1993 (10) TMI 116 - AT - Income Tax

Issues Involved:

1. Disallowance of Rs. 1,06,760 as unproved liabilities.
2. Proportionate disallowance of interest payable to Sri U.J. Patel.
3. Jurisdiction of CIT(A) to direct the addition of Rs. 1,06,760 in the assessment year 1979-80.
4. Principles of natural justice regarding the statement of Sri K.R. Sheth.
5. Disallowance of Rs. 21,404 in respect of interest on liabilities.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 1,06,760 as unproved liabilities:

The Assessing Officer (AO) noted a liability of Rs. 2,83,122 in the assessee's balance-sheet, purportedly clients' deposits. A credit of Rs. 2 lakhs was in the name of Sri U.J. Patel since 1978, with Rs. 40,097 as interest payable. Upon inquiry, the assessee claimed it was a loan from four individuals, facilitated by Sri U.J. Patel. However, the AO found discrepancies in the sale proceeds of shares and concluded that only Rs. 93,240 was genuine, adding Rs. 1,06,760 as income from undisclosed sources.

2. Proportionate disallowance of interest payable to Sri U.J. Patel:

The AO allowed proportionate interest of Rs. 18,693 out of Rs. 40,097, disallowing Rs. 21,404, based on the finding that the genuine liability was only Rs. 93,240.

3. Jurisdiction of CIT(A) to direct the addition of Rs. 1,06,760 in the assessment year 1979-80:

The CIT(A) upheld the AO's action but directed that the unproved liability should be added in the assessment year 1979-80, where it first appeared. The assessee challenged this direction, arguing that once it was found that the amount did not relate to the year under appeal, the CIT(A) had no jurisdiction to direct its addition in another year. The Tribunal referred to several cases, including ITO v. Murlidhar Bhagwandas and N.K.T. Sivalingam Chettiar, concluding that the CIT(A) had no jurisdiction to give such a direction but upheld the finding that the amount was assessable in the assessment year 1979-80.

4. Principles of natural justice regarding the statement of Sri K.R. Sheth:

The assessee contended that the statement of Sri K.R. Sheth, recorded under section 131, was used against him without an opportunity for cross-examination, violating natural justice principles. The Tribunal, citing Kalra Glue Factory v. Sales Tax Tribunal, restored the matter to the AO to allow cross-examination and arrive at a fresh decision.

5. Disallowance of Rs. 21,404 in respect of interest on liabilities:

Given the finding that the addition of Rs. 1,06,760 could only be made in the assessment year 1979-80, the Tribunal directed that the disallowance of interest should be reconsidered. Only the part of the liability claimed as a deduction in the assessment year 1983-84 should be disallowed, contingent on a fresh finding on the merits regarding the addition in the assessment year 1979-80.

Conclusion:

The appeal was partly allowed. The Tribunal upheld the finding that the amount was assessable in the assessment year 1979-80 but deleted the direction to add it in that year. The matter was remanded to the AO for a fresh decision after allowing cross-examination of Sri K.R. Sheth. The disallowance of interest was directed to be reconsidered based on the outcome of the reassessment.

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