Judgment:
This appeal is preferred by the revenue against the order of the learned Commissioner (Appeals)-I, Raipur, dated 4-6-1999.
1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 8,47,276 made by the assessing officer as fictitious liability of Shri T.P. Sahu.
2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 6,44,527 made by the assessing officer as payments not made or payments taken back by Shri T.P. Sahu.
3. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in directing to allow depreciation of Rs. 7,51,558 as against Rs. 3,69,730 allowed by the assessing officer.
4. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the addition of Rs. 20,04,000 made by the assessing officer on account of unexplained cash credits.
5. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 1,62,312 made by the assessing officer disallowing interest on the amount of unexplained cash credit.
A common issue arising out of ground Nos. 1 to 3 relates to he ascertainment of exact amount payable by the assessee-firm to Shri T.P.Sahu on conversion of his proprietary business M/s Ankit Steels into partnership business.
The relevant facts of the case are that the assessee-firm filed its original return for assessment year 1996-97 on 1-11-1996, declaring nil income. Subsequently, a revised return was filed on 22-10-1997, in which depreciation of Rs. 7,51,678 was claimed by the assessee on the fixed assets (excluding land) of Rs. 29,63,871. During the course of assessment proceedings it was found by the assessing officer that the proprietary business of Shri T.P. Sahu was taken over on 7-7- 1995, by the, assessee-firm comprising of four partners, viz., Shri T.P. Sahu, Suresh Kumar Agrawal, Vishnu Kumar Agrawal and J.P. Agrawal.
Subsequently, Shri T.P. Sahu retired from the partnership firm on 31-8- 1995 and later on one Shri Nandkishore Agrawal was admitted as a partner by the three surviving partners. Finally, Shri Suresh Kumar Agrawal, Shri Vishnu Krumar Agrawal and Shri J.P. Agrawal also retired from the partnership firm in the subsequent year relevant to assessment year 1997-98 and thus the business in the name of M/s Ankit Steels which was originally owned by Shri T.P. Sahu in his individual capacity was ultimately transferred to Shri Nandkumar Agrawal. In the background of this chequered history of M/s Ankit Steels, the assessing officer examined the account of Shri T.P. Sahu appearing in the books of the assessee-firm which showed the following position: It was also noticed by the assessing officer that the fixed assets of M/s Ankit Steels excluding land were originally acquired by Shri T.P.Sahu on 7-4-1994, for Rs. 29,63,871 and no depreciation on the same was claimed by him either for financial year 1994-95 relevant to assessment year 1995-96 nor for the period 1-4-1995 to 6-7- 1995. The, assessing officer, therefore, was of the opinion that the cost of acquisition of the proprietary business of M/s Ankit Steels shown by the assessee-firm. at Rs. 30,91,803 was on the higher side and accordingly he proceeded to examine the matter in further detail. He called upon the assessee firm to produce Shri T.P. Sahu for examination and also required the production of his books of account for making cross-verification of the payments claimed to have been made by the assessee-firm to him. The assessee, however, could not produce Shri T.P. Sahu before the assessing officer nor could it produce the books of account of Shri T.P. Sahu before him. Consequently, a summons under section 131 was issued on T.P. Sahu in response to which Shri T.P. Sahu appeared before the assessing officer with his counsel Shri M. Kashyap.
A statement of Shri T.P. Sahu was recorded by the assessing officer in which he stated that the consideration payable by the assessee-firm to him for transfer of his proprietary business of M/s Ankit Steels was about Rs. 15 lakhs to Rs. 16 lakhs. He also stated that he was in dire need of disposing the said unit in order to pay his loan liabilities.
On the basis of this statement made by Shri T.P. Sahu as well as the other facts of the case, the assessing officer came to the conclusion that the total consideration payable by the assessee-firm to Shri T.P.Sahu towards transfer of his proprietary business of M/s Ankit Steels was at the most Rs. 16 lakhs. Accordingly, he made the following additions to the income returned by the assessee-firm : Excess payment shown to have been made to Shri T.P. Sahu assuming that the same was either not made or if made, was taken back (22,44,527 - Rs. 16,00,000) Aggrieved by the additions so made by the assessing officer, the assessee preferred an appeal before the learned Commissioner (Appeals) and it was submitted on behalf of the assessee before him that the evidence collected by the assessing officer at the back of the assessee in the form of statement of Shri T.P. Sahu recorded by him was not made available to the assessee nor any opportunity was given to it to cross-examine the said person. It was, therefore, contended on behalf of the assessee that the assessing officer has clearly violated the principles of natural justice and the addition made on the basis of the said statement is not sustainable. The attention of the learned Commissioner (Appeals) was also invited by the assessee towards the various documents placed on record before the assessing officer in the form of copies of relevant partnership deeds as well as the balance sheets to point out that sufficient evidence in support of the cost of acquisition of the assets of M/s Ankit Steels was furnished before the assessing officer. An affidavit of Shri T.P. Sahu. was also filed before the learned Commissioner (Appeals) confirming that he has received Rs. 30,91,803 as full and final settlement of his capital account from the assessee-firm. The learned Commissioner (Appeals) found merits in the submissions made on behalf of the assessee before him and considering the facts of the case as well as the evidence placed on record before him, he deemed it proper to delete all the three additions made by the assessing officer on the issue under consideration. Aggrieved by the same, the revenue is in appeal before us.
The learned Departmental Representative submitted before us that the frequent changes in the constitution of the assessee-firm during the relevant period gave rise to a suspicion about the cost of acquisition of the various assets claimed by the assessee-firm and the further examination conducted by the assessing officer also revealed that the said cost shown by the assessee-firm was on a higher side. He submitted that the assessing officer, therefore, asked the assessee-firm to produce Shri T.P. Sahu for his examination and his books of account were also required to be produced for the purpose of cross-examination of the payments claimed to have been made by the assessee-firm to him.
He submitted that the assessee, however, avoided the production of Shri T.P. Sahu as well as his books of account stating one reason or the other and consequently Shri T.P. Sahu was summoned by the assessing officer. According to him, a statement of Shri T.P. Sahu was recorded by the assessing officer in the presence of his counsel and in his statement, Shri Sahu categorically admitted of having made a distress sale of M/s Ankit Steels to the assessee-firm for a total consideration of about Rs. 15 lakhs to Rs. 16 lakhs. He submitted that keeping in view this clear-cut admission made by Shri Sahu in the statement recorded under section 131 and considering the other constitutional aspects pointed out in his order, the assessing officer was fully justified in making the resultant additions and his action was fully supported by the evidence brought on record by him. He submitted that the assessee filed an affidavit of Shri T.P. Sahu before the learned Commissioner (Appeals) in support of the cost of acquisition shown in its books of account and the learned Commissioner (Appeals) allowed relief to the assessee merely relying on the said document which was filed before him by the assessee for the first time. He contended that the learned Commissioner (Appeals) ought to have given an opportunity to the assessing officer to examine the said evidence filed by the assessee before him for the first time especially when the contents of the same were contradictory to the statement made by Shri T.P. Sahu before the assessing officer. He, therefore, contended that the order of the learned Commissioner (Appeals) on this issue may be set aside and the matter be restored back to the file of the assessing officer for deciding the issue afresh in the light of the fresh evidence filed by the assessee.
The learned counsel for the assessee submitted that sufficient evidence in the form of relevant balance sheets and copies of partnership deed was before the assessing officer by the assessee in support of its claim relating to the amount payable to Shri T.P. Sahu on transfer of his proprietary business to the partnership firm. Referring to the relevant clauses of the said partnership deed placed in his paper book, he pointed out that all the assets and liabilities of the proprietary concern were taken over, by the partnership firm, and the capital account of Shri T.P. Sahu appearing in the balance sheet of his proprietary concern at Rs. 30,91,803 was also transferred in the books of account of the assessee-firm. He contended that as per the partnership deed executed on 7-7-1995, any partner retiring from the partnership firm was entitled for the amount standing to the credit of his capital account and accordingly the account of Shri T.P. Sahu was settled on his retirement from the partnership firm. He contended that the claim of the assessee relating to the amount payable to Shri T.P.Sahu was thus fully supported by the said documentary evidence placed on record before the assessing officer and there was no reason for him to doubt the assessee's claim on this count. He submitted that the assessing officer, however, insisted for the production of Shri T.P.Sahu before him for examination and due to some unavoidable reasons, the assessee could not produce him before the assessing officer. He submitted that a complete address as well as GIR/PA No. of Shri T.P.Sahu was, however, given by the assessee to the assessing officer to facilitate such examination. He submitted that Shri T.P. Sahu was subsequently summoned by the assessing officer and his statement under section 131 was also recorded by him. Referring to the English version of the said statement filed by him before us, he contended that Shri T.P. Sahu had expressed his inability to tell the exact amount received from the assessee-firm in the absence of relevant documents available with him stating that the matter was quite old. He contended that the assessing officer, however, insisted for the reply from him and as a result, Shri T.P. Sahu gave a very vague answer. He also contended that the said statement of Shri T.P. Sahu recorded by the assessing officer was not made available to the assesse for contradicting the deposition made by Shri T.P. Sahu nor any opportunity was given by the assessing officer to cross-examine the deponent. He, therefore, contended that there was a clear violation of principles of natural justice by the assessing officer in relying on the said statement for making the impugned additions to the income of the assessee and the order passed by the assessing officer on this issue was void as held by Hon'ble Kerala High Court in the case of M.S. Jewellery v. Asstt. Commr. of Agrl. IT and ST & Anr. (1994) 208 ITR 531 (Ker) and by the Hon'ble Supreme Court in the case of R.B. Shreeram Durgaprasad and Fatehchand Nursing Das v. Settlement Commission (IT & WT) & Anr. (1989) 176 ITR 169 (SC).
Regarding the contention of the learned departmental Representative that the learned Commissioner (Appeals) relied on the fresh evidence filed by the assessee in the form of affidavit of Shri T.P. Sahu, the learned counsel for the assessee contended that the powers of the learned Commissioner (Appeals) are co-terminous with that of the assessing officer and the said additional evidence having been considered by him in exercise of the specific powers conferred on him, he was not under a legal obligation to give any opportunity to the assessing officer for examining the said evidence. He submitted that the statement of Shri T.P. Sahu recorded by the assessing officer was not made available to the assessee and the assessee had the only occasion to rebut the said statement by way of filing an affidavit of Shri T.P. Sahu before the learned Commissioner (Appeals). He contended that the assessee thus placed on record the said affidavit on the first occasion available to it before the learned Commissioner (Appeals) and the learned Commissioner (Appeals) was fully justified in admitting and relying on the said evidence considering the facts and circumstances of the case.
As regards the merits of the additions made by the assessing officer on the issue under consideration, the learned counsel for the assessee submitted that sufficient evidence was produced by the assessee before the assessing officer in support of the amount claimed as payable to Shri T.P. Sahu and all the payments against the said liability were also made by the assessee to Shri T.P. Sahu by account payee cheques.
He submitted that Shri T.P. Sahu in his affidavit filed before the learned Commissioner (Appeals) has categorically admitted of having received the entire amount of Rs. 30,91,803 and there being nothing brought on record by the assessing officer to show that any portion of the said amount was received back by the assessee, his action in holding that the cost of acquisition of assets by the assessee-firm was inflated was not justified. He contended that the additions in dispute were thus made by the assessing officer on the basis of assumptions and surmises and the learned Commissioner (Appeals) was fully justified in deleting the same.
We have considered the rival submissions and also perused the relevant material on record. It is observed that the amount shown to have been payable to Shri T.P. Sahu by the assessee-firm at Rs. 30,91,803 on conversion of his proprietary business was suspected/doubted by the assessing officer on the basis of subsequent changes in the constitution of the partnership firm culminating in the transfer of the said business of M/s Ankit Steels to one Shri Agrawal which according to the assessing officer was the device to avoid showing a direct purchase. He, therefore, proceeded further to examine and verify the amount payable by the assessee-firm to Shri T.P. Sahu and the assessee-firm was called upon to prove the said cost. In this regard, the assessee-firm vide its letter dated 21-12-1998, (copy placed at page No. 29 of assessee's paper book) furnished the address of Shri T.P. Sahu as well as his income-tax particulars like GIR No./PA No. and the concerned IT ward. Subsequently, the assessee-firm also filed a copy of balance sheet and P&L a/c of the proprietary concern of Shri T.P. Sahu for the period from 1-4-1995 to 6-7-1995, under its letter dated 29-12-1998. A copy of IT return of Shri T.P. Sahu for the assessment year 1996-97 was also filed with the said letter. A perusal of the said balance sheet of M/s Ankit Steels, the etrstwhile proprietary concern of Shri T.P. Sahu, as on 6-7-1995, i.e., immediately before its transfer to partnership firm placed at page No.67 of assessee's paper book reveals that the book value of fixed assets of M/s Ankit Steels as on 6-7- 1995, was Rs. 31,83,870 and on the same date the capital account of Shri T.P. Sahu was showing a credit balance of Rs. 30,91,803. It is pertinent to note that this balance sheet as well as its relevant annexures were filed by Shri T.P. Sahu along with his return for assessment year 1996-97 on 27-1-1998 and the same were available on the record of the department. Meanwhile, the assessee-firm had also placed a copy of partnership deed executed on 7-7- 1995, between Shri T.P. Sahu, Shri Suresh Kumar Agrawal, Shri Vishnu Kumar Agrawal and Shri Jai Prakash Agrawal by which the proprietary business of M/s Ankit Steels of Shri T.P. Sahu was converted/transferred to the partnership firm and clause No. 10 of the same reads as under: "That the present status of bank borrowings and other unsecured loans, long-term loans, long-term liabilities and current liabilities of the firm shall be the liabilities of this partnership firm. Similarly, the present current assets and long-term assets of the firm shall be the assets of the firm and shall be discharged by the firm jointly and severally." From the perusal of the above clause, it is evident that all the assets and liabilities of the head-wise proprietary concern of Shri T.P. Sahu had been transferred to the partnership firm and there was no mention about revaluation of any of the assets owned by the proprietary concern. On conversion of the proprietary concern into a partnership firm, the necessary entries in the books of account of the assessee-firm were also passed transferring the assets and liabilities of the head-wise proprietary concern at its book value. It is thus clear that a very cogent and relevant evidence was filed by the assessee-firm before the assessing officer in support of the cost of assets acquired by it from the proprietary concern of Shri T.P. Sahu and the amount credited to his capital account on conversion of the proprietary concern into a partnership firm. Despite this, the assessing officer however, insisted for the production of Shri T.P.Sahu before him in order to cross-verify the amount shown to have been payable by the assessee-firm to him as also the actual receipt of the same by him. In this regard, it is observed that the amount payable to Shri T.P. Sahu on retirement from the partnership firm was governed by clause No. 15 of the partnership deed dated 7-7- 1995, which was very much available with the assessing officer and in terms of the same, Shri T.P. Sahu was entitled to receive the amount standing to the credit of his capital account as on the date of retirement. Thus, when the credit to his capital account on conversion of proprietary business to the partnership firm was supported by cogent evidence placed on record by the assessee and the amount to that extent was payable to Shri T.P. Sahu on his retirement subsequently as per a specific clause contained in the partnership deed, we are of the opinion that there was no reason for the assessing officer to have any suspicion/doubt in the matter and insist for the examination of Shri T.P. Sahu.
The assessing officer, however, persisted for the production of Shri T.P. Sahu and on assessee's failure to produce him for one reason or the other, he issued a summons to him and recorded his statement on 27-1-1999. In the said statement, Shri T.P. Sahu gave the following replies to the questions asked by the assessing officer apropos the amount received by him from the assessee-firm on his retirement.
"Question : As you say that due to all these problems you have discontinued, how much amount you have received in consideration thereof? Answer: Whatever amount I have received that was less than the borrowing obtained by me for business. Whatever I have received has been utilized for repayment of loan and balance amount of borrowing was repaid out of other earnings.
Question: My question was that, how much amount you had received, this you have not told.Answer : I can explain whatever has been written in papers. Without going through the papers I am not able to tell the amount since it is an old matter to which I can explain after going through papers.
Question : You can remember every small thing but when you are being asked about the amount received, you are repeatedly avoiding the answer. Once again I am asking that how much amount you have received? Answer : My borrowing was Rs. 15 to 16 lacs, the amount received was little less.
Question : You have received much more amount as per information provided by Ankit Steels, whether it is true? Answer : Whatever amount I had borrowed was only paid, I have not received any additional amount.
Question : Has it happened like this that you have deposited the cheque in your account which was received from them simultaneously, they have obtained self cheques from you and withdrawn amounts? Answer : My account is in Union Bank of India, Samta Colony, Branch, Raipur.
From the perusal of the above replies given by Shri T.P. Sahu, it is apparent, that he was not in a position to give the precise information about the amount received from the assessee-firm on his retirement and had categorically stated that such information could be furnished only with the help of the supporting evidence. He had also made it very clear that the matter was quite old and in the absence of availability of the relevant papers, he is not in a position to give the exact information. The assessing officer, however, persisted with his question and tried to extract the required information about the amount paid by the assessee-firm to the deponent even when he had expressed his inability to do so. Finally, Shri T.P. Sahu appears to have yielded to the persistence by the assessing officer and somehow gave a very vague answer while stating that he received little less than the amount of his borrowings which was in the range of Rs. 15 to 16 lakhs. It is pertinent to note that the balance sheet of Shri T.P. Sahu as on 6-7- 1995, his capital account in the books of the assessee-firm, the partnership deed dated 7-7- 1995, incorporating the specific clauses about the taking over of assets and liabilities of his proprietary concern as well as his relevant income-tax papers were all available on the record of the assessing officer when the statement of Shri T.P.Sahu was recorded showing a different position than the one stated by him in his statement and even then, the assessing officer did not confront any of these documents to him in order to point out the apparent. contradiction in the amount appearing in the said documents with the one mentioned by him in his statement. Moreover, the replies given by Shri T. P. Sahu in the said statement also indicate that the statement made by him regarding the amount received by him from the assessee-firm was very vague. It is also apparent from the said statement that questions in the proper manner were not putforth by the assessing officer to Shri T.P. Sahu in the matter and heavy reliance was placed by him on a very vague answer given by Shri T.P. Sahu about the amount received from the assessee-firm to draw an adverse conclusion that the amount mentioned in the relevant documents was not correct. In our opinion, no definite conclusion could have been drawn on the basis of the said statement of Shri Sahu which was full of contradictions, ambiguity and vaguness.
It is also observed that the said statement of Shri T.P. Sahu, which was heavily relied upon by the assessing officer to draw adverse conclusion against the assessee while making the impugned additions, was not made available to the assessee for rebutting or coniroverting the same. It is also observed that the said statement was recorded by the assessing officer on 27-1-1996 and thereafter the hearing in the assessment proceedings was fixed on three occasions, i.e., on 22-3-1999, 25-3-1999 and 26-3-1999, and even though there was appearance on behalf of the assessee, statement of Shri T.P. Sahu was not confronted to the assessee by the assessing officer. It is a fundamental rule of law embedded in the legal maxim "Audi Alteram Partem" that no man shall be condemned unheard. In the case of M.S.Jewellery v. Asstt. Commr. of Agrl. IT and ST & Anr. (supra),the Hon'ble Kerala High Court has held that the order passed by an authority violating principles of natural justice is void. In the case of R.B. Shreeram Durgaprasad and Fatehchand Nursing Das v. Settlement Commissioner (IT & WT) & Anr. (supra), the Hon'ble Supreme Court has held that the order passed violating principles of natural justice is a nullity. In the present case, the evidence in the form of statement of Shri T.P. Sahu recorded by the assessing officer was used against the assessee without giving any opportunity to the assessee of rebutting or controverting the same and thus there was a clear violation of principles of natural justice on the part of the assessing officer and the assessment made by him on this issue violating the principles of natural justice was void in the eye of law.
It is observed that the additional evidence in the form of affidavit of Shri T.P. Sahu. confirming the receipt of Rs. 30,91,803 on oath was filed by the assessee before the learned Commissioner (Appeals) and the learned Commissioner (Appeals) relied on the same while deleting the addition made by the assessing officer on this count. In this regard, the learned departmental Representative has contended before us that the said evidence was admitted and relied upon by the learned Commissioner (Appeals) in contravention of rule 46A under which it was obligatory for the learned Commissioner (Appeals) to give an opportunity to the assessing officer to examine the said evidence. The learned departmental Representative, therefore, has contended that this matter may be sent back to the assessing officer for examining the said evidence and deciding the issue afresh after such examination. It is true that the affidavit of Shri T.P. Sahu filed before him for the first time was relied by the learned Commissioner (Appeals) in contravention of sub-rule 3 of rule 46A inasmuch as no opportunity was given to the assessing officer to examine the said evidence. However, at the same time, it is also to be seen that the statement of Shri T.P.Sahu recorded by the assessing officer was not confronted to the assessee during the assessment proceedings and the opportunity to rebut the contents of the said statement came the assessee's way in the appellate proceedings before the learned Commissioner (Appeals) for the first time which he utilized by filing the said affidavit. The learned Commissioner (Appeals), therefore, was right in admitting the said fresh evidence filed before him for the first time as per clause (d) of sub-rule 1 of rule 46A. However, before relying on the same, he ought to have afforded an opportunity to the assessing officer to examine the same. Be that as it may, even if the evidentiary value of the said affidavit is not taken into consideration, the fact remains to be seen is that the statement of Shri T.P. Sahu which was used as evidence against the assessee, was not confronted to the assessee by the assessing officer and as such there was a clear violation of principles of natural justice rendering his order passed on the issue under consideration void. The rule of general importance in the application of legal principles is that Quod ab initio non valet in tractu temporis non convalescit, which means that which was originally void, does not by lapse of time become valid. In the present case, the required averment to confront the evidence before using it against the assessee was totally omitted by the assessing officer and, therefore, the relief sought by the revenue from the Tribunal in the form of setting aside the issue back to the assessing officer for reconsideration in the light of additional evidence or for that matter enabling him to make the statement of Shri T.P. Sahu available to the assessee, in our opinion, cannot be allowed at this stage. As such, considering all the facts of the case and the legal position discussed in the foregoing portion of this order, we are of the considered opinion that the assessment made by the assessing officer on the issue under consideration violating the principles of natural justice was void and there was no infirmity in the impugned order of the learned Commissioner (Appeals) in deleting the addition made by the assessing officer on this count.
In ground No. 4, the revenue has challenged the action of the learned Commissioner (Appeals) in deleting the addition of Rs. 20,04,000 made by the assessing officer on account of unexplained cash credits.
During the course of assessment proceedings, it was found by the assessing officer that substantial amounts were credited in the books of the assessee-firm to the capital account of its partners. During further investigation, it was also noticed by the assessing officer that the partners had borrowed these amounts from various creditors which were introduced by them as their capital in the assessee-firm.
The assessee was called upon by the assessing officer to prove the genuineness of all these cash credit entries appearing in its books of account. In reply, a preliminary objection was raised on behalf of the assessee stating that the assessee-firm had not borrowed any loans from the said creditors but the said loans in fact were obtained by its three partners for introducing the same in the firm as their respective capital. This objection was not found sustainable by the assessing officer in view of the decision of Hon'ble Madhya Pradesh High Court in the case of CIT v. Shiv Shakti Timbers (1998) 229 ITR 505 (MP) and that of Hon'ble Rajasthan High Court in the case of CIT v. Kishorilal Santoshilal (1995) 216 ITR 9 (Raj). According to the assessing officer, the burden to establish the identity as well as the creditworthiness of the said creditors was on the assesseia-firm as the relevant credits were appearing in its books of account. In order to prove the genuineness of these loans, the assessee-firm fumished a list of creditors before the assessing officer. Photocopies of the confirmation letters of the said creditors were also filed in which GIR Nos. of the said creditors were also mentioned. The assessing officer, however, required the assessee-firm to produce all the creditors for their examination. The assessee could not produce the same despite having been given sufficient opportunity by the assessing officer in this regard stating one reason or the other. After taking into consideration the documents produced by the assessee and keeping in view the failure of the assessee to produce the creditors before him for examination, the assessing officer came to the conclusion that the assessee has failed to discharge its onus to explain the said credits inasmuch as creditworthiness of the creditors remained unproved. Accordingly, he treated the entire cash credit amount of Rs. 20,04,000 as unexplained, relying on the decision of Hon'ble Calcutta High Court in the case of Bharati (P) Ltd. v. CIT (1978) 111 ITR 951 (Cal) and in the case of CIT v. Precision Finance (P) Ltd. (1994) 208 ITR 465 (Cal), and added the same to the income of the assessee. The matter was carried before the learned Commissioner (Appeals) who, after considering the submissions made on behalf of the assessee as well as the material available on record before him, deleted the said addition made by the assessing officer observing as under: "In the instant case all the creditors are income-tax assessees. In most of the cases assessments have been completed. All of them have confirmed having advanced the sums to the partners of the appellant-firm. In such a situation I do not find any reason as to why the loans should be disallowed on suspicion and surmises. In my opinion the ground made out by the assessing officer for disallowing the above credits under section 68, is not correct. Relying on the decision of the Supreme Court in the case of CIT v. Daulatram Rawatmull (1973) 87 ITR 349, 350 (SC). Gauhati High Court in Jalan Timbers v. CIT (1997) 223 ITR 11 (Gau) and the decision of the Tribunal, Ahmedabad Bench, in Dhorajia Construction Co. v. Income Tax Officer (1992) 42 ITD 450 (Ahd), I deem it proper to delete the addition of Rs. 20,04, 000 made by the assessing officer. " Aggrieved by the relief allowed by the learned Commissioner (Appeals) on this count, the revenue is in appeal before us.
The learned departmental Representative submitted before us that sufficient evidence to establish the creditworthiness of the concerned creditors was not filed by the assessee before the assessing officer and the said creditors were also not produced before him for the required examination despite sufficient opportunity granted to the assessee in this regard. He submitted that the addresses of the said creditors given by the assessee were also not sufficient to trace the said creditors and in the absence of complete addresses, the assessing officer could not make the necessary enquiries for verifying the genuineness of the transactions as well as the creditworthiness and identity of the creditors. Relying on the decision of Hon'ble Madhya Pradesh High Court in the case of CIT v. Shiv Shakti Timbers (supra) and that of Hon'ble Rajasthan High Court in the case of CIT v.Kishorilal Santoshilal (supra), he contended that there is no distinction. between the cash credit entries in the books of the firm whether they are of partners or of third parties, and the burden to prove the identity and capacity of the creditors was on the assessee-firm. He contended that when the credits recorded in the books in the names of the partners were not satisfactorily explained, the provisions of section 68 were clearly applicable and the assessing officer was fully justified in making the addition on this count to the income of the assessee-firm in whose books the said credit entries were appearing. He submitted that the primary onus in this regard was not discharged by the assessee-firm and since there was a clear failure on the part of the assessee-firm to establish the creditworthiness of the concerned creditors, the addition made under section 68 was fully justified. He submitted that the assessee did not fully co-operate in the matter during the assessment proceedings and due to the time limitation, the assessing officer also could not complete the examination in the absence of any positive co-operation forthcoming from the assessee. He submitted that if the Tribunal is of the opinion that the assessee still deserves an opportunity in the matter of establishing the creditworthiness of the concerned creditors, the matter may be sent back to the assessing officer for giving such opportunity.
The learned counsel for the assessee submitted that the impugned credit entries were made in the books of the assessee-firm to the capital accounts of the partners. He submitted that three partners in whose names these amounts were credited in the books of the assessee-firm had owned the said credits and sources for the same being the loans taken by the concerned partners from the various creditors, were also explained. He submitted that even the confirmation letters from the said creditors who had given loans to the partners were also furnished before the assessing officer and the GIR Nos. of the said creditors were also given, He contended that the primary onus of establishing the identity of the creditors as well as the sources of such credits were fully discharged by the assessee before the assessing officer. He contended that the assessing officer, however, treated the said credits as unexplained for the reason that the creditworthiness of the concerned creditors who had advanced loans to the partners was not established. According to him, the exercise done by the assessing officer in this direction tantamount to examining the source of source which was not permissible. He contended that the primary onus was duly discharged by the assessee by establishing the identity as well as the capacity of the partners who were the immediate creditors in relation to the impugned transactions and the learned Commissioner (Appeals) was right in treating the relevant cash credit entries appearing in the books of the assessee-firm as explained. Relying on the decision of Hon'ble Madhya Pradesh High Court in the case of CIT v. Metachem Industries (2000) 161 CTR (MP) 444 : (2000) 245 ITR 160 (MP), he contended that once it is established that the amount has been invested by a particular person, be he a partner or an individual, the responsibility of the assessee-firm was over and if that person owns that entry, then the burden of the assessee-firm stands discharged. He contended that the partners in the present case had owned the cash credit entries and had also explained the sources of the funds so introduced by them in the partnership firm and thus the burden on the assessee-firm was satisfactorily discharged. He also placed reliance on the decision of Hon'ble Punjab and Haryana High Court in the case of CIT v. Burma Electro Corporation (2001) 252 ITR 344 (P&H), wherein it was held that when the partners admitted to have made the investments in the assessee-firm and there was no material to indicate that the cash credits appearing in the books of the assessee-firm in the names of the partners were the profit of the firm, they could not be assessed as the firm's income and the unexplained investments could be assessed in the hands of the partners under section 69, if permissible. He further submitted that by furnishing the complete list of the creditors and by filing their confirmation letters, the assessee-firm even had discharged its primary onus in the matter of establishing the identity of the said creditors and when their GIR Nos. were also communicated to the assessing officer, there was no justification in the action of the assessing officer in treating the same as unexplained without making any further enquiry from their income-tax records. He, therefore, contended that the action of the assessing officer in treating the said cash credits as unexplained and making addition in respect of the same to the income of the assessee under section 68 was not justified and the learned Commissioner (Appeals) was right in deleting the same.
We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessing officer had treated the relevant cash credit entries appearing in the books of the assessee-firm in the name of its partners as unexplained because the creditors advancing these funds to the partners for further introduction as capital in the assessee-firm were not proved. In this regard, the first contention of the learned counsel for the assessee is that the said cash credit entries were appearing in the names of the partners and as the said partners had owned the money and had also explained the corresponding sources, the onus on the assessee-firm to explain the said cash credit entries was duly discharged. In support of this contention, he has relied on the decisions reported at (2001) 252 ITR 344 (P&H) (supra), (1983) 141 ITR 241 (All) and (2000) 245 ITR 160 (MP) (supra). The revenue's contention, on the other hand, is that the relevant cash credit entries were appearing in the books of the assessee-firm and, therefore, the burden to explain the said entries was on the assessee-firm and the assessee-firm having failed to establish the creditworthiness of the concerned creditors, the addition was rightly made by the assessing officer under section 68. In support of this contention, the revenue has relied on the decision of Hon'ble Madhya Pradesh High Court reported in (1997) 229 ITR 505 (MP) (supra) and that of Hon'ble Rajasthan High Court reported in (1995) 216 ITR 9 (Raj) (supra). In this regard, it is pertinent to refer to the views expressed in the judicial pronouncements cited by both the parties.
In the case of CIT v. Kishorilal Santoshilal (supra), the Hon'ble Rajasthan High Court has held that in the case of cash credits in the accounts of a firm, there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party and the burden to prove the identity, capacity and genuineness is on the firm and if the cash credit is not satisfactorily explained, the assessing officer is justified to treat it as income of the assessee-firm from undisclosed sources. In the case of CIT v. Shiv Shakti Timbers (supra), the Hon'ble Madhya Pradesh High Court has held that where there is a credit entry in the name of a partner appearing in the books of account of the assessee-firm and there is no satisfactory explanatioh, then it will be deemed to be the income of the firm and will be added to its income. In the case of CIT v.Metachem Industries (supra), the Hon'ble Madhya Pradesh High court has observed that once it is established that the amount has been invested by a particular person, be he a partner or an individual, the responsibility of the assessee-firm is over and if that person owns that entry, then the burden of the assessee-firm is discharged. In the case of CIT v. Burma Electro Corporation (supra), the Hon'ble Punjab and Haryana High Court has held that since the partners admitted to have made the investments in the assessee-firm and there was no material to indicate that the cash credits were the profit of the firm, they could not be assessed as the firm's income and the unexplained investments could be assessed in the individual hands of the partners under section 69, if permissible.
A conspectus of the opinions expressed by the various judicial authorities on the issue is that when there is a cash creait entry appearing in the name of a partner in the books of the assessee-firm, it is not material whether the same appears in the name of a partner or of a third party and the partner in such a case is treated as an immediate creditor in respect of the said entry. The burden, therefore, is on the assessee-firm in whose books the said entry appears to prove the identity and capacity of the said creditor as wen as the genuineness of the transaction. In the instant case, undoubtedly, the impugned cash credit entries were related to the partners of the assessee-firm and the said partners had owned the said credits.
Moreover, the sources of these cash credit entries were also explained by the said partners by furnishing the details of creditors from whom they had obtained the loans. Further more, the confirmation letters of the said creditors were also filed before the assessing officer and their GIR Nos. were also furnished. In these circumstances, the insistence of the assessing officer for producing the said creditors for examination in an effort to establish their creditworthiness was surely an attempt to ascertain the source of the source. In the case of S. Hastimal v. CIT (1963) 49 ITR 273 (Mad), the Hon'ble Madras High Court has held that the moment the assessee proves the identity of the creditor, his capacity to lend and the genuineness of the transaction, he cannot further require to prove the source of the source of the money out of which loan was given. In the present case, as already discussed, the identity of the creditors, i.e., the partners of the firm as well as their capacity was proved by the assessee-firm by adducing sufficient evidence before the assessing officer and thus the burden cast on the assessee in this regard was duly discharged. In these circumstances, there was no occasion for the assessing officer to examine the aspect of creditworthiness of the persons who had lent the corresponding funds to the partners of the assessee-firm and his action in invoking the deeming provisions of section 68 for the reason that the source of source is not established, was not justified in law. As such, considering all the facts of the case and the legal position emanating from the aforesaid judicial pronouncements, we are of the considered opinion that the, relevant cash credit entries were duly explained by the assessee and the assessing officer was not justified in treating the same as unexplained and thereby making addition under section 68 to the income of the assessee-firm. The learned Commissioner (Appeals), therefore, was correct in holding the said addition made by the assessing officer to be unsustainable and his impugned order on this count suffers from no infirmity warranting any interference.
The next issue relating to the disallowance of interest amounting to Rs. 1,62,312 on the unexplained cash credits raised in ground No. 5 is consequential to the issue of addition made by the assessing officer under section 68 inasmuch as since the cash credits amounting to Rs. 20,04,000 were treated by him as unexplained, the interest claimed by the assessee as payable to the concerned creditors was disallowed by the assessing officer. As we have upheld the order of the learned Commissioner (Appeals) deleting the disallowance made by the assessing officer under section 68 by holding that the said cash credits were duly explained by the assessee, the assessee would be consequently entitled for deduction on account of interest payable on the said cash credits treated as genuine. The impugned order of the learned Commissioner (Appeals) directing the assessing officer to allow the said interest is, therefore, upheld.In the cross- objection, the assessee has challenged the action of the learned CIT(A) in sustaining the addition of Rs. 1,00,000 made by the assessing officer to the trading results on account of excess burning loss.
After considering the rival submissions and perusing the relevant material on record, it is observed that a burning loss at 7.1 per cent of the total input was claimed by the assessee. When the assessing officer asked the assessee to explain this burning loss, it was submitted on behalf of the assessee that the total shortage at 10 per cent was claimed by the assessee in the stock record out of which 2.9 per cent was on account of end-cuts, misrolls, etc. and the balance of 7.1 per cent was attributable towards the burning loss. This burning loss was found to be excessive by the assessing officer in the absence of sufficient record maintained by the assessee in support of its claim and keeping in view the report of Expert Committee under Colombo Plan which had indicated the possibility of burning loss upto 5 per cent.
He, therefore, made an addition of Rs. 1,00,000 on this count which was confirmed by the learned Commissioner (Appeals).
Before us, the learned counsel for the assessee has relied on the decision of this Bench in the case of Dharampal Family Trust v. Asstt.
CIT rendered vide its order dated 23-7-1993, in ITA No. 384/Nag/1990, wherein the burning loss at the rate of 10 per cent was accepted by the Tribunal as reasonable and considering that the facts of the said case are identical to the facts of the instant case, we follow the said decision and hold that the burning loss claimed by the assessee at 7.1 per cent cannot be considered as unreasonable or excessive. The disallowance made by the assessing officer and confirmed by the learned Commissioner (Appeals) on this count is, therefore, deleted.
In ground No. 2 of the cross-objection, the assessee has challenged the action of the learned Commissioner (Appeals) in sustaining the disallowance of Rs. 2,49,188 made by the assessing officer out of commission expenditure.
A deduction on account of commission amounting to Rs. 2,49,188 paid to M/s Balaji Steel Industries was claimed by the assessee in its P&L a/c.
It was found by the assessing officer that the said concern, i.e., M/s Balaji Steel Industries is related to the assessee-firm and the business expediency for incurring the expenditure on payment of commission to the said concern could not be established by the assessee. The details required by the assessing officer in support of this claim also could not be furnished by the assessee before the assessing officer and, therefore, he proceeded to disallow the said expenditure under section 36 as well as under section 40A(2)(b). The learned Commissioner (Appeals) confirmed the said disallowance made by the assessing officer observing that the essential conditions for justifying the commission payments were not satisfied by the assessee.
Before us, the learned counsel for the assessee submitted that a steep competition prevails in the area of Raipur where the rolling mill of the assessee is located and it is a normal practice to avail the services of commission agents in order to procure the required business. As far as the commercial expediency of the said expenditure is concerned, he relied on the decision of Hon'ble Karnataka High Court in the case of CIT v. Motor Industries Co. Ltd. (1997) 223 ITR 112 (Kar) to contend that the commercial expediency of a businessman's decision to incur an expenditure has to be considered from a business point of view and the same has to be respected by the concerned authorities. Reliance was also placed on the decision of Delhi Bench of Tribunal in the case of Multi-Tech Computers (P) Ltd. v. Dy. CIT (2000) 112 Taxman 260 (Del)(Mag), wherein it has been held that the legitimate business needs of an assessee or the benefit derived by or accruing to the assessee from goods, services or facilities, etc. are not to be judged from the view point of revenue officers, but from the view point of a businessman and the payments made for commercial considerations being real and genuine and incurred wholly and exclusively for the purpose of business cannot be partly disallowed under section 40A(2)(b). The learned departmental Representative, on the other hand, relied on the orders of the authorities below.
After considering the rival submissions and perusing the relevant material on record, it is observed that the required details of the commission paid by the assessee to its sister concern M/s Balaji Steel Industries could not be produced before the assessing officer. In a letter dated 9-9-1998, filed before the assessing officer during the course of assessment proceedings, it was merely stated by the assessee that the said commission has been paid for the procurement of orders and collection of payments from parties. However, the transaction-wise details of the said commission sought by the assessing officer could not be furnished by the assessee. Moreover, it was also noticed by the assessing officer that the partners of the assessee-firm only were in control of the affairs of M/s Balaji Steel Industries and since their experience, relations and goodwill were available to the assessee-firm, there was no necessity of availing the services of M/s Balaji Steel Industries. It is thus clear that the very necessity of incurring the said expenditure on commission as well as business expediency of the same was not proved and considering that the said expenditure was hit by the provisions of section 36 as well as section 40A(2)(b), the assessing officer disallowed the entire expenditure claimed by the assessee on this count. In our opinion, the specific findings given by the assessing officer in his order are sufficient to show that the impugned expenditure was not wholly and exclusively incurred by the assessee for the purpose of its business and this being so, the disallowance made by him in the facts of the present case was fully justified. The decisions of Hon'ble Karnataka High Court reported in (1997) 223 ITR 256 (Kar) (supra) and that of Delhi Bench of Tribunal reported in (2000) 112 Taxman 109 (Del)(Mag) (supra), according to us, are distinguishable on facts and the same have no application to the facts of the present case. As such, considering all the facts and circumstances of the case, we hold that there was no infirmity in the impugned order of the learned Commissioner (Appeals) confirming the disallowance of commission expenditure made by the assessing officer.
The same is, therefore, upheld on this issue.
In the result, the appeal of the revenue is dismissed whereas the cross-objection of the assessee is allowed in part.