Shri. N.D. Patel, Bangalore V. DCIT, Bangalore

ITA 841/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51300 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-09-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 25-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE
• Assessee Lawyers: V SRINIVASAN
• Keywords: Business income; Business expenditure; Bad and doubtful debts; Validity of assessment
• Section: 234B

Judgement Text

PAGE 1 OF 11 ITA NO.841/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.841/BANG/2010 (ASSESSMENT YEAR 2004-05) SHRI N D PATEL, PROP. M/S RANISHA FINANCE, #484, SHIVASHAKTI, 15 TH MAIN, RMV EXTENSION, BANGALORE-80. - APPELLANT PAN NO.ABQPP 5529C VS THE DEPUTY COMMISSIONER OF INCOME TAX (CENTRAL), CIRCLE-8(1), BANGALORE. - RESPONDENT DATE OF HEARING : 15/09/2011 DATE OF PRONOUNCEMENT : 26/09/2011 APPELLANT BY : SHRI V SRINIVASAN, C.A. RESPONDENT BY : SMT. SUSAN THOMAS JOSE, JCIT ORD ER PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF CIT(A)-II, BANGALORE DATED 26.2.2010. THE RELEVANT ASST. YEAR IS 2004-05. 2. THE ASSESSEE HAS RAISED NINE GROUNDS IN THE MEM ORANDUM OF APPEAL. THE FIRST GROUND AND THE NINTH GROUND A RE GENERAL IN NATURE AND HENCE, REQUIRE NO ADJUDICATION. PAGE 2 OF 11 ITA NO.841/BANG/2010 2 3. GROUND NO.2 RELATE TO THE VALIDITY OF ASSESSMENT ON THE ISSUE OF LIMITATION. AT THE TIME OF HEARING, THE AS SESSEES COUNSEL SUBMITTED THAT HE IS NOT PRESSING THIS GROUND. HEN CE, THIS GROUND IS DISMISSED AS NOT PRESSED. 4. GROUND NO.8 RELATE TO LEVY OF INTEREST U/S 234B AND 234C OF THE ACT. 4.1 THE LEVY, BEING MANDATORY AND CONSEQUENTIAL, THI S GROUND IS DISMISSED. 5. THE REMAINING EFFECTIVE GROUNDS, VIZ. GROUND NO .3 TO 7 READS AS FOLLOWS:- 3) WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) IS NOT JUSTIFIED IN UPHOLDING THE ADDITION O F THE INTEREST RECEIVABLE AMOUNTING TO RS.8,90,493/- UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. HE FAILED TO APPRECIATE THAT THE APPELLANT FOLLOWS THE CASH SYSTEM OF ACCOUNTING AND CONSEQUENTLY, THERE CANNOT BE INCLUDED INTEREST RECEIVABLE AS INCOME RECEIVED BY THE APPELLANT HAVING REGARD TO THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE APPELLANT AND THEREFORE, THE ADDITION SUSTAINED DESERVES TO BE DELETED. 4) WITHOUT PREJUDICE TO THE ABOVE, THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN COMPUTING THE INTEREST RECEIVABLE BY THE APPELLANT AT THE RATE OF 18% PER ANNUM, WITHOUT ANY BASIS, WHICH DESERVES TO BE DELETED. PAGE 3 OF 11 ITA NO.841/BANG/2010 3 5) THE LEARNED CIT(A) IS NOT JUSTIFIED IN SUSTAINING THE DISALLOWANCE TO THE EXTENT OF RS.72,722/- FROM OUT OF A SUM OF RS.86,604/- BEING THE TRAVELING EXPENSES INCURRED BY THE APPELLANT UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 6) THE LEARNED CIT(A) IS NOT JUSTIFIED IN SUSTAINING THE DISALLOWANCE OF RS.75,000/- OUT OF THE ROUND- SUM DISALLOWANCE OF RS.2,00,000/- MADE BY THE LEARNED AO IN RESPECT OF BUSINESS EXPENDITURE UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANTS CASE. 7) WITHOUT PREJUDICE TO THE ABOVE, THE AFORESAID DISALLOWANCES MADE BY THE LEARNED AO ARE HIGHLY EXCESSIVE AND LIABLE TO BE REDUCED SUBSTANTIALLY. 6. LET US TAKE UP THE ISSUE GROUND-WISE. GROUND N O.3 AND 4 RELATE TO THE ISSUE, WHETHER THE CIT(A) IS JUSTIFIE D IN SUSTAINING THE ADDITION OF RS.8,90,493/- ON ACCOUNT OF INTEREST RE CEIVABLE. THE FACTS IN RELATION TO THE ABOVE ISSUE ARE AS FOLLOWS :- THE ASSESSEE IS AN INDIVIDUAL, A MONEY LENDER AND INVESTOR. FOR THE CONCERNED ASST. YEAR, RETURN OF I NCOME WAS FILED DECLARING A TOTAL INCOME OF RS.18,84,923/-, WHICH I NCLUDED A SUM OF RS.2,50,000/- BEING INCOME FROM AGRICULTURE. THE C ASE WAS SELECTED FOR SCRUTINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE ACT. THE AO COMPLETED THE ASSESSMENT FIXING THE TOTAL INCOME AT RS.32,84,170/- AND THE INCOME FROM AGRICULTURE AT RS.1,20,000/- VI DE HIS ORDER DATED 28.12.2006. IN THE COURSE OF ASSESSMENT PROCEEDING S, THE AO NOTICED THAT THE ASSESSEE HAD ADVANCED FUNDS TO VARIOUS PER SONS AND IN PAGE 3 PAGE 4 OF 11 ITA NO.841/BANG/2010 4 OF THE ASSESSMENT ORDER, THE AO TABULATED THE ADVAN CED GIVEN BY THE ASSESSEE. THE AO NOTED THAT THE ASSESSEE HAD NOT DISCLOSED ANY INTEREST IN RESPECT OF LOANS ADVANCED TO THESE PERS ONS. THEREFORE, HE COMPUTED INTEREST CHARGEABLE AT 18% ON THE ADVANCES GIVEN TO THE SAID PARTIES AND ARRIVED AT A TOTAL OF RS.9,28,252/ - AS INTEREST CHARGEABLE BY THE ASSESSEE. AFTER REDUCING A SUM OF RS.37,759/- ADMITTED BY THE ASSESSEE AS INTEREST RECEIVED, THE A O MADE AN ADDITION OF RS.8,90,493/-, WHICH HE ULTIMATELY DETER MINED AS BUSINESS INCOME. 7. AGGRIEVED BY THE ADDITION SO MADE, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUT HORITY. 8. THE CIT(A) CONFIRMED THE ADDITION OF RS.8,90,49 3/- MADE BY THE AO. THE GIST OF CIT(A)S FINDINGS/OBSER VATIONS READS AS FOLLOWS:- I) AS DISCUSSED IN THE PRECEDING PARA, THE APPELLANT I S MAINTAINING MERCANTILE SYSTEM OF ACCOUNTING. HENCE, INTEREST ON LOAN ADVANCED SHOULD HAVE BEEN OFFERED ON ACCRUAL BASIS MAINLY BECAUSE THE APPELLANTS BUSINE SS IS FINANCING ACTIVITY. II) SECONDLY, INTEREST ON DEPOSITS WAS DISCLOSED ON ACC RUAL BASIS AND, HENCE, INTEREST ON LOAN AND ADVANCES ALS O SHOULD HAVE BEEN ACCOUNT6ED ON ACCRUAL BASIS. THE APPELLANT CANNOT MAINTAIN DIFFERENT METHOD OF ACCOU NT FOR DIFFERENT LOANS AND ADVANCES. III) LOAN ADVANCED TO ELECTREX INDIA LTD. (NO.5) AND KIR AN ELECTRICALS AND ENGG. WORKS (NO.8) HAVE BEEN RECEIV ED FULLY. SIMILARLY, AN AMOUNT OF RS.14,48,148/- OUT OF THE TOTAL ADVANCE OF RS.36,84,146/- HAS BEEN RECEIVED F ROM MOHAN ALUMINIUM PVT. LTD. (NO.6). THEREFORE, THE APPELLANT MUST HAVE RECEIVED INTEREST BUT NOT DISCL OSED IN THE PROFIT AND LOSS ACCOUNT. PAGE 5 OF 11 ITA NO.841/BANG/2010 5 9. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFOR E US. 10. THE LEARNED AR MORE OR LESS REITERATED THE SUB MISSIONS MADE BEFORE THE CIT(A). THE ASSESSEE HAS ALSO FU RNISHED TWO PAPER BOOKS RUNNING INTO 28 PAGES AND 56 PAGES RESPECTIVE LY CONTAINING INTER ALIA COPIES OF CASE LAWS AND STATEMENT OF AFFAIRS F OR THE ASST. YEARS 2003-04 TO 2005-06. IT WAS SUBMITTED WITH REFERENC E TO PARA 4.6 AND 4.7 OF THE IMPUGNED ORDER OF THE CIT(A) THAT TH E FDS ARE THE PERSONAL ASSET OF THE ASSESSEE AND NOT THAT OF THE PROPRIETARY CONCERN (M/S RANISHA FINANCE) RUNNING A FINANCING B USINESS. IT WAS SUBMITTED THAT INTEREST ACCRUED FROM THE PERSONAL A SSET OF THE ASSESSEE WAS DISCLOSED IN THE RETURN OF INCOME UNDE R THE HEAD INCOME FROM OTHER SOURCES WHEREAS FOR THE PROPRIETARY CONC ERN, THE INCOME WAS DISCLOSED UNDER THE HEAD BUSINESS. IT WAS SU BMITTED THAT FOR DIFFERENT SOURCE OF INCOME, THE ASSESSEE WAS ENTITL ED TO ADOPT SEPARATE SYSTEM OF ACCOUNTING PROVIDED BOTH INCOME A ND EXPENDITURE IN RESPECT TO SAME SOURCE ARE ACCOUNTED IN THE SAME MANNER. FOR THE ABOVE PROPOSITION, THE LEARNED COUNSEL FOR THE ASSE SSEE RELIED ON THE FOLLOWING JUDGEMENTS OF VARIOUS HONBLE HIGH COURTS :- J K BANKERS V CIT, U.P. & ANOTHER 94 ITR 107 (ALL.) ; CIT V E A E T SUNDARARAJ 99 ITR 226 (MAD.); CIT V SOUTH INDIA CORPORATION (AGENCIES) LTD. 293 ITR 237 (MAD.); CIT V PONDICHERRY INDUSTRIAL PROMOTION DEVELOPMENT INVESTMENT CORPORATION LTD. 254 ITR 748; & JUGGILAL KAMLAPAT UDYOG LTD. V CIT 278 ITR 52 (CALCUTTA). PAGE 6 OF 11 ITA NO.841/BANG/2010 6 10.1 WITH REFERENCE TO CIT(A)S OBSERVATION IN PAR A 4.8 OF THE IMPUGNED ORDER, IT WAS SUBMITTED THAT IN SARAL RETURN OF INCOME THERE IS NO COLUMN MENTIONING THE METHOD OF ACCOUN TING. THE COPY OF THE SARAL RETURN OF INCOME FILED BY THE ASSESSEE FOR THE CONCERNED ASST. YEAR IS PRODUCED FOR VERIFICATION. IT WAS FUR THER SUBMITTED THAT SINCE THE ASSESSEE IS CHALLENGING THE ADDITIONS MAD E BY THE AO, THE ASSESSEE DID NOT DEEM IT NECESSARY TO FILE RECTIFICA TION APPLICATION TO CORRECT THE SYSTEM OF ACCOUNTING. 10.2 IT WAS CONTENDED WITH REFERENCE TO THE OBSERV ATION OF THE CIT(A) IN PARA 4.10 (CLAUSE III) THAT THE AMOUN TS RECEIVED FROM ELECTREX INDIA LTD. AND KIRAN ELECTRICALS AND ENGG. WORKS ARE PRINCIPLE + INTEREST AND INTEREST RECEIVED IS DULY D ISCLOSED IN THE RETURN OF INCOME. 11. THE LEARNED DR ON THE OTHER HAND STRONGLY RELIE D ON THE FINDING OF THE INCOME TAX AUTHORITIES. 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE RELEVANT PROVISION, NAMELY, SECTION 145(1) AT THE MATERIAL TIME READS AS FOLLOWS:- 145(1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. PAGE 7 OF 11 ITA NO.841/BANG/2010 7 12.1 FROM THE READING OF THE ABOVE PROVISION, IT I S CLEAR THAT ASSESSEE IS GIVEN AN OPTION TO ADOPT WHATEVER METHO D OF ACCOUNTING IN RESPECT OF INCOME ASSESSABLE UNDER THE HEAD PROFIT S AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURC ES. IN THE INSTANT CASE, THE PROPRIETORS INCOME RECEIVED FROM THE PRO PRIETARY BUSINESS OF THE ASSESSEE IS ASSESSED UNDER THE HEAD BUSINES S WHEREAS THE INTEREST INCOME WHICH HE HAS RECEIVED ON FDS, WHICH IS THE PERSONAL ASSETS OF THE ASSESSEE, IS ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES. IT IS OPEN FOR THE ASSESSEE TO FOLLOW ON E SYSTEM OF ACCOUNTING IN RESPECT OF ONE SOURCE AND ANOTHER SYS TEM IN RESPECT OF THE OTHER SOURCE. THE FINANCIAL STATEMENTS FOR THE ASST. YEARS 2003- 04 TO 2005-06 ARE FURNISHED AT PAGES 7 TO 47 OF THE PAPER BOOK FILED BY THE ASSESSEE. THE ASSESSEE HAS BEEN FOLLOWING TH E CASH SYSTEM OF ACCOUNTING IN RESPECT OF MONEY LENDING BUSINESS AND IT IS CLEAR FROM THE ABOVE SAID FINANCIAL STATEMENTS FILED BY THE ASS ESSEE FOR VARIOUS YEARS. FROM THE PERUSAL OF THE SAID FINANCIAL STATE MENTS, IT IS CLEAR THAT THE ASSESSEE HAD NOT RECOGNIZED ANY ACCRUED INTEREST/EXPENDITURE IN THE SAID FINANCIAL STATEMEN TS AND IT IS ONLY ON ACTUAL EXPENSES INCURRED THAT THE ASSESSEE HAD RECO GNIZED INCOME AND EXPENDITURE IN HIS BOOKS OF ACCOUNTS. IN OTHER WOR DS, THERE IS NO INTEREST RECEIVABLE FROM PARTIES SHOWN AS AN ASSET IN THE BALANCE SHEET OF THE ASSESSEE. NEITHER ANY OUTSTANDING EXPE NSE IS SHOWN AS LIABILITIES IN THE BALANCE SHEET. 12.2 HOWEVER, WHETHER THE ASSESSEE HAD CORRECTLY R ETURNED THE INTEREST INCOME IS TO BE EXAMINED IN VIEW OF TH E OBSERVATION OF PAGE 8 OF 11 ITA NO.841/BANG/2010 8 THE CIT(A) AT PAGE 12 OF HIS IMPUGNED ORDER (REASON ING IN CLAUSE III). THE CIT(A) HAS OBSERVED THUS :- (III) LOAN ADVANCED TO ELECTREX INDIA LTD. (NO.5) AND KIRAN ELECTRICALS AND ENGG. WORKS (NO.8) HAVE BEEN RECEIVED FULLY. SIMILARLY, AN AMOUNT OF RS.14,48,148/- OUT OF THE TOTAL ADVANCE OF RS.36,84,146/- HAS BEEN RECEIVED FROM MOHAN ALUMINIUM PVT. LTD. (NO.6). THEREFORE, THE APPELLANT MUST HAVE RECEIVED INTEREST BUT NOT DISCLOSED IN THE PROFIT AND LOSS ACCOUNT. IN LIGHT OF ABOVE DOUBT RAISED BY THE CIT(A), THE MA TTER IS REMITTED TO THE FILE OF THE AO, WHO SHALL VERIFY THE FOLLOWIN G, NAMELY, - 1. THE SYSTEM OF ACCOUNTING FOLLOWING BY THE ASSESSEE FOR THE PROPRIETARY CONCERN M/S RANISHA FINANCE; 2. IF IT IS FOUND THAT M/S RANISHA FINANCE IS FOLLOWIN G CASH SYSTEM OF ACCOUNTING, THE AO SHALL BRING TO TA X ONLY THE INTEREST INCOME ACTUALLY RECEIVED BY THE PROPRIETARY BUSINESS. 12.3 IN THE RESULT, GROUND NOS. 3 AND 4 ARE ALLOWE D FOR STATISTICAL PURPOSES. 13. GROUND NOS. 5, 6 AND 7 RELATE TO THE ISSUE OF DISALLOWANCES OF TRAVELLING EXPENSES AND BUSINESS E XPENDITURE CLAIMED BY THE ASSESSEE. 13.1 BRIEFLY STATED THE FACTS IN RELATION TO GROUND NOS.5, 6 AND 7 ARE AS FOLLOWS:- PAGE 9 OF 11 ITA NO.841/BANG/2010 9 IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD CLAIMED RS.4,46,583/- AS AN EXPENDITURE TO EARN THE INTEREST INCOME. OUT OF TH E ABOVE SAID EXPENDITURE OF RS.4,46,583/-, A SUM OF RS.1,16,024/ - WAS UNDER THE HEAD TRAVELLING EXPENSES. OUT OF RS.1,16,024/-, IT WAS SEEN BY THE AO THAT THE ASSESSEE HAD DEBITED APPROXIMATELY AN AM OUNT OF RS.90,000/- TOWARDS AIR TICKET CHARGES TO PLACES LI KE MUMBAI, BARODA AND AHMEDABAD. ACCORDING TO THE AO, SINCE THE ASSE SSEE HAS NO BUSINESS CONNECTION IN THESE PLACES, THE AIR TICKET CHARGES DEBITED UNDER THE HEAD TRAVELLING EXPENSES WERE NOT INCID ENTAL AND CONNECTED TO BUSINESS ACTIVITIES OF THE ASSESSEE AND THEREFOR E, THE AMOUNT OF RS.90,000/- WAS DISALLOWED. 13.2 OUT OF THE REMAINING EXPENDITURE OF RS.3,30,5 59/- (RS.4,46,583 RS.1,16,024), WHICH WAS DEBITED TO P &L ACCOUNT OF M/S RANISHA FINANCE, THE AO WAS OF THE VIEW THAT THE EX PENDITURE CLAIMED WAS ON THE HIGHER SIDE AND ACCORDINGLY, DISALLOWED A ROUND SUM AMOUNT OF RS.2,00,000/-. 13.3 ON FURTHER APPEAL BEFORE THE FIRST APPELLATE AUTHORITY WITH REFERENCE TO TRAVELLING EXPENSES, THE DISALLOW ANCE WAS RESTRICTED TO RS.72,722/- INSTEAD OF RS.90,000/- MADE BY THE AO . THE REASONING OF THE CIT(A) IS GIVEN AT PARA 5.4 OF HIS IMPUGNED ORDER. SIMILARLY, THE DISALLOWANCE OF RS.2 LAKHS WAS REDUCE D TO RS.75,000/- IN HIS IMPUGNED ORDER VIDE PARA 6.2. 13.4 THE ASSESSEE, BEING AGGRIEVED, IS IN APPEAL B EFORE US. PAGE 10 OF 11 ITA NO.841/BANG/2010 10 13.5 THE SUBMISSIONS MADE BEFORE THE INCOME TAX AU THORITIES WERE REITERATED BEFORE US BY THE LEARNED AR. 13.6 ON THE OTHER HAND, THE LEARNED DR RELIED ON T HE FINDINGS OF THE CIT(A). 13.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD. THE ASSESSEE HAS NOT PRODUCED ANY MATERIAL TO DISPEL/ASSAIL THE FINDINGS OF THE CIT(A). THE FIRS T APPELLATE AUTHORITY HAS GIVEN COGENT REASON FOR SUSTAINING THE DISALLOW ANCE OF RS.72,722/- WITH REFERENCE TO TRAVELLING EXPENSES CLAIMED BY THE ASSESSEE. SIMILARLY, THE EXPENDITURE TO THE EXTENT OF RS.75,00 0/- WAS DISALLOWED BY THE CIT(A) FOR THE REASON THAT NO DETA ILS WITH REGARD TO SUNDRY EXPENSES/BAD DEBTS/SALE PROMOTION HAS BEEN PR ODUCED BEFORE THE INCOME TAX AUTHORITIES. THE CIT(A) HAS ALSO TA KEN INTO CONSIDERATION THE BUSINESS ACTIVITIES DURING THE PR EVIOUS YEARS AND FOUND THAT THE EXPENSES SEEMS TO BE EXCESSIVE AND A CCORDINGLY, RESTRICTED THE DISALLOWANCE TO THE EXTENT OF RS.75, 000/-. THIS DISALLOWANCE SUSTAINED BY THE CIT(A) IS FOR COGENT R EASONS AND THE ASSESSEE ON HIS PART HAS NOT PRODUCED ANY SHRED OF E VIDENCE TO OVERTURN THE FINDINGS OF THE CIT(A). THEREFORE, TH E ORDER OF THE CIT(A) WITH REFERENCE TO DISALLOWANCES TO THE EXTEN T OF RS.72,722/- AND RS.75,000/- ARE UPHELD. 13.8 IN THE RESULT, GROUND NOS. 5, 6 AND 7 ARE DIS MISSED. PAGE 11 OF 11 ITA NO.841/BANG/2010 11 THE ORDER PRONOUNCED ON THE 26 TH DAY OF SEPTEMBER, 2011 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.