Income Tax Appellate Tribunal - Madras
M.K. Mathivathanan vs Income-Tax Officer on 31 May, 1989
Equivalent citations: [1989]31ITD114(MAD)
ORDER
George Cheriyan, Sr. Vice-President
1. The appeal in the present case is by the assessee. The Cross Objection is by the Revenue. The matters relate to the assessment year 1985-86. The assessment made is in the status of "Individual". The assessee had undertaken contracts from the Tamil Nadu Housing Board. He had also during this period built a cinema theatre.
2. There was a search in the assessee's premises. The Income-tax Officer noticed that there was expenditure aggregating to Rs. 6,90,231 evidenced by 15 vouchers for which there were no corresponding debits on the exact dates in the books of accounts which were seized. In the course of assessment, the I.T.O. mentioned that the assessee had stated that there were expenditure to the extent of about Rs. 2.90 lakhs towards supply of materials and Rs. 2.36 lakhs towards wages which could not be traced by way of debits in the cash and bank accounts. There were also certain other debits. The I.T.O. enquired of the assessee about the source of the expenditure of Rs. 6,90,231. The assessee contended that he had borrowed Rs. 3.25 lakhs from his father-in-law Shri Kasirajan but after examining Shri Kasirajan, the I.T.O. was of the view that the father-in-law could not have advanced the amounts. The I.T.O., in the course of the assessment order, had mentioned the fact that the assessee has also in this period constructed a theatre in which the work in progress shown as on 31-3-1985 was Rs. 27.42 lakhs against Rs. 1.98 lakhs on 31-3-1984 showing an increase of investment of Rs. 25.43 lakhs. Under the provisions of Section 69C, he made an addition of Rs. 6,90,231 in framing the assessment.
3. The Income-tax Officer also made an addition of Rs. 68,170 for interest on borrowings diverted for construction of the theatre, Rs. 23,730 income from sale of empty gunny bags and Rs. 6,831 -10% profit on the work done in the name of Manimaran.
4. The assessee appealed. Before the C.I.T. (A), the main ground was against the addition of Rs. 6,90,231. The assessee pressed into service the ratio of the decision of the Tribunal in S.F. Wadia v. ITO [1986] 19 ITD 306 (Ahd.) and submitted that if under Section 69C an addition of Rs. 6,90,231 was to be made, an identical deduction would have to be given towards business expenditure. The C.I.T.(A) put this contention to the I.T.O. who pointed out that the assessee was constructing the theatre already referred to and he submitted before the C.I.T.(A) that the major portion of the expenditure of Rs. 6,90,231 was relatable to the construction of the theatre and hence being capital expenditure, no deduction could be allowed.
5. The C.I.T. (A) carefully considered the contentions of the assessee. He stated that there was no material to pinpoint as to what item of expenditure related to what work but since the assessee had shown a net profit of 16.19% in the Housing Board contracts before allowing depreciation and interest, which was an unusually high profit, the C.I.T.(A) considered that a portion of the expenditure of Rs. 6,90,231 was to be apportionable between Housing Board Contract and unaccounted theatre expenditure. He determined such figure at Rs. 1 lakh as relating to Housing Board Contract and directed exclusion of the same. Having regard to the ratio of the decision of the Ahmedabad Bench of the Tribunal in S.F. Wadia's case (supra), the Commissioner (Appeals) eventually upheld the inclusion of the balance of Rs. 5,90,231.
6. The assessee contests the addition retained of Rs. 5,90,231. The Department in its Cross Objection contests the deletion of Rs. 1 lakh. The grounds taken in the Cross Objection are reproduced in extenso as under: -
1. The order of the learned CIT(A) -HI, Madras is against the provisions of law and contrary to the facts and circumstances of the case in so far as it relates to the allowance of relief of Rs. 1 lakh in respect of the additions made Under Section 69C by the I.T.O.
2. The Learned CIT(A) is not correct in allowing the above relief of Rs. 1 lakh on mere presumption, as the said relief is not warranted on a careful consideration of the totality of the facts and circumstances of the case.
3. The Learned CIT(A) should have confirmed the addition made Under Section 69C in toto as the same was based on valid and proper grounds.
4. The Learned CIT(A) should not have apportioned a sum of Rs. 1 lakh out of the additions made Under Section 69C for Rs. 6,90,231 being the expenses relating to Housing Board Contracts, as this apportionment is not borne out from the facts and circumstances of the case and the materials on records.
5. The basis of apportionment of the above amount of Rs. 1 lakh towards Housing Board Contracts is not warranted on the facts and circumstances of the case and hence the relief allowed in this regard is not justified.
6. The Respondent craves the leave of the Hon'ble Tribunal for modifying, amending and/or raising additional grounds of cross-objection at the time of hearing.
7. At the hearing before us, the learned counsel submitted that the investment shown in the theatre at Rs. 27.42 lakhs was total investment in the building and this was evidenced by the valuation independently made by the Valuation Officer, a copy of which was not given to him on the plea that it would be supplied if it was to be used against the assessee. Therefore, the full amount of Rs. 6,90,231 will relate only to the Housing Board contracts and the deduction to be allowed by the C.I.T.(A) should have been the full amount. He also submitted that it was possible to link specifically some more items as relating to Housing Board Contracts out of the 15 items which aggregated to Rs. 6,90,231. In view of the contentions adduced by the learned counsel for the assessee and in view of the contentions raised in the Cross Objections by the Department and since the valuation report has not been made available to the assessee, we considered that the proper course would be to call for a Remand Report from the C.I.T.(A) which we did by our order dated 30-12-1988.
8. The C.I.T.(A) sent an interim Remand Report on 30-3-1989 wherein he stated that the matter had been further remanded to the I.T.O. to go into the vouchers in full and send a report. Subsequently, the I.T.O. sent a report dated 6-4-1989 and on the basis of that the C.I.T.(A) sent his final Remand Report dated 13-4-1989. The C.I.T.(A) submitted that the valuation officer of the department had arrived at a probable cost of construction at Rs. 26.82 lakhs (excluding the cost of electrical wiring, furniture, plant and machinery, other appurtenances and standby generator). There is no material which has been adduced to show that the valuation of Rs. 27.42 lakhs for the theatre building which was shown in the balance-sheet was on the lower side. The C.I.T.(A) in his Remand Report has categorically stated that there is, therefore, no question of there being any unexplained investment in relation to the theatre.
9. The C.I.T.(A) finally stated that the expenditure relatable to the theatre included in the figure of Rs. 6,90,231 is only Rs. 12,726.
10. Based on the Remand Report, we have heard the parties. The provisions of Section 69C read as under: -
69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Income-tax Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year.
The gist of the decision of the Tribunal in S.F. Wadia's case (supra) was that unexplained expenditure had to be added with reference to the provisions of Section 69C but where such unexplained expenditure was actually incurred for business purposes and not recorded in the books, such expenditure will have to be allowed separately as a deduction. To illustrate: Suppose the total unexplained expenditure comes to 'A' and this is comprised of personal expenditure of rupees 'B', capital expenditure of rupees 'C and expenditure relating to disclosed business of rupees 'D', then while under Section 10A. Coming to the facts of the present case on the aforesaid background and starting with the Annexure to the assessment order and the position as clarified after verification by the I.T.O. and the Remand Reports of the C.I.T.(A), we find the following: -
S.No. Names of Suppliers Amount as per Relating to Date
Voucher theater as
per Remand
Order
1. Ramachandra Clamps Rs. 23,369
2. Syndicate Electricals Rs. 4,800 2000 15.2.85
3. Five Star Supply Rs. 8,005 6200 23.3.85
4. Blue Shine Supply Rs. 4,034
5. Madhagan Supply Rs. 55,220
6. Painter Sundaram Rs. 50,904
7. Adinarayanan Rs. 3,500
8. Centering Kanniappan Rs. 1,45,581 174 30.3.85
9. P.V.Supply & Raja Supply Rs. 7,285
10. Fitter Thangaraj & Vasu Rs. 1,36,458 1230 March '85
11. Misc. Expenses (Genl. File)Rs. 72,873 1270 Feb.'85
12. Astalakshmi Transport Rs. 7,265
13. Sangu Pillai Maistry Rs. 51,595 432 16.3.'85
14. Manohar Padmanabhan, Rs. 22,840 1420 9-2-85
Kuppuswamy and Raja
15. Muthu Brick Works Rs. 96,500
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Rs. 6,90,231 12,726
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The aforesaid tabular statement would show that out of the unaccounted expenditure of Rs. 6,90,231, on a careful analysis with books maintained at site which were subsequently gone through by the I.T.O. and which he has categorically stated as prima fade genuine in his Remand Report of 6-4-1989, the expenditure attributable to the cinema theatre is only Rs. 12,726. In the light of what we have explained earlier, while Rs. 6,90,231 has to be added back with reference to the provisions of Section 69C because the source from which the expenditure was made is also not explained, the expenditure which is non-business expenditure is only Rs. 12,726 which relates to the theatre. This is capital expenditure. Therefore, to the extent of Rs. 12,726, no separate addition would be admissible and the deduction admissible would be restricted to Rs. 6,77,505 (Rs. 6,90,231 minus Rs. 12,726).
11. The submission of the learned Departmental Representative was that it was only an inference that Rs. 6,90,231 less Rs. 12,726 was spent towards the Housing Board contracts. We are unable to agree. We have gone through the orders of the authorities below and the Remand Reports. Even at the outset itself, the figures had been given of expenditure in, a certain period as relating to material and wages which aggregate to Rs .5.26 lakhs (Rs. 2.90 lakhs plus Rs. 2.36 lakhs). The I.T.O. had only referred to the construction of the theatre but did not spell out any inference from the narration. He made the addition under Section 69C of Rs. 6,90,231.
12. Before the C.I.T.(A), the assessee took the plea specifically that having regard to the ratio of the decision of the Tribunal in S.F. Wadia's case (supra) since the full amount of Rs. 6,90,231 related to the Housing Board contracts, an equivalent amount should be allowed as a deduction. This argument of the assessee was put by the C.I.T.(A) to the I.T.O. We quote below paragraph 4 of the order of the C.I.T.(A): -
I had a discussion with the ITO. He pointed out that during the year the appellant was constructing a theatre called 'Kasi Theatre' and approximately Rs. 25 lakhs was invested in this theatre. He pointed out that the major portion of the expenditure of Rs. 6,90,231 was related to the construction of the theatre and hence, being capital expenditure, the decision of IT AT, Ahmedabad relied by the learned representative will not apply to this case.
It is clear that before the C.I.T.(A), the categorical stand was that a major portion of the expenditure of Rs. 6,90,231 related to the construction of the theatre. Thereafter, we called for the Remand Report and after a complete analysis it has now been stated that only Rs. 12,726 related to the construction of the theatre. The Department in its Cross Objection has also contested the finding of the C.I.T.(A) on the ground that he had no basis for making the apportionment between unaccounted for expenditure which went into the construction of the theatre and the expenses relating to Housing Board contracts. The I.T.O. in the course of remand proceedings has specifically ascertained that Rs. 12,726 alone has gone into the theatre construction. What originally fell in the realm of estimate before the CI.T.(A) has now been crystallised into exact figure of Rs. 12,726 as relating to the amount which went into the theatre building. The Department's contention originally was in the C.O. that there was no basis for the C.I.T.(A) making an apportionment between theatre construction expenditure and Housing Board construction expenditure. Now that the amount has been crystallised, this grievance no longer survives. Rs. 12,7265 relates to the theatre construction and the balance of Rs. 6,77,505 can relate only to other items of expenditure, namely, Housing Board construction. At no stage has there been any material put forth to show that there was any third variety of expenditure. Therefore, we have to come to the conclusion that the amount of Rs. 6,77,505 relates to Housing Board contracts. The C.I.T(A) has already found that the net profit shown on Housing Board contracts was ex facie on the high side after excluding interest payments etc. This aspect also does not stand disputed. There is no material to show that the balance expenditure of Rs. 6,77,505 which relates to the Housing Board contracts is inflated. In the absence of any such material, it is not possible to reduce the figure relating to Housing Board contract from Rs. 6,77,505 to any lesser amount whatever be the eventual resultant net profit. This is the position with reference to the material on record before us. Having regard to the aforesaid discussion, we would hold that the assessee is entitled to a further relief of Rs. 5,77,505 the C.I.T.(A) having already given a relief of Rs. 1 lakh. The result is the appeal of the assessee is allowed in part. The Cross Objection of the Department is dismissed.