2009 (6) TMI 658 - AT - Income Tax

Taxability of income - Accrual or payment basis - Held that - AO cannot resort to double taxation if he finds that the assessee had disclosed the income to this extent in the subsequent year. The income if any included in the subsequent year may be excluded. Expenses on purchase of property - AO inferred that such expenditure had been incurred by the assessee out of his unexplained sources and added the same to the income of the appellant. - Held that - AO cannot brush aside the assertion of the appellant without bringing any material on record. The AO had not made any enquiry from Smt. Madhu Sood the seller of the property. In absence of any material brought on record the AO was not justified in making addition. Surrender of income - Held that - surrender alone as such cannot be the basis of making the addition and even the AO has not proceeded on that basis and made addition only of the amount which was not explained and (sic-not) the surrender to the extent explained to be from withdrawals from bank for purchase of drafts. - When a part of the surrender can be accepted on proper explanation the rest can also be allowed to be explained. - The assessee s claim that balance was from cash withdrawals from cash book has to be tested on the facts appearing in the case. - AO directed to verify if the amount of Rs. 12, 33, 799 invested in purchase of draft was withdrawn from the regular cash book after verification of entries of cash withdrawals. In the peculiar facts of the case it would first be necessary to establish availability of funds in the cash book.

Issues Involved:
1. Sustenance of disallowance of interest paid to Shri Sanjeev Sarin.
2. Sustenance of addition of accrued interest on loan given to Shri Arun Kumar Jain.
3. Sustenance of addition of expenses incurred by the seller in connection with the sale of a plot.
4. Sustenance of addition of drafts deposited in Nova-Scotia Bank, New Delhi.
5. Confirmation of estimate of professional income.
6. Charging of interest under sections 234A, 234B, and 234C.

Issue-wise Detailed Analysis:

1. Sustenance of disallowance of interest paid to Shri Sanjeev Sarin:
The appellant had taken a loan of Rs. 35,000 from Shri Sanjeev Sarin at 18% interest. The interest amounting to Rs. 29,400 was paid for 56 months, but the AO restricted the allowance to twelve months and disallowed Rs. 23,100. The CIT(A) upheld this disallowance. The Tribunal found that under section 145 of the IT Act, the assessee was required to follow either the mercantile or cash system of accounting. Since the appellant maintained books on a mercantile basis but followed a hybrid system for interest transactions, the disallowance was upheld.

2. Sustenance of addition of accrued interest on loan given to Shri Arun Kumar Jain:
The appellant advanced a loan of Rs. 10,00,000 to Shri Arun Kumar Jain but did not credit any interest in the books on an accrual basis. The AO added interest at 18%, which was reduced to 12% by the CIT(A). The Tribunal upheld the addition of Rs. 37,480 as accrued interest, noting that the appellant could not follow a hybrid system of accounting.

3. Sustenance of addition of expenses incurred by the seller in connection with the sale of a plot:
The appellant purchased a plot from Smt. Madhu Sood and claimed that the seller incurred expenses of Rs. 36,010 for stamp paper and registry. The AO added this amount to the appellant's income, stating there was no mention of such expenses in the sale deed. The Tribunal found that the AO did not bring any material on record to disprove the appellant's claim and had not made any enquiry from the seller. Thus, the addition of Rs. 36,010 was deleted.

4. Sustenance of addition of drafts deposited in Nova-Scotia Bank, New Delhi:
The appellant surrendered Rs. 27,53,939 as undisclosed income. The AO accepted drafts of Rs. 15,19,600 from the bank account but not Rs. 12,33,799 from the cash book, leading to an addition under section 69. The CIT(A) confirmed this, citing doubts about the cash book's reliability. The Tribunal found that the AO and CIT(A) erred in not accepting the cash book entries without material evidence. The Tribunal directed the AO to verify if the drafts were purchased from cash withdrawals in the regular cash book and to allow relief if verified.

5. Confirmation of estimate of professional income:
The AO estimated professional receipts at Rs. 1,30,000 against Rs. 1,20,214 shown by the appellant, based on section 145 applicability. The CIT(A) confirmed this without specific defects or basis. The Tribunal found no basis for the estimation and reversed the CIT(A)'s order, deleting the addition of Rs. 7,986.

6. Charging of interest under sections 234A, 234B, and 234C:
This issue was deemed consequential, and the AO was directed to allow consequential relief.

Separate Judgments:
Diva Singh, J.M.:
Disagreed with the majority on ground No. 4, emphasizing the need to first establish the availability of funds in the cash book, which the assessee failed to do before tax authorities or the Bench. She highlighted the necessity to verify the availability of funds before considering the drafts' purchase from the cash book.

R.P. Garg, Senior Vice President (as Third Member):
Agreed with Diva Singh, J.M., stating that the availability of funds in the cash book must first be established. He directed the AO to verify the cash book entries and the availability of funds before verifying the drafts' purchase.

Final Decision:
The Tribunal, by majority decision, directed the AO to examine the issue in accordance with the direction of Diva Singh, J.M., verifying the availability of funds in the cash book first. The appeal was treated as allowed in part.

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