Income Tax Appellate Tribunal - Mumbai
Seth Textiles vs Income Tax Officer on 6 March, 2002
Equivalent citations: (2003)80TTJ(MUM)329
ORDER
A.D. Jain, J.M.
1. This appeal by the assessee pertains to the asst. yr. 1986-87. It is directed against the order, dt. 22nd Jan., 1993, passed by the CIT(A).
2. It would be apposite to relate here, briefly, the factual material leading to the filing of the present appeal.
3. The assessee is a resident unregistered firm. The major part of its business is related to doing labour job work, weaving blankets for its sister concern, viz., M/s Seth Industries, Prop. M/s Simplex Woollen Mills. Return of income declaring a net loss of Rs. 3,60,269 was filed on 9th Feb., 1987. P&L a/c, balance sheet and other relevant statements of accounts were also filed with the return. Notices under Section 143(2)/142(1) were issued. Appearance was put in before the AO, on behalf of the assessee. The books of accounts produced were verified on a test check basis.
4. The assessee had taken loans amounting to Rs. 3,76,000 from 30 parties. The AO treated this loan amount of Rs. 3,76,000 and interest thereon, amounting to Rs. 43,632, totalling to Rs. 4,19,632, as unexplained cash credits appearing in the books under s. 68 of the IT Act. Penalty proceedings under Section 271(1)(c) were initiated separately.
5. While making this addition, the learned AO observed, inter alia, that in respect of the creditors, the assessee submitted confirmations, which were not signed by the creditors; that this has no evidentiary value; that further, since the assessee claimed that the payments have been received by cheques, letters under Section 133(6) of the IT Act were issued to these parties at the addresses given by the assessee in the confirmation letters; that there is neither any response to these letters, nor did the postal authorities return these letters with the comments 'incomplete addresses' or 'parties left from the given addresses'; that the assessee was, therefore, given an opportunity, vide letter, dt. 1st Feb., 1989, to produce these parties in order to verify the identity and capability of the creditors and the genuineness of the loans given by them; that despite this opportunity, the assessee failed to produce the creditors; that again, summons under Section 131 were issued to these parties; that there is no response to the summons, nor were the summons returned by the postal authorities with comments like 'incomplete address' or 'parties left from the given addresses' and that, therefore, the AO was left with no other alternative but to treat the loans as not proved by the assessee as genuine, because the identity and capacity of the lender, and also the genuineness of the credit could not be verified.
6. This issue was set aside by the CIT(A). vie order, dt. 22nd Nov., 1989. A direction was issued to the AO to conduct a full enquiry into the matter, if necessary by deputing an Inspector to look into the books of accounts of the creditors of the assessee.
7. We deem it necessary to reproduce here the relevant portion of the said order, dt. 22nd Nov., 1989, passed by the CIT(A) :
"The summons could not be served because they were not accepted by the parties. In the case of others, there was no response by them and they did not attend before the AO. The authorised representative again reiterates that the parties are not co-operative and urges that the AO should verify the genuineness of the parties through enquiry and also suggests that should any Inspector be deputed, the appellant is agreeable to help in the enquiry. It is further stated that the appellant has done whatever possible in its power to give as much evidence as possible regarding the loans, but it is found that the creditors did not give co-operation. The appellant has submitted confirmation letters from some of the parties. It is also seen that some of the creditors have filed money suits against the appellant in Bombay High Court. A copy of the same is also filed. The AO, though issued a summons, he could have made a little more enquiries before disallowing the claim.
In my opinion, a full enquiry should be conducted and this ground is sent back to the AO so that a thorough scrutiny is conducted, if necessary by deputing an Inspector for looking into the books of accounts of the creditors mentioned."
8. The direction issued by the CIT(A), as reproduced above, was not carried out by the AO. On the contrary, the AO passed the assessment order under Section 143(3), observing therein, inter alia, that the assessee was asked to file details on the basis of directions issued by the CIT(A). The assessee filed confirmatory letters. The AO issued summons to the concerned parties as per the addresses given by the assessee. Only 6 parties out of a total of 30 parties put in appearance before the AO in response to the summons. The assessee was again asked to produce the parties for verification on 16th March, 1992. The assessee failed to do so. The matter was posted to 20th March, 1992, on which date, the accountant of the assessee attended. The AO drew his attention to the fact that despite opportunities given, the assessee had failed to produce any party for verification of the credits appearing in the books of accounts of the remaining 24 parties. The case was adjourned to 23rd March, 1992, for the assessee to produce these parties. This was the final chance given. On 23rd March, 1992, nobody attended on behalf of the assessee, nor was any party produced for verification. The AO therefore, concluded that since the onus to prove the credits appearing in the books of the assessee squarely lies upon the assessee, and since such onus had been discharged, the credits remained unexplained. As a result, the addition was made, excluding the amount of credits appearing in the books of the 6 parties who put in appearance before the AO in response to the summons issued to them, aggregating to Rs. 30,000. Interest thereon was also added.
9. In appeal, the assessee contended before the CIT(A), that it had discharged its onus by filing the confirmatory letters from the creditors. It was pointed out that most of the loans were obtained through brokers. The names and addresses of the brokers were made available to the AO. He ought to have issued summons to these brokers and examined them. No liability could be imputed, if the summons issued by the ITO were not served. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Orissa Corporation (1986) 159 ITR 78 (SC).
10. The CIT(A), upholding the addition of Rs. 3,60,000, observed, inter alia, that when the cash credit entry appears in the assessee's books of accounts in an accounting year, the assessee has a legal obligation to explain the nature and source of such credits; that reliance in this regard was placed on the Supreme Court decision in the case of Sreelakha Banerjee v. CIT (1963) 49 ITR 112 (SC), that if the assessee offers an explanation about the cash credit, the IT Department can put the assessee to prove his explanation, and if the assessee fails to tender evidence, the AO is justified in rejecting the explanation and holding that the income is from an undisclosed source; that reliance was placed on Seth Kalekhan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC), that in so far as the ingredients of the assessee's onus are concerned, it is necessary for the assessee to prove prima facie the transaction which results in cash credit in his books of accounts; that such proof includes proof of the identities of his creditors, the capacity of such creditors to advance the money and, lastly, the genuineness of the transactions; that mere filing of confirmatory letters does not discharge the onus that lies on the assessee; that reliance was placed on the Calcutta High Court's decision in Bharati P. Ltd. v. CIT (1978) 111 ITR 951 (Cal) and that the case of CIT v. W.J. Walkar & Co. (1979) 117 ITR 690 (Cal), was also relied on; that similarly, merely establishing the identity of the creditors is not enough [reliance placed on Shankar Industries v. CIT (1978) 114 ITR 689 (Cal) and C. Kant & Co. v. CIT (1980) 126 ITR 63 (Cal), both Calcutta High Court decisions]; that applying the above principles to the facts of the present case, he found that the assessee has simply filed confirmatory letters, which does not discharge its onus; that the AO started making enquiries by issuance of summons; that these summons were issued at the addresses supplied by the assessee; that the summons were returned by the postal authorities in almost all the cases except six; that this fact was brought to the notice of the assessee; that the assessee was requested to produce these parties; that nothing was done by it; that under these facts, it was impossible for the AO to verify the genuineness of these transactions; that the assessee made a point that since the loans were obtained through brokers, summons ought to have been issued to them; that he [CIT(A)] did not subscribe to this view; that it is the assessee's case that the loans were arranged by brokers; that if this was so, it was for the assessee to produce the brokers for examination; that this was not done by it; that the onus, therefore, does not shift on to the Department to issue summons to the brokers; and that as such, he was not inclined to agree with this stand of the assessee. Accordingly, he held that the assessee has filed to satisfactorily explain the nature, source and genuineness of the credits appearing in the accounts of the impugned parties; and that the AO was justified in making the impugned addition under s. 68 of the IT Act, 1961. The addition was confirmed. The addition of Rs. 40,932 on account of interest on the cash credits was also confirmed.
11. An amount of Rs. 2,19,019 was debited to the P&L a/c by the assessee as interest paid on loans, which was disallowed in earlier years as unexplained cash credits appearing in the books of the assessee under s. 68 of the IT Act. This amount was also disallowed by the AO and added to the income of the assessee. Penalty proceedings under Section 271(1)(c) were initiated separately on this account as well.
12. In appeal, the learned CIT(A) observed that such a disallowance would depend upon the finding given in respect of the addition made on account of unexplained cash credits in the earlier years. The AO was, therefore, directed to verify the facts in this regard and to restrict this disallowance to the interest paid on those loans, which was added in the earlier years.
13. It is in the above factual background that the assessee has been driven to file this appeal.
14. In response to the query of the Bench as to why the direction of the CIT(A) was not carried out by the AO, the Department has responded that the direction carried with it a rider, id est, that such enquiry was to be conducted, only if it was found necessary to do so. The stand taken is that since the AO did not find any such necessity, no enquiry was ordered.
15. It is with regard to this aspect of the matter that the direction, as contained in the order of CIT(A), was reproduced in para 7 above. It is a rudimentary tenet of law that an order has to be read as a whole. A party cannot just pick up words which are suited to its convenience, in order to twist the interpretation of the order misleadingly in its favour. A perusal of the order under reference clearly shows that the CIT(A) has not minced words in making the observations therein. Firstly, it has been observed that the summons issued could not be served because they were not accepted by the parties. Other parties also did not respond to the summons. In the case of non-acceptance of the summons, service is legally deemed to have been effected upon them and they are, for all intents and purposes, deemed to have been served. However, since six parties had refused to accept the summons and since the other parties did not respond to the summons by way of attending before the AO, it is abundantly clear that they were in no mood to co-operate with the assessee. It was, therefore, that the assessee was constrained to request the AO to verify the genuineness of the parties through enquiry, as observed by the CIT(A) in the order under consideration, Further, the assessee went even to the extent of offering, which it was legally obliged to do at his option to help in the enquiry, should any Inspector be deputed for the purpose.
16. It was in the above backdrop that the CIT(A) directed the enquiry.
17. Thus viewing the order of the CIT(A), there is not even an iota of doubt that the direction of the CIT(A) was not merely directory; it was mandatory.
18. Coming to the convenience plucked out of the order by the Department, reading the order as it is, we are to consider as to whether it is made out from a bare reading thereof that the CIT(A) left any option with the AO as is intended by the Department now to be believed by us.
19. A portion of the order of the CIT(A) is reproduced here as under:
"In my opinion, a full enquiry should be conducted, and this ground is sent back to the AO so that a thorough scrutiny is conducted, if necessary by deputing an Inspector for looking into the books of accounts of the creditors mentioned."
20. Even if the stand of- the Department is to be accepted, what is culled out from an analysis of the order is that the opinion of the CIT(A) was that a full enquiry is to be conducted that a thorough scrutiny has to be conducted for looking into the books of accounts of the creditors, even by deputing an Inspector for the purpose, if deemed necessary so to do, by the AO.
21. As such, in any case, a thorough scrutiny was to be conducted, whether or not by deputing an Inspector for the purpose. Has the Department done so ?
22. We find the Department to be thoroughly, blatantly, disdainfully contemptuously and illegally wanting in this regard.
23. The assessment order does not reveal any enquiry whatsoever to have been conducted in pursuance and compliance of the mandatory direction issued by the CIT(A). The stand of the Department that it has been given an option, as stated above, by the CIT(A) himself, could have been sustained in case the Department had laid bare even endeavour at making any such enquiry. This not being the case, it cannot take umbrage of the alleged option bestowed by the CIT(A). This so-called option is amply clear in character, It cannot be read divorced from what preceded it. And that is, the conducting of a thorough scrutiny. It is an either/or situation. The purport of the CIT(A) in giving such a direction was that a thorough scrutiny in the matter be carried out, in whatever manner thought fit and proper by the AO, even by deputing an Inspector, if necessary.
24. In view of the above, the flimsy ground taken by the Department cannot and does not stand the test of reason, much less that of law. Hence, it must fail.
25. It stands settled and oft reiterated by the Hon'ble Supreme Court that the lower authorities are bound to accept the decisions and directions of the appellate authority without any reservation. The latest case on the point is that of Nicco Corporation v. CIT (2001) 251 ITR 791 (Cal).
26. The appeal of the Revenue is liable to be rejected on this lone score. So far as regards the assessee, he has filed a paper book before us. This paper book contains, inter alia confirmations duly signed and new addresses furnished by the brokers. The affidavits under consideration are those of:
(i) Kiran Arora
(ii) Virender Verma
(iii) Rajkumar Hasija
(iv) Radha International
(v) Renu Sehgal The learned Departmental Representative has objected to this being read into evidence since, as per him, they constitute fresh evidence, which was not produced before either of the authorities below.
27. We find no merit in this contention of the learned Departmental Representative. The assessee has only endeavoured to butress his earlier stand that the cash credits in question were genuine. Before the learned AO, he had produced all possible evidence within his reach. He stressed on the point that it was the AO who did not deem it proper to conduct any enquiry into the matter, even though the summons were duly served and parties were not cooperating with the assessee.
28. Coming back to the paper book, the second page of its index contains a certificate under r. 18 of the IT Rules, that the documents contained in the paper book were produced before the AO. We now proceed to scrutinise these documents, so as to arrive at a proper conclusion on the issue at hand.
29. Pages 1 to 3 of the paper book comprise of a chart indicating the names of the creditors/parties, the amount paid, the mode of payment (which, in all cases, is by way of crossed cheques), the name of the bank, the mode of interest paid, the PAN/GIR numbers, new addresses of the parties and remarks. Then, there are loan confirmations, which again, contain, inter alia, the relevant cheque details. This apart, the assessee has also filed before us the affidavits of the five brokers who, as per the assessee, brought the account payee cheques regarding the cash credits in question to the assessee from various parties and whose responsibility it was to obtain the loan confirmations and the PAN/GIR numbers from the parties. These affidavits, we see, are replete with all the requisite details of the cash credits in question.
30. In view of the above, the ground taken by the assessee with regard to the addition of cash credits is accepted.
31. It has been contended that the figure of Rs. 3,60,000 has wrongly been shown. It should have been Rs. 3,46,000. We find this to be correct. The learned Departmental Representative accedes. This ground is also accepted.
32. As a result of our above findings, the confirmation of the disallowance of interest of Rs. 40,392 in respect of the above cash credits is also unsustainable. The ground in this regard is also accepted. The assessee is right in contending that the cash credits during the year are out of the addition made in the earlier year on cash credits and/or interest disallowed on account of unexplained cash credits.
33. The last ground of appeal is with regard to confirmation of the disallowance of loans of earlier years.
34. The learned CIT(A) has held that such a disallowance would depend upon the finding given in respect of the addition made on account of unexplained cash credits in the earlier years. It was, therefore, that the AO was directed to verify the facts in this regard and to restrict this disallowance to the interest paid on these loans, which are added in the earlier years.
35. We find that the finding arrived at by the CIT(A) is perfectly legal. The same, hence, does not require any interference on our part.
36. Resultantly, this ground of appeal is rejected.
37. Consequently, the appeal is partly allowed.