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TMI Blog2002 (8) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has erred in deleting the addition of Rs. 1,62,312 made by the AO disallowing interest on the amount of unexplained cash credit. 3. A common issue arising out of ground Nos. 1 to 3 relates to the ascertainment of exact amount payable by the assessee-firm to Shri T.P. Sahu on conversion of his proprietary business M/s Ankit Steels into partnership business. 4. The relevant facts of the case are that the assessee-firm filed its original return for asst. yr. 1996-97 on 1st Nov., 1996, declaring nil income. Subsequently, a revised return was filed on 22nd Oct., 1997, in which depreciation of Rs. 7,51,678 was claimed by the assessee on the fixed assets (excluding land) of Rs. 29,63,871. During the course of assessment proceedings, it was found by the AO that the proprietary business of Shri T.P. Sahu was taken over on 7th July, 1995, by the assessee-firm comprising of four partners, viz., Shri T.P. Sahu, Suresh Kumar Agrawal, Vishnu Kumar Agrawal and J.P. Agrawal. Subsequently, Shri T.P. Sahu retired from the partnership firm on 31st Aug., 1995 and later on one Shri Nandkishore Agrawal was admitted as a partner by the three surviving partners. Finally, Shri Suresh Kumar Agrawa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liabilities. On the basis of this statement made by Shri T.P. Sahu as well as the other facts of the case, the AO came to the conclusion that the total consideration payable by the assessee-firm to Shri T.P. Sahu towards transfer of his proprietary business of M/s Ankit Steels was at the most Rs. 16 lakhs. Accordingly, he made the following additions to the income returned by the assessee-firm: Rs. (1) Excess depreciation claimed on the inflated cost of assets. 3,81,828 (2) Liability shown to have been payable to Shri T.P. Sahu as on 31-3-96. 8,47,276 (3) Excess payment shown to have been made to Shri T.P. Sahu assuming that the same was either not made or if made, was taken back (22,44,527 - Rs. 16,00,000) 6,44,527 Aggrieved by the additions so made by the AO, the assessee preferred an appeal before the learned CIT(A) and it was submitted on behalf of the assessee before him that the evidence collected by the AO at the back of the assessee in the form of statement of Shri T.P. Sahu recorded by him was not made available to the assessee nor any opportunity was given to it to cross-examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the other constitutional aspects pointed out in his order, the AO was fully justified in making the resultant additions and his action was fully supported by the evidence brought on record by him. He submitted that the assessee filed an affidavit of Shri T.P. Sahu before the learned CIT(A) in support of the cost of acquisition shown in its books of account and the learned CIT(A) allowed relief to the assessee merely relying on the said document which was filed before him by the assessee for the first time. He contended that the learned CIT(A) ought to have given an opportunity to the AO to examine the said evidence filed by the assessee before him for the first time especially when the contents of the same were contradictory to the statement made by Shri T.P. Sahu before the AO. He, therefore, contended that the order of the learned CIT(A) on this issue may be set aside and the matter be restored back to the file of the AO for deciding the issue afresh in the light of the fresh evidence filed by the assessee. 6. The learned counsel for the assessee submitted that sufficient evidence in the form of relevant balance sheets and copies of partnership deed was before the AO by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons to the income of the assessee and the order passed by the AO on this issue was void as held by Hon'ble Kerala High Court in the case of M.S. Jewellery vs. Asstt. Commr. of Agrl. IT and ST Anr. (1994) 208 ITR 531 (Ker) and by the Hon'ble Supreme Court in the case of R.B. Shreeram Durgaprasad and Fatehchand Nursing Das vs. Settlement Commission (IT WT) Anr. (1989) 75 CTR (SC) 187 : (1989) 176 ITR 169 (SC). 7. Regarding the contention of the learned Departmental Representative that the learned CIT(A) relied on the fresh evidence filed by the assessee in the form of affidavit of Shri T.P. Sahu, the learned counsel for the assessee contended that the powers of the learned CIT(A) are co-terminous with that of the AO and the said additional evidence having been considered by him in exercise of the specific powers conferred on him, he was not under a legal obligation to give any opportunity to the AO for examining the said evidence. He submitted that the statement of Shri T.P. Sahu recorded by the AO was not made available to the assessee and the assessee had the only occasion to rebut the said statement by way of filing an affidavit of Shri T.P. Sahu before the learned CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .P. Sahu for the asst. yr. 1996-97 was also filed with the said letter. A perusal of the said balance sheet of M/s Ankit Steels, the etrstwhile proprietary concern of Shri T.P. Sahu, as on 6th July, 1995, i.e., immediately before its transfer to partnership firm placed at page No. 67 of assessee's paper book reveals that the book value of fixed assets of M/s Ankit Steels as on 6th July, 1995, was Rs. 31,83,870 and on the same date the capital account of Shri T.P. Sahu was showing a credit balance of Rs. 30,91,803. It is pertinent to note that this balance sheet as well as its relevant annexures were filed by Shri T.P. Sahu along with his return for asst. yr. 1996-97 on 27th Jan., 1998 and the same were available on the record of the Department. Meanwhile, the assessee-firm had also placed a copy of partnership deed executed on 7th July, 1995, between Shri T.P. Sahu, Shri Suresh Kumar Agrawal, Shri Vishnu Kumar Agrawal and Shri Jai Prakash Agrawal by which the proprietary business of M/s Ankit Steels of Shri T.P. Sahu was converted/transferred to the partnership firm and clause No. 10 of the same reads as under: "That the present status of bank borrowings and other unsecured loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his statement on 27th Jan., 1999. In the said statement, Shri T.P. Sahu gave the following replies to the questions asked by the AO apropos the amount received by him from the assessee-firm on his retirement. "Question: As you say that due to all these problems you have discontinued, how much amount you have received in consideration thereof? Answer: Whatever amount I have received that was less than the borrowing obtained by me for business. Whatever I have received has been utilized for repayment of loan and balance amount of borrowing was repaid out of other earnings. Question: My question was that, how much amount you had received, this you have not told. Answer: I can explain whatever has been written in papers. Without going through the papers I am not able to tell the amount since it is an old matter to which I can explain after going through papers. Question: You are talking of which papers? Answer: I will ask from Accountant that what account was prepared. Question: You can remember every small thing but when you are being asked about the amount received, you are repeatedly avoiding the answer. Once again I am asking that how much amount you have received? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt contradiction in the amount appearing in the said documents with the one mentioned by him in his statement. Moreover, the replies given by Shri T.P. Sahu in the said statement also indicate that the statement made by him regarding the amount received by him from the assessee-firm was very vague. It is also apparent from the said statement that questions in the proper manner were not putforth by the AO to Shri T.P. Sahu in the matter and heavy reliance was placed by him on a very vague answer given by Shri T.P. Sahu about the amount received from the assessee-firm to draw an adverse conclusion that the amount mentioned in the relevant documents was not correct. In our opinion, no definite conclusion could have been drawn on the basis of the said statement of Shri Sahu which was full of contradictions, ambiguity and vaguness. 13. It is also observed that the said statement of Shri T.P. Sahu, which was heavily relied upon by the AO to draw adverse conclusion against the assessee while making the impugned additions, was not made available to. the assessee for rebutting or controverting the same. It is also observed that the said statement was recorded by the AO on 27th Jan., 1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the assessee during the assessment proceedings and the opportunity to rebut the contents of the said statement came the assessee's way in the appellate proceedings before the learned CIT(A) for the first time which he utilized by filing the said affidavit. The learned CIT(A), therefore, was right in admitting the said fresh evidence filed before him for the first time as per cl. (d) of sub-r. 1 of r. 46A. However, before relying on the same, he ought to have afforded an opportunity to the AO to examine the same. Be that as it may, even if the evidentiary value of the said affidavit is not taken into consideration, the fact remains to be seen is that the statement of Shri T.P. Sahu which was used as evidence against the assessee, was not confronted to the assessee by the AO and as such there was a clear violation of principles of natural justice rendering his order passed on the issue under consideration void. The rule of general importance in the application of legal principles is that Quod ab initio non valet in tractu temporis non con valescit, which means that which was originally void, does not by lapse of time become valid. In the present case, the required averment to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m furnished a list of creditors before the AO. Photocopies of the confirmation letters of the said creditors were also filed in which GIR Nos. of the said creditors were also mentioned. The AO, however, required the assessee-firm to produce all the creditors for their examination. The assessee could not produce the same despite having been given sufficient opportunity by the AO in this regard stating one reason or the other. After taking into consideration the documents produced by the assessee and keeping in view the failure of the assessee to produce the creditors before him for examination, the AO came to the conclusion that the assessee has failed to discharge its onus to explain the said credits inasmuch as creditworthiness of the creditors remained unproved. Accordingly, he treated the entire cash credit amount of Rs. 20,04,000 as unexplained, relying on the decision of Hon'ble Calcutta High Court in the case of Bharati (P) Ltd. vs. CIT 1975 CTR (Cal) 40 : (1978) 111 ITR 951 (Cal) and in the case of CIT vs. Precision Finance (P) Ltd. (1994) 121 CTR (Cal) 20 : (1994) 208 ITR 465 (Cal), and added the same to the income of the assessee. The matter was carried before the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rily explained, the provisions of s. 68 were clearly applicable and the AO was fully justified in making the addition on this count to the income of the assessee-firm in whose books the said credit entries were appearing. He submitted that the primary onus in this regard was not discharged by the assessee-firm and since there was a clear failure on the part of the assessee-firm to establish the creditworthiness of the concerned creditors, the addition made under s. 68 was fully justified. He submitted that the assessee did not fully co-operate in the matter during the assessment proceedings and due to the time limitation, the AO also could not complete the examination in the absence of any positive co-operation forthcoming from the assessee. He submitted that if the Tribunal is of the opinion that the assessee still deserves an opportunity in the matter of establishing the creditworthiness of the concerned creditors, the matter may be sent back to the AO for giving such opportunity. 18. The learned counsel for the assessee submitted that the impugned credit entries were made in the books of the assessee-firm to the capital accounts of the partners. He submitted that three partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the firm, they could not be assessed as the firm's income and the unexplained investments could be assessed in the hands of the partners under s. 69, if permissible. He further submitted that by furnishing the complete list of the creditors and by filing their confirmation letters, the assessee-firm even had discharged its primary onus in the matter of establishing the identity of the said creditors and when their GIR Nos. were also communicated to the AO, there was no justification in the action of the AO in treating the same as unexplained without making any further enquiry from their income-tax records. He, therefore, contended that the action of the AO in treating the said cash credits as unexplained and making addition in respect of the same to the income of the assessee under s. 68 was not justified and the learned CIT(A) was right in deleting the same. 19. We have considered the rival submissions and also perused the relevant material on record. It is observed that the AO had treated the relevant cash credit entries appearing in the books of the assessee-firm in the name of its partners as unexplained because the creditors advancing these funds to the partners for fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owns that entry, then the burden of the assessee-firm is discharged. In the case of CIT vs. Burma Electro Corporation, the Hon'ble Punjab and Haryana High Court has held that since the partners admitted to have made the investments in the assessee-firm and there was no material to indicate that the cash credits were the profit of the firm, they could not be assessed as the firm's income and the unexplained investments could be assessed in the individual hands of the partners under s. 69, if permissible. 21. A conspectus of the opinions expressed by the various judicial authorities on the issue is that when there is a cash credit entry appearing in the name of a partner in the books of the assessee-firm, it is not material whether the same appears in the name of a partner or of a third party and the partner in such a case is treated as an immediate creditor in respect of the said entry. The burden, therefore, is on the assessee-firm in whose books the said entry appears to prove the identity and capacity of the said creditor as well as the genuineness of the transaction. In the instant case, undoubtedly, the impugned cash credit entries were related to the partners of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest claimed by the assessee as payable to the concerned creditors was disallowed by the AO. As we have upheld the order of the learned CIT(A) deleting the disallowance made by the AO under s. 68 by holding that the said cash credits were duly explained by the assessee, the assessee would be consequently entitled for deduction on account of interest payable on the said cash credits treated as genuine. The impugned order of the learned CIT(A) directing the AO to allow the said interest is, therefore, upheld. 23. In the cross-objection, the assessee has challenged the action of the learned CIT(A) in sustaining the addition of Rs. 1,00,000 made by the AO to the trading results on account of excess burning loss. 24. After considering the rival submissions and perusing the relevant material on record, it is observed that a burning loss at 7.1 per cent of the total input was claimed by the assessee. When the AO asked the assessee to explain this burning loss, it was submitted on behalf of the assessee that the total shortage at 10 per cent was claimed by the assessee in the stock record out of which 2.9 per cent was on account of end-cuts, misrolls, etc. and the balance of 7.1 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commercial expediency of the said expenditure is concerned, he relied on the decision of Hon'ble Karnataka High Court in the case of CIT vs. Motor Industries Co. Ltd. (1996) 136 CTR (Kar) 513 : (1997) 223 ITR 112 (Kar) to contend that the commercial expediency of a businessman's decision to incur an expenditure has to be considered from a business point of view and the same has to be respected by the concerned authorities. Reliance was also placed on the decision of Delhi Bench of Tribunal in the case of Multi-Tech Computers (P) Ltd. vs. Dy. CIT (2000) 112 Taxman 260 (Del)(Mag), wherein it has been held that the legitimate business needs of an assessee or the benefit derived by or accruing to the assessee from goods, services or facilities, etc. are not to be judged from the view point of Revenue officers, but from the view point of a businessman and the payments made for commercial considerations being real and genuine and incurred wholly and exclusively for the purpose of business cannot be partly disallowed under s. 40A(2)(b). The learned Departmental Representative, on the other hand, relied on the orders of the authorities below. 29. After considering the rival submission ..... X X X X Extracts X X X X X X X X Extracts X X X X
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