Income Tax Appellate Tribunal - Jaipur
Income Tax Officer vs Bandi Agencies. (Bandi Agencies V. Ito) on 4 September, 1996
ORDER
Pradeep Parikh, A.M.
1. All these appeals, cross-appeals and cross objections arise out of the combined order of the learned CIT(A), dt. 24th Sept., 1990, for asst. yrs. 1987-88 and 1988-89. As common issues are involved, we find it convenient to dispose of them all by this consolidated order. First we take up asst. yr. 1987-88 and in it, the departmental appeal is taken up first.
Asst. yr. 1987-88
2. The first ground in the departmental appeal pertains to the deletion of accrued interest income of Rs. 93,924. The assessee is a partnership firm carrying on business as manufacturer and seller of cloth. The impugned amount of Rs. 93,924 consists of two amounts of which we are concerned with Rs. 91,505 only.
2.1. At the end of the accounting year, the assessee had shown debtors to the tune of Rs. 11,65,973. In the course of assessment proceedings, the assessee was asked as to whether any interest was charged from the debtors. It was stated that interest was charged on debts remaining outstanding for over four months. A list of such debtors amounting to Rs. 5,08,360 was furnished to the Assessing Officer (AO). The AO observed that overdue interest was charged by the assessee in case of some debtors whereas in some it was not so charged. He was of the view that since it was the policy of the assessee to charge overdue interest, the assessee ought to have done so in all the cases. The AO, therefore, computed the interest at the rate of 18% on such debtors, where no interest was charged and accordingly added a sum of Rs. 91,505 to the total income of the assessee.
2.2. The learned Departmental Representative strongly supported the order of the AO and urged for its restoration. Shri N. M. Ranka, the learned counsel for the assessee, on the other hand, submitted that the assessee's consistent policy has been to account for the interest as and when the debt was settled, because it was at the time of settling the debt only, the issue of interest was settled with the debtor. In some cases interest was charged, in some, it was not charged. Further, even in cases where it was charged, the rate was not uniform in all the cases. Everything depended on various exigencies of business. This policy has been accepted by the Department in the past and in subsequent years also. It was, therefore, vehemently pleaded that the assessee was being taxed on notional income and not on real income and hence, it should be deleted from the total income.
2.3. After pondering over the respective pleas, we find nothing wrong with the order of the CIT(A) who, in our opinion, has rightly deleted the addition. The observations of the AO himself are contradictory. First he observes that the assessee has not shown any terms and conditions where interest is chargeable after four months. Then he observes that it was obligatory on the part of the assessee to charge interest on all the debtors. Nothing really emerges from these contradictory observations of the AO, except that he has not been able to make out a case which can even remotely indicate that the assessee had in fact charged interest from debtors, but had not accounted for it in the books. In our view, the decision to charge interest or not to charge, should be left to the assessee itself. It is he, who knows best as to how a particular customer should be dealt with. The decision he takes may turn out to be advantageous in more than one way or may be detrimental to him. The AO should not assume this responsibility on him. He has to find out whether the assessee has earned the income or not, either by way of accrual or by actually receiving it, depending on the consistent method of accounting followed. The AO has failed in this direction. The policy of settling the interest issue at the time of settling the debt is neither challenged nor disputed. In fact, it stands confirmed by the CIT(A). Thus, if at all interest is charged, it will not accrue to the assessee till the debt itself is settled. Hence, we see no infirmity in the order of the CIT(A) on this issue and do not disturb the same. The ground taken in this respect by the assessee in its cross-objections appears to be misconceived. It refers to the finding by the lower authorities as regards the method of accounting followed by the assessee generally, and in respect of interest on debtors. Whereas the AO has not given any specific finding in this regard, the finding of CIT(A) supports the contention of the assessee. The same being, therefore, misconceived, is rejected.
2.4. We are not concerned with the second component, namely, of Rs. 2,419 which is included in the sum of Rs. 93,924 mentioned in the first ground decided above. The same does not arise out of the order of the CIT(A) and, hence, the ground to that extent is misconceived and hence reject the misconceived portion included in the ground.
2.5. The second ground in the departmental appeal is to the effect that the CIT(A) erred in directing to include the income of the alleged benami concerns as declared by those concerns.
2.6. A survey under s. 133A was conducted on the group concerns of the assessee on 6th April, 1989. Certain documents, books of account and other material were impounded. In the opinion of the AO, the impounded material revealed that the assessee-firm had floated three other firms which were ostensibly owned by three different persons, but in reality they were benami concerns of the assessee. After considering the operational and various other aspects, the three concerns, viz., Manoj Textiles, Himmat Fabrics and Classic Fabrics were held to be benami concerns of the assessee. A gross profit rate of 6% was applied on the turnover declared by the three concerns and accordingly Rs. 2,49,543, Rs. 79,420 and Rs. 5,340 (totalling to Rs. 2,34,303) respectively, were added to the total income of the assessee.
2.7. The assessee, in its appeal, has challenged against holding the three concerns as benami of the assessee-firm. Hence, it would be appropriate to deal with the assessee's ground first, and then with the ground raised by the Revenue as regards the quantum of income to be added, if at all it has to be added. The CIT(A) held the three concerns to be benami but directed that only the income declared by these three concerns, be added to the income of the assessee.
2.8. Shri Ranka submitted that actually there was no reason for the Revenue to hold the three concerns as benami concerns of the assessee-firm. The main reason for holding as such by the Revenue appeared to be, in his opinion, that the business of the three concerns was financed by the assessee-firm. However, he went on, there was nothing unusual or unbusinesslike if the assessee had provided finance to these three concerns. The three proprietors had themselves contributed amount Rs. 5,000 each. Moreover, the business of all the three concerns had been closed down after a short period and did not continue for long. Had it been the intention to divert the income, Shri Ranka submitted, not only the three concerns would have survived, but they would have survived with substantial income and not merely with an income of Rs. 2,575, Rs. 16,931 and Rs. 4,675, respectively. It was further submitted that it was not at all unusual if there were inter-related sales or purchases. All the three concerns were looked after by the respective proprietors and since they failed, they had to be closed down. In closing down the business, they had defaulted towards the dues of the banks, and the bankers had issued legal notices to the three proprietors only and not to the assessee-firm or its partners. Summarising his arguments, Shri Ranka submitted that all the three tests, namely, capital, management and the fruits of the business, stood established enough to show that the three concern were not benami concerns of the assessee-firm. It was, therefore, urged that the income of these three concerns be excluded from the total income of the assessee. The learned Departmental Representative strongly relied on the orders of the lower authorities as regards the benami aspect of the three concerns.
2.9. We have considered the rival submissions and the material placed before us. In dealing with an obstruse concept like 'benami', it is apposite to be guided by the principles laid down by their Lordships of the superior Courts. A leading case on the subject, as referred to by the Bombay High Court in the case of Choithram Begraj Lalvaney vs. CIT (1992) 197 ITR 302 (Bom), is the decision of the Hon'ble Supreme Court in the case of Jaydayal Poddar vs. Mst. Bibi Hazra AIR 1974 SC 171, wherein the Supreme Court observed as follows :
"Though the question, whether a particular sale is benami or not, is largely one of fact, and for determining this question, no absolute formula or acid test uniformly applicable in all situations, can be laid down, yet in weighing the probabilities and for gathering the relevant indicia, the Courts are usually guided by these circumstances : (1) the source from which the purchase money came; (2) the nature and possession of the property, after the purchase; (3) motive, if any, for giving the transaction a benami colour; (4) the position of the parties and the relationship, if any, between the claimant and the alleged benamidar; (5) the custody of the title deeds after the sale; and (6) the conduct of the parties concerned in dealing with the property after the sale."
2.10. The Supreme Court also observed in the above case that the above indicia are not exhaustive and their efficacy varies according to the facts of each case. Nevertheless No. 1, viz., the source whence the purchase money came, is by far the most important test for determining whether the sale standing in the name of one person, is in reality for the benefit of another. Similar are the observations of the Supreme Court in case of Vidyadhar Krishnarao Mungi & Ors. vs. Usman Gani Saheb Konkani & Ors. AIR 1974 SC 658. It was observed that in a case where it is asserted that an assignment in the name of the person is in reality for the benefit of another, the real test is the source whence the consideration came. But when it is not possible to obtain evidence which conclusively establishes or rebuts the allegation, the case must be dealt with on reasonable probabilities and legal inferences arising from proved or admitted facts.
2.11. The case before us does not pertain to a sale. Nonetheless the principles enunciated above can be conveniently applied to the facts of the case. The most relevant for our purposes would be, (a) the sources of funds, (b) the motive, and (c) the conduct of the parties. Amongst these, the most important factor, as held by the Supreme Court, is the sources of funds. It is not disputed that the contribution of the three proprietors in the business is around Rs. 5,000 to Rs. 6,000 and that the combined business of Rs. 1,27,89,711 (aggregate turnover) of the three concerns is largely financed by the assessee-firm. The submission of the learned counsel that the proprietors are men of means and that it is not unusual if the business is financed by another, is worth considering in the light of the facts emerging from the records.
2.12. We do agree with the learned counsel that it is not unusual if finance is provided by someone. But the question is, if they were men of means, then what was assessee's interest in funding the business. This automatically leads us to enquire as to what could be the motive to set up the three proprietary concerns alleged to be the benami concerns of the assessee.
2.13. In the context of the present case, the motive, if there was any, could be only to divert the profits from the assessee-firm to the alleged benami concerns and reduce the incidence of tax. In order to ascertain as to whether there was diversion of profit and consequential benefit to the assessee-firm, it would be necessary to understand the modus operandi of the business transacted by the assessee-firm vis-a-vis the alleged benami concerns.
2.14. Prior to the setting up of the three concerns, the assessee used to get its "Vivek" brand suiting cloth manufactured from third parties. The assessee then used to process it and sell it in the market. When the three concerns were set up, these three concerns got the cloth manufactured from third parties under the brand name "Vivek". The three concerns processed the cloth and sold the same to the assessee-firm, which in turn, sold the same in the market. Thus, it is apparent that the value addition which was earlier done by the assessee-firm, was now done by the three concerns. The profit on this value addition, which was hitherto earned by the assessee-firm, was now earned, at least ostensibly, by the three concerns. To this extent, the circumstances do indicate deviation of profits. But still it cannot be finally concluded that they were the benami concerns of the assessee, because we have yet to deal with at least two more circumstances which have a bearing on the alleged benami character.
2.15. It was contended by the learned counsel that the smallness of the profits dispelled the belief that the three concerns were benami concerns of the assessee. There is some force in this contention, but this will again depend on the facts of each case. The profits declared by the three concerns were Rs. 2,575, Rs. 16,931 and Rs. 4,675. These profits are, by no means, huge profits. The question is, are these true profits ? In the opinion of the AO, they were not. He applied a gross profit rate of 6% in the turnover declared by each of these concerns and added the resultant figure to the total income of the assessee. In other words, he applied the provisions of s. 145 in each case. But no reasons or factors leading to apply (sic) the said provisions have been adduced by the AO. Nothing has been brought on record to show that the profits declared by the three concerns are not true profits. Hence, we are constrained to accept that what has been declared by the three concerns are their true profits.
2.16. Having held that the profits declared by the three concerns are true profits and also having stated that they are not substantial enough to fulfil the alleged motive to reduce the tax implication on the assessee-firm, still, can it be held that the three concerns were benami concerns so as to attract the addition of the declared profits ? For this we may resort to yet another test laid down by the Supreme Court in the case cited supra, and that is, the subsequent conduct of the parties. The major event common to all the three concerns which reflects the conduct of the parties, was that all the three concerns did not remain in business for long. Manoj Textiles remained in business for 6 months, Himmat Fabrics for 14 months and Classic Fabrics for a little over 12 months.
2.17. Thus, the totality of circumstances as discussed above, boils down to the proposition that the assessee-firm floated the three concerns to divert a total profit of Rs. 24,163 and thereby reduce its tax liability. This sounds quite a far-fetched proposition. Had the business in the three concerns continued, probably the smallness of profits would not have come the way to hold the concerns as benami. Also, had there been any other consideration to divert the profit, save to reduce the tax implication of the assessee, it could have probably changed the course of our conclusion. But there is no such allegation on the assessee. The evidences brought on record by the Department to prove the benami character of the three concerns, so also certain defence taken by the learned counsel, like the bankers sending notices to the proprietors of the three concerns only, all these do throw some light on the issue, and have been considered by us but by themselves they do not take us to the root of the dispute. It is only by applying the tests laid down by the Hon'ble Supreme Court to the facts of the case, we could reach to the conclusion.
2.18. We, therefore, hold that M/s Manoj Textiles, M/s Himmat Fabrics and M/s Classic Fabrics are not the benami concerns of the assessee-firm and accordingly delete the additions sustained by the CIT(A) in respect of the profits of these three concerns. This takes care of the second ground in the appeal by the Department and of the only ground taken by the assessee in its appeal.
3. The third ground in the departmental appeal pertains to the deletion of disallowance of Rs. 7,500 in respect of salary payment to Shri Bharat Kumar. It was observed by the AO that Shri Bharat Kumar was a family member and was a partner in various other firms having substantial business activities. In his opinion, therefore, Shri Bharat Kumar could not have had sufficient time to attend to the assessee-firm's work justifying the salary paid to him. Hence, inferring that it was merely a book entry, disallowed the same. The CIT(A) deleted the disallowance after finding that Shri Bharat Kumar was in service in earlier years also and that he has also attended to some work of the firm.
3.1. From the material placed on record, we observe that Shri Bharat Kumar is in service of the firm since asst. yr. 1984-85 and the deduction has been consistently allowed to the firm in respect of salary paid to him. Shri Bharat Kumar, we observe, has also been taxed in respect of this income after having claimed standard deduction therefrom. Though these factors alone cannot be the basis for allowance, in this case, the AO has not unearthed anything to show that Shri Bharat Kumar was not working for the firm. The disallowance is based only on surmise. On the other hand, the CIT(A) has given a finding as regards his working for the firm and hence, we do not find anything wrong with his conclusion. We, therefore, uphold his order on this ground. This takes care of the third ground in the appeal by the Department and of the second ground in the cross-objections by the assessee.
3.2. The fourth ground in the departmental appeal pertains to certain disallowances out of various expenses. One such disallowance is of Rs. 7,545 out of shop expenses. Total shop expenses amounted to Rs. 32,788. From the details furnished, the AO considered Rs. 12,545 as having spent on entertainment. Hence, after considering Rs. 5,000 as allowable, he disallowed a sum of Rs. 7,545. The CIT(A) found that the AO had wrongly taken Rs. 12,545 as entertainment expenses and held them to be for business consideration, thereby deleting the addition. The details of such expenses are placed on record. We have perused the same. It consists of expenses like stationery, conveyance, small repairs, etc. Hence, the findings of CIT(A) are correct and the disallowance has rightly been deleted by him. We uphold the same.
3.3. The next disallowance is of Rs. 1,971 out of sales promotion expenses. This amount represented cost of presentation articles, each costing more than Rs. 50. Hence, the disallowance. The CIT(A) found that the impugned amount represented cost of four brief-cases given to Dalals as incentives and hence, wholly for business consideration. He, therefore, deleted the disallowance. In our opinion too these are not advertisement expenses and hence, the CIT(A) was justified in allowing the same. We do not disturb his order. 3.4. The last disallowance pertains to Rs. 5,925 out of petrol expenses. This allowance represented 1/4th of the total expenses on petrol and depreciation on one car and a scooter on grounds of personal use. The CIT(A), considering the disallowance to be excessive, directed the AO to restrict it to 1/7th of the total. The directions of the CIT(A) is reasonable and, hence, we uphold the same.
Asst. yr. 1988-89 :
4. The first ground in the departmental appeal pertains to the deletion of accrued interest income of Rs. 74,376. The facts in respect of this disallowance are identical to the facts referred to in ground No. 1 in the appeal for asst. yr. 1987-88. For the reasons mentioned in our order for that year above, we uphold the order of the CIT(A). This also deals with the first ground in the cross-objections of the assessee and is rejected for the same reasons as mentioned by us earlier.
4.1. The second ground in the appeal by the Department is also dismissed which deals with the holding of three concerns as benami of the assessee-firm. The facts are identical to asst. yr. 1987-88. They are held to be not as benami of the assessee-firm and the addition made in respect of their income stands deleted. The first (sic) ground in the assessee's appeal, therefore, stands allowed.
4.2. The third ground pertains to the deletion of the disallowance of Rs. 30,275 representing salary payments. Total expenses debited on salary account were Rs. 75,508. For non-production of attendance registers, payment registers and for other reasons as mentioned by him in his order for asst. yr. 1987-88, the AO disallowed salary of Rs. 18,000 to Shri Badri Lal and Rs. 8,075 to Shri Dhanraj, totalling to Rs. 30,275.
4.3. On appeal, the CIT(A) sustained an addition of Rs. 9,000 out of the addition of Rs. 18,000 in respect of salary paid to Shri Bharat Kumar. The balance Rs. 9,000 was disallowed by him on the ground that during the year Shri Bharat Kumar had done business in his individual capacity in the name of Puja Syntex from which he had earned Rs. 36,406. Thus, it was inferred that Shri Bharat Kumar could not have had sufficient time to justify the payment of Rs. 18,000. As regards payments to Shri Badrilal and Shri Dhanraj, who are graders, the CIT(A) observed that grading was to be done at only one stage, but such charges were claimed both by the assessee-firm as well as the three other concerns which were alleged to be benami concerns. He, therefore, remanded this matter back to the AO for further investigation, with a direction to allow the grading charges only at one stage. He has not deleted the disallowances in respect of payments to Badri Lal and Dhanraj and hence, the ground taken by the Department to that extent is misconceived. We, therefore, do not deal with that part of the ground and reject the same.
4.4. As regards salary paid to Shri Bharat Kumar, it has to be noted that in asst. yr. 1987-88, he was paid Rs. 17,250. This year there is marginal increase of Rs. 750. The AO based the disallowance on asst. yr. 1987-88, whereas the CIT(A) disallowed 50% on the finding that a new business was carried out by Shri Bharat Kumar during the year. But while doing so the CIT(A) did not consider the submission that he was partner in the assessee-firm in HUF capacity and besides devoting time, the finance of the HUF was also involved. Hence, in our opinion, there was no reason to make ad hoc disallowance. We, therefore, delete the disallowance of Rs. 9,000 sustained by the CIT(A). The third ground in the departmental appeal is rejected, the third ground in the assessee's appeal is allowed and the second ground in the assessee's cross-objection stands partly allowed.
4.5. The fourth ground in the appeal by the Department pertains to the deletion of disallowance of Rs. 6,640 out of various expenses. The AO made an ad hoc disallowance considering the same to be on higher side. As the AO had not pinpointed any specific head of expenditure which he thought to be on higher side, the CIT(A) deleted the disallowance. We also, in absence of any provision of law prescribing for any ad hoc disallowance, uphold the order of the CIT(A) and reject the ground of the Department.
4.6. The last ground relates to the deletion of the addition of Rs. 12,532 representing interest on advance made to Shri Bharat Kumar and Shri Rajendra Kumar.
4.7. The AO found that the assessee had advanced a sum of Rs. 25,009 and Rs. 44,618 to S/Shri Bharat Kumar and Rajendra Kumar respectively on which no interest was charged. After considering the explanation of the assessee, the AO calculated interest at the rate of 18% and added the sum of Rs. 12,532 to the total income of the assessee. The CIT(A) accepted the explanation of the assessee and deleted the addition. The learned Departmental Representative relied on the order of the AO, whereas the learned counsel's arguments were the same as they were before the lower authorities.
4.8. As regards Shri Bharat Kumar, it was submitted that against the withdrawal, the salary paid to him was credited to his account and that the credits exceeded the debits. Despite there being no credit, Shri Bharat Kumar had not charged interest from the firm, hence, there was no question of charging any interest on the sum advanced to him. This fact is not disputed by the Department. Under these circumstances we see no reason for any addition. Moreover, in this case also the AO himself has admitted that no interest has been charged, but has sought to tax notional income. The addition deleted by the CIT(A), therefore, stands confirmed.
4.9. In case of Shri Rajendra Kumar, the money was advanced on 14th Nov., 1987. The AO calculated interest from 1st April, 1987, to 31st March, 1988. On the other hand, the assessee itself has charged interest from 14th Nov., 1987, to 31st March, 1989, and the same has been declared in the asst. yr. 1989-90. This is the finding of the CIT(A) not challenged by the Department. Thus, no addition is called for in respect of interest on the sum advanced to Shri Rajendra Kumar. We confirm the deletion.
4.10. Now in respect of asst. yr. 1988-89, there remains only one ground, i.e., ground No. 2 in the assessee's appeal. The grievance of the assessee is that the CIT(A) has not given any finding on the trading addition of Rs. 70,355.
4.11. While framing the assessment, the AO had applied the provisions of s. 145(1) to the assessee's case and had made a trading addition of Rs. 70,355. Being aggrieved by this addition, the assessee had raised this ground in its appeal before the CIT(A). However, we observe from the order of the CIT(A) that the said ground has not been dealt with by him at all. We, therefore, remit this matter to the file of the CIT(A) with a direction to deal with the ground and give his finding thereon.
5. In result, for asst. yr. 1987-88 :
(a) the appeal of the Department is dismissed;
(b) the appeal of the assessee is allowed; and,
(c) the cross-objections of the assessee are partly allowed.
for asst. yr. 1988-89 :
(a) the appeal of the Department is dismissed;
(b) the appeal of the assessee is allowed; and,
(c) the cross-objections of the assessee are partly allowed.