Income Tax Appellate Tribunal - Pune
Hotel Kiran vs Assistant Commissioner Of Income Tax on 20 February, 1998
Equivalent citations: [2002]82ITD453(PUNE)
ORDER
K.C. Singhal, J.M.
1. This appeal is directed against the order of block assessment under Section 158BC of the IT Act, 1961, passed by the Asstt. CIT (Inv.) Cir. 1(4), Kolhapur. The block period consists of asst. yrs. 1986-87 to 1995-96 and a period from 1st April, 1995, to 11th Sept., 1995, relevant to asst. yr. 1996-97.
2. The assessee is a partnership firm comprising of two partners viz., Shrinivas J. Bhat and Smt. Anjali Shanbhag. It is carrying on the business of hotel viz., Hotel Kiran at Miraj. The business premises of the assessee as well as residential premises of the partners were searched under Section 132 on 12th Sept., 1995, in the course of which, cash of Rs. 35,658 was found. In addition to it, certain incriminating books of accounts, loose papers were also found and seized by the Department. The statement of partners and staff of the assessee-firm were recorded. After considering the seized record and statement of the assessee as well as the staff members and the explanation offered by the assessee, the AO made various additions and determined the undisclosed income for the block period aggregating to Rs. 63,77,258. Aggrieved by the same, present appeal has been preferred by the assessee.
3. Firstly, we shall deal with the addition of Rs. 4.5 lakhs on account of on money alleged to have been paid by Shri S.J. Bhat on purchase of flat and plot for his daughter Anjali Shanbhag in 1991. At the time of search, Shri S.J. Bhat was present at the residence of her daughter Smt. Anjali Shanbhag. The statement of Smt. Anjali Shanbhag was recorded under s, 132(4). As per question No. 8, she was asked to explain how and when did she purchase the flat No. 4 in Chinar Apartment, Karve Road, Pune, In reply, it was stated by her as under:
"I have purchased this flat from M/s Sathe and Godse in 1991 for Rs. 7,70,000. I do not know from which bank the loans of Rs. 4,50,000 and Rs, 2,00,000 have been taken. I do not know about the money given other than that, My father can tell about it. Also my father has booked a plot of 10,000 sq. ft. area in 1991-92 near Sortur Hospital, Sangali Road, Miraj on the name of myself and my mother, Mrs. Shrivas Bhat, I do not know how much money has been given for this and from where. My father can tell about it."
Thereafter, the statement of Shri S.J. Bhat, father of Smt. Anjali Shanbhag, was recorded under Section 132(4) on the same date. He was asked the question regarding the purchase of the aforesaid flat and plot. Question Nos. 3, 4 and 8 and answer to them was given as under:
Q. 3 : In whose name does this flat No. 4, 'Chirar' 41/5 Erandawana, Pune-4? Who purchased this flat?
Ans : This flat stands in the name of my daughter, Smt. Anjali Jayram Shanbhag, I totally looked after the purchase of this flat, I purchased this flat from M/s Sathe Godse in 1991-92. The cost of this flat is Rs. 11,70,000. I paid Rs. 4,00,000, out of this in cash before the agreement. I paid the balance amount from time to time. I have thus paid the total amount of Rs. 11,70,000 of this flat uptil now. The sale deed of this flat has still not been executed. Out of this total amount, my daughter Smt. Anjali Jayaram Shanbhag had paid Rs. 4,20,000 for this place by raising loan on the policy in her husband's and her name from LIC, Pune. Rs. 4,20,000 were taken from Sangli Urban Co-operative Bank, Miraj against the security of the place at Miraj and deposited for this flat and the remaining amount of Rs. 1,50,000 was deposited from the capital account of my daughter (Smt. Anjali Jayram Shanbhag) in the firm Kiran Hotel, Cash of Rs. 4,00,000 was taken from the business of Kiran Hotel and Kiran Lodge. I have not indicated this amount in the income-tax return. 1 am prepared to pay the income-tax on this amount.
Q. No. 4 : Where else have you taken additional property in the name of your daughter Smt. Anjali Jayaram Shanbhog?
Ans : I had purchased a plot admeasuring 9000 sq. ft. in the name of my daughter in 1990-91. Half the above thereof was Rs, 1,50,000 and I transferred half share standing in the name of my wife, in the name of my daughter. Half the share was taken in the name of my daughter by giving Rs, 1,00,000, I had paid the balance Rs. 50,000 in cash in this transaction. I had taken this amount from my daughter's capital account in Kiran Lodge and Kiran Hotel. I have not paid income-tax on these Rs. 50,000; so I am prepared to pay income-tax on these Rs, 50,000. I shall thus be paying income-tax on this additional income of Rs. 4,50,000 of Kiran Hotel and Kiran Lodge. There is one Maruti car MGH 1201 in the name of my daughter. I have given this car to my daughter. It has been given to the daughter for household work and dropping the grandchildren in the school. This car is shown in the balance sheet of Kiran Lodge.
Q. No. 8 : As stated above, now the 'on money' of Rs. 4,50,000 spent for the flat at Pune (Flat No. 4, 'China:', Tarte Colony, Karve Road, Pune-4) standing in the name of your daughter and the plot at Miraj standing in the name of daughter, Smt. Anjali Jayaram Shanbhag--got accumulated in the money of your firm?
Ans : This amount of Rs. 4,50,000 got accumulated due to having indicated less(er) amount of profits of the firm in the income-tax return filed every year. On 14th Sept., 1995 the statement of Shri P.J. Shanbhog--husband of Smt. Anjali Shanbhog was also recorded. Question No. 4 and answer to it are as under ;
Q. No. 4 : What are your movable and immovable assets? Please give the details.
(i) Immoveable asset--As a co-owner (second name holder) in flat No. 4, I have got invested this flat and belongs entirely to my wife. My name rs recorded as co-owner for facilitating to take her housing loan from LIC. Otherwise, than, this I have no interest in this house.
(ii) Moveable asset--. ...............
Subsequently, Shri S.J. Bhat vide his affidavit dt. 16th Sept., 1995 retracted from his statement given under Section 132(4) by alleging :
(1) that the statements were already prepared one as per their own will and he was forced to sign the statements by putting mental pressure by way of threats and fear;
(2) that the contents of these statements were not disclosed to the witnesses who were also hired one;
(3) that he was already under disturbed state of mind due to series of calamities of immeasurable magnitude for the last 15 years;
(4) that his son was suffering from mental and physical handicaps for last many years such as permanent headache;
(5) that his wife was suffering from physical illness for so many years, such as diabetes, B.P., heart disease, acidity, etc.;
(6) the daughter Smt. Anjali was also suffering from low B.P. In view of the above reasoning, it was stated by him in the affidavit that he was not connected with any transactions of the property purchased by his daughter and it was their own family matters. The statement given at the time of search was not binding on him or any other family members.
4. The AO considered various statements mentioned above along with seized material. He was of the view that the assessee had paid 'on money' on the purchase of flat and plot for his daughter. Accordingly, he made an addition of Rs. 4.50 lakhs.
5. The learned counsel for the assessee Mr Pathak submitted before us that there is no evidence on record to show that 'on money' was given by the assessee in respect of plot and the flat purchased by his daughter Anjali Shambhag. According to him, the addition has been made solely on the basis of statement recorded under Section 132(4) which stands retracted by an affidavit dt. 16th Sept., 1995. According to the terms of the affidavit, the statement of Shri S.J. Bhat was recorded under coercion by putting mental pressure, threats, etc. It was only out of fear that such statement was given by Mr. Bhat. Besides this, he was also having disturbed state of mind due to physical and mental illness for the reasons given in the affidavit. It was his submission that no evidentiary value can be given to such a statement which was been retracted successfully. In this connection, he referred to the decision of the Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala and Anr. (1973) 91 ITR 18 (SC) for the proposition that retraction from admission is permissible in law. He referred to the decision of the Supreme Court in the case of P.K. Singh v. State of Manipur AIR 1956 SC 9 for the proposition that confession should be corroborated if it is retracted and such corroboration must be on the basis of independent evidence. He referred to the Delhi High Court decision in the case of S. Arjun Singh v. CWT (1989) 175 ITR 91 (Del) to contend that admission is an important piece of evidence but not conclusive. He then referred to the Orissa High Court in the case of CIT v. Biju Patnaik (1991) 190 ITR 396 (On) to submit that the statement under Section 131 cannot be used by the assessee (sic) without giving an opportunity of rebuttal. The decision of the Bombay High Court in the case of Gordhandas Hargovandas and Anr. v. CIT (1980) 126 ITR 560 (Bom) was referred to in support of the contention that the Tribunal must follow certain criteria mention in the judgment while weighing the evidence. In addition to the above, he also referred to various Tribunal decisions reported as Pushpavihar v. Asstt. CIT (1994) 48 TTJ (Bom) 389, Asstt. CIT v. Mrs. Sushiladevi S. Agarwal (1994) 49 TTJ (Ahd) 663 : (1994) 50 ITD 524 (Ahd), Jagdish Chand Gupta v. Asstt. CIT (1996) 56 TTJ (Chd) 337, Deepchand & Co. v. Asstt. CIT (1995) 51 TTJ (Bom) 421, (1994) 48 TTJ (Bom) 389 (supra) and Gaun Shanker Omkarmal v. ITO (1990) 37 TTJ (Ahd) 353. It was also contended by him that principle of retraction is embedded in Section 139 as revised return can be filed to cancel the mistake in the return filed under Section 139(1). In view of the above, it was submitted by him that the assessee has rightly retracted from his statement given under Section 132(4). He drew our attention to the statement of Mr. Bhat appearing at p. 347 of the paper book which states that Rs. 50,000 was paid by cash while purchasing the plot for his daughter but in fact, the said amount was paid by cheque. He also stated that it has nowhere been stated that the sum of Rs. 50,000 was paid over and above the sale consideration as per the evidence. In fact, it had been stated by him that the value of the plot (half portion) was Rs. 1,50,000 out of which Rs. 1 lakh was paid by cheque and balance Rs. 50,000 by cash. When it was found by him that this statement is factually incorrect and the payment was made by cheque, he retracted the statement. It was further stated by him that the plot was transferred by the mother to his daughter and there is no question of paying 'on money' due to close relations. In respect of flat it was stated by him that there is no evidence to suggest payment of 'on money' by S.J. Bhat. Consequently, it was prayed by him that addition on this account be deleted. 6. In reply, the learned Departmental Representative Mr. Sanjay Prasad has vehemently opposed the contention of Mr. Pathak by making various submissions. Firstly, it is submitted by him that there is no evidence on record that statement under Section 132(4) was obtained under coercion or threat of any kind. The statement was recorded in the presence of Panchas (witnesses). The assessee is incorrect in deposing that witnesses were hired one as there is no material on record to suggest the same. He drew our attention to p. 365 of paper book No. 1 to show that witnesses were the neighbours of Anjali Shanbhag, daughter of Mr. S.J. Bhat who made a statement under Section 132(4). According to him, these witnesses could not be hostile to the assessee n'or there is any allegation to this effect. He further submitted that specific details given by Mr. Bhat in his statement were so specific that it could not be said that he was of unsound mind. Proceeding further, he submitted that authorised officers could not have known all the details of the transactions in advance and therefore, the contents of the affidavit to the effect that the statement was prepared according to the will of the authorised officers cannot be said to be correct. According to him, the assessee on his own had stated that the sum of Rs. 4 lakhs was paid before the agreement and the balance of Rs. 7.7 lakh were paid later on from time to time. In view of these facts he concluded by pleading that the statement of Mr. Bhat was made voluntarily and thus was binding on him.
6.1. The second submission of Mr. Prasad is that once it is shown that the statement was voluntary then, the assessee cannot be allowed to retract. He relied on the recent judgment of the Supreme Court in the case of Surjeet Singh Chhabra v. Union of India Ors. AIR 1997 SC 2560. Further there is no material on record to suggest the mistaken belief either of facts or law for making the retraction. He also referred to the decision of the Supreme Court in the case of Banarasi Das v. Kanshi Ram and Ors. AIR 1963 SC 1165 and the Tribunal decisions in the cases Param Anand Builders (P) Ltd. v. ITO (1996) 56 TTJ (Bom) 21 : (1996) 59 ITD 29 (Bom) and (1997) 61 ITD 35 (sic). He also referred to the provisions of Sections 24, 25, 31 and 115 of the Evidence Act.
6.2. The third submission was that the statement under Section 132(4) has greater evidentiary value than statement given under other provisions of the statute. The legislature has specifically provided in its wisdom that such statement may be used in evidence while such requirement has not been specified in other Sections like 131 and 133A. He was at great pains to submit that if such a statement is allowed to be retracted, then it would be a mockery of law. He then distinguished the case law referred to by Mr. Pathak.
6.3. On merits, it was submitted by him that Mr. Bhat has specifically stated that the sum of Rs. 4 lakhs was given before agreement. In answer to question No. 8 it has been admitted by him that this sura had been given out of suppressed profit of the firm. At the time of statement made at Pune, he could not have anticipated the duplicate set of books of Hotel at Miraj would have been found and seized. Despite this ignorance, he admitted that the payment was made out of undisclosed profits of the firm. What else is required for making the addition. Accordingly, he concluded by submitting at the addition made by the AO was justified.
7. Rival submissions of the parties as well as material placed before us and the case law referred to by the parties have been considered carefully. The crucial question is whether the addition can be made on the basis of statement recorded under Section 132(4) which is alleged to have been retracted by the assessee. It is settled law that admission by a person is a good piece of evidence though not conclusive and the same can be used against a person who makes it. The reason behind this is a person making statement stops the opposite party from making further investigation. This principle is also embedded in the provisions of the Evidence Act. But the statement recorded under Section 132(4) is on a different footing. The legislature in its wisdom has provided that such a statement may be used in evidence in any proceedings under the IT Act, 1961. Therefore, in our opinion, great evidentiary value has been attached to such statement.
8. However, there are exceptions to such admission where the assessee can retract from such admission. The first exception exists where such statement is made involuntarily i.e. obtained under coercion, threat, duress, undue influence etc. But the burden lies on the person making such allegations to prove that statement was obtained by the aforesaid means. The second exception is where the statement has been given under some mistaken belief either "of fact or law. It is well settled that there cannot be estoppel against the law. If a person is not liable to tax in respect of any receipt, he cannot be made liable to pay tax merely because he has agreed to pay the tax in the statement under Section 132. He can always retract in such situation. For example, the assessee might have sold his agricultural land and not declared its sale proceeds in his income-tax return. If such agricultural land does not fall within the ambit of the words "capital asset" then no tax is payable. If the assessee had offered to pay tax on the profits on such sale under Section 132(4), in our opinion, he can always retract from such statement. Similarly, if the assessee can show that the statement has been made on mistaken belief on facts, he can retract from the statement if he can show that facts on the basis of admission so made were incorrect. This is what has been held by the Hon'ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. (supra).
9. In view of the above discussions, we are of the view that admission made in statement under Section 132(4) has great evidentiary value and is binding on a person who makes it. Therefore, the addition can be made on the basis of such admission by using the same in evidence. The legislature was well aware that under the general law mere admission may not be conclusive one. The IT Act is a specific Act and assessment has to be made on the basis of material gathered by the AO. For this purpose, vast powers have been conferred on the IT authorities for making investigation including the powers of search. If in the course of such search, the assessee makes some admission, he debars the authorised officer from making further investigation. In view of this, legislature in its wisdom has provided that such statement can be used in evidence and the assessment can be made on the basis of such statement. The sanctity of such provision would be lost if the assessee is allowed to contend that no addition can be made on the basis of such admission. However, such admission can be retracted by the assessee only if the circumstances as mentioned in the earlier paragraphs are established by the assessee to exist.
10. In the present case, there is no evidence before us which may even indicate that statement under Section 132 was obtained under coercion, threat, duress or undue influence. The contents of the affidavit to the effect that Mr. Bhat and his family members were physically and mentally ill, are not substantiated by any material or evidence on the record. The mere statement that Mr. Bhat was facing series of calamities of immeasurable magnitude and thus his family members were also suffering from permanent headache, diabetes, B.P., heart disease, acidity, etc. is not sufficient to hold that he was so mentally disturbed that he could not make any sensible statement. In our opinion, no case has been made to prove that he was having a disturbed state of mind. If a particular act is performed in discharge of official duties, the presumption is that act was performed bona fide. The search operations were conducted in the presence of witnesses. The allegations of Mr. Bhat that witnesses were hired one is also not supported by any material or evidence. The witnesses were in fact, the neighbours of Smt. Anjali Shanbhag, daughter of Mr. Bhat. This fact is apparent from the Panchnama. There is no allegation that those witnesses were hostile either to Mrs. Anjali Shanbhag or Mr. Bhat. The other allegation that statement was written by the authorised officers, according to their own will, also cannot be accepted for the reason that the details regarding purchase of property are so specific, which could not have been known by the authorised officers. Even the authorised Officers did not ask any specific question regarding payment of 'on money'. The question asked for was "In what name does this flat No. 4, Chinar Apartment, 41/5 Erandawana, Pune?" "Who purchased this Flat?" In response to these questions, he had replied that he purchased this flat for his daughter for. Rs. 11.7 lakhs out of which Rs. 4 lakhs were paid in cash before the agreement. The balance sum of Rs. 7.7 lakhs was paid from time to time. He had given other details, that is, the year of purchase, name of the vendors, source of amount paid. The source of Rs. 4 lakhs has been stated to be out of business profits of Hotel Kiran, which had not been shown in the return of income. In view of such specific details, we are of the view that he was having sound state of mind and the statement was made voluntarily. The contention of the assessee that statement under Section 132(4) was obtained under coercion or threat, is therefore, rejected.
11. However, on the basis of the material produced before us we are of the view the assessee has been able to show that statement regarding payment of Rs. 50,000 in cash against purchase consideration of the plot at Miraj was under mistaken belief of facts. The agreement shows that entire payment of Rs. 1.5 lakhs was paid by cheques and drafts. Mr. Bhat also never said that said sum of Rs. 50,000 was paid over and above the consideration mentioned in the agreement. It was also specifically stated by him that plot was purchased for a total consideration of Rs. 1.5 lakhs. Moreover, the transfer of plot was by mother to the daughter and therefore, there was no possibility of passing any 'on money'. In view of these facts, we hold that statement of Mr. Bhat that Rs. 50,000 was paid in cash was under mistaken belief of facts. In fact, the entire consideration was paid either by cheque or by drafts. Therefore, in our opinion, he could legally retract this part of the statement.
12. But regarding the payment of Rs. 4 lakhs, there is nothing on record to suggest that there was any mistaken belief of facts or law. There was categorical statement that flat was purchased by him for his daughter for Rs. 11.7 lakhs while the agreement was only for Rs. 7.7 lakhs and Rs. 4 lakhs was paid before the agreement out of the suppressed profits of the firm. Therefore, we do not accept the retraction of Mr. Bhat as far as the payment of Rs. 4 lakhs is concerned.
13. We have already expressed our view that the addition can be made on the basis of admission under Section 132(4) unless specifically retracted. Mr. Bhat has not only admitted the payment of Rs. 4 lakhs before the agreement but also agreed that the same was paid out of suppressed profits of the firm. In our opinion, there is a direct nexus between the payment of 'on money' and suppressed profits of the firm M/s Hotel Kiran.
14. The view which we have taken is supported by the decision of the Hon'ble Supreme Court in the case of Surjeet Singh Chhabra v. Union of India and Ors. (supra). In that case, it was contended that the petitioner had retracted from his confession within six days and, therefore, he was entitled to cross-examine the Panch witnesses before the authorities take a decision on the proof of the offence. The Hon'ble Supreme Court held "we find no force in this contention. The custom officers are not police officers. The confession though retracted, is an admission and binds the petitioner. So there is no need to call Panch witnesses for examination and cross-examination by the petitioner". On the other hand, the decisions relied upon by Mr. Pathak are distinguishable on the facts. In the decision of the Supreme Court in the case of P.K. Smgh v. State of Manipur (supra), it was held that confessions even if inculpatory it should be corroborated if it is retracted. In that case, the retraction of the statement was not the subject-matter of litigation but in the present case, the retraction itself has been disputed by the Revenue. The Tribunal decisions relied upon by him are also distinguishable on facts. In the case of Pushpa Vihar v. Asstt. CIT (supra) there was a confession that the assessee has suppressed sales and on that account, he had declared undisclosed income of Rs. 9,25,000. Subsequently, the statement was retracted on the ground that there was a factual mistake on. fact, inasmuch as, the statement was made with reference to sales only. The Tribunal had accepted the contention of the assessee that the assessee might have misunderstood the contents of the statement. The Tribunal also took into consideration that statement was given by a person who was a non-matric and juniormost partner in the firm. But in the present case before us, we have not found any material to suggest that statement was given under coercion or threat as alleged by the assessee. In the case of Jagdish Chand Gupta v. Asstt. CTT (supra) a statement was recorded at a time when son of the assessee being got married and the assessee simply penned his signature on the statement recorded by the officers of the search party with a view to complete the formalities. But in the present case, it is not so. The contents of statement clearly show that the statement was given by the assessee with open mind. We need not repeat the other decisions of the Tribunal because, in our opinion, all these decisions are distinguishable on facts.
15. In view of the above discussions, we hold that the statement under, Section 132(4) was voluntarily made and there was no coercion or threat whatsoever. The contents of the statement are clear and unambiguous and the same are binding on the assessee. The assessee has been able to show that a part of statement regarding payment of Rs. 50,000 was given under mistaken belief of fact while there was no such belief with reference to other part of the statement regarding payment of Rs. 4 lakhs. Consequently we confirm the addition of Rs. 4 lakhs. However, since the source of payment of Rs. 4 lakhs is the suppressed profits of the assessee-firm, the assessee is entitled to set off against the suppressed business profits of the firm relating to the years ending 31st March, 1991, to the extent the addition is ultimately sustained. The AO is, therefore, directed to set off the aforesaid addition against the suppressed business profits of the firm relating to asst. yrs. 1986-87 to 1991-92 to the extent it is finally sustained. Though this plea was not raised before us, we are allowing the set off because in law, the person cannot be taxed twice over the same income. One cannot be taxed merely because of his ignorance in the pleadings. This ground is therefore, partly allowed.
16. The next issue relates to the addition on account profits out of suppressed sale. The addition made by the AO is in two parts. The first part of the addition relates to asst. yrs. 1994-95 to 1996-97 amounting to Rs. 11,28,131 while the second part relates to the addition of Rs. 32,19,082 pertaining to asst. yrs. 1986-87 to 1993-94. The total addition thus comes to Rs. 43,47,213.
16.1. In the course of search, duplicate set of account books were found relating to the period from 1st April, 1993, to the date of search i.e. 12th Sept., 1995. Rough cash books was maintained by the manager of the hotel Mr. Sitaram Bhat. This book contains entries of actual sales of the day. It also contains the entries of the expenditure incurred by him out of sale proceeds. The fair cash books was written by the accountant Mr. Rajaram Kulkarni. This book contains entries of suppressed sales. It also contains entries of suppressed expenditure incurred by the manager. The entries of suppressed expenditure were made to cover the suppressed sales. The statement under Section 132(4) of Shri Sitaram Bhat was recorded. The relevant extract of his statement is being reproduced for the benefit of our order.
"Q. No. 3 : Give more information about the nature of your work.
Ans : I work as manager in Hotel Kiran. This includes managing the cash counter from the time the hotel opens till the time it closes. After the hotel closes, I enter the sale amount in the rough cash book and hand it over to the owner of the hotel Shri Shrinivas Janardan Bhat. Similarly, I purchase raw material for the hotel. Besides Hotel Kiran, I accept the cash collected from the receptionist of M/s Kiran Lodge and give to Shri Srinivas Bhat.
Q. No. 9 : Who is entrusted with making entries in the rough and fair cash books of M/s Hotel Kiran?
Ans : Everyday, I count the amount in the cash-box and enter the corresponding sale amount in the rough cash book in my own handwriting. I have been maintaining the cash books in this manner, i.e., since I have been employed. Shri Rajaram S. Kulkarni maintains the fair cash books.
Q. No. 10 : On what basis does Deewanji Shri Rajararn S. Kulkarni write the fair cash books?
Ans : I hand over my rough cash books to Deewanji for making entries. I don't know, or on what basis Deewanji writes the fair cash books.
Q. No. 14 : Where is the fair cash book and pass book before the financial year 1993-94? , Ans : The 5-6 year old books have been destroyed. I do not know what was done with the remaining books or where they are."
The statement of Shri Shrinivas Bhat, senior partner of the firm was also recorded under Section 132(4) on 13th Sept., 1995. The relevant portion of the statement is extracted as under :
"Q. No. 4 : Have you preserved the account books of your hotel business. If yes, which are they and where are they kept?
Ans : I have kept account books, rough cash books, fair cash books and pass books for business purpose. The mentioned account books have been kept in a room in the hotel since the financial year 1993-94.
Q. No. 5 : Where are the account books like rough cash books, fair cash books, pass books, etc. before the financial year 1993-94?
Ans : As the old books before the financial year 1993-94 had started getting spoilt and similarly our lawyer told us that the sales-tax and income-tax assessment had been completed and the books won't be required. Therefore, some account books have been destroyed. The account books before the year 1993-94 got destroyed in that.
Q. No. 7 : Who writes the rough and fair cash books?
Ans : Our hotel manager Shri Sitaram Shrinivas Bhat writes the rough cash book and our accountant Shri Rajaram S. Kulkarni writes the fair cash books. As per my instructions, Shri Kulkarni indicates the sale amount less by 5-10 per cent than the actual. I have the above instructions about 2 years ago due to profit pressures."
Statement of Shri R.S. Kulkarni was recorded under Section 131 on 27th Sept., 1995. The relevant questions and answers are being reproduced :
Q. No. 2 : How long and since when you are doing the job of writing the books of accounts for Shrinivas Bhat?
Ans : I have been writing the books of accounts since 1974, starting of the hotel.
Q. No. 3 What books of accounts do you maintain/write?
Ans : I write fair books of accounts, cash book, ledger, etc. Q. No. 4 : On what basis do you write/make entries in fair cash book?
Ans : Shri Sitaram Bhat maintains the rough cash book. He gives me the rough cash book and bills of purchase which I use as the basis for writing the fair cash book.
Q. No. 5 : I will now show you the rough cash books 1993-94, 1994-95 and 1995-96. There is a discrepancy in the sale amounts indicated in the rough and fair cash books. How these discrepancies are observed when you say that you write the fair cash book based on the rough one?
Ans : Since 1993, Shrinivas Bhat has instructed me to indicate the sale amount in the fair cash book two or three thousand less than in the rough cash book or as per the situation. Accordingly, I have indicated the sale amount by reducing it, in the fair cash book. Shri Bhat had given instructions to reduce the daily sale amount by Rs. 2,000 to Rs. 3,000.
Q. No. 6 : Are all the bills of expenditure entered in the rough cash book also entered in the fair book?
Ans : As per instructions from the owner, Shri Shrinivas Bhat, bills for vegetables, milk are shown reducing these by half, vegetables are purchased every two-three days and the expenditure for that is noted in the rough cash book. However, expenditure of Rs. 50-60 for vegetables is indicated in the fair cash book, every day.
Q. No. 7 : How long and since when Sitaram Bhat has been giving you the rough cash book?
Ans : Sitaram Bhat has been giving me the rough cash book since 1993.
Q. No. 8 : On what basis were you maintaining the fair cash book prior to 1993-94?
Ans : Prior to 1993-94 Sitaram Bhat used to give me a slip of paper writing thereon the sale amount every day and I used to enter that very amount in the fair cash book. Similarly, I used to enter the expenses in the fair cash book as per the bills.
Q. No. 9 : You have stated that you don't enter all the amount corresponding to the bills for various purchases. How much purchase amount were you entering in the fair cash book every day?
Ans : I used to enter the bills to cover the sale amount which I was instructed to enter. Furthermore, there were instructions that a cash balance must be left over. Taking all these factors all the purchase amount was not indicated/entered in the fair cash book. For example expenses for purchase of vegetables have been shown every two days, however, expenditure of Rs. 50 to 60 has been shown every day, in the fair cash book. As per instructions of Shrinivas Bhat, only half the expenditure on milk is indicated/entered in the fair cash book.
Q. No. 10 : Where are the slips of papers given to you during 1974 to 1992?
Ans : I have torn off the slips of paper (indicating the sale amount) upto 1974-75. 1992-93 after entering the details in the fair cash book.
Q. No. 11 : Since when Shrinivas Bhat has given you instructions to show only half the expenditure on milk and vegetables.
Ans : These instructions were given since 1974, i.e. starting the hotel.
Statement of Shri Sitaram Bhat was also recorded under Section 131 on 27th Sept., 1995. The relevant question is Question No. 11 which is reproduced hereunder:
Q. No. 11 : In which book were you entering the daily sale amount before 1993-94?
Ans : I used to note the daily sale on a piece of paper and hand it over to Mr. Kulkarni. Also I used to note down the expenditure on that piece of paper. I used to hand over the bills to Mr. Kulkarni."
On the basis of seized papers and the statement recorded under ss. 132(4) and 131. the AO was of the view that the true profits have not been declared by the assessee in the regular returns. He, therefore, recasted the trading account by crediting all sales as per rough cash book. On the expenditure side, he took all the figures shown in the regular cash book plus expenditure which according to him. incurred by the assessee, entered into the rough cash book but not accounted for in the fair cash book. As a specimen the recasted account for the financial year 1993-94 is reproduced as under:
Rs.
Rs.
Opening stock 16,392 Sales 20,48,641 Purchases: tax-free taxable 6,64,315 Party/reception 36,430 Octroi/freight 1,05,612 Closing stock 15,245 Net expenses not debited to fair book 2,28,916 Gross profit 9,89,804 21,00,316 21,00.316 Since the gross profit as per fair cash book was Rs. 6,57,994, he determined the undisposed profit at Rs. 3,22,010 for asst. yr. 1994-95. In the same manner, he determined the undisclosed profit at Rs. 5,64,485 and Rs. 2,40,637 for asst. yrs. 1995-96 and 1996-97 respectively.
16.2. On the basis of various statements mentioned above, the AO was also of the view that assessee had suppressed sales in the earlier years also. Accordingly, he estimated the suppressed sales pertaining to asst. yrs. 1986-87 to 1993-94 equal to 30 per cent of the disclosed sums. Relevant yearwise details are given at p. 9 of the assessment order. The total addition on account of suppressed sales was made at Rs. 32,19,082.
17. The learned counsel for the assessee Mr. Pathak has vehementaly assailed these additions. The first submission of Mr. Pathak is that once the entire sales have been included in the recasted trading account, the AO should have allowed the deductions regarding expenditure incurred by the manager out of such sales. According to him, the principles of "heads I win tails you lose" is not permissible in law. In support of his submissions, he relied on the decision of the Tribunal Pune Bench in the case of Kantilal and Bros. (1995) 51 TTJ (Pune) 513 : (1995) 52 ITD 412 (Pune). He drew our attention to the recasted trading account prepared by the AO who had allowed a sum of Rs. 2,28,916, Rs. 2,63,130 and Rs. 1,41,079 as net expenditure not debited in fair cash book for asst. yrs. 1994-95 to 1996-97 respectively. But according to him, no working had been given by the AO for ascertaining these figures. So according to him, the principle of natural justice were violated. At this stage, the assessee's counsel was asked by the Bench about the correct figures of net expenditure not debited in the fair cash book. In response to the same, another paper book consisting of 90 pages has been filed. According to him, the actual net expenditure not accounted for in the fair cash book accounts to Rs. 6,71,612, Rs. 7,04,014 and Rs. 3,85,358 for asst. yrs. 1994-95 to 1996-97 respectively against the figures worked out by the AO. He has given detailed working at pp. 1 to 35 of the second paper book.
17.1. The expenditures shown in the rough cash book also include expenditure of Rs. 4,03,564 and under the head 'P.A. A/c' which according to the AO was of personal in nature. The details of such expenditure appear at p. 35 of the second paper book. Out of this, Mr. Pathak himself has admitted before us that Rs. 2,45,431 were on personal account. However, it was pleaded by him that balance amount of Rs. 1,58,133 related to expenditure on provision, but he was unable to give any evidence. He further submitted that the AO has himself made another addition of Rs. 3,40,000 out of aforesaid sum of Rs. 4,03,164 which according to him amounted to allowance of Rs. 63,564 as deduction by the AO himself on the purchase of provisions. He prayed that reasonable deduction may be allowed.
17.2. Regarding addition of Rs. 32,19,082 it was contended by him that there is no evidence on record to prove that the assessee suppressed the sales in the earlier years. In support of his contention, he relied on the decision of the Supreme Court in the case of State of Kerala v. C. Velukutty (1966) 60 ITR 239 (SC), decisions of Orissa High Court in the cases reported at 67 STC 101, 45 STC 366 and the decision of the Tribunal Bombay Bench in the case of Harish R. Kapadia (ITA No. 1835 and 1836/Bom/1995), to which one of us (Shri K.C. Singhal) was a party. He also took as through the statement of Sitaram Bhat and Mr. Kulkarni to show that rough cash book was maintained only for asst. yrs. 1994-95 to 1996-97 and there was no suppression of sales in earlier years. According to him, the entire addition is based on suspicion. Regarding the statement of Mr. Kulkarni, it was stated by him that Mr. Shrinivas Bhat was not well and he asked to sit outside the office when the statement of Mr. Kulkarni was being recorded. He drew our attention to the medical certificate appearing at p. 416 of the paper book. In such circumstances, how he could cross-examine when he did not know the contents. He had merely endorsed a statement of Mr. Kulkarni without knowing the contents of the same-According to him, this amounted to gross violation of natural justice and such statement could not be relied. In the course of hearing, the Bench had asked Mr. Pathak whether any specific request was made by the assessee for cross examination of Mr. Kulkarni, it was admitted by him that no such specific request was made. Proceeding further, it was submitted by him that such addition was never proposed by the AO in his notice dt. 13th May, 1996, appearing at pp. 217 and 218 of the paper book. Hence there is violation of principles of natural justice. In support of this contention, he referred to the Special Bench decision of the Tribunal in the case of Colonisers v. Asstt. CIT (1993) 45 TTJ (Hyd) (SB) 114 : (1992) 41 ITD 57 (Hyd) (SB) and the decision of Allahabad Bench of the Tribunal in the case of Raj Kumar Jain v. Asstt. CIT (1994) 208 ITR 22 (AT) and the decision of the Andhra Pradesh High Court in the case of CIT v. Tatavarthy Narayanamurthy (1972) 83 ITR 58 (AP). He then pointed out to the statement of Mr. Kulkarni. According to him, the answer to question No. 8 suggests that he had shown actual sales in his fair books and, therefore, no suppression of sales. He further stated that only inference that can be raised is that the assessee suppressed the purchases which amounts to showing higher profit. It was also pleaded by him that if any addition is to be made on account of unexplained purchases the same has to be allowed a legitimate expenditure of business. Hence, no addition is possible Reliance was placed on the decision of Patna Bench of the Tribunal in the case of Nishant Housing Development (P) Ltd. v. Asstt. CIT (1995) 52 ITD 103 (Pat). 17.3. He also referred to Circular No. 717 dt. 14th Aug., 1995, reported at (1994) 215 ITR (St) 70 to contend that case of earlier years could not be reopened unless there was any material to these years. It was also submitted by him that intention of the assessee was to suppress the sales only and not income because of levy of heavy sales-tax on the sales by restaurant and hotel. According to him, this was done to avoid the effect of notification of Maharashtra Government notified in the year 1994. Earlier to the notification, there was no incentive to evade the tax. In view of this, it was submitted by him that it was because of the State Government notification that the assessee started suppressing sales from 1993. Prior to that these was no suppression.
17.4. Alternatively, it was argued by him that the entire sale receipts could not have been assessed as undisclosed income. Income-tax is levy on income and, therefore, the AO should have determined the income arising out of sales and assessed the same as undisclosed income.
18. The learned Departmental Representative Mr. Sanjay Prasad submitted before us that whatever expenditure which were not accounted for in the fair books of accounts has been allowed by the AO. He has furnished the working made by the AO in respect of the amount allowed by him. The working is available at pp. 1 to 21 to the Departmental paper book. According to him, the AO has ascertained the day-to-day expenditure in respect of vegetables, bread and milk which were not debited to fair cash book. Therefore, the question of giving further claim does not arise. It was also submitted by him that recasted trading account was given to the assessee for tendering any explanation in this regard. Since no explanation was given by the assessee, it cannot be said that there was any violation of principles of natural justice. He therefore, supported the order of the AO.
18.1. Regarding the additions of Rs. 32,19,082 his submission was that statement of Mr. Sitaram Bhat, Mr. Kulkarni and Mr. Shrinivas Bhat are sufficient to indicate that rough cash book was being maintained in the similar manner in earlier years and, therefore, the AO was justified in estimating the suppressed sales pertaining to asst. yrs. 1986-87 to 1993-94. He took us through statements given by these persons. Mr. Shrinivas Bhat, partner of the firm had stated in answer to question No. 5 that rough cash books of the earlier years had been destroyed by him. Similarly, Mr. Sitaram Bhat, the accountant of the firm, in his answer to question No, 10 has stated that he had torn off the slips of papers for earlier years after entering the details in the fresh cash book. He also stated in answer to question No. 11 that he was processing the expenditure since 1974. He also drew our attention to answer to question No. 11 given by Mr. Sitaram Bhat wherein it has been said that prior to 1993-94, he used to note the daily sales on a piece of paper and hand it over to Mr. Kulkarni. He also used to note down the expenditure on that piece of paper.
18.2. He further submitted that evasion of sales-tax cannot be said to be the reason for evading the income-tax. It was also submitted by him that the notification by the Government of Maharashtra regarding levy of sales-tax was subsequent to the financial year 1993 when the assessee alleged to have started maintaining the rough cash book. Proceeding further, it was also stated by him that once the suppression of sales is proved on the record, the presumption can be made backward and forward. Reliance was placed on the decision of the Supreme Court in the case of Ambika Prasad Thakur and Ors. v. Ram Ekbal Rai 1966 AIR SC 605. He also referred to the decision of the Tribunal in the case of Overseas Chinese Cuisine (India) (P) Ltd. v. Asstt. CIT (1995) 55 TTJ (Bom) 304 and the decision of the Supreme Court in the case of CIT v. H.M. Esufali H.M. Abdulaji (1973) 90 ITR 271 (SC) and also the decision of the Supreme Court in the case of Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC) and also the decision of the Mysore High Court in the case of P. Venkanna v. CIT (1969) 72 ITR 328 (Mys).
18.3. It was also submitted by him that an opportunity was given to Mr. Shnnivas Bhat to cross-examine Mr. Kulkarni. Since he refused to cross-examine, the question of violation of principles of natural justice does not arise. Moreover, the same does not make the order void. In support of his contention, he relied on the following decisions :
(i) Guduthur Bros. v. ITO (1960) 40 ITR 298 (SC);
(ii) Kapurchand Shrimal v. CIT (1981) 131 ITR 451 (SC);
(iii) Addl. CIT v. Boina Suranna (1980) 124 ITR 328 (AP);
(iv) CIT v. Prem Syndicate (1983) 141 ITR 290 (MP);
(v) Thakur V. Hari Prasad v. CIT (1987) 167 ITR 603 (AP);
(vi) CIT v. National Taj Traders (1980) 121 ITR 535 (SC); and
(vii) Superintendent (Tech. I), Central Excise, I.D.D. Jabalpur and Ors. v. Pratap Rai (1978) 114 ITR 231 (SC), Thus, he distinguished the case law relied upon by the assessee's counsel. Finally, he justified the order of the AO.
19. Rival submissions of the parties, material produced before us and the case law referred to have been considered by us carefully. Firstly, we shall deal with the addition of Rs. 11,28,131. In our opinion, the contentions raised by Mr. Pathak are not without force. There is no dispute about the suppressed sales. There cannot also be any dispute to the legal proposition of Mr. Pathak that expenditures incurred out of suppressed sales have to be allowed since tax is to be levied on income and not receipts. The AO has also allowed such expenditure but the dispute is limited to the computation of the expenditure which is to be allowed. For example, the AO has allowed a sum of Rs. 2,28,916, Rs. 2,63,130 and Rs. 1,41,079 incurred by the assessee not accounted for in the fair cash book relating to asst. yrs. 1994-95 to 1996-97, respectively, while as per the assessee, the expenditure which should have been allowed amounts to Rs. 6,71,612, Rs. 7,04,014 and Rs. 3,85,358 for asst. yrs. 1994-95 to 1996-97 respectively. We have gone through the details filed by the assessee as well as the learned Departmental Representative. In our opinion, there is a fallacy in the working of the AO. He has worked the net expenditure not accounted for in the fair cash book with reference to mainly vegetables, bread and milk. Probably, it was done by him keeping in view the statement of Mr. Kulkarni to the effect that partner of the firm had instructed him to reduce the expenditure on milk and vegetables by 50 per cent. But in our view, once the entire sales as per rough cash book have been taken in the recasted trading account, the AO was dutybound to allow the entire expenditure incurred out of such sale proceeds. This, could be done only by ascertaining the entire expenditure not accounted for in the fair cash book relating to all the items provided these were of revenue nature.
20. The total expenditure for the period from 1st April, 1993 to 12th Sept., 1995, which is not accounted for in the fair cash book as per assessee's details is Rs. 17,60,984 which includes a sum of Rs. 4,03,564 incurred under the head 'P.A. a/c'. The bifurcation of the P.A. a/c yearwise amounts to Rs. 1,67,384, Rs. 1,58,870 and Rs. 77,310 for asst. yrs. 1994-95 to 1996-97 respectively as is apparent from the details given at p. 35 of the second paper book. The perusal of such details shows that a sum of Rs. 2,45,431 relates to household expenses and other expenses of partners which undoubtedly cannot be allowed being personal or capital in nature. Even Mr. Pathak has also agreed to such disallowance. However, he has stressed that balance sum of Rs. 1,58,133 be allowed as expenditure on provisions. Since no material has been produced before us to substantiate this submission, the same cannot be allowed. We therefore, confirm the disallowance of Rs. 4,03,564 out of Rs. 17,60,984.
21. As far as balance amount of Rs. 13,57,220 is concerned, we agree in principle with Mr. Pathak that if such expenditure is of revenue nature, it has to be allowed. The assessee has furnished before us the day-to-day details of the expenditure which appears to be of revenue nature. But this requires verification by the AO. We therefore, restore the matter to the file of the AO for verification of the nature of expenditure mentioned above. The details filed before us shall be furnished by the assessee before the AO who shall verify the same from the original record seized by the Department and then allow the claim which is verified to be of revenue nature and found to be not accounted for in the fair cash book.
22. Regarding the addition of Rs. 32,19,082 on account of suppressed sales pertaining to asst. yrs. 1986-87 to 1993-94, we are unable to accept the proposition of Mr. Pathak that no addition whatsoever can be made for earlier years. There cannot be any dispute to the proposition canvassed by him that no addition can be made for earlier years unless there is evidence to show the suppression of sales in those years. The addition cannot be made on mere suspicion. But if there is material or evidence to show the same, then certainly addition can be made. In our opinion, material or evidence need not be direct and it may be indirect or circumstantial evidence. In the present case, there is circumstantial evidence available in the form of statements of the assessee as well as its staff. The cumulative effect of the statements of Mr. Kuikarni, Sitaram Bhat and Shrinivas Bhat, in our opinion, clearly indicates that the assessee was suppressing the sales in earlier years also. There is no dispute that Mr. Sitaram Bhat and Mr. Kulkarni are employed with the assessee since beginning of the hotel business as is also apparent from their statements. Mr. Sitaram Bhat, manager of the firm has admitted by giving a categorical statement that he was managing the sales counter and had been writing rough cash book wherein the actual sales were incorporated. The entries of the expenditure made by him were also incorporated therein. Question No. 9 and answer thereto is very relevant wherein it has been admitted by him that he had been maintaining such cash book in the above manner since his employment.
23. The above statement is corroborated by the statement of accountant Mr. Kulkarni, which was recorded much after the date of search i.e. 27th Sept., 1995. It has been admitted by him that rough cash book was maintained by the management and on the basis of such rough cash book, he used to prepare the fair cash book by suppressing the figures of sales and expenditure recorded in the rough cash book (question Nos. 4, 5 and 6). A specific question being question No. 8 was asked about the basis of maintaining cash book prior to financial year 1993-94. It was stated by him that Mr. Sitaram Bhat used to give him slip of papers containing the sales of the day and he used to enter the very same amount in the fair cash book. The answer to question No. 9 suggests that he used to enter those purchase bills which were sufficient to cover the sales. He further stated in answer to question'No. 10 that slips of earlier years from 1974 to 1992 had been torn off. Then, a specific question No. 11 was asked "since when Mr. Sitaram Bhat has given you instructions to show only half the expenditure of milk and vegetables?". A clear statement was given by him that these instructions were being since 1974. Mr. Srinivas Bhat in his statement dt. 13th Sept., 1995, had stated that rough cash book was being maintained by the firm. Such rough cash books for the financial year 1993-94 onwards were kept in a room while for earlier years these were destroyed (answer to question Nos. 4 and 5). In his earlier statement dt. 12th Sept., 1995, he had stated that he paid 'on money' of Rs. 4,00,000 on the purchase of flat for his daughter in 1991 and the same was paid out of accumulated suppressed business profits of the firm.
24. A combined reading of these statements shows that the assessee was not recording sales and expenditure correctly even in earlier years. A fair cash book was being written by the accountant Mr. Kulkarni on the basis of material supplied by the manager Mr. Sitaram Bhat. It is immaterial whether such material was in the form of rough cash book or slips. Since these were destroyed, the same could not be found in the search. But the fact remains that the assessee was maintaining the rough cash book and was not recording the correct sales and expenditure in the earlier years. Mr. Shrinivas Bhat, a partner of the firm, has stated clearly that rough cash books for the earlier years were destroyed.
25. Mr. Pathak's reliance was on the answer to question Nos. 5 and 7 given by Mr. Kulkarni where he has stated that instructions to show lesser sales and expenditure was actually w.e.f. 1993. He also relied on the statement of Mr. Sitaram Bhat that there were slips of papers showing daily sales from 1993-94 and the statement of Mr. Kulkarni to the effect that he used to enter the very same amount in the fair cash book. In our opinion, while weighing the evidence, the entire evidence on record has to be considered as a whole and no conclusion can be drawn on the basis of a particular question and answer. We have already indicated that a partner of the firm himself has stated that rough cash book and other records of the earlier years were destroyed by him. His own statement under Section 132(4) that payment of Rs. 4 lakhs as 'on money' paid in 1991 out of accumulated undisclosed profit of business corroborated the fact that he was not showing the correct profits in the earlier years. Mr. Sitararn Bhat has also clearly stated in answer to question No. 9 that rough cash book was being maintained in the similar manner since he was employed with the firm. In view of these specific admissions, it is futile to contend that there was no evidence or material for suppression of sales and expenditure in the earlier years. In our opinion, the assessee cannot get advantage of his own wrongs.
26. The contention of Mr. Pathak that there was violation of principles of natural justice is also not well founded. We find from the statement of Mr. Kulkarni that AO had already allowed Mr. Shrinivas Bhat to cross-examine Mr. Kulkarni which he refused. There is no evidence on record to suggest that Mr. Bhat was asked to sit outside the office and he did not know the contents of the statement. Even assuming that he did not know the contents, there is no dispute that statement, of Mr. Kuikarni was supplied to the assessee and this fact was admitted before us. It was also admitted before us that the assessee never asked that AO to allow the cross-examination of Mr. Kulkarni. In these premises, it cannot be said that principles of natural justice were violated.
27. In view of the above discussions, we hold that rough cash book was being maintained by the assessee in the earlier years and it was not recording the sales and expenditure correctly. Consequently, the AO was justified in estimating the sales of earlier years. Keeping in view the figures of suppressed sales for asst. yrs. 1994-95 to 1996-97 we are of the view that estimate of 30 per cent of the returned sales adopted by the AO was fair and reasonable. In view of the above finding, it is not necessary for us to discuss the case law and the circular relied upon by the parties.
28. However, in our opinion, the approach of the AO treating the entire sales as undisclosed income is clearly erroneous, illegal and against the basic principles of Income-tax law. It has been found that the assessee was not only suppressing the sales but also not showing the correct expenditure. In view of these facts, the AO could only estimate and assess the profits arising out of the suppressed sales. We therefore, set aside the addition and restore the matter to the file of the AO for estimating the reasonable profits on estimated suppressed sales on the basis of material on record and then assess the same as undisclosed income.
29. The next issue relates to the addition of Rs. 3,40,000. On the scrutiny of the rough cash book, it was noticed by the AO that the assessee had withdrawn almost everyday Rs. 400, Rs. 600, Rs. 800, etc. under the head 'P.A. a/c'. He also noticed that Mr. Sitaram Bhat, manager of the firm, had stated in his statement under Section 131 that these amounts were given to domestic servants as per instructions of Mr. Shrinivas Bhat for household expenses. According to him, these amounts have not been accounted for in the firm's cash book. On the average of Rs. 500 per day, he estimated the total withdrawal at Rs. 1,80,000. As per income-tax record, the assessee has shown withdrawals around Rs. 45,000 per year. According to him, the withdrawals of Rs. 1,35,000 per annum remained unexplained. Accordingly, he made an addition of Rs. 1,35,000 each for asst. yrs. 1994-95. and 1995-96 and also estimated such addition at Rs. 70,000 for the period from 1st April, 1995, to 11th Sept., 1995, relevant for the asst. yr. 1996-97 and taxed as unexplained expenditure under s. 69C.
30. After hearing both the parties, we do hot find any justification for making such an addition. We have already held that the withdrawal of Rs. 4,03,564 by the assessee under the head 'P.A. a/c' recorded in the rough cash book could not be allowed as deduction against suppressed sales. Therefore, to that extent the addition has already been sustained. There cannot be double addition in respect of same source. Accordingly, we delete the addition of Rs. 3,40,000.
31. The next issue relates to addition of Rs. 9,17,826. In the course of search, a loose paper containing the following entries was found :
Rs.
9,17,826.57 minus 2,10,012.77 7,07,813.80 The assessee was asked to explain the above figures. It was stated by the assessee that these figures were noted by the accountant. Since the assessee could not produce the accounting, the AO made an addition of Rs. 9,17,826 as unexplained investment. It has been contended by the learned counsel for the assessee that such addition was never proposed by the AO and, therefore, question of not explaining the same did not arise. However, it has been explained before us that these two figures are the totals of P&L a/c prepared by the accountant which appears at p. 81 of the second paper book. A sum of Rs. 9,17,826.57 is the total of credit side of the P&L a/c. While a sum of Rs. 7,07,813 is the total debit side of the first page of the P&L a/c. This forms part of the regular statement of accounts furnished with the return. Faced with this situation, the learned Departmental Representative had nothing to say.
31.1. In our opinion, the addition of Rs. 9,17,826 is uncalled for since these two figures have been explained properly. Accordingly we delete the said addition.
32. The next issue relates to the addition of Rs. 50,400 being rent of Pan shop. On scrutiny of the rough cash book, the AO was of the view that the assessee had received the rent of Rs. 400 p.m. for the Pan shop. When asked to explain, it was submitted by the assessee that Pan shop belonged to Shri Sitaram Bhat, manager of the firm and income of the same is reflected in his return of income. The AO was not satisfied with the explanation of the assessee. Since according to him, the shop was being run in the business of the premises and in the absence of any evidence to show that Pan shop belonged to Sitaram Bhat, he made an addition of Rs. 4,800 for each assessment years i.e. 1986-87 to 1995-96 and Rs. 2,400 for the period from 1st April, 1995, to llth Sept., 1995. The total addition thus amounted to Rs. 50,400.
33. The learned counsel for the assessee Mr. Pathak has explained before us that Mr. Sitaram Bhat is the most faithful, sincere and seniormost employee of the firm and he was allowed to build a shop and no ground rent was charged from him. It was further submitted by him that Mr. Sitaram Bhat had built the shop by investing a sum of Rs. 8,000 in the asst. yr. 1981-82 and this fact has been disclosed by him in his personal income-tax return. It was further explained by him that the shop is run by Mr. Devadiga who is paying the rent to Mr. Sitaram Bhat. The licence of Pan shop is also in the name of Mr. Devadiga. The income by way of rent from Pan shop has also been shown by Mr. Sitaram Bhat in his return. The relevant evidence are also produced in the paper book appearing at pp. 407 to 411. It was further submitted by him that the AO has erroneously taken the figure of Rs. 400 p.m. as rent of the Pan shop while, in fact, the rent admitted by the manager of the firm was Rs. 200 p.m. only. Reference was made to question No. 8 appearing at p. 307 of the paper book. He also invited our attention to the letter of the assessee appearing at p. 420 wherein the assessee had been asked for a copy of records where the receipt of rent was stated to be Rs. 400. No such information was given. Lastly, it was stated by him that no such addition could be made under Section 158BC.
34. On the other hand, the learned Departmental Representative drew our attention to pp. 51 to 52 of the Departmental paper book, wherein such entries appear in the rough cash book. It is the submission of the learned Departmental Representative that Mr. Sitaram Bhat was receiving the rent on behalf of the assessee of the Pan shop belonging to the assessee. It was also submitted by him that the rough cash book also contained entries from rent from Indira Bhavan and the same has been accepted by the assessee. According to him, if the rent from Indira Bhavan was the income of the assessee, then there is no question of treating the rent of Pan shop as income of Mr. Sitaram Bhat Accordingly, he justified the action of the AO.
35. After hearing both the parties, we do not find any justification for making the addition of Rs. 50,400. First of all, the AO has not shown how he arrived at the figure of Rs. 400 p.m. We have gone through pp. 51 and 52 of the Departmental paper book. It merely indicates Pan shop rent receipt but there is no sum mentioned against this item. At p. 51 it is the sale proceeds of the day which is written against Pan shop rent and it is not disputed that it is only the sale proceeds. On the right hand side, the sum of Rs. 800 is the expenditure under the head 'P.A. a/c'. Similarly, on. p. 52 there is no figure on the left hand side against Pan shop. On the right hand side a sum of Rs. 400 is the expenditure debited under the P.A. a/c. Therefore, there is no justification for assuming that Rs. 400 was the shop rent. On the contrary, the statement of Mr. Sitaram Bhat clearly shows that he received the rent of the stop @ Rs. 200 p.m. In view of this, it cannot be accepted that the rent of shop was Rs. 400 p.m. Further, it appears from the statement of income of Shri Bhat for asst. yr. 1981-82 that he had shown the investment of Rs. 8,000 in the Pan shop and monthly rent of Rs. 125. It is also on the record that shop licence under the Bombay Shops and Establishment Act, 1948, is in the name of Shri Shrikant Basappa Devadiga. The statement of Mr. Srinivas Bhat, partner of the firm also shows that Pan shop belongs to Mr. Sitaram Bhat. The detail of entries in rough cash book also shows that manager was noting his personal entries which shows that rough cash book not only contained business entries but also personal entries of manager. Reference may be made to withdrawal of Rs. 500 on 23rd May, 1994, by Sitaram Bhat as per detail given by the assessee in the notes furnished by Mr. Pathak. In view of these facts, we accept the explanation given by the assessee and hold that income of the Pan shop belonged to the manager and not to the assessee. In the result, the addition of Rs. 50,400 is deleted.
36. The next issue relates to the addition of Rs. 97,354 on account of disallowance of interest on the alleged debit balances in the capital account of the partners. The assessee's counsel Mr. Pathak submitted before us that the addition has been made by the AO assuming incorrect facts. He drew our attention to the balances appearing in the name of partners in the various balance sheets for different assessment years. According to him, there are in fact credit balances in the capital account of the partners. He also submitted before us that probably the sides have been changed while preparing the balance sheet and that is why the AO had treated the credit balance as debit balances. In view of these facts, the learned Departmental Representative had nothing to say.
37. We have gone through the. relevant balance-sheets and find that there are credit balances in the capital account of the partners. However, we were unable to find out the figures of debit balance given by the AO in his assessment order. We, therefore, summoned the original record which was produced before us by the learned Departmental Representative. On examination of the original record, we did not find such figures as noted by the AO in the order. The learned Departmental Representative has also agreed that these figures are not available in the original record. The fact remains that there were credit balance in the capital account of the partners. In view of this fact, no addition could have been made by the AO. We, therefore, delete the addition of Rs. 97,354 made by the AO on this account.
38. The next issue relates to the addition of Rs. 40,970 on account, of unexplained cash at business premises. It has been submitted by the assessee's counsel that the IT Department has not raised any query on this issue either during the investigation or in the course of assessment proceedings or even in its notice under Section 142(3). According to him, had such opportunity been given, the assessee would have clarified the correct factual position. This has been admitted by the learned Departmental Representative, that no such opportunity was given to the assessee. In view of this, we set aside the order of the AO on this issue and restore the matter to his file for adjudicating the matter afresh after giving proper opportunity of being heard to the assessee.
39. The next addition relates to the addition of Rs. 71,000 on account of unexplained cash found at the residence. Brief facts on this issue are that in the course of search under Section 132 at the residential premises of the partner Shri Srinivas Bhat cash of Rs. 71,000 was found. In the course of search, he was unable to explain about the same. However, in the course of assessment proceedings, the assessee vide letter dt. 6th June, 1996, submitted that the members of the family, i.e. Shri Shrinivas Bhat, Smt. Sumati Bhat and Shri Surender Bhat had declared cash of Rs. 35,000, Rs. 25,000 and Rs. 10,000 in their wealth-tax returns for the asst. yr. 1995-96 and this would explain the availability of cash found at the time of search. This contention of the assessee was not accepted by the AO on the following grounds :
(i) in the wealth-tax return cash was shown on estimate basis,
(ii) how such cash was acquired by these three persons particularly when Shri Srinivas Bhat had no independent source of income except share of profit from the assessee-firm, and
(iii) it was not shown whether such cash was available on 12th Sept., 1995.
The assessee's counsel has reiterated his stand taken before the AO while the learned Departmental Representative has supported the order of the AO.
40. We have considered the rival submissions. No doubt the assessee was not able to explain at the time of search, but he has shown on record that the family member of the assessee partner were having cash of Rs. 70,000 on 31st March, 1995 in their wealth-tax return. But that cannot be the end of the matter. It must be shown on the record that the said sum of Rs. 70,000 was available on 12th Sept., 1995, and for this purpose, the assessee must show the availability of cash by furnishing the cash flow for the period 1st April, 1995, to 12th Sept., 1995. Similarly, the AO could ask the assessee to explain the source of cash available with the family members. But from the perusal of the record we do not find any material to show that such queries were put to the assessee for explanation. No addition can be made without asking such explanation. We, therefore, set aside the order of the AO on this issue and restore the matter to his file for deciding the matter afresh after giving proper opportunity of being heard to the assessee. The assessee would be at liberty to produce all the relevant material to prove acquisition of cash available with the family members and to prove that the cash declared in the wealth-tax return was available on 12th Sept., 1995.
41. The last issue relates to the addition of Rs. 63,000 on account of supervision charges paid to Smt. Anjali Shanbhag, partner of the firm. In the course of the assessment proceedings, the AO found that sum of Rs. 18,000 per annum was being paid as supervision charges to Smt. Anjali Shanbhag, partner of the firm, in accordance with the terms of the partnership deed. The AO was of the view that such deduction could be allowed in view of the fact that no services were rendered by that lady. On the basis of the statement given by her, the AO was of the view that that lady could not explain anything about the firm's affairs. Accordingly, he made addition of Rs. 18,000 in respect of each assessment year, i.e. 1993-94 to 1995-96 and Rs. 9,000 for asst. yr. 1996-97. The learned counsel for the assessee submitted before us that she used to visit the business premises of the assessee-firm at Miraj once in a month or two months and looked after the management of the hotel. Besides this, he raised a legal contention that no addition could be made on this account in view of Expln. (b) to Section 158BB. On the other hand, the learned Departmental Representative has supported the order of the AO.
42. After considering the rival submissions, we are of the view that the assessee had not been able to establish that any service was rendered by Smt. Anjali Shanbhag to the assessee-firm. However, we find force in the legal contention raised by Mr. Pathak. Expln. (b) to Section 158BB is as under:
"(b) of a firm, returned income and total income assessed for each of the previous years falling within the block period shall be income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called."
A bare reading of the aforesaid Explanation clearly shows that the returned income and total assessed income for each previous year has to be determined before allowing the deduction of any payment to the partners. If such course is adopted then, in our opinion, no addition would be called for. By way of example, we take figures for asst. yr. 1993-94 :
Particulars Returned income Assessed income (Rs.) (Rs.) N.P. as per P/L a/c.
35,003 35,003 Disallowance made by 'A' 80,986 80,986 Supervision charges to Smt. Anjali 18,000 18,000 Addition made by AO 5,14,238 1,33,989 6,48,127 Less: Depreciation and difference in balance sheet 44,279 44,279 89,710 6,03.848 The difference between assessed income and returned income = Rs. 5,14,138. From the assessment order, we find that the undisclosed income for the asst. yr. 1993-94 has been computed at Rs, 5,32,138. That means the AO has wrongly calculated undisclosed income. We, therefore, set aside the order of the AO on this issue and restore the matter to the file of the AO for recomputing the undisclosed income in the matter stated above.
43. In the result, appeal of the assessee is partly allowed.