1989 (5) TMI 149 - AT - Income Tax

Appeal partially allowed, additional relief granted. Department's cross-objection dismissed, final addition limited.

The appeal of the assessee was partially allowed, granting further relief of Rs. 5,77,505 in addition to the Rs. 1 lakh already excluded by the CIT(A). ... Unexplained expenditure deemed income under section 69C - allowance of unexplained business expenditure as deduction - distinction between capital and business expenditure - apportionment of unexplained expenditure on remand - reliance on remand report for crystallisation of factsUnexplained expenditure deemed income under section 69C - allowance of unexplained business expenditure as deduction - distinction between capital and business expenditure - apportionment of unexplained expenditure on remand - Whether the unexplained expenditure of Rs. 6,90,231 added under s.69C should be reduced by amounts shown to be business expenditure relating to disclosed Housing Board contracts, and what portion (if any) is capital expenditure relating to the cinema theatre - HELD THAT: - The Tribunal applied the principle that although unexplained expenditure is prima facie taxable under s.69C, any portion of such expenditure that is shown to be incurred for disclosed business purposes must be allowed as a deduction (following the ratio in S.F. Wadia). On remand the ITO and CIT(A) examined vouchers and site books; the valuation and remand enquiries crystallised that only Rs. 12,726 of the aggregate Rs. 6,90,231 related to capital expenditure on the cinema theatre (and thus not deductible as business expenditure). The remaining amount (Rs. 6,77,505) was attributable to the Housing Board contracts; there was neither material to show it was inflated nor any third category of expenditure. Consequently, while Rs. 6,90,231 is prima facie includible under s.69C, an equivalent deduction must be allowed in respect of the portion demonstrably expended for the disclosed business, reducing the net addition to the taxable income. The CIT(A) had earlier allowed Rs. 1,00,000 by apportionment; on the factual crystallisation in the remand reports the Tribunal held that a further relief of Rs. 5,77,505 is warranted, leaving only the capital component of Rs. 12,726 unallowable as a business deduction. [Paras 10, 11, 12, 13]The unexplained expenditure of Rs. 6,90,231 added under s.69C is to be reduced by the portion proved to be business expenditure relating to Housing Board contracts (total relief Rs. 5,77,505 in addition to the Rs. 1,00,000 already allowed by the CIT(A)), leaving only Rs. 12,726 as capital expenditure for the theatre; the assessee's appeal is allowed in part and the Department's cross-objection is dismissed.Final Conclusion: On the facts established after remand, the Tribunal reduced the s.69C addition by the portion shown to be expenditure for disclosed Housing Board contracts and allowed further relief to the assessee (leaving only the small capital expenditure on the theatre as non-deductible); the assessee's appeal is allowed in part and the Revenue's cross-objection is dismissed. Issues Involved:1. Addition of Rs. 6,90,231 under Section 69C.2. Addition of Rs. 68,170 for interest on borrowings.3. Addition of Rs. 23,730 as income from sale of empty gunny bags.4. Addition of Rs. 6,831 as 10% profit on work done in the name of Manimaran.5. Deletion of Rs. 1 lakh by CIT(A).Detailed Analysis:1. Addition of Rs. 6,90,231 under Section 69C:The primary issue revolves around the unexplained expenditure of Rs. 6,90,231 discovered during a search of the assessee's premises. The Income Tax Officer (ITO) noted that there were expenditures evidenced by vouchers for which there were no corresponding debits in the books of accounts. The assessee claimed that part of this amount was borrowed from his father-in-law, but the ITO found this explanation unsatisfactory. Consequently, the ITO added Rs. 6,90,231 under Section 69C, which allows for such an addition if the source of expenditure is not satisfactorily explained.The Commissioner of Income Tax (Appeals) [CIT(A)] considered the assessee's argument that this expenditure should be allowed as a business deduction if it was indeed incurred for business purposes, referencing the Tribunal's decision in S.F. WADIA vs. ITO (1986) 19 ITD 306 (Ahd). The CIT(A) concluded that Rs. 1 lakh of the expenditure related to Housing Board Contracts and directed its exclusion while upholding the addition of the remaining Rs. 5,90,231.Upon further appeal, it was determined that only Rs. 12,726 of the expenditure related to the construction of a theatre, which was capital expenditure. The balance of Rs. 6,77,505 was deemed to be business expenditure related to Housing Board Contracts and thus deductible. Therefore, the assessee was entitled to a further relief of Rs. 5,77,505, in addition to the Rs. 1 lakh already excluded by the CIT(A).2. Addition of Rs. 68,170 for Interest on Borrowings:The ITO made an addition of Rs. 68,170, attributing it to interest on borrowings that were allegedly diverted for the construction of a theatre. This addition was part of the overall assessment but was not contested separately in the appeal.3. Addition of Rs. 23,730 as Income from Sale of Empty Gunny Bags:Another addition of Rs. 23,730 was made by the ITO, considering it as income from the sale of empty gunny bags. This addition was also part of the overall assessment but was not separately contested in the appeal.4. Addition of Rs. 6,831 as 10% Profit on Work Done in the Name of Manimaran:The ITO added Rs. 6,831, estimating it as 10% profit on work done in the name of Manimaran. This addition was part of the overall assessment but was not separately contested in the appeal.5. Deletion of Rs. 1 lakh by CIT(A):The CIT(A) had deleted Rs. 1 lakh from the addition of Rs. 6,90,231, considering it to be related to Housing Board Contracts. The Department contested this deletion, arguing that the CIT(A) had no basis for such apportionment. However, after a detailed remand report and analysis, it was concluded that Rs. 12,726 related to theatre construction, and the remaining Rs. 6,77,505 related to Housing Board Contracts. Therefore, the deletion of Rs. 1 lakh was justified, and the Department's cross-objection was dismissed.Conclusion:The appeal of the assessee was allowed in part, granting further relief of Rs. 5,77,505, in addition to the Rs. 1 lakh already excluded by the CIT(A). The cross-objection of the Department was dismissed, upholding the deletion of Rs. 1 lakh by the CIT(A). The final addition under Section 69C was thus limited to Rs. 12,726, which was capital expenditure related to theatre construction.