Income Tax Appellate Tribunal - Hyderabad
Indo-Bangladesh Trading Co. (P.) Ltd. vs Income-Tax Officer on 28 May, 1987
Equivalent citations: [1987]23ITD86(HYD)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee for the assessment year 1975-76 for which the previous year ended on 30-9-1974. The assessee is a private limited company-formed for exporting lungis and other garments to Bangladesh. No such business was ever done. There were only two shareholders viz. Sri Ali Siddiqui and Sri M.K. Raju. The latter was the Managing Director of the company during the relevant period.
2. Notice Under Section 139(2) was served on the assessee and the assessee applied for extension of time now and then and finally the return for the assessment year 1975-76 was submitted on 17-2-1978. The assessment was closed as "NA" (No Assessment) on 17-2-1978. However, on 19-3-1979, the Income-tax Officer received a communication from the Assistant Director of Inspection enclosing a copy of the judgment of the Special Judge, Delhi, in CC No. 13 of 1975, wherein certain payments were indicated by Sri Narendra Gopal on behalf of the company; a report was also received from the CBI authorities through the Deputy Director of Inspection, Delhi. On the basis of the above communications, the assessment was reopened Under Section 147(a). The assessee objected to the reopenment of the assessment on the ground that the original assessment was never completed and therefore there was no question of reopening the assessment. The Income-tax Officer rejected the preliminary objection on the ground that as per his records, the original assessment was closed as "NA" and, therefore, reassessment proceedings were validly taken.
3. In the first appeal, the assessee raised its preliminary objection against the reassessment and also challenged the validity of the reassessment. These objections were rejected by the Commissioner of Income-tax (Appeals) for the reasons mentioned in his order. Before us also, the assessee raised similar objections against reassessment.
4. Sri D. Ranga Rao, learned Chartered Accountant for the assessee, submitted that the Income-tax Officer did not act on the original return filed by the assessee on 17-2-1978 and allowed it to get time-barred. In such a case, the Income-tax Officer cannot take recourse to the provisions of Section 148. This is because, if the earlier assessment had been closed as "NA", there is no provision under law for reopening the assessment Under Section 147. Therefore, the reassessment proceedings were vitiated. He also referred to the decision of the Bombay High Court in the case of Sharad L. Patel v. ITO [Writ Petition No. 711 of 1984 dated 17-7-1985], wherein it was laid down that the notice for reopening the assessment Under Section 148 should embody the reasons for so doing and such notice should also indicate whether the reopening was made Under Section 147(a) or Under Section 147(b). Therefore, Sri Ranga Rao submitted that as the notice issued to the assessee was deficient in these respects, the proceedings resting on such notice were bad at law. The reassessment was made by the Income-tax Officer on 28-2-1984 in relation to the assessment, year 1975-76. The period of four years prescribed for initiating action Under Section 147(b) had to be reckoned from the end of the assessment year and by such reckoning, the assessment had to be completed by 31-3-1980 or 31-10-1980 whichever was later, whereas the reassessment was completed only on 28-2-1984 and, therefore, the reassessment Under Section 147(b) is time-barred. Arguing further, Sri Ranga Rao submitted that there was absolutely no scope for the presumption that reassessment notice was given Under Section 147(a), because the notice itself is silent whether the action was proposed under a. 147(a) or (b). The assessee was not in. a position to state fully and truly all the material facts necessary for the assessment on account of the fact that all the books and other records were in the custody of the CBI and, therefore, there was no default on the part of the assessee warranting action Under Section 147(a).
5. Sri N. Santhanam, learned departmental representative, submitted that the preliminary objections raised by the assessee were nothing new and, as a matter of fact, had been raised before the Income-tax Officer and reiterated before the CIT (Appeals). In this connection, he referred to the findings of the CIT (Appeals) in paras 6 and 7 of the impugned order and argued that this was a fit case where action Under Section 147(a) was called for. It is not as if there was no default on the part of the assessee. In fact, the assessee itself was unable to give the relevant particulars of its income in the original return. It is immaterial whether it was in a position or not in a position to do so. As far as the return of income is concerned, it did not contain the necessary statements and clarifications with the help of which the income would be determined. As a matter of fact, the assessee had submitted only a nil return, though explaining the circumstances in which it had to file the nil return. The circumstances are that the books were seized by the CBI and were still in their custody and, therefore, it had no means of finding and declaring the taxable income. Such is the stand taken before the Income-tax Officer at the time of filing the original return of income. The Income-tax Officer had to complete the assessment in view of the impending time limit for completion of the assessment and, therefore, he closed the assessment as "NA" since a return disclosing nil income was filed. The Income-tax Officer did not stop here. He reserved to himself the right of scrutinising the return for taking appropriate action at a future occasion. Thus, the assessment was closed as "NA" purely on a termporary basis and whether the assessment resulted in a tax demand or in a refund or a nil demand or neither demand nor refund, still it is an assessment duly completed ; later on, if omissions were found, the Income-tax Officer was clearly empowered to reopen the assessment under appropriate provisions. Thus, Sri Santhanam submitted that there is no merit in the preliminary objections raised by the assessee.
6. Having regard to rival submissions and the materials on record, we uphold the contentions of the learned departmental representative. The assessee filed nil return on 17-2-1978 accompanied by a covering letter. In that letter, the assessee explained that its books were seized by CBI and were in their custody and, therefore, the assessee was not in a position to ascertain its true income. We have gone through the order-sheet which contained the following endorsements on 5-12-1977 and 17-2-1978 :-
It is seen from the report that all the books of the company are with CBI Delhi in connection with Tulmohan Ram M.P.'s case in the Court since it is time-barred assessment it is closed as N.P. When the books are received from the CBI, they will be scrutinised and necessary action will be taken, if necessary.
I1d. xx 5-12-77 Since the NIL return has been filed it is closed as N.A. l1d. xx 17-2-78.
Thus, the Income-tax Officer closed the proceedings as 'NA' upon receipt of the assessee's return declaring nil income which was filed on 17-2-1978. The assessee's contention is that as the Income-tax Officer had simply closed the file as 'NA' without communicating the same to the assessee, it was not open to him to take action Under Section 147, because the assessment was still pending with him. He argued further that when a person submitted an incomplete or defective return of income such as in this case, the Income-tax Officer cannot legally accept the same even Under Section 143(1) of the Income-tax Act. Such being the case, it is not permissible to hold there was an assessment at 'Nil' income, giving rise to reassessment proceedings later. Sri Santhanam vehemently contends that when the return was closed with the remark "NA", that amounted to the end of the assessment proceedings and a notice for reassessment, if otherwise justified, may thereafter be served on the assessee. We uphold his contention as he is supported by the decisions of the Madras High Court in V, 8. Sivalingam Chettiar v. CIT [1966] 62 ITR 678, M.CT. Muthuraman v. CIT [1963] 50 ITR 656 and Aruppukottai Chandra Bus Lines v. CIT [1973] 87 ITR 154. It was further held in Esthuri Aswathiah v. ITO [1961] 41 ITR 539 (SC), that when an assessee files a nil return for a particular year and the Income-tax Officer orders "No Proceeding" or just "files" the case, such order is tantamount to an order disposing of the assessment proceeding on the finding that the income of the assessee was nil and, therefore, reassessment proceedings would be valid in respect of the income of such year. In fact, the Supreme Court in CIT v. Bidhu Bhusan Sarkar [1967] 63 ITR 278 had gone to the length of stating that even an invalid order terminating proceedings had the effect of terminating them unless the order terminating them was vacated by a proper authority. Therefore, we reject the arguments of the learned representative of the assessee and uphold the reassessment proceedings.
7. The assessee's further contention is that it had given all the necessary details for the proper computation of the income and that it had made full and true disclosure of all facts by 17-2-1978. We do not agree with these contentions which are not borne out by the records. The only full and true disclosure which the assessee had made when it filed the return of income on 17-2-1978 was as contained in the covering letter in which it had expressed its inability to make a correct computation of the income in view of the fact that the books were in the custody of the CBI. A mere statement by the assessee that it is unable to compute the income in view of certain special hardships or circumstances attending on it is not the just equivalent of making a full and true disclosure of the facts and materials necessary for the completion of the assessment. Therefore, we uphold the contention of the revenue that the original return which was filed by the assessee did not contain the particulars necessary for the completion of the assessment and in the absence of details, the Income-tax Officer was perfectly justified in closing the proceeding as "NA" reserving his right to scrutinise the books as soon as further information and records are made available by the CBI and other sources. In other words, the Income-tax Officer completed the assessment as 'NA' pending further investigation. When communications were received from external and internal sources, the Income-tax Officer rightly felt that there had been escapement of income as a result of which he initiated proceedings Under Section 147. Section 149 deals with the time limit for the issuance of notice Under Section 148 and is as follows : -
149. (1) No notice Under Section 148 shall be issued, -
(a) in cases falling under Clause (a) of Section 147-
(i) for the relevant assessment year, if eight years have elapsed from the end of that year, unless the case falls under Sub-clause (ii) ;
(ii) for the relevant assessment year, where eight years, but not more than sixteen years, have elapsed from the end of that year, unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to rupees fifty thousand or more for that year ;
(b) in cases falling under Clause (b) of Section 147, at any time after the expiry of four years from the end of the relevant assessment year.
(2) The provisions of Sub-section (1) as to the issue of notice shall be subject to the provisions of Section 151.
Section 151 reads as follows :-
151(1) No notice shall be issued Under Section 148 after the expiry of eight years from the end of the relevant assessment year, unless the Board is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.
(2) No notice shall be issued Under Section 148 after the expiry of four years from the end of the relevant assessment year, unless the Commissioner is satisfied on the reasons recorded by the Income-tax Officer that it is a fit case for the issue of such notice.
On a reading of both these sections and upon a consideration of the fact that the notice for reopening was issued on 17-11-1979 in respect of the assessment year 1975-76, we hold that the reassessment proceedings were validly initiated within the time limit.
8. Sri Ranga Rao vehemently argued that the reassessment notice did not specify whether the action was proposed Under Section 147(a) or Section 147(b) and, therefore, any action flowing therefrom would be invalid. Sri Santhanam for the revenue submitted that the non-specification of the clause under which action was initiated is not such a serious defect as to invalidate the proceeding itself. In Kantamani Venkata Narayana & Sons v. First Addl. ITO [1967] 63 ITR 638, their Lordships of the Supreme Court held that reassessment notice is not vitiated because of the non-specification of the particular clause. Therefore, we uphold the stand of the revenue.
9. As a matter of fact, on going through the records, we notice that the Income-tax Officer proposed action only Under Section 147(a). This is evident from his notings in the order-sheet to the following effect :-
19-11-79 : The assessment for A.Y. 75-76 was closed as NA on 17-2-78. On 19-3-79 reaches a communication (No. IW : ADI : I : Misc. 7 : 78-79, dt. 12-3-79) from ADI of the Commissioner's office enclosing copy of an extract of judgment of O.P. Singhia, Special Judge, Delhi in CC No. 13 of 1975-indicating certain payments in Oct., 1973 (By Narendra Gopal on behalf of Indo Bangladesh Trading Co.) and also indicating a payment of Its. 3 lakhs on behalf of the Indo Bangladesh Tr. Co. to purchase 'Import Licences' from 7 Pondichery merchants in about April '74. The ac. year (Pr. yr) of the assessee-company for A.Y. 75-76 is 14-9-73/Start of the co./to 30-9-74/Pr. year in question All these payments have not been recovered by the company in the books of the accounting year in the papers filed before completing the NA assessment on 17-2-78.
Rs.
Payments in Narender Gopal on behalf of the assessee Co. are 2,30,000 A allowed cash payments Rs. 2,90,000 to the Pondichery/Yanam merchants by withdrawing the same from this bank account and diverting cash. The Pondichery merchants denied receipt of the payments. These were obviously for purchase of import licences. In addition to accepted "draft" payment, the 2,90,000 to the a/c. indicates excess debit to the accounts for purposes of import licences. The payment also offends Section 40A(3). Hence assessable .... viz. 2,90,000 _________ Total 5,20,000
Totally an amount of Rs. 5,20,000 escaped assessment. Reopen the asst. Under Section 147(a) for A.Y. 75-76.
There is no doubt in our mind that in facts and circumstances of this case, to which we will advert in the following paragraphs, reassessment is justified Under Section 147(a).
10. The next point of dispute is about the addition of Rs. 2,18,000 arising out of disallowance of certain amounts said to have been paid in cash to parties in Pondichery, Yanam and Mahe. According to the Income-tax Officer, the assessee-company had taken upon itself the job of securing licences in the names of 7 licensees for passing them on to M/s Khandelwal Engineering and Metal Industries (referred to hereinafter as KEMI) (proprietor : Sri K.N. Khandelwal). The licences were obtained and forwarded to the latter. But, before these licences could be utilised by KEMI for the import of goods, they were seized and impounded by the CBI authorities at Bombay on 14-10-1974. The assessee had received Rs. 5,28,000 from KEMI as follows :-
Date Mode Amount
Rs.
18-5-74 Cash 2,00,000
20-5-74 DD 3,00,000
15-7-74 Chq 27,707
31-8-74 Cash 293
________
5,28,000
________
The assessee in turn had made certain advances to the Pondichery parties on the following dates :-
Date Mode Name Amount
Rs.
22-5-74 DD M.Z. Maraicar 65,000
" " A.M. Reddiar 50,000
" " A.M. Abu Baker 50,000
" " G.S. Ganapathi Rao 60,000
23-5-74 Chq Kumaran Stores 25,000
22-5-74 DD " 5,000
" " S. Chidambaram 30,000
________
Total 2,85,000
________
The Income-tax Officer took the view that the money received by the assessee from KEMI was towards consideration for arranging the licences and the monies paid to the Pondichery parties were towards ... parting with the licences in favour of the former. Initially, the Income-tax Officer added a sum of Rs. 3,15,000 as the income of the assessee on the ground that the assessee had received Rs. 6,00,000 towards the transaction. Incidentally, he also referred to the provisions of Section 40A(3) while passing the order.
11. It was argued before the Commissioner of Income-tax (Appeals) that only Rs. 5,28,000 was received by assessee from KEMI and not Rs. 6,00,000. It was further urged that the said sum of Rs. 5,28,000 represented the borrowings by the assessee from KEMI and not a payment for services. In support of these arguments, the assessee's representative relied on the notice issued by M/s. Firdosh & Co., attorneys, dated 28-2-1980 by which they had demanded the repayment of Rs. 5,28,000 from the assessee. In addition, reliance was placed on the published accounts of KEMI wherein the assessee was depicted as a debtor for a sum of Rs. 5,28,000. The books of the assessee also revealed a corresponding credit in favour of KEMI for a sum of Rs. 5,28,000. It was further pointed out that KEMI was regularly assessed to income-tax and has been consistently showing this amount as a loan to the assessee which had been accepted by the income-tax authorities at Bombay. Lastly, it was argued, without admitting that even if the assessee had intended to receive this sum as a consideration for services rendered, the venture eventually did not fructify in view of the intervention by the CBI which had impounded the licences and as the transactions failed to materialise, the assessee stood in the position of a debtor to KEMI and income did not accrue to the assessee. Similarly, the payments made to the parties in Pondichery did not also partake of the nature of expenditure for earning the income just in the same way as the receipt from the Bombay party did not partake of the nature of income of the assessee. The true nature of the transaction was that the assessee was arranging finance for the seven parties at Pondichery, Yanam and Mahe on loan basis, it having received funds from the Bombay party equally on loan basis and the books of account of all the parties lend support to the above facts and the Income-tax Officer erred in construing these dealings as an adventure in the nature of trade treating the difference between receipt and payment as income of the assessee. The CIT (Appeals), for the reasons mentioned in paras 10 and 11 of his order, rejected these contentions of the assessee, but reduced the addition made by the Income-tax Officer from Rs. 3,15,000 to Rs. 2,18,000. In this process, he allowed a deduction of Rs. 25,000 towards probable expenditure for negotiating the deal between the licensees on the one hand and KEMI on the other and towards other incidental expenses in arranging the transaction. The department is not in appeal over the relief granted by the CIT (Appeals). The assessee is on appeal against the addition sustained by the CIT (Appeals).
12. Sri Ranga Rao vehemently argued that the Income-tax Officer and the CIT (Appeals) did not appreciate the true character of the transaction in the proper perspective. They either overlooked or did not appreciate the unimpeachable evidence standing in favour of the assessee in the form of entries in the books of the assessee and corresponding entries in the books of KEMI. Even till date, KEMI is demanding repayment of the amount advanced to the assessee. KEMI is a private limited company whose accounts are subjected to audit and as per their published accounts, there is a debit against the assessee to the extent of Rs. 5,28,000 and this debit has not been controverted by the revenue while making the assessment of the said company at Bombay. Therefore, there is absolutely no reason for the revenue to adopt a different stand against the assessee while making the assessment at Hyderabad. The true nature of the transaction was that the assessee wanted to arrange finances as between the parties and in the process the assessee thought that it could earn some profit. But, the entire transaction fell because of the intervention by the CBI which had impounded the licences. Therefore, KEMI, which had Initially advanced the funds to the assessee, is demanding back the payment of the same and the assessee is unable to recover the amount advanced to the Pondichery parties. Since the transaction did not materialise, the assessee could not earn anything out of the transaction. In such a situation, it is a travesty of truth to hold that the assessee had really embarked upon an adventure in the nature of trade and earned any income represented by the difference between its borrowings from KEMI and its lendings to the Pondichery parties. In fact, neither of the two shareholders of the assessee-company, who were also the directors, was prosecuted by the CBI in C C No. 13 of 1975 in the court of Sri O.P. Singhia, Special Judge, Delhi, in the case between the State and Tulmohan Ram and others, nor were they cited as witnesses in the said case. Thus, there is nothing to connect the assessee-company with the case and the Income-tax Officer had based his conclusions on surmises and conjectures not warranted by the facts and circumstances of the case. In this context, he referred to the depositions made by KEMI and also Sri M.K. Raju, one of the directors of the assessee-company. He contended that assuming for the sake of argument but without admitting on facts, that the assessee had embarked upon an adventure in the nature of trade, such trade being a clandestine one, the ordinary tests for payments as prescribed Under Section 43A should not be applied, because the entire transaction beginning with securing of licences in the names of a few persons for eventual transfer to some other person was wholly a clandestine one and, therefore, the payments that have been made for obtaining such licences and for arranging for their transfers should be allowed In their entirety, whether paid in cash or not and the authorities below did not appreciate this aspect of the matter when the provisions of Section 43A in respect of cash payments made to the Pondichery parties were mentioned. If these cash payments had been taken into account, it would have been evident that the assessee had not got any profit at all out of this transaction or, at any rate, the profit is not as much as has been computed by the authorities below. In any view of the matter, he submitted that the assessment is fit to be set aside and justice rendered.
13. Sri N. Santhanam, learned departmental representative, took us through the orders of the Income-tax Officer and the CIT (Appeals). He submitted that the assessee-company was recently floated and did not have any dealings previously with KEMI. The latter was not its customer. As a matter of fact, the assessee-company did not commence its business of exporting garments to Bangladesh. In such circumstance, naturally, the question arises as to why KEMI, which is based at Bombay, should volunteer to part with a huge sum of Rs. 5,28,000 to the assessee-company. It has not been established that it was an advance against materials to be supplied by the assessee-company which has not started production. No pronote was obtained by the creditor. No resolution was passed in the books of the assessee-company for taking such a huge loan. Therefore, the submission of the learned counsel that the amount was just an advance made by KEMI does not stand to reason, because a stranger will never make an advance to a newly formed company in such a huge sum of Rs. 5,28,000 without security or even without a foothold. So, the truth lies elsewhere. It was certainly money transferred to the company for the purpose of arranging the licences from the Pondichery parties. Even though the two shareholders of the company viz. Ali Siddiqui and M.K. Raju, were not prosecuted in the criminal case cited supra, or were not cited as witnesses, the fact is that the approver in that case, one Sri S.M. Pillai, had referred to his meeting these two persons in connection with arranging for the licences. Thus, the only two shareholders, who happen to be the directors, were very much involved right from the beginning in procuring the licences and the diary-sheet entries of Ali Siddiqui, appended by the Income-tax Officer as annexure II to his order, certainly prove that monies have flowed from the company in connection with this licences deal. Thus, it will be evident that the company was engaged in an adventure in the nature of trade, though such a trade happened to be a clandestine one and opposed to public policy. In this process, it had parted with certain sums in favour of the parties at Pondichery, Yanam and Mane as consideration for procuring the licences from them for onward transmission to KEMI at Bombay. But for the questions being raised in the Parliament resulting in the prosecution of Sri Tulmohan Ram, Congress (I) M.P., the licences would not have been impounded by the CBI. It is on record that the assessee managed to procure the licences from the Pondichery parties and had in fact delivered them to KEMI at Bombay. It was at that stage the licences were impounded by the CBI. So, the alternative argument of the assessee that the transaction did not materialise and, therefore, profit did not accrue to the assessee should also fail.
14. Sri Santhanam submitted further that entries in the books of account are not determinative of the true legal character of a receipt. These entries should be construed as an afterthought in view of the swift developments that had taken place with the intervention of CBI in the Pondichery Licences Scandal. It was in the interest of the Bombay party and to its advantage to plead innocence by showing the amount given to the assessee as advance because none could deal with licences obtained by some other person in such a clandestine manner as had taken place in this case. It was also equally in the interests of the company and to its advantage to record in its books the amount received from KEMI as a loan or a liability as, otherwise, it would be also caught in the criminal proceeding. He vehemently contended that here is a case where one person is in Bombay and some persons are in Pondichery, Yanam and Mahe and what interest had the assessee-company in both these parties for obtaining a loan from one of these parties and making advance to the other and that too sans pronote and security ? It may be relevant to point out that none of the parties are related to the Managing Director or to the other shareholder or in any way known to the company by way of previous dealings. Secondly, the assessee is not a good Samaritan to go to the rescue of an unknown person. So, the motive is not as made out by the assessee. The motive was certainly a business motive and the transaction was obviously a business transaction, though a clandestine one. The transaction has been put through as would be evident from the fact that payments were made to the Pondichery parties who parted with their licences which were handed over to KEMI. It is only after such delivery of licences, the CBI intervened and impounded them. Thus, the venture had become complete and whatever difference remained between receipt and payment, accrued to the assessee as profit in the transaction. Therefore, there is no truth in the allegation made by the assessee that the assessment was based on conjectures and surmises.
15. Sri Santhanam submitted that it is not as if the provisions of Section 40A(3) were applied in regard to cash payments said to have been made to the Pondichery parties. In fact, statements were obtained from the said parties through the counterparts in the department and the learned CIT (Appeals) had allowed all those payments which were admitted to have been received by the Pondichery parties and had disallowed only such of those payments alleged to have been made by the assessee as were not admitted by the payees. Thus, he argued that it is not as if the provisions of Section 40A(3) were applied in regard to cash payments in this clandestine business even though a reference was made to it in passing by the Income-tax Officer. Thus, he submitted that in any view of the matter, there is no justification to interfere with the order of the learned CIT (Appeals).
16. Having regard to rival submissions and the materials on record, we uphold the order of the CIT (Appeals) on this count. The assessee's representative laboured hard to impress upon us that what the assessee did was not an adventure in the nature of trade. He submitted that the assessee was only arranging for funds as between the parties and in support of his submissions, he relied on the accounting treatment of the sums provided by KEMI to the assessee in its balance-sheet and also the corresponding treatment given in the books of the assessee. Thus, in effect, he argued that it is only a loan received by the assessee-company from the Bombay party. He also drew our attention to the notices issued by the alleged creditor demanding repayment of the sums said to have been advanced and referred to the deposition of Sri Khandelwal. We are unable to agree with the stand taken by the assessee. As the learned departmental representive rightly submitted, KEMI and the assessee are strangers. They did not have any previous business dealings with each other. The assessee-company was formed for the purpose of exporting garments to Bangladesh and KEMI, as the name would suggest, is an engineering concern. We are unable to understand how there could be a business connection between these two companies which operate in different fields. KEMI is not a financing company and, therefore, it is hard to believe the statement of the assessee that KEMI had advanced money in the course of its money-lending or financing activities. In his affidavit, Sri Khandelwal of KEMI stated that Ali Siddiqui represented to him that he would be getting import licences in exchange for exports and that he would be handing over to his company letters of authority issued by Joint Controller of Imports and Exports, provided the company advanced necessary funds to the tune of Rs. 5,28,000. In para 3 of the said affidavit, he confirmed that the assessee had handed over to his company import licences together with letters of authority. He is silent about the terms of advance, period of repayment, rate of interest and nature of security, if any, for the advance; nor is there any mention of the consideration for which the assessee-company offered its services. Thus, there is something more than what meets the eye. In the criminal case filed against Tulmohan Ram, M.P., in CO No. 13 of 1975, in the Court of Sri O.P. Singhia, Special Judge, Delhi, there are references to Sri Ali Siddiqui and also Sri M.K. Raju, the shareholders of the assessee-company. According to the approver, he had met Sri Ali Siddiqui and one Narinder Gopal, both from Hyderabad, at Janpath Hotel and he had assured both of them that the issuance of import licences was in the final stage. Later on, the approver had gone to Madras and Sri Siddiqui and Sri M.K. Raju of Hyderabad also joined him in Madras. There are references to payments having been made by one Narinder Gopal (para 3 of the judgment). Sri Ali Siddiqui and Sri M.K. Raju and Sri Narender Gopal were kept informed of the developments that were taking place. The approver further stated that "in the month of April, 1974, M.K. Raju of Indo-Bangladesh Trading Co. and Narinder Gopal came to Madras with Ali Siddiqui. They made different agreements with 7 licensees and Narinder Gopal issued cheques to the licensees. The total amount of the cheques was about Rs. 3 lakhs. The agreements were entered into by the licensees and M/s Indo-Bangladesh Trading Pvt. Ltd. Co. All the cheques issued by Sri Narinder Gopal to the licensees were dishonoured. In lieu of dishonoured cheques, Indo-Bangladesh Trading Pvt. Ltd. Co. issued drafts which were cashed. At the asking of Indo-Bangladesh Trading Pvt. Ltd. Co. the licensees issued consent letters in favour of M/s Khandelwal & Co., Bombay, for issue of letter of authority". Thus, it is evident that the assessee, either by itself or through its share-holders-cum-directors, was arranging for the delivery of licences with consent letters obtained from Pondichery parties to and in favour of KBMI. It is further evident that the assessee secured the licences with consent letters in favour of KEMI for issue of letter of authority and certainly this is a business transaction though a clandestine one. If the assessee confined itself only to financing operations, why should the assessee engage itself in the procurement of licences from the Pondichery parties in favour of the party at Bombay? If the transaction is only a case of money-lending for temporary accommodation, why should the assessee remain idle over all these years without initiating any proceedings to recover the amount from the Pondichery parties? It is also equally interesting to note that KEMI, which had advanced an omnibus sum of Rs. 5.28 lakhs had not taken any coercive action against the assessee for the recovery of the amount which it had initially provided. All these are pointers to the fact that the assessee was dealing in licences by bringing together parties at Pondichery and Bombay and in the process it had earned profits. The learned. Commissioner has fixed the profit element as the amount representing the difference between the amount received from the Bombay party and the amount paid to the Pondichery parties and after making some allowance for expenses incurred in the course of such transaction.
17. The assessee's alternative argument is that the cash payments made to the Pondichery parties had not been taken into account in view of the provisions of Section 40A(3) and in a clandestine business, such as this one, the provisions of Section 40A(3) should be liberally construed. This is certainly an attractive argument, but it should fail. The CIT (Appeals) has specifically stated that the amounts said to have been paid in cash to the seven Pondichery parties have not been admitted to have been received by the said parties. Therefore, in our considered view, the amount had been disallowed not so much on account of the provisions of Section 40A(3) as on account of lack of acknowledgment or admission on the part of the alleged payees. In other words, the assessee had not proved by any evidence-direct or indirect-that it had made payments to Pondichery parties in cash. Therefore, the alternative argument of the assessee also fails.
18. There is force in the contention of the learned departmental representative that entries in the books of account are not determinative of the true legal nature of the receipt. In view of serious turn of developments that had taken place in this case due to the intervention of the CBI and the impounding of the licences by the CBI, much credence cannot be given to the entries that are standing in the books of the rival parties. The mere fact that the revenue had accepted the balance-sheet of KEMI in which the assessee was treated as a debtor does not in any way improve the case of the assessee. It is only when KEMI writes off this amount of Rs. 5.28 lakhs and claims the same as a bad debt, there would be an occasion for the Income-tax Officer at Bombay to examine in depth the nature of this debt. Till then, this amount of Rs. 5 28 lakhs will remain as an asset in the balance-sheet and there might not be any occasion for him to probe into it. Therefore, the mere fact that this amount was accepted in the assessment of the creditor at Bombay does not in any way come to the assistance of the assessee, nor can it be viewed as a stand which is in conflict with the stand taken by the revenue at Hyderabad.
19. The next point of dispute relates to the addition of Rs. 2,19,306 representing unexplained cash credits in the name of M/s Ratan Trading Co. together with interest thereon. The Income-tax Officer noticed one account by name Ratan Trading Co. in this Creditors and Debtors Movement Statement submitted by the Managing Director of the company. The assessee did not file any confirmation letter from the alleged creditor though called for by the Income-tax Officer. The letter addressed by the Income-tax Officer by registered post to M/s Ratan Trading Co. As per the address furnished by the assessee was returned to the Income-tax Officer with an endorsement by the post office to the effect that the "party not found at the address". Enquiries made by the Director of Inspection (Investigation), Bombay, about M/s Ratan Trading Co. revealed that there was no such party at the address given by the assesses. The Income-tax offcer, therefore, held that the assessee had not discharged the onus placed on it and added the peak credit of Rs. 2,00,000 and the interest thereon amounting to Rs. 19,306.
20. Before the CIT (Appeals) it was contended that the copy of the account of Ratan Trading Co. duly confirmed by the said concern was filed by the assessee in the course of the proceedings before the Income-tax officer and because of lapse of time-more than 10 years-it was not possible for the assessee to produced the creditor. It was also suggested that by the time income-tax authorities tried to contact Ratan Trading Co., it might have wound up its affairs, but that does not mean that the credit was bogus. It was also contended that the working of the peak credit was not correct. The assessee placed reliance on the copy of the account of Ratan Trading Co. in its books duly countersigned by the proprietor of Ratan Trading Co. The CIT (Appeals), after adverting to the circumstances in which the addition was made, held that te confirmtory letter cannot be relied upon, because it did not bear any date ; besides, it was signed by seone as proprietor of Ratan Trding Co. The assessee was unable to produce the creditor nor could the creditor be contacted at the address furnished by the assessee. The assessee did not even give the permanent account number of the alleged creditor. In this view of the matter, he upheld the addition of Rs. 2,19,306.
21. Sri Ranga Rao vehemently contended that the tax authorities have overlooked the fact that the assessee was asked to explain the transactions of 1974 in the year 1984. When the transactions took place way back in 1974, Ratan Trading Co. was very much in existence at the address furnished and the transactions were genuine. The proprietor had signed the statement of account in token of confirming the balance. This evidence was rejected by the CIT (Appeals) on slender grounds. The tax authorities were unable to contact the creditor at the address furnished by the assessee because the address furnished by the assessee was the one as given by the creditor 10 years before. Therefore, the adverse inference drawn by the authorities was unjustified. He also disputed the correctness of the computation of peak credit. Alternatively, he contended that in the cash rotation statement furnished by the assessee, there are certain payments which have been rejected by the income-tax authorities as not genuine. Therefore, set off should be given for them against the credits in the name of Ratan Trading Co. Sri Santhanam, on the other hand, took us through the orders of the Income-tax Officer and the CJT (Appeals) and submitted that the addition sustained was justified. To a query from the Bench as to how a sum of Rs. 19,306 could be added by way of interest on bogus credits, Sri Santhanam very fairly submitted that once the credit is held to be bogus, there is no room for making any addition by way of interest on such bogus credit.
22. Having heard rival submissions and considered the materials on record, we are inclined to modify the order of the CIT (Appeals) on this count. The Creditors and Debtors Movement Statement contains the receipts and payments of the company for the year under appeal a,nd also for the subsequent years. A sum of Rs. 3,15,000 is shown as having been received by the assessee from Ratan Trading Co. on various dates. Similarly, payments are shown to have been made to Ratan Trading Co. by the assessee on several dates. It is the case of the department that the assessee had not discharged its onus of proving the credit. The Income-tax Officer was unable to trace Ratan Trading Co. at the address furnished by the assessee. The Director of Inspection also was unable to locate the creditor at the address furnished. The assessee had just produced a statement of account of Ratan Trading Co. as it stood in its books and this statement of account does not bear any date though, of course, signed by some person said to be the proprietor of the creditor. The assessee did not produce the creditor before the Income-tax Officer in support of its stand. The only explanation offered by the assessee for its inability is the time interval between the date of the transactions and the date of enquiry. In the circumstances, the addition made by the Income-tax Officer was sustained by the CIT (Appeals). The onus is always on the assessee to prove the credits found in its books, whatever be the difficulties and the same has not been discharged in this case. On a scrutiny of the entries in the account of Ratan Trading Co. as reflected in the Creditors and Debtors Movement Statement, the peak credit works out to Rs. 1,99,850 on 19-8-1974 as against Rs. 2 lakhs adopted by the Income-tax Officer. Sri Ranga Rao's alternative contention is that the assessee must be deemed to have held enough cash represented by payments which were held to be bogus and such cash should be set off against the peak credit. Sri Santhanam contends that such an adjustment is not permissible. In our considered view, there is merit in the submissions of the learned representative of the assessee. On 21-5-1974, certain payments are said to have been made by the assessee as follows :-
Rs.
(1) S. Mohd. Zakaria 95,000
(2) Marimuthu Reddiar 65,000
(3) G.S. Ganapathi Rao 70,000
(4) Abu Baker 60,000
________
2,90,000
________
These payments are said to have been made in cash, but the payees upon enquiry denied having received any such payments though they admitted the other payments that were made by cheque or draft. These payments, therefore, were held to be not having been made and on that ground, the Income-tax Officer disallowed the above sums in computing the business profit. In the subsequent years, the assessee had credited the accounts of the first three parties as though it had received back the said amounts. The Income-tax Officer had added these credits also to the income of the assessee in the subsequent years and the CIT (Appeals) rightly deleted the addition on the ground that as these payments were held to be bogus and therefore disallowed for purposes of computing the profits of the business in the assessment year 1975-76, there was no justification for making a second addition in respect of the same amounts, (Para 13 of the CIT (Appeals)'s order for this year read with his order for the assessment year 1977-78 dated 29-10-1985 in ITA No. 26/SIC. I(A)/CIT I/84-85.) Thus, the payments against SI. Nos. 1 to 3 were duly considered by the CIT (Appeals) against credits found in the subsequent years in the name of the same parties. This leaves us to consider the payment made to Sri Abu Baker in a sum of Rs. 60,000 against SI. No. 4. In the subsequent years, the assessee did not credit the account of Sri Abu Baker and, therefore, no addition was made by the Income-tax Officer in the subsequent years in respect of the amount in the name of Abu Baker. This leads us to the inference that the amount of Rs, 60,000 shown to have been paid to Sri Abu Baker was not paid at all and, therefore, the said sum should be deemed to be available with the assessee in the assessment year 1975-76 itself, it having been considered in the computation of business profits by disallowing the same as bogus payment. Hence, telescoping of this sum of Rs. 60,000 into the peak credit of Rs. 1,99,850 is just and proper in the facts and circumstances of the case and, to this extent, the assessee is entitled to grant of relief. Accordingly, we reduce the peak credit amount of Rs. 2,00,000 to Rs. 1,39,850 (Rs. 2,00,000 - Rs. 150 - Rs. 60,000). When the credit itself is held bogus, there is no justification for adding interest on such credit. Therefore, the addition of Rs. 19,306 on account of interest on such peak credit is deleted.
23. Sri Ranga Rao submitted that in case the Tribunal decided the main issue against the assessee, he would plead that more expenses should be allowed than that allowed by the CIT (Appeals). This was because he said that the company had to undertake extensive travels in establishing contacts and the allowance granted by the CIT (Appeals) in a sum of Rs. 25,000 is very meagre. Sri Santhanam objected to this plea being raised on the ground that the assessee had not disputed the quantum of expenses allowed by the CIT (Appeals) in its grounds of appeal. Sri Ranga Rao in his reply submitted that this is covered in his ground No. 1 wherein he is questioning the amount of profit as sustained by the CIT (Appeals), because profit is computed only after making allowance for the expenditures involved and thus he pleaded that his submission for grant of higher allowance should be considered as covered by ground No. 1.
24. We have heard rival submissions. It is true that the assessee had not specifically agitated in its grounds of appeal the quantum of expenses allowed by the CIT (Appeals). However, it had certainly questioned the addition of Rs. 2,18,000 as sustained by the CIT (Appeals). This addition of Rs. 2,18,000 is the profit as computed by the CIT (Appeals) in the adventure in the nature of trade carried on by the assessee. In computing this sum of Rs. 2,18,000, the CIT (Appeals) has allowed Rs. 25,000 towards probable expenses even though they were not verifiable. Therefore, there is merit in the contention of the assessee's representative that even though a specific ground was not taken, he could agitate for higher deductions towards expenses in earning the said profit. From the records, it is obvious that both Sri Ali Siddiqui and Sri M.K. Raju have visited Delhi, Madras and Pondichery on a number of occasions. They have established contact with the approver and one Sri Nair and also Sri Tulmohan Ram, the Congress (I) M.P. besides others. They have secured the licences from the parties from Pondichery, Yanam and Mahe and handed them over to the Bombay party. All these involved travel and incidental expenses. In the totality of the circumstances of the case, we feel that the expenditure estimated by the CIT (Appeals) at about 10% requires an upward revision and we estimate that a sum of Rs. 40,000 in all would meet the ends of justice.
25. In the result, the appeal is partly allowed.