2006 (9) TMI 346 - AT - Income Tax

Disallowance u/s 37 - Reimbursement of expenses paid on behalf of their client - illegal payments made in the form of bribes - Search and seizure operation u/s 132 - Unexplained investments unexplained interest income - HELD THAT - In the matter before us it is the claim of the assessee that it has not claimed any deduction for the impugned expenditure in its Profit Loss Account and hence the Assessing Officer was not justified in disallowing the same. The Department has not placed any material before us to controvert the aforesaid submission made on behalf of the assessee. In this view of the matter the appeal filed by the Department is liable to be dismissed. We order accordingly. Addition on alleged renovations at office premises - seized loose papers - HELD THAT - In our view the loose papers as also the statements made at the time of search simply provided a clue to the Department to investigate the matter further and verify as to whether any alteration was at all carried out at the office premises and if so the expenditure incurred in carrying out those renovations. This was all the more necessary when both the directors had retracted from their statements and when it was stated before the Assessing Officer that the items mentioned in the seized papers were non-existent at the office premises. Since the Department has not linked the contents of the seized paper with the actual renovations allegedly carried out at the office premises it is difficult to sustain the addition. Rebuttable presumption raised by section 132(4A) is restricted to accepting the genuineness of the document found at the time of search and not to the interpretation of those documents. Thus the impugned addition made by the Assessing Officer and sustained by the learned CIT(A) is deleted. Ground No. 1 is allowed. Addition on account of alleged unexplained loans and of alleged undisclosed interest income - HELD THAT - In the matter before us the assessee had filed a list of parties along with their addresses in respect of whom the jottings were made in the seized paper and requested the Assessing Officer to examine them. It was therefore for the Assessing Officer to find out as to whether the jottings made in the seized paper really pertained to the debtors recorded in the assessee s books of account. Secondly the assessee had filed affidavits of the parties mentioned in the seized paper and requested the Department to summon them and verify the facts which the Assessing Officer did not do. Thirdly it is not a case where the assessee has not offered any explanation about the nature and source of the transactions shown in the seized papers. If the Department was keen to reject them it was open to them to do so after examining the executants of the affidavits and after rebutting the explanation given by the assessee. The Assessing Officer presumed the unexplained nature of jottings made in the said seized paper without examining the concerned parties who have filed their affidavits. Additions cannot be made on the basis of conjectures and surmises. In our view the materials brought on record by the Assessing Officer are not sufficient to bring the case of the assessee within the ambit of section 69 of the Income-tax Act. Ground No. 2 is allowed. Appeal filed by the assessee is allowed.

Summary

Issues Involved:

1. Disallowance of Rs. 35,77,500 claimed as reimbursement of expenses.
2. Addition of Rs. 7,77,480 on account of alleged renovations at office premises.
3. Addition of Rs. 36,28,700 on account of alleged unexplained loans and Rs. 5,98,735 on account of alleged undisclosed interest income.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 35,77,500 claimed as reimbursement of expenses:

The Department contended that the CIT(A) erred in deleting the disallowance of Rs. 35,77,500, which was claimed by the assessee as reimbursement of expenses paid on behalf of their client. The Department argued that these payments were illegal bribes to employees and thus not allowable as deductions under section 37 of the Income-tax Act, 1961. The assessee, however, argued that it did not claim these expenses as deductions in its Profit & Loss Account, asserting that they were merely reimbursements from clients for expenses incurred on their behalf. The Tribunal concluded that since the assessee did not claim these expenses as deductions, the disallowance by the Assessing Officer was unjustified. Therefore, the appeal filed by the Department was dismissed.

2. Addition of Rs. 7,77,480 on account of alleged renovations at office premises:

During a search, a loose paper indicating renovations worth Rs. 7,77,480 was seized from a Director's residence. The Assessing Officer and CIT(A) upheld the addition based on this document. The assessee argued that the paper did not correlate with actual renovations and claimed it was merely an estimate. The Tribunal found that the seized paper lacked specific details such as the year and exact location of renovations. Additionally, the Department did not verify whether the renovations were actually carried out. The Tribunal held that the document and statements provided only a clue and required further verification, which was not conducted. Consequently, the addition was deleted, and Ground No. 1 of the assessee's appeal was allowed.

3. Addition of Rs. 36,28,700 on account of alleged unexplained loans and Rs. 5,98,735 on account of alleged undisclosed interest income:

The addition was based on a seized paper with codified figures, which the Department interpreted as unexplained loans and corresponding interest income. The assessee explained that the paper was a rough list of debtors and provided affidavits from the parties mentioned, requesting the Assessing Officer to verify these claims. The Assessing Officer, however, did not summon these parties, assuming the transactions were unrecorded and unverifiable. The Tribunal noted that mere jottings on a paper do not suffice to presume unexplained investments under section 69. The Tribunal emphasized that the Department failed to verify the affidavits and explanations provided by the assessee. Therefore, the addition was deemed based on conjectures and surmises, and Ground No. 2 of the assessee's appeal was allowed.

Conclusion:

The Tribunal dismissed the Department's appeal and allowed the assessee's appeal, deleting the disallowances and additions made by the Assessing Officer and upheld by the CIT(A). The Tribunal emphasized the necessity of proper verification and evidence before making such additions and disallowances.