1986 (3) TMI 132 - AT - Income Tax

Issues Involved:
1. Residential status of the assessee-firm.
2. Addition of Rs. 75,000 as unexplained cash credit.
3. Scope of the Commissioner (Appeals) order dated 3-2-1979.
4. Addition of Rs. 6,50,000 to trading results.
5. Cash credits in the name of S. Sarin Singh.
6. Interest paid to S. Sarin Singh.
7. Langar expenses.
8. Income-tax paid in Afghanistan.
9. Addition of Rs. 4 lakhs to trading results.
10. Residential status for the assessment year 1973-74 and 1974-75.
11. Existence of the firm.

Issue-wise Analysis:

1. Residential Status of the Assessee-Firm:
The main contention was whether the assessee-firm was a non-resident, as claimed by the assessee, or a resident, as determined by the revenue. The assessee argued that the control and management of the firm were exercised from Kabul, with no business transactions, income, or expenses in India. The revenue contended that the firm was managed from India, citing the presence of partners in India for significant periods and the firm's constitution under the Indian Partnership Act. The Tribunal upheld the revenue's view, noting that the partners were in India for substantial periods, and there was no evidence to show that the control and management were wholly outside India.

2. Addition of Rs. 75,000 as Unexplained Cash Credit:
The assessee claimed that Rs. 75,000 was part of the savings of the deceased employee, Shri Dwarka Nath. The Commissioner (Appeals) did not accept this explanation due to the lack of supporting evidence. The Tribunal, however, found the explanation plausible and deleted the addition, noting that Shri Dwarka Nath was a person of means and could have saved the amount from his salary.

3. Scope of the Commissioner (Appeals) Order Dated 3-2-1979:
The departmental appeal contended that the set-aside of the assessment by the Commissioner (Appeals) was total and unfettered, allowing the ITO to re-examine all aspects of the assessment. The Tribunal agreed with this view, stating that the Commissioner (Appeals) had set aside the entire assessment, making it open for the ITO to reassess all aspects.

4. Addition of Rs. 6,50,000 to Trading Results:
The ITO rejected the trading results due to a decline in the gross profit rate and the lack of vouchers for purchases and sales in Kabul. The Commissioner (Appeals) and the Tribunal found the rejection unjustified, noting that fluctuations in profit were normal, and there was no evidence of inflated purchases or understated sales.

5. Cash Credits in the Name of S. Sarin Singh:
The ITO added Rs. 5 lakhs as unexplained cash credits. The Commissioner (Appeals) deleted the addition on the ground that it was not made in the original assessment. The Tribunal restored the matter to the Commissioner (Appeals) for examination on merits, noting discrepancies in the accounts and the need for further investigation.

6. Interest Paid to S. Sarin Singh:
The addition of Rs. 20,000 as interest paid to S. Sarin Singh was set aside by the Tribunal, restoring the matter to the Commissioner (Appeals) for re-examination in line with the findings on the genuineness of the loan.

7. Langar Expenses:
The ground regarding langar expenses was not pressed by the assessee and was dismissed.

8. Income-Tax Paid in Afghanistan:
The Tribunal upheld the disallowance of Rs. 5,47,866 paid as income-tax in Afghanistan, noting that it was not an expenditure to earn income.

9. Addition of Rs. 4 Lakhs to Trading Results:
The Tribunal confirmed the Commissioner (Appeals) order deleting the addition, noting that the decline in gross profit rate was not sufficient ground to reject the trading results.

10. Residential Status for the Assessment Year 1973-74 and 1974-75:
The Tribunal upheld the revenue's view that the assessee-firm was a resident, noting that the partners were in India for significant periods, and there was no evidence to show that the control and management were wholly outside India.

11. Existence of the Firm:
The Judicial Member raised a dissenting note questioning the existence of the firm, as the law in Afghanistan did not recognize the entity of the firm for tax purposes. The Third Member concluded that the issue of the firm's existence could be gone into, as it was relevant to the question of control and management. The matter was referred back to the Bench for a final decision.

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