1985 (8) TMI 47 - HC - Income Tax

High Court rules against telescoping benefits for intangible additions in trading account. Specific evidence linking cash credits required.

The High Court held that the Tribunal erred in allowing telescoping benefits for intangible additions in the trading account. The Court ruled in favor of ... Cash Credits, Income From Undisclosed Sources Issues Involved:1. Genuineness of cash credits.2. Telescoping benefit on account of intangible additions.3. Set-off of additions in trading account against unexplained cash credits.4. Assessment of inflated purchase figures and excess shortage of bidi leaves.5. Estimation of gross profit and its adjustment.6. Legal principles regarding unexplained cash credits and intangible additions.Issue-wise Detailed Analysis:1. Genuineness of Cash Credits:The assessee, a firm of five partners dealing in bidi leaves and tobacco, was assessed as an unregistered firm. The Income-tax Officer found sums credited in the books of the firm for the assessment years 1967-68 and 1968-69, which were treated as unexplained income and taxed accordingly. The Appellate Assistant Commissioner and the Tribunal largely confirmed these findings, except for certain loans from Navjug Bidi Company and Ram Bidi Company, which were accepted as genuine. The Tribunal concluded that the assessee failed to explain cash credits of Rs. 1,29,106 for 1967-68 and Rs. 85,356 for 1968-69.2. Telescoping Benefit on Account of Intangible Additions:The Tribunal allowed telescoping benefits to the assessee due to intangible additions sustained in the bidi leaves and tobacco accounts, amounting to Rs. 25,000 and Rs. 17,250 for the respective years. The Revenue objected to this, arguing there was no occasion for such adjustments. The Tribunal's basis was consistency with a previous decision for the assessment year 1966-67, where similar benefits were allowed.3. Set-off of Additions in Trading Account Against Unexplained Cash Credits:The Tribunal had previously allowed set-off of additions in trading accounts against cash credits, assuming a connection between profits withheld and cash credits. However, the High Court found no presumption that additions to profits must be set off against unexplained cash credits. It emphasized the need for specific evidence linking cash credits to intangible additions, which was not provided by the assessee.4. Assessment of Inflated Purchase Figures and Excess Shortage of Bidi Leaves:For the assessment year 1967-68, the Income-tax Officer reduced the purchase figure of bidi leaves by Rs. 1,50,000 and added Rs. 25,000 for excess shortage, treating these as income. Similar adjustments were made for the year 1968-69. On appeal, the Appellate Assistant Commissioner and the Tribunal reduced these figures significantly, but still upheld some additions.5. Estimation of Gross Profit and Its Adjustment:The Income-tax Officer estimated the gross profit at a higher percentage than shown by the assessee, adding Rs. 32,156 for 1967-68 and Rs. 5,000 for 1968-69. The Appellate Assistant Commissioner and the Tribunal made further adjustments, reducing the additions but still upholding some discrepancies.6. Legal Principles Regarding Unexplained Cash Credits and Intangible Additions:The High Court referred to several precedents, emphasizing that there is no general rule that additions to profits must be set off against unexplained cash credits. Each case must be considered on its facts, and a connection between cash credits and profits must be established by evidence. The Tribunal had not found such a connection in this case, making the set-off inappropriate.Conclusion:The High Court concluded that the Tribunal was incorrect in allowing telescoping benefits on account of intangible additions in the trading account for the same assessment year. The reference was answered in favor of the Revenue, with no order as to costs.