2008 (10) TMI 253 - AT - Income Tax

Unexplained Cash credit - Addition on Investment in purchases of books and substantial cash introduced in the books of account - Third Member order - difference of opinion on certain points between the members - Whether the issue relating to source of investment in purchases should be restored back to the file of the AO for fresh decision as proposed by the ld. AM - Assessee described as 'a loss making company', again showed loss in return for the AY 1995-96 - AO treated, cash introduced in the books of account on account of sale of books was treated as unexplained and added to the total income u/s 68. The investment in the books was also treated as unexplained and sum was added on this account. Assessee submitted that the sale of books to the assessee was duly reflected in the books of associate company. The legal books had been sold and there was no dosing stock left. Therefore, the purchases and sales had to be accepted - CIT(A) was satisfied by the explanation of the assessee - CIT observed that existence of shareholders was established and money received from them was well founded. Therefore, he deleted both the additions. HELD THAT - I am inclined to hold that assessee has not been able to establish that cash was represented sale proceeds of books. I do not find any substance in the finding of ld CIT (A) that sales should be accepted as it is recorded in the books of account of the assessee. In my considered opinion, some evidence of sale generating extraordinary income of about 100 per cent in hands of a loss making company in purchase of books from a sister concern i.e. in an item not carried in routine, was required to be placed by the assessee. Mere entries of sale to justify credit were not good enough. It is accordingly held that the assessee has failed to establish that credit represented sale consideration of books. Having held so, I am inclined to hold that addition was not made by the AO in this case. It is evident that by adding and deducting the same amount the AO practically did not make any addition for unexplained sale of books. Ultimately what has been left of transactions of sale and purchase of books is the disallowance of purchases. If relief is allowed, it would result in assessment of income lower than returned. Introduction of cash could be held to be income from undisclosed sources . As the amount already stood credited to the books of account of the assessee as income, the matter was required to be left by recording an appropriate finding. There is no addition of amount in the computation of the income. In the circumstances the question of deletion cannot arise. The effective addition made as noted and no addition. Therefore, relief cannot be allowed to the assessee. This position unfortunately has not been taken into account by the ld CIT (A) or by the ld JM. Question of sustaining addition is being separately considered. I, therefore, hold that there is no addition in the assessment order. The amount stood already credited in the P L account. It is receipt from undisclosed sources and could not be deleted. I, therefore, answer question No. 1 in the negative. The amount was neither required to be deducted nor added in the income of the assessee. AO had also challenged delivery of books to the assessee. Shri Sampath during the course of hearing of appeal had vehemently contended that the assessee and M/s. Haryana Wool Allied Industries (P.) Ltd. were operating from the same premises. In this connection, he relied upon observations made by ITAT in the case of the assessee for AY 1996-97. The ld JM in the proposed order had accepted the claim of the assessee but ld AM had raised certain doubts and has further held that source of investment in purchase is not clear from the order of the AO and the CIT(A). Therefore, this aspect was restored to the AO for fresh scrutiny. There is no doubt that assessee, before the A.O. adopted a non-cooperative attitude and did not furnish evidence called for to prove investment. No evidence was furnished before CIT (A) of delivery and investment in purchase. The plea that the assessee and M/s. Haryana Wool Allied Industries (P.) Ltd. are operating from the same premises has been advanced for the first time before the Tribunal, although adverse finding was recorded by the AO in the assessment order. The claim relating to payment of purchase money and of delivery of books is required to be verified by the AO. The ld Members of the Tribunal in the AY 1996-97 were also not called upon to examine the issue whether the assessee and M/s. Haryana Wool Allied Industries (P.) Ltd. were operating from the same premises and in their order has made only a passing observation. It is not a finding of fact. Although purchase and sale of books has been claimed by the assessee as part and parcel of transaction, yet it is different. Purchase has been claimed to be made from the sister concern for a stated consideration. Sale had been claimed to be made to other outside parties. Purchase and sale are, therefore, two distinct transactions discussed as one in orders impugned before me. It is possible that assessee may be able to establish purchase of books, though sale of the same books has not been accepted. In that case, addition of will have to be allowed as a deduction. The parties before me could not draw my attention to any relevant evidence on record on the basis of which the issue could have been resolved. Therefore, on facts, I agree with proposed order of ld AM that this question should be restored to the file of the AO for re-determination in accordance with law. Therefore, the matter may now be placed before the regular Bench for an appropriate order, in accordance with law.

Summary

Issues Involved:
1. Addition of Rs. 51,65,820 on account of investment in purchases from Adbros Electro Tech.
2. Addition of Rs. 1,00,04,855 on account of bogus cash sale entries.
3. Disallowance of Rs. 88,106 on account of guest house expenses.
4. Deduction of Rs. 40,26,166 on account of goods in transit written off.

Detailed Analysis:

Issue 1: Addition of Rs. 51,65,820 on account of investment in purchases
The Revenue challenged the deletion of the addition of Rs. 51,65,820 made by the AO for purchases from Adbros Electro Tech, a division of Haryana Wool & Allied Industries (P) Ltd. The AO doubted the genuineness of these transactions, citing that the assessee was a loss-making company and did not have surplus funds to invest in shares. The AO concluded that the transactions were sham as no evidence of actual purchase or delivery was furnished, and all transactions were in cash.

The CIT(A) deleted the addition, stating that the purchases were supported by vouchers and the investment was reflected in the books of accounts. The CIT(A) emphasized that the existence of shareholders and the receipt of money from them were adequately proved.

The Tribunal, considering the facts and the order of the Tribunal for the assessment year 1996-97, upheld the CIT(A)'s order, finding no discrepancy in the transactions recorded in the books of accounts and the absence of any closing stock.

Issue 2: Addition of Rs. 1,00,04,855 on account of bogus cash sale entries
The AO added Rs. 1,00,04,855 under Section 68, treating it as unexplained cash credit, as the assessee failed to prove the genuineness of the cash sales. The AO noted that the assessee could not provide evidence of delivery of books or the existence of buyers, and all transactions were in cash.

The CIT(A) deleted the addition, observing that the transactions were supported by book entries and the sales were reflected in the books of the purchasers. The Tribunal upheld the CIT(A)'s order, noting that the sales and purchases were duly recorded and no error was found in the books of accounts.

However, the AM disagreed, emphasizing that the assessee failed to substantiate the cash sales with proper evidence, and the transactions appeared to be a device to introduce unaccounted cash. The AM proposed restoring the matter to the AO for fresh examination.

The Third Member agreed with the AM, noting that the assessee could not explain the source of cash introduced and the transactions were not satisfactorily explained. The Third Member held that the addition of Rs. 1,00,04,855 was justified.

Issue 3: Disallowance of Rs. 88,106 on account of guest house expenses
The AO disallowed the guest house expenses, citing the Supreme Court's decision in Britannia Industries Ltd. v. CIT. The CIT(A) deleted the disallowance, following the Tribunal's order for the assessment year 1994-95, which found no evidence that the premises were used as a guest house.

The Tribunal set aside the CIT(A)'s order and restored the matter to the AO to verify the nature and use of the building. If the premises were used as a guest house, the disallowance would be justified; otherwise, the claim should be allowed.

Issue 4: Deduction of Rs. 40,26,166 on account of goods in transit written off
The AO disallowed the deduction, treating it as a contingent liability. The CIT(A) allowed the deduction, noting that the goods were auctioned by the Bombay Port Trust authorities and the write-off was reflected in the books of accounts.

The Tribunal set aside the CIT(A)'s order and restored the matter to the AO for fresh examination, directing the AO to verify the nature of the liability and whether it was claimed in earlier years.

Conclusion:
The Tribunal upheld the CIT(A)'s deletion of the additions of Rs. 51,65,820 and Rs. 1,00,04,855, but the Third Member agreed with the AM that the addition of Rs. 1,00,04,855 was justified. The disallowance of guest house expenses and the deduction for goods in transit were remanded to the AO for fresh examination.