ITO, Trichur v. Shri V.J. Varghese, Trichur

ITSSA 152/COCH/2005 | misc
Pronouncement Date: 29-10-2010

Appeal Details

RSA Number 15221916 RSA 2005
Assessee PAN TOBER2010G
Bench Cochin
Appeal Number ITSSA 152/COCH/2005
Duration Of Justice 5 year(s) 3 month(s) 7 day(s)
Appellant ITO, Trichur
Respondent Shri V.J. Varghese, Trichur
Appeal Type Income Tax (Search & Seizure) Appeal
Pronouncement Date 29-10-2010
Appeal Filed By Department
Bench Allotted DB
Tribunal Order Date 29-10-2010
Date Of Final Hearing 01-09-2010
Next Hearing Date 01-09-2010
Assessment Year misc
Appeal Filed On 22-07-2005
Judgment Text
IN THE INCOME TAX APPELLAT E TRIBUNAL COCHIN BEN CH COCHIN BEFORE S/SHRI N.VIJAYAKUMARAN JM AND SANJAY AR ORA AM IT(SS)A 152/COCH/2005 BLOCK PERIOD : 1.4.1988 TO 16.6.1998 THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-2(1) RANGE- 2 TRICHUR. [PAN: NC/V-5] VS. SHRI V.J.VARGHESE VATTAPARAMBIL HOUSE CHIYYARAM P.O. THRISSUR. (REVENUE-APPELLANT) (ASSESSEE-RESPONDENT) REVENUE BY SHRI S.C.SONKAR CIT-DR ASSESSEE BY SHRI K.R.SUDHAKARAN PILLAI ADV. O R D E R PER SANJAY ARORA AM: THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-V KOCHI (`CIT(A) FOR SHORT) DATED 4.3.2005 PARTLY ALLOWING THE ASSESSEES APPEAL AGAINST THE BLOCK ASSESSMENT UNDE R SECTION 158BC R.W.S. 143(3) OF THE INCOME-TAX ACT 1961 ('THE ACT' HEREINAFTER) VIDE O RDER DATED 28/6/2000 FOR THE BLOCK PERIOD 1.4.1988 TO 16.6.1998. 2. A MINOR DELAY OF 5 DAYS ATTENDS THE FILING OF THE INSTANT APPEAL. THE SAME IS ACCOMPANIED BY A CONDONATION PETITION BEING A SWOR N AFFIDAVIT BY THE CONCERNED ASSESSING OFFICER (A.O.) EXPLAINING THE DELAY AS HA VING BEEN CAUSED DESPITE EXERCISE OF DUE DILIGENCE. ON GOING THROUGH THE SAME AND HEARI NG THE PARTIES IN THE MATTER WE ARE SATISFIED THAT IT IS A FIT CASE FOR CONDONATION OF THE DELAY AND THE HEARING OF THE APPEAL WAS PROCEEDED WITH. THE APPEAL RAISES SEVERAL ISSU ES EACH OF WHICH WE SHALL TAKE UP IN SERIATIM. BEFORE WE PROCEED TO DISCUSS THE DIFFERE NT ISSUES ARISING IN THE APPEAL A RECOUNT OF THE FACTS WOULD BE RELEVANT. THE ASSESS EE IS A MONEY LENDER ALSO GETTING SALARY FROM ONE M/S. SELECT DISTRIBUTORS. HE WAS SUBJECT TO SEARCH AT HIS RESIDENCE U/S. 132 OF THE ACT ON 17.6.1998 AND MATERIAL EVIDENCIN G UNDISCLOSED INCOME FOUND AND ITA.NO. 152/COCH./2005 2 SEIZED THERE-FROM. THE ASSESSEE WAS FOUND TO BE NO T FILING HIS RETURNS OF INCOME REGULARLY NOR KEEPING ANY BOOKS OF ACCOUNT FOR HIS BUSINESS. ACCORDINGLY THE ENTIRE INCOME FOR THE BLOCK PERIOD AS DETERMINED WAS ASSES SED AS THE UNDISCLOSED INCOME. 3. COMING TO THE FIRST ISSUE THE ASSESSEE IN E XPLAINING THE NATURE AND SOURCE OF THE SUMS INVESTED IN VARIOUS ADVANCES FOR HIS MONEY LEN DING BUSINESS AND/OR BUSINESS INVESTMENTS FURNISHED THE NAMES OF THREE CREDITORS FROM WHOM AN AGGREGATE AMOUNT OF RS. 1 90 000/- WAS CLAIMED TO HAVE BEEN RECEIVED IN CASH WHICH WERE CONSIDERED AS NOT SATISFACTORILY EXPLAINED BY THE A.O. WHILE CONSIDE RED SO BY THE LD. CIT(A) LEADING TO THE PRESENT APPEAL BY THE REVENUE. THE PARTICULARS ARE AS UNDER: NAME OF THE CREDITOR AMOUNT IN RS. CHANDRIKA : 40 000/- BABY TONY : 50 000/- SUBRAMANIAN : 1 00 000/- THE MATTER BEING FACTUAL AND WHICH WOULD THEREFORE VARY FROM CASE TO CASE; THE SAME SHALL HAVE TO BE EXAMINED INDIVIDUALLY FOR EACH CRE DITOR. THE FACTS QUA THE FIRST CREDIT ARE THAT SMT. CHANDRIKA IS WORKING AS A LIC AGENT EARN ING AT AN AVERAGE AN ANNUAL COMMISSION OF RS. 35 000/-. HER HUSBAND SHRI CHAN DRAN IS ENGAGED IN SUPPLYING ARTICLES TO VARIOUS SHOPS. THE SOURCE OF FUNDS FOR ADVANCE TO THE ASSESSEE IS EXPLAINED TO BE A LOAN FROM NEDUPUZHA SERVICE CO-OPERATIVE BANK. THE CREDITOR WAS SUMMONED BY THE AO U/S. 131 OF THE ACT WHEREAT SHE CONFIRMED TH E CONTENTS OF HER CONFIRMATION LETTER WHICH ALSO STATED THAT SHE WAS EARNING INTEREST AT THE RATE OF 24% ON HER DEPOSIT WITH THE ASSESSEE WHILE PAYING 18% ON THE AMOUNT AVAILED AS LOAN. THE AO HOWEVER WAS OF THE VIEW THAT THE LOAN FROM THE BANK HAVING BEEN AVAILE D FOR BUSINESS PURPOSES THE CREDITOR WAS ONLY A NAME LENDER. FURTHER NO SECURITY OR OT HER DOCUMENTS STOOD EXECUTED BY THE ASSESSEE TOWARD THE TRANSACTION SO THAT BOTH THE GE NUINENESS OF THE TRANSACTION AND THE CAPACITY STOOD NOT PROVED. THE LD. CIT(A) FOUND TH E MATERIAL AS SUFFICIENT TO HOLD THE PARAMETERS OF SECTION 68 AS HAVING BEEN SATISFIED O R THE ONUS ON THE ASSESSEE TO EXPLAIN THE CREDIT AS DISCHARGED. ITA.NO. 152/COCH./2005 3 THE SECOND CREDIT IS FOR RS. 50 000/- IN THE NAME OF ONE BABY TONY WIFE OF SH. TONY V.JOSEPH ON 1.4.1995. THE SOURCE OF FUNDS WAS EXPLAINED TO BE A LOAN OF RS. 50 000/- FROM KURIACHIRA SERVICE CO-OPERATIVE BANK. THOUGH THE COPY OF THE LOAN ACCOUNT WAS NOT SUBMITTED A CERTIFICATE FROM THE B ANK MENTIONING OF THE LOAN BEING GRANTED DURING F.Y. 1994-95 WAS FURNISHED. THE CRE DITOR WAS ALSO NOT PRODUCED FOR CROSS- EXAMINATION BY THE AO WHO WAS OF THE VIEW THAT BOT H THE GENUINENESS AND THE CREDITWORTHINESS STAND NOT SATISFACTORILY PROVED IN VIEW OF THE NON-PRODUCTION OF THE BANK ACCOUNT AS WELL AS THE CREDITOR WITH EVEN THE DATE OF AVAILING THE LOAN BEING NOT KNOWN SO THAT WHAT HAPPENED TO THE LOAN AMOUNT DURING THE INTERREGNUM IS ALSO NOT KNOWN. THE LD. CIT(A) FOUND THE LOAN TO HAVE BEEN TAKEN ON 19. 12.1994 SO THAT THE DOUBT THAT PREVAILED WITH THE AO WAS DUE TO THE INTERIM PERIOD OF 4 MONTHS. THAT HOWEVER WAS NOT A CRUCIAL FACTOR TO HIS MIND WHERE THE CREDIT I S CONFIRMED - PER THE CONFIRMATION LETTER IN THE CASE - WHICH FURTHER SPEAKS OF CHARGING INTE REST AT THE RATE OF 24% SO THAT THERE WAS NO REASON TO INFER THE SAME AS NOT GENUINE. THE THIRD CREDIT IS STATED TO BE A LOAN FR OM ONE SHRI SUBRAMANIAN IN THE SUM OF RS. 1 LAKH TAKEN ON 4.11.1995. THE SOURCE OF THE SAME AS PER THE CONFIRMATION LETTER FILED IS A LOAN OF RS. 2 LAKHS SANCTIONED BY ADAT FARMERS S ERVICE CO-OPERATIVE BANK. THE ASSESSEE HOWEVER COULD NOT FURNISH THE DATE OF WI THDRAWAL FROM THE BANK SO THAT THE SOURCE REMAINED UNPROVED. THE DETAILS OF RE-PAYMEN T EFFECTED TO THE BANK ALONG WITH THE SOURCE THEREOF WAS NOT FURNISHED. UNDER THE CI RCUMSTANCES THE SAID LOAN WAS CONSIDERED BY THE A.O. TO BE UNEXPLAINED. AGAIN IN VIEW OF THE CONFIRMATION LETTER FILED THE LD. CIT(A) FOUND NO REASON TO INFER NON-GENUINE NESS WHICH ALSO MENTIONED OF INTEREST @ 30% BEING CHARGED ON THE SAID CREDIT; TH E AO HAVING NOT BROUGHT ANY MATERIAL ON RECORD TO SUPPORT THE SAID INFERENCE WITH THE P RIMARY ONUS ON THE ASSESSEE BEING DISCHARGED BY IT. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERI AL ON RECORD. SMT. CHANDRIKA THE COPY OF THE BANK PASS BOOK STANDS FURNISHED TO THE AO. THE WITHDRAWALS FROM THE BANK AS IT APPEARS ARE IN CASH AND THE DATE/S THE REOF APPARENTLY MATCH WITH THE DATE OF THE LOAN ADVANCED TO THE ASSESSEE. HOWEVER NOT MU CH CREDENCE COULD BE PLACED ON THIS ITA.NO. 152/COCH./2005 4 ASPECT AS THE ASSESSEE IS NOT MAINTAINING ANY BOOK S OF ACCOUNT SO THAT THE DATES OF CREDITS MAY AS WELL HAVE BEEN DERIVED FROM THAT OF THE LOAN WITHDRAWALS. IN OTHER WORDS THIS IS A NEUTRAL FACT AND COULD NOT BE TAKEN AS A POSITIVE EVIDENCE OF ESTABLISHING THE FACTUM OF LOAN. THE SECOND ASPECT IS THAT THE LOAN FROM THE BANK THE OSTENSIBLE SOURCE OF THE FUNDS OR THE IMPUGNED CREDIT IS FOR BUSINESS P URPOSES. THIS IS UNUSUAL PARTICULARLY CONSIDERING THAT MONEY LENDING; THE CREDITOR BEING ONLY AWARE THAT THE MONEY LENT WOULD NOT BE UTILIZED BY THE ASSESSEE FOR HIS OWN BUSINES S BUT FURTHER LENT ON A STILL HIGHER RATE OF INTEREST IS HIGHLY RISKY. THE ASSESSEE AS WELL AS THE LD. CIT(A) IN RELATION TO THE ASSESSEES CLAIM FOR BAD DEBTS ADMIT OF MONEY LEND ING BEING A HIGH RISK BUSINESS WHICH IS EVEN OTHERWISE A MATTER OF COMMON KNOWLEDGE. THI S IS AS ONLY THOSE WOULD APPROACH THE MONEY LENDER TO WHOM FUNDS ARE NOT ACCESSIBLE T HROUGH THE NORMAL CHANNELS. THAT APART AS REASONS OTHER THAN THAT COULD ALSO OBTAIN AS OF UNDERTAKING UNACCOUNTED BUSINESS BY THE BORROWER THE EXORBITANT RATE OF IN TEREST ESTABLISHES OF IT BEING ATTENDED WITH HIGH RISK. THE SOURCE OF FUNDS FOR THE REPAYM ENT OF THE BANK LOAN IS ANOTHER FACTOR WHICH COULD THROW LIGHT ON THE GENUINENESS OF THE T RANSACTION AND WHICH ASPECT AS IT APPEARS HAS NOT BEEN EXAMINED. THE CREDITOR HAS C LAIMED OF BEING PAID INTEREST @ 24% P.A. BY THE ASSESSEE AND WHICH HAS ALSO BEEN DISAL LOWED BY THE AO IN VIEW OF HIS NON- ACCEPTANCE OF THE CREDIT. THE SAME WOULD OF COURSE BE ONLY CONSEQUENTIAL AS THE LIABILITY TO INTEREST ARISES ONLY ON A GENUINE LOAN. EVEN SO THE QUESTION THAT ARISES IS THAT WOULD ANYONE I.E. EVEN A PERSON OF MEAGRE RESOURCES AS THE CREDITOR IS UNDERTAKE DISPROPORTIONATE RISK BY UNDERTAKING FINANCIAL INTE RMEDIATION HIMSELF FOR A RETURN OF RS. 2400/- P.A. OR RS. 200/- P.M. I.E. EVEN ASSUMING TIMELY PAYMENTS THROUGHOUT. WE DO NOT THINK SO. RATHER PRUDENCE WOULD DICTATE THAT SUCH A PERSON WOULD BE MORE RISK AVERSE AS ANY FAILURE TO HONOUR ITS OBLIGATIONS TO THE BAN K WOULD WEIGH HEAVY ON HIM. A PERSON BARELY MANAGING TO MEET THE FINANCIAL NEEDS OF HIS FAMILY AS THE INCOME LEVEL INDICATES WOULD SCARCELY VENTURE IN SUCH A FINANCIAL SCHEME. WHEN DIRECT EVIDENCE IS NOT FORTHCOMING AS IN THE INSTANT CASE THE COURT HAS TO ASSUME A CONDUCT THAT ACCORDS WITH THE PROBABILITIES OF HUMAN BEHAVIOUR OR AS PER THE PREPONDERANCE OF PROBABILITIES. WE MAY CLARIFY THAT THERE IS NOTHING TO SHOW THAT THE ALLEGED CREDITOR WAS BEING PAID INTEREST AT REGULAR INTERVALS BY THE ASSESSEE AND HER NAME SURFACED ONLY IN VIEW OF THE ASSESSEES EXPLANATION WITH REGARD TO THE NATURE AND SOURCE OF THE FUNDS AVAILABLE WITH HIM FOR HIS ITA.NO. 152/COCH./2005 5 MONEY LENDING BUSINESS. ALSO THERE IS NO EVIDENCE TO SHOW THAT SHE HAD BEEN RETURNING HER INTEREST INCOME GROSS OR NET TO THE REVENUE. THIS IS AS WHERE ANY SUCH EVIDENCE IS AVAILABLE THE SAME WOULD TAKE PRECEDENCE OVER SUCH CIRCUMSTANTIAL EVIDENCES A REASONABLE INFERENCE FROM THE TOTALITY OF WHICH IS TO BE DRAWN AS TO THE GENUINENESS OF TRANSACTION. TRUE SHE HAS BEEN IN CONTRADISTINCT ION TO THE OTHER TWO CREDITORS PRODUCED. BUT IF AT ALL IT ONLY PROVES THE TRUTH OF THE ASS ESSEES STATEMENT OF HER BEING A FAMILY FRIEND; NOTHING MORE AND NOTHING LESS. HER NAME NO T APPEARING IN THE ASSESSEES RECORDS WOULD HAVE BEEN FURNISHED IN EXPLANATION ONLY ON SO ME BASIS. UNDER THE CIRCUMSTANCES WE DO NOT THINK THAT THE ASSESSEE HAS BEEN ABLE TO SATISFACTORILY PROVE THE NATURE AND SOURCE OF THE FUNDS WITH IT TO THE EXTENT ASCRIBED TO SMT. CHANDRIKA AND THE REVENUES INFERENCE THAT SHE IS ONLY A NAME LENDER IS NOT WIT HOUT MERIT. WE MAY CLARIFY HERE THAT THE ONUS TO PROVE HIS CASE IS SQUARELY ON THE ASSES SEE AND IT IS NOT THAT THE REVENUE TO DISCREDIT THE ASSESSEES EXPLANATION IS CHARGED WI TH THE OBLIGATION TO ESTABLISH SO; ALL THAT IS SUFFICIENT FOR THE PURPOSE IS THAT THE ASSESSEE HAS NOT BE ABLE TO LEAD EVIDENCE FROM WHICH A REASONABLE SATISFACTION ON THE MERITS OF HI S EXPLANATION COULD BE ARRIVED AT. WE DECIDE ACCORDINGLY. SMT. BABY TONY THE FIRST THING THAT WE OBSERVE IS THAT THE COPY OF THE BANK LOAN ACCOUNT I.E. THE STATED SOURCE OF FUNDS STANDS NOT FURNISHED BEFORE THE AO . IT IS NOT CLEAR THEREFORE AS TO WHAT IS THE BASIS OF THE DATE OF AVAILMENT OF THE LOAN A S STATED BY THE LD. CIT(A); THE AO CLEARLY STATING OF THE SAID DATE BEING NOT FURNISHED. SECO NDLY THE CERTIFICATE BY THE BANK WHICH WAS SUBMITTED TO THE AO WOULD ONLY BE BASED ON BANK RECORDS SO THAT THE NON-FURNISHING OF THE LOAN ACCOUNT STATEMENT IS PUZZLING. THE SAI D ACCOUNT WOULD APART FROM CLARIFYING THE DATE OF AVAILMENT OF LOAN ALSO CLARIFY ITS PUR POSE AS ALSO IF THE SAME WAS AVAILED IN CASH OR NOT I.E. AT ONCE THROW SOME LIGHT ON THE ASPECT OF CAPACITY AND GENUINENESS OF THE CREDIT UNDER REFERENCE. THIS IS AS IT IS THE AD MITTED POSITION (IN ALL THE THREE CASES) THAT THE CREDITOR DID NOT HAVE RESOURCES OF HIS OWN TO L END THEM TO THE ASSESSEE AND HIS CAPACITY IS BEING SOUGHT TO BE ESTABLISHED WITH REF ERENCE TO A LOAN ASSUMED BY THE CREDITOR WHICH WOULD ONLY BE FOR SOME DEFINITE PUR POSE. THE SOURCE OF FUNDS FOR THE REPAYMENT OF THE LOAN IF ANY ALSO BECOMES A RELEV ANT CONSIDERATION I.E. ACCEPTING THAT ITA.NO. 152/COCH./2005 6 THE LOAN WAS INDEED DIVERTED THE EXTENT OF WHICH I S ALSO RELEVANT. THESE ARE AMONG THE QUESTIONS THAT ARISE FROM THE ASSESSEES EXPLANATIO N WHICH COULD ONLY BE ANSWERED BY THE ALLEGED CREDITOR AND ENABLE FORMATION OF AN OBJECT IVE VIEW AS TO THE CAPACITY AND GENUINENESS OF THE CREDIT. UNDER THE CIRCUMSTANCES; IT IS DIFFICULT TO SAY AS THAT THE GENUINENESS STANDS ESTABLISHED. IT NEEDS TO BE BOR NE IN MIND THAT DIVERSION OF BANK LOANS FOR MONEY LENDING PURPOSE WHICH IS A HIGH RISK BUS INESS AND THOUGH NOT POSSIBLE IS NOT NORMAL OR A REGULAR FEATURE AND QUITE UNUSUAL. AS SUCH SOME PRIMA FACIE SATISFACTION AS TO THE GENUINENESS WOULD REQUIRE ADEQUATE MATERIAL WHICH IS MISSING IN THE INSTANT CASE. WITH REGARD TO THE CHARGING OF INTEREST OUR OBSERV ATIONS IN THE CASE OF SMT.CHANDRIKA INCLUDING WITH REGARD TO THE RECORDS BEING MAINTAIN ED AND FOUND WITH THE ASSESSEE WOULD BE APPLICABLE HERE AS WELL. WE ARE THEREFORE UNAB LE TO AGREE WITH THE FINDING OF THE LD. CIT(A) AND RESTORE THE ORDER OF THE AO ON THIS CRED IT. SH. SUBRAMANIAN WE FIND THAT THE PRIMARY REASON FOR THE AO IN NON-ACCEPTING THE CREDIT WAS THE ABSENCE OF THE WITHDRAWAL DATE FROM THE BANK SO THA T THE SOURCE OF THE MAIN CREDIT COULD NOT BE SAID TO BE ESTABLISHED. THE SAME IS QUITE CLEARLY A VERY VALID REASON. THIS IS AS THE MATTER COULD BE PROCEEDED WITH ONLY BE WHEN THE PRIMARY SOURCE WHICH IS THE NEXUS BETWEEN THE ALLEGED CREDITOR AND THE CREDIT IS EST ABLISHED CLEARLY AND THE BANK PASS BOOK IS A PRIMARY MATERIAL IN THIS REGARD AND WHICH HAS NOT BEEN ADMITTEDLY FURNISHED BEFORE THE AO. THE SAME WOULD ALSO CLARIFY WITH REGARD TO THE DETAILS OF THE RE-PAYMENT IF ANY OF THE SAID LOAN WHICH IS A RELEVANT CONSIDERATION IN THESE CASES; THE LOANS HAVING BEEN GRANTED FOR SOME DEFINED PURPOSE WHICH WOULD ALSO BECOME THE SOURCE OF THE GENERATION OF FUNDS FOR THEIR REPAYMENT. OUR OTHER OBSERVATION S ARE ALSO THE SAME AS IN RESPECT OF THE OTHER TWO CREDITS WITH THERE BEING NO PRODUCTION O F THE CREDITOR AS IN THE CASE OF BABY TONY. WE ARE THEREFORE UNABLE TO TAKE ANY DIFFERENT VIEW OF THE MATTER AND HOLD THIS CREDIT AS ALSO NOT PROVED. BEFORE PARTING WITH THE MATTER WE MAY ALSO CL ARIFY THAT IT IS NOT A QUESTION OF THE AO BRINGING ANY ADVERSE MATERIAL ON RECORD. THE BRIEF OF THE AO IS NOT TO DISPROVE THE MATERIALS FURNISHED BEFORE HIM. IT IS ONLY WHERE HE FOR VALID REASONS ENTERTAINS DOUBTS AS ITA.NO. 152/COCH./2005 7 TO THE VERACITY OF MATERIALS FURNISHED BEFORE HIM T HAT HE MAY PROCEED TO VERIFY THE SAME IN THE MANNER HE DEEMS FIT. THE QUESTION IS WHETHER THE ASSESSEE BEING CHARGED WITH THE ONUS TO ESTABLISH THE CREDITS ON THE THREE PARAMETE RS HAS BEEN ABLE TO DO SO I.E. LEAD EVIDENCE FROM WHICH A REASONABLE SATISFACTION AS TO THE NATURE AND SOURCE OF THE CREDITS CAN BE DERIVED. THE MATTER OF PURELY ONE OF FACTUAL INFERENCE WHICH IS TO BE DRAWN FROM THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES. IT IS THIS INFERENCE OF THE AO WHICH WE HAVE FOUND NOT INFIRM TO EXAMINE WHICH ONLY IS THE MAND ATE OF ANY APPELLATE AUTHORITY. THE LAW IN THE MATTER IS WELL SETTLED AND NEEDS NO DILA TION. THE SECOND ISSUE OF THE DISALLOWANCE OF INTEREST ON THESE CREDITS AS AFORE MENTIONED IS ONLY CONSEQUENTIAL THOUGH FOR THE SAKE OF REFERENCE ONE MAY ADVERT TO THE DECISION IN THE CASE OF GOVINDARAJULU MUDALIAR V. CIT (1958) 34 ITR 807 (SC). WE DECIDE ACCORDINGLY. 5. THE NEXT ISSUE AGITATED PER ITS GROUND NOS. 6 & 7 BY THE REVENUE IS WITH REGARD TO THE DELETION OF INTEREST INCOME AT RS. 1 60 000/ - ON AMOUNTS ADVANCED BY THE ASSESSEE DURING THE COURSE OF HIS MONEY LENDING BUSINESS. E XAMINING THE DIFFERENT ACCOUNTS IT WAS FOUND BY THE AO THAT THE ASSESSEE DID NOT INCL UDE THE INTEREST ON CERTAIN ADVANCES ON THE BASIS THAT THE RECOVERY OF THE PRINCIPAL AMOUNT WAS IN JEOPARDY. THERE WAS NO RECOVERY OF INTEREST AND NO SUITS HAVE BEEN FILED. THE AO HOWEVER WAS NOT CONVINCED AS FIRSTLY THE ASSESSEE WAS PURSUING LEGAL RECOUR SE IN THE MATTER AND SECONDLY HAD FILED SUITS AT ENHANCED AMOUNTS I.E. INCLUSIVE OF EXPENS ES AND INTEREST. AS SUCH THERE WAS NO QUESTION OF NON-ACCRUAL OF INTEREST TILL AT LEAST T HE DATE OF FILING OF THE SUIT WHICH HE WORKED OUT AT RS. 60 000/- ESTIMATING THE SAME AT RS. 1 LAKH ON OTHER I.E. OTHER THAN SUIT FILED ACCOUNTS AND EFFECTED A TOTAL ADDITION OF RS . 1 60 000/-. IN HIS VIEW THE PRINCIPLE AS LAID DOWN IN THE CASE OF CIT VS. COATS INDIA LTD . 232 ITR 324 (SC) WOULD APPLY SO THAT A HONEST JUDGMENT AS TO WHETHER A DEBT IS RECO VERABLE OR NOT WOULD HAVE TO BE MADE. IT IS ONLY WHERE THE RECOVERY BECOMES IMPOSSIBLE A ND NOT FOR THE REASON THAT IT POSES CERTAIN DIFFICULTIES OR HURDLES THAT THE ASSESSEE M AY HAVE TO FACE FOR RECOVERY THAT CAN LEAD TO A SUCCESSFUL CLAIM FOR BAD DEBT. THE LD. C IT(A) WAS OF THE VIEW THAT FIRSTLY THE SEARCH DID NOT REVEAL ANY BASIS FOR THE WORKING OF SUCH INTEREST. SECONDLY THE PREROGATIVE UNDER SECTION 145 IS ON THE ASSESSEE WHO COULD CHOO SE HIS METHOD OF ACCOUNTING SO THAT WHERE HE ADOPTS CASH METHOD OF ACCOUNTING THE ACCR UAL METHOD COULD NOT BE IMPOSED BY ITA.NO. 152/COCH./2005 8 THE ASSESSING AUTHORITY. THIRDLY THE CONCEPT OF RE AL INCOME AS EXPLAINED IN THE CASE OF UCO BANK VS. CIT (1999) 237 ITR 889 (SC) WOULD HOLD AND THE PRINCI PLE OF ACCRUAL WOULD NOT BE APPLIED IN DISREGARD TO THE FACTUAL S ITUATION OBTAINING. HE ACCORDINGLY DELETED THE ENTIRE ADDITION OF RS. 1 60 000/-. 6. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. WE FIRSTLY FIND THAT THERE HAS BEEN NO DISCUSSION WHATSOEVER IN THE ASSESSMENT ORDER WITH REGARD TO THE ADDITION OF RS. 1 LAKH I.E. IN RESPECT OF INTERES T ACCRUED ON OTHER ADVANCES. THAT BEING THE CASE IT IS DIFFICULT TO SEE AS TO HOW THE ADDI TION COULD BE SUSTAINED. AS REGARDS THE BALANCE RS. 60 000/- I.E. IN RESPECT OF FOUR SUIT S FILED ACCOUNTS WE ARE NOT IN AGREEMENT WITH THE LD. CIT(A) THAT THERE WAS NO MATERIAL FOUN D IN SEARCH WITH REGARD TO THE SAID INCOME OR OF IT HAVING FOLLOWED THE CASH METHOD OF ACCOUNTING. THIS IS FOR THE REASON THAT THE AMOUNT ADVANCED THE PERIOD OF INTEREST AS WELL AS ITS RATE STOOD FOUND BY THE AO ONLY FROM THE DETAILED RECORDS MAINTAINED BY THE AS SESSEE IN RESPECT OF HIS UNDISCLOSED MONEY LENDING BUSINESS. IN FACT AS CLARIFIED BY TH E APEX COURT IN CIT V. CHIDAMBARAM CHETTIAR (1971) 80 467 (SC) THE METHOD OF ACCOUNTING IS WH OLLY IRRELEVANT WHEN THE INCOME (INTEREST) IS NOT BEING ACCOUNTED FOR AT ALL ; THE ASSESSEE IN THE PRESENT CASE NOT MAINTAINING ANY ACCOUNTS SO THAT HIS ENTIRE BUSINES S INCOME IS UNACCOUNTED. SO HOWEVER WE ARE IN FULL AGREEMENT THAT THE CON CEPT OF REAL INCOME COULD NOT BE THROWN TO WINDS WHILE DETERMINING INCOME BE IT DIS CLOSED OR UNDISCLOSED AND IT HAS TO BE DETERMINED ON THE SAME BASIS AND APPLYING THE S AME PRINCIPLES AS FOR DISCLOSED INCOME; THE ONLY DIFFERENCE BEING THAT ONE STANDS D ISCLOSED TO THE REVENUE AND OTHER NOT. WHEN THE RECOVERY OF THE PRINCIPAL IS IN DOUBT SO THAT THE ASSESSEE IS CONSTRAINED TO TAKE LEGAL STEPS THE INTEREST CANNOT BE SAID TO HAVE AC CRUED. THE FILING OF THE SUIT ON AN ADVANCE AMOUNT I.E. INCLUSIVE OF AN INTEREST WOU LD NOT AGAIN CREATE INCOME WHERE THERE IS NONE. UNCERTAINTY OF REALIZATION IS A SIGNIFICAN T FACTOR OF COURSE RECKONED HONESTLY TO DECIDE ON THE ACCRUAL OF AN INCOME. WHERE SUIT FILE D THE SAME (REALIZATION) IS FIRSTLY IS SUBJECT TO ADJUDICATION BY THE COURT OF LAW AND SE CONDLY GRANTING SUCCESS IN PRACTICAL TERMS A TARDY AND CUMBERSOME PROCESS. AS SUCH WHE RE THE ASSESSEE HAS LED EVIDENCES TO SHOW THAT THE RECOVERY WAS NOT FORTHCOMING EXERCIS ING LEGAL ACTION NO INCOME COULD BE SAID TO HAVE ACCRUED. ONLY BECAUSE THE INCOME FROM THE TRANSACTIONS WAS NOT DISCLOSED TO ITA.NO. 152/COCH./2005 9 THE REVENUE WOULD NOT IN ANY MANNER ENTITLE IT TO B RING TO TAX NON-EXISTENT INCOME. WE FOR THE FOREGOING REASONS UPHOLD THE IMPUGNED ON T HESE GROUNDS. 7. THE LAST ISSUE IN THIS APPEAL (GROUND NOS. 8 9 & 10) IS WITH REGARD TO THE DELETION OF THE DISALLOWANCE OF THE ASSESSEES CLAIM FOR BAD DE BTS TO THE EXTENT OF RS. 495710/-. THE ASSESSEE MADE A CLAIM FOR BAD DEBTS AT A TOTAL OF R S. 11 73 645/- FOR THE DIFFERENT ASSESSMENT YEARS COMPRISING THE BLOCK PERIOD. IN E XPLANATION HE FURNISHED THE DETAILS IN RESPECT OF EACH AND WHICH CLAIM TO THE STATED EXTE NT WAS DISALLOWED BY THE A.O. AFTER EXAMINING THE SAME IN DETAIL (PGS. 7 TO 14 OF THE E STIMATION ORDER). NO LEGAL ACTION HAD BEEN TAKEN IN SOME CASES EVEN AS THE BORROWER IS HA VING IMMOVABLE PROPERTIES WHICH COULD BE PROCEEDED AGAINST BY THE ASSESSEE. HE WAS NOT SATISFIED WITH REGARD TO THE IRRECOVERABLE STATUS OF THE DEBT WHICH IS TO BE DE TERMINED AS ON THE DATE OF THE SEARCH. IF AS EXPLAINED IN SOME CASES THE LEGAL ACTION COULD NOT BE PRESSED IN VIEW OF THE RELEVANT PAPERS BEING IN THE CUSTODY OF THE DEPARTMENT THE SAME WAS ONLY A POST SEARCH DEVELOPMENT. WHERE THE IMMOVABLE PROPERTIES OF THE BORROWER HAD BEEN TRANSFERRED IN ASSESSEES FAVOUR AS A SECURITY THERE IS NO QUESTI ON OF THE DEBT BEING IRRECOVERABLE EVEN AS THE BORROWER MAY BE RETAINING/OCCUPYING THE PROP ERTY. SIMILAR WOULD BE THE CASE WHERE THE SIGNED CHEQUES STAND OBTAINED BY THE ASSE SSEE FROM THE BORROWER AS SECURITY. FURTHER WHERE ON FACTS THE BARRING FOR PAYMENT O F CHEQUES IS SUBSEQUENT TO THE DATE OF SEARCH IT CANNOT BE SAID THAT THE DEBT HAD BECOME BAD ON THE DATE OF SEARCH. IN SOME CASES THE ONLY REASON CITED WAS THAT THE BORROWER HAD REFUSED TO MAKE THE PAYMENT. MOST IMPORTANTLY IN EACH OF THE CASE THE DATE ON WHICH THE DEBT BECAME BAD HAD NOT BEEN SHOWN BY THE ASSESSEE FOR IT TO CLAIM THE SAME IN A PARTICULAR YEAR. THE OBSERVATIONS IN THE CASE OF CIT V. COATS INDIA LTD . (SUPRA) AS STAND MENTIONED AT PARA 6 OF THIS ORD ER (IN RELATION TO THE ADDITION ON ACCOUNT OF INTEREST) WO ULD BE APPLICABLE. HE THEREFORE RELYING ON THE SAID DECISION EFFECTED THE IMPUGNED DISALLO WANCE. THE LD. CIT(A) WAS OF THE VIEW THAT THE AMENDMENT TO SECTION 36(1)(VII) W.E.F. 1. 4.1989 WOULD BE APPLICABLE SO THAT THE ASSESSEE IS NO LONGER REQUIRED TO ESTABLISH THAT TH E DEBTS HAD BECOME BAD IN THE YEAR IN WHICH IT BECAME SO AND IT THAT WOULD BE SUFFICIENT FOR THE PURPOSE IF THE SAME STOOD WRITTEN OFF IN THE ACCOUNTS AS IRRECOVERABLE. THE AO HAS BASED HIS CONCLUSIONS ON THE PRE-AMENDED LAW AND WHICH IS NO LONGER APPLICABLE. HE THEREFORE ALLOWED THE ASSESSEES ITA.NO. 152/COCH./2005 10 CLAIM IN TOTO RELYING ON THE DECISIONS IN THE CASE OF GIRISH BHAGWATPRASAD VS. CIT 256 ITR 772 (GUJ.); CIT VS. VALLABH LEASING & FINANCE CO. PVT. LTD . (2004) 265 ITR 189 (M.P.) AND THE CBDT CIRCULAR NO. 557 DATED 23.1.199 9. 8. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD AS WELL AS THE CASE LAW CITED. 8.1 THE FIRST THING THAT NEEDS TO BE CLARIFIED IN THE MATTER IS THE LAW THAT WOULD BE APPLICABLE. THE SEARCH BEING ON 17.6.1988 THE BLO CK PERIOD IS 1.4.1988 TO 16.6.1998. AS SUCH IT IS THE LAW AS IN FORCE FOR THE RELEVANT YE ARS THAT WOULD APPLY FOR COMPUTING THE ASSESSEES INCOME FOR THE DIFFERENT YEARS COMPRISED IN THE BLOCK PERIOD. SECTION 36(1)(VII) STANDS SUBSTANTIALLY CHANGED BY THE DIRE CT TAX LAWS AMENDMENT ACT 1987 W.E.F. 1.4.1989 I.E. FROM A.Y. 1989-90 ONWARDS. C LEARLY THEREFORE FOR ALL THE YEARS UNDER CONSIDERATION IT IS THE LAW AMENDED THAT WOU LD APPLY. THE SAME ADMITTEDLY ONLY REQUIRES THE ASSESSEE FOR A SUCCESSFUL/VALID CLAIM FOR BAD DEBTS TO WRITE IT OFF AS IRRECOVERABLE IN HIS ACCOUNTS FOR THE RELEVANT PREV IOUS YEAR OF COURSE SUBJECT TO SECTION 36(2). THE PRE-AMENDED LAW WHICH REQUIRED THE ASS ESSEE TO ESTABLISH IT AS SO FOR THE RELEVANT PREVIOUS YEAR WOULD THUS NOT HOLD. SECT ION 36(2)(II) MANDATES THAT THE DEBT UNDER REFERENCE SHOULD IN CASE OF A BUSINESS OF MO NEY LENDING REPRESENTS THE MONEY LENT IN THE ORDINARY COURSE OF HIS BUSINESS OF MONEY LEN DING BY THE ASSESSEE. THE AO HAS DISCUSSED EACH OF THE CASE IN DETAIL ALSO REPRODUC ING THE ASSESSEES CONTENTIONS IN EACH CASE. THE SAME REPRESENT MONIES LENT IN THE COURSE OF HIS MONEY LENDING BUSINESS WHICH THE ASSESSEE CLAIMS TO BE NO LONGER RECOVERABLE. A S SUCH EVEN THOUGH NO SPECIFIC FINDING STANDS ISSUED BY THE AUTHORITIES BELOW IN THE MATTE R THERE IS ADMITTEDLY SATISFACTION OF THE CONDITION OF S.36(2)(II). 8.2 THE LD. CIT(A) HAS ACCEPTED THE ASSESSEES CLAI M ON THE BASIS THAT THE AO HAD UNNECESSARILY TRAVELLED INTO THE REALM OF THE PRE-A MENDED LAW PLACING RELIANCE ON CIT VS. COATS INDIA LTD. (1998) 232 ITR 324 (CAL.). PLA CING RELIANCE ON THE DECISIONS AS IN THE CASE OF CIT VS. GIRISH BHAGWAT PRASAD (2002) 256 ITR 772 774 (GUJ.); CIT VS. VALLABH LEASING AND FINANCE CO. PVT. LTD . (2004) 265 ITR 189 (M.P.) HE STATES THAT WHAT IS ITA.NO. 152/COCH./2005 11 REQUIRED POST AMENDMENT FOR A CLAIM OF BAD DEBT IS ITS WRITE OFF IN THE ACCOUNTS AS IRRECOVERABLE. FURTHER RECOVERABILITY OF THE DEBT IS AN IMPORTANT ASPECT IN DETERMINING THE INCOME IN MONEY LENDING BUSINESS ESPECIALLY WH EN HIGH RATES OF INTEREST HAVE BEEN CHARGED SO THAT THE INCOME CANNOT BE PEGGED AT IRR ATIONAL LEVELS WITHOUT CONSIDERING THE ASPECT OF THE RECOVERABILITY OR THE LOSS ARISING ON ACCOUNT OF IRRECOVERABILITY OF THE MONEY LENT. BOTH THE PROPOSITIONS AS STATED BY THE LD. C IT(A) ARE VALID AND ON WHICH THERE IS NO DISPUTE. SO HOWEVER THE QUESTION IS NOT ONE O F LAW BUT ONE OF FACT. THE FIRST QUESTION THAT ARISES IS WHETHER THE ASSESSEE HAD I NFACT WRITTEN OFF THE DEBTS UNDER REFERENCE IN ITS ACCOUNTS AS IRRECOVERABLE FOR AN Y OF THE YEARS COMPRISING THE BLOCK PERIOD. THERE IS NO FINDING WHATSOEVER BY THE LD. CIT(A) ON THIS ISSUE. AN ENTRY OF WRITE OFF COULD BE WITH REFERENCE TO A PARTICULAR DATE AN D BEARING RELEVANT PARTICULARS HAVING THE EFFECT OF REMOVING THE DEBT OR PART THEREOF F ROM THE ASSESSEES ACCOUNTS. UNTIL AND UNLESS THEREFORE THERE IS A CLEAR WRITE OFF IN AC COUNTS WHICH THE LAW DEEMS AS A SUFFICIENT DISCHARGE BY THE ASSESSEE OF THE ONUS O F DEBT HAVING BECOME BAD AS WELL AS THE YEAR IN WHICH IT BECAME SO THE CLAIM COULD NOT BE ACCEPTED. THE ASSESSEE IS NOT MAINTAINING ANY BOOKS OF ACCOUNTS. THERE IS NO DIS CUSSION AS TO THE EXACT NATURE OF THE RECORDS FOUND WHICH SO FAR AS WE OBSERVE FROM THE ORDERS OF THE REVENUE AUTHORITIES DEPICTS THE DEBTS AS WELL AS THE RATE OF INTEREST B EING CHARGED THERE-TO. THE ENTRY FOR WRITING OFF THE DEBT WHATSOEVER BE ITS MANNER IS A PERQUISITE AND THE CLAIM CANNOT BE MADE ON THE ORAL SUBMISSION AS THE AMOUNT HAVING BE COME IRRECOVERABLE. IT IS NOT THE FORM OF THE ENTRY WHICH IS RELEVANT BUT ITS SUBSTAN CE I.E. IT SHOWING EXPLICITLY OF THE AMOUNT/S AS HAVING BEEN TREATED AS BAD ON ACCOUNT O F ITS BEING IRRECOVERABLE WITH EFFECT FROM A PARTICULAR DATE SO AS TO BE NO LONGER CONSI DERED AS A PART OF THE LOAN OR DEBT OF THE BUSINESS. THE ASSESSEE MAY OR MAY NOT CONTINUE TO PURSUE THE LEGAL RECOURSE IF ANY ALREADY INITIATED TOWARDS THE RECOVERY OF THE DEBT. IN THE PRESENT CASE THERE IS NO SUCH MATERIAL FOUND IN THE SEARCH OR LED BY THE ASSESSE E IN RESPECT OF THE PRE-SEARCH PERIOD TO SHOW THAT THE CLAIMED DEBTS HAVE ACTUALLY BEEN WRIT TEN OFF BY THE ASSESSEE IN ITS ACCOUNTS TO WHATEVER EXTENT AND MANNER THEY ARE MA INTAINED IN RESPECT OF HIS MONEY LENDING BUSINESS. FURTHERMORE THIS ENTRY HAS TO B E AT ANY TIME DURING THE BLOCK PERIOD AND CANNOT BE A POST SEARCH PHENOMENON AS THE INCO ME BEING DETERMINED IS ONLY FOR THE ITA.NO. 152/COCH./2005 12 BLOCK PERIOD. AS SUCH THERE IS NO QUESTION OF SATI SFACTION OF THE CLEAR MANDATE OF SECTION 36(1)(VII) FOR THE ASSESSEE TO BE ALLOWED ITS CLAI M THERE-UNDER. 8.3 WITH REGARD TO THE DEBT AS HAVING BECOME ACT UALLY BAD IN A PARTICULAR YEAR IN THE SENSE THAT THE AMOUNTS STAND IRREOVERABLY LOST SO THAT THERE IS NO SCOPE FOR RECOVERY WHATSOEVER AS ADVERTED TO BY THE AO AND SOUGHT TO BE APPLIED BY HIM IT IS NO LONGER APPLICABLE UNDER THE AMENDED LAW UNDER WHICH LAW O NLY THE ASSESSEES CLAIM CAN BE CONSIDERED AND EXAMINED. IN FACT TO THE EXTENT IT HAS BEEN ALLOWED RELIEF BY THE A.O. BY PART ACCEPTING ITS CLAIM FOR BAD DEBTS IS ALSO ON THE BASIS OF THE PRE-AMENDED LAW WHICH IS NO LONGER APPLICABLE ON BEING CONVINCED THAT CI RCUMSTANCES EXIST TO SHOW THAT THE DEBT THOUGH NOT WRITTEN OFF HAS BECOME BAD SOME T IME DURING THE BLOCK PERIOD. AS SUCH HE HAS ONLY BEEN FAIR AND INDULGENT IN ALLOWING THE ASSESSEE ITS CLAIMS TO THE EXTENT HE DOES. 8.4 IN VIEW OF THE FOREGOING THOUGH WE DO NOT A PPROVE OF THE REASONS FOR DISALLOWING THE ASSESSEES CLAIM BY THE A.O. WE UPHOLD HIS ORD ER AND REVERSE THAT OF THE FIRST APPELLATE AUTHORITY FOR THE REASONS DISCUSSED ABOVE . WE MAY BEFORE PARTING WITH THIS ISSUE ALSO CLARIFY THAT THE NON-ACCEPTANCE OF THE ASSESSEES CLAIM FOR THE CURRENT YEAR WOULD NOT PRECLUDE THE ASSESSEE FOR CLAIMING THE DE BT AS BAD IN A SUBSEQUENT YEAR. WE DECIDE ACCORDINGLY ALLOWING THE REVENUES THESE GR OUNDS. 9. THE ASSESSEE HAS RELIED ON CASE LAW TO PRESS ITS CLAIM THAT THE UNDISCLOSED INCOME COULD ONLY BE ASSESSED ON THE BASIS OF THE MATERIAL FOUND DURING OR AS A RESULT OF SEARCH I.E. NOT ON THE BASIS OF THE CASH FLOW SUBMITTED B Y HIM. THAT IS TRITE LAW. QUA THE PRESENT CASE HE HAS NOT ANYWHERE SHOWN THAT HIS CASH FLOW IS NOT PREPARED ON THE MATERIALS FOUND IN OR AS A RESULT OF SEARCH. FURTHER THE RETURN OF UNDISCLOSED INCOME FILED ON THE BASIS OF THE CASH FLOW PREPARED BY HIM IS ONLY ON THE STRENG TH OF THE MATERIALS IN RELATION TO HIS UNDISCLOSED BUSINESS OF MONEY LENDING. IN FACT HIS CLAIMS TO THE EXTENT ACCEPTED ARE AGAIN ON THE BASIS OF SUCH MATERIAL. AS SUCH TO CO NTEND THAT THE ASSESSMENT FRAMED IS NOT ON THE BASIS OF THE MATERIAL ARISING OUT OF SEARCH IS MISCONCEIVED; THE MATERIALS RELIED ITA.NO. 152/COCH./2005 13 UPON BEING BOTH RELEVANT AND ARISING OUT OF THE SEA RCH AND NO EXTRANEOUS MATERIAL HAS BEEN ADVERTED TO OR RELIED UPON BY THE REVENUE. 10. IN THE RESULT THE REVENUES APPEAL IS PARTLY ALLOWED. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 29 TH OCTOBER 2010 GJ COPY TO: 1. SHRI V.J.VARGHESE VATTAPARAMBIL HOUSE CHIYYARA M P.O. THRISSUR. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE -2(1) RANGE-2 TRICHUR. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-V KOCHI . 4. THE COMMISSIONER OF INCOME-TAX TRICHUR. 5. D.R./I.T.A.T. COCHIN BENCH COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) ITA.NO. 152/COCH./2005 14