2016 (9) TMI 1504 - AT - Income Tax

Statement recorded during the course of survey u/s 133A - accommodation entries - no actual import of goods - whether officer is not authorised to administer oath and to take any sworn statement which alone has evidential value as contemplated under law? - HELD THAT - As per verdict in the case of CIT Vs. S. Kahder Khan sons, 2013 (6) TMI 305 - SC ORDER Section 133A does not empower any IT Authority to examine any person on oath, hence, mere statement recorded during survey has no evidentiary value and any such addition cannot be made, without bringing on record corroborative materials. The Hon ble Supreme Court further observed that this view is clearly supported by CBDT Circular dated 10th March, 2003. Accordingly it was held that no addition can be made merely on the basis of statement recorded during survey u/s.133A. Survey party did not find any incriminating evidence/material that can establish the stand taken by the AO alleging that the assessee is engaged in the business of accommodation bills. There is no dispute to the fact that no incriminating evidence was found on the day of the survey which is a testimony to the fact that statement of Mr. Paras Jain was to be considered. Merely on the basis of the statement of another director, that also after a lapse of 20-25 days of the survey, without having any proof at all, cannot be the basis for addition or even for that matter, bringing into assessment any amount without supporting evidence. The statement recorded u/s. 133A of the Act cannot be taken on oath and therefore it cannot be said to have an evidentiary value. Accordingly addition made on the basis of statement is not sustainable. With regard to the nature of assessee s business, we found that the import of diamonds undergoes appraisal process by the appraisers appointed by the custom authorities. The officers appointed by Government of India verify physically each and every parcel of diamonds in order to ascertain the quality, quantity, rate, value and place of origin visa vis declared by the importers. All the transaction of purchase, sales, import was made through cross account payee cheques and not a single payment made to any party by way of cash. All the purchase and sales transactions are carried out with reputed parties of the diamond trade and all the payment received from debtors are through cross account payee cheques and all payment made to creditors are through cross account payee cheques. AO cannot allegedly consider the imports of goods as providing accommodation bill in the market when physical delivery of goods were confirmed by the other arm of government authorities i.e. custom authorities. We found that in the regulation of the Customs Act 1962, when the goods are imported in the country, the goods are checked and authorized by the custom officers before the goods can be taken for domestic consumption. Since, the goods have been cleared by the respective authorities and custom duty thereon has been paid, the claim of the A.O. regarding no actual import of goods is unjust. These documents prove that the assessee is not engaged in the issuing the accommodation bills and acting as a dummy for importing diamonds bills. Thus, the contention of the ld. AO that the bills issued by the assessee are all accommodation bill is wrong. Just on the basis of the statement recorded he cannot come to the conclusion that the assessee has issued accommodation bills and reject the books of account of the assessee. The assessee has also filed quantitative tally of purchase of import and sales. Also maintained proper books of accounts and filed all the details before the A.O. and the CIT(A). So far as the ground taken for reopening is concerned, we do not find any merit, as reasonable belief was framed by the A.O. on the basis of the survey. Accordingly, we uphold the reopening of the assessment. In view of the above discussion, and also following the judicial pronouncements in the case of Morewel Impex Pvt. Ltd. 2015 (12) TMI 457 - ITAT MUMBAI by the co-ordinate bench in its order dated 14.10.2015, we direct the A.O. to delete the income as estimated by him for both the years under consideration and accept the book results declared by the assessee. Correct head of income - Interest income offered by the assessee as business income - A.O. treated the same as income from other sources - HELD THAT - From the record we found that during the year under consideration the assessee offered interest income under business head because the assessee was getting credit period for 30 to 150 days from buyers. However, the sales proceeds are received on sale itself. Therefore the assessee has idle business funds which is used in temporary loan and balance is in bank account on the same appellant had earned income and same is offered under the business head. AO assessed the same as Income from other Source . The Ld. AO failed to consider that income arise from business fund is assessable under the business. The issue under consideration is squarely in the case of CIT vs. Lok Holdigns 2008 (1) TMI 365 - BOMBAY HIGH COURT wherein it was held that interest received on deposits made out of advance money so received by the assessee in the course of its business is liable to be taxed as business income . Rejection of books of accounts - HELD THAT - Action of the AO to reject the books of accounts merely on the basis of statement signed by the assessee during the survey is bad in law. There should be some valid reason to reject the books of accounts which the Income Tax Officer has not given and hence rejection of books of accounts is not justified. The assessee has got its books of accounts audited by a qualified Chartered Accountant, being one of the pre-requisites. Hence when the accounts are audited, it leads to the inference that due skill and expertise has been exercised in assessing the accounts and no material discrepancy has been noticed either on the fact of it or otherwise. By rising doubt on conduct of business and the transactions recorded therein only frustrates the very purpose of carrying/conducting Audits by qualified personnel. Disallowance of expenses - CIT (A) confirm the rejection of books of account only on statement of another director - HELD THAT - It is general rule that books of account cannot be rejected without finding any discrepancy in books of account. Assessee s books of accounts are audited and no defect was founds. Hence, the books of account rejected in assessee case is unwarranted. Further, the assessee s books are not only subject to tax audit are also audited under Maharashtra Value Added Tax, Company Act. And further the goods verified by custom authorities under Custom Law. Thus, the assessee complied with 4 laws and every department accepted the genuineness of transaction. Hence, the same cannot be set aside on mere assumption basis. After going through the various expenses so incurred by the assessee, we found the AO failed to consider that under business head expenses incurred wholly and exclusively for the purpose of business is allowable expenditure. Further, for taking excess commission rate of 2% the AO state that there is more risk involves and foreign currency is also involved. Then the AO has to allow the foreign currency loss also because it is arises due to imports and it is arises due to increase and decrease in value of currency on which assessee does not have any control. Assessee has to suffer that loss. Further the expenses so incurred were in nature of business. After going through the various expenses so incurred by the assessee, we found that these are basic expenses without these businesses cannot be run. For doing business assessee need to incur bank charges, brokerages, electricity of office, office expenses salary, import expenses, foreign traveling expenses, exchange loss etc. Hence, these are required to be allowed as incurred wholly and exclusively for the purpose of business. - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of Books of Account
2. Estimation of Commission Income
3. Treatment of Interest Income
4. Validity of Statements Recorded During Survey
5. Reopening of Assessment
6. Disallowance of Expenses

Issue-wise Detailed Analysis:

1. Rejection of Books of Account:
The assessing officer (AO) rejected the books of account of the assessee on the assumption that the assessee was engaged in providing accommodation bills. This conclusion was based on statements recorded during a survey under section 133A of the Income Tax Act, 1961. However, the tribunal noted that no incriminating material was found during the survey, and the director of the assessee company retracted his statement within a month, claiming he was coerced. The tribunal emphasized that statements recorded during a survey do not have evidentiary value unless supported by corroborative evidence. The tribunal concluded that the AO was not justified in rejecting the books of account as no defects were pointed out, and the books should have been accepted.

2. Estimation of Commission Income:
The AO estimated commission income at 2% of sales, assuming the assessee provided accommodation bills. The tribunal referred to a similar case, Morewel Impex Pvt. Ltd. vs. ITO, where it was held that such estimation was unjustified without corroborative evidence. The tribunal found that the AO did not bring any material on record to support his conclusions and relied solely on retracted statements. The tribunal directed the AO to delete the estimated income and accept the book results declared by the assessee.

3. Treatment of Interest Income:
The AO treated the interest income earned by the assessee as 'income from other sources' instead of 'business income'. The tribunal noted that the interest income arose from idle business funds temporarily loaned out or kept in bank accounts. Citing the case of CIT vs. Lok Holdings, the tribunal held that interest received on deposits made out of business funds is liable to be taxed as 'business income'. The tribunal directed the AO to assess the interest income as 'business income'.

4. Validity of Statements Recorded During Survey:
The tribunal reiterated that statements recorded under section 133A of the Income Tax Act do not have evidentiary value unless supported by corroborative evidence. It cited several judicial pronouncements, including CIT vs. S. Khader Khan Son, where it was held that such statements cannot be the sole basis for making additions. The tribunal found that the AO's reliance on the retracted statement of the director was unjustified, and no addition could be made based on such statements without supporting evidence.

5. Reopening of Assessment:
The tribunal upheld the reopening of the assessment, stating that the AO had reasonable belief based on the survey to initiate reassessment proceedings. However, it emphasized that the reassessment should be based on proper evidence and not merely on retracted statements.

6. Disallowance of Expenses:
The AO disallowed various business expenses, but the tribunal found that these expenses were necessary for the business operations and were incurred wholly and exclusively for business purposes. The tribunal noted that the assessee's books of accounts were audited under multiple laws, including the Income Tax Act, VAT, and Customs Act, and no defects were found. The tribunal directed the AO to allow the business expenses as claimed by the assessee.

Conclusion:
The tribunal set aside the orders of the lower authorities, directing the AO to accept the book results declared by the assessee, delete the estimated income, and assess the interest income as 'business income'. The tribunal also directed the AO to allow the business expenses as claimed by the assessee. The appeals of the assessee were allowed in part.