2007 (2) TMI 271 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on fraudulent withdrawals. AO to verify remanded issues. Partial expenditure claims accepted.

The Tribunal dismissed the Department's appeals and upheld the CIT(A)'s decisions, ruling that fraudulent withdrawals from the Animal Husbandry Department ... Chargeability Issues Involved:1. Fraudulent withdrawals from the Animal Husbandry Department (AHD), Government of Bihar.2. Taxability of fraudulent receipts as income.3. Disallowance of interest on loans.4. Treatment of bank deposits.5. Unexplained loans and share application money.6. Deletion of sales-tax deferred liability.7. Disallowance of expenditure against hiring charges.Issue-wise Detailed Analysis:1. Fraudulent Withdrawals from AHD:The main issue in these appeals is fraudulent withdrawals from the AHD, Government of Bihar, in the fodder scam. The modus operandi involved placing bogus purchase orders and raising fake bills without actual supplies. The fraudulent amounts were withdrawn and divided among conspirators. The fraudulent withdrawals were detected by the Government of Bihar, leading to FIRs and a CBI investigation. The Hon'ble High Court directed the CBI to investigate and the IT Department to take appropriate action under the IT Act.2. Taxability of Fraudulent Receipts as Income:The AO taxed the entire receipts from the AHD as income of the assessee on a substantive basis. The CIT(A) deleted these additions, holding that the fraudulently withdrawn sums did not constitute income under s. 2(24) of the IT Act. The Tribunal upheld the CIT(A)'s decision, stating that the fraudulent withdrawals could not be treated as income since the original owner (the State) was pursuing recovery, and the assessee did not have ownership over the defrauded amount.3. Disallowance of Interest on Loans:The AO disallowed interest claimed on loans for various assessment years. The CIT(A) deleted these disallowances, and the Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order.4. Treatment of Bank Deposits:The AO made protective additions for bank deposits in the hands of the assessee, which were also assessed substantively in the hands of Shri Dipesh Chandak. The CIT(A) deleted these additions, and the Tribunal upheld the CIT(A)'s decision, noting that the deposits were already included in the total receipts from AHD considered in the hands of Shri Dipesh Chandak.5. Unexplained Loans and Share Application Money:The AO added unexplained loans and share application money as income. The CIT(A) deleted these additions. The Tribunal found that the CIT(A) violated r. 46A by not allowing the AO to examine fresh evidence and restored the matter to the AO for verification.6. Deletion of Sales-tax Deferred Liability:The AO disallowed the sales-tax deferred liability. The CIT(A) deleted the disallowance, relying on eligibility certificates and CBDT circulars. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere.7. Disallowance of Expenditure Against Hiring Charges:The AO disallowed expenditure against income from truck and cylinder hiring charges. The Tribunal allowed 50% of the claimed expenditure, noting that the hiring out of trucks and cylinders was not disputed.Conclusion:The Tribunal dismissed the Department's appeals and upheld the CIT(A)'s decisions in most cases, confirming that the fraudulent withdrawals did not constitute income under the IT Act. The Tribunal also restored certain matters to the AO for verification and allowed partial expenditure claims against hiring charges.