Income Tax Appellate Tribunal - Pune
Parakh Foods Ltd. vs Deputy Commissioner Of Income-Tax on 14 July, 1997
Equivalent citations: [1998]64ITD396(PUNE)
ORDER
Shri K. C. Singhal (Judicial Member)
1. This appeal is directed against the block assessment order dated 31-7-1996 passed by Shri D. B. Goel, Dy. CIT Special Range-4, Pune. The block period consists of previous years 1985-86 to 1994-95 and period from 1-4-1995 to 12-7-1995 relevant to assessment years 1986-87 to 1996-97.
2. The assessee is a limited company engaged in the manufacture and sale of food products such as Gram dal, besan, atta, rava, maida, oil and oil cake, etc. It has the following units for manufacturing the above items :
1. Unit No. 1 at Khopoli (flour mill division)
2. Unit No. 2 at Khopoli (flour and Dal mill division)
3. Unit at Vashi (Dal Mill and Besan Division)
4. Unit at Kurkumbh (oil mill division)
3. Search and seizure action was taken under section 132 against the assessee on 12-7-1995 at the aforesaid manufacturing units as well as at its Offices at Market Yard, Gultekadi, Pune and also at Ashok Chambers, Mumbai. Similar action was also taken at the premises of its sister concern M/s. Parakh Food International (hereinafter referred to as 'PFI') a partnership firm constituted by S/Shri Harakchand K. Parakh, Prakash Parakh and Suresh H. Parakh, who, inter alia, are also the Directors of the assessee-company.
4. In response to notice under section 158BC dated 30-8-1995, a return for the block period was filed by the assessee on 22-5-1996 declaring undisclosed income at Rs. 6,89,349. In the course of assessment proceedings, the assessee filed a revised return on 1-7-1996 declaring undisclosed income at Rs. 52,62,268. On the basis of seized material as well as materials obtained in the course of assessment proceedings by the Assessing Officer from the assessee, various additions were proposed by the Assessing Officer vide his letter dated 3-7-1996 addressed to the assessee. The assessee was asked to file objections with evidence by 12-7-1996. It was also advised to seek the hearing before the CIT, Pune, if so desired. Simultaneously the Assessing Officer prepared a draft order which was sent to the CIT on 18-7-1996 for approval. Subsequently, the Assessing Officer wrote a letter dated 22-7-1996 to the assessee proposing to treat the income of its sister concern M/s. PFI as income of the assessee for the reasons given by him in that letter. The assessee was directed to reply on the next date by 4.00 p.m. The assessee vide its letter dated 23-7-1996 replied to the Assessing Officer stating reasons for not treating the income of PFI as the income of the assessee. Finally, the assessment was completed on 31-7-1996 after getting the approval of the CIT by making huge additions on various grounds. The total undisclosed income as assessed by the Assessing Officer amounted to Rs. 12,95,59,177. The same has been assailed by the assessee in the present appeal.
5. S/Shri Sunil Pathak, C. V. Khandelwal appeared on behalf of the assessee while Shri Hari Krishan, the learned Senior Departmental Representative Sanjay Prasad and Manish Gupta, the learned Departmental Representatives appeared on behalf of the revenue. Both the parties have argued in support of their respective stands on merits in respect of each addition. Both of them have also argued at length on the scope of provisions of Chapter XIV-B. First of all, we will dispose of the legal contentions raised by the parties with reference to the scope of provisions of Chapter XIV-B since it will help us in disposing the various issues involved in this appeal.
6. Dr. Pathak, the learned counsel for the assessee took us through various provisions of Chapter XIV-B consisting of section 158B to section 158BH as well as the Budget Speech of Finance Minister in the Parliament and Explanatory Notes on the Finance Bill and Finance Act, 1985. His first contention was that the intention of the Legislature is to assess only undisclosed income as is apparent from the provisions of section 158BA which is a charging section. The 'undisclosed income' has been defined in clause (b) of section 158B. So, he emphasised that any income falling outside the scope of clause (b) of section 158 cannot be assessed under Chapter XIV-B. According to him, this definition is in two parts. The first part includes the income represented by money, bullion, jewellery or other valuable articles or things or the income on the basis of any entry in the books of account or documents or transaction found at the time of search, while the second part provides a boundary for finding out the undisclosed income. According to him, the assets or entries specified in the first part must represent wholly or partly the property or income which the assessee had not disclosed before the date of search either in the return or in the course of assessment proceedings and where the return has not become due then, the assets or entries are such that the same would not have been disclosed if the search had not taken place. In this connection, he referred to the meaning of the word 'definition' as given in Webster's Dictionary to support his contention that definition clause not only provides the meaning of a word but also its boundaries. He also relied on the decision of Andhra Pradesh High Court in the case of Addl. CIT v. ITAT [1975] 100 ITR 483. Hence, he submitted that section 158B would not include that income in respect of which assessee has disclosed prior to search or in respect of which assessee would not have disclosed if search had not taken place. What is required to be disclosed is the primary facts and not he inferential facts as laid down by the Hon'ble Supreme Court in the case of Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624. He illustrated his stand by stating three situations. First, where the assessments have been completed before the date of search in respect of assessment years falling within the block period; second, where the assessments are pending on the date of search; and third, where the returns are yet to be filed after the date of search. According to him, if the assessee had recorded the relevant entries in respect of any income in the regular books of accounts and the primary facts have been disclosed either in the return or in the course of assessment proceedings prior to the date of search then, in either of the situations nothing can assessed as undisclosed income under the provisions of Chapter XIV-B merely on the grounds that some adverse inference is drawn against the assessee by the Assessing Officer he submitted that the words "has not been disclosed or would not have been disclosed for the purposes of the Act' used by the Legislature in the definition clause are significant. He further submitted that prior to insertion of Chapter XIV-B, there was no definition of the word 'undisclosed income' though these words find place in section 132(1)(c) of the Income-tax Act. He pointed out that the Legislature has used the same language in section 158B(b) as used in section 132(1)(c) of the Act. He, therefore, submitted that the same interpretation should be applied which has been laid down by the Hon'ble Delhi High Court in the case of L. R. Gupta v. Union of India [1992] 194 ITR 32 while interpreting section 132(1)(c) of the Act.
7. He then contended that the undisclosed income must be which is detected as a result of search. He referred to the marginal note to section 158BA, i.e., "the assessment of undisclosed income as a result of search". He also referred to the Budget Speech of the Finance Minister in the Parliament in this regard which is 87 ITR 212 (sic). He also drew our attention to the Explanatory Notes on Finance Bill, 1995 and the Finance Act, 1995 which are reported ar 212 ITR 306 (St.) 212 ITR 346 (St.). It was also contended by him that the undisclosed income must be determined as a result of materials found at the time of search or material gathered having nexus with the material found in the course of search. But according to him, there cannot be an assessment of an income as undisclosed income if the material is gathered by the Assessing Officer in the normal course of enquiry without having any nexus with the seized material. He emphasised on the word 'such' used by the Legislature in section 158BB. In support of his stand he referred to the Dictionary meaning of the word 'such'. He submitted that the Legislature used the words "such other material or information" after the words "on the basis of evidence found as a result of search or requisition of books of account or documents". Therefore, "such other material or information" must have some nexus with the material found as a result of search. For example, a loose paper may be found at the time of search containing entries "Rs. 50,000 ..... X". This entry does not explain anything. Therefore, if the Assessing Officer makes further enquiry and finds that the assessee had received consideration from 'X', which is of revenue nature then the Assessing Officer can assess the said income as undisclosed income. He, therefore, concluded that under the provisions of Chapter XIV-B it is only that income which is discovered as a result of search which can be assessed as undisclosed income under Chapter XIV-B.
8. His next contention is that the assessment proceedings under Chapters XIV and XIV-B are mutually exclusive and Assessing Officer is competent to initiate and continue both the proceedings simultaneously and independently. According to him, the provisions of Chapter XIV-B do not take away the jurisdiction of the Assessing Officer which is vested in him by virtue of provisions of Chapter XIV. Therefore, he submitted that the scope of the additions in both the proceedings is different. He then submitted that on the same set of facts, assessment cannot be made under Chapter XIV-B. Why the assessee should suffer a higher rate of tax on income in respect of which the assessee had already disclosed its particulars. According to him, the provisions of section 158BB are subservient to section 158BA which is a charging section. Therefore, it is only the undisclosed income as defined in section 158B which can be assessed under Chapter XIV-B. But where the proposed addition does not fall within the scope of section 158B the same can be assessed under section 143(3) or section 144 or section 147 as the case may be. For example, the assessee might have shown a particular receipt believing it to be a capital receipt and, therefore, not offered for taxation. In such cases, if the Assessing Officer is of the view that such receipt is of revenue nature, he can only assess in the course of regular assessment proceedings and not under Chapter XIV-B.
9. He next contended that in computing the total income under section 158BB, the Assessing Officer is not only to compute the income as per Chapter IV but is also bound to give relief as per the other provisions of Act except where the Legislature has specifically excluded the application of any provision. He drew our attention to section 158BH which provides that all the provisions of the Act would apply except otherwise provided in this Chapter. For example, Explanation to section 158BB(1) specifically denies set off of brought forward losses or unabsorbed depreciation. He, therefore, submitted that in case of any addition as undisclosed income, the assessee should be allowed deduction in respect of such income as provided in Chapter VI-A or under any provisions of the Act except where application of any provisions is excluded specifically.
10. On the other hand, Mr. Manish Gupta, the learned departmental representative, vehemently opposed the contention raised by Dr. Pathak. His first contention was that the definition in clause (b) of section 158B is inclusive one and, therefore, it is wider in sense. According to him, each and every income which has not been disclosed by the assessee in his return can be assessed as undisclosed income. There is no restriction clause by the Legislature. There is nothing in definition clause to suggest that the undisclosed income must spring as a result of search. According to him, any sum which can be assessed as income of the assessee and which has not been returned by the assessee would be undisclosed income. It was also submitted by him that in the case of inclusive definition, what is included therein has to be considered in addition to the normal meaning of the word. In such cases, Legislature merely enlarges the normal meaning. Therefore, meaning of the word in the inclusive definition cannot be restricted to what is included therein. Reliance was placed on the following decisions :
(1) Father Epharam v. CIT [1989] 176 ITR 78 (Ker.);
(2) CIT v. Vijay Kumar Budhia [1975] 100 ITR 380 (Pat.);
(3) Raja Ragavendra Singh v. State of Punjab [1976] 102 ITR 40 (Punj. & Har.);
(4) CIT v. Jaora Oil Mill [1981] 129 ITR 423/5 Taxman 223 (MP).
11. He further submitted that the marginal note, speech of the Finance Minister, etc., can be used as an aid to the interpretation where the language of the provision is ambiguous. But where the language is clear and unambiguous resort to such things cannot be made. He referred to the interpretation by Maxwell as well as the decision of the Bombay High Court in the case reported as B. M. Desai v. V. Ramamurthy, ITO [1958] 34 ITR 409. Since the language of the definition clause is clear, its natural meaning has to be taken. Therefore, the contention of the counsel for the assessee that undisclosed incomes must be such income that is discovered or detected as a result of search should not be accepted. In support of his contention, he relied on the following decisions :
(1) CIT v. Puthuthotam Estates (1943) Ltd. [1981] 127 ITR 481/6 Taxman 65 (Mad.);
(2) CIT v. Central Bank of India Ltd. [1990] 185 ITR 6 (Bom.)(FB);
(3) Associated Cement Co. Ltd. v. CIT [1994] 210 ITR 69 (Bom.).
12. Alternatively, he submitted that the words "as a result of the search" in the marginal note to section 158BA qualified the word 'assessment' and not the words 'undisclosed income'. According to him, there cannot be generation of undisclosed income as a result of search. It is only the assessment which is to be made as a result of search.
13. He then referred to the provisions of section 158BB on which reliance was placed by the assessee's counsel. According to him, the word 'such' is followed by the word 'as'. Therefore, such other material means any material in possession of the Assessing Officer in addition to the materials found in the course of search. To butress his arguments, he referred to the provisions of section 143(3) and, submitted that similar words are used in that section and, therefore, the Assessing Officer has all the powers to assess on the basis of any material gathered by him. Hence, the Assessing Officer's power cannot be restricted to the materials as suggested by the assessee's counsel. In support, he relied on the decision in the case of N.T. John v. CIT [1997] 90 Taxman 483 (Ker.).
14. He then contended that under section 158BB it is total income that is to be computed. Once the total income is computed then out of it deductions which can be allowed are enumerated in the section itself. The remaining amount has to be treated as undisclosed income. According to him, such provisions could also be used to define the words for which only inclusive definitions is given. He relied on decision of Patna High Court in the case of CIT v. Vijoy Kumar Budhia [1975] 100 ITR 380. He further submitted that section 158BB specifically states that the total income has to be computed in accordance with the provisions of Chapter IV and, therefore, deduction referred to in Chapter VI-A cannot be allowed. He also submitted that there cannot be two different meanings of the words 'total income', i.e., one for the block assessment and the other for regular assessment. He also referred to the judgment of the Kerala High Court in the case of N.T. John (supra) for the contention that once the proceedings under this Chapter are commenced then no assessment be made by way of regular assessment.
15. He also contended before us that concept of block assessment was introduced to overcome the difficulty faced by the Government in the past. He submitted that in the past, there were disputes between the assessee and the revenue with respect to the year to which the income belongs. If the Court held that the income sought to be taxed did not belong to that year then it was very difficult to tax it again as by that time, it was not legally possible to reopen the assessment. Therefore, in order to avoid this mischief the block assessment was introduced by the Legislature. To restrict the scope of the income in search cases, was never the reason to enact the Chapter XIV-B. In support of his contention, he relied on the decision of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13.
16. He also disputed the contention of assessee's counsel that so long as the primary facts are disclosed no income can be construed as undisclosed income. According to him, section 158B does not contemplate about disclosure of facts. Such concept which existed earlier in section 147 has also been deleted from that section.
17. Regarding the decision of Delhi High Court in the case of L.R. Gupta (supra) it was submitted by him that in the case interpretation of section 132(1)(c) was involved. That decision should be restricted to the interpretation of that section only. According to him, the meaning of the word 'undisclosed income' appearing in section 158B cannot be equated with the meaning of the word in section 132 and, therefore, that decision should not be applied in the present case.
18. In reply it was submitted by him that contention of revenue that definition in section 158B is inclusive is not disputed. But the condition in the later part has to be fulfilled. Then it was submitted that wording in section 158B is on the similar lines to wording is section 132(1)(c). Therefore, decision of Delhi High Court is fully applicable. He further submitted that decision of Kerala High Court if accepted would create anomalies.
19. Rival submissions of the parties have been considered by us carefully. We have also gone through the relevant provisions to which our attention was drawn as well as the case law relied on by the parties. Before considering the scope of the provisions of Chapter XIV-B, we think it necessary to reproduce the relevant provisions contained in the said Chapter. The relevant provisions are as under :
"158B. In this Chapter unless context otherwise requires.
(a) ** ** **
(b) 'undisclosed income' includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act.
158BA. (1) Notwithstanding anything contained in any other provisions of this Act, where after 30th day of June, 1995, a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter.
(2) The total undisclosed income relating to the block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or years to which such income relates irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.
(3) ** ** ** 158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the pervious years falling within the block period computed in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisition of books of account or documents and such other materials or information as are available with Assessing Officer, as reduced by the aggregate of the total income or as the case may be, as increased by the aggregate of the losses of such previous years, determined, -
(a) where assessments under section 143 or section 144 or section 147 have been concluded, on the basis of such assessments;
(b) where returns of income have been filed under section 139 or section 147 but assessments have not been made till the date of search or requisition, on the basis of the income disclosed in such returns;
(c) where the due date for filing a return of income has expired but no return of income has been filed as nil;
(d) where the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 has not expired, on the basis of entries relating to such income or transactions as recorded in the books of account and other documents maintained in the normal course on or before the date of the search or requisition relating to such previous years;
(e) where any order of settlement has been made under sub-section (4) of section 245D on the basis of such order;
(f) where an assessment of undisclosed income has been made earlier under clause (c) of section 158BC on the basis of such assessment.
Explanation : For the purposes of determination of undisclosed income;
(a) the total income or loss of each pervious year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of Chapter IV without giving effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32;
(b) and (c) ** ** ** (2) and (3) ** ** **
(4) For the purpose of assessment under this Chapter, losses brought forward from the pervious year under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32 shall not be set off against the undisclosed income determined in the block assessment under this Chapter, but may be carried forward for being set off in the regular assessments.
158BG. The order of assessment for the block period shall be passed by an Assessing Officer not below the rank of an Assistant Commissioner.
(Provided that no such order shall be passed without the previous approval of the Commissioner or Director, as the case may be).
158BH. Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter."
20. Firstly, we shall deal with the scope of definition clause (b) in section 158B. The definition clauses are introduced in the enactments by the Legislature in order to clarify the meaning of various words used by it in the enactment. It indicates the intention of the Legislature. Words are defined by the Legislature in various Acts. Sometimes exhaustive meaning is given in the definition clause by using the words 'means' or 'means and includes', while in some enactment it does not define a word, but it enlarges the natural meaning of the word. In such cases, it uses the word 'includes'. While in some other cases, it neither defines nor enlarges the meaning but it merely restricts the natural meaning of a word or excludes something out of the same.
21. In the present case, we are concerned with the definition clause, which is inclusive as well as restrictive. It is inclusive in the sense that it enlarges the meaning of the word 'income', inasmuch as it includes the various assets which otherwise could not have been included in the natural meaning of the word 'income'. On the other hand, it is restrictive in the sense that it specifies the boundaries by using the words "has not been or would not have been disclosed". We have given our deep thoughts to the language used in the definition clause. A close reading of this clause, in our opinion, shows that the intention of the Legislature is to tax every kind of income which has been hidden from the knowledge of the Income-tax Department. As already pointed out, the definition clause is in two parts. First part which is inclusive one takes within its ambit the various assets as well as income based on the entries in the books of account, document or transactions. So, first part is in the wider sense. But second part of this clause restricts to those assets/income which have been hidden from the knowledge of the department. This analogy is drawn from the words "has not been or would not have been disclosed for the purpose of the Act" used by the Legislature. Since this definition is applicable only to search cases, the fact whether income has been hidden or not is to be seen with reference to the date of search. If prior to the date of search, the assessee has disclosed particular of the income either in the return or in the course of assessment proceedings to the Assessing Officer or where the return has not become due, same are duly recorded in the regular books of account, then, in our opinion, such income cannot be treated as undisclosed income.
22. But we are unable to accept the contention of Mr. Pathak, the learned counsel for the assessee, that undisclosed income must be that income which is detected as a result of the search. It is the settled law that where the language of a section is clear and unambiguous, it has to be understood in accordance with its natural meaning and nothing has to be added to or subtracted from the language. The learned counsel for the assessee has heavily relied on the marginal notes, Speech of the Finance Minister in the Parliament and Notes on the Finance Bill, etc. In our opinion, Mr. Manish Gupta, learned departmental representative has rightly contended that these are only aids to the interpretation and can be used only where language of the section is ambiguous. There is nothing in the language used in section 158B(b) to suggest what has been contended by Mr. Pathak. In our opinion, the language of the section is clear and unambiguous and, therefore, resort to marginal notes or Finance Minister's Speech, etc., is not required for the purpose of determining the scope of section 158B(b). Since the definition clause is inclusive as well as restrictive one, this, in our opinion, would include the natural meaning of the words 'undisclosed income' in addition to what has been specifically included therein, subject to the restrictions mentioned in the second part.
23. Now the question arises, what is the natural meaning of such word. The word 'undisclosed' has not been defined in the Act. Therefore, it has to be understood in accordance with its dictionary meaning. The word 'undisclosed' means 'not disclosed'. The words 'disclosed' and 'undisclosed' have been defined in the various dictionaries as under :
Meaning as per Webster's Third New International Dictionary :
Disclose : To open, to open up, unclose, to expose to view, lay open or uncover (something hidden from view), to make known, open up to general knowledge, to reveal in words (something that is secret or not generally known).
Undisclosed - not made known, not named or identified.
Meaning as per Chambers 20th Century Dictionary :
Disclose : To unclose, to open, to lay open, to bring to light, to reveal, to hatch (Shak), to transform and give vent to (spens) disclost - n, a disclosure, emergence from the egg (Shak), n, disclosure - act of disclosing, a bringing to light or revealing, that which is disclosed or revealed.
Meaning as per Black's Law Dictionary (6th Edition) :
Disclose - To bring into view by uncovering, to expose, to make known, to lay bare, to reveal to knowledge, to free from secrecy or ignorance, or make known.
Discovery : In a general sense, the ascertainment of that which was previously unknown, the disclosure or coming to light of what was previously hidden, the acquisition of notice or knowledge of given acts or facts; as, in regard to the 'discovery' of fraud affecting the running of the statute of limitations, or the granting of a new trial for newly 'discovered' evidence.
Meaning as per the Shorter Oxford English Dictionary :
Disclose : To open up, to unfasten, to hatch, to uncover, to remove a cover from and expose to view, to uncover (a young bird), etc., from the egg, to hatch, Barely to lay (Eggs), to discover to open up to the knowledge of others, to reveal.
A close look to the various dictionary meaning clearly shows that 'undisclosed' means something which is hidden from the knowledge of others. The word 'hide' shows deliberate intention of the person hiding the fact. But where a fact is brought within the knowledge of a person then it cannot be said that such fact is hidden from his knowledge. So it would include every income which is hidden from the knowledge of the department whether detected as a result of the search or not. There may be cases where the Assessing Officer may find out the hidden income subsequent to the date of search and that too from the books of account of the assessee itself. Sometimes, the Assessing Officer get the information and material from the Government agencies which may indicate concealed income of the assessee pertaining to the block period. The intention of the Legislature is to assess the undisclosed income of the assessee as is apparent from the provisions of sub-section (1) of section 158BA. What is undisclosed income is defined in section 158B. We have already expressed our view that the language of section 158B is clear and unambiguous and, therefore, it would include every kind of income which is hidden from the knowledge of the department. If the contention of Mr. Pathak that undisclosed income must be that which is detected as a result of search is accepted, then it would amount to restrict the natural meaning of the word undisclosed income in section 158B(b).
24. We are also unable to accept the contention of Mr. Pathak that undisclosed income must be assessed on the basis of material found as a result of search, or other material having nexus with the seized material. According to him, the words 'such other material' used in section 158B suggests such interpretation. He has referred to the meaning of the word 'such' as given in the dictionary. According to him, it must relate to the preceding words. In our opinion, the words 'such' may not necessarily refer to the word or words preceding to it. It is the settled law that words used by the Legislature should be interpreted in the manner which advances its object and not which frustrates it. The object of the Legislature is to find out all the hidden income of the assessee. Therefore, in our opinion, the words 'such other material' has to be understood as 'any other material'. Interpretation suggested by him would again restrict the natural meaning of the word 'undisclosed' income. According to dictionary meaning, the word 'such' has both meanings. It indicates precedent as well as antecedent. Therefore, the meaning has to be seen in the context in which it is used. As already expressed by us, the context requires that the words 'such other material' should be understood 'as any other material'.
25. However, we agree with Mr. Pathak, learned counsel for the assessee that assessment proceedings under Chapter XIV-B and Chapter XIV are mutually exclusive and both the proceedings can be initiated and continued independently and simultaneously. Prior to the insertion of Chapter XIV-B, the Assessing Officer was fully empowered to assess every kind of income under the provisions contained in Chapter XIV by way of regular assessment or reassessment. After insertion of Chapter XIV-B, which deals with the search cases, i.e., in respect of those assessees only at whose premises search has taken place after 30th June, 1995, the Assessing Officer is vested with the powers to assess the undisclosed income in accordance with the provisions contained in this Chapter. That means that powers of the Assessing Officer to assess the income other than undisclosed income continue to be vested with him under Chapter XIV. There is nothing in Chapter XIV-B which suggests to take away the power of the Assessing Officer vested in Chapter XIV except to assess undisclosed income. It is now settled law that once a jurisdiction is vested with the Assessing Officer the same cannot be taken away by implications. Reference may be made to the Supreme Court judgment in the case of CIT v. Dadi Sahu [1993] 199 ITR 610. Section 158BA(2) provides that undisclosed income shall be assessed at the rates specified in section 113. In our opinion, absurd results would follow if we accept the contention of Mr. Gupta that regular assessments need not be made in search cases. The reason is obvious. Under section 158BA(2), the assessee can be assessed with reference to undisclosed income only. In such situation, question would arise how regular disclosed income would be assessed ? How the department would recover the tax due on the disclosed income ? How the assessee will be able to get refund of the excess advance tax paid ? Such absurd situations could not have been contemplated by the Legislature. On the contrary, in our opinion, there is no anomaly in the provisions of the Act. Chapters XIV and XIV-B have their own fields. Undisclosed income as defined in section 158B has to be assessed under Chapter XIV-B and the same cannot be assessed under Chapter XIV. Similarly, income other than the undisclosed income has to be assessed under Chapter XIV. We therefore, hold that proceedings under both the Chapters are mutually exclusive and can be exercised independently and simultaneously.
26. In view of what we have expressed above, we are unable to accept the contention of Mr. Gupta, learned departmental representative that any income which is includible in the total income but not returned by the assessee would be undisclosed income under section 158B. Such contention of Mr. Gupta is too extreme to be accepted. Even at the cost of repetition it is clarified that if the assessee has disclosed the particulars of income before the date of search and the Assessing Officer draws an adverse inference and intends to assess the same as income, then, in our considered opinion, such income cannot be treated as undisclosed income. For example, the assessee may claim a particular receipt as not taxable or may claim a particular expenditure as allowable deduction under the provisions of Income-tax Act. In such cases, if the assessee has disclosed particulars of such income or expenditure and the Assessing Officer intends to take a different view, then such income, in our opinion, cannot be termed as undisclosed income, though the same may be considered for inclusion in the total income during the course of regular assessment or reassessment as the case may be, in accordance with law.
27. Now the question arises, what is to be disclosed by the assessee. Answer can be found from the judgment of Hon'ble Supreme Court in the case of Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. (supra), wherein it has been held that it is the primary facts which are to be disclosed and not inferential facts. Mr. Gupta has contended that section 158B does not contemplate about disclosure of facts. But we are unable to agree with him. The words 'for the purposes of this Act' in the end of the definition clause under section 158B are significant. Section 139 provides for filing of the return in the prescribed manner setting-forth such particulars as may be prescribed. The return form prescribes material aspects which are to be disclosed by the assessee. Section 147 provides that if material facts are not disclosed in respect to any income which has not been returned, the Assessing Officer may reassess the income of the assessee. We are also unable to agree with Mr. Gupta that concept of disclosure of material facts is deleted from section 147. Proviso to the amended section 147 still includes this concept. Therefore, we hold that where the assessee has disclosed primary facts relating to the particulars of receipts and expenses either in the return or in the course of the assessment proceedings or where the return has not become due such particulars have been duly recorded in the regular books of account prior to the date of search and the Assessing Officer intends to assess the same then such income cannot be assessed as undisclosed income within the scope of section 158B(b) merely on the ground that adverse inference is drawn by the Assessing Officer. However, the Assessing Officer may perhaps assess the same either by way of regular assessment or reassessment, as the case may be, in accordance with law.
28. No case law is available to interpret the meaning of undisclosed income, except the decision of the Delhi High Court which happened to consider the meaning of the word 'undisclosed' as defined in section 132(1)(c). The following observations are quoted for the benefit of this order :
L.R. Gupta v. Union of India [1992] 194 ITR 32, 34 (Delhi) "Sub-clause (c) of section 132(1) pertains only to movable and not immovable assets. Secondly, it pertains to those assets which, wholly or partly, represent what should have been income. The expression 'income' which has not been, or would not be, disclosed for the purposes of 'the Income-tax Act' would means that income which is liable to tax but which the assessee has not returned in his income-tax return or made known to the Income-tax Department. The sub-clause itself refers to this as 'undisclosed'. In that context, it must mean income which is hidden from the Department. Clause (c) would refer to cases where the assessee knows that the movable asset is or represents income which is taxable but which asset is not disclosed to the department for the purpose of taxation. Those assets must be, or represent, hidden or secreted funds or assets. Where, however, the existence of the money or asset is known to the Income-tax Department and where the case of the assessee is that the said money or valuable asset is not liable to be taxed, then the provisions of sub-clause (c) of section 132(1) would not be attracted. An assessee is under no obligation to disclose in his return of income all the moneys which are received by him which do not partake of the character of income or income liable to tax. If an assessee receives, admittedly, a gift from a relation or earns agricultural income which is not subject to tax, then he would not be liable to show the receipt of that money in his income-tax return. Non-disclosure of the same would not attract the provisions of section 132(1)(c). It may be that the opinion of the assessee that the receipt of such amount is not taxable may be incorrect and, in law, the same may be taxable, but, where the department is aware of the existence of such an asset or the receipt of such an amount by the assessee, then the department may be fully justified in issuing a notice under section 148 of the Act, but no action can be taken under section 132(1)(c). Authorisation under section 132(1) can be issued if there is a reasonable belief that the assessee does not want the Income-tax Department to know about the existence of such income or asset in an effort to escape assessment. Section 132(1)(c) has been incorporated in order to enable the department to take physical possession of those movable properties or articles which are, or represent, undisclosed income or property. The words 'undisclosed income' mean income which is liable to be taxed under the provisions of the Income-tax Act but which has not been disclosed by an assessee in an effort to escape assessment. 'Not disclosed' implies the intention of the assessee to hide the existence of the income or the asset from the Income-tax Department while being aware that the same is rightly taxable."
Though the meaning of undisclosed income was given with reference to section 132(1)(c), we are of the view that the same can be applied with reference to Chapter XIV-B. The view which we have taken therefore is fortified by the aforesaid decision.
29. What we have expressed above regarding the scope of the provisions of Chapter XIV-B is sufficient to dispose of the present appeal. We, therefore, refrain ourselves from expressing our views on the other aspects argued by the parties.
30. Issue regarding the clubbing of income of Parakh Food International :
The brief facts of the case are these : M/s. Parakh Food International (hereinafter referred to as PFI) is a sister concern of the assessee. It is a partnership firm consisting of three partners, viz., S/Shri Harakchand Parakh; Prakash H. Parakh and Suresh H. Parakh which was formed on 23-1-1990 with a view to start the business of import and export in all kinds of goods. The partners of the firm are also the Directors of assessee-company. The said firm is duly registered under the provisions of Indian Partnership Act, 1932. It started the business of import and export in various goods. Later on, it restricted to export business in pulses. The said firm has been registered under the provisions of the Income-tax Act, 1961 and continuation of its registration has been granted in the subsequent years. The premises of the assessee as well as M/s. PFI were search under section 132 on 12-7-1995. As per the provisions of Chapter XIV-B, the block assessment of both the concerns were to be completed by 31-7-1996. On 22-7-1996, a notice was issued by the Assessing Officer to the assessee-company to show cause why the income of PFI be not clubbed in the hands of the assessee for the reasons mentioned in the said notice. The assessee was required to reply on the next date by 4.00 P.M. The assessee vide his letter dared 23-7-1996 replied to the objection of Assessing Officer. However, the Assessing Officer was not satisfied with the reply of the assessee and clubbed the income of PFI in the hands of the assessee pertaining to assessment years 1991-92 to 1994-95. The reasons given by the Assessing Officer for clubbing the income of PFI are as under :
(1) That partners of the firm PFI are also the Directors of the assessee-company and PFI was created to carry on the same business which was on by the assessee;
(2) The PFI did not have any manufacturing facility of its own and the goods imported by the assessee were directly unloaded at the premises of the assessee at Washi and after processing the same were directly despatched for export from Washi to Bombay Port;
(3) That there was no agreement between the assessee and PFI for processing of the goods;
(4) That consideration for processing of goods is not in monetary terms but is in the form of chuni and husk obtained in the process of gram which is not consistent, inasmuch as the yield of chuni and husk vary from 22 per cent. to 27 per cent.;
(5) That no separate production record is maintained by the assessee to distinguish the product of assessee and PFI. Even the stock of raw material is not kept separately. Since the raw material is always in the pipeline it is not possible to differentiate the processing meant for inland sales and for export;
(6) That the firm was created with a motive to claim higher deduction under section 80HHC;
(7) That the partnership firm was started with the small capital and there was free flow of funds between the assessee and PFI. For all practical purposes, PFI was financially dependent on the assessee;
(8) That the funds of PFI were ultimately diverted to the assessee-company which shows that the profits of PFI were enjoyed by the assessee-company;
(9) That there was no infrastructure facilities with PFI to carry on its own business.
31. On the basis of the above reasoning, the Assessing Officer has concluded that PFI is merely a branch of the assessee-company. Consequently, the income of PFI relevant to assessment years 1991-92 to 1994-95 was clubbed in the hands of the assessee-company which amounted to Rs. 5,52,95,926.
32. The learned counsel for the assessee has vehemently assailed the finding of the Assessing Officer that the partnership firm PFI is a merely branch of assessee-company. It was submitted by him that the firm was constituted on 23-1-1990 by the three persons with a view to carry on the business of import and export of various items which were entirely different activity from the activity of the assessee-company. The assessee-company was not in the line of export business. He drew our attention to the fact that in the financial year 1990-91, the partnership firm exclusively dealt in the export business of onions. On the contrary, the assessee-company never dealt in purchase and sales of onions. In the financial year 1991-92, the assessee exported goods of general merchandise as much as 61 items, a list of which is given at page 24 of the paper book. In addition to these items, it also exported gram dal urad dal and tur dal. Then in the subsequent years up to financial year 1994-95, it restricted to export dals only. In 1995-96 it has imported sugar while in 1996-97 it imported edible Oils and oil seeds. In view of these facts, it was argued by him that the Assessing Officer was wrong in observing at page 109 of the assessment order that all the activities for which the firm was created were being done by the assessee-company.
33. He then contended that the PFI had been validly constituted and its genuineness has not been doubted. The firm has been duly registered with the Registrar of firms. Besides it has been registered under various Acts such as Central Sales-tax Act, Bombay Sales-tax Act and Bombay Shops Act. It was also registered as Merchant Exporter under the Import and Export Policy for 1992 to 1997 by the Office of the Joint Director (Export Promotion), Ministry of Finance and Export Code was allotted to it. Various licences by Food Grain Distribution Officer, Pune and licence by Krishi Utpan Bazar Samiti (Agricultural Produce Market Committee), Pune. In support of his contention, he referred to pages 7 to 23 of the paper book. According to him, none of the authorities had doubted the genuineness of the partnership firm. Even the Income-tax Department has accepted the genuineness of the firm by granting registration as well as continuation of registration under the provisions of the Income-tax Act, 1961.
34. Regarding the manufacturing/processing of pulses, it was submitted by him that there was nothing wrong in getting the goods processed from outside parties. In group cases, it is always convenient to get the goods processed from its sister concern. There was an oral agreement for processing of goods against which due consideration had been paid by PFI to the assessee-company. It is between the parties to pay the consideration either in money or in money worth. The payment in kind is duly recognised in such trade. He drew our attention to the fact that even the Food Corporation of India (FCI) which is Government agency is also in practice of paying the processing charges in the form of by-product, i.e., chuni and husk. At this stage, the assessee's counsel was asked to furnish the evidence to establish this fact. In response to the same, a speciman copy of FCI tender was filed. It was also submitted by him that the assessee has been doing such job work of another firm of M/s. Eastern Overseas Corporation on the same terms and conditions. It was also stated by him that the processing charges were paid in kind in order to take care of the inflation in the cost. It was also submitted by him that it was not necessary to set up its own plant. Getting the goods manufactured by others is a general and known practice of business. He also drew our attention to the judgment of the Bombay High Court in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 to support his submission. Regarding direct receipt of the raw materials at and despatch of processed goods from Washi unit, it was submitted by him that assessee's purchases were by way of import from other countries and goods were to be brought from Bombay Port. Since Washi unit is on the National Highway between Bombay and Pune, no prudent man would have decided to bring the goods first from Port to Pune and then transport it back to Washi for processing. It was convenient and economical to bring the goods directly from Port to Washi. Similarly, the decision of despatching the processed goods directly from Washi to Bombay Port was in the interest of business. It was also contended by him that the activity of import and export was only by the clearing agents though under the supervision of the partners of the firm PFI. The payment of them is fully supported by their bills. Reference was made to the speciman bills at pages 776 and 777 of the paper book. Regarding the observations of the Assessing Officer that payments of processing charges in kind were disproportionate, he pointed out that the Assessing Officer had himself observed in the block assessment order in the case of PFI that these charges were excessive and provisions of section 40A were applied by the Assessing Officer. This fact rather goes in favour of the assessee rather than the revenue.
35. It was also submitted by him that the fact that the partners of the firm were also directors and shareholders of the assessee-company could not be a relevant fact for holding that these two concerns were the same. He drew our attention to the list of shareholders as on 31-3-1990 appearing at page 742 of the paper book which consists of 15 persons. Besides, there was a nominee of the SICOM on the Board of Directors. The partners of the firm merely held 7311 shares in aggregate out of the total shareholdings of 26,500 shares at the time when the firm was formed. According to him, majority of the shareholdings was with other persons. Besides this, there was no legal bar on carrying on an independent business by the shareholders or the directors of the company.
36. It was then contended by him that carrying on of the business on low capital cannot be a factor on the basis of which adverse inference was drawn by the Assessing Officer. The business is run on the creditworthy of the persons who carry on the business. He drew our attention to various pages between page Nos. 37 to 118 of the paper book to show that the capital of the firm was increased from meagre amount to crores on account of the profits earned by the firm. So, according to him, low capital was never a handicap to him and it never depended on the funds of the company. On the contrary, in the subsequent years, the firm had advanced loans to the assessee-company. Besides, the firm was getting 90 days credit from the foreign suppliers. Bank finances were also available, as is apparent from the various balance sheets of the firm. Regarding the withdrawal of Rs. 1 crore each by the partners in the financial year 1992-93, it was submitted by him that these monies were given to the company for allotment of shares as shares application money. Finally, all the partners got the allotment of the shares. Dividends against such shares have also been duly included in the income of these partners. He further drew our attention to page No. 779 of the paper book to show that the partners of PFI not only invested in the assessee-company, but also invested money in shares of Parakh Food International Ltd., Parakh Oils Ltd., Parakh Agro Industries Ltd., Indian Tanners Ltd. and Hotel Leela Venture. These investments amount to more than Rs. 67 lakhs by each partner. Besides this, Prakash Parakh and Mr. Suresh Parakh had advanced money to other persons. Mr. Prakash Parakh had also purchased land at Mundhawa, and a motor car worth Rs. 7.7 lakhs and Rs. 5.03 lakhs respectively. From these facts, he pointed out that fruits of the partnership firm had been enjoyed by the partners personally and there is not a single evidence to show that other shareholders and directors of the assessee-company enjoyed the profis of the firm. According to him, this fact is very much essential to be established by revenue in order to prove that the partnership firm was the benamidar of the assessee-company. He further submitted that no adverse inference can be drawn merely on the fact that there were some transactions of loans between the assessee and PFI. He also submitted that in group cases guarantees are given by the sister concerns to help each other. He also pointed out that not only the assessee-company, but the partners also stood as guarantors.
37. Regarding stock, it was submitted by him that the assessee was keeping the stock of PFI separately. Stocks of PFI were identifiable on account of different quality of gunny bags and the same were kept separately, though in the same premises. He referred to page No. 8 of the assessment order to show that the stock of PFI was kept separately. He also referred to the letter of the Central Bank of India dated 9-2-1994 appearing at page No. 745 of the paper book to show that the stock of the assessee and PFI were required to be kept separately. Stock registers were maintained by PFI on each licence basis. He then referred to para 3 of the letter of the assessee dated 9-5-1996 addressed to the Assessing Officer which states that the material imported by PFI was stored and kept separately and processing was also done in separate mill. This fact has not been disproved by the Assessing Officer. He also stated that at the time of search, the authorised officer never asked any question pertaining to the stock of PFI. Had such question been asked by the authorised officers, the assessee would have told about the stock of PFI. Even assuming that there was inter-mingling of stock, this factor cannot be a ground to treat the firm as benamidar of the assessee-company. He relied on the decision of the Tribunal in the case of G.L. Chabada v. ITO [1995] 53 ITD 53 (Bang.).
38. Regarding the motive of the assessee, Mr. Pathak submitted that there was no question of avoiding tax by claiming higher deduction under section 80HHC. If this could have been the only motive, the assessee could have started a separate 100% export-oriented unit and thereby claim 100% exemption from tax. In fact, the ladies who were shareholders and directors did not went to take the risk of the stringent provisions of the Foreign Exchange Regulation Act. The income-tax provisions under section 80HHC are the consequence of such decision and not the motive.
39. Regarding the infrastructure facilities, it was submitted by him that the assessee was maintaining separate office, telephone, telex and employees. The office was undoubtedly in the same building, but there is nothing wrong in having office in the same building. The offices of the assessee and PFI were entirely different. The activity of export and import was handled by the clearing agents in Bombay who were paid for their services. For the routine work, PFI had its own employees.
40. Besides above, it was also stated by him that the customers of PFI were different from the customers of the assessee. There is also nothing on the record that PFI sold goods at higher price than sold by the assessee to the similar customers. Goods were sold by PFI in accordance with the International market price. The assessee was not in the line of export business. Therefore, he submitted that if some of the shareholders/directors intended to start a different kind of business, no adverse inference could be drawn.
41. On the legal aspect, it was contended by him that it is settled law that burden lies on the person who alleges that a particular concern is a benamidar of the other. Reference was made to the Madras High Court decision in the case of First ITO v. M. R. Dhanalakshmi Ammal [1978] 112 ITR 413. He pointed out that no evidence has been brought on record either to prove that the capital of the firm was contributed by the assessee or profits of the firm was enjoyed by the assessee. In support of his contention, he also relied on various other decisions which are as follows :
(1) Padinjarekara Agencies (P.) Ltd. v. CIT [1988] 173 ITR 637/40 Taxman 1 (Ker.);
(2) IAC v. Shree Gita Tea Trading Co. [1991] 39 TTJ (Ahd.) 489;
(3) CIT v. Standard Mercantile Co. [1985] 153 ITR 105 (Pat.);
(4) 29 TTJ 223 (sic);
(5) Asstt. CIT v. Prakash Textiles Associates [1996] 54 TTJ (Ahd.) 531;
(6) ITO v. Ghanshyambhai R. Thakkar [1996] 56 TTJ (Ahd.) 460;
(7) ITO v. U. P. Tractors [1986] 19 ITD 199 (Jab.).
It was also submitted by him that there was no material to prove that profits of PFI were diverted to the assessee-company. On the contrary, the volume of the business and profits have increased after the firm came into existence. There was no motive to circumvent the provisions of Income-tax Act, as held by the Assessing Officer. Since the lady directors did not intend to take the risk of the stringent provisions of the Foreign Exchange Regulation Act, the three directors decided to carry on their own business of import and export in partnership. Deduction under section 80HHC of the Income-tax Act, is the consequence of such decision and not motive to carry on the business. He also distinguished the case law relied upon by the Assessing Officer.
42. Lastly, it was argued by him that even assuming that PFI was benamidar of the assessee, such an additional could not have been made as undisclosed income under the provisions of Chapter XIV-B. He submitted that not even a single piece of evidence was found that the time of search to suggest the conclusion arrived at by the Assessing Officer. No fresh facts have come to the knowledge of the Assessing Officer. All the primary facts were already within the knowledge of the Assessing Officer. He drew our attention to the order of the Assessing Officer in the case of PFI for the assessment year 1992-93 wherein the Assessing Officer had taken cognizance of the fact that the assessee-company was doing processing job of PFI against consideration in kind by way of retaining chuni and husk under oral agreement. The Assessing Officer who assessed PFI was also the assessing authority of the assessee-company. Therefore, it cannot be said that any fresh fact came to the knowledge of the revenue. Hence, on the same set of facts, no addition was warranted under Chapter XIV-B and, if any addition was warranted, that could have been made by the Assessing Officer in accordance with the provisions of Chapter XIV only.
43. On the other hand, Mr. Sanjay Prasad, the learned departmental representative, has vehemently opposed the contentions of the learned counsel for the assessee. According to him, the case of the department is that PFI is benamidar of the assessee-company and the businesses of the assessee and PFI are the same. At the outset, it was submitted that each fact by itself may not be conclusive proof, but cumulative effect of all the facts and circumstances of the case would prove the case of the revenue. For this proposition, he relied on the decision of the Madras High Court in the case of E.A.E.T. Sundararaj v. CIT [1974] 95 ITR 454. He elaborated the various factors taken into consideration by the Assessing Officer. He tried to point out that there was unity of control, management and finance. According to him, the Assessing Officer came to know of the several factors after the date of search to suggest that the partnership firm was the branch of the assessee-company.
44. First of all, he referred to the fact that all the partners of the firm PFI were directors of the assessee-company. There was no separate infrastructure of PFI as it had common office premises, telephone facility, employees, etc. He pointed out that surprisingly there was nothing on the record that the partners went abroad for its business, though business was of import and export. How the firm could import or export without the help of the assessee-company is a question to be considered. He drew our attention to the fact that the address of PFI and the assessee-company was the same, i.e., 1 and 2 Market Yard, Gultekadi, Pune. Reference was made to page 745 of the paper book. He also drew our attention to page 757 of the paper book to show that the address of the Bombay Office of both the concerns was also the same and no expenses of Bombay Office have been debited by PFI. He also pointed out that no office rent or salary has been shown by PFI. In this connection, he referred to P&L account appearing at pages 37-38 of paper look. He also referred to page 43 which is profit and loss account of the year ending 31-3-1991 to show that a meagre amount of Rs. 24,000 has been shown as salary which is insignificant keeping in view the volume of business. He further pointed out that in the business of import and export, one has to carry on various activities, like quality control, packing, handling of goods, transportation, etc. For such activities, the staff maintained by PFI was inadequate. He also pointed out that there were no office assets, except a Xerox machine. There was no furniture or typewriter, though all the work was of typing. There were no foreign tour expenses by PFI whereas such expenses have been incurred by the assessee. How PFI received export orders is not known. On the contrary, it appears that it was the assessee who transacted the business with J.K. International of Australia on behalf of PFI. Shipment of imported goods was as early as May 1990, which could not have been possible without the help of the assessee. He also pointed out that PFI exported 81,250 bags onion. How packing was done in the absence of adequate employees ? So, he submitted that these facts and circumstances do indicate that the entire management and control of PFI vested in the assessee-company.
45. He further submitted that Finance of PFI was dependent on the assessee-company and there was free flow of funds between these two concerns. The partnership business was started with a meagre sum of Rs. 4,500 only. 90 days credit facility by foreign suppliers and bank finances would not have been possible but for the goodwill of the assessee-company. The assessee-company had also stood as guarantor for PFI to the bank. Besides this, funds of Rs. 3 crores were diverted from PFI to the assessee-company. He referred to page 779 to show that each partner withdrew Rs. 1 crore each from PFI and deposited the same with the assessee-company. Though it has been mentioned by the partners that this money was given as share application money, but from the balance sheet of the assessee-company it appears as a loan. Reference was made to page 127 of the paper book. If the assessee-company had received the money as share application money, it was required to show as such in its books of account, as provided under the company law and not as a loan. No interest on such loan was provided by the assessee. He also referred to the fact that the assessee had given loan of Rs. 12,62,525 to PFI in assessment year 1991-92 and Rs. 1,19,514 in assessment year 1990-91. He also referred to para 12 of the letter dated 19th February, 1994 issued by the Central Bank of India to PFI stating that a sum of Rs. 218 lakhs had been diverted from the business. No explanation had been given by PFI. Reference was also made to pages 45, 46 regarding credit of J.K. International, Australia who was also the creditor of the assessee. It was submitted by him that such credit was available to PFI only because of the assessee-company. In view of these facts, it was concluded by him that there was free flow of money between the assessee and PFI.
46. The next submission was with reference to processing charges. He pointed out that processing charges could include the charges for processing of goods only. What about the charges for other activities, for example, storage, handling and packing of goods processed. No such charges had been shown by the PFI. Even transport charges from Washi to Bombay Port had not been shown by PFI. He referred to page 43 to show that PFI had not shown any freight outward. It was also submitted by him that copy of the tender (FCI) filed by the assessee is a new piece of evidence. At this stage, it was clarified by the Bench that such copy was supplied on the direction of the Bench. He then submitted that the arrangement between the assessee and PFI is not similar to that of FCI as much as clause 7 of that tender was different. He also objected to the admission of evidence of Eastern Overseas Corporation, as the contents of the same were not substantiated. Besides this, processing charges were not consistent inasmuch as there was variation in production of chuni and husk ranking between 22% to 27%.
47. His next submission was with reference to stock found at the time of search. He submitted that no separate stock of PFI was found. He referred to Panchanama appearing at pages 943, 967 and 968, 1007, 111 to 114. Nowhere it was indicated that any stock belonged to PFI. Reference to page 184 was also made with reference to the statement of Mr. Suresh. It has been admitted by him that inventory was found to be true and correct. He also submitted that there was no finding of the Assessing Officer that there was separate stock of PFI as alleged by the assessee's counsel. He had only recorded the statement of the assessee. He referred to pages 6 and 17 of the inventory to show that wherever the imported material was there, it was mentioned as such. He also referred to Annexure 'K' of assessment order to show that there was nothing to indicate that there was any imported material. He further submitted that the assessee's counsel has merely assumed that stock of 2100 bags belonged to PFI. So his contention was that there was intermingling of stock.
48. He then referred to certain other details which had some discrepancies. He referred to pages 747 to 756. According to him, the sugar appeared to be imported by PFI, while contract was with the assessee-company. He also referred to para 13.4 of the assessment order to indicate that the assessee did not have proper system of maintaining stock of Bardana. Bardana of both the concerns got mixed up. It was also submitted by him that the plastic sheet is inserted in the gunny bags for export of dal but the cost of the same has not been shown. He also pointed out that packing expenses for 275125 onion bags and 14729 chana bags would have been much more than shown by the PFI. Huge business of onions could not have been possible without the help of the assessee-company. It is also not clear how export orders were obtained by PFI.
49. His next submission was that registration of the firm under the various Acts cannot be the basis for holding that the firm is genuine. As far as registration under the Income-tax Act is concerned, it was granted only under section 143(1). The material on the record is sufficient to hold that PFI was a unit of the assessee-company.
50. He further stated that the lady director had gone to Australia as director. Therefore, it cannot be said that the lady directors were afraid of Foreign Exchange Regulation Act provisions. The fact that lady directors went to Australia is clear from paras 4.1 and 4.2 of the order of the CIT(Appeals) for the assessment year 1990-91 in the case of the assessee-company. He referred to clause 4 of the Memorandum of Association to show one of the objects was to deal in import and export business. Therefore, there was no question of starting separate business of foreign trade. Regarding exemption under section 10B, it was submitted by him that the stringent conditions were required to be fulfilled in order to claim exemption under section 10B. On the contrary, separate business has been started with a meagre capital without any effort. He further pointed out that the profits of the firm have also been enjoyed by the assessee-company as there was free flow of funds. A chart has been furnished by the learned departmental representative to show that 85% of the profit of the firm was enjoyed by the assessee-company.
51. In the end, he concluded that cumulative effect of the above factors clearly show that PFI was benamidar of the assessee-company and the Assessing Officer was justified in holding that PFI was merely a branch of the assessee. In support of his contentions, he relied on the following decisions :
(1) CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC);
(2) Produce Exchange Corpn. Ltd. v. CIT [1970] 79 ITR 739 (SC);
(3) Standard Refinery & Distillery Ltd. v. CIT [1971] 79 ITR 589 (SC);
(4) First ITO v. M. R. Dhanalakshmi Ammal [1978] 112 ITR 413 (Mad.);
(5) Seth Ramnath Daga v. CIT [1971] 82 ITR 287 (Bom.);
(6) Calcutta Electric Supply Corpn. v. CWT [1971] 82 ITR 154 (SC); and (7) Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC) He then submitted that the case law relied upon by the assessee were distinguishable on facts. In G.L. Chabada's case (supra), it was held by the Tribunal that the alleged firm held to be benami was formed prior to the firm in whose hands income was clubbed. In Prakash Textiles Associates' case (supra), U.P. Tractors' case (supra), Shri Gita Tea Trading Co.'s case (supra), department was not able to prove regarding the intention and enjoyment of profits, etc. In Padinjarekara Agencies (P.) Ltd.'s case (supra), facts were totally different. In Ghanshayambhai R. Thakkar's case (supra), intermingling of stock was not proved.
52. Lastly, Mr. Manish Gupta opposed the contention of Mr. Pathak that addition cannot be made under Chapter XIV-B. He maintained that any addition made by the Assessing Officer which is not shown by the assessee can be assessed as undisclosed income. Further there was no question of change of opinion as there was no existing opinion of the Assessing Officer in this regard. This issue has never been discussed in any earlier assessment year. He also submitted that if addition by way of clubbing of income can be made under section 148 then there is no reason why it cannot be made under Chapter XIV-B. In support of the same, he referred to Sohan Singh v. CIT [1986] 158 ITR 174/23 Taxman 219 (Delhi) and Kirpa Ram Ramji Dass v. ITO [1982] 135 ITR 68/[1980] 3 Taxman 487 (Punj. & Har.) to point out that even under section 148 addition can be made where a concern was held to be benami of the assessee.
53. In reply, Mr. Pathak clarified the factual aspects presented by Mr. Sanjay Prasad. Firstly, he pointed out that onion export was carried out with the help of M/s. Bansilal B. Raisoni and Sons, Pune, whose one of the partners is college friend of Mr. Prakash Parakh, partner of PFI. The said firm had no business connection with the assessee-company in earlier years. Export orders were received through the said firm on the condition that onion would be purchased from that firm. Regarding the expenses of packing, it was clarified that onion bags costed only Rs. 1.72 ps. per bag while cost of bag for dal was Rs. 4.51 ps. Therefore, there was no discrepancy in packing expenses. Since direct export was made to third party question of disclaimer certificate was not required. Regarding other expenses, it was stated by him that purchase price of onion included all expenses up to the delivery at dock. The party to whom onions were exported had no dealings with the assessee-company.
54. Regarding the creditworthiness of J.K. International, Australia, it has been stated by him that the first transaction took place in November 1990 for which the assessee opened Letter of Credit with Central Bank of India. Relevant evidence was also furnished before us. This party does not believe either the assessee or the PFI. Credit is given only against irrevocable letter of credit. Hence, it is wrong to state that credit by J.K. International was on account of the assessee-company.
55. Regarding the foreign tour of Mr. Prakash Parakh and his wife Mrs. Asha Parakh, it was pointed out by him that they went to Australia in 1989 while PFI came into existence much after, i.e., 23rd January, 1990. The first purchase of chana was in November 1990, i.e., 15 months after that tour. There cannot be any co-relation between these two events. He further submitted that whenever partners of PFI went abroad, their expenses have been duly shown in the account books.
56. Regarding the intermingling of stock, it was submitted by him that the assessee maintained inward/outward gate pass system and stocks of PFI were kept separately. Employees of assessee were always aware about the stock of PFI. It was further submitted by him that no specific question was asked by search party about separate stocks of PFI. Reply would have been given if such question had been asked. Regarding the organisation and infrastructure of PFI, it was stated by him that building at Plot Nos. 1 and 2, Gultekadi, Pune, belongs to Parakh Agro Industries. Wherein PFI as well as the assessee are having separate offices. PFI had also clerical staff of 3 persons at Pune. The said firm had also paid telephone, telex expenses which were debited to P&L a/c in assessment years 1990-91 to 1992-93. It was also pointed out by him that rent of Rs. 12,000 was paid by PFI for furnished office and, therefore, separate furniture was not shown in the accounts of PFI. Besides this, PFI had reimbursed the assessee towards telephone, telex as well as office and general expenses, etc., on ad hoc basis. PFI has also reimbursed the Parakh Agro Industries. For example in assessment year 1991-92 Rs. 24,000 and in 1992-93 Rs. 8,400 towards general expenses. All the work related to dock in respect of import and export business was mainly handled by the clearing and forwarding agents which is supported by their bills. Regarding the process charges it was submitted by him that it included the charges for storage, handling and packing of the goods processed. It was also pointed out by him that details of freight outward were debited in the books of PFI under the head 'Clearing and forwarding expenses'. Therefore, the learned departmental representative was wrong in submitting that there was no infrastructure facilities by PFI.
57. Rival submissions of both the parties as well as materials and case law to which our attention was drawn have been considered carefully. The question to be considered is whether the partnership firm, namely, PFI is the benamidar of the assessee so that the income of PFI could be considered as income of the assessee. It is by now well-settled that burden of proof that a particular concern is benamidar of another lies on the person who alleges as such. In the present case, the stand of the department is that PFI is benamidar of the assessee. The finding of the Assessing Officer is that PFI is merely a branch of the assessee. Therefore, the burden lies on the department to prove by materials or evidence that PFI is benamidar of the assessee. Hence, the department has to prove the following as per the tests laid down by Courts :
(i) that the capital of PFI was contributed by the assessee;
(ii) that overall control of PFI was in the hands of the assessee-company;
(iii) that possession of assets and documents belonging to PFI in fact was in the hands of the assessee; and
(iv) that profits of PFI were ultimately enjoyed by the assessee.
Therefore, the question arises whether the department has been able to discharge its onus which lay on it. Let us examine the various materials relied on by the Assessing Officer.
58. One of the objections of the Assessing Officer is that partners of PFI are also directors of the assessee-company and PFI was created to carry on same business which was carried on by the assessee. There is no dispute about the fact that the partners of the firm are also directors of the assessee-company. But it is also undisputed fact that at the time of formation of the partnership firm, PFI, there were as much as 15 shareholders of the assessee-company. Besides this, the Board of Directors not only included the partners of PFI, but also Mrs. Anju Parakh and Mrs. Asha Parakh as well as a nominee of ISCOM. This fact also is not disputed. From the list of shareholders furnished at page 742 of the paper book, it is also clear that shareholdings of the partners of PFI were mere 7311 shares out of total shareholdings of 26500 shares which means that partners of PFI were holding only 27.59% of the shares of the assessee-company, while rest of the shares were held by other shareholders. These facts clearly show that all the shareholders of the assessee-company were neither interested nor involved in the affairs of the partnership business. No doubt the other shareholders are related to the partners of PFI, but no material is brought on record to show that the other shareholders enjoyed profits of PFI in any manner. It is well-settled that shareholders, directors, etc., are separate and distinct entities from the company and there is no legal restriction for carrying on separate business by shareholders or directors, unless there is a specific agreement to the contrary. Therefore, the fact that partners of PFI were also the Directors of assessee is not relevant for deciding the issue. Moreover, we find that PFI was formed for carrying on the business of export in various commodities which was not the business of the assessee-company. The assessee-company had merely imported the goods and sold the processed goods locally. We have also gone through various assessment orders in the case of the assessee for the assessment years 1986-87 to 1990-91. It appears from the perusal of these order that the assessee had not exported any goods as there was no claim of assessee under section 80HHC. Even in the subsequent years up to assessment year 1993-94 show that there was no claim in respect of profit from export. No material has been placed before us to suggest that the assessee was engaged in the business of exports. Therefore, we vacate the finding of the Assessing Officer that the partnership firm was created with a view to carry on the same business which was being carried on by the assessee.
59. The next objection of the Assessing Officer is that PFI did not have any manufacturing facility of its own and the goods imported by the assessee were directly unloaded at the premises of the assessee at Washi and after processing the same were despatched for export directly from Washi to Bombay Port. In our opinion, this objection of the Assessing Officer is irrelevant. There is no legal bar for getting its goods manufactured or processed through outside parties. Reference may be made to the decision of the Hon'ble High Court of Bombay in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879, wherein it has been held that a person can be said to be a manufacturer even where he gets its goods manufactured from outside parties on job basis. Admittedly, the processing job has been done in the present case against consideration though in kind. Therefore, no adverse inference can be drawn. Regarding the other objection, we are of the view that there was nothing wrong in sending the goods directly from Port to Washi and after processing directly despatching the same to Bombay Port for export. Washi is situated on National Highway between Bombay and Pune. Carrying goods from Bombay to Pune and then Pune to Washi will not only be inconvenient but also uneconomical. Similar will be the position vice versa. How the business is to be carried on is the domain of the businessman and not the Assessing Officer. In our opinion, no prudent businessman would have brought the goods from Bombay to Pune and then Pune to Washi as it would have been not only inconvenient but also uneconomical. Hence, this factor is also not relevant for deciding the issue.
60. The next objection of the Assessing Officer is that there was no agreement between the assessee and PFI for processing of the goods. This objection too is without any basis and is contrary to the facts. In the commercial world so many transactions are effected under oral agreements/understanding which are not legally prohibited. The fact that there was oral agreement/understanding between the assessee and PFI for processing of goods is accepted by the department, as is apparent from the order of assessment for assessment year 1992-93 in the case of PFI appearing at pages 71 to 73 of the paper book. At page 2 of the order, this fact has been taken cognizance of and accepted by the Assessing Officer. It is pertinent to note that the Assessing Officer of PFI and the assessee was the same Officer. Therefore, we vacate this finding of the Assessing Officer.
61. The next objection of the Assessing Officer is that the consideration for processing of the goods is not in monetary terms, but is the form of chuni and husk obtained in the processing of gram. Besides this, the consideration is not consistent as yield of chuni and husk varies from 22% to 27%. This objection too is not sustainable in law. It is between the parties how the payment is to be made for the services rendered. The payment in kind is not prohibited by law. Rather, there is material to support that such practice exists in such trade. It has been brought to our notice that similar agreements are made by the Food Corporation of India for getting its goods processed. The objection of the learned departmental representative that the evidence in the form of copy of the tender between FCI and parties being a fresh evidence be not admitted, was rejected by the Bench as this evidence was furnished by the assessee on the direction of the Bench. The contention of the learned departmental representative is that there was a distinguishing feature in FCI agreement inasmuch as sub-clause (vii) of clause X of the terms and conditions provided that the Miller was entitled to service charges in addition to the chuni and husk, while in the present case nothing is paid by PFI to the assessee except chuni and husk. We are unable to find any force in such objection of the learned departmental representative. Firstly, it is between the parties in what manner consideration is paid or received. Clause of the tender relied upon by the learned departmental representative provides that Miller may quote service charges after taking into consideration various objections which had to be performed. The agreement with FCI also shows that consideration in the form of chuni and husk would include all manufacture turning expenses including packing, loading and unloading as well as transportation. If any Miller was satisfied with chuni and husk he may not quote any service charges in addition to chuni and husk. Secondly, there was obligations as per clause (i) of clause X to bear transport charges including loading and unloading from FCI godown (local) to the premises of Miller and vice versa which would certainly involve substantial amount. But in the present case, transport charges between Bombay Port to Washi and vice versa had been borne by PFI and not by assessee. Therefore, it is futile to contend that there must be service charges in addition to chuni and husk. It is a business decision which is to be taken by the parties and the department cannot interfere in such decisions. On the contrary, in the block assessment of PFI same Assessing Officer at page 5 has held that consideration paid by PFI was substantially excessive and consequently disallowed expenditure to the extent of Rs. 68,55,073 under section 40A(2) and, therefore, this objection of the Assessing Officer that consideration paid by PFI is in kind and is not consistent is irrelevant for deciding the present issue.
62. The next objection of the Assessing Officer that no separate production record is maintained by the assessee to distinguish the product of the assessee and PFI. Even stock of raw material is not kept separately. Since raw material is always in the pipeline, it is not possible to differentiate the processing meant for inland sale and export. After hearing both the parties, we agree with the Assessing Officer that the assessee has not maintained any record to distinguish the stock of PFI and the assessee kept at Washi. It has been submitted by the learned counsel for the assessee that no manufacturing on behalf of PFI was done at Khopoli. The processing was only done at Washi unit which has not been disputed by the learned departmental representative. But the fact remains that stock of raw material and finished product pertaining to PFI and the assessee was not identifiable. We have gone through the panchanama prepared at the time of search. The inventory prepared does not indicate that separate stock of PFI was kept there. The stock of gram in the books of PFI was 206960 kgs. as is apparent from page 8 of the assessment order. The learned counsel for the assessee tried to convince us that a lot of 2100 bags appearing at page 8 of the inventory with the Panchanama was sufficient to take care of the stock of PFI which was separately kept. Though possibility of stock of PFI in the lot of 2100 bags is not ruled out, yet there is a similar possibility of getting the stock of both the concerns mixed up. The only record which is maintained at Washi is the inward and outward register. Entries in this register shows that goods pertaining to PFI were received at Washi and also despatched from there. The assessee in the course of hearing has produced before us the type of gunny bags which were required for packing of goods of PFI for export. According to the assessee, these special bags are identifiable and, therefore, stock of finished goods at any time could be verified. It was also contended by the assessee's counsel that no specific question was asked by the authorised officers at the time of preparing of the inventory regarding the stock of PFI. We will discuss the effect of this factor and other possibilities later on. But for the time being, we hold that there is no material to hold that stocks of raw material as well as finished goods were kept separately. Possibility of stocks being mixed up cannot be ruled out.
63. The next objection of the Assessing Officer is that the firm was carried with the motive of claiming higher deduction under section 80HHC. After considering the submissions of both the parties, we do not find any force in this objection of the Assessing Officer. If this had been the only motive, the assessee could have easily started a new 100% export-oriented unit and claimed 100% exemption under section 10B. There was sufficient financial resources with the assessee to start such a unit. As already observed by us, the partners of PFI had only 27.59% shareholding in the assessee-company at the time of formation of the partnership firm. If the motive of the assessee had been to claim higher deduction under section 80HHC, rest of the shareholders who had majority of the shareholdings would not have allowed these three partners to eat away the entire profits of the firm. There is no evidence on record that the other shareholders of the company enjoyed any part of the profits of the firm. The learned counsel for the assessee appears to be correct in contending that the lady shareholders/directors of the assessee-company did not want to be involved in the business of exports on account of stringent provisions of the Foreign Exchange Regulation Act. The claim under section 80HHC, in our opinion, is the consequence of the decision of the male directors to carry on separate business in partnership and not the motive. The explanation of the assessee in this regard is plausible one and the same is accepted.
64. The next objection of the Assessing Officer is that the partnership business was started with a small capital and there was free flow of funds between the assessee and PFI. Admittedly, the business of PFI was started with a small capital, but that cannot be a reason for holding that such firm is benami of the assessee. There is no evidence that capital was contributed by the assessee-company. Now the question arises whether the business of PFI was carried on with the funds of assessee-company. We have gone through the various balance sheets of PFI to which our attention was drawn. The balance sheet as on 31-3-1990 shows credit balance in the name of assessee for Rs. 1,19,543 which is on account of credit purchases from the assessee. There is no transfer of cash from assessee to PFI. On the contrary, this amount is stated to have been paid by PFI in the next year. The balance sheet as on 31-3-1991 shows that there was loan of Rs. 12,62,555 from the assessee-company against turnover of PFI to the extent of Rs. 1,21,35,896. Thereafter, the balance sheets as on 31-3-1992 to 31-3-1994 do not show any loans from the assessee-company in spite of the fact that turnover of these years were increased to the extent of Rs. 8.82 crores, Rs. 11.6 crores and Rs. 3.49 crores respectively. We have referred to the figures up to assessment year 1994-95 inasmuch as additions on account of clubbing has been made up to assessment year 1994-95 only. No addition has been made for subsequent years since there was loss in the business in the subsequent years. These figures themselves speak that a small amount of funds of assessee-company were utilised as loan only in the initial period. On the contrary, it appears from the balance sheets for the above periods that PFI advanced loans to the assessee-company, i.e., to the extent of Rs. 32.48 lakhs in 1992-93, Rs. 15.23 lakhs in assessment year 1993-94 and Rs. 11 lakhs in assessment year 1994-95. On the basis of these statements, it cannot be said that business of PFI was carried on with the funds of the assessee-company. But we agree with the learned departmental representative that to some extent, there was transfer of funds from one party to the other. There is also no dispute about the fact that the company stood as a guarantor to the Central Bank of India for advancing of loans to PFI. The effect of this finding will be considered later.
65. The next objection of the Assessing Officer is that the funds of PFI were ultimately diverted to the assessee-company which shows that profits of PFI were enjoyed by the assessee-company. The main emphasis of the Assessing Officer is on the transfer of Rs. 3,00 crores in the assessment year 1993-94. The partners of PFI had withdrawn Rs. 1.00 crore each and advanced the same as loan to the assessee. The explanation of the assessee was that the said amount was given to the assessee as share application money. The materials placed before us have been perused. We find from the balance-sheet of the assessee-company for the period ending 31-3-1993 that the said sum has been shown as loan from the directors. If the company had received this sum as share application money, it was required under the law to show as such. Therefore, the learned departmental representative is right in submitting that the sum of Rs. 3.00 crores was advanced by the partners who are also directors of the assessee-company by way of loan. However, that is not the end of the matter. Further perusal of the record shows that this amount was converted into share application money, as is apparent from the balance-sheet of the assessee for the year ending 31-3-1994. This shows that the amount of Rs. 3.00 crores was utilised by the assessee as loan for one year approximately and ultimately, the said sum was converted into share application money. There is also no dispute of the fact that finally shares were allotted to the partners of PFI and the amount of Rs. 3.00 crores was appropriated against allotment of shares. Perusal of balance-sheet as on 31-3-1995 confirms this fact. In view of these facts, it cannot be said that profits of PFI to the extent of Rs. 3.00 crores has been enjoyed by the assessee. If any money has been transferred from one person to another against consideration, then it cannot be said that money of the former has been enjoyed by the latter. After allotment of shares, the partners of PFI had become owner of the same and admittedly dividends received against such shares are enjoyed by the partners which are duly taxed as income of such partners.
66. We have also gone through the statement furnished by the learned departmental representative in which it has been mentioned that 84.27% of the profit of PFI have been ploughed back into the business of the assessee. This includes Rs. 3.00 crores in the assessment year 1993-94 in respect of which we have already discussed. In addition to Rs. 3.00 crore there is another sum of Rs. 2.34 crores in assessment year 1994-95 which is alleged to be ploughed back to the funds of the assessee-company. We find from the record that in fact a sum of Rs. 1,09,91,600 has been given by the partners as loan to the assessee-company details of which are as under :
Shri Haraklal Parakh Rs. 48,25,000
Shri Prakash Parakh Rs. 29,74,600
Shri Suresh Parakh Rs. 31,92,000.
No doubt in the statement of capital accounts of these partners in the books of PFI, it has been mentioned that sum of Rs. 90 lakhs, Rs. 72 lakhs and Rs. 74 lakhs were withdrawn against the narration 'Parakh Foods Ltd.' But the assessee have given clarification at page 779 of the paper book about the investment of these amounts by the partners.
The details given at that page are as under :
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Narration Haraklal Prakash Suresh
---------------------------------------------------------------------
Parakh Foods Ltd. 48,25,000 29,74,600 31,92,000
Shares in Parakh
Oils Ltd. 16,75,000 16,75,000 16,75,000
Shares in Parakh 25,00,000 25,00,000 25,00,000
Agro Industries Ltd.
Shares in Indian
Tanners Ltd. nil nil 62,000
Shares in Hotel
Leela Venture nil 50,400 nil
--------- --------- ----------
90,00,000 72,00,000 74,00,000
--------- --------- ----------
The fact that the sum of Rs. 1,09,91,600 only has been given as loans by the partners is corroborated by Schedule 4 to the balance-sheet of the assessee-company as on 31-3-1995, appearing at page 136 of the paper book. It also appears from this Schedule that substantial amount has been returned by the assessee to these partners, inasmuch as loans from the directors as on 31-3-1995 is reduced to Rs. 51,93,000. The statement in Schedule 4 given with the balance sheet as on 27-7-1995 shows further reduction from Rs. 51.93 lakhs to Rs. 34.96 lakhs (see page 139 of the paper book). These facts clearly show that the substantial amount given as loan has been subsequently received back by the partners of PFI. The Table given above also shows that these partners had also invested in other companies. Details at page 780 of the paper book also show that Mr. Prakash Parakh had also invested in the purchase of a motor car as well as land at Mundhwa. The narration given in the capital account of the partners in the books of account that the amounts were withdrawn for Parakh Foods Ltd. appears to be a clerical mistake. We are therefore of the view that the profits of the firm have really been enjoyed by the partners of PFI and not assessee-company. There is no iota of evidence that any part of the profits of PFI had been enjoyed by other shareholders of the assessee-company. In our opinion, there is no basis for holding that profits of PFI were enjoyed by the assessee-company. At the most, it could be said that funds of PFI were utilised to some extent by way of loans without interest.
67. Now let us examine other factual aspect to which our attention was drawn by the learned departmental representative. One of the discrepancies pointed out by him was that PFI had not shown any freight outward, though goods were despatched from Washi to Bombay. It has been clarified that such expenses were included under the head 'Clearing and forwarding charges' by mistake. In the course of hearing, we had directed the learned departmental representative to verify this fact. After examining the books of account produced by the assessee, the learned departmental representative informed the Bench that the explanation of the assessee was correct.
68. Regarding the onions exported by the assessee, the learned departmental representative submitted that the assessee had not shown any expenses. It has been clarified by the assessee by furnishing copy of the bill issued by M/s. Bansilal B. Raisoni & Sons, Pune, from whom onions were purchased. This bill shows that price of onions included all expenses up to the delivery of goods at the dock. This is clear from the narration "Bombay dock delivery without gunny bags" on the bills. This itself clearly shows that except cost of gunny bags all expenses were borne by the sellers. We find from the record that cost of gunny bags has been duly shown in the books of account of PFI. Hence, there is no discrepancy in this regard.
69. Mr. Manish Gupta, the learned departmental representative also pointed out a discrepancy regarding custom duty. According to him, duty free import was allowed to the assessee under the Advance Licensing System. Under this scheme, if the assessee imported 1.05 kg of raw pulse he was under obligation of export of 1 kg of processed Dal. Since yield of Dal was 75% only, question is from where he exported Dal for balance quantity. According to him, either the assessee should have paid customs duty on the proportionate quantity of import or purchased goods locally. There is nothing on record to show that any customs duty was paid by the assessee. On the next hearing, it has been clarified by the assessee's counsel that the assessee had also imported raw pulse after paying customs duty and the same has been either included in the cost of goods or has been debited to the head 'Forwarding and clearing expenses'. Speciman copies of the "Bill of Entry for home consumption" have been furnished in the paper book filed on 21-4-1997. Relevant books of account were also shown to the departmental representative to verify this fact. Since this fact has been verified, no discrepancy exists.
70. Regarding the infrastructure facilities, we find that the assessee has its own separate office, furniture and necessary staff. No doubt the address of both the assessee and PFI is the same, but that is because of the fact that such offices are in the same building. The building belongs to M/s. Parakh Agro Industries Ltd. which had leased out the separate premises to both the parties. Rent is paid for such premises. It has also been clarified that rent paid by PFI is for the furnished office and, therefore, the assessee has not purchased office furniture. It has also been clarified that whenever any expenses were borne by the assessee, the same had been reimbursed by PFI on ad hoc basis. Page 18 of the paper book filed on 2-4-1997 shows reimbursement of various expenses. PFI had three employees of its own. Since all the dock related work was handled by the clearing and forwarding agent, no separate staff was kept for this purchase. In view of these clarifications, we hold that PFI had separate infrastructure facilities to carry on its business.
71. Regarding the credit by J.K. International, Australia, it has been clarified that 90 days' credit has been given on the basis of irrevocable letter of credit. On the contrary, sales are made against 'Bills at Sight' which are discounted with the bank immediately. So, there is no paucity of funds, as alleged by the learned departmental representative. Necessary materials has been furnished in the paper book at pages 5 to 9 filed on 2-4-1997.
72. In view of the above discussions, following facts emerge :
(1) The partners of PFI are also directors of the assessee-company but not vice versa. Mrs. Asha Parakh and Mrs. Anju Parakh were also Directors of the assessee-company who did not join PFI. There were 10 other shareholders who also are not partners of PFI.
(2) The partnership firm PFI was constituted in January 1990 to carry on the business of export of general items which was not the business of the assessee-company. PFI did export onion in assessment year 1990-91 and 61 items in financial year 1991-92 which were never purchased or sold by the assessee in the past.
(3) PFI firm is validly constituted and registered under Indian Partnership Act, 1932. It is also registered with various Government authorities. Even the registration and continuation of registration have been granted by the income-tax authority under sections 185 and 184(7) of the Income-tax Act, 1961. The same had not been revoked till date.
(4) That capital of PFI has not been contributed by the assessee-company.
(5) That PFI has no manufacturing facility of its own.
(6) That oral agreement/arrangement exists between the assessee and PFI under the terms of which the assessee is to process pulses supplied by PFI against consideration in kind, i.e., chuni and husk obtained in the process which includes all expenses from the stage of unloading of raw material till the stage of dispatching of processed goods, except the cost of packing material which is supplied by PFI. Similar practice is also adopted by the Food Corporation of India.
(7) That raw pulses of PFI are directly unloaded at the premises of the assessee and after processing directly despatched to the port.
(8) That all dock-related activities are carried on by the Clearing and Forwarding Agents for which due remuneration is paid by PFI.
(9) That separate infrastructure facilities are available with PFI, such as office, employees, telephone, etc. (10) That it is not proved that stocks belonging to PFI and assessee were kept separately. Even there is no production register maintained by the assessee. No stock register is also maintained.
(11) That to some extent there was transfer of funds between the assessee and PFI. Funds were initially transferred from assessee to PFI to small extent, but later on loans were advanced by PFI to assessee.
(12) That there is no ploughing back of funds from PFI to assessee's coffer.
73. Now the question arises whether the revenue has been able to discharge its onus to establish that PFI is benamidar of the assessee-company. After considering the materials placed before us, facts and circumstances taken as a whole and the rival submissions of the parties, we are of the view that revenue has not discharged its onus to establish the same. There are only three factors, i.e., inter-mingling of stocks, transfer of funds between the sister concerns and the guarantee given by the assessee to the banks for advancing loans to PFI which create suspicion. But in such cases, the question posed before us cannot be decided on the basis of suspicion alone. Suspicion cannot take the place of evidence. Except these facts, all other facts clearly show that PFI and assessee are two different entities validly constituted. Even otherwise, there is a possibility that stock of PFI was included in the lot of 2100 bags found at the time of search. In the course of hearing, we have been shown the special type of gunny bags in blue colour used for packing of imported material. So there is always possibility of identifying such stock. The explanation of the assessee cannot be brushed aside in toto. We also find that no specific question was asked by the search party with reference to the stocks of PFI. Probably, the authorised officers might have been satisfied with the stocks of PFI and, therefore, did not ask any question in this regard. As far as transfer of funds is concerned, we do not find anything wrong in it. In group cases, funds are normally transferred to each other to help them. Merely interest has not been charged, no adverse inference can be drawn against the assessee. There are numerous cases where the department is disallowing interest on borrowed funds where the borrowed funds are transferred to subsidiary company or sister concerns without interest. But on this fact, the sister concerns are never held to be benami. Similarly giving of guarantee to banks for loan facilities to the sister concerns only creates suspicion. All these factors taken together cannot establish the fact that PFI is benami of the assessee. These facts could be relevant only if essential ingredients of benami are established.
74. On the contrary, there is no proof to establish the necessary ingredients, i.e., contribution of the capital, enjoyment of the profits and control of the business. There is no proof that capital of PFI was ever contributed by the assessee. The control of the business of PFI exclusively vests in the partners of PFI. There is no evidence to establish that business of PFI was ever conducted by any of the employees of the assessee, except processing activity for which due consideration has been paid by PFI to the assessee. There are separate office premises and telephone facilities available with the PFI. Where such facilities of assessee have been utilised the same have been reimbursed. There is also no proof that profits of PFI have been enjoyed by any shareholder of the assessee-company except partners of PFI. Mere transfer of funds for a short period is no ground for holding that profits were enjoyed by the assessee-company. The amount of Rs. 3.00 crores remains invested in the shares of the assessee-company. A major amount out of Rs. 2.36 crores withdrawn by the partners has also been invested by the partners in purchase of shares of other companies, land and motor car, as is apparent from pages 779 to 780 of the paper book. The amount given by these partners as loan to the assessee-company has slowly been returned as discussed earlier. Besides, the genuineness of the firm is also proved by the fact that registration as well as continuation of registration have been granted by the Assessing Officer for the earlier years. Perhaps, the Assessing Officer is also not sure about the benami character because registration granted to PFI has not been revoked, though he had power under section 186 to cancel the registration as well as continuation of registration. We are also of the view that no capital can be made out of the fact that the assessee had no manufacturing facility and the consideration was paid in kind. There is no legal bar in carrying on the business as such. Such practice is established by the fact that FCI which is a Government Agency also gets its goods processed from the third parties on similar terms. We have already discussed about the various objections of the Assessing Officer and held that those objections are not relevant and, therefore, need not be referred again. Therefore, keeping in view of the facts and circumstances as a whole, we are of the view that the department has not been able to prove that PFI is benamidar of the assessee-company. We hold accordingly. The addition made on account of clubbing is, therefore, deleted.
75. Even otherwise, we are of the view that the impugned addition could not have been made by the Assessing Officer under the provisions of Chapter XIV-B. We find that primary facts were well within the knowledge of the Assessing Officer. Perusal of the assessment order for assessment year 1992-93 in the case of PFI clearly shows that the Assessing Officer took cognizance of the fact that there was an agreement between PFI and assessee for processing of goods belonging to PFI against consideration in kind, i.e., chuni and husk. This fact has also been accepted by the Assessing Officer. Moreover, chuni and husk retained by the assessee has been treated by the Assessing Officer as sale by PFI for the purpose of computing deduction under section 80HHC. It is pertinent to note that the Assessing Officer who assessed PFI for assessment year 1992-93 is also the Assessing Officer of the assessee-company. This is apparent from the assessment orders passed by her in both the cases. The fact that chuni and husk obtained by the assessee in processing of the goods is duly included in the chuni account is not disputed. This fact is also mentioned in the Note to the profit and loss account. Even the Assessing Officer in the present case has taken note of it. The fact that partners of PFI are directors of the assessee-company was duly within the knowledge of the Assessing Officer as both the parties were assessed by the same Assessing Officer. Therefore, it cannot be said that the primary facts were hidden from the knowledge of the revenue. Perhaps, Assessing Officer was also satisfied about the genuineness of PFI, inasmuch as he had assessed the assessee-company for assessment year 1993-94 by way of regular assessment on 27th March, 1996, i.e., much after the date of search without including the income of PFI. There is not even a whisper expressing any doubt about the non-genuineness of PFI. Further no addition was proposed by him till 18th July, 1996, as is apparent from the letter of the Assessing Officer dated 8-7-1996 and draft assessment order dated 18-7-1996. For the first time, notice was issued by him on 22nd July, 1996 proposing the clubbing of income of PFI with the assessee and the assessee was asked to reply within 24 hours and the assessment was completed within a week including the time taken for approval from the CIT. No reason has been given for making such addition at the fag end of period of limitation. The reasons are best known to the revenue. There is also no material to show that anything was found at the time of search to suggest clubbing. Therefore, we hold that all primary facts were within the knowledge of the Income-tax Department and nothing was hidden from its knowledge. Hence, the impugned addition could not fall within the scope of the definition of 'undisclosed income'.
76. Before parting with our order on this issue, we would like to mention that the fact whether a particular concern is a benami or not of another is always a question of fact. Therefore, reference to case law cited by both the parties is not necessary. However, we would like to mention that the decisions of the Supreme Court relied upon by the learned departmental representative, viz., CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632, Produce Exchange Corpn. Ltd. v. CIT [1970] 77 ITR 739 and Standard Refinery & Distillery Ltd. v. CIT [1971] 79 ITR 539 deal with different issues and, therefore, are distinguishable. In those cases, the question was whether different business carried on by the assessee were the same business for the purpose of section 24(2) of Indian Income-tax Act, 1992. Those cases proceeded on the basis that different businesses were admittedly carried on by the assessee and there was no dispute on these facts. But in the present case, the facts are entirely different, inasmuch as the fact whether the business carried on by PFI belongs to the assessee or not is itself in dispute and, therefore, we hold that these decisions of the Supreme Court do not advance the case of the revenue.
77. Addition on account of Bardana expenses :
The brief facts in respect of this issue are these. The assessee used to purchase gunny bags for packing of its processed goods and the entire expenditure on such purchases were being claimed as business expenditure, as and when incurred irrespective of its use. This practice was being adopted by the assessee since inception and also accepted by the department as no addition was ever made on this account. However, in the block assessment proceedings, the Assessing Officer asked the assessee to file the details quantity-wise in respect of bardana purchased and consumed for all the years falling within the block period. The assessee vide its letter dated 20th May, 1996/5th June, 1996 filed relevant details pertaining to assessment years 1989-90 to 1995-96. However, in respect of earlier years, it was submitted by the assessee that details were not available as regards were destroyed in a fire which took place at the office premises on 10-2-1988. It was also stated therein that, apart from the purchases made from the open market, the assessee also received bardana along with the material purchased which was used by the assessee for the following purposes :
(a) Packing of the finished goods;
(b) Using the same in the material handling process in the factory. The bardana which is used in material handling assumes the character of the Plant because this bardana is used as material handling equipment.
(c) Laying the same on the ground as well as the bottom of the trucks during the rainy days;
(d) Certain quantity of bardana forms part of the closing stock including raw material.
(e) Certain bags do not torn while opening the same for taking out the raw material and these bags become useless for the purpose of making no use of them.
(f) Certain bardana after wear and tear is disposed of in toto.
All the details were filed by the assessee which form part of the assessment order as Annexures B2 to B16.
78. After considering the explanation of the assessee (Annexure B1 to the assessment order), the Assessing Officer was of the view that the system adopted by the assessee was faulty and incorrect. According to him, the assessee could claim expenditure either by debiting such expenditure on consumption basis or where the entire expenditure was debited to P&L account then opening and closing stock of the bardana should be taken into consideration. He, therefore, rejected the method of accounting adopted by the assessee. The Assessing Officer also found from the details furnished by the assessee that it had claimed deduction on account of loss of 25% of bardana received that along with the raw material. 5% loss was stated to be on account of torn bags and 20% on account of damage during the process of manufacturing and dunnage. It was also observed by him that details of opening and closing stock are without basis. He, therefore, was of the view that loss of 25% was not justified. He has mentioned in his assessment order that the assessee had filed some photographs and video film showing the use of bags, but the same could not be relied upon as such evidence could be contrived. However, he was of the view that 10% loss of bardana received along with the raw material would be reasonable. He, therefore, disallowed remaining 15% of the loss of bardana received along with the material. Accordingly, he made additions in respective years after taking into consideration the valuation of opening stock and closing stock of bardana as well as 10% loss of bardana as mentioned above. Addition in respect of assessment years 1986-87 to 1988-89 was made at the rate of 25% of the value of the packing expenses as there was no details available due to fire which took place in the office of the assessee in the year 1988. In valuing the loss of bags, the Assessing Officer adopted average purchase rate of the gunny bags. According to the Assessing Officer if the opening and closing stock of bardana is taken into account, the highest closing stock was at Rs. 35,39,288 at the end of assessment year 1993-94. He, therefore, made an addition of this amount on the basis of peak value. Addition on account of disallowance of loss in bardana account amounted to Rs. 1,02,84,531 in aggregate. However, he allowed the set off Rs. 21,16,947 on account of addition made in the regular assessment for assessment year 1993-94. Hence, the net addition for the block period amounts to Rs. 1,17,06,872.
79. The learned counsel for the assessee, Mr. Pathak challenged the above additions on various grounds. He first assailed the addition on account of closing stock. His submission was that the assessee had been debiting purchases of new bardana and claiming the same as expenditure under section 37 in accordance with the accounting standard prescribed by the Institute of Chartered Accountants. He referred to AS 2 prescribed by the Institute. He further submitted that these are selling expenses and not manufacturing expenses, since the gunny bags are used after manufacturing process. However, it has to be treated as past manufacturing expenses which is allowable under section 37. Therefore, question of valuing closing stock does not arise. He further argued that expenditure under section 37 is to be allowed when it is incurred during the previous year even on the last day of the accounting year. In this connection, he relied on the decision of the Tribunal, Bangalore Bench in the case of Motor Industries Co. Ltd. v. IAC [1995] 55 ITD 465, decision of Bombay Bench in the case of Spaco Carburettors (India) Ltd. [IT Appeal Nos. 1767 and 538 (Bom.) of 1983] and the decision of the Special Bench in the case of ITO v. Food Specialities Ltd. [1994] 206 ITR 119 (Delhi) AT] as well as Supreme Court decision in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481.
80. In respect of loss on account of wear and tear in the various stages of the manufacturing process and handling of goods, it was submitted by him that loss has been claimed on the basis of experience. He referred to the affidavit of Mr. Tatiya, General Manager of the Washi unit. Mr. Prakash Parakh, one of the Directors of the assessee-company, stated before us that the gunny bags used in the process of manufacturing are destroyed during a period of 15 days. It was also stated by him that dunnage is provided at the time of loading of the goods in the truck which amounts to 80 bags approximately. However, this statement has been modified by him on the next day to 20 to 25 bags. In the course of hearing, the Bench had repeatedly asked the learned counsel for the assessee whether there was any comparable case claiming such higher percentage of loss in bardana, but he could not point out any such case. However, it was submitted by him that there was also no comparable case with the department for determining the loss at 10%. Alternatively, it was claimed that value of bardana should be taken at price at which it was purchased along with the raw material and not with reference to the price of new bardana purchased by the assessee. It was submitted by him that normally one bag in weight is around 1 kg. while material with bag is 100 kgs. Therefore, if the material purchased is Rs. 500 per quintal, then the value of bag would be Rs. 5 only. Mr. Khandelwal also argued that bardana purchased is a tool for the assessee, and, therefore, it should be treated as a plant and 100% deduction should be allowed under section 32, since each bag cost less than Rs. 5,000.
81. Mr. Pathak then argued that even assuming that addition is warranted, the same cannot be made under the provisions of Chapter XIV-B because the assessee had disclosed the facts in respect of such expenditure in all the assessment years and nothing was hidden from the knowledge of the department. All the assessments had been made under section 143(3) and no addition had been made on this account. All the purchases are duly recorded and no material adverse to the assessee was found at the time of search. Therefore, there cannot be any undisclosed income in respect of bardana.
82. Mr. Sanjay Prasad, the learned departmental representative, has strongly opposed the contentions of the assessee's counsel. It was stated by him that details filed by the assessee are without any basis. There is no basis of 25% loss of bardana received with the material. There is no basis even for the opening stock of bardana, i.e., 1,40,000 bags as on 1-7-1986. It was submitted by him that figures have been prepared by the assessee on backward basis by taking into consideration the stock found at the time of search and bardana loss at the rate of 25% of bardana received along with the material purchased. Even the loss shown by the assessee is not consistent. If the figures are not consistent, then the question arises how the figure of loss was arrived at. In the absence of record, reconciliation of the stock of bardana and the loss of bardana is not reliable. In this regard he took us through various figures which formed part of paper book and assessment order. He also submitted that even in the course of hearing, different stands have been taken by Mr. Parakh regarding the use of the bardana as dunnage, inasmuch as initially it was stated by him that around 80 bags were required per truck not on the next day he stated that around 20 to 25 bags were required. He, therefore, submitted that loss of 25% should not be accepted. The Assessing Officer has been more than reasonable in accepting the loss at 10%.
83. Regarding the other aspect, it was argued by him that the expenditure on the purchase of bardana cannot be allowed in its entirety. It has to be allowed on the basis of consumption. Unsold bardana is a part of stock-in-trade and, therefore, must be valued at the end of the year. Its character is that of raw material which, if not consumed, has to be valued at the end of the year. He also submitted that the accounting standard 2 relied upon by the assessee's counsel does not speak anything about the packing material. On the contrary, reliance was placed on accounting principles by Pickle which says that unconsumed material has to be valued and it is the net quantity which is consumed has to be debited to the P&L account. He also refuted the claim of Mr. Parakh that bags utilised in the manufacturing process are completely destroyed in 15 days, by submitting that such claim is also without any basis. Regarding the affidavit of Mr. Tatiya, General Manager of the Washi factory, it was submitted by him that it is merely a self-serving document which is not substantiated by any material. He also distinguished the case of Motor Industries Co. Ltd. (supra) by submitting that the expenditure related to consumable store which is not part of the direct cost, while in the present case, we are concerned with the packing material which is the direct cost to the finished product sold by the assessee. Regarding the Food Facilities case, it was submitted by him that it was distinguishable as the Tribunal was concerned with deduction under section 43B. The Supreme Court decision in the case of Chainrup Sampatram (supra) was also relied upon by him by submitting that it rather goes in favour of the revenue as unsold stock has to be valued at the end of the year. It was also argued by him that bardana is part of manufacturing cost. Any process which makes the goods marketable is part of the manufacturing process. Reliance was placed on the decision of the Supreme Court in the case of J. K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO [1965] 16 STC 563 and the decisions of the Karnataka and Calcutta High Courts in CIT v. Baraka Overseas Traders [1993] 201 ITR 827/67 Taxman 188 and CIT v. Union Carbide India Ltd. [1987] 165 ITR 550, respectively. He also relied on the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 for the proposition that if the system of accounting is wrong and does not give true picture of profits and losses, then the same can be rejected by the Assessing Officer despite the fact that it was constantly adopted by the assessee in the past. He further submitted that gunny bags used by the assessee for the sale of goods is a primary packing, inasmuch as processed goods could not have been sold without such packing. He relied on the decision of Supreme Court in the case Eastern Paper Industries 43 ELT 201 and the decision of the Rajasthan High Court [1983] ELT 6 wherein it has been held that primary packing is part of direct cost. He also refuted the contention of Mr. Khandelwal by submitting that the assessee had never claimed bardana as plant nor it has been shown as such in the balance sheet. It has never been claimed as tools for carrying on business. It has been purchased only as an item of expenditure. Regarding the peak of the closing stock, it was submitted by him that it is the correct method of determining correct undisclosed income.
84. Regarding the last contention of Mr. Pathak, it was also argued by Mr. Manish Gupta, learned departmental representative that any addition which is made by the learned ITO can be treated as undisclosed income. It was also submitted by him that section 4 of the Income-tax Act, provides that income of a previous year has to be charged. Therefore, if any expenditure which does not relate to the previous year cannot be allowed. Therefore, unconsumed bardana has to be excluded from the expenditure claimed by the assessee. He further submitted that bardana is part of the raw material as held by the Supreme Court in the case of Eastern Paper Industries (supra) and, therefore, unsold stock in bardana has to be valued at the end of the year. Regarding loss of 25% it was submitted by him that Assessing Officer has placed sufficient material to refute the claim of the assessee and, therefore, excess loss claimed by the assessee can be assessed as undisclosed income.
85. Rival submissions of the parties as well as materials and case law to which our attention was drawn have been considered carefully. In our opinion, there is no force in the main submissions of the assessee's counsel. We are unable to agree with the contention of Mr. Pathak that expenditure on the purchase of Bardana (gunny bags) is deductible under section 37. Section 37 is a residuary section and can be invoked only when an expenditure is not allowable in the preceding section. Section 28 provides that profits and gains of the business are chargeable under that section. Section 29 provides that income referred to in section 28 shall be computed in accordance with sections 30 to 43D. A bare reading of these two sections clearly shows that commercial profits are first to be determined under section 28 itself. Once the profits are determined, then such profits are further to be computed as provided in section 29. Profits on sale can be arrived at only after deducting the corresponding expenditure in respect of such sales. Therefore, in our opinion, all the expenditure which are necessary in making the final product marketable are to be deducted from the sale consideration. In making this exercise, it is the proportionate cost which is to be deducted from the sales of final product and not the entire cost. It is on the basis of this principle that gross profit has to be arrived at after taking into consideration the opening stock and closing stock of all the material which are used in making the goods marketable. Absurd result would follow if such an exercise is not made. In our considered opinion, section 28 speaks of such commercial profits which are further to be computed in accordance with the provisions of section 29. Bardana is a necessary component of the product sold by the assessee and consequently proportionate cost of bardana has to be deducted from the sale consideration of the final product. It is on the basis of this principle that all the direct costs relating to the final product are deductible under section 28. Since all the proportionate expenses which are necessary to make the goods marketable are deductible under section 28 itself, the contention of Mr. Pathak that only expenditure up to the stage of manufacture should be taken into consideration while computing the gross profit is without force. Since bardana forms part of the final product sold, its expenditure has to be deducted under section 28 itself. Consequently, its opening stock and closing stock has also to be taken into consideration. The view which we have taken is supported by the decision of the Hon'ble Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965] 75 ITR 521, wherein two important propositions have been laid down, viz., (i) that business profits must be arrived at on commercial principles, and (ii) that there is distinction between business profits ascertained on commercial profits and profits fixed by statute for its specified purpose. It has been further held that profits under section 10(1) of the Indian Indian Income-tax Act, 1922 are not profits regulated by any such statute, but are profits of the business carried on by the assessee computed on commercial principles. The provisions of section 10(1) of the Indian Income-tax Act, 1922 are similar to the provisions of section 28 of the 1961 Act. Therefore, the said decision is fully applicable to the present case. It is, therefore, held that the Assessing Officer was justified in rejecting the method of accounting vis-a-vis bardana expenses.
86. In view of what we have stated above, it is not necessary to refer to the case law cited by both the parties, except the decision of the Tribunal in the case of Motor Industries Co. Ltd. (supra) on which heavy reliance has been placed by Mr. Pathak. In our view, the said decision of the Tribunal is distinguishable on the facts. In that case, the Tribunal was concerned with the expenditure on consumables stores and machinery spares. In para 14 of the order, it has been recorded as a fact that none of the items had gone into manufacturing of the article. Not only that, such items had not entered into the direct cost of the finished product. But in the present case, Bardana purchased by the assessee itself formed part of the finished product sold by the assessee. Secondly, the Tribunal was concerned only about the bona fide of the change in the method of accounting. The Tribunal has noted in para 12 that there was no dispute about the correctness of the changed method of accounting. But in the present case, the method of accounting itself is in dispute.
87. We would also like to observe about the Accounting Standard II on which reliance was placed by the assessee's counsel Mr. Khandelwal. On going through AS-II, we do not find any statement which authorises the assessee to charge the entire expenditure on packing material to the profit and loss account without taking into account the valuation of the inventory of the same. AS-II provides the manner of valuation of all kinds of inventory, except those items which are listed in para 5. None of the items excluded in para 5 relates to the packing material. Impliedly, it means that the inventory of the packing material has to be valued at the end of the year. The view of ours is rather supported by the opinion expressed by the Expert Advisory Committee of the Institute of Chartered Accountants of India which is reported in the ICAI Compendium of Opinions, Vol. IV, 1st Edn. In that case, the querist was engaged in the manufacture of PVC compound and allied plastic products who was purchasing raw materials in iron drums/polythene bags. The empty drums/bags in hand at the end of the year were not reflected in the trading account and the balance sheet of the company. This practice had been followed consistently in the past. The following query was raised :
(i) Should the amount in respect of empty drums/bags be reflected in the balance sheet ? If yes, then should it be shown under the head 'Stock-in-trade' or under some other head ?
(ii) What should be the basis of valuation of empty drums/bags in hand in case they are required to be shown in the balance sheet ?
The Expert Committee has given the following opinion, vide para 4 at page 9 of the said publication :
"(i) The amount in respect of empty drums/bags need not be reflected in the balance-sheet if the amount involved is not material. However, where the said amount is material, a disclosure thereof should be made under the head 'Current assets' preferable as a separate item.
(ii) In the latter case, the empties should be valued at estimated net realisable value."
From the opinion expressed by the Advisory Committee of the Institute of Chartered Accountants, it is clearly shown that where the closing stock involved is material, it has to be valued and shown in the balance-sheet. We are, therefore, unable to accept the contention of the assessee's counsel that the system of accounting adopted by the assessee is a recognised method.
88. However, we agree with the alternate contention of Mr. Pathak that on the facts of the case, addition on this account cannot be made under the provisions of Chapter XIV-B. Firstly, we would like to mention that addition, if any, cannot be made in the manner in which it was made by the Assessing Officer. There is no system of peak for making such addition. Once the Assessing Officer had rejected the method of accounting, he should have computed the income for each year separately. Secondly, we find that the assessee had always debited the cost of packing material to the profit and loss account and claimed the entire expenditure as deduction. The same had been allowed by the Assessing Officer in all the years. None of the Assessing Officers in the past objected to the system of accounting adopted by the assessee. On the basis of these facts, we are of the view that nothing was hidden from the knowledge of the department, inasmuch as all the purchases are duly recorded in the regular books of account and duly shown in the statements of accounts filed along with the returns. Not even a single material adverse to the assessee was found at the time of search in this connection. It is a case of mere change of opinion at the end of the Assessing Officer. Therefore, in view of what has been held by us on the scope of provisions of Chapter XIV-B, it is not possible to uphold the addition as undisclosed income under Chapter XIV-B. We hold accordingly. In view of the above discussions, we delete the addition of Rs. 35,29,288 on this account.
89. Let us now examine the other addition of Rs. 1,02,84,531 on account of 25 per cent. loss of Bardana. After considering the rival submissions of the parties, we do not find any merit in the main submission of the assessee's counsel. Admittedly, the assessee neither maintains stock register nor any details on the basis of which stock of Bardana at the end of the year could have determined. There is also no material on record to show the basis on which 25 per cent. loss of Bardana could be determined. There is also no basis of the opening stock of Bardana taken by the assessee as on 1-7-1986 for assessment year 1988-89. Mr. Prasad is right in submitting that reconciliations appearing at pages 180 to 195 had been prepared by the assessee on backward basis on the basis of stock found at the time of search. The figures mentioned in such reconciliations also show that loss of Bardana had been quantified according to its own convenience. Though the assessee has been claiming loss of Bardana at the rate of 25 per cent. for all the years, the reconciliation statements show a different picture. We find from Annexure B-14 to the assessment order that different percentage of loss of Bardana has been shown in respect of each year. It ranges between 19.38 per cent. to 23.39 per cent. In our opinion, different percentage of loss could be claimed only on the basis of proper record. Since the assessee has not maintained any record in this regard, it appears to us that the loss of Bardana has been taken by the assessee according to its own convenience. We, therefore, reject the claim of the assessee regarding 25 per cent. loss of Bardana. The Assessing Officer has accepted the fact that some loss of Bardana is inevitable. In the absence of record, it is only the best judgment which has to be made. No doubt, there is no basis with the Assessing Officer also to determine the loss at 10 per cent of the Bardana received with the raw material. But in such a situation, the Court has only to see whether the best judgment is bona fide or not. In our opinion, 10 per cent. loss of Bardana received with the raw material appears to be reasonable. By way of caution, it is observed that this should not be taken as a precedent. In future years, if there is sufficient material on record, the matter will be required to be examined in the light of evidence produced.
90. However, we find force in the alternate contention of the assessee's counsel that the value of the loss of Bardana should be determined at the rate at which it cost to the assessee. The assessee has furnished details of purchase of raw material with Bardana for each year. The details show that average cost of material with Bardana varies from Rs. 4.84 to Rs. 8.43 per kg. in respect of various years. Consequently, the cost of such bag would vary between Rs. 4.84 to Rs. 8.43 per kg. inasmuch as the weight of bag is 1 per cent. vis-a-vis the material with bag. We find from Annexure B-16 to the assessment order that he has valued the Bardana at the average cost of the new Bardana purchased which varies from Rs. 8.72 to Rs. 19.12 per bag. The disallowance of expenditure can be made only to the extent to which it has entered into the trading or profit and loss account. Admittedly, the disallowance has been made in respect of Bardana received with the material. Therefore, we hold that the disallowance has to be restricted to the value at which it has cost to the assessee.
91. The last contention of Mr. Pathak that such addition cannot be made as undisclosed income under Chapter XIV-B cannot be accepted. In our opinion, such income was hidden from the knowledge of the department. The assessee had never given any details of Bardana lying with the assessee at the end of the year which is material fact for determining such loss of Bardana. Such income could not have been detected, if the Assessing Officer had not made thorough enquiries in this regard.
92. In view of the above discussion, we hold that the Assessing Officer was justified in determining the undisclosed income on account of loss of Bardana. However, we restore the matter to the file of the Assessing Officer to re-determine the value of loss of Bardana in accordance with average cost of Bardana received with the raw material. The correctness of the figures furnished before us may be examined by the Assessing Officer. The assessee is also directed to furnish copy of these details to the Assessing Officer.
93 to 159. [These paras are not reproduced here as they involve minor issues].