1997 (7) TMI 222 - AT - Income Tax

Partnership firm not benamidar; clubbing addition deleted; bardana purchase expense disallowed under Section 37; 10% loss allowed

ITAT PUNE - AT held that the partnership firm (PFI) is not a benamidar of the assessee-company and deleted the clubbing addition; the department failed to ... Scope of provisions of Chapter XIV-B - definition clause (b) in section 158B - Block assessment - Search and seizure action u/s 132 - undisclosed income - huge additions - manufacture and sale of food products such as Gram dal, besan, atta, rava, maida, oil and oil cake, etc. - undisclosed income on account of loss of Bardana - purchase of Bardana (gunny bags) is deductible under section 37 - onus to establish that PFI is benamidar of the assessee-company - whether the partnership firm, namely, PFI is the benamidar of the assessee so that the income of PFI could be considered as income of the assessee - HELD THAT:- The partners of PFI arc also directors of the assessee-company but not vice versa Mrs. Asha Parakh and Mrs. Anju Parakh were also Directors of the assessee-company who did not join PFI. There were 10 other shareholders who also are not partners of PFI. We are also of the view that no capital can be made out of the fact that the assessee had no manufacturing facility and the consideration was paid in kind. There is no legal bar in carrying on the business as such. Such practice is established by the fact that FCI which is a Government Agency also gets its goods processed from the third parties on similar terms. We have already discussed about the various objections of the Assessing Officer and held that those objections are not relevant and, therefore, need not be referred again. Therefore, keeping in view of the facts and circumstances as a whole, we are of the view that the department has not been able to prove that PFI is benamidar of the assessee-company. We hold accordingly. The addition made on account of clubbing is, therefore, deleted. We find that primary facts were well within the knowledge of the Assessing Officer. Perusal of the assessment order for assessment year 1992-93 in the case of PFI clearly shows that the Assessing Officer took cognizance of the fact that there was an agreement between PFI and assessee for processing of goods belonging to PFI against consideration in kind, i.e., chuni and husk. This fact has also been accepted by the Assessing Officer. Moreover, chuni and husk retained by the assessee has been treated by the Assessing Officer as sale by PFI for the purpose of computing deduction under section 80HHC. It is pertinent to note that the Assessing Officer who assessed PFI for assessment year 1992-93 is also the Assessing Officer of the assessee-company. This is apparent from the assessment orders passed by her in both the cases. The fact that chuni and husk obtained by the assessee in processing of the goods is duly included in the chuni account is not disputed. This fact is also mentioned in the Note to the profit and loss account. Even the Assessing Officer in the present case has taken note of it. The fact that partners of PFI are directors of the assessee-company was duly within the knowledge of the Assessing Officer as both the parties were assessed by the same Assessing Officer. Therefore, it cannot be said that the primary facts were hidden from the knowledge of the revenue. Perhaps, Assessing Officer was also satisfied about the genuineness of PFI, inasmuch as he had assessed the assessee-company for assessment year 1993-94 by way of regular assessment on 27th March, 1996, i.e., much after the date of search without including the income of PFI. There is not even a whisper expressing any doubt about the non-genuineness of PFI. Further no addition was proposed by him till 18th July, 1996, as is apparent from the letter of the Assessing Officer dated 8-7-1996 and draft assessment order dated 18-7-1996. For the first time, notice was issued by him on 22nd July, 1996 proposing the clubbing of income of PFI with the assessee and the assessee was asked to reply within 24 hours and the assessment was completed within a week including the time taken for approval from the CIT. No reason has been given for making such addition at the fag end of period of limitation. The reasons are best known to the revenue. There is also no material to show that anything was found at the time of search to suggest clubbing. Therefore, we hold that all primary facts were within the knowledge of the Income-tax Department and nothing was hidden from its knowledge. Hence, the impugned addition could not fall within the scope of the definition of 'undisclosed income'. Addition on account of Bardana expenses : - We are unable to agree with the contention of Mr. Pathak that expenditure on the purchase of Bardana (gunny bags) is deductible under section 37. Section 37 is a residuary section and can be invoked only when an expenditure is not allowable in the preceding sections. Section 28 provides that profits and gains of the business are chargeable under that section. Once the profits are determined, then such profits are further to be computed as provided in section 29. Profits on sale can be arrived at only after deducting the corresponding expenditure in respect of such sales. Therefore, in our opinion, all the expenditure which are necessary in making the final product marketable are to be deducted from the sale consideration. The view which we have taken is supported by the decision of the Hon'ble Supreme Court in the case of Poona Electric Supply Co. Ltd. v. CIT [1965 (4) TMI 20 - SUPREME COURT], wherein two important propositions have been laid down, viz., (i) that business profits must be arrived at on commercial principles, and (ii) that there is distinction between business profits ascertained on commercial profits and profits fixed by statute for its specified purpose. It has been further held that profits under section 10(1) of the Indian Income-tax Act, 1922 are not profits regulated by any such statute, but are profits of the business carried on by the assessee computed on commercial principles. The provisions of section 10(1) of the Indian Income-tax Act, 1922 are similar to the provisions of section 28 of the 1961 Act. Therefore, the said decision is fully applicable to the present case. It is, therefore, held that the Assessing Officer was justified in rejecting the method of accounting vis-a-vis bardana expenses. The view of ours is rather supported by the opinion expressed by the Expert Advisory Committee of the Institute of Chartered Accountants of India which is reported in the ICAI Compendium of Opinions, Vol. IV, 1st Edn. In that case, the querist was engaged in the manufacture of PVC compound and allied plastic products who was purchasing raw materials in iron drums/polythene bags. The empty drums/bags in hand at the end of the year were not reflected in the trading account and the balance sheet of the company. This practice had been followed consistently in the past. From the opinion expressed by the Advisory Committee of the Institute of Chartered Accountants, it is clearly shown that where the closing stock involved is material, it has to be valued and shown in the balance-sheet. We are, therefore, unable to accept the contention of the assessee's counsel that the system of accounting adopted by the assessee is a recognised method. Therefore, in view of what has been held by us on the scope of provisions of Chapter XIV-B, it is not possible to uphold the addition as undisclosed income under Chapter XIV-B. We hold accordingly. In view of the above discussions, we delete the addition on this account. Addition on account of 25 per cent loss of Bardana - Since the assessee has not maintained any record in this regard, it appears to us that the loss of Bardana has been taken by the assessee according to its own convenience. We, therefore, reject the claim of the assessee regarding 25 per cent loss of Baredna. The Assessing Officer has accepted the fact that some loss of Bardana is inevitable. In the absence of record, it is only the best judgment which has to be made. No doubt, there is no basis with the Assessing Officer also to determine the loss at 10 per cent of the Bardana received with the raw material. But in such a situation, the Court has only to see whether the best judgment is bona fide or not. In our opinion, 10 per cent loss of Bardana received with the raw material appears to be reasonable. By way of caution, it is observed that this should not be taken as a precedent. In future years, if there is sufficient material on record, the matter will be required to be examined in the light of evidence produced. Admittedly, the disallowance has been made in respect of Bardana received with the material. Therefore, we hold that the disallowance has to be restricted to the value at which it has cost to the assessee.we hold that the Assessing Officer was justified in determining the undisclosed income on account of loss of Bardana. However, we restore the matter to the file of the Assessing Officer to re-determine the value of loss of Bardana in accordance with average cost of Bardana received with the raw material. The correctness of the figures furnished before us may be examined by the Assessing Officer. The assessee is also directed to furnish copy of these details to the Assessing Officer. Issues Involved:1. Scope of provisions of Chapter XIV-B.2. Clubbing of income of Parakh Food International (PFI) with the assessee.3. Addition on account of Bardana expenses.Detailed Analysis:1. Scope of Provisions of Chapter XIV-B:Dr. Pathak argued that the intention of the Legislature was to assess only undisclosed income, as defined in Section 158B(b). He emphasized that any income disclosed before the search or that would have been disclosed if the search had not occurred cannot be assessed under Chapter XIV-B. He illustrated three situations: completed assessments before the search, pending assessments on the date of the search, and returns yet to be filed after the search. He contended that only primary facts need to be disclosed, not inferential facts, and supported his arguments with various legal references.On the other hand, Mr. Manish Gupta argued that the definition in Section 158B(b) is inclusive and should be interpreted broadly. He contended that any income not disclosed in the return can be assessed as undisclosed income, regardless of whether it was detected as a result of the search.The Tribunal held that the definition of 'undisclosed income' in Section 158B(b) is inclusive and restrictive. It includes assets and income hidden from the department's knowledge, whether detected as a result of the search or not. The Tribunal did not accept Dr. Pathak's contention that undisclosed income must be detected as a result of the search. The Tribunal emphasized that the provisions of Chapter XIV-B and Chapter XIV are mutually exclusive and can be exercised independently and simultaneously.2. Clubbing of Income of Parakh Food International (PFI):The Assessing Officer clubbed the income of PFI with the assessee, citing reasons such as the partners of PFI being directors of the assessee, PFI not having its own manufacturing facility, and the firm being created to claim higher deductions under Section 80HHC.The assessee argued that PFI was a validly constituted partnership firm engaged in a different line of business (export) than the assessee (domestic sales). The assessee provided evidence of PFI's registration under various acts, separate office facilities, and independent financial transactions. The assessee contended that the partners of PFI enjoyed the profits of the firm, not the assessee.The Tribunal found that the revenue had not discharged its onus to prove that PFI was a benamidar of the assessee. The Tribunal noted that PFI and the assessee were separate entities with distinct business activities. The Tribunal held that the addition on account of clubbing could not be made under Chapter XIV-B, as primary facts were already within the knowledge of the department, and no new material was found during the search.3. Addition on Account of Bardana Expenses:The Assessing Officer disallowed a portion of the bardana expenses claimed by the assessee, citing inconsistencies in the loss percentage and the method of accounting.The assessee argued that the entire expenditure on bardana should be allowed under Section 37, as it was incurred during the previous year. The assessee contended that the loss percentage was based on experience and provided evidence of the use of bardana in the manufacturing process.The Tribunal held that the method of accounting adopted by the assessee was not acceptable. The Tribunal emphasized that the expenditure on bardana should be allowed based on consumption, and the opening and closing stock of bardana should be taken into account. The Tribunal agreed with the Assessing Officer's determination of a 10% loss of bardana received with the raw material but directed the Assessing Officer to re-determine the value of the loss based on the average cost of bardana received with the raw material.Conclusion:The Tribunal provided a detailed analysis of the issues, emphasizing the importance of disclosing primary facts and maintaining proper records. The Tribunal upheld the principles of mutual exclusivity of Chapter XIV-B and Chapter XIV and directed the Assessing Officer to re-determine the value of the bardana loss based on the average cost. The Tribunal deleted the addition on account of clubbing of income and partially upheld the addition on account of bardana expenses, subject to re-determination.