Assistant Commissioner of Income-Tax Central Circle-1(3), Nagpur V. M/s Prabhu Steel Industries Limited, Nagpur

ITA 165/NAG/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9626 (ITAT-NAGPUR)
• Duration Of Justice: 3 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 03-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR MILIND BHUSARI
• Assessee Lawyers: R V LOYA
• Keywords: Unexplained investment; Recovery proceedings; Business income; Business expenditure; Search and seizure; Document seized; Principle of natural justice; Additional evidence; Capital receipt; Commercial expediency; Documents seized

Judgement Text

IN THE INCOME TAX APPELLATE TRIBNAL NAGPUR BENCH, NAGPUR BEFORE SHRI P.K.BANSAL, ACCOUNTANT MEMBER AND SHRI D.T.GARASIA, JUDICIAL MEMBER ITA NO.165(NAG.)/2009 (ASSESSMENT YEARS : 2006-07) THE ASST. COMMISSIONER OF INCOME TAX, M/S PRABHU STEEL IND. LTD., CENTRAL CIRCLE-1(3), OLD MOTOR STAND, NAGPUR. NAGPUR VS PAN NO. AABCP 0025E APPELLANT RESPONDENT AND C.O.NO.10(NAG)/2009 (IN ITA NO.165(N)/2009) (ASSESSMENT YEAR : 2006-07) M/S PRABHU STEEL IND. LTD., THE ASST. COMMISSIONER OF INCOME-TAX OLD MOTOR STAND, CENTRAL CIRCLE-1(3), NAGPUR NAGPUR REVENUE BY : DR. MILIND BHUSARI, DR ASSESSEE BY : SHRI R.V.LOYA, CA DATE OF HEARING : 12-10-2012 DATE OF PRONOUNCEMENT : 09-11-2012 O R D E R PER SHRI D.T.GARASIA, JM: THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A)-I, NAGPUR DATED 04- 05-2009 RELATING TO ASSESSMENT YEAR 2006-07 AND THE CROSS OBJECTION IS BY THE ASSESSEE. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL; ITA NO.165 (N)/2010 & CO NO.10(N)/2009 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN DIRECTING THE AO TO ALLOW TELESCOPIC CREDIT OF RS.4,50,000/- AGAINST INCOME SURRENDERED OF RS.1.00 CRORE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW TELESCOPIC CREDIT OF RS.1,30,000/- AGAINST INCOME SURRENDERED OF RS.100 CRORE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING RS.3,28,64,792/- WHICH REPRESENTED UNACCOUNTED INVESTMENT IN RAW MATERIAL, IGNORING THE FINDINGS GIVEN BY THE AO IN THE ASSESSMENT ORDER. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN GIVING MORE CREDENCE TO THE STOCK STATEMENT TAKEN BY THE ASSESSEE IN ABSENCE OF ANY AUHROIZED OFFICER, THAN THE STOCK STATEMENT TAKEN DURING THE COURSE OF SEARCH AND THEREBY ERRED IN DELETING THE AMOUNT OF RS.3,28,64,792/- 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)ERRED IN GIVING MORE EMPHASIS TO THE STATEMENT GIVEN BY THE ASSESSEE IN ANSWER TO Q.NO.16 OVER THE ASSESSEES ANSWER TO Q.NO.14 AND THEREBY FURTHER ERRED IN DELETING AN AMOUNT OF RS.3,28,64,792/- 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT IN ANSWER TO Q.NO.16, THE ASSESSEE HAS REFERRED TO VALUATION OF FINISHED STOCK AS INCORRECT AND NOT WITH REFERENCE TO THE VALUATION OF RAW MATERIAL AND THEREBY ERRED IN DELETING AN AMOUNT OF RS.3,28,64,792/-. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN COMPLETELY RELYING ON THE SELF-SERVING DOCUMENT IN THE FORM OF AN AFFIDAVIT FILED BY THE ASSESSEE, WHICH MERELY CONTAIN BARE ASSERTIONS, UNSUPPORTED BY ANY MATERIAL EVIDENCE, IGNORING THE OBSERVATIONS OF ITAT, COCHIN BENCH IN THE CASE OF K.P.DAVIS VS ITO 53 ITD 79. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING AN AMOUNT OF RS.4,21,12,847/- BEING CESSATION OF LIABILITY U/S 41(1) OF THE IT ACT, 1961. 9. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HOLDING THAT THE ENTIRE REMISSION OF LIABILITY RECEIVED BY THE ASSESSEE IN ONE-TIME SETTLEMENT WITH PUNJAB NATIONAL BANK WAS ON ACCOUNT OF PRINCIPAL ONLY. 10. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN DELETING THE REMISSION OF INTEREST RECEIVED WITHOUT APPRECIATING THE FACT THAT IN EARLIER ASSESSMENT YEARS, THE ASSESSEE HAD CLAIMED DEDUCTION TOWARDS INTEREST PAYABLE ON THE VERY SAME BANK LOAN, WHICH WAS SUBJECT MATTER OF ONE TIME SETTLEMENT. 11. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN DIRECTING THE AO TO ALLOW TELESCOPIC CREDIT FOR THE ADDITIONS /DISALLOWANCES CONFIRMED BY THE LEARNED CIT(A) AGAINST THE DISCLOSURE OF RS.1.00 CRORES, WITHOUT APPRECIATING THE FACT THAT THERE IS NO NEXUS BETWEEN THE AMOUNT SURRENDERED AND THE ADDITIONS CONFIRMED. 2. ITA NO.165(N)/2009 (AY: 2006-07) ( BY REVENUE) 2 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 IN THIS APPEAL, GROUND NOS.4,5,6 & 7 RELATES TO ONE ISSUE ONLY HENCE WE DEAL THE SAME ACCORDINGLY. 3. THE SHORT FACTS OF THE CASE ARE AS UNDER; THERE WAS A SEARCH IN THE FACTORY PREMISES OF THE ASSESSEE ON 27-09-2005 THE QUANTITY OF THE STOCK AND INVENTORY WAS COMPARED WITH THE STOCK AS PER THE BOOKS OF ACCOUNTS AND ACCORDINGLY, IT WAS FOUND THAT THERE WAS A DIFFERENCE IN BETWEEN THE ACTUAL STOCK AND THE STOCK AS PER THE BOOKS OF ACCOUNTS. THE ASSESSEE HAS OBJECTED TO THE MANNER IN WHICH THE PHYSICAL INVENTORY WAS TAKEN LATER ON, THEREFORE, THE AO HELD THAT THE ASSESSEE DID NOT OBJECT INVENTORY ON THE DATE WHEN IT WAS PREPARED AND THE ASSESSEE ACCEPTED THE STOCK IN THE STATEMENT RECORDED ON 29- 09-2005. THE AO HELD THAT THERE IS NO EVIDENCE IN SUPPORT OF HIS EXPLANATION AND THE AFFIDAVIT FILED BY THE ASSESSEE ACCORDINGLY, THE AO DETERMINED EXCESS STOCK OVER THE BOOK STOCK AND MADE ADDITION U/S 69A AS UNEXPLAINED INVESTMENT. 4. THE MATTER CARRIED IN APPEAL BEFORE THE CIT(A) AND THE CIT(A) HAS DELETED THE ADDITION BY OBSERVING AS UNDER; 3 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 9.1 DECISION : I HAVE CAREFULLY CONSIDERED SUBMISSIONS OF APPELLANT; I HAVE ALSO EXAMINED THE BACKGROUND AND THE EVENTS SURROUNDING THE ALLEGED UNACCOUNTED STOCK AND STOCK-TAKING (METHOD EMPLOYED BY SEARCH PARTY, CALCULATIONS AND ERRORS INTO IT). THE APPELLANT'S COUNSEL HAS TAKEN GREAT PAINS TO DRIVE HOME THE POINT, BASED ON THE CONTEMPORARY DOCUMENTARY EVIDENCE, THAT THE STOCK INVENTORY, AS PREPARED AT THE TIME OF SEARCH, SUFFERS FROM SERIOUS CALCULATION MISTAKES WITH REGARD TO SIZE OF INVENTORY AND SECTIONAL WEIGHT. ON PERUSAL OF COMPLETE RECORD AVAILABLE IN THIS REGARD, I FIND THAT NONE OF THE IMPORTANT DOCUMENTARY EVIDENCE IS BROUGHT ON RECORD BY THE AO, NOR ARE THE INTRINSIC ISSUES INVOLVED IN STOCK-TAKING DISCUSSED BY THE AO IN THE IMPUGNED ORDER. IN THIS SCENARIO, IT BECOMES IMPERATIVE FOR ME TO TRACE THE PROCEEDINGS/EVENTS, CULMINATING INTO THE IMPUGNED ADDITION, IN A CHRONOLOGICAL SEQUENCE. THE SAME ARE AS UNDER :- 1. ASSESSEE'S PREMISES/ FACTORY WERE SUBJECTED TO SEARCH U/S.132(1) OF THE ACT ON 27-09-2005. 2. NONE OF THE DIRECTORS OR FAMILY MEMBERS WAS PRESENT IN FACTORY PREMISES WHEN INVENTORY OF STOCK WAS TAKEN BY THE SEARCH PARTY AS THEY WERE HELD UP IN THE RESIDENCE ON ACCOUNT OF SEARCH THERE. 3. THE STOCK IN QUESTION IS AN EXCISABLE ITEM AND STOCK REGISTERS AS PER EXCISE ACT ARE DULY MAINTAINED AND ARE IN THE CUSTODY OF IT DEPTT AS A RESULT OF SEARCH. 4. ON 29-09-2005, ON FINALISATION OF STOCK INVENTORY BY THE SEARCH PARTY, SHRI HARISH AGRAWAL, IN-CHARGE PERSON, WAS CALLED FROM HOME TO SIGN THE INVENTORY FOR CONCLUSION OF SEARCH PROCEEDINGS. 5. AT THE CONCLUSION, STATEMENT OF SHRI HARISH AGRAWAL WAS RECORDED WHEREBY HE WAS SPECIFICALLY ASKED, VIDE QUESTION NO. 14, ABOUT THE METHOD AND PROCEDURE, WHETHER HE WAS SATISFIED WITH THE STOCK AND THE WEIGHT OF THE INVENTORY BY THE SEARCH PARTY; TO WHICH HE REPLIED THAT SINCE THE METHOD AND PROCEDURE FOR TAKING STOCK AND ITS WEIGHT WERE AS PER THE NORMS UNDER THE SUPERVISION OF IN-CHARGE PERSON HE WAS SATISFIED. 4 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 6. HOWEVER, IN THE CONCLUDING PART OF THE STATEMENT, AT QUESTION NO. 16, SHRI HARISH AGRAWAL STATED THAT THE SECTION WEIGHT CONSIDERED BY SEARCH PARTY ARE ON THE HIGHER SIDE AND NOT CORRECT AS THE COMPANY IS MANUFACTURING LIGHT ANGLES WHOSE ACTUAL WEIGHT SECTION WEIGHT, IT APPROXIMATELY LESS BY 10%. 7. THUS, IN THE COURSE OF SAME PROCEEDINGS AND STATEMENT, SHRI HARISH AGRAWAL EXPRESSED HIS RESERVATIONS AND APPREHENSION THAT STOCK WAS NOT TAKEN CORRECTLY AND PROPERLY BY THE SEARCH PATY. 8. BUT THIS PART OF STATEMENT OF SHRI HARISH AGRAWAL HAS BEEN COMPLETELY BRUSHED ASIDE WHILE MAKING IMPUGNED ADDITION. 9.2 NOW, I PROCEED TO TRACE AND RECORD SUBSEQUENT DEVELOPMENTS WHICH GO TO ESTABLISH THE FACT THAT THE SAID INVENTORY OF STOCK WAS NEVER ACCEPTED BY THE APPELLANT ASSESSEE BUT NO HEED WAS EVER PAID TO THEIR OBJECTIONS BY THE DEPARTMENT, I.E. THE INVESTIGATION WING, AT THAT MOMENT, AND AN OPPORTUNITY WAS LOST FOR EVER TO RECONCILE THE STOCK POSITION. IT IS A MATTER WHERE TIMELY AND PROMPT REMEDIAL ACTION WITH REGARD TO TALLY OF STOCK AND RECONCILIATION WAS VERY MUCH WARRANTED IN VIEW OF VARIOUS OBJECTIONS RAISED BY THE ASSESSEE BUT NO SUCH ATTEMPT WAS MADE BY THE DEPARTMENT TO RESOLVE THE MATTER. AT THIS JUNCTURE, IT IS IMPORTANT TO RECORD SUBSEQUENT DEVELOPMENTS AND OBJECTIONS RAISED BY THE ASSESSEE WHICH ARE AS UNDER :- 1. AS IT DAWNED UPON THE ASSESSEE THAT SERIOUS MISTAKES HAD CREPT INTO STOCK-TAKING, IT LOST NO TIME IN BRINGING IT TO THE NOTICE OF DDIT CONCERNED AND REQUESTED FOR FURNISHING A COPY OF INVENTORY, COPY OF PANCHNAMA AND COPIES OF STATEMENTS SO THAT EXACT MISTAKES COULD BE POINTED OUT. REF : ASSESSEE'S LETTERS DATED 05-10-2005, 07-10-2005, 11-10-2005, AFFIDAVIT DATED 06-10-2005 AND STATEMENT DATED 08-10-2005. 2. NONE OF THE ABOVE REFERRED SUBMISSION /ASSERTION OF THE ASSESSEE WAS EVER COUNTERED OR REJECTED BY THE DDIT CONCERNED; NOR IS THE SAME HANDLED BY THE AO IN THE IMPUGNED ORDER. 3. IT IS SURPRISING THAT IN A MATTER, INVOLVING AN ADDITION OF MORE THAN 3 CRORES OF AMOUNT, THE ASSESSEE WAS NOT GIVEN OPPORTUNITY TO SET RIGHT THE MISTAKES IN THE STOCK INVENTORY AS THE SAME WAS NEVER FURNISHED TO THE ASSESSEE. 5 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 FROM THE ABOVE, IT MAY BE SEEN AND APPRECIATED THAT THE ASSESSEE WAS NEVER CONFRONTED THE SO CALLED INVENTORY OF UNACCOUNTED STOCK AND ITS VALUATION. FIRST TIME WHEN IT WAS SHOWN TO THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AGAIN OBJECTIONS WERE RAISED BUT NO COGNIZANCE OF THE SAME WAS TAKEN BY THE AO. IT IS PERTINENT TO POINT OUT THAT THE ASSESSEE, DURING THE RECORDING OF STATEMENT ON 08-10-2005, CATEGORICALLY STATED THAT THE VALUATION AND INVENTORY WORKED OUT BY THE DEPARTMENT ON THE DAY OF SEARCH WAS NOT CORRECT AND NEEDED TO BE REDRAWN BUT NOTHING WAS DONE IN THIS REGARD. IN THIS WAY THE DEPARTMENT, RIGHT FROM THE DAY OF SEARCH TILL THE COMPLETION OF IMPUGNED ASSESSMENT, CHOSE TO STICK TO A STOCK INVENTORY AND WEIGHMENT THEREOF, WHICH RIGHT FROM THE BEGINNING, WAS NOT ACCEPTED BY THE ASSESSEE. 9.3 IN THE BACKDROP OF ABOVE STATED FACTS AND EVENTS IT BECOMES NECESSARY TO SEE THE RECORD MAINTAINED BY THE ASSESSEE WITH REGARD TO THE STOCK FOUND AT THE TIME OF SEARCH, SO AS TO ASCERTAIN CORRECT PICTURE IN THIS REGARD. IT IS OF UTMOST IMPORTANCE TO KNOW THAT, AT NO STAGE OR POINT IN TIME, ANY COMPARATIVE TALLY OF STOCK WITH REFERENCE TO THE BOOKS OF ACCOUNTS AND REGISTERS MAINTAINED BY THE ASSESSEE HAS BEEN WORKED OUT. THERE IS MERIT IN THE ARGUMENT PUT FORTH BY APPLELLANT'S COUNSEL THAT IN THE COURSE OF SEARCH AS WELL AS ASSESSMENT PROCEEDINGS NOT AN IOTA OF EVIDENCE WAS FOUND TO EVEN REMOTELY SUGGEST THAT ASSESSEE HAD PROCURED RAW MATERIAL, ETC. OUTSIDE BOOKS OF ACCOUNTS. AS CAN BE SEEN, THE ENTIRE ADDITION OF RS. 3,28,64,792/- HAS BEEN MADE BY THE AO ONLY ON THE BASIS OF ONE PARTICULAR QUESTION/ANSWER IN THE STATEMENT OF SHRI HARISH AGRAWAL (QN. NO. 14 REFERRED ABOVE) WHICH IS NOT COMPLETE IN ITSELF IN AS MUCH AS IN THE SAME STATEMENT, TWO QUESTION LATER, SHRI HARISH AGRAWAL HAD EXPRESSED HIS APPREHENSIONS THAT STOCK WAS NOT TAKEN PROPERLY. THE APPELLANT'S AR ASSERTS THAT THE STOCK WHICH IS MENTIONED IN THE SAID INVENTORY CANNOT BE CORRECT ON ACCOUNT OF THE SHEER FACT THAT NO SUCH DIMENSIONS OF THE INGOTS AND BULLETS ARE AVAILABLE ANYWHERE IN THE MARKET. THIS INDICATES SERIOUS FLAWS IN THE STOCK INVENTORY TAKEN BY SEARCH PARTY. THE AO HAS FURTHER OBSERVED THAT THE ASSESSEE HAS NOT OBJECTED TO THE INVENTORY AT THE TIME OF ITS PREPARATION, THIS REMARK OF AO, IN VIEW OF ABOVE STATED FACTUAL POSITION SINCE THE DAY OF SEARCH, DOES NOT HOLD GOOD AS THE ASSESSEE HAS POINTED OUT THE MISTAKE BEFORE CONCLUSION OF THE SEARCH AND ALSO THEREAFTER IN POST SEARCH PROCEEDINGS BY WAY OF LETTERS AND AFFIDAVIT. THUS IT IS MORE THAN OBVIOUS THAT THE 6 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 AO HAS MADE THE IMPUGNED ADDITON BY IGNORING CORRECT AND COMPLETE FACTS OF THE CASE AND HE HAS ALSO BRUSHED ASIDE SOME VITAL POINTS AND ARGUMENTS THAT ARE INSTRUMENTAL IN ARRIVING AT DECISION EITHER WAY IN THIS CASE. THIS POSITION NEEDS FURTHER ELUCIDATION AS ATTEMPTED HEREUNDER, IN THE IMMEDIATELY FOLLOWING PARA. 9.4 ASSESSEE'S OBJECTIONS TO THE STOCK INVENTORY AND ITS WEIGHMENT ON DIFFERENT DATES THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE DID NOT RAISE OBJECTION ON THE LIST OF INVENTORY AT THE TIME WHEN IT WAS PREPARED. ON THE CONTRARY, THE APPELLANT CLAIMS BEFORE ME THAT THE ASSESSEE DID RAISE OBJECTIONS POINTING OUT MISTAKES IN THE INVENTORY THROUGH VARIOUS LETTERS, AFFIDAVIT AND STATEMENTS RECORDED. I HAVE CAREFULLY EXAMINED THE ISSUE WITH REFERENCE TO THE VARIOUS RECORD PRODUCED BEFORE ME WHICH ARE AS UNDER :- 1. THE STATEMENT OF SHRI HARISH AGRAWAL WAS RECORDED ON 29 TH SEPTEMBER 2005 AT THE TIME OF CONCLUSION OF THE SEARCH. THE INVENTORY WAS SHOWN TO HIM AND HE WAS ASKED TO SIGN ON THE LIST. THE ASSESSEE RAISED OBJECTION WHILE SIGNING THE INVENTORY AND ALSO AT THE TIME OF RECORDING OF STATEMENT. IN ANSWER TO QUESTION NO. 16 HE INFORMED THAT THE SECTION WEIGHT CONSIDERED FOR DETERMINATION OF WEIGHT OF STOCK IS ON HIGHER SIDE SINCE THE COMPANY IS MANUFACTUING LIGHT ANGLES WHOSE ACTUAL SECTION WEIGHT IS APPROXIMATELY LOWER BY 10%. 2. THE ASSESSEE REQUESTED FOR THE COPY OF PANCHNAMA ALONG WITH ANNEXURES LIKE STOCK INVENTORY, ETC. HOWEVER, THE SAME WAS NOT PROVIDED. 3. THE LEARNED AR CONTENDED THAT SINCE THE AUTHORITIES DID NOT PAY ANY ATTENTION AND FAILED TO RECORD THE GRIEVANCES, ASSESSEE FILED A SWORN AFFIDAVIT ON 06-09-2005 MENTIONING THEREIN THE EVENTS AS THEY OCCURRED DURING SEARCH PROCEEDINGS, THE WAY DOCUMENTS WERE SIGNED, AND ALSO POINTING OUT NATURE OF MISTAKES IN THE INVENTORY OF STOCKS AND THE FACT OF NON RECEIPT OF COPY OF PANCHNAMA ALONGWITH ANNEXURE. THE CONTENTS OF THE AFFIDAVIT ARE REPRODUCED HEREUNDER :- (3) THAT DURING THE COURSE OF SEARCH I WAS BUSY AT THE RESIDENTIAL PREMISES AND OFFICE PREMISES AND WAS NOT ABLE TO ATTEND THE PROCESS OF INVENTORY UNDERTAKEN AT THE FACTORY PREMISES, I HAVE TO FURTHER STATE THAT THE PHYSICAL 7 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 VERIFICATION COMMENCED AT 5:00 P.M. IN THE EVENING ON 27 TH SEPTEMBER, 2005 AND CONTINUED UPTO NIGHT ON 28 TH SEPTEMBER, 2005. (4) THAT ON 29 TH SEPTEMBER, 2005 I WAS CALLED AT FACTORY PREMISES AT AROUND 4:00 P.M. AND I WAS INFORMED THAT THE COMPLETE RECORDING AND VERIFICATION IS OVER AND TO END THE PROCEEDINGS I WAS REQUIRED TO SIGN CERTAIN PAPERS. THEREAFTER I WAS SHOWN THE PANCHNAMA ALONGWITH NECESSARY ANNEXURES WHICH ALSO INCLUDED THE SHEETS ON WHICH I WAS INFORMED THAT THE STOCK HAS BEEN INVENTORISED. (5) THAT THE SIGNATURE ON PANCHNAMA AND THE ANNEXURES THERETO WERE TAKEN HURRIEDLY AND I WAS UNABLE TO GO THROUGH THE CONTENTS OF THE DOCUMENTS IN DETAIL. HOWEVER WHILE SIGNING THE PAPERS IT CAME TO MY NOTICE AT THE FIRST INSTANCE ON GOING THROUGH THE STOCK SHEET RELATING TO RAW MATERIAL THAT THE FOLLOWING MISTAKES OCCURRED WHICH I IMMEDIATELY POINTED OUT TO THE AUTHORISED OFFICER. I. THE SECTION, LENGTH AND NO. OF PIECES WERE ONLY WRITTEN IN THE INVENTORY SHEETS. (II) THE SIZE OF BILLETS AND INGOTS WERE INCORRECT. III. THE LENGTH OF THE INGOTS WERE INCORRECT AS NO INGOTS IN SUCH LENGTHS ARE MANUFACTURED. (6) THAT THE INVENTORY WAS TAKEN WITH THE HELP OF AVAILABLE STAFF IN THE FACTORY PREMISES WITHOUT ANY TECHNICAL PERSON. (7) THAT I WAS TOLD THAT THE INVENTORY WOULD BE PROVIDED TO ME IMMEDIATELY AFTER THE PROCEEDINGS ARE COMPLETE. HOWEVER TILL DATE I HAVE NOT BEEN PROVIDED WITH THE INVENTORY OF STOCK TAKEN AS WELL AS COPY OF PANCHNAMA AND COPIES OF ITS ANNEXURES. (8) THAT INSPITE OF MY REPEATED REQUEST I HAVE NOT BEEN PROVIDED WITH THE COPY OF THE PANCHNAMA, STOCK SHEET, STATEMENT ETC. WHICH ARE PART OF THE PROCEEDINGS; 8 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 THUS HE ONCE AGAIN CONFIRMED THE FACT OF POINTING OUT DEFECTS IN THE INVENTORY TO THE AUTHORIZED OFFICER. 4. THE AFFIDAVIT WAS FILED ALONGWITH A LETTER DATED 7 TH OCTOBER, 2005 CONTENTS OF WHICH ARE AS UNDER :- A SEARCH WAS CONDUCTED ON 27 TH SEPTEMBER, 2005 AT OUR FACTORY PREMISES AND OFFICE PREMISES. ON 29 TH SEPTEMBER, 2005 WHEN THE DEPARTMENT COMPLETED THE INVENTORY OF STOCKS LYING IN THE FACTORY PREMISES, SHRI HARISH AGRAWAL WAS CALLED AND REQUIRED TO SIGN THE PANCHNAMA AND ANNEXURES ATTACHED THERETO. WITHOUT GOING THROUGH THE PAPERS HE HAS SIGNED ON ALL THE DOCUMENTS WHICH WERE PLACED BEFORE HIM. THIS WAS DONE TO COMPLETE THE SEARCH PROCEEDINGS AS WAS TOLD BY THE AUTHORISED OFFICER. DURING THE COURSE OF SIGNING THE INVENTORY OF RAW MATERIALS, CERTAIN MISTAKES WERE OBSERVED AND POINTED OUT TO THE AUTHORISED OFFICER REGARDING THE LENGTH AND DIMENSION OF INGOTS AND BILLETS. THEREAFTER BEFORE YOUR GOODSELF ALSO IT WAS POINTED ONCE AGAIN. TO RECONFIRM THE FACTS WE ARE ENCLOSING HEREWITH THE AFFIDAVIT OF SHRI HARISH AGRAWAL STATING THE FACTS BEFORE YOUR GOODSELF. 6. WE HAVE TO SUBMIT THAT THE STOCK WAS TAKEN IN A HURRIED MANNER AND THERE IS A POSSIBILITY OF OTHER MISTAKES COMMITTED WHILE RECORDING THE INVENTORY. WE REQUEST YOUR GOODSELF TO KINDLY PROVIDE US THE COPY OF THE INVENTORY SO THAT WE CAN OFFER NECESSARY EXPLANATION. 7. SINCE THE MISTAKES NOTICED IN THE INVENTORY OF RAW MATERIAL WERE OF VERY SERIOUS NATURE, WE IMMEDIATELY UNDERTOOK PHYSICAL VERIFICATION OF RAW MATERIALS LYING IN THE FACTORY PREMISES ON VERY NEXT DAY AND HAVE PREPARED THE DETAILS OF RAW MATERIALS AVAILABLE AT THE TIME OF SEARCH. THE LIST IS ENCLOSED FOR YOUR KIND PERUSAL. 8. DURING THE COURSE OF SEARCH, PRELIMINARY AND OTHER STATEMENTS WERE RECORDED. THE PERSONS INVOLVED WERE UNDER STRESS AND MENTAL STRAIN BECAUSE OF PRESSURE IN MIND, DUE TO SEARCH PROCEEDINGS. THERE IS A POSSIBILITY OF ASSESSEE HAVING NOT UNDERSTOOD THE QUESTION OR THE REPLY MAY NOT HAVE BEEN PROPERLY GIVEN. THERE IS A POSSIBILITY THAT THE PERSONS MIGHT HAVE COMMITTED TO PROVIDED SOME DETAILS/INFORMATION LATER ON WHICH SUCH PERSONS 9 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 ARE UNABLE TO RECOLLECT. THERE MIGHT BE CERTAIN INFIRMITIES WHICH NEEDS TO BE REMOVED OR EXPLAINED. FOR THIS PURPOSE WE HAD REQUESTED EARLIER TO PROVIDE US THE COPY OF STATEMENT SO THAT THE PROPER CLARIFICATION CAN BE GIVEN. WE ONCE AGAIN REQUEST YOUR GOODSELF TO KINDLY PROVIDE US THE STATEMENT RECORDED IN CONNECTION WITH THE COMPANY OF ALL SUCH PERSONS. WE DRAW YOUR KIND ATTENTION TO THE FACT WE HAVE STILL NOT RECEIVED THE COPY OF PANCHNAMA ALONG WITH ANNEXURES OF FACTORY PREMISES WHICH MAY KINDLY BE PROVIDED TO US. THE ASSESSEE IN ABOVE MENTIONED LETTER REITERATED ITS STAND REGARDING THE ISSUE OF PROVIDING COPY OF PANCHNAMA ALONG WITH ANNEXURES, THE COPY OF INVENTORY AND COPY OF STATEMENTS. HE FURTHER POINTED OUT THE FACT OF MISTAKE IN INVENTORY AND ALSO PROVIDED THE LIST OF INVENTORY WHICH WAS PHYSICALLY TAKEN IMMEDIATELY AFTER NOTING THE MISTAKE. 5. STATEMENT OF SHRI HARISH AGRAWAL WAS RECORDED ON 7/8-10-2005. HE WAS INQUIRED ABOUT THE DETAILS OF RAW MATERIAL USED, NAMES OF MAJOR SUPPLIERS, DETAILS OF FINISHED PRODUCTS, NAME AND ADDRESS OF PRINCIPAL BUYER. ETC. IN QUESTION NO. 18 HE WAS CONFRONTED WITH DIFFERENCE IN STOCK DETERMINED BY THE DEPARTMENT TO WHICH HE OBJECTED AS UNDER : IN THIS REGARD, I HAVE TO STATE THAT I HAVE RESERVATION REGARDING THE PHYSICAL INVENTORY OF STOCK TAKEN BY THE DEPARTMENT. I FEEL THAT THE DIMENSION INCLUDING LENGTH OF RAW MATERIAL GOODS HAVE NOT BEEN RECORDED CORRECTLY. I HAVE RIGHT TO POINT OUT THE MISTAKES IN THE SIZES OF THESE GOODS. AS FAR AS FINISHED GOODS IS CONCERNED THE INVENTORY TAKEN BY THE DEPARTMENT INCLUDES OUR TRADING STOCK OF ABOUT 435 M.T. IN ADDITION TO EXCISABLE STOCK OF 845 M.T. INDICATED ABOVE THE STOCK OF SCRAP AS RECORDED IN OUR EXCISE REGISTER AS ON 27-09-2005 IS ABOUT 62 M.T. AS THE INVENTORY TAKEN BY THE DEPARTMENT SHOWN BALANCE OF 65 M.T. WHICH IS TAKEN ON EYE ASSESSMENT, IT TALLIES WITH THE STOCK OF SCRAP. 10 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 6. THE ASSESSEE ASKED FOR THE COPY OF STATEMENTS VIDE LETTERS FILED ON 13 TH OCTOBER, 2005, 5 TH OCTOBER, 2006 AND 18 TH JANUARY, 2007. HOWEVER, NEITHER THE STATEMENTS NOR THE COPY OF INVENTORY WERE PROVIDED. 7. DURING THE COURSE OF ASSESSMENT PROCEEDING, VIDE LETTER DATED 07-12-2007 ATTENTION OF THE ASSESSING OFFICER WAS DRAWN TO VARIOUS DOCUMENTS AND BOOKS OF ACCOUNTS SEIZED FROM THE FACTORY AND OFFICE PREMISES FOR THE PURPOSE OF VERIFICATION OF CLAIM REGARDING PHYSICAL STOCK AVAILABLE. SUCH SEIZED MATERIAL WAS TILL THE PERIOD OF SEARCH, I.E. 26-09-2005, AND COMPRISES OF FOLLOWING DOCUMENTS : (A) ANNEXURE B-1/F1/ITEM NO. 1 DELIVERY CHALLANS DATED 25-9-2005 AND 26-9-2005 (B) ANNEXURE B-1/F1/ITEM NO. 2 DAILY STOCK REGISTER OF FINISHED GOODS WHICH IS DECLARED AND MAINTAINED UNDER EXCISE ACT. (C) ANNEXURE B-1/F1/ITEM NO. 3 DAILY REGISTER OF STOCK POSITION OF RAW MATERIAL WHICH PROVIDES THE CLOSING STOCK AS ON THE DATE OF SEARCH. THE REGISTER IS DECLARED UNDER EXCISE ACT AND IS MAINTAINED IN FORM-IV AS PER RULE 173G. (D) ANNEXURE B-1/F1/ITEM NO.5 & 6 REGISTER MAINTAINED AT FACTORY PREMISES ON THE PURPOSE OF RECORDING PURCHASE OF RAW MATERIAL (E) ANNEXURE B-1/F1/ITEM NO. 31 FILE CONTAINING PURCHASE INVOICES FOR THE PERIOD FROM APRIL 2005 TO AUGUST 2005. (F) ANNEXURE B-1/F1/ITEM NO. 34-FILE CONTAINING INVOICES CUM DELIVERY CHALLANS FOR THE PERIOD 29-8-2005 TO 23-9-2005 (G) ANNEXURE B-1/F1/ITEM NO. 35 & 36 ORDER FILE CONTAINING FAX COPIES OF THE ORDERS RECEIVED FROM VARIOUS PARTIES. APART FROM THE ABOVE MENTIONED DOCUMENTS AND RECORD, THERE ARE MANY MORE RECORDS RELATING TO MOVEMENT OF STOCK, EXCISE RECORDS, CORRESPONDENCE ETC. ALL THE RECORDS HAVE BEEN VERIFIED AND NO MISTAKE OR DEFECT WAS POINTED OUT IN SUCH RECORDS. 8. DURING THE COURSE OF ASSESSMENT THE ASSESSEE VIDE LETTER DATED 6 TH DECEMBER, 2007 ONCE AGAIN OBJECTED TO THE STOCK DETERMINED ON 27-9-2005 AND CATEGORICALLY STATED THAT THE INVENTORY IS INCORRECT AND NOT ACCEPTABLE TO HIM. HE ONCE AGAIN DREW ATTENTION OF ASSESSING OFFICER REGARDING VARIOUS FACTS AT THE TIME OF SEARCH AND POST SEARCH PROCEEDINGS. THE COPY OF AFFIDAVIT AND OTHER 11 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 LETTERS WERE ALSO PRODUCED. IT WAS INFORMED TO THE AO THAT THE INVENTORY LIST WAS NEITHER PROVIDED AT THE TIME WHEN THE STATEMENT WAS RECORDED NOR EVEN THEREAFTER. THE AO REJECTED CONTENTION OF THE ASSESSEE THAT THE OBJECTIONS WERE RAISED BY IT, AT THE APPROPRIATE TIME, REGARDING THE METHOD AND THE MANNER OF TAKING STOCK INVENTORY, AND, THAT THE DEFECTS IN INVENTORY WERE ALSO POINTED OUT. AO OBSERVES, ON PAGE NO. 8 OF THE ASSESSMENT ORDER, THAT IT IS SURPRISING THAT ASSESSEE DID NOT OBJECT AT THE TIME WHEN THE INVENTORY OF STOCK WAS BEING PREPARED DURING THE COURSE OF SEARCH AND SEIZURE PROCEEDINGS. AS THE SEQUENCE OF EVENTS IS RECOUNTED SINCE THE DAY OF SEARCH (SUPRA) AND AFTER PERUSAL OF VARIOUS COMMUNICATIONS OF THE ASSESSEE TO THE INVESTIGATION WING AS WELL AS AO, I FIND THAT THE ASSESSEE HAS SUFFICIENTLY ESTABLISHED ON RECORD HIS OBJECTIONS ON THE ISSUES REGARDING INVENTORY OF STOCKS DURING THE COURSE OF SEARCH. FROM THE LETTERS, STATEMENTS AND AFFIDAVIT AS MENTIONED ABOVE, I AM SATISFIED THAT THE ASSESSEE HAS REGISTERED THE OBJECTION AT EVERY STAGE WHEREVER POSSIBLE. SUCH OBJECTIONS AND RESERVATIONS ON THE STOCK TAKEN BY THE DEPARTMENT ARE CONTAINED IN STATEMENT OF THE ASSESSEE DATED 29 TH SEPTEMBER, 2005 BEFORE THE CONCLUSION OF SEARCH, STATEMENT ON 7/8 TH OCTOBER, 2005 DURING THE COURSE OF SEARCH PROCEEDINGS, BY WAY OF A LETTER DATED 7 TH OCTOBER, 2005, AFFIDAVIT SWORN ON 6 TH SEPTEMBER 2005 AND THEREAFTER DURING THE ASSESSMENT PROCEEDINGS VIDE LETTERS DATED 06-12-2007 AND 07-12-2007. HOWEVER, I FIND THAT THE CONTENTIONS OF THE APPELLANT WERE REJECTED SUMMARILY WITHOUT DEALING WITH THE ISSUE. THE AO FAILED TO BRING ON RECORD ANY EVIDENCE OR CORRESPONDENCE FROM THE SIDE OF THE DEPARTMENT BY WHICH THE ASSESSEE WAS CONFRONTED WITH REGARD TO THE OBJECTIONS RAISED BY HIM. THERE IS AN AFFIDAVIT BY SHRI HARISH AGRAWAL POINTING OUT THE DEFECTS OF VARIOUS NATURE TO THE AUTHORISED OFFICER WHILE SIGNING THE PAPERS AT FACTORY PREMISES ON 29 TH SEPTEMBER, 2005. THE CONTENTION OF THE ASSESSEE ALSO REMAINS UNCONTROVERTED. SURPRISINGLY, SUCH A SERIOUS NATURE OF OBJECTION WAS NOT AT ALL DISCUSSED IN THE STATEMENT RECORDED ON 07-10-2005 BY INVESTIGATION WING BY WHICH DATE THE ASSESSEE HAD ALREADY BROUGHT ON RECORD HIS OBJECTIONS REGARDING DEFECTS IN THE INVENTORY PROCESS. THEREAFTER ALSO THE AO NEITHER EXAMINED SHRI HARISH AGRAWAL NOR ANY OTHER PERSON TO CONFRONT ON THE ISSUES INVOLVED. THUS CONSIDERING THE FACTS, I HOLD THAT THE ASSESSEE HAS PROPERLY REGISTERED ITS OBJECTION DURING THE COURSE OF SEARCH AS WELL AS THEREAFTER IN SEARCH PROCEEDING AND ASSESSMENT PROCEEDINGS. BUT IN START DENIAL OF PRINCIPAL OF NATURAL JUSTICE, THE OBJECTIONS RAISED BY VARIOUS MEANS WERE NOT HEEDED. THE AO WAS NOT JUSTIFIED IN SUMMARILY REJECTING THE EXPLANATION AND THE EVIDENCE AVAILABLE ON RECORD AND DETERMINING THE EXCESS STOCK ON THE BASIS OF LIST OF INVENTORY WHICH IS UNDER DISPUTE RIGHT FROM THE BEGINNING. 12 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 THE WHOLE PROCESS OF CONFRONTING THE ASSESSEE WITH THE INVENTORY OF STOCK WAS MADE WITHOUT PROVIDING THE COPY OF THE INVENTORY TO THE ASSESSEE. THE OBJECTIONS IN THIS REGARD ARE FOUND IN THE LETTER AND THE AFFIDAVIT OF SHRI HARISH AGRAWAL. THE DEPARTMENT SHOULD HAVE ONCE AGAIN PROVIDED THE LIST TO THE ASSESSEE FOR HIS EXPLANATION (EVEN IF IT IS PROVIDED EARLIER) IN THE INTEREST OF JUSTICE AND TO HAVE THE SAY OF THE ASSESSEE ON SUCH AN IMPORTANT ISSUE. THE EXERCISE DONE BY THE DEPARTMENT IN SUCH A MANNER HAS RESULTED INTO LOSS OF EVIDENTIARY VALUE IN RESPECT OF THE INVENTORY PREPARED BY THE SEARCH TEAM. I FURTHER FIND THAT THE ASSESSEE DID NOT STOP BY ONLY RAISING OBJECTIONS BUT ALSO PROVIDED THE LIST OF INVENTORY OF RAW MATERIAL AVAILABLE IN THE FACTORY PREMISES BY HIMSELF UNDERTAKING PHYSICAL VERIFICATION IMMEDIATELY THE NEXT DAY AFTER THE CONCLUSION OF SEARCH AT FACTORY PREMISES. SUCH INVENTORY WAS SUBMITTED TO THE INVESTIGATION WING VIDE LETTER DATED 07-10-2005 AND TO THE AO DURING THE ASSESSMENT PROCEDINGS. THE ASSESSEE HAS FURTHER CLAIMED THAT THE LIST OF INVENTORY TALLIES WITH THE STOCK RECORDS AVAILABLE IN SEIZED MATERIAL AND IS VERIFIABLE WITH THE PURCHASE BILLS AND OTHER EXCISE RECORDS. THIS CONTENTION OF THE ASSESSEE IS UNREBUTTED AND THEREFORE STANDS ACCEPTED AS THE AO DID NOT POINT OUT ANY DEFECTS IN THIS REGARD. THE APPELLANT DREW MY ATTENTION TO THE INVENTORY OF DOCUMENTS/BOOKS OF ACCOUNTS SEIZED DURING THE COURSE OF SEARCH AND TO THE LETTER DATED 07- 12-2007 IN WHICH THE EXPLANATION OF EACH ITEM IN THE INVENTORY WAS OFFERED. THE CLAIM OF THE APPELLANT IS THAT THE MOVEMENT OF STOCK AND THE ENTRIES IN THE BOOKS OF ACCOUNTS ARE DULY RECORDED IN THE BOOKS OF ACCOUNTS TILL THE DATE OF SEARCH. THE PURCHASES ARE SUPPORTED BY PURCHASE BILLS WHICH FIND PLACE IN THE SEIZED MATERIAL. I ALSO FIND THAT IN POST SEARCH PROCEEDINGS THE INVESTIGATION WING SEPARATELY OBTAINED THE PRINT OUT OF PURCHASE REGISTER FOR 01-04-2005 TO 26-09-2005. THE DAILY STOCK REGISTER OF RAW MATERIAL AND FINISHED GOODS IS AVAILABLE IN THE SEIZED RECORD ALONGWITH RECORDS MAINTAINED AND DECLARED UNDER THE EXCISE ACT. THE APPELLANT HAS CLAIMED BEFORE THE AO THAT THE STOCK CAN BE DETERMINED ON THE BASIS OF SUCH RECORDS. IT WAS FURTHER ASSERTED THAT THE PHYSICAL STOCK TAKEN BY THE ASSESSEE IMMEDIATELY ON THE NEXT DAY IS CORROBORATED WITH THE SEIZED DOCUMENTS AND BOOKS OF ACCOUNTS AVAILABLE WITH THE AO. THE AUTHENTICITY AND THE CORRECTNESS OF THE INVENTORY PREPARED BY THE ASSESSEE HAS NOT BEEN CHALLENGED WITH COGENT EVIDENCE. RATHER IN ABSENCE OF ANY DEFECTS POINTED OUT BY THE AO, I HOLD THAT THE INVENTORY 13 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 LIST SUBMITTED BY THE ASSESSEE IS SUPPORTED BY THE EVIDENCE/PROOF AVAILABLE IN THE SEIZED MATERIAL. THE ASSESSEE HAS FURTHER CLAIMED THAT THE STOCK CAN BE DETERMINED FROM THE SEIZED MATERIAL WHICH INCLUDES STOCK MOVEMENT REGISTER AS WELL AS FINANCIAL RECORDS CONTAINING ENTRIES RELATING THERETO. THE AO DID NOT FIND ANY FAULT WITH THE EXPLANATION AND THE ISSUES RAISED BY THE APPELLANT AND REJECTED THE SAME BY SIMPLY OBSERVING THAT THERE IS NO EVIDENCE PUT FORTH BY THE ASSESSEE IN SUPPORT OF HIS EXPLANATION AND THE AFFIDAVIT. THE AFORESAID OBSERVATION IS CONTRARY TO THE RECORDS AVAILABLE IN SEIZED MATERIAL AND ALSO DOES NOT STAND TO REASON IN VIEW OF THE FACT THAT THE AO HAS NOT FOUND ANY FAULT/MISTAKE IN SUCH RECORD. THE APPELLANT HAS CALIMED BEFORE ME THAT ALL THE SEIZED MATERIAL WAS CORROBORATED AND TALLIED WITH THE REGULAR BOOKS OF ACCOUNT WHICH ARE DULY AUDITED AND THERE WAS NO INFIRMITY FOUND BY THE AO. THUS IN SUCH CIRCUMSTANCES WHEN THE ORIGINAL LIST IS UNDER DISPUTE IN VIEW OF SERIOUS NATURE OF MISTAKES POINTED OUT BY THE ASSESSEE AND NOT DEALT BY THE DEPARTMENT AT ANY STAGE, I HOLD THAT EXCESS STOCK DETERMINED BY THE AO ON THE BASIS OF THE IMPUGNED INVENTORY IS ARBITRARY AND UNJUSTIFIED. THE STOCK AS DECLARED IN THE BOOKS OF ACCOUNTS IN SUCH CIRCUMSTANCES WILL HAVE TO BE ACCEPTED. NOW COMING TO THE STATEMENT OF SHRI HARISH AGRAWAL DATED 29-09-2005, I FIND THAT THE AO HAS PLACED UNDUE RELIANCE ON THE STATEMENT FOR MAKING ADDITION OF SUBSTANTIALLY LARGE AMOUNT. THE ASSESSEE HAS REGISTERED HIS PROTEST BY RAISING SERIOUS OBJECTION AGAINST USING THE STATEMENT WHICH WAS NOT PROVIDED TO THE ASSESSEE INSPITE OF THE SPECIFIC REQUEST MADE BEFORE THE INVESTIGATION WING AND THE AO. ACCORDING TO THE APPELLANT THE STATEMENT WAS PROVIDED DURING THE COURSE OF ASSESSEMENT PROCEEDINGS (AT THE END) WHEN THE ISSUE OF STOCK WAS CONFRONTED TO THE ASSESSEE. MY ATTENTION WAS DRAWN TO VARIOUS LETTERS OF THE APPELLANT BY WHICH REQUEST WAS MADE TO PROVIDE THE STATEMENT AND THE LAST LETTER IN THE SEQUENCE IS DATED 18 TH JANUARY, 2007. SHRI HARISH AGRAWAL IN HIS LETTER FILED ON 07-10- 2005 AND 13-10-2005 HAS CATEGORICALLY MENTIONED THE CONDITIONS PREVAILING AT THE TIME OF SEARCH AND THE POSSIBILITY OF INFIRMITY IN THE STATEMENT BECAUSE OF MISTAKEN BELIEF OF LAW AND FACTS WHICH ACCORDING TO HIM NEEDS TO BE REMOVED OR EXPLAINED. IN SPITE OF THIS, THE STATEMENTS WERE NOT PROVIDED TO THE ASSESSEE. THUS I FIND FORCE IN THE CONTENTION OF THE ASSESSEE THAT SUCH STATEMENT CANNOT BE USED AGAINST THE ASSESSEE. AFTER CAREFUL PERUSAL OF THE STATEMENT, I FIND THAT THE AO LOST SIGHT OF THE ANSWER OF SHRI HARISH AGRAWAL AT PAGE 14 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 NO. 7 WHEREIN HE POINTED OUT THE DISCREPANCY IN DETERMINATION OF WEIGHT OF STOCK. DURING THE COURSE OF APPELLATE PROCEEDINGS IT WAS POINTED OUT THAT THE RECORDING OF STATEMENT COMMENCED AT FACTORY PREMISES AND IN BETWEEN SHRI HARISH AGRAWAL WAS TAKEN TO OFFICE PREMISES AND THE QUESTIONS FROM QUESTION NO. 14 ONWARDS WERE ASKED WITH REFERENCE TO DOCUMENTS AT OFFICE PREMISES. THE WITNESS OF THE STATEMENT REMAINED SAME THOUGH THE PREMISES CHANGED. THUS ACCORDING TO THE LEARNED AR THERE IS A SERIOUS LAPSE ON THE PART OF THE DEPARTMENT AS IS MANIFEST IN THE PROCESS ADOPTED FOR RECORDING OF STATEMENT ITSELF, AND THIS SUPPORTS THE CONTENTION OF APPELLANT THAT THE EXERCISE WAS CARRIED OUT IN A HURRIED AND IMPROPER MANNER. FURTHER, IN THE STATEMENT RECORDED ON 7/8 TH OCTOBER 2005 SHRI HARISH AGRAWAL HAS BROUGHT ON RECORD HIS RESERVATION REGARDING STOCK TAKING AND CATEGORICALLY POINTED OUT THAT THE DIMENSIONS INCLUDING THE LENGTH OF RAW MATERIAL, GOODS HAVE NOT BEEN RECORDED CORRECTLY. IN SUBSEQUENT LETTERS ALSO THE ASSESSEE HAS ALREADY OBJECTED TO THE METHOD AND THE MANNER OF TAKING OF PHYSICAL INVENTORY AND THE CONTENTS OF THE INVENTORY. CONSIDERING THE ABOVE FACTUAL ASPECTS, IT CANNOT BE INFERRED THAT THE ASSESSEE HAS ACCEPTED THE STOCK AS PER THE INVENTORY PREPARED AT THE TIME OF SEARCH. IN SUCH CIRCUMSTANCE, I HOLD THAT NO ADDITION CAN BE MADE, SIMPLY RELYING ON SELECTIVE PART OF THE STATEMENT AND TOTALLY DISREGARDING THE OTHER EVIDENCE AND FACTS BROUGHT ON RECORD BY THE APPELLANT. IT IS PERTINENT TO MENTION HERE THAT THE ASSESSEE HAS TAKEN CARE TO BRING ON RECORD, BY WAY OF AN AFFIDAVIT, VARIOUS FACTS RELATING TO THE PROCEEDINGS OF VERIFICATION OF PHYSICAL INVENTORY AND PREPARATION OF THE STOCK LIST. I AGREE WITH THE LEARNED AR, TO THE EXTENT THAT THE AVERMENTS OF AN AFFIDAVIT, WHICH IS DULY SWORN IN, ARE TO BE ACCEPTED AS TRUTHFUL UNTIL THE SAME IS REBUTTED BY WAY OF EVIDENCE BROUGHT ON RECORD. THE HON'BLE SUPREME COURT IN THE CASE OF MEHTA PARIKH & CO. VS. CIT (1956) 30 ITR 181 (SC) AND THEREAFTER IN MANY OTHER CASES HAS REITERATED THAT UNLESS THE PERSON MAKING THE STATEMENT IN THE AFFFIDAVIT IS CROSS EXAMINED BY THE REVENUE, IT IS NOT OPEN TO THE REVENUE TO CHALLENGE THE CORRECTNESS OF THE STATEMENT MADE BY THE DEPONENT IN THE AFFIDAVIT. IN THE INSTANCE CASE, THE INVESTIGATION WING AND THE AO NEVER CROSS EXAMINED THE DEPONENT ON THE SAID AFFIDAVIT. THEY ALSO DID NOT COLLECT ANY OTHER MATERIAL TO SHOW THAT THE EVIDENCE PRODUCED BY THE ASSESSEE WAS NOT CORRECT. THE AO REJECTED THE AFFIDAVIT SIMPLY SAYING THAT THE SAME IS WITHOUT ANY EVIDENCE. THE AO WAS NOT JUSTIFIED IN REJECTING THE AFFIDAVIT AND OTHER 15 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 MATERIAL IN SUCH A MANNER. THE ASSESSEE HAS CLAIMED THAT THE SIZE AND LENGTH OF THE BILLETS AND INGOTS NOTED IN THE INVENTORY ARE INCORRECT IN AS MUCH AS NO SUCH SIZE OF RAW MATERIAL IS MANUFACTURED BY ANY MANUFACTURER OF SUCH PRODUCT. ACCORDING TO HIM THE MOULDS USED BY THE MANUFACTURING INDUSTRIES ARE OF STANDARD SIZE AND NOWHERE THE ITEMS OF RAW MATERIAL IN THE SIZE NOTED IN THE INVENTORY COULD BE FOUND. IN SUPPORT OF THIS CLAIM HE REFERRED TO THE PURCHASE BILLS, DELIVERY MEMO STOCK REGISTER AND OTHER RELEVANT SEIZED RECORD AND SUBMITTED BEFORE THE AO THAT THERE IS NO SUCH INWARD OF GOODS OR PURCHASE BILL IN THE VOLUMINOUS SEIZED MATERIAL. NO FAULT WAS FOUND IN THE AFORESAID EXPLANATION OF THE ASSESSEE. DURING THE COURSE OF THE SEARCH PROCEEDINGS THE ENTIRE PREMISES OF THE ASSESSEE WERE SCANNED AND ALL BOOKS OF ACCOUNTS AND DOCUMENTS WERE TAKEN POSSESSION OF. APART FROM RELYING ON THE FAULTY INVENTORY OF THE STOCK PREPARED, THE AO HAS NOT BEEN ABLE TO REFER TO AN IOTA OF MATERIAL TO CORROBORATE OR LEND SUPPORT TO HIS FINDING. FOR INTANCE, NOT A SINGLE BILL OR PAPER INDICATING PURCHASE OF THE MATERIAL OUTSIDE THE BOOKS OF ACCOUNT OR THE MATERIAL NOTED IN THE INVENTORY WAS FOUND DURING THE COURSE OF ENTIRE SEARCH OPERATION. THERE WAS NO EVIDENCE FOUND REGARDING PAYMENT/RECEIPT IN CASH WITH RESPECT TO THE PURCHASE OR SALE TRANSACTION. I FIND FORCE IN THE ARGUMENT OF THE APPELLANT THAT THIS COULD NOT BE THE CASE IF THE ASSESSEE HAS INDULGED IN PURCHASE OF MATERIAL OUTSIDE THE BOOKS OF ACCOUNTS ON SUCH ENORMOUS SCALE. IN THESE CIRCUMSTANCES, I HAVE NO OPTION BUT TO TAKE THE INVENTORY PREPARED BY THE DEPARTMENT AS A UNILATERAL AND SELF-SERVING DOCUMENT, PREPARED BY THE SEARCH PARTY WITHOUT TAKING COGNIZANCE OF THE OBJECTIONS RAISED BY THE APPELLANT AT VARIOUS STAGES. THAT BEING SO THE BURDEN LIES ON THE DEPARTMENT TO ESTABLISH THAT THE STOCK TAKING HAD BEEN DONE IN FAIRLY REASONABLE AND SATISFACTORY MANNER WHICH THE AO HAS FAILED TO DISCHARGE. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE, AND ON THE BASIS OF DOCUMENTS AVAILABLE ON RECORD AND THE SUBMISSION OF THE APPELLANT, I FIND THAT THE MANNER IN WHICH STOCK TAKING HAS BEEN DONE HARDLY EVOKES ANY CONFIDENCE AND THE FINDING OF EXCESS STOCK FOUND IN THE COURSE OF SEARCH OPERATION BY THE INVESTIGATION WING AND THE AO IS ON GROSSLY INADEQUATE MATERIAL. THAT FINDING CANNOT BE SUSTAINED AS THE ASSESSEE HAS, AT ALL STAGES, THAT TOO IN A PROPER AND LEGAL MANNER, OBJECTED TO THE METHOD AND THE MANNER OF STOCK TAKING AND HAS ALSO POINTED DEFECTS IN THE INVENTORY WITH THE HELP OF SEIZED MATERIAL AND OTHER 16 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 RECORDS WHICH REMAINS UNCONTROVERTED. THE AO FAILED TO POINT OUT ANY FAULT IN THE LIST OF INVENTORY SUBMITTED TO HIM BY THE ASSESSEE WHICH STANDS CORROBORATED WITH EVIDENCE IN THE SEIZED MATERIAL AND THE BOOKS OF ACCOUNT. 5. THE LEARNED DR SUBMITTED THAT THERE WAS A SEARCH IN THE BUSINESS PREMISES OF THE ASSESSEE AND PHYSICAL INVENTORY OF THE STOCK TAKEN DURING THE COURSE OF SEARCH. THE QUANTITY OF THE STOCK AS PER INVENTORY WAS COMPARED WITH THE STOCK AS PER THE BOOK OF ACCOUNTS THERE WAS A DIFFERENCE IN BETWEEN THE ACTUAL STOCK AND STOCK AS PER BOOKS. DURING THE COURSE OF SEARCH, THE ASSESSEE HAS ACCEPTED THE STOCK IN STATEMENT RECORDED ON 29-09-2005. HOWEVER, THE ASSESSEE HAS NOT OBJECTED TO THE MANNER IN WHICH THE STOCK INVENTORY WAS TAKEN. THE ASSESSEE HAS OBJECTED THE MANNER IN WHICH THE STOCK WAS TAKEN ON LATER DATE ON 07-10-2005, BUT THAT IS AFTER THOUGH, THEREFORE, THE AO JUSTIFIED IN HIS ACTION. 6. THE LEARNED AR SUBMITTED THAT THE SEARCH PARTY HAS PREPARED THE PANCHAMA AND ANNEXURES AND HE HAS SIGNED WITHOUT GOING THROUGH THE PAPERS AND HE HAS DONE TO COMPLETE THE SEARCH PROCEEDINGS IN THE FACTORY PREMISES. NEITHER THE COPY OF PANCHANAMA NOR THE COPY OF INVENTORY WAS SUPPLIED AT THAT TIME. THE ASSESSEE HAS OBJECTED TO THE MANNER IN WHICH THE INVENTORY WAS TAKEN AND THE DEPARTMENT WAS NOT CONSIDERING HIS OBJECTIONS THEREFORE, THE ASSESSEE IMMEDIATELY UNDER-TOOK THE PHYSICAL INVENTORY OF RAW MATERIAL LYING THE FACTORY PREMISES ON VERY NEXT DAY AND SUBMITTED THE COPY TO THE DEPARTMENT. THE ASSESSEE WAS NOT PROVIDED WITH A COPY OF THE PANCHANAMA IN SPITE OF REPEATED REQUESTS. THE ASSESSEE OBJECTED THIS INVENTORY PREPARED BY THE DEPARTMENT ON 07-10-2005 WHICH WAS SUBMITTED BEFORE THE DDIT. THE LEARNED AR SUBMITTED THAT INVENTORY OF THE STOCK IS ONE OF THE CRUCIAL DOCUMENT AND SHOULD HAVE BEEN SUPPLIED TO THE ASSESSEE BEFORE TAKING ANY STATEMENT THEREFORE, IN THE ABSENCE OF LIST OF INVENTORY THE ASSESSEE WAS DENIED THE OPPORTUNITY TO CLARIFY ON THE ISSUE RELATING TO THE SIZE, DIMENSION, WEIGHT ETC. THE 17 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 ASSESSEE WAS ALSO NOT PROVIDED WITH A COPY OF THE STATEMENT. THE ASSESSEE HAS FILED AN AFFIDAVIT ON 06-10-2005 WHEREIN HE HAS EXPLAINED THE MISTAKE COMMITTED BY THE PARTIES AND MISTAKE COMMITTED BY TAKING THE SIZE OF BILLETS AND INGOTS THEREFORE, THERE IS NO REASON TO MAKE ANY ADDITION ON ACCOUNT OF UNEXPLAINED INVESTMENTS. FURTHER, IT IS FOUND FROM THE RECORD THAT THE ASSESSEE ALSO SUBMITTED A LETTER DATED 07-10-2005 WHICH WAS FILED BEFORE THE DDIT ALONGWITH AN AFFIDAVIT AND INVENTORY TAKEN BY THE ASSESSEE. ON ENQUIRY BY THE AO IN THE ASSESSMENT PROCEEDINGS, WE FIND THAT THE ASSESSEE HAS AGAIN RAISED OBJECTION TO THE PHYSICAL VERIFICATION OF THE STOCK AND SUBMITTED HIS EXPLANATION WHICH IS AT PAGE-21 OF THE PAPER BOOK. THERE IS NO EVIDENCE THAT THE ASSESSEE HAS PURCHASED THE RAW MATERIAL OUTSIDE THE BOOKS OF ACCOUNTS AND THE CIT(A) HAS RIGHTLY DELETED THE SAME. 7. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. LOOKING INTO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESEES PREMISES WERE SUBJECT TO SEARCH ON 27-09- 2005. NONE OF THE DIRECTORS AND FAMILY MEMBERS WERE PRESENT IN THE FACTORY PREMISES WHEN THE SEARCH WAS UNDERTAKEN BY THE SEARCH PARTY. ON 29-09-2005 THE PHYSICAL STOCK OF INVENTORY BY THE SEARCH PARTY SHRI HARISH AGRAWAL, WHO IS I/C WAS CALLED AND HE HAS SIGNED THE CONCLUSION OF THE SEARCH PROCEEDINGS. SHRI HARISH AGRAWAL, HAS OBJECTED THE MANNER IN WHICH THE INVENTORY WAS PREPARED. WE FIND THAT THE ASSESSEE HAS OBJECTED TO THE STOCK INVENTORY AND HAS RAISED OBJECTIONS WHILE SIGNING THE INVENTORY AND AT THE TIME OF RECORDING THE STATEMENT. AFTER SEARCH, ON 07-10- 2005 THE ASSESSEE HAS FILED THE AFFIDAVIT ALONGWITH THE EVIDENCE AND HE HAS OBJECTED TO THE MANNER IN WHICH THE PHYSICAL INVENTORY WAS TAKEN. THE ASSESEE WAS NOT GIVEN A COPY OF THE PANCHANAMA AND VARIOUS DOCUMENTS. THE CIT(A) HAS RAISED THE ISSUE IN DETAIL IN HIS ORDER. WE FIND FROM THE ORDER OF THE CIT(A) THAT SHE HAS DEALT WITH THE OBJECTION RELATING TO NON-PROVIDING OF INVENTORY, OBJECTION RAISED BY THE ASSESSEE IN THE STATEMENTS RECORDED DURING THE SEARCH AND THE POST SEARCH 18 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 PROCEEDINGS, THE AFFIDAVIT SUBMITTED ALONGWITH INVENTORY AND VARIOUS EXPLANATIONS FURNISHED BEFORE THE DDIT AND THE AO. THE ASSESSEE HAS POINTED OUT THAT THERE WERE NO DIFFERENCE IN INVENTORY. THE EVIDENCES SUBMITTED BY THE ASSESSEE ALONG EXPLANATION ARE UNCONTROVERTED. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE AS PER LETTERS, STATEMENT AND AFFIDAVIT RAISED HIS OBJECTIONS WHEN EVER IT IS POSSIBLE. THE ASSESEEE HAS OBJECTED ABOUT THE STOCK ON 29-09-2005 BEFORE THE CONCLUSION OF THE SEARCH AND ON THE STATEMENT OF 7 TH & 8 TH OCTOBER, 2005 DURING THE COURSE OF SEARCH PROCEEDINGS AND BY WAY OF LETTERS DATED 07-10-2005, THE AFFIDAVIT SWORN ON 06- 10-2005 THEREAFTER DURING THE ASSESSMENT PROCEEDINGS. THE ASSESSEE HAS ALSO BROUGHT ON RECORD VARIOUS BOOKS OF ACCOUNTS, EXCISE REGISTERS, GOODS MOVEMENTS REGISTER ETC.,WHICH ARE SEIZED AND HAS CLAIMED THAT THE SAME TALLIES WITH THE STOCK FOUND WHICH FACT IS UNCONTROVERTED. WE AGREE WITH THE FINDINGS OF THE CIT(A) AND THE LEARNED DR HAS FAILED TO BRING BEFORE US ANYTHING CONTRARY TO WHAT IS FOUND. THEREFORE, WE ARE OF THE VIEW THAT THE AO HAS FAILED TO BRING OUT ANY EVIDENCE CONTRARY TO WHAT WAS SUBMITTED BY THE ASSESSEE. THE ASSESSEE WAS NOT PROVIDED WITH A COPY OF THE STATEMENT. CONSIDERING THE VARIOUS EVIDENCES AVAILABLE ON RECORD, SUBMISSIONS IN THE ASSESSMENT PROCEEDINGS AND FACTS OF THE CASE. WE ARE OF THE VIEW, THAT THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION AND OUR INTERFERENCE IS NOT CALLED FOR. 8. IN THE RESULT, THE GROUNDS OF THE DEPARTMENT ARE DISMISSED. 9. GROUND NOS.8,9 & 10. THE SHORT FACTS OF THE GROUNDS IN THE APPEAL ARE AS FOLLOWS; THE ASSESSEE HAS OBTAINED LOAN FROM PUNJAB NATIONAL BANK IN EARLIER YEARS AND BECAUSE OF PERSISTENT LOSSES THE ASSESSEE DEFAULTED WITH THE BANKER AND THEREFORE, A CIVIL SUIT WAS FILED FOR 19 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 RECOVERY BEFORE THE DRT AND THE TOTAL DUE TO BANK IN RESPECT OF THE COMPANY WERE SETTLED BY ALLOWING REMISSION OF RS.4,21,12,847/-. THE ASSESSEE CLAIMED THAT THE REMISSION IS ON ACCOUNT OF PRINCIPAL AND THEREFORE, NOT LIABLE TO THE TAX. HOWEVER, THE AO HELD THAT THE REMISSION IS ON ACCOUNT OF INTEREST AND THEREFORE, HE MADE ADDITION TO THE RETURNED INCOME. 10. THE MATTER CARRIED IN APPEAL BEFORE THE CIT(A) AND THE CIT(A) HAS DELETED THE SAME BY OBSERVING AS UNDER; 10.2 DECISION I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, DOCUMENTS PRODUCED BEFORE ME RELATING TO THE SETTLEMENT WITH BANK, AGREEMENT AND PLAINT OF THE BANK AND SUBMISSIONS MADE BEFORE ME. IT IS FOUND THAT THE APPELLANT HAD EARLIER INCURRED SUBSTANTIAL LOSSES AND DEFAULTED WITH PUBJAB NATIONAL BANK IN REPAYMENT OF LOAN AND ACCORDINGLY THERE WAS A CIVIL SUIT FILED FOR RECOVERY BY THE BANK ON 2 ND MAY, 1995 FOR AN AMOUNT OF RS. 9,69,18,171/- AND FUTURE INTEREST. THE TOTAL LIABILITY AGAINST THE COMPANY OUTSTANDING AS PER THE BOOKS OF ACCOUNT IS AS UNDER : TOTAL OUTSTANDING IN THE BOOKS OF ACCOUNTS AS ON 31-3-1994 RS.7,87,53,848/- ADD : FURTHER INTEREST PROVIDED FOR THE PERIOD FROM 1-4-1994 TO THE DATE OF FILING OF SUIT I.E. 2-5-1995 TO THE EXTENT CLAIMED IN THE BOOKS OF ACCOUNT. RS. 1,81,64,324/- RS. 9,69,18,172/- ULTIMATELY THE ASSESSEE AND BANK ENTERED INTO ONE TIME SETTLEMENT (OTS) ON 2-9-2003 AND ACCORDINGLY THE ORDER WAS PASSED BY THE HONBLE DEBTS RECOVERY TRIBUNAL (DRT). THE OTS WAS ENTERED WITH THE COMPROMISE AMOUNT OF RS.5,52,78,000/- IN RESPECT OF THREE COMPANIES DETAILS OF WHICH ARE AS UNDER : M/S. PRABHU STEEL INDUSTRIES LTD. (APPELLANT HEREIN) RS. 3,99,23,000/- M/S. MAHESH AGRICULTURE & IMPL. FACTORY RS.1,03,55,000/- M/S. HARIGANGA ALLOYS & STEEL LTD. RS. 50,00,000/ - 20 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 RS. 5,52,78,000 /- THUS IT IS AN UNDISPUTED FACT THAT THE LIABILITY TO SUIT IN THE CASE OF PRESENT APPELLANT WAS SETTLED FOR RS.3.99 CRORES. THE ASSESSEE GOT REMISSION IN VIEW OF THE OTS AND CLAIMED SUCH REMISSION ON CAPITAL ACCOUNT. THE AMOUNT OF RS. 4,21,12,847/- WAS CREDITED BY THE COMPANY IN THE CAPITAL RESERVE ACCOUNT, HOWEVER, THE AO HELD THAT THE REMISSION IN ON ACCOUNT OF INTEREST AND THEREFORE LIABLE TO BE TAXED. 10.3 ON PERUSAL OF THE ORDER OF THE AO, I FIND THAT THE REMISSION OF RS.4,21,12,847/-, ACCOUNTED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE, HAS BEEN CONSIDERED AS INCOME OF THE ASSESSEE ON THE BASIS THAT THE BENEFIT ARISING OUT OF THE BANK SETTLEMENT IS ON ACCOUNT OF WAIVER OF INTEREST WHICH HAS BEEN CLAIMED BY THE ASSESSEE AS EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT IN THE EARLIER YEARS. AO HAS FURTHER HELD THAT THE ASSESSEE HAS FAILED TO PROVIDE ANY EVIDENCE WHICH CAN ESTABLISH THE CLAIM BEING ON ACCOUNT OF CAPITAL/PRINCIPAL AMOUNT. ACCORDING TO HIM THE BANK ADJUSTS THE RECOVERED AMOUNT AGAINST THE PRINCIPAL FIRST AND IF ANY REBATE IS ALLOWED THEN IT IS ONLY OF INTEREST AND NOT PRINCIPAL AMOUNT AS CLAIMED BY THE ASSESSEE. THE ADDITION WAS MADE INVOKING PROVISIONS OF SECTION 41(1) OF THE INCOME TAX ACT. IN THIS REGARD THE AO FURTHER SOUGHT CLARIFICATION FROM THE PUNJAB NATIONAL BANK ON THE ISSUE WHETHER THE REMISSION IS ON ACCOUNT OF PRINCIPAL OR OTHERWISE VIDE LETTER 28-12-2007 TO WHICH THE REPLY FROM THE BANK WAS RECEIVED BY AO ON 19-03-2008. THE COPY OF THE REPLY WAS SUBMITTED BEFORE ME ON 26-03-2008 AND THE AO ONCE AGAIN REITERATED HIS STAND THAT THE BANK HAS RECOVERED PRINCIPAL AMOUNT AND NOT INTEREST AND THEREFORE JUSTIFIED HIS ACTION IN TREATING THE AMOUNT OF REMISSION AS INCOME OF THE APPELLANT. THE AO ATTENDED APPELLATE PROCEEDING AND REQUESTED THE IMPUGNED LETTER OF THE BANK BE ACCEPTED IN SUPPORT OF HIS CONTENTION. THE EVIDENCE IS BEING OF CRUCIAL NATURE, I ALLOWED THE ADDITIONAL EVIDENCE OBTAINED BY THE AO, TO BE PLACED ON RECORD. 10.4 CONTRARY TO THE AVERMENTS MADE BY THE AO, IN THE IMPUGNED ORDER AS WELL AS IN APPELLATE PROCEEDINGS, THE APPELLANT HAS CLAIMED THAT THE REMISSION IS ON CAPITAL ACCOUNT AND THEREFORE THE COMPANY HAS RIGHTLY CREDITED RS. 4,21,12,847/- TO CAPITAL RESERVE ACCOUNT IN THE AUDITED BOOKS OF ACCOUNTS. THE CONTENTIONS OF THE APPELLANT ARE SUMMARISED AS UNDER :- (A) THAT THE REMISSION IS ON ACCOUNT OF PRINCIPAL AMOUNT AND NOT INTEREST AND THEREFORE OUTSIDE THE PURVIEW OF PROVISIONS OF SECTION 41(1) OF THE INCOME TAX ACT. (B) THAT AS PER THE AGREEMENT WITH THE BANK, THE INTEREST CHARGED BY THE BANK BECOMES PRINCIPAL AMOUNT IN THE NEXT QUARTER AND THEREFORE THE AMOUNT OF CIVIL SUIT REPRESENTS THE PRINCIPAL AMOUNT. (C) THAT THE SETTLEMENT WAS IN LUMPSUM AMOUNT AND THERE WAS NO ITEMWISE BIFURCATION BETWEEN PRINCIPAL AND INTEREST. (D)THAT AS PER THE BANKING NORMS AND PRACTICE THE AMOUNT RECOVERED IS ADJUSTED FIRSTLY AGAINST INTEREST AND THEREAFTER TOWARDS THE PRINCIPAL AMOUNT. (E) THE AMOUNT OF SETTLEMENT WAS NOT SUFFICIENT TO SERVE THE INTEREST ALSO. 21 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 10.5 THE LETTER OF THE AO DATED 26 TH MARCH, 2008 ALONGWITH THE LETTER OF THE BANK ADDRESSED TO AO DATED 19 TH MARCH, 2008 WAS PROVIDED TO THE APPELLANT TO GIVE OPPORTUNITY. THE APPELLANT VEHEMENTLY OBJECTED AND SUBMITTED THAT THE ADDITIONAL EVIDENCE FILED BY THE AO SUFFERS FROM VARIOUS DEFECTS. MY ATTENTION WAS DRAWN TO THE LETTER OF THE BANK AND IT WAS CONTENDED BY THE LEARNED AR THAT THE RECOVERABLE DUES MENTIONED IN THE IMPUGNED LETTER AT RS. 18.37 CRORES IS IN VARIANCE WITH THE ACTUAL AMOUNT OF CLAIM FILED BY THE BANK WHICH IS RS. 9.69 CRORES. FURTHER, THE BALANCE OUTSTANDING (O/S) MENTIONED AT RS.4,76,17,956/- IS INCORRECT AND CONTRADICTORY TO THE BANK'S OWN CONFIRMATION OBTAINED FROM THE ASSESSEE AND ENCLOSED WITH THE PLAINT. ACCORDING TO THE CONFIRMATION, COPY OF WHICH IS PRODUCED BEFORE ME THE BALANCE OUTSTANDING VIDE ACKNOWLEDGEMENT DATED 15-04- 1994 IS RS.7,88,45,755.63. FURTHER, THE LETTER OF THE BANK DOES NOT CATEGORICALLY MENTION AS TO WHAT IS THE PRINCIPAL AMOUNT IN THE CASE OF THE APPELLANT. THE STAND TAKEN BY THE BANK THAT THEY HAVE RECOVERED PRINCIPAL AMOUNT UNDER OTS IS CONTRARY TO THE COMPROMISE PROPOSAL BEFORE THE HON'BLE DRT WHEREIN THERE WAS NO SUCH BIFURCATION OF THE RECOVERED AMOUNT INTO PRINCIPAL AND INTEREST. THE LEARNED AR FURTHER DREW MY ATTENTION TO THE AGREEMENT OF HYPOTHECATION LOAN AND SUBMITTED THAT THE AMOUNT CLAIMED BY THE BANK IN THE CIVIL SUIT IS PRINCIPAL AMOUNT IN VIEW OF THE CLAUSE OF INTEREST IN THE AGREEMENT. CONSIDERING THE OBJECTIONS OF THE LEARNED AR, CLARIFICATIONS WERE SOUGHT FROM THE AO DURING THE COURSE OF APPELLATE PROCEEDING. HE WAS SPECIFICALLY ASKED TO CLARIFY WHETHER THE AMOUNT OF RS. 9.69 CRORES REPRESENTS PRINCIPAL AMOUNT IN VIEW OF THE CLAUSE IN THE AGREEMENT AND ALSO TO SEEK CLARIFICATION ON THE PRAYER OF THE BANK IN THE PLAINT REGARDING CHARGING OF INTEREST FROM THE DATE OF FILING OF SUIT TILL DISPOSAL OF THE CASE. HE WAS FURTHER ASKED TO GET CLARIFICATION ABOUT THE BANKING LAWS AND PRESCRIBED PRACTISE BY THE RBI REGARDING APPLICATION OF THE AMOUNT RECOVERED FROM THE BORROWER. APART FROM THE CLARIFICATION, SINCE THE ISSUE INVOLVED IS CRUCIAL, I ALSO DIRECTED AO TO SUMMON THE BANK OFFICIAL SO THAT NECESSARY CLARIFICATIONS CAN BE OBTAINED. IN RESPONSE THEREOF, THE AO ATTENDED ALONGWITH THE MANAGER, MR. R. G. MISHRA. THE LETTER OF THE BANK DATED 19-03- 2008 WAS CONFRONTED TO THE MANAGER AND CLARIFICATION WAS SOUGHT ON THE OBJECTIONS AND THE INFIRMITIES POINTED OUT BY THE LEARNED AR. FOR THE SAKE OF CLARIFICATION, SPECIFIC ENQUIRY WAS MADE REGARDING THE CORRECTNESS OF THE BALANCE SHOWN AS OUTSTANDING AT RS. 4,76 CRORES AND THE RECOVERABLE DUES MENTIONED IN THE LETTER AT RS.18.37 CRORES AS AGAINST THE SUIT FILED BY THE BANK AT RS. 9.69 CRORES AND TO CLARIFY WHAT IS THE QUANTUM OF PRINCIPAL AMOUNT ACCORDING TO THIS LETTER ITSELF. THE BRANCH MANAGER WAS UNABLE TO CLARIFY THE INFIRMITY POINTED OUT BY THE LEARNED AR AND WAS UNABLE TO SATISFY AS TO HOW THE VARIOUS AMOUNTS HAVE BEEN DETERMINED BY THE BANK AND MENTIONED IN THE LETTER DATED 19-03-2008. THE MANAGER SOUGHT TIME TO CONSULT HIS LEGAL CELL AND THEREAFTER TO PROVIDE THE NECESSARY EXPLANATION. THE CLARIFICATION FROM THE BANK WAS COMMUNICATED VIDE LETTER DATED 23-04- 2009 TO THE AO. ACCORDINGLY, THE AO SUBMITTED LETTER DATED 23-04-2009 RECEIVED BY HIM FROM PUNJAB NATIONAL BANK, SPECIAL ASSET RECOVERY CELL, KINGSWAY, NAGPUR. THE CONTENTS OF THE LETTER ARE REPRODUCED HEREIN BELOW : 1. THAT THE BANK HAD FILED SUIT FOR AN AMOUNT OF RS. 9,69,18,171.64 WHICH INCLUDED INTEREST UPTO 02-05-1005. THE INTEREST IN THE ACCOUNT OF PRABHU STEEL INDUSTRIES LTD. ON VARIOUS CREDIT FACILITEES ENJOYED IS CHARGED ON THE BASIS OF FOLLOWING CLAUSE IN THE AGREEMENT WHICH IS REPRODUCED AS UNDER :- 22 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 AS PER AGREEMENT OF HYPOTHECATION PAGE NO. 10/10 : THAT INTEREST AT THE RATE OF 4% P.A. OVER THE RBI RATE WITH A MINIMUM OF 13% P.A. SHALL BE CALCULATED ON THE DAILY BALANCE DUE TO THE BANK ON THE SAID ACCOUNT & SHALL BE CHARGED MONTHLY/QUARTERLY SO LONG AS THE AMOUNT DUE FROM THE BORROWERS IS NOT PAID IN ITS ENTIRELY AND THE SAME WILL FORM PART OF THE PRINCIPAL & CARRY INTEREST AT THE ABOVE MENTIONED RATES. IN CASE OF DEFAULT IN THE PAYMENT OF INTEREST ON THE DUE DATES ... IN VIEW OF THE AFORESAID CLAUSE IN THE AGREEMENT OF HYPOTHECATION, THE INTEREST FOR EVERY QUARTER/MONTH IS CONSIDERED AS PRINCIPAL AMOUNT AND CONSIDERED AS OUTSTANDING BALANCE AND THEREAFTER THE INTEREST IS CHARGED ON SUCH AMOUNT WHICH IS OUTSTANDING. 2. AS REGARDS YOUR SPECIFIC QUERRY ABOUT THE METHOD OF CHARGING INTEREST THE SUIT IS FILED, BANK HAS CLAIMED BEFORE DRT NAGPUR FOR AN ORDER AND DECREE TO PAY A SUM OF RS. 9,69,18,171.64 + INTEREST THEREON @ 18.75% P.A. WITH QUARTERLY RESTS FROM THE DATE OF FILING OF THE SUIT TILL FULL REALIZATION OF THE A/C. ACCORDINGLY, THE BANK CLAIMED FURTHER INTEREST ON RS. 9.69 CRORES AND NOT ON LAST SANCTIONED LIMIT OF RS.3.80 CRORES, FROM THE DATE OF FILING OF THE SUIT FILL FULL REALIZATION OF THE ACCOUNT. 3. IT IS FURTHER CLARIFIED THAT AS PER THE BANKING NORMS AND PRESCRIBED PRACTICE BY THE RBI, THE MONEY RECOVERED FROM THE BORROWER IS TO BE APPLIED FIRST TOWARDS INTERET AND THEN TOWARDS PRINCIPAL. HOWEVER, IN THE PRESENT OTS SETTLEMENT OF PRABHU STEEL INDUSTRIES LTD. THE SETTLEMENT WAS MADE CONSIDERING THE CLAIM OF RS. 9.69 CRORES IN THE PLAINT AND FURTHER AMOUNT OF INTEREST DUE ON SUCH CLAIM. IT IS FURTHER CLARIFIED THAT THE OTS WAS MADE ON LUMPSUM BASIS AND THERE WAS NO SEGREGATION OF THE AMOUNT IN BETWEEN THE PRINCIPAL AS WELL AS INTEREST IN VIEW OF THE INSUFFICIENCY OF SETTLED AMOUNT. THE LETTER OF THE BANK IS SELF EXPLANATORY WHICH ALSO CONSIDERS THE CLAUSE IN THE LOAN AGREEMENT REGARDING THE CHARGEABILITY OF INTEREST AND ITS METHOD. IT HAS BEEN FURTHER CLARIFIED AS TO WHAT IS THE PRINCIPAL AMOUNT, HOW THE AMOUNT RECOVERED IS ADJUSTED AND IF THE INTEREST IS TO BE CHARGED FROM THE DATE OF FILING OF SUIT THEN WHAT WILL BE THE AMOUNT CONSIDERED AS PRINCIPAL AMOUNT. THUS AS PER PARA 1 OF THE ABOVE MENTIONED LETTER THE BANK HAS HIMSELF CATEGORISED THE AMOUNT OF RS. 9.69 CRORES AS PRINCIPAL AMOUNT IN VIEW OF THE TERMS OF THE AGREEMENT. AT THIS JUNCTURE, IT IS IMPORTANT TO REFER TO THE PLAINT NO. 463 OF 1995 FILED BY THE BANK BEFORE THE COURT FOR THE PURPOSE OF THE AMOUNT DUE TO THE BANK. THE AMOUNT INVOLVED IN THE SUIT AND CLAIM OF RECOVERY IS RS. 9,69,18,171.64 AGAINST THE COMPANY M/S. PRABHU STEEL INDUSTRIES LTD. AS PER PARA 4 OF THE PLAINT IT IS FOUND THAT THE SUIT IS FILED TO RECOVER THE AMOUNTS DUE AND PAYABLE UNDER CASH CREDIT FACILITY GRANTED BY THE PLAINTIFF, I.E. BANK TO THE APPELLANT. IN PARA (1) PAGE 9 OF THE REFERENCE IS MADE REGARDING INCREASE IN THE LIMIT TO RS. 3.80 CRORES BY THE DEED OF HYPOTHECATION DATED 30-04-1991 AND ALSO THE FACT OF GUARATEEE COVERING THE OTHER FACILITIES GRANTED TO THE COMPANY. IT IS MENTIONED HERE THAT THE ASSESSEE WAS ALSO ENJOYING THE LIMIT OF BANK GUARANTEE AND IN VIEW OF DEFAULT THE BANK GUARANTEE WAS INVOKED AND CONSEQUENTIALLY THE AMOUNT WAS ALSO DUE FROM THE ASSESSEE IN ADDITION TO THE CASH CREDIT FACILITY. ALTHOUGH THE LETTER OF THE BANK DATED 19- 03-2008 REFERS TO BALANCE OUTSTANDING OF RS. 4,76,17,956/-, THE PLAINT IN PARA 11 MENTIONS THAT THE AMOUNT DUE AND PAYABLE UNDER THE CASH CREDIT FACILITY IS RS.7,88,45,755/- ON 31-03-1994 WHEN THE LAST OF SUCH ACKNOWLEDGEMENT DATED 15-04-1994 WAS AVAILABLE WITH THE BANK. ON PAGE 13 & 23 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 14 OF THE PLAINT THE PARTICULARS OF THE ACKNOWLEDGEMENT OF DEBIT ON VARIOUS DATES ARE MENTIONED. AT PARA 13 IT HAS BEEN CATEGORICALLY MENTIONED THAT THE AMOUNT DUE AND PAYABLE AS ON 01-12- 1994 IS RS. 8,94,51,750/- WHICH WAS DUE AND PAYABLE ON 1 ST DECEMBER, 1994. AT PARA 17 THE AMOUNT OF RS.9,69,18,171/- FINDS MENTION, BEING THE SUM DUE AND PAYABLE BY THE APPELLANT, AND THE GUARANTORS OF THE LOAN. 10.6 THUS, IT IS CLEAR FROM THE PLAINT, THAT THE SUIT AMOUNT OF RS.9.69 CRORES REPRESENTS THE AMOUNT OUTSTANDING IN THE CASH CREDIT FACILITY UTILISED BY THE APPELLANT. THIS PLAINT HAS TO BE READ IN CONJUNCTION WITH CLAUSE IN LOAN HYPOTHECATION AGREEMENT WHICH IS REPRODUCED IN THE REPLY OF THE BANK MANAGER. THE BANK MANAGER HAS CATEGORICALLY ACCEPTED THAT IN VIEW OF THE CLAUSE IN THE AGREEMENT THE INTEREST FOR EVERY QUARTER/MONTH IS CONSIDERED AS PRINCIPAL AMOUNT AND CONSIDERED AS OUTSTANDING BALANCE AND THEREAFTER FRESH INTEREST IS CHARGED ON SUCH AMOUNT WHICH IS OUTSTANDING. THUS THERE IS NO SCOPE FOR DISPUTE TO DECIDE AT TO WHAT IS THE PRINCIPAL AMOUNT, CONSIDERING THE AGREEMENT OF HYPOTHECATION, PLAINT OF THE BANK AND THE CLARIFICATION BY THE MANAGER, WHO HAS ACCEPTED THE FACT OF PRINCIPAL AMOUNT BEING RS.9.69 CRORES WHICH IS STRICTLY AS PER BANKING NORMS AND KEEPING IN MIND THE RELEVANT CLAUSE OF AGREEMENT FOR LOAN. THAT BEING SO, IT IS TO BE SEEN, AT WHAT AMOUNT COMPROMISE WAS REACHED. ACCORDING TO THE COMPROMISE PETITION THE ASSESSEE WAS REQUIRED TO PAY RS. 3.99 CRORES TO THE BANK EXCLUDING THE AMOUNT WHICH IS ALREADY AVAILABLE WITH THE BANK WHICH ITSELF SUGGESTS THAT THE AMOUNT PAID IS LESS THAN THE SUIT AMOUNT WHICH IS THE PRINCIPAL AMOUNT CONSIDERING THE DISCUSSIONS MADE HEREIN ABOVE. THUS, I HOLD THE REMISSION IN THE COMPROMISE PROPOSAL OF THE SUIT PENDING BEFORE THE HON'BLE DRT IS IN RESPECT OF THE PRINCIPAL AMOUNT AND NOT INTEREST. AT THIS JUNCTURE, IT IS ALSO ESSENTIAL TO TAKE NOTE OF THE TREATMENT GIVEN BY THE ASSESSEE-COMPANY IN ITS BOOKS OF ACCOUNTS TO THE AMOUNT OUTSTANDING TOWARDS THE BANK. AS PER THE AUDITED BALANCE SHEET THE LIABILITY TOWARDS THE BANK WAS SHOWN AS OUTSTANDING AT RS.7,87,53,848/- AS ON 31-03-1994. THEREAFTER, THE ASSESSEE PROVIDED FOR THE INTEREST FOR THE PERIOD FROM 01-04-1994 TO THE DATE OF FILING OF SUIT, I.E. 2 ND MAY, 1995 FOR RS.1,81,64,324/- AMOUNTING TO THE INTEREST CLAUSE IN THE AGREEMENT. THUS THE ASSESSEE HAS ALSO ACCOUNTED FOR THE BANK LOAN IN THE BOOKS OF ACCOUNT TO THE EXTENT OF RS.9,69,18,171/- AS ALREADY DISCUSSED ABOVE AND BY VIRTUE OF THE AGREEMENT WITH THE BANK, PLAINT AND THE METHOD OF CHARGING INTEREST THE AFORESAID AMOUNT BECOMES PRINCIPAL AMOUNT IN VIEW OF THE SPECIFIC AGREEMENT WITH THE BANK. THE AMOUNT PAID IS INSUFFICIENT TO THE TOTAL OF CLAIM OF RS. 9.69 CRORES AND THEREFORE IN THE COMPROMISE BETWEEN THE BANK THERE WAS A WAIVER OF LOAN WHICH, CONSIDERING THE FACTS OF THE CASE AS DISCUSSED ABOVE, IS THE WAIVER OF PRINCIPAL AMOUNT. THEREFORE, I HOLD THAT THE REMISSION RECEIVED BY THE APPELLANT IS ON CAPITAL ACCOUNT AND THEREFORE NOT LIABLE TO BE INCLUDED IN THE INCOME OF THE COMPANY. 10.7 I HAVE FURTHER ANALYSED THE ISSUE BEFORE ME FROM ANOTHER ANGLE, THAT IF AT ALL THE SUIT AMOUNT CONSISTS OF INTEREST (AS CLAIMED BY THE AO), THEN IN SUCH CIRCUMSTANCES HOW THE AMOUNT PAID BY THE ASSESSEE BE DEALT WITH. THE AO HAS HELD THAT WHENEVER THERE IS A RECOVERY BY THE BANK THE SAME IS ADJUSTED AGAINST THE PRINCIPAL FIRST AND THEREAFTER THE REMAINING AMOUNT IS ADJUSTED AGAINST THE INTEREST. THE QUESTION BEFORE ME AND WHICH NEEDS TO BE EXAMINED IS WHETHER THERE WAS AN ITEM WISE COMPROMISE OR IT IS A LUMPSUM ONE TIME SETTLEMENT, WITHOUT GOING INTO THE DETAILS OF PRINCIPAL AMOUNT AND INTEREST. FOR THIS PURPOSE I READ THROUGH THE JOINT APPLICATION BEFORE THE HON'BLE DRT (MA-168/2003) IN OA NO.207/2001WHICH WAS MADE BY PUNJAB NATIONAL BANK AND THE APPELLANT COMPANY. THIS APPLICATION WAS MADE JOINTLY WITH A PRAYER TO HON'BLE DRT TO PASS TO DECREE AND ISSUE THE RECOVERY CERTIFICATE ON THE TERMS AND CONDITION SET OUT IN THE 24 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 APPLICATION. THE APPLICATION REFERS TO THE PROCEEDINGS FILED BY THE BANK AGAINST THE APPELLANT FOR NON PAYMENT OF AMOUNT UTILISED FOR VARIOUS CREDIT FACILITIES AND DESIRE TO SQUARE UP THE LIABILITIES TO SETTLE THE ACCOUNTS. IN THE CONSENT TERMS MENTIONED IN THE APPLICATION THE CLAUSE 2 AND 3 READ AS UNDER :- (2) HOWEVER DECREE TO BE MARKED SATISFIED IF THE DEFENDANTS PAY AN AMOUNT OF RS. 552.78 LACS AS PER THE TERMS AND CONDITIONS MENTIONED BELOW. THIS AMOUNT IS BEING PAID AS THE SETTLEMENT FOR THE ACCOUNT OF M/S. PRABHU STEEL INDUSTRIES LTD. MAHESH AGRICULTURAL IMPLEMENTS LTD. AND HARIGANGA ALLOYS AND STEEL INDUSTRIES LTD. I.E ON BEHALF OF ALL THE THREE COMPANIES BY THE AUTHORISED PERSON (COMMON PROMOTER) OF THESE THREE COMPANIES. CONSENT DECREE ARE ALSO BEING OBTAINED ON SIMILAR TERMS AND CONDITIONS IN THE SUIT FILED AGAINST THE OTHER TWO COMPANIES, OA NOS. 208 AND 209 OF 2001. (3) THE AMOUNT OF RS. 5,52,78,000/- IS TO BE PAID ALONGWITH INTEREST ON REDUCING BALANCE WITHIN A PERIOD OF 12 MONTHS FROM 22-07-2003 THUS THE APPLICATION DID NOT MENTION THE ITEMWISE BIFURCATION OF APPROPRIATION OF SETTLED AMOUNT INTO PRINCIPAL AND INTEREST. THE OTHER CLAUSES IN THE APPLICATION ARE IN RELATION TO THE MODE, TIME OF PAYMENT, DISPOSAL OF SECURITY AND OTHER FORMALITIES TO BE COMPLETED. IN PURSUANCE TO THE APPLICATION AN ORDER WAS PASSED BY THE HON'BLE DRT ON 2 ND SEPTEMBER, 2003 WHICH CONSIDERED THE COMPROMISE PETITION AND ALLOWED THE APPLICATION AND ISSUANCE OF RECOVERY CERTIFICATE. IN THE SAID ORDER THERE WAS NO ITEM WISE BIFURCATION OF THE AMOUNT DETERMINED FOR COMPROMISE AND THE APPLICATIONS OF THE PETITIONERS WERE ACCEPTED AS IT IS. AFTER RECEIPT OF THE PAYMENT FROM THE COMPANY, PUNJAB NATIONAL BANK ISSUED A CERTIFICATE DATED 09-09-2005 CERTIFYING THAT THE SUM OF RS. 552.78 LACS ALONGWITH INTEREST OF RS. 21.50 LACS IS RECEIVED AS PER THE COMPROMISE TERMS AS FULL AND FINAL PAYMENT OF THE AMOUNT DUE TO THE BANK. THE AGREEMENT WITH THE APPELLANT DOES NOT SPECIFICALLY STATE ANYTHING ABOUT THE APPROPRIATION OF THE AMOUNT OF RS. 552.78 LACS PAID BY THE COMPANY IN DISCHARGE OF THE DEBT. THUS TO CONCLUDE, I HOLD THAT THE AMOUNT OFFERED FOR PAYMENT IN THE OTS WAS WITHOUT ANY COMMITMENT FROM EITHER SIDE FOR ADJUSTMENT AGAINST EITHER PRINCIPAL OR INTEREST. AS THE MODE OF APPROPRIATION OF PAYMENT IS NOT MADE CLEAR BY THE DEBTOR OR THE CREDITOR, IT WILL BE APPROPRIATED ACCORDING TO SECTION 60 OF THE INDIAN CONTRACT ACT. IN POLLACK N. MULLA OF INDIAN CONTRACT AND SPECIFIC RELIEF ACT, NINTH EDITION AT PAGE 434, THE LAW REGARDING APPROPRIATION WHEN THE SAME AMOUNT IS PAID TOWARDS PRINCIPAL AND INTEREST, IS HELD TO BE AS FOLLOWS - PRINCIPAL AND INTEREST WHERE THERE IS A DEBT CARRYING INTEREST, MONEY PAID AND RECEIVED WITHOUT ANY DEFINITE APPROPRIATION IS TO BE FIRST APPLIED IN PAYMENT OF INTEREST. IF THE DEBTOR APPROPRIATES A PAYMENT TO PRINCIPAL, THE DEBTOR NEED NOT ACCEPT PAYMENT ON THOSE TERMS, BUT IF HE DOES NOT HE MUST RETURN MONEY; IF HE DOES ACCEPT HE IS BOUND BY THE APPROPRIATION. THE SAME RULE APPLIED TO JUDGEMENT DEBTS. THUS WHEN A SUM IS REALISED ON ACCOUNT OF A DECREE, THAT AMOUNT IS TO BE DEDUCTED FROM THE INTEREST AND NOT FROM THE PRINCIPAL. THE RULE IS THE SAME EVEN IF THE DECREE BE AN INSTALLMENT DECREE. THUS IF A DECREE IS PASSED FOR RS.1,500/- WITH INTEREST AT FIVE PER CENT PER ANNUM PAYABLE BY THREE YEARLY INSTALLMENTS OF RS. 500 EACH, AND THE JUDGEMENT DEBTOR PAYS RS. 500 AT THE END OF THE THREE YEARS WITHOUT APPROPRIATING THE PAYMENTS TO PRINCIPAL, THE DECREE- 25 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 HOLDER IS ENTITLED TO APPROPRIATE RS. 75 FOR THE INTEREST DUE AND THE BALANCE OF RS.425/- TO PRINCIPAL, THE EXPOSITION OF LAW MADE BY THE LEARNED AUTHORS QUOTED ABOVE IS BASED ON THE FOLLOWING DECISIONS, VIZ., (I) AIR 1950 FEDERAL COURT 38 AT SCS, (II) P. C. LAL VS. STATE OF BIHAR AIR 1952 PTN, 414, (III) CIT VS. MAHARAJADHIRAJA OF DARBANGHA AIR 1933 PC 108, (IV) AIR (1952) (ALL.) 514 AND MEGH RAJ & ORS. VS. MST. DAYABAI AND ORS. AIR (1970) (SC) 161. IN VIEW OF THE ABOVE SAID LUCID EXPOSITION OF LAW, THE AO'S UNDERSTANDING OF LAW THAT THE PAYMENTS MADE SHOULD BE APPROPRIATED TOWARDS BASIC AMOUNT OF THE LOAN (PRINCIPAL AMOUNT) AND THE REMAINING AMOUNT ONLY SHOULD BE APPROPRIATED TOWARDS INTEREST PAYMENTS IS WRONG IN LAW. THE PAYMENT MADE BY THE APPELLANT IN THE INSTANT CASE TO THE BANK, ACCORDING TO THE RULES OF APPROPRIATION, SHALL BE FIRST APPROPRIATED TOWARDS INTEREST AND THEREFORE THERE IS NO QUESTION OF REMISSION OF INTEREST. 10.8 ON THE ABOVE ISSUE, SPECIFIC QUERY WAS RAISED TO THE AO WHO WAS PRESENT WITH THE BANK MANAGER OF PUNJAB NATIONAL BANK WHO SIGNED LETTER DATED 23 RD APRIL, 2009 TO CLARIFY THE BANKING NORMS AND PRESCRIBED PRACTICE. IT WAS CLARIFIED BY THE MANAGER THAT AS PER THE BANKING NORMS AND PRESCRIBED PRACTICE BY THE RBI, THE MONEY RECOVERED FROM THE BORROWER IS TO BE APPLIED FIRST TOWARDS INTEREST AND THEN TOWARDS PRINCIPAL. THIS RESOLVES THE ISSUE BEFORE ME AND THEREFORE IN THE FACTS OF THE CASE THE PAYMENT MADE BY THE APPELLANT WILL HAVE TO BE APPROPRIATED TOWARDS INTEREST FIRST. THUS THE MAIN POINT AT ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE ON THIS GROUND. THE DETAILS OF PAYMENT AND THE ADJUSTMENT AGAINST SUCH PAYMENT AS BORNE OUT FROM THE FACTS, WHICH IS UNDISPUTED, ARE AS UNDER :- PAYMENTS MADE IN FY 2003-04, 2004-05 & 2005-06 RS.4,71,30,506/- LESS : ADJUSTED AGAINST THE LIABILITY OF HARIGANGA ALLOYS & STEEL LTD. RS. 50,00,000/- RS.4,21,30,506/- DEPOSITS WITH BANK ADJUSTED RS.1,32,77,878/- FIXED DEPOSIT WITH PNB RS. 13,19,129/- 26 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 INTEREST RECEIVABLE ON FDR ADJUSTED RS. 3,27,811/- RS.5,70,55,324/- OUT OF ABOVE THE RECOVERY WAS MADE AS UNDER : 1. INTEREST ON THE SETTLEMENT AMOUNT RS. 5.52 CRORES AS THE SAME WAS PAID IN INSTALLMENT (-) RS. 21,50,000/- 2) VALUATION CHARGES (-) RS. 1,00,000/- 3) LIABILITY AS PER BOOKS OF ACCOUNTS : ON ACCOUNT OF INTEREST PROVIDED EARLIER UPTO 31-03-1994 RS.3,66,41,000/- INTEREST NOW PROVIDED FOR THE PERIOD 01-04-1994 TO 02-05-1005 TO THE EXTENT PAID AND CLAIMED RS. 1,81,64,324/- RS. 5,70,55,324/- THUS, ON THE PRINCIPLE THAT THE AMOUNT RECOVERED BY THE BANK SHOULD BE FIRST ADJUSTED TOWARDS INTEREST AS PER THE BANKING NORMS AND PRACTICE AND FOLLOWING THE RULES OF APPROPRIATION, THE AMOUNT RECOVERED BY THE BANK HAS BEEN TOTALLY APPROPRIATED TOWARDS THE LIABILITY OF INTEREST AS PROVIDED IN THE BOOKS OF ACCOUNTS AND ALSO TOWARDS THE INTEREST ON THE COMPROMISE AMOUNT AS ORDERED IN THE HON'BLE DRT'S ORDER. IN SUCH CIRCUMSTANCES WHAT REMAINS UNPAID IS THE PRINCIPAL AMOUNT DETAILS OF WHICH ARE AS UNDER : LIABILITY IN THE BOOKS OF ACCOUNT ON ACCOUNT OF CASH CREDIT LIMIT RS.3,80,00,000/- LIABILITY ON ACCOUNT OF LG/BG FACILITY, INVOKED BY BANK RS. 41,12,847/- RS.4,21,12,847/- I T IS AN UNDISPUTED FACT THAT THE LAST SANCTIONED LIMIT IN THE CASH CREDIT ACCOUNT IS RS. 3.80 CRORES AND THE LIABILITY TOWARDS BANK GUARANTEE INVOKED IS RS. 41.12 LACS. THIS AMOUNT IS PROVIDED BY THE BANK AS LOAN TO THE ASSESSEE AND, THEREFORE, THERE IS NO QUESTION OF ASSESSEE GETTING/CLAIMING DEDUCTION OF SUCH AMOUNT IN THE P & L ACCOUNT IN THE EARLIER YEARS. THE AMOUNT OF REMISSION RECEIVED BY THE ASSESSEE ON THIS ACCOUNT CANNOT BE BROUGHT WITHIN THE PURVIEW OF SECTION 41(1). THE WAIVER, CONSIDERING THE ABOVE ASPECT OF RULES OF APPROPRIATION AND THE BANKING NORMS AND PRESCRIBED PRACTICE OF RECOVERING INTEREST FIRST, IS ON ACCOUNT OF PRINCIPAL AMOUNT AND, THEREFORE, THE PROVISIONS OF SECTION 41(1) CANNOT BE INVOKED TO BRING SUCH WAIVER OF LOAN INTO TAX NET. THE LEARNED A.R. HAS RELIED ON VARIOUS DECISIONS (REF : SUBMISSIONS REPRODUCED ABOVE) 27 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 INCLUDING THAT OF JURISDICTIONAL HIGH COURT ON THE ISSUE THAT THE REMISSION/CESSATION OF THE LOAN LIABILITY IS A CAPITAL RECEIPT AND IT CANNOT BE SUBJECT TO TAX U/S.41(1) OF THE ACT AND THAT A DEBT FORGIVEN CANNOT BE TREATED AS INCOME SINCE SUCH WAIVER ONLY AFFECTS CAPITAL ACCOUNT. THE DECISIONS SQUARELY APPLY TO THE FACTS OF THE CASE AND SUPPORT THE VIEW TAKEN AS ABOVE. 11. THE LEARNED DR SUBMITTED THAT THE REMISSION OF RS.4,21,12,847/- IS ACCOUNTED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND IT IS THE INCOME OF THE ASSESSEE, AS THE BENEFIT IS ARISING OUT OF BANK SETTLEMENT ON ACCOUNT OF WAIVER OF INTEREST WHICH CLAIMED BY THE ASSESSEE AS EXPLAINED IN PROFIT & LOSS ACCOUNT IN THE EARLIER YEARS. THE ASSESSEE HAS FAILED TO PRODUCE ANY EVIDENCE WHICH CAN ESTABLISH ITS CLAIM ON ACCOUNT OF CAPITAL/PRINCIPAL AMOUNT. THEREFORE, ACCORDING TO AO THE BANK HAS ADJUSTED AND RECEIVED THE AMOUNT AGAINST THE PRINCIPAL AND IF ANY RECEIPTS IS ALLOWED AND THEN IT IS ONLY THE INTEREST AND NOT THE PRINCIPAL AS CLAIMED BY THE ASSESSEE. 12. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF THE CIT(A). THE ASSESSEE COMPANY IS RUNNING INTO LOSSES SINCE LAST SO MANY YEARS AND THEREFORE, COULD NOT PAY THE DUES OF BANKER. THE PUNJAB NATIONAL BANK HAS FILED THE CIVIL SUIT FOR RECOVERY FROM THE ASSESSEE AND THE OTHER CONCERNS WHICH ARE PROMOTED BY SHRI GANGARAM AGRAWAL AND FAMILY. THERE WAS A SETTLEMENT IN DRT AND AS PER THE SETTLEMENT NO DUES CERTIFICATE WAS GIVEN BY THE BANK. THE ASSESSEE HAS TOTAL OUTSTANDING IN THE BOOKS OF ACCOUNTS AS ON 31-03-1994 OF RS.7,87,53,848/- AGAINST WHICH THE BANK FILED CIVIL SUIT FOR RECOVERY OF AMOUNT OF RS.9,69,18,171/-. THE ASSESSEE STOPPED MAKING PROVISION FOR INTEREST, AS THE BANK HAS FILED THE SUIT. THE SETTLEMENT WAS GIVEN BY THE PROMOTER OF THE THREE COMPANIES AND THE COMPANIES HAVE SETTLE THE DUES AND AS THE PAYMENT WAS CONSIDERED AS PER THE BOOKS OF ACCOUNTS, THE LIABILITY WAS SHOWN AT RS.7,87,53,848/- WHICH WAS OUTSTANDING AMOUNT AS ON 31-03-1994. FROM THE DATE OF FILING THE SUIT I.E 2-05-1995 IN THE BOOKS OF ACCOUNTS AND IN THE ORDER OF SETTLEMENT AND EXPLAINED THE EXPENDITURE ON ACCOUNT OF INTEREST AND THE ASSESSEE HAS EXPLAINED THIS. THEREFORE, AS PER THE NORMS THE PAYMENT ARE ADJUSTED 28 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 AGAINST INTEREST AND THEREFORE, AFTER THE BALANCE AMOUNT IS ADJUSTED AGAINST THE PRINCIPAL SINCE THE AMOUNT PAID WAS NOT SUFFICIENT AND THE REMISSION IS ON ACCOUNT OF LOAN AMOUNT THEREFORE, THE ASSESSEE HAS CREDITED THE REMISSION TO THE CAPITAL RECEIPTS ACCOUNT AND THE SAME IS NOT TAXABLE BEING THE REMISSION/CESSATION OF THE LOAN LIABILITY IS A CAPITAL RECEIPT AND IT CANNOT BE SUBJECT TO TAX U/S 41(1) OF THE ACT, 1961. 13. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES. LOOKING IN TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE HAS SUBMITTED ALL THE DOCUMENTARY EVIDENCE BEFORE THE AO AND CIT(A), AND THE CIT(A) HAS CALLED FOR THE REMAND REPORT, BY CALLING THE REMAND REPORT THE CIT(A) HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, THE ASSESSEES CLAIM WAS THAT THE BANK HAS FILED A CIVIL SUIT FOR RECOVERY OF AMOUNT OF RS.9,69,18,171/- WHICH IS THE TOTAL AMOUNT DUE ON THE DATE OF FILING THE SUIT. THE HYPOTHECATION AGREEMENT PROVIDES THAT INTEREST SHALL BE CHARGED ON MONTHLY/QUARTERLY BASIS AS THE AMOUNT AS THE AMOUNT FROM THE BORROWER IS NOT PAID ENTIRELY AND THE SAME WILL BECOME PART OF PRINCIPAL AMOUNT. ON PERUSAL OF THE CLAUSES IN THE AGREEMENT, LETTER OF THE BANK AND CONFIRMATION BY THE BRANCH MANAGER IN THE REMAND PROCEEDINGS, WE FIND THAT THE INTEREST WHICH WAS UNPAID ON A PARTICULAR DATE BECOMES PRINCIPAL, WHEN THE BANK CHARGES INTEREST OVER THE BALANCE WHICH COMPRISES OF INTEREST AMOUNT ALSO. THUS, UPTO THE DATE OF SUIT, THE INTEREST WAS ACCOUNTED IN THE BOOKS OF THE BANK AND THE INTEREST AMOUNT BECOMES THE PRINCIPAL. THE ASSESSEE HAS TO PAY A TOTAL AMOUNT OF RS.9,69,18,171/- AGAINST WHICH THE ASSESSEE HAS PAID RS.5,70,55,324/- THUS, REMISSION OF RS.4,21,12,847/- IS ON ACCOUNT OF PRINCIPAL AMOUNT AND NOT ON INTEREST. THE ASSESSEE HAS PAID THE AMOUNT ON THE LOAN LIABILITY AND IT CANNOT BE SUBJECT TO TAX U/S 41(1) OF THE IT ACT. WE FIND THAT THE CIT(A) HAS HELD THAT THE BANK MANAGER OF PUNJAB & NATIONAL BANK, WHO HAS SIGNED A LETTER ON 23-04-2009, CLARIFYING THE BANKING NORMS AND PRESCRIBED PRACTICE BY THE RBI, THE MONEY RECOVERED FROM THE BORROWER IS TO BE APPLIED FIRST 29 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 TOWARDS INTEREST AND THEN TOWARDS PRINCIPAL. THUS, THE DETAILS OF THE PAYMENT AND THE ADJUSTMENT AGAINST SUCH PAYMENT AS BORNE OUT FROM THE FACTS, WHICH IS UNDISPUTED ARE AS UNDER; PAYMENTS MADE IN AY:2003-04,2004-05& 2005-06 RS.4,71,30,506 LESS : ADJUSTED AGAINST THE LIABILITY OF HARIGANGA ALLOYS & STEEL LTD., RS. 50,00,000 RS. 4,21,30,506 DEPOSITS WITH BANK ADJUSTED RS 1,32,77,878 FIXED DEPOSIT WITH PNB RS. 13,19,129 INTEREST RECEIVABLE ON FDR ADJUSTED RS. 3,27,811 RS.5,70,55,324 OUT OF ABOVE THE RECOVERY WAS MADE AS UNDER; INTEREST ON THE SETTLEMENT AMOUNT RS.5.52 CRORES AS THE SAME WAS PAID IN INSTALMENTS (-) RS. 21,50,000 2) VALUATION CHANGES (-) RS. 1,00,000 3) LIABILITY AS PER BOOKS OF ACCOUNTS ON ACCOUNT OF INTEREST PROVIDED EARLIER UPTO 31-03-1994 RS.3,66,41,000 INTEREST NOW PROVIDED FOR THE PERIOD 01-04-1994 TO 02-05-1995 TO THE EXTENT PAID AND CLAIMED RS.1,81,64,324 RS.5,70,55,324 THUS, ON THE PRINCIPLE THAT THE AMOUNT RECOVERED BY THE BANK SHOULD BE FIRST ADJUSTED TOWARDS INTEREST AS PER THE BANKING NORMS AND PRACTICE AND FOLLOWING THE RULES OF APPROPRIATION, THE AMOUNT RECOVERED Y THE BANK HAS BEEN TOTALLY APPROPRIATED TOWARDS THE LIABILITY OF INTEREST AS PROVIDED IN THE BOOKS OF ACCOUNT AND ALSO TOWARDS THE INTEREST ON THE COMPROMISE AMOUNT AS ORDERED IN THE HONBLE DRTS ORDER. IN SUCH CIRCUMSTANCES WHAT REMAINS UNPAID IS THE PRINCIPAL AMOUNT. THUS, IT IS UNDISPUTEDLY THE FACT THAT THIS AMOUNT IS PROVIDED BY THE BANK AS LOAN TO THE ASSESSSEE AND THEREFORE, THERE IS NO QUESTION OF ASSESSEE GETTING DEDUCTION OF SUCH AMOUNT IN THE PROFIT & LOSS ACCOUNT IN THE EARLIER YEARS. THE AMOUNT OF REMISSION RECEIVED BY THE ASSESSEE ON 30 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 THIS ACCOUNT CANNOT BE BROUGHT WITHIN THE PURVIEW OF SEC.41(1) OF THE ACT. THE WAIVER, CONSIDERING THE ABOVE ASPECT OF RULES OF APPROPRIATION AND THE BANKING NORMS AND PRESCRIBED PRACTICE OF RECOVERING INTEREST FIRST, IS ON ACCOUNT OF PRINCIPAL AMOUNT AND THEREFORE, THE PROVISIONS OF SEC.41(1) CANNOT BE INVOKED TO BRING SUCH WAIVER OF LOAN INTO TAX. 14. DURING THE COURSE OF HEARING THE LEARNED DR COULD NOT BRING ANY CONTRARY MATERIAL AGAINST THE FINDING OF THE CIT(A), THEREFORE, WE ARE OF THE VIEW THAT THE CIT(A) JUSTIFIED IN HIS ACTION AND OUR INTERFERENCE IS NOT REQUIRED. 15. IN THE RESULT, THE GROUNDS OF THE REVENUE ARE DISMISSED. 16. NOW WE TAKE UP GROUND NOS.1,2 & 11 OF THE REVENUE. THE AO MADE ADDITION OF RS.4,50,000/- AS UNRECORDED INCOME AND RS.1,30,000/- AS INCOME OF THE ASSESSEE. THE ADDITION MADE WAS CONTESTED BY THE ASSESSEE BEFORE THE CIT(A) WHO CONFIRMED THE ADDITION. THE ASSESEEE HAS FILED CROSS OBJECTION CONTESTING THE ACTION OF THE CIT(A) IN HIS GROUND NO.1 & 2. 17. THE LEARNED DR IS AGITATED OVER THE FACT THAT THE CIT(A) HAS ALLOWED THE TELESCOPIC CREDIT OF RS.4,50,000/-AND RS.1,30,000/- AGAINST THE INCOME SURRENDERED OF RS.1.00 CRORE IN THE RETURN OF INCOME. ACCORDING TO THE LEARNED DR THERE IS NO CONNECTION BETWEEN THE ADDITION MADE AND THE INCOME SURRENDERED BY THE ASSESSEE AND THEREFORE, THE TELESCOPING IN THIS IS UNJUSTIFIED. THE LEARNED COUNSEL OF THE ASSESSEE SUPPORTED THE ORDER OF THE LEARNED CIT(A). THE LEARNED DR WHILE RAISING THE GROUND NO.11 OVER THE TELESCOPIC CREDIT ALLOWED BY THE CIT(A) ANY ADDITION/DISALLOWANCE CONFIRMED BY THE LEARNED CIT(A) AGAINST THE DISCLOSURE OF RS.1.00 CRORE. BEFORE US, WHILE ARGUING VEHEMENTLY SUBMITTED THAT THERE IS NO NEXUS BETWEEN AMOUNT SURRENDERED AND THE ADDITION CONFIRMED. 31 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 18. ON THE OTHER HAND, LEARNED COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF THE CIT(A). 19. WE HAVE HEARD BOTH THE PARTIES. ON PERUSAL OF THE FACTS AVAILABLE ON RECORDS AND THE SUBMISSION MADE BY THE ASSESSEE AT THE TIME OF ASSESSMENT AS WELL AS IN THE ASSESSMENT PROCEEDINGS, WE FIND THAT THE SURRENDER OF RS.1.00CRORE WAS MADE IN THE RETURN OF INCOME AND A NOTE IN THIS REGARD WAS ALSO FILED ALONGWITH THE RETURN. THE RELEVANT COMPUTATION OF INCOME IS AT PAGE-50 OF THE PAPER BOOK. ON GOING THROUGH THE ASSESSMENT ORDER, WE FIND THAT THE AO HAS ACCEPTED THE OFFER OF THE ASSESSEE AND FINALLY ASSESSED THE SURRENDERED AMOUNT AS BUSINESS INCOME. WE ALSO FIND THAT THE SURRENDER OF RS.1.00 CRORE IS NOT REPRESENTED BY ANY UNDISCLOSED/UNRECORDED INCOME OR ANY TANGIBLE ITEM OF ASSETS. THERE IS NO CONTROVERSY ON THIS ISSUE. THE ASSESSEE HAS ASKED FOR TELESCOPIC CREDIT IN THE COMPUTATION OF INCOME AS WELL AS IN THE ASSESSMENT PROCEEDINGS. THE CLAIM OF THE ASSESSEE WAS NOT CONSIDERED BY THE AO. HOWEVER, NO REASONS WERE PROVIDED OR DISCUSSED IN THE ASSESSMENT ORDER. VARIOUS CASE LAWS REGARDING AVAILABILITY OF TELESCOPING ARE DISCUSSED AT PAGE-45 OF THE ORDER OF THE LEARNED CIT(A). CONSIDERING THE FACTS AND THE DECISIONS RELIED ON BY THE LEARNED COUNSEL THE AMOUNT SURRENDERED IN GENERAL AGAINST NO EXISTING ASSETS OR ANY UNEXPLAINED OR UNDISCLOSED INCOME ARE AVAILABLE FOR TELESCOPIC TO THE ASSESSEE AND A BROAD VIEW IN THE MATTER HAS TO BE TAKEN. THE AO HAS ALSO FAILED TO LINK SUCH SURRENDER O ANY INCOME/ASSET. IN SUCH CASE, WE CONFIRM THE ACTION OF THE CIT(A) THAT THE AMOUNT OF RS.1.00 CRORE SURRENDERED BY THE ASSESSEE IN THE RETURN OF INCOME IS AVAILABLE FOR TELESCOPIC AGAINST ANY ADDITION MADE BY THE AO OR SUSTAINED AT APPELLATE STAGE. CONSEQUENTLY, THE GROUND NO.1, 2 & 11 ARE DISMISSED. 20. IN THE RESULT, THE GROUNDS RAISED IN THIS APPEAL ARE DISMISSED. C.O.NO.10(NAG)/2009(IN ITA NO.165(N)/2009) (ASSESSMENT YEAR 2006-07) 32 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 IN THIS CROSS OBJECTION THE ASSESSEE HAS RAISED GROUNDS WHICH ARE AS UNDER; 1) THAT THE ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN MAKING ADDITION OF RS. 4,50,000/- AS UNRECORDED INCOME AND THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE AUTHORITIES HAVE FAILED TO APPRECIATE THAT THE SOURCE OF CREDITS IS AVAILABLE. 2) THAT THE ASSESSING OFFICER ERRED IN LAW & ON FACTS IN MAKING ADDITION OF RS. 1,30,000/- IN THE INCOME OF THE ASSESSEE AND THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE AUTHORITIES HAVE FAILED TO APPRECIATE THAT THE IMPUGNED SUM DOES NOT REPRESENT INCOME. 3) THAT THE ASSESSING OFFICER ERRED IN LAW AND ON FACTS IN DISALLOWING SETTLEMENT EXPENSES WITH BANK RS 50.00 LAKHS AND THE LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER. ON THE BASIS THAT THE AMOUNT IS RECOVERABLE AND CAN NOT BE CLAIMED AS EXPENDITURE. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE AUTHORITIES SHOULD HAVE CONSIDERED THE FACT THAT SUCH PAYMENT WAS A PRECONDITION FOR OTS WITH BANK IN THE CASE OF THE ASSESSEE. 4) WITHOUT PREJUDICE TO GROUND NO 3., THE LEARNED CIT(A) ERRED IS NOT GIVING SPECIFIC DIRECTION OF ADJUSTING THE ADDITION OF RS. 50.00 LAKHS FROM THE INCOME SURRENDERED. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE INCOME SURRENDERED IS AVAILABLE FOR TELESCOPING OF ADDITION CONFIRMED. 5) THAT ON THE FACTS & CIRCUMSTANCES OF THE CASE AND IN LAW THE INCOME SURRENDERED IN THE RETURN BE ALLOWED TO BE ADJUSTED AGAINST ADDITION MADE CONFIRMED AT ANY STAGE OR THE SAME MAY BE ALLOWED TO BE WITHDRAWN. 6) THAT FOR ANY OTHER GROUND WITH KIND PERMISSION OF YOUR HONORS AT THE TIME OF HEARING OF APPEAL. 21. GROUND NOS.1 & 2 THE AO HAS MADE AN ADDITION OF RS.4,50,000/- AS UNRECORDED INCOME AND RS.1,30,000/- AS INCOME OF THE ASSESSEE WHICH THE ASSESSEE IS CONTESTING BEFORE US. ON PERUSAL OF THE ASSESSMENT ORDER AT PARA-4, WE FIND THAT THE ADDITION OF RS.4,50,000/- IS MADE ON THE BASIS OF THE SEIZED DOCUMENTS, ITEM NO.1 PAGE-104. ACCORDING TO THE AO THE TRANSACTIONS MENTIONED IN THE SEIZED DOCUMENTS WERE NOT FOUND RECORDED IN THE REGULAR BOOKS OF ACCOUNTS. THE ASSESSEE EXPLAINED BEFORE US THAT THE IMPUGNED DOCUMENT IS THE DAILY ACCOUNT OF MONEY TAKEN AS ADVANCE FROM THE 33 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 COMPANY AND SPENT FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY. SUCH ADVANCES ARE RECORDED IN THE BOOKS OF ACCOUNTS AFTER THE TRANSACTIONS ARE OVER. THE LEARNED COUNSEL FURTHER REITERATED THAT THE CASH BOOK WAS PRODUCED BEFORE THE AO TO SHOW THAT SUFFICIENT CASH BALANCE IS AVAILABLE. FURTHER, AS REGARDS THE ADDITION OF RS.1,30,000/- WE FIND THAT THE SAME WAS MADE ON THE BASIS OF THE SEIZED DOCUMENT ITEM-1/PAGE-12. THE LEARNED COUNSEL EXPLAINED THAT THE PAYMENTS MENTIONED IN THE INTERIM DOCUMENTS ARE FROM THE RECEIPTS WHICH ARE CONSIDERED FOR DETERMINATION OF LONG TERM CAPITAL GAINS. THE LEARNED COUNSEL MADE AN ALTERNATE PLEA OF ALLOWING TELESCOPING CREDIT OF ADDITIONS AGAINST THE AMOUNT SURRENDERED. SINCE WE HAVE ALREADY HELD WHILE DECIDING THE DEPARTMENT APPEAL THAT THE ASSESSEE IS ENTITLED FOR TELESCOPING OF ADDITION MADE BY THE AO OR SUSTAINED BY THE CIT(A) FROM THE AMOUNTS SURRENDERED IN THE RETURN OF INCOME THEREFORE, WE DISMISS THE GROUND NOS.1 & 2 AS NOT PRESSED. 22. GROUND NOS.3 & 4 THE AO HAS MADE AN ADDITION OF RS.50.00 LAKHS BY DISALLOWING THE EXPENDITURE CLAIMED BY THE ASSESEE ON ACCOUNT OF SETTLEMENT WITH THE BANKERS. WE FIND THAT A SETTLEMENT WAS ARRIVED BY THE ASSESEE WITH THE PUNJAB NATIONAL BANK, AS RESULT THEREOF, THE COMPANY WAS REQUIRED TO PAY RS.50.00LAKHS ON BEHALF OF M/S HARIGANGA ALLOYS AND STEEL LTD., THE AFORESAID COMPANY WAS UNDER LIQUIDATION AND THE BANKER RECOVERED RS.50.00 LAKHS AS A PRECONDITION FOR SETTLEMENT. THE ASSESSEE TOOK THE RESPONSIBILITY OF PAYMENT OF RS.50.00 LAKHS SO THAT THE COMPROMISE PROPOSAL COULD BE ACCEPTED. THE LEARNED COUNSEL SUBMITTED THAT THE EXPENDITURE WAS MADE OUT OF COMMERCIAL EXPEDIENCY. THE LEARNED COUNSEL AGREED NOT TO PRESS THE GROUND, IF THE TELESCOPING IS ALLOWED. 23. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE ACTION OF THE AO AND STATED THAT AMOUNT PAID CANNOT BE CONSIDERED AS BUSINESS EXPENDITURE OF THE ASSESSEE. 34 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 24. IN GROUND NO.4 THE ASSESSEE HAS MADE AN ALTERNATIVE PLEA TO ADJUST THE ADDITION OF RS.50.00 LAKHS BY TELESCOPING AGAINST THE AMOUNT SURRENDERED IN THE RETURN OF INCOME. THE LEARNED COUNSEL DREW OUR ATTENTION TO THE DECISION OF THE CIT(A) AT PARA-11.1 AND SUBMITTED THAT THE LEARNED CIT(A) DID NOT GIVE ANY SPECIFIC DIRECTION TO ADJUST THE ADDITION AGAINST THE SURRENDERED AMOUNT. WE FIND THAT THE SUCH DIRECTION WAS GIVEN AGAINST OTHER ADDITIONS AND WE ALSO FIND THAT WHILE DEALING WITH THE GROUND RELATING TO TELESCOPIC IN GROUND NOS.18 & 19 BEFORE THE CIT(A), SHE HAS ALREADY HELD THAT THE AMOUNT OF RS.1.00 CRORE SURRENDERED BY THE ASSESSEE IN ITS RETURN OF INCOME IS AVAILABLE FOR TELESCOPIC AGAINST ANY ADDITION MADE BY THE AO OR SUSTAINED AT APPELLATE STAGE. 25. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES LOOKING TO THE FACTS AND CIRCUMSTANCE OF THE CASE WE FIND THAT MR. G. R. AGRAWAL, PROMOTER ON BEHALF OF THREE COMPANIES TO THE BANK TO SETTLE THE THREE ACCOUNTS. THE BANK HAD COMMENCED RECOVERY PROCEEDINGS AGAINST THREE COMPANIES VIS PRABHU STEEL INDUSTRIES LTD, MAHESH AGRICULTURE IMPLEMENTS & STEEL FORGING LTD AND HARIGANGA ALLOY AND STEEL LTD. IN THE SETTLEMENT PROCEEDINGS THE BANK BUNDLE THE THREE OUTSTANDING AMOUNTS FOR PURPOSE OF SETTLEMENT. THE ASSESSEE ACCEPTED THE SAME IN VIEW OF POSSIBLE BENEFIT. THE BANK HAS ACCEPTED THE OFFER OF COMPROMISE AT RS. 552.78 LAKHS PLUS VALUATION CHARGE OF RS. 100000/- AND INTEREST CHARGEABLE IN THE SETTLEMENT PERIOD FOR INSTALLMENT GRANTED. THE BANK HAS FINALIZED THE AMOUNT AND ASSESSEE WANTED TO SETTLE THE ACCOUNT AND IT WAS BENEFICIAL TO PAY RS. 50 LAKHS IN VIEW SUBSTANTIAL REMISSION RECEIPT, THE COMPANY HAS PAID RS. 50 LAKHS AND CLAIMED THE SAME AS EXPENDITURE ON ACCOUNT OF SETTLEMENT. THE AMOUNT WAS NOT RECOVERABLE FROM HARIGANGA ALLOYS AND STEELS AS THE COMPANY WAS UNDER LIQUIDATION AND THE LIABILITY TOWARDS THE BANK BY THE AFORESAID COMPANY WAS STILL RECOVERABLE FROM THE AFORESAID COMPANY. IN VIEW OF THIS FACT ASSESSEE COMPANY TOOK THE RESPONSIBILITY OF PAYMENT OF RS. 50 35 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 LAKHS SO THAT COMPROMISE PROPOSAL COULD BE ACCEPTED WHICH WAS IN VIEW OF COMMERCIAL EXPEDIENCY. IN VIEW OF THIS FACT WE ARE OF THE VIEW THAT ASSESSEE IS ENTITLE AS BUSINESS EXPENDITURE, HENCE WE ALLOW THE SAME. 26. IN THE RESULT, GROUND NO.3 OF THE ASSESSEE IS ALLOWED AND GROUND NO 4 IN WHICH ASSESSEES CLAIMS ALTERNATIVELY TO ADJUST THE INCOME AGAINST SURRENDER INCOME DOES NOT SURVIVE AS WE HAVE ALREADY ALLOWED AS BUSINESS EXPENDITURE, HENCE DISMISSED. 27. GROUND NO.5 WE HAVE ALLOWED AND CONFIRMED THE ACTION OF THE CIT(A) IN ALLOWING THE ADJUSTMENT OF INCOME SURRENDERED IN THE RETURN AGAINST THE ADDITION MADE BY THE AO OR SUSTAINED AT APPELLATE STAGE. IN THE DEPARTMENTS APPEAL VIDE GROUND NO.11, THE GROUND, AS WE HAVE ALREADY DISMISSED THE DEPARTMENT APPEAL THE GROUND TAKEN BY THE ASSESSEE IS PARTLY ALLOWED AND THE QUESTION OF WITHDRAWING THE SURRENDERED AMOUNT IS NOT PRESSED BY THE COUNSEL. 28. IN THE RESULT, THE GROUND RAISED IS PARTLY ALLOWED. 29. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE C.O. FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 09 NOVEMBER, 2012. SD/- SD/- (P.K. BANSAL) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PANAJI 09/11/2012 *AM/NANU* COPY TO : 36 ITA NO.165 (N)/2010 & CO NO.10(N)/2009 1 APPELLANT 2 RESPONDENT 3 CIT(A), NAGPUR 4 CIT 5 DR, ITAT, NAGPUR BY ORDER ASSISTANT REGISTRAR, ITAT, NAGPUR 37