SLN COFFEE CURING WORKS,KUDLOOR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, MYSORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

SLN Coffee Curing Works, Kushalnagar Page 2 of 33 1. “The order of the Commissioner of Income Tax(Appeals) dismissing the appeal is contrary to law, erroneous and unsustainable on the facts of the case.

2. The CIT(A) erred in confirming the addition of Rs.7,73,54,936 made as unexplained investment under sec.69 of the Act.

3. The CIT(A) was not justified in confirming the amounts recorded in the loose sheets assuming that the entire amount pertains to the assessee which had not been recorded in the regular books maintained by the assessee and hence the addition was unjustified.

4. The CIT(A) failed to appreciate that the entries in loose sheets found in the course of search cannot be the basis for addition since they do not carry evidentiary value unless supported by corroborated by documentary evidence and therefore cannot be the fulcrum to make addition as unexplained investment in assessee's hands.

5. The CIT(A) further failed to appreciate that the noting in the loose sheets contained the amounts advanced by the assessee-firm to the two partners, Mr.Viswanathan and Mr.Sathappan through banking channel and hence cannot be subjected to addition as unexplained investment u/s.69 of the Act.

6. The CIT(A) further failed to appreciate that total amount of Rs.8,80,60,779 was advanced by the firm to the partner in various years through regular banking channel and hence this cannot be subjected to addition u/s.69 of the Act.

2. Ground No.1 in all these appeals is general in nature and does not require any adjudication. Hence, dismissed.

Asst. year N. Viswanathan N. Visalakshi N. Sathappan 2012-13 2,58,95,512 83,49,888 3,88,89,553 +42,19,983 2013-14 3,07,46,000 -- -- (Accrued 39,99,413 12,58,894 59,00,251 interest) +36,97,254 2014-15 1,15,00,000 -- 53,32,930 (Accrued 13,12,101 3,66,480 19,65,843 interest) +21,08,377 3.1. The ld AO in his report stated that all the above amounts represent cash loans advanced by the Firm to the partners and do not find a place in the books of accounts of the Firm. The ld AO in his order for Asst. year 2012-13 also observed that: “Since these figures represent balances carried forward from the previous year, it is to be construed that the amount mentioned above relate to cash loans taken during the FY.2011-12 and outstanding as on 31.3.2012. ….. Thus, a total amount of Rs.3,84,65,382 represents cash loans given to the partners Smt.Visalakshi and Sri Viswanathan by the Firm and outstanding as on 31.3.2011 which are not recorded in the books of account.” …..

“In the case of Sri N Sathappan, the balance as on 01.04.2012 was Rs.3,88,89,553 respectively. Since these figures represent balances carried forward from the previous year, it is to be construed that the amount mentioned above relate to cash loans taken during the FY 2011-12 and outstanding as on 31.03.2012. Thus a total amount of Rs.7,73,54,935 represents cash loans given to the partners Smt.Visalakshi and Sri Viswanathan by the Firm and outstanding as on 31.03.2011 which are not recorded in the books of account.”

The AO made identical observations in the orders passed for asst. years 2013-14 and 2014-15 as well.

Page 4 of 33 3.2 The AO based on the seized document A/SLNCP/01 – page 43 made an assumption that the entire amount found recorded in this loose sheet are cash advances made by the Firm to the partners. The AO further assumed that these advances are to be added as the unexplained investment of the Firm, although, he came to the conclusion that the advances are the opening balances for the asst. year 2012-13 and also gave a finding that since these figures represent balances carried forward from the previous year, it is to be construed as loans taken during FY 2011-12 and outstanding as on 31.3.2012.

3.3 Before the AO, the assessee explained the factual position vide letter dated 24.12.19. It was stated that the partners had taken interest free loans from the Firm for their personal investment purposes on a returnable basis. That, the amounts were drawn from two Canara Bank current accounts of the Firm and the current account numbers are 0517201000680 and 05689201000764 with Madikere and Kushalnagar. That the total withdrawal seen in the seized material page 43 contains the withdrawal through cheques from the bank accounts and also cash portion which does not belong to the assessee-Firm. The seized material referred to by the officer contains the total loan amount of Rs.13,97,89,709. Out of this, the total amount drawn by the partners through banking channel was Rs.4,47,91,221/- and notional interest of Rs.3,49,91,717/-, thus totalling to Rs.7,97,82,938/-. That the remaining amounts were cash withdrawal from the cash generated in the real estate business. In their respective applications before the Income Tax Settlement Commission, Mr.N. Viswanathan offered Rs.4,63,96,000/- and Mr.N. Sathappan offered Rs.53,32,930/- as undisclosed incomes.

Page 5 of 33 3.4 With regard to the notional interest found in the loose sheet, the AO observed at para (e) that “The assessee’s contention that interest was not paid may be true, but the Firm, being a partnership firm consisting of 6 partners, is required to charge interest on overdrawals by partners for personal use and offer the interest to tax.” It was submitted before the AO by the assessee that there was a partial internal family arrangement between N.Sathappan and N.Viswanathan and in order to arrive at their respective financial position vis-à-vis the group entities, the notional interest was worked out at 18% p.a. and that there was no actual payment of interest.

3.5. In the appeals filed, the Commissioner of Income-tax (Appeals) vide orders dated 24.5.2022, merely confirmed the additions made in the order of the AO and had not given his findings on the explanations given by the assessee in so far as the advances made by the Firm through banking channels in the prior years and the cash loans taken partners from other entities of the group.

3.6. It was submitted that the advances made in the previous years and so found recorded in the seized material page 43 of A/SLNCP/01 cannot be subject matter of consideration in the asst. years 2012-13, 13-14 and 14-15. Admittedly, the AO stated in the assessment order for A.Y.2012-13 that “these figures represents balances carried forward from the previous year, …” but states it is to be construed as loans taken during FY.2011-12 and outstanding as on 31.03.2012. The ld AR argued that this assumption of the assessing officer is contrary to settled position of law and accounting principle that opening balance of the year cannot be examined and subjected to addition in the current year. The ld AR placed reliance on the following judgements of the High Courts and Tribunal on this issue.

Page 6 of 33 i) CIT Vs Usha Stud Agricultural Farm Ltd. – Delhi High Court [301 ITR 384] (Extract) : Para 8 :…. “Hence this was not a fresh credit entry of the previous year under consideration and these credit entries were already made and accounted for in the assessment years 1995-96 and 1997- 98 which were introduced in the form of advance against breeding stallions owned by the assessee an d thus these credit entries did not relate to the year under consideration for being considered under Section 68 of the Act. Since it is a finding of fact recorded by the CIT(A) that this credit balance appearing in the accounts of the assessee, does not pertain to the year under consideration, the assessing officer was not justified in making the impugned addition …..” -In Paper book, at page 31, 32.

(ii) This judgement was followed by the Hon’ble Tribunal, Chennai Bench in the case of M/s.Sooraj Leathers Vs ITO in the order dated 22.4.2016. It was held by the Tribunal at Para 5 of the order that “If the liabilities are old, no credit has been made in so far those credits in the books of accounts in the assessment year under consideration, sec.68 cannot be applied. This view of ours is supported by the judgement of Delhi High Court in the case of Usha Stud Agricultural Farms Ltd., cited supra wherein held that credit balance in the account of the assessee did not pertain to the year under consideration, the AO was not justified in making the addition u/s.68 of the Act. Hence, in our opinion, the liabilities which were not credited in the previous year relevant to the assessment year under consideration, the provisions of the section 68 cannot be applied and the AO is directed to exclude the same from the addition u/s.68 of the Act after duly verifying the same.”

3.7 The ld AR for the assessee stated that in so far as the amounts advanced by the Firm to the 3 partners are concerned, the year-wise break-up along with the notional interest computed is provided in the chart hereunder. He stated that it is evident from the foregoing charts that substantial amounts were advanced by assessee to the Page 7 of 33 partners through banking channel prior to the asst. year 2012-13. This fact was also accepted by the AO in the assessment order but construed it as having advanced in the asst. Year 2012-13 for the purpose of making addition.

N Sathappan Loan A/c in SLN Coffee Curing Works [chart 1] Loan Amount Notional FY Total(Rs.) (Rs.) Interest (Rs.) 2008-09 5,82,085 11,272 5,93,357 2009-10 1,77,55,000 12,08,759 1,89,63,759 2010-11 44,30,000 46,92,325 91,22,325 2011-12 16,75,000 56,55,112 73,30,112 2012-13 - 59,00,251 59,00,251 2013-14 - 19,65,843 19,65,843 Total 2,44,42,085 1,94,33,562 4,38,75,647 N Viswanathan Loan A/c in SLN Coffee Curing Works [chart 2] Loan Amount Notional FY Total(Rs.) (Rs.) Interest (Rs.) 2009-10 1,00,74,134 4,87,995 1,05,62,129 2010-11 34,10,002 25,55,428 59,65,430 2011-12 27,50,000 33,67,956 61,17,956 2012-13 - 39,99,413 39,99,413 2013-14 - 13,12,101 13,12,101 Total 1,62,34,136 1,17,22,893 2,79,57,029 V Visalakshi Loan A/c in SLN Coffee Curing Works [chart 3] Loan Amount Notional Financial Year Total(Rs.) (Rs.) Interest (Rs.) 2009-10 30,35,000 1,20,998 31,55,998 2010-11 10,80,000 8,29,996 19,09,996 2011-12 - 12,58,894 12,58,894 2012-13 - 12,58,894 12,58,894 2013-14 - 3,66,480 3,66,480 Total 41,15,000 38,35,262 79,50,262

Grand Total 4,47,91,221 3,49,91,717 7,97,82,938 Cash taken by partners from other entities [chart 4]

N Sathappan Loan Amount Notional Financial Year Total(Rs.) (Rs.) Interest (Rs.) 2013-14 53,32,930.00 - 53,32,930.00

N Viswanathan Loan Amount Notional Financial Year Total(Rs.) (Rs.) Interest (Rs.) 2011-12 41,50,000.00 69,983.00 42,19,983.00 2012-13 3,07,46,000.00 36,97,284.00 3,44,43,284.00 2013-14 1,15,00,000.00 21,08,377.00 1,36,08,377.00 Total 4,63,96,000.00 58,75,644.00 5,22,71,644.00

Grand Total 5,17,28,930.00 58,75,644.00 5,76,04,574.00 Abstract of all the amounts received by partners [chart 5] Through Banking Channel Loan Amount Notional Particulars Total(Rs.) (Rs.) Interest (Rs.) N Sathappan 2,44,42,085 1,94,33,562 4,38,75,647 N Viswanathan 1,62,34,136 1,17,22,893 2,79,57,029 V Visalakshi 41,15,000 38,35,262 79,50,262 Total(A) 4,47,91,221 3,49,91,717 7,97,82,938

Cash [chart 6] Loan Amount Notional Particulars Total(Rs.) (Rs.) Interest (Rs.)

N Sathapan 53,32,930 - 53,32,930 N Viswanathan 4,63,96,000 58,75,644 5,22,71,644 Total(B) 5,17,28,930 58,75,644 5,76,04,574

Grand Total(A+B) 9,65,20,151 4,08,67,361 13,73,87,512 3.8. The ld AR for the assessee further submitted that in the above charts, chart 1, 2 and 3 are amounts advanced through banking channel and chart 5 gives the consolidated amounts in this regard. Chart 4 is the cash amounts received by the partners from the real estate business of the group which was also recorded in the loose sheet page 43 of A/SLNCP/01. The DCIT had wrongly assumed all the above as cash advances made by the assessee-Firm. The assessee had enclosed the two bank statements of Canara Bank from which the advances were made by the Firm (advances highlighted in SLN Coffee Curing Works, Kushalnagar Page 10 of 33 yellow). Also enclosed is the excel sheets showing the dates of advances.

3.9. On the issue of notional interest found noted in the loose sheet no.43, the ld AR submitted that the partners had been drawing amounts from the Firm and other entities of the group. There was a partial internal family arrangement and in order to crystallise their financial position vis-à-vis the group concerns, the partners had computed notional interest at the rate of 18% and noted in the sheet. Whereas, no interest payment was ever made and the question of making an addition of interest also would not arise. He submitted that there was considerable capital balance of the partners in the Firm. Further, it was not the case of the assessing officer that interest bearing funds had been drawn by the partners interest-free and so interest addition is to be made in the hands of the Firm. The entire addition only rests on the notings in the loose sheet and therefore the notional interest worked out for the purpose of internal family arrangement would not lead to addition of the notional interest in the hands of the assessee.

3.10 The ld AR for the assessee further submitted that yet another aspect of the issue is that the cash advances received by Mr.Viswanathan of Rs.4,63,96,000 and by Mr.Sathappan of Rs.53,32,930 totalling to Rs.5,17,28,930 was part of the total amount recorded in the loose sheet page no.43 of A/SLNCP/01. The assumption of the AO in making the addition of the amount is that these are also advances made by the assessee-Firm to the partners which remain unexplained.

3.11 In this regard, the ld AR submitted that the loose sheet contains the abstract of the total amount of advances inclusive of the cash advances, which has not flown from the assessee-firm. The two

Page 11 of 33 partners had real estate businesses before the formation of the Firm called M/s.SLN Builders on 26.6.2015. There was generation of cash in the real estate business which was kept in a cash pool account. The two partners had drawn from this cash pool account for their personal investments and not from the assessee-firm. It is for this reason that such cash taken by the partners and recorded in the loose sheet seized could not be explained with clarity, the two individuals had offered them as their undisclosed incomes in the ITSC applications filed by them. The relevant portion of the explanation given in the ITSC application while offering the amounts as their undisclosed incomes is extracted herein below. Extract : The applicant is offering an additional amount of Rs.5332930 as undisclosed income, which is not part of the offer tabulated in the sworn statement but part of the search material. The applicant and his brother, Mr.N.Viswanathan have their own personal businesses from where cash amounts had been drawn. There were also advances received by them from M/s.SLN Coffee Curing Works totaling to Rs.8,80,60,779 and these were through regular banking channels only and so not part of the offer of additional incomes. The consolidated amount of Rs.13,97,89,709 is the cash amounts available and the amounts received as advances. The amount of Rs. 5332930 is the amount taken by applicant is now being offered in the applicant’s hands in the assessment year 2014-15 under other income and the balance undisclosed cash of Rs.Rs.4,63,96,000 is offered in his brother, Mr.N.Viswanathan’s application.

The Interim Board of the Settlement Commission -1,Delhi completed the hearing of the above cases that is Mr.N.Viswanathan and Mr.N.Sathappan under section 245D(4) on 02-12-2022 and advised to submit the written submissions on or before 12-12-2022.

3.12. Further, the ld AR submitted that the cash availability in the hands of the partners can also be explained by the Wealth Tax Returns filed by the two partners. Mr.N.Viswanathan and Mr.N.Sathappan in their wealth tax returns filed for the asst. years 2013-14, 2014-15 and 2015-16 have disclosed cash available in their hands as follows for the respective asst. years.

Page 12 of 33 Mr.N.Sathappan Asst. Year 2013-14 2014-15 2015-16 Cash disclosed Rs. 8273403 10301884 868082 Mr.N.Viswanathan Asst. Year 2013-14 2014-15 2015-16 Cash disclosed Rs. 48906068 57543657 35032252 3.13 Further the ld AR stated that all the wealth tax assessments for the above assessment years are completed under section 16(3) of the wealth tax act 1957. From the above, it is seen that there is no basis for the presumption of the DCIT that cash was advanced by the assessee-Firm to the two partners. Whereas, the two partners had sourced the cash from the cash generated in the real estate business of the group and was also disclosed in their wealth tax returns.

3.14. In the sworn statements recorded in the course of search from Mr.N.Viswanathan and Mr.N.Sathappan, the issue of cash advances was not put across to them and so there was also no response on this particular seized material explaining this position.

3.15. De hors the factual explanations furnished herein above by the ld AR on the seized material, i.e., A/SLNCP/01 – page 43, which was a loose sheet found in the premises of the accountant of assessee, the assessee submitted that loose sheets per se cannot be taken as sacrosanct and additions made only on that basis as undisclosed/unexplained income or investment of assessee. It is settled law as per the decisions of Supreme Court in C.B.I. v. V.C. Shukla [1998] 3 SCC 410and in Common Cause (A Registered Society) Vs Union of India (in short ‘Sahara case’), that loose sheets per se do not carry evidentiary value and the entries made therein cannot be subject matter of addition in income tax assessments. In the Sahara

Page 13 of 33 Case, the Court relied on the findings in the V.C.Shukla case, wherein it was observed thus :“This Court has considered the entries in Jain Hawala diaries, note books and file containing loose sheets of papers not in the form of "Books of Account" and has held that such entries in loose papers/sheets are irrelevant and not admissible under Section 34 of the Evidence Act, and that only where the entries are in the books of account regularly kept, depending on the nature of occupation, that those are admissible.”The Supreme Court in Sahara case concluded thus: “Since it is not disputed that for entries relied on in these loose papers and electronic data were not regularly kept during course of business, such entries were discussed in the order dated 11.11.2016 passed in Sahara's case by the Settlement Commission and the documents have not been relied upon by the Commission against assessee, and thus such documents have no evidentiary value against third parties. On the basis of the materials which have been placed on record, we are of the considered opinion that no case is made out to direct investigation against any of thepersons named in the Birla's documents or in the documents A-8, A-9 and A-10 etc. of Sahara.” Thus, the ld AR submitted that in the case of assessee, the loose sheet found and seized cannot be entirely relied on by the assessing officer, without any corroborative material to substantiate the correctness of those entries and resort to additions as unexplained investment in the hands of the assessee.

3.16 In view of the above facts, the ld AR for the assessee prayed that the Tribunal may consider the above submissions and delete the addition of amounts added as unexplained investment under sec.69 of the Act and also the notional interest in the hands of the assessee- Firm and thus render justice.

4.1 He submitted that the assessment order discussed in detail the various evidence seized that shows loans were given to partners by the assessee firm outside their books of accounts on which interest was also charged/chargeable. The ld DR submitted that the assessee's contention that cash withdrawal from the firm totaling to Rs.4,63,96,000/- has been offered for tax in the settlement application filed by the partners and therefore, no addition is warranted in the hands of the assessee firm cannot be accepted as it is clear from the seized material discussed in the assessment order that the loans are given to the partners by the assessee firm and not vice versa. There is no income in the hands of the partners on account of the above-mentioned transactions as it is a capital receipt in their hands. The source for the loans is the assessee firm (M/s SLN Coffee Curing Works) and the loans are not accounted in the books of account of the firm. While in the submissions before the AO, it is stated that cash loans given to the partners do not belong to SLN Coffee Curing Works, however the seized material clearly indicates that the loans have been given by the assessee firm M/s. SLN Coffee Curing Works. Seized documents reveal that partners have acknowledged on paper the specific amounts they owe to the firm. These loans given by the assessee firm are not reflected in its books of accounts. No source for these loans has been explained by the assessee. AO has taxed these loans under section 69 of the Act. For ease of SLN Coffee Curing Works, Kushalnagar Page 15 of 33 understanding, the ld DR reproduced section 69 of the Act as under: - "Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of accounts, _if any, maintained by him for any source of income, AND the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the incomeof the assessee of such financial year."

4.2 Section 69 therefore requires fulfillment of twin conditions: - (i) During the financial year, the investments/ money/bullion/article/valuable thing is not recorded in books of accounts, if any, maintained by him for any source of income, AND, (ii) Assessee fails to offer satisfactory explanation about the nature and source thereof. 4.3 The ld DR submitted that since both the above conditions are satisfied in this case, the AO was therefore justified in adding the amount of cash loan advanced by the assessee firm to the partner(s) outside the books of accounts whose source could not be explained.

4.4 In this regard, the ld D.R. relied on the following decisions with regard to addition made u/s 69 of the Act in this case by the AO: SLN Coffee Curing Works, Kushalnagar Page 16 of 33 1 . C I T V s R . M a l l i k a 1 2 0 1 3 1 3 6 t a x m a n n . c o m 2 3 1 ( M a d r a s ) / 1 2 0 1 3 1 2 1 9 T a x m a n 2 4 4 ( M a d r a s ) where Hon'ble Madras High Court held that where assessee had purchased a property for Rs. 22 lakhs and she had not discharged burden as regards source from which investment had been made, investment in property was an unexplained investment and same was rightly added to income of assessee.

5. AmitaKochar Vs ACIT 120171 79 taxmann.com 432 (Patna)/120161 389 ITR 345 (Patna) where Hon'ble Allahabad High Court upheld addition where assessee, in block return, did not disclose total gold found during search nor did it give any reasonable explanation therefore and even figures given in belated explanation did not match with gold jewellery actually found in assessee's possession.

6. Vijay Kumar Saraf Vs ITAT 119961 85 Taxman 465 (Madhya Pradesh)/I19971 226 ITR 860 (Madhya Pradesh) Certain jewellery and ornaments seized during raid on business premises of assessee were claimed to be assets of ancestral business of assessee's father. Assessee's aforesaid plea having not been pressed before tax authorities nor substantiated by any material evidence. Hon'ble MP High Court held that Tribunal had rightly upheld assessment by treating value of seized assets as also purchase of scooter as unexplained investments ofassessee within meaning of section 69.

7. Thiru S Shyam Kumar Vs ACIT (2018-TIOL-2326- HC-MAD-IT) where Hon'ble Madras High Court held that addition made as undisclosed income u/s 69 on the basis of clear and legible material is fully justified and cannot be challenged by the assessee on the basis of retraction, which is vague and clear afterthought SLN Coffee Curing Works, Kushalnagar Page 18 of 33 8. Ashokbhai H Jariwala Vs ACIT [20171 84 taxmann.com196 (SC)/[20171 250 Taxman 14 (SC), 2017-TIOL-236-SC-IT where Hon'ble Supreme Court held that when nothing was on record to show that sister of assessee was in exclusive possession of bedroom in assessee's house from where cash was seized and further, there was contradiction in statement of assessee and his sister with respect to ownership of actual amount in cash, seized cash would be included as unexplained income in hand of assessee under section 69A, SLP dismissed. Roger Enterprises P. Ltd. v. CIT 120161 72 taxmann.com 167 (SC) 9. SLP dismissed against High Court's ruling that where evidence of one of two witnesses was by itself sufficient to draw adverse inference against assessee that commission payments made by it were fictitious, refusal by assessee to cross-examine said witness must follow that assessee had accepted said witness and commission payments were rightly disallowed. 10.Sukh Ram Vs ACIT 159 Taxman 385 (Delhi)/120061 285 ITR 256 (Delhi)/[200611204 CTR 336 where Hon'ble Delhi High Court held that where pursuant to a search conducted at residential premises of assessee, huge sum of cash was found, for which assessee explained that said cash belonged to certain organization but did not bring any material on record to substantiate his explanation and, moreover, verification of books of account of said organization showed no connection with cash recovered from assessee, in said circumstances assessee was to be treated as owner of said cash, and same was to be added to income of assessee under section 69A.

Page 19 of 33 12.S.Rudramuniyappa Vs CIT (75 taxmann.com 241) (SC) where Hon'ble Supreme Court dismissed SLP on ground of delay against order of High Court wherein it was held that since assessee failed to justify his stand that there was no unaccounted sale as indicated in seized documents, addition made on basis of seized documents was justified.

13.Karun Dutt Sinai' Vs CIT 120171 85 taxmann.com 177 (Kerala) where Hon'ble Kerala High Court held that where AO made addition to assessee's income in respect of gold ornaments recovered from him after rejecting his explanation that it belonged to his employer company, in view of fact that director of employer company in his statement recorded under sec. 131 denied to have given ornaments to assessee for sale or as samples, impugned addition was to be confirmed. 14.Sunil Balasubramaniam Shankar Vs ITO 120191 107 taxmann.com 55 (Madras) where Hon'ble Madras High Court held that where assessee had allegedly allowed his friend to use his credit cards, who refused having used assessee's credit card, and, thus, amount in question was added to assessee's income as unexplained expenditure, since assessee failed to prove nature of expenses incurred through credit cards despite adequate opportunity given by Tribunal, impugned addition made by authorities. below was to be confirmed.

4.5 In view of the above discussion, the ld DR requested that this ground of assessee may be dismissed.

Page 20 of 33 Coffee Pvt. Ltd. at KIADB Industrial Area, Kudloor, Kushalnagar on 26.4.2007 in the form of loose sheets marked as A/SLNCP/01. These documents are printouts of files maintained in the computer with Sri B.K. Vijayakumar, General Manager, Finance of the SLN Group. Pages 24 to 43 of the said bunch of loose sheets contains notings of transactions between Shri N. Sathappan and Shri N. Vishwanathanas well as Smt. Vishalakshi. All these 3 persons are partners in M/s. SLN Coffee Curing Works. The contents of page 43 of A/SLNCP/01 are reproduced below: SETTLEMENT 30/06/2013 Particulars Shri N. Sathappan Shri N. Viswanathan / VV Amount due (Rs.) Amount due (Rs.) Balance as on 30.11.2008 37107695 31460186 4545000 4304470 Add: Interest up to 31.3.2009 32562695 27155716 1764397 1512859 Opening balance as on 1.4.2009 34327092 28668575 Add: Addition 1000000 35327092 28668575 Less: Settlement upto 31.3.2010 0 3000000 35327092 25668575 Add: Interest upto 31.3.2010 6210295 4619515 Opening balance as on 1.4.2010 41537387 3028809 Add: Addition 0 177075 41537387 30465165 Less: Settlement upto 30.4.2011 0 1867378 41537387 28597787 Add: Interest upto 31.3.2011 7476730 5281252 Opening balance as on 1.4.2011 49014117 33879039 Less: Settlement upto 30.4.2011 2000000 47014117 33879039 Add: Nalanda School share 20428983 67443100 33879039 Add: Interest upto 31.3.2012 11322423 6114935 78765523 39993974 Less: Settlement upto May 2012 2000000 Old dues 76765523 39993974 Less: Settlement upto 30.6.2012 1800000 0

74965523 39993974 Interest upto 31.3.2013 13592720 7198915

Page 21 of 33 88558244 47192889 Interest upto 30.6.2013 3974203 2117862

92532446 49310751 Fresh loans from SLN CCW/cash Due to curing works Interest upto 30.6.2013 50122734 89666975 1965843 3786958 Total principal amount due 52088577 93453932 Balance due as on 30.6.2013 140646821 140646821 5.1 Page 36 of A/SLNCP/01 contains a ledger account which gives details of cash loan paid to Shri Vishwanathan N. and Smt. Vishalakshi V during the FYs 2012-13 and 2013-14. The balance appearing in the account of Shri N. Vishwanathan/V Vishalakshi in page No.43 with the noting “Due to Coffee Curing Works” matches with the figures of Rs.8,96,66,975 and the interest component of Rs.37,86,958 as mentioned in the ledger account on page 36 which was found and seized during the course of search proceedings in the case of M/s. SLN coffee Pvt. Ltd. 5.2 The AO observed that these transactions under the head “Fresh Loans from SLN CCW/Cash” under the column head of Shri N. Vishwanathan/VV in page 43 represents the cash loan paid by the firm M/s. SLN Coffee Curing Wors to Sri N. Viswanathan and his wife V. Vishalakshi. However, these transactions of cash loans advanced by the firm do not find a place in the books of account of the firm. It is seen that in the case of Shri N. Vishwanathan and Smt. V. Vishalakshi as on 1.4.2012 was Rs.2,58,95,512/- and Rs.83,49,888/- respectively. Since these figures represent balances carried forward from the previous year, it is to be construed that the amount mentioned above relate to cash loans taken during the FY 2011-12 and outstanding as on 31.3.2012. The same is the case in respect of another loan account of Shri N. Viswanathan

Page 22 of 33 where the opening balance as on 1.4.2012 was Rs.42,19,983/-, which is to be construed as cash loan advanced during FY 2011-12 and outstanding as on 31.3.2012. Thus, a total amount of Rs.3,84,65,382/- represents cash loans given to the partners Smt. Visalakshi and Sri Viswanathan by the firm and outstanding as on 31.3.2011 which are not recorded in the books of account. Page 37 of A/SLNCP/01 contains a ledger account which give details of cash loan paid to Shri N. Sathappan during the FYs 2012-13 and 2013-14. The balance appearing in the account of Shri N. Vishwanathan/V Vishalakshi in page No.43 with the noting “Due to Coffee Curing Works” matches with the figures of Rs.5,01,22,734/- and the interest component of Rs.19,65,843/- as mentioned in the ledger account on page 37 which is reproduced below:

5.3 From this, it is clear that transactions under the head “Fresh loans from SLN CCW/Cash” under the column head of N. Sathappan in page 43 represents the cash loan paid by the firm M/s. SLN Coffee Curing Works to Shri N. Sathappan. However, these transactions of cash loans advanced by the firm do not find a place in the books of account of the firm. It is seen that in the case

Page 23 of 33 of Shri N. Sathappan, the balance as on 1.4.2012 was Rs.3,88,89,553/- respectively. Since these figures represent balances carried forward from the previous year, it is to be construed that the amount mentioned above relate to cash loans taken during the FY 2011-12 and outstanding as on 31.3.2012. According to ld. AO, a total amount of undisclosed advance made by assessee in these assessment years is as follows:-

Loan Amount Notional Assessment year Total(Rs.) (Rs.) Interest (Rs.) 2012-13 4,47,91,221 3,49,91,717 7,97,82,938 2013-14 3,07,46,000 1,48,55,812 4,56,01,812 2014-15 1,68,32,930 57,52,801 2,25,85,731 Total(A) 9,23,70,151 5,56,00,330 14,79,70,481 5.4 The main contention of Ld. A.R. before us is that the addition made by the AO on the basis of entries in the loose sheets relating to the amount advanced by assessee firm to its partners, which are not recorded in the books of accounts of the assessee. According to the entries made, loose sheets cannot be made a basis for addition. We have carefully gone through the entries in the loose sheets. It contains the advance by way of cheque as well as by cash. The assessee entered amount advanced by way of cheque in its books of accounts and cash advances not entered in the books of accounts of the assessee.

5.5 Now the contention of the Ld. AR is that loose sheets are not books of accounts of the assessee and addition cannot be made without bringing on record any corroborative evidence in support of the same. However, AO observed that the authenticity of the loose sheets has been questioned by the revenue authorities at the time of investigation and assessee’s partners have accepted the contents therein in their sworn statements recorded by the authorities.

Page 24 of 33 5.6 Further, there was no retraction of this sworn statement by the assessees’ partners and those statements are valid till today. More so, the amount advanced by assessee firm to these partners by way of cheque has been entered and only the cash advance has not been entered. The reading of the loose sheets in its entirety shows that the transactions mentioned therein are correct. The assessee opted to show only the amount advanced by way of banking channel i.e. by cheque in its books of accounts and not it has not disclosed advance made by way of cash and interest thereon. In our opinion, the assessee had explicitly conceded the cash advances made by it to its partners and before Settlement Commission the partners offered the additional income on this count. Such being the case, the lower authorities is justified in treating the same as unaccounted cash advance made by assessee and making addition towards this. Further, we take support from the following judgements:

(i) With regard to placing reliance on the entries in loose slips to make additions, in our opinion, the Hon’ble Supreme Court in the case of S.S. Gadgil v. Lal and Co. (1964) 53 ITR 231 (SC), held as under: “9. A proceeding for assessment is not a suit for adjudication of a civil dispute. That an income-tax proceeding is in the nature of a judicial proceeding between contesting parties is a matter which is not capable of even a plausible argument. The income-tax authorities who have power to assess and recover tax are not acting as judges deciding a litigation between the citizen and the State: they are administrative authorities whose proceedings are regulated by statute, but whose function is to estimate the income of the taxpayer and to assess him to tax on the basis of that estimate. Tax legislation necessitates the setting up of machinery to ascertain the taxable income, and to assess tax on the income, but that does not impress the proceeding with the character of an action between the citizen and the State : Commissioner of Inland Revenue v. Sneath (1932) 17 TC 149 (CA) at page 164 and Shell Co. of Australia Ltd. v. Federal Commissioner of Taxation (1931) AC 275”.

Page 25 of 33 (ii) Further, in the case of R.P. Vashisht Vs. Deputy Commissioner of Income-tax (2008) (301 ITR 37) the Hon’ble Punjab & Haryana High Court has held as under: “The assessee was working as a personal assistant to the Chief Engineer of Chandigarh administration. In a search conducted at the premises of the assessee, certain loose slips were found relating to the expenditure incurred by him for renovation of his ancestral house. The assessing Officer taking into account the payments made by one S. liaison agent for the companies supplying electricity goods to the Chandigarh administration, from where a daily cash book showing payments to the assessee date-wise was found. The assessee denied the receipt of the amounts indicated in the diary. Based on the loose papers found at the premises of the assessee coupled with the entries in the diary of S which indicated various payments made to the assessee, the Assessing Officer made an addition of Rs.95,050 on account of unexplained investment. The Commissioner (Appeals) sustained the addition of Rs.79,325 but gave a relief of Rs.15,675. The Tribunal held that whether the illegal gratification was received by the assessee or not, may have to be decided in criminal proceedings but for the purpose of income- tax proceedings the material was sufficient to fasten the tax liabilities upon the assessee. On appeal contending that criminal proceedings in a corruption case were pending and the decision taken by the authorities, of addition to the income of the assessee may be in conflict with the decision taken in criminal case. Held, dismissing the appeal, there was no merit in the contention of the assessee. The assessee had not been able to point out any infirmity in the order passed by the Tribunal. The view taken by the Tribunal was a possible one, which was based on appreciation of evidence.”

(iii) In the case of Rajnik & Company Vs. ACIT (251 ITR 561) the Hon’ble Andhra Pradesh High Court has held as under: “During the course of search in the business premises of group concerns and also the residential premises of the partners of the assessee and residential premises of certain employees of the assessee, the authorities seized materials in the form of loose sheets relating to the suppressed sales for the financial years 1995-96 and 1996-97 which were not brought to the books of account of the assessee firm. As a result of the search, the assessee was asked to file a return for the block period from April 1, 1985 to November, 13, 1996. The assessee firm filed its return declaring an undisclosed income of only Rs.7 lakhs, but the Assessing Officer determined the undisclosed income at Rs.63,08,120 based on the loose sheets representing the unaccounted sales and by estimating such Page 26 of 33 suppressions for the assessment years 1996-97 and 1997-98 till the date of search. In view of the largeness of the estimated undisclosed income, no separate addition was made on account of the unexplained investments. The Tribunal did not find any defects in the assessment based on the materials seized from the assessee firm but, however, it felt that the method adopted in estimating a uniform rate of suppressed sales at an average rate of Rs.1,43,175 per day for he whole period of 279 days in the year was not proper and restricted the addition to six times the actual suppression for the assessment year 1996-97 and made an addition of only three times for the assessment year 1997-98 because the period of business was less than six months by the date of the search. On appeal:

Held, that the assessee was not able to dispute the findings of the Assessing Officer as well as the Tribunal where the seized material had shown that there was suppression for a period of 24 days during the assessment year 1996-97 and 15 days for 1997-98 and also that the suppressions were on a day-to-day basis and the evidence recorded from the partner had shown that the same method was adopted throughout the assessment years for the entire block period. Where the assessee had carried on the business for the full year, the addition was made at six times the suppression found during that year and for the assessment year 1997-98 the addition was restricted to only three times, as the assessee had carried on the business only for half of the period with reference to the earlier year where six times addition was made. It was clear from the order of the Tribunal that the estimations of the undisclosed income made were based on relevant material and there was absolutely no unreasonableness or arbitrariness while making such addition. Though there was no material with reference to the addition made for the assessment years 1986-87 to 1995-96, yet it was admitted by the partner of the assessee firm that the assessee had practiced suppression of sales turnover even in those years and taking the quantum of business the suppression was estimated at 20 percent and the gross profit rate returned by the assessee was accepted. The Tribunal had rightly found that the estimation of the suppressed turnover as well as undisclosed income by the Assessing Officer was on the higher side and the Tribunal on consideration of the material on record redetermined the suppressed turnover as well as the undisclosed income which was reasonable and proper.”

(iv) In the case of Rajendra Prasad Subhash Chand Vs. UOI and others the Hon’ble Rajasthan High Court reported in (2012) 344 ITR 533 (Raj) held as under: “In sections 69, 69A, 69B and 69C of the Income-tax Act, 1961, what is provided is that if an assessee is found to be the owner of any money, jewellery or any other valuable articles not recorded in Page 27 of 33 the books of account and fails to offer any explanation about the nature and source thereof or in case any such explanation, if offered, is not satisfactory in the opinion of the Assessing Officer, then this may be deemed to be the income of the assessee for such financial year. Ultimately, therefore, it would be dependent on the nature of the explanation submitted by the assessee and the satisfaction of the Assessing Officer about the acceptability thereof, which is the sine qua non for invoking the provisions contained in sections 69, 69A, 69B and 69C of the Act. It is in this context that the satisfaction of the Assessing Officer about the correctness and completeness of thebooks of account maintained by the assessee in accordance with the provisions contained in section 145 of the Act co-relates with the satisfaction of the Assessing Officer arrived at under sections 69, 69A, 69B and 69C.

In May 2002, a survey under section 133A was conducted at the business premises of the assessee. An assessment order was made computing the income of the assessee at Rs.7,94,420, on the ground that during the course of survey unexplained cash to the tune of Rs.2,95,000 and unexplained stocks to the tune of Rs.2,28,086 had been discovered and further the Assessing Officer disallowed the interest under section 36(1)(iii) to the tune of Rs.26,833. This order was confirmed by the Commissioner (Appeals) and the Tribunal. On appeal to the High Court: Held, dismissing the appeal, that the assessee failed to give any satisfactory explanation on all the issues and could not produce any cogent evidence in support of any explanation. Not only the Assessing Officer but also the Commissioner (Appeals) and the Tribunal in this case had concurrently recorded their findings against the assessee on all the issues. Those findings in the facts of the present case could not be said to be either perverse or erroneous so as to warrant interference by this court. The additions were justified.”

(v) This Tribunal in the case of H.B. Sudarshan in to 313/Bang/2018 vide order dated 20.4.2022 wherein held as under: “We have heard both the parties on the issue. The main grievance of the ld. DR is that the CIT(A) overlooked the digital evidence procured during the course of search action and evidence itself shows the various incriminating transactions carried out by the assessee and same is the basis for addition and addition cannot be deleted on the reason that there is no evidence. The further contention is that section 292C creates a deeming presumption that any books of account, other documents, money, bullion, jewellery or other value articles or things are found in the possession and control of any person in the course of search action u/s. 132 or u/s. 133A as it may be, it should be presumed that it is belonging to the concerned assessee and it is the duty of assessee to explain that it is not Page 28 of 33 belonging to the assessee. Thus he submitted that in the present case the assessee failed to explain the contents of CD found in the search action in his case. Being so, it cannot be rejected on the basis of judgment of Supreme Court in the case of V.C. Shukla (supra). In our opinion, the judgment in the case of V.C. Shukla (supra) is not in relation to Income-tax Act, it was relating to criminal proceedings and there was no application of section 292C of the I.T. Act in that case. In Income Tax proceedings, strict rule of evidence is not applicable as rightly pointed out by the ld. DR. The CIT(A) should not have placed reliance on the above judgment and he should have independently examined each seized material and ought to have decided the issue on the basis of weightage of those evidence. Accordingly, this ground of revenue in is allowed.”

5.7 The contention of the learned D.R. is that cash advance made by assessee is also supported by the action of the partners offering the following amount before the Settlement Commission in respective hands of the partners at Rs.5,76,04,574/- which includes cash advance of Rs.5,17,28,930/- and notional interest thereon at Rs.58,75,644/-.

5.8 The contention of the Ld AR is that since the partners have offered the said amount of Rs.5,17,28,930/- as income in their hands, there cannot be any addition in the hands of present assessee. The addition made in the hands of the assessee on account of unaccounted advances made by the assessee in the form of cash and the source is not being explained by the assessee and is nothing but the amount offered by the partners before Settlement Commission towards advance received by them and its repayment. As per section 184 of the Indian Partnership Act, 1932, an income is to be assessed only in the hands of firm in case there exists the partnership deed instrument specifying its partners’ respective shares. Section 2(a) of the said Act defines the firm to mean act or omission by any or all of its partners. Section 18 thereof envisages that a partner acts as an agent of the firm for the purpose of its business. Section 23 of the said law makes it clear that a partner’s

Page 29 of 33 admission or representation concerning a firm’s affair is in the nature of evidence. In other words, a person who have entered into partnership with one another are called individually partners and collectively a firm. A partner acted individually as a partner will bind the firm also. In other words, the partnership is a relationship between partners who agree to share the profits of the business. The business can be carried on by all of them or any of them acting for all. This definition suggests that a partner can be an agent of the others. Section 18 specifies that a partner is an agent of the firm for the purpose of business of the firm. This is actually one of the essential elements of a partnership. Hence, a partner embraces the character of both, the principal and the agent. Therefore, if he acts for himself and in his own interest in the common concern of the partnership, then he is acting as a principal. On the other hand, if he acts for and in the interest of his partners, then he is acting as an agent. It is important to note that a partner is an agent only for the purpose of business of the firm. He is not an agent for all transactions and dealings between the partners themselves. In our opinion if the undisclosed advance and interest thereon made by the firm has been disclosed as income by partners before Settlement Commission by N. Viswanathan and N. Sathapan and as well as disclosure of additional income of Rs.41,50,000/- by N. Viswanath in the assessment year 2012-13 in his return of income, the benefit of telescoping to be given to the assessee. According the learned A.R., the assessee has admitted the undisclosed advance of Rs.5,17,28,930/- and interest accrued on it at Rs.58,75,644/- which was not recorded in the books of accounts. Now taxing once again the same amount in the hands of assessee firm is amounts to double taxation, which cannot be permitted. In our opinion, only peak credit of undisclosed advances has to be considered and to be taxed. The offering of additional income by assessee’s partners before the Settlement Commission or offering additional income in the partners

Page 30 of 33 hands would suffice the taxing of the same in the hands of the assessee firm. The undisclosed cash advances cannot be brought to tax in the hands of assessee firm as well as in the hands of its partners, which amounts to double taxation, which shall be avoided.

5.9 The next contention of ld Counsel for the assessee is that the interest recorded in the loose sheets cannot be considered as income of the assessee as this was only notional entry and there was no accrual of income to the assessee. The ld DR’s contention is that when the entries in the loose sheets the assessee categorically recorded the interest receivable from the partners and it has also recognized the interest income in advance made by the assessee through banking channels and what is applicable is advance made by assessee through banking channel, same is applicable to the advance made by assessee to its partners by way of cash advances. In this case the AO computed the receipt of notional interest on the basis of entries in the loose sheets/excel sheets. There is no mentioning of date of advance of the loans to partners. There is no execution of any documents for advancing the loan or charging of interest recovered by search team. In the present scenario, even if the loans has been made on the basis of security, the recovery of such loan or interest thereon is very doubtful. Even secured advance made by parties are becoming doubtful of recovery. Being so, it cannot be conclusively said that the notional entries made in the loose sheets would result in accrual of interest income or receipt of interest income by the assessee. It is only notional entry made by assessee to facilitate the calculation of interest without any corroborative evidence. Being so, it is not possible to exactly estimate the interest income as it has not been said to be accrued to the assessee and same cannot be taxed in the hands of the assessee without bringing any supportive evidence by the AO with regard to accrual of interest income in the hands of the assessee.

5.10 The next contention of the ld AR is that the AO considered the opening balance of advance made by assessee in the form of cash loan to its partners in earlier years. In our opinion, opening balance of advances standing in the beginning of the year cannot be considered as advance made by assessee in these assessment years under consideration. To that extent, AO has to exclude only the amount advanced by assessee in these 3 assessment years to be considered as unaccounted advances by way of cash is to be considered which shall be peak credit. As such the assessee has given details of advance as per loose slip as below to be taxed in these assessment years: Abstract of all the amounts received by partners [chart 5]

Through Banking Channel

Loan Amount Notional Particulars Total(Rs.) (Rs.) Interest (Rs.) N Sathappan 2,44,42,085 1,94,33,562 4,38,75,647 N Viswanathan 1,62,34,136 1,17,22,893 2,79,57,029 V Visalakshi 41,15,000 38,35,262 79,50,262 Total(A) 4,47,91,221 3,49,91,717 7,97,82,938

Loan Amount Notional Particulars Total(Rs.) (Rs.) Interest (Rs.) N Sathapan 53,32,930 - 53,32,930 N Viswanathan 4,63,96,000 58,75,644 5,22,71,644 Total(B) 5,17,28,930 58,75,644 5,76,04,574 Grand Total(A+B) 9,65,20,151 4,08,67,361 13,73,87,512 5.11. The assessee’s explanation with regard to interest in the loose sheet found during the course of search was that it was for the purpose of memory and the addition could not have been made solely on the basis of loose paper which is against the well settled law in this regard. Moreover, the entire alleged advance could not partake character of income. There is no ambiguity under law that no addition can be made merely on the basis of loose paper without

Page 32 of 33 being substantiated by any corroborative evidence. In the present case, undisputedly, the entries relating to advances have been accepted by assessee. More so, advance made by assessee by banking channels was found to be duly recorded in the books of accounts, therefore, we are in agreement with the contention of the learned DR that such figures found on loose sheet could not be imaginary. The moot question arises whether the entire advance is correctly taxed or only the entries relevant to AYs under consideration should have been taxed. Admittedly, the assessing officer has invoked section 69/69A of the Act. Therefore, we are of the considered view that only peak credit advance made in those AYs should have been taxed after giving telescoping benefit with regard to undisclosed advance declared by partners relating to seized materials pertaining to the assessee. We, therefore, direct the assessing officer to restrict the addition relating to peak credit of cash advance made to partners in these AYs only after giving due credit to the income disclosed by partners before Settlement Commission towards undisclosed income and also additional income disclosed in their return of income relating to impugned seized materials.

5.12 Accordingly, in our opinion, the assessee has to be given telescoping benefit towards income disclosed in the hands of assessee’s partners N. Sathapan at Rs.53,32,930/- and N. Viswanathan at Rs.4,63,96,000/- before settlement commission if it is so and also due credit to be given to an amount of Rs.41.50 lakhs disclosed as an additional income by N. Viswanathan in assessment year 2012-13 in his return of income towards entries relating to cash advance found in the seized materials and actual interest income accrued to the assessee. Further, we make it clear that the notional entries in seized material with regard to interest income to be ignored as it is not corroborated by any supporting documents. SLN Coffee Curing Works, Kushalnagar Page 33 of 33 In view of the above, the orders of the lower authorities are set aside and the grounds of appeals of the assessee are remitted to the file of AO for re-computation of income as discussed above.