented only a deposit received and not an advance made. Therefore, the exclusion of the sum of Rs. 3,11,380 from the interest calculation in the impugned assessment, is justified.
Since the CIT(A) had deleted the peak amount of Rs. 2,20,000 in respect of Antony George, the calculation of interest on accrual basis on such amount was also rightly deleted by the CIT(A) in the impugned assessment. As for the computation of income in respect of advances made to K. K. Basheer and A. Moosa respectively in a sum of Rs. 1,00,000 and Rs. 5,00,000 the learned CIT(A) noted the contention of the assessee that the interest on such advances had been accounted for on receipt basis in the subsequent years and having regards to this contention he held that "if the said contention is not correct, then the ITO would be justified in the calculation of interest at 24% on the amount held to be advances given by the appellant in the assessment year under consideration as well as any earlier loan given by the appellant". With these remarks he deleted the addition of Rs. 1,32,731 being the aggregate interest on accrual basis.
13. We do not find any infirmity in the order of the CIT(A). He has only directed the ITO to verify whether the assessee has reported the interest on receipt basis in the subsequent years on receipts of such interest from A. Moosa and K. K. Basheer, and if so, he observed that there was no justification for including the same in the impugned assessment on accrual basis : if not, its inclusions was justified.
Thus, the issue is left open and stands restored to the ITO by the CIT(A). The direction of the CIT(A) is fair and reasonable in the context of the contention of the assessee. We decline to interfere.
14. In the result, the Revenues appeal is dismissed and the assessees appeal is partly allowed.