1995 (4) TMI 78 - AT - Income Tax

Summary

Issues Involved:
1. Grant of registration/continuation of registration under section 184(7).
2. Clubbing of income from sister concerns.
3. Disallowance of inter-firm interest.
4. Lump sum additions to gross profit.

Issue-wise Detailed Analysis:

1. Grant of Registration/Continuation of Registration under Section 184(7):
The main appeal relates to M/s H. Bhagwati & Sons concerning both the quantum appeal and the grant of registration. The facts reveal that the assessment for the year 1984-85 was initially set aside under section 263 by the CIT, who noted that registration was granted without examining the basic facts, and the income was not properly taxed. The fresh assessment determined the income at Rs. 8,24,206. The AO found that the business of M/s H. Bhagwati & Sons and its four sister concerns was carried on from the same premises with common management and employees, and the income was diverted to reduce tax liability. Consequently, the AO refused the continuation of registration under section 184(7), treating the firm as an AOP.

The CIT(A), however, held that M/s H. Bhagwati & Sons and the sister concerns were genuine and entitled to registration. The CIT(A) thoroughly considered the points raised by the AO and concluded that the income of the sister concerns could not be clubbed with the main firm. The CIT(A) directed the AO to grant registration to the main firm and the sister concerns, which the Revenue contested.

2. Clubbing of Income from Sister Concerns:
The AO clubbed the income of the four sister concerns with the main firm, arguing that the firms were created to divert income and avoid tax liability. The CIT(A) disagreed, stating that the sister concerns were genuine and had been separately assessed for several years. The CIT(A) noted that some sister concerns were formed before the main firm, making it illogical to claim they were created to divert income. The CIT(A) emphasized that the stock inventory during the survey was identifiable and properly explained, and no unexplained cash was found.

The Tribunal supported the CIT(A)'s view, stating that the AO's conclusions were based on suspicion rather than evidence. The Tribunal highlighted that the burden of proving the sister concerns as benami lay with the Department, which it failed to discharge. The Tribunal confirmed that the income of the sister concerns could not be clubbed with the main firm.

3. Disallowance of Inter-firm Interest:
The AO disallowed inter-firm interest, arguing that the sister concerns were non-genuine and their income was clubbed with the main firm. The CIT(A) deleted the disallowance, reasoning that the sister concerns were genuine and their transactions should be treated as such. The Tribunal upheld the CIT(A)'s decision, confirming that the interest paid to the sister concerns was genuine and the disallowance was unjustified.

4. Lump Sum Additions to Gross Profit:
The AO made a lump sum addition to the gross profit, presuming stock manipulation to adjust book results. The CIT(A) deleted the addition, noting that the sales and purchases were properly vouched, and the stock was identifiable and separate from other concerns. The Tribunal agreed with the CIT(A), stating that the AO failed to point out specific discrepancies in the accounts, making the lump sum addition unjustified.

Conclusion:
The Tribunal confirmed the CIT(A)'s findings, supporting the genuineness of the main firm and the sister concerns, and rejecting the clubbing of income. The Tribunal also upheld the deletion of disallowances related to inter-firm interest and lump sum additions to gross profit. Consequently, all appeals by the Revenue were dismissed.