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TMI Blog2012 (5) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... st-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans used the AO could not have disallowed the interest. - There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. - Decided in favor of the assessee - ITA No. 416/Jd/2009; - - - Dated:- 9-12-2011 - R. K. Gupta, N. L. Kalra, JJ. Mahendra Gargieya for the Assessee G.R. Kokani for the Revenue ORDER N. L. Kalra, Accountant Member:- 1. The assessee has filed an appeal against the order of the learned CIT(A), Jodhpur, dt. 12th May, 2009 for the asst. yr. 2006-07. 2.1 First ground of appeal is general in nature and will therefore, stand disposed of in view of the findings recorded against other grounds of appeal. 3.1 Second ground of assessee is that the learned CIT(A) has erred in confirming the disallowance under s. 40A(3) of IT Act amounting to Rs. 19,84,000. 3.2 Brief facts are that the assessee in the relevant year derived income from wholesale trading of cement, hiring of marriage hall, purchase and sale of plots and commission from J.K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment made in cash was advance was, not tenable. The assessee was engaged in the business of purchase and sale of plots and thus, the payment was covered within the provision of s. 40A(3). Consequently, she disallowed 20 per cent of the expenditure made in cash in excess of Rs. 20,000 amounting to Rs. 19,84,000. The AO also took an alternative argument by relying on the cases of the Kejriwal Iron Stores vs. CIT (1987) 62 CTR (Raj) 227 : (1988) 169 ITR 12 (Raj) and Sajowanlal Jaiswal vs. CIT 1976 CTR (Ori) 204 : (1976) 103 ITR 706 (Ori) if the assessee's argument of the same be treated as advance is accepted. 3.3 In the first appeal, the learned CIT(A) held as under:- "I have given careful thought to the elaborate submissions made by the appellant. I find that the appellant has failed to produce any evidence in support of assertions and claims made by him before the AO as well as during the appellate proceeding, more particularly as regards the claim that the possession of the land had not passed to him. I find that the AO has rightly pointed out that the claim whether the possession of land had passed to the assessee and whether the transaction of purchase had materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has rightly made addition of the sum of Rs. 19,84,000 which is confirmed. As regards the appellant's contention that neither any expenses on this transaction have been claimed in the P and L a/c nor any transaction related to the trading has been affected and it has not been shown in the trading account because no purchase has been made, it is well-settled that the value of stock-in-trade has to be taken into account while determining the gross profit under s. 28 on the principles of commercial accounting, as has been held by the Hon'ble apex Court in the case of Attar Singh Gurumukh Singh vs. ITO (1991) 97 CTR (SC) 251 : (1991) 191 ITR 667 (SC). As it has been held as discussed above that the transaction entered into by the assessee by making payment of Rs. 1 crore is nothing but purchase of land being stock-in-trade, the assessee by not showing the said amount in its P and L a/c has apparently violated the principles of commercial accounting, as has been settled by the Hon'ble apex Court in the case of Attar Singh Gurumukh Singh (supra). In the light of the decision of the Hon'ble apex Court, it has to be held that the AO has rightly drawn the P and L a/c as mentioned in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement to sale. Both the authorities however, strangely failed to judiciously appreciate that after the cancellation of the earlier transaction between the appellant and Shri Jethmal, the same very land was ultimately sold to a third buyer Shri Praveen S/o Shri Oma Ram through a registered sale deed (paper book 88-94) and Shri Praveen again sold to M/s Vinayak Developers and Colonizers, a partnership firm (paper book 95-99). The AO rejected this fact on mere suspicion that the new buyer M/s Vinayak Developers and Colonizers was a firm in which the assessee was a partner but ignoring the legal implication thereof as also ignoring the very fact that under the IT Act itself a firm is an absolutely different person under s. 2(31) of the Act. The registered agreements (paper book 88-91) clearly mentioned in para 4 that possession of the land has been handed over to the new buyer. In para 5 (paper book 91) and in para 7 (paper book 98) it is made clear that the said land was not sold to any other person. The AO and learned CIT(A) ignored this aspect. 2.3.1 Secondly, it is not denied that the entire transaction was cancelled vide a separate cancellation agreement dt. 29th April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Binawara is by caste Dhobhi and belongs to scheduled cast and the agreement cannot be performed being forbidden by law, therefore, the amount of Rs. 1 crore has been received back through demand draft in the subsequent financial year. (iii) There are three stages in the performance of a contract of sale of goods by the seller viz.:- (a) Transfer of property in the goods. (b) Transfer of possession of the goods (i.e. delivery), and (c) The passing of the risk. Transfer of property in goods from the seller to the buyer is the main object of a contract of sale, the term 'property in goods' must be distinguished from possession of the goods; 'property in goods' means the ownership of the goods whereas possession of the goods refers to the custody or control of the goods. Since the possession of the goods has not been transferred, title of the goods has also not been transferred and the deliver has also not made either in part or in full, therefore, the same payment made cannot be treated as purchases. 2.3.3 There was one more reason that the buyer did not find any entry from Khasra No. 59 hence also, cancelled the deal by mutual consent. However, there does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l agreement (and understood to have been destroyed) which was his legal right as the transaction stood cancelled. It is as per human probability that based on the original agreement the buyer could have misused the same. Unfortunately thereafter, Shri Jethmal, the seller has. also expired. 2.4.4 The authorities below have laid unwarranted stress on the non-availability of the initial agreement to sale which was not possible to be produced. Still however, the subsequent agreements, other evidence, facts and circumstances are sufficient to support the assessee's contention. 2.4.5 No suit of specific performance is reported from the seller against the assessee. Absence of agreement to sale (purchase) is in favour of assessee. 2.5 The allegation of the CIT(A) that the rule of preponderance of probability in commercial transaction establishes that the assessee having made the full payment over a prolonged period starting from 30th July, 2005 to 14th Feb., 2006, the transaction of purchase had materialized on payment of full consideration of the price of the land, is not correct. The learned CIT(A) has clearly presumed the facts which are completely wrong in as much as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the purchases and sales between the parties. The advance paid by the buyer assessee was adjusted towards the final sale consideration, whereas in this case, admittedly transactions could not materialize and the advance paid was refunded back. 3.2 The allegation of the AO (at p. 9) that ultimately the assessee purchased the subjected land, which is a misconception of law in as much as admittedly the land was firstly, sold to Shri Praveen and thereafter, he sold to M/s Vinayak Developers and Colonizers, which is a partnership firm consisting of two partners and is an independent entity. Further Shri Praveen did not sale the land as it is but divided the same into various plots (paper book 95-98). The said firm is a separate assessee and has shown this land in its balance sheet as on 31st March, 2008. Also kindly refer para 2.2 of this working sheet. Moreover, Praveen permanently resided in a Village Miyasani, Post Office Banar, Tehsil Lunee, District Jodhpur." 3.5 The learned Authorised Representative has relied upon the decision of Tribunal, Cochin Bench in the case of Asstt. CIT vs. Hotel Harbour View (2010) 44 DTR (Coch)(Trib) 41. 3.6 On the other hand, the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Authorised Representative has submitted as under:- "1. No nexus established:- The law is settled that in such cases it is always for the AO to have established a physical nexus between the interest-bearing funds and the interest-free advances so made, which condition has not been fulfilled in the present case. On the contrary the subjected interest-free advances were out of the interest-free funds as evidenced from the audited balance sheet (paper book 61) wherein the assessee was having capital of Rs. 56,23,976 apart from interest-free advances as against the interest-free advances of Rs. 48.69 lacs only. Unless this is done no charging of notional income is permissible nor any disallowance could have at all been made. Kindly refer CIT vs. Hotel Savera (1998) 148 CTR (Mad) 585 : (1999) 239 ITR 795 (Mad), Shree Digvijay Cement Co. Ltd. vs. CIT (1982) 26 CTR (Guj) 184 : (1982) 138 ITR 45 (Guj), Ganesh Chawala vs. ITO (2008) 9 DTR (Jp)(Trib) 162, Gujarat Narmada Valley Fertilizers Co. Ltd. vs. Dy. CIT (2001) 73 TTJ (Ahd) 787 and CIT vs. Tin Box Co. (2003) 182 CTR (Del) 171 : (2003) 260 ITR 637 (Del). Kindly refer CIT vs. Radico Khaitan Ltd. (2005) 194 CTR (All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of proceedings before us, the learned Authorised Representative has submitted that the AO has notionally charged the interest and included in the income. However, it is noticed from the order of the AO that he has disallowed the expenditure debited under the head interest. The balance sheet is available at p. 61 of the paper book filed by the learned Authorised Representative. The capital account at the end of the previous year is to the extent of Rs. 56,23,976. The interest-bearing advances under consideration are to the extent of Rs. 48,68,657. There are investments in shares to the extent of Rs. 6,49,450. Hence, the amount advanced without interest and including investment in shares is less than the capital of the assessee. Therefore, following the decision of Tribunal Jaipur Bench in the case of Asstt. CIT vs. Ram Kishan Verma (ITA No. 960/Jp/2010, dt. 8th July, 2011), we hold that the learned CIT(A) was not justified in confirming the addition of Rs. 2,43,177. It will be useful to reproduce para 10.4 from the order of the Tribunal in the case of Asstt CIT us. Ram Kishan Verma (supra):- "10.4 We have heard both the parties. The assessee is having sufficient capit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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