1985 (11) TMI 230 - AT - Income Tax

Issues Involved:
1. Deletion of addition made on account of accrued interest on interest-free loans to directors.
2. Genuineness of cash credit of Rs. 40,000 in the name of Ugamlal Parekh.
3. Unexplained credit in the account of Shri Choggalal Akodia.
4. Classification of expenditure incurred for prospecting of mines as revenue or capital expenditure.
5. Disallowance of car expenses for personal use of directors.
6. Deletion of addition of Rs. 20,495 shown in the profit and loss account.
7. Deletion of addition of Rs. 86,169, Rs. 79,555, and Rs. 38,835 representing unpaid wages.

Detailed Analysis:

1. Deletion of Addition Made on Account of Accrued Interest on Interest-Free Loans to Directors:
The Commissioner (Appeals) deleted the addition made by the ITO amounting to Rs. 85,017 on the grounds that the ITO had not established any nexus between the borrowings and the advances made. The loans were old, dating back to 1950, and a resolution passed in 1961 by the shareholders decided that no interest would be charged from the directors. The department's reliance on section 36(2)(iv) of the Income-tax Act, 1961, was found not applicable. The Tribunal upheld the Commissioner (Appeals)' decision, confirming that there was no nexus between the loans taken and advanced, and the principle of consistency demanded that the department should not make inconsistent additions without basis.

2. Genuineness of Cash Credit of Rs. 40,000 in the Name of Ugamlal Parekh:
The ITO added Rs. 40,000 as unexplained cash credit, relying on a statement from Ugamlal Parekh, who denied giving any loan to the assessee. The Commissioner (Appeals) deleted the addition, emphasizing that the ITO should have summoned Parekh for cross-examination. The Tribunal disagreed, holding that the confirmatory letter and book entries were disproved by Parekh's statement, and the assessee failed to prove the genuineness and creditworthiness of the transaction. The Tribunal restored the ITO's addition of Rs. 40,000 under section 68 but did not uphold the interest addition of Rs. 1,757.

3. Unexplained Credit in the Account of Shri Choggalal Akodia:
The issue was remanded to the Commissioner (Appeals) to be decided afresh as per the directions of the Tribunal for the assessment year 1973-74 in the assessee's own appeal.

4. Classification of Expenditure Incurred for Prospecting of Mines:
The ITO treated the expenditure as capital expenditure. The Commissioner (Appeals) reversed this, holding it as revenue expenditure, reasoning that the lease was for working out the mines and not for prospecting operations. The Tribunal upheld this decision, noting that the assessee was engaged in mining for the last 40 years on one lease, and the nature of the expenditure was revenue.

5. Disallowance of Car Expenses for Personal Use of Directors:
The Commissioner (Appeals) sustained the disallowance at Rs. 9,700 (one-sixth of the total expenses). The Tribunal found this excessive and adjusted it to one-fifth, in line with the past record.

6. Deletion of Addition of Rs. 20,495 Shown in the Profit and Loss Account:
The Commissioner (Appeals) deleted the addition, following the Tribunal's order for the assessment year 1973-74, which held that these items were not originally passed through the profit and loss account, making section 41(1) inapplicable. The Tribunal confirmed this decision.

7. Deletion of Addition of Rs. 86,169, Rs. 79,555, and Rs. 38,835 Representing Unpaid Wages:
The ITO added these amounts under section 41(1), arguing that the liabilities ceased to exist. The Commissioner (Appeals) deleted the additions, noting that the amounts were not transferred to the profit and loss account and payments were still being made. The Tribunal was divided on this issue. The Judicial Member supported the ITO's view, emphasizing the non-payment and lack of details. The Accountant Member disagreed, citing that mere time-barring did not constitute cessation of liability under section 41(1). The Third Member sided with the Accountant Member, concluding that there was no remission or cessation of liability, and the amounts could not be treated as income under section 41(1).

Conclusion:
The appeals for the assessment years 1972-73 and 1978-79 were partly allowed. The appeal for the assessment year 1973-74 was treated as allowed for statistical purposes. The appeal for the assessment year 1979-80 was dismissed.

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