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Before: SMT. P. MADHAVI DEVI
IN THE INCOME TAX A PPELLATE TRIBUNAL HYDERABAD BENCH ‘SMC', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA Nos. 1653, 1654 & 1655/Hyd/2017 and 1671 & 1672/Hyd/2017 Assessment Years: 2003-04, 2004-05, 2005-06, 2007-08 & 2008-09 Inderjeet Singh, vs. Asst. Commissioner of Hyderabad. Income-tax, Circle – 4(1), Hyderabad. PAN – AGQPS 2107N Appellant Respondent Assessee by: Shri P. Murali Mohana Rao Revenue by: Smt. Esther N Hanghal Date of hearing: 17/12/2019 Date of pronouncement: 17/12/2019 O R D E R
All of these appeals are filed by the assessee for the AYs 2003-04 to 2005-06 & 2007-08 & 2008-09.
Brief facts of the case are that the assessee is engaged in the business of auto finance and brokerage. A survey operation u/s 133A was initiated on 29/11/2007 and the same was converted into search. In response to the notice issued u/s 153A, the assessee filed his returns of income from the AYs 2002-03 to 2008-09 on 30/07/2009. The assessments were completed under section 153A rws 143(3) of the IT Act by making additions towards auto finance, unexplained cash and disallowance of expenses on commission income. Further, the AO also observed that there was the income on auto finance, which included undisclosed interest income @ 24% on annual turnover of auto finance and fresh unexplained additional advances were also made during the year which
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were to be brought to tax. The AO disallowed the expenditure on commission income based on the incriminating material found during the course of survey and search operation and accordingly, the assessment proceedings were completed.
Aggrieved by the order of AO, the assessee preferred appeals before the CIT(A) against disallowance of expenditure on commission income. The CIT(A) confirmed the addition and the assessee filed further appeals to ITAT.
The ITAT vide its order dated 28/07/2011, estimated the net interest income at 1% per month instead of 2% per month considered by the AO on cumulative advances and accordingly computed month-wise interest by considering the advances given and EMI received as repayment. The Tribunal further observed that the income earned which is already subjected to tax is to be considered for reinvestment and accordingly due deduction should be allowed. The ITAT also directed the AO to consider 30% of the advances as well as interest as bad debts and directed the AO to redetermine the taxable income from auto finance.
4.1 Accordingly, in the consequential proceedings giving effect to ITAT order, AO reduced bad debts @ 30% of unexplained advances, but did not allow 30% of the interest income as bad debts and also did not allow the telescoping of the disallowances as sources for making advances in the next AYs.
Aggrieved, the assessee preferred appeals before the CIT(A), who confirmed the order of the AO and the assessee is in second appeal before the ITAT.
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The ld. counsel for the assessee submitted that the AO and the CIT(A) have failed to follow the directions of ITAT and, therefore, AO should be directed to allow 30% of bad debts both from gross advances as well as interest income in accordance with the directions of ITAT. He also prayed that the AO should be directed to telescope the disallowed expenditure on commission income as cash available with the assessee for giving advances for the subsequent financial years.
The ld. DR, however, supported the orders of authorities below.
After hearing both the parties and having considered the material on record, I find that the Tribunal vide para 15 & 16 of its order has very clearly directed as under: 15. We have considered the net interest income at 1% per month instead of 2% per month adopted by the Assessing Officer since the auto finance is a very risky venture and the assessee has to deal with lower strata of society and the volume of bad debts is very high which was not considered by the Assessing Officer. Similarly, the additional unexplained advance has to be computed after giving due weightage to the income earned. It means that the income earned is also be reinvested in a form of fresh advances and it is to be given due weightage while arriving the unexplained fresh advance. Thus, we have deducted the income offered to tax in each year from the cumulative advance of that year while arriving at fresh advance in each year. We have observed that the assessing officer has not given deduction towards interest income earned while determining the fresh advance. The income earned is already subjected to tax and it is reinvested and due deduction is to be given while ascertaining the fresh advance. Accordingly, we have deducted the interest offered to tax while determining the fresh advance. The assessing officer is directed to consider the same while determining the fresh advance. We have also given deduction at 30% towards bad debts while determining the unexplained fresh advance and same to be given on
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interest income. Thus, the assessing officer is required to determine the taxable income from Auto finance as follows:
Financial Assessm- Undisclosed Fresh Unaccounted year ent Year income* Rs. Unexplained income during additional the year* advance made during the year 2002-03 2003-04 30580 616959 647539 2003-04 2004-05 216524 1010283 1226807 2004-05 2005-06 496427 459461 955888 2005-06 2006-07 782304 3945992 4728296 2006-07 2007-08 1063007 Ignored 1063007 2007-08 2008-09 574797 Ignored 574797
* Bad debts on interest income to be excluded by assessing officer
With these observations, we set aside the entire issue to the file of assessing officer for limited purpose of reframing the assessable income in each assessment year after considering the disallowance of expenses on commission income if any as discussed in the following para.”
8.1 The assessee has filed a chart showing advances given, EMI received, cumulative advances, net interest at 1% and also bad debts to be given at 30% as directed by the ITAT and the same is reproduced hereunder for ready reference: Month Advance EMI Cumula- Net Total Unexpla Closing Net addi- given received tive adv. Int. interest ined bal. of tion made (@1%) for the advance cumulativ year for the e adv. year For the year Jun’02 9000 0 9000 90 Jul’02 52000 1170 59830 598 Aug’02 16000 5520 70310 703 AY Sep’02 94000 7340 156970 1570 03 Oct’02 51000 16110 191860 1919 - Nov’02 75000 23780 243080 2431 04 Dec’02 142000 31580 353500 3535 Jan’03 126000 47420 432080 4321 Feb’03 258500 61120 629460 6295 Mar’03 372500 90010 911950 9120 30580 911950 911950 Bad 9174 273585 debts written of @ 30% Less: 30580 Interest income Less: 87050 Expens es on comm.in come
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21406 520735 87050 629191 Apr’03 336000 124260 1123690 11237 May’03 356000 156120 1323570 13236 Jun’03 228000 204510 1347060 13471 Jul’03 427000 228360 1545700 15457 Aug’03 517500 267310 1795890 17959 Sep’03 226000 302050 1719840 17198 Oct’03 529500 315270 1934070 19341 Nov’03 256600 352690 1837980 18380 AY Dec’03 593000 374280 2056700 20567 04 Jan’04 504500 378915 2182285 21823 - Feb’04 437000 405450 2213835 22138 05 Mar’04 786000 428100 2571735 25717 216524 1659785 1659785 Bad 64957 497936 debts written of @ 30% Less: 216524 Int. income Less: 178633 exp. On comm.in come 151566 766693 91583 1009842 Apr’04 686300 470990 2787045 27870 May’04 955500 513860 3228685 32287 Jun’04 783500 579570 3432615 34326 Jul’04 1247500 618350 4061765 40618 Aug’04 994500 683370 4372895 43729 AY Sep’04 743000 737580 4378315 43783 05 Oct’04 989500 777040 4590775 45908 - Nov’04 1127000 807320 4910455 49105 06 Dec’03 953800 866830 4997425 499974 Jan’05 654200 928560 4723065 47231 Feb’05 646900 934820 4435145 44351 Mar’05 238500 949110 3724535 37245 496427 1152800 2064750 Bad 148928 345840 debts written of @ 30% Less: 496427 Int. income Less: 206821 exp. On comm.in come 347499 103712 28188 479399 Apr’06 2066600 2001133 10209437 102094 May’06 1848600 2106703 9951334 99513 Jun’06 1416500 2198938 9168896 91689 Jul’06 1927800 2244393 8852303 88523 Aug’06 2679700 2303293 9228710 92287 Sep’06 2318850 2426880 9120680 91207 Oct’06 2475800 2505730 9090750 90908 Nov’06 2514600 2607340 8998010 89980 AY Dec’06 1998700 2688005 8308705 83087 07 Jan’07 2323200 2715495 7916410 79164 - Feb’07 2396200 2733565 7579045 75790 08 Mar’07 3137700 2840345 7876400 78764 106300 7 Bad 318902 -- debts written of @ 30% 744105 - 32405 776510 Apr’07 2908500 2974595 7810305 78103 May’07 3851000 3135579 8525726 85257 Jun’07 3217400 3295624 8447502 84475 Jul’07 3538300 3352184 8633618 86336 Aug’07 2989200 3479379 8143439 81434 AY Sep’07 2709000 3543296 7309143 73091 08 Oct’07 2362800 3620696 6051247 60512 - Nov’07 124000 3616481 2558766 25588 09 Dec’07 10000 3477966 -909200 574797 Bad 172439
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debts written of @ 30% 402358 69849 472207
8.2 I find that the Tribunal had directed the AO to allow 30% of the advances given as bad debts and therefore, the interest income thereon also has to be reduced by i.e. 30%. With regard to the expenses disallowed on commission income, I agree with the contention of the ld. counsel for the assessee that the same has to be considered as is available with the assessee for making fresh advances during the year. In view of the same, I direct the AO to allow 30% of the gross advances as well as interest thereon as bad debts by 30% and disallowed expenses on commission income be telescoped as sources for fresh advances during the year. With these directions, the appeals of the assessee are treated as allowed for statistical purposes.
In the result, all the appeals under consideration are allowed for statistical purposes. Pronounced in the open court on 17th December, 2019.
Sd/- (P. MADHAVI DEVI) JUDICIAL MEMBER
Hyderabad, dated 17th December, 2019. kv Copy forwarded to: 1. Inderjeet Singh, C/o P. Murali & Co., CAs, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad – 82 2. ACIT, Circle – 4(1), Hyderabad. 3. CIT(A) – 1, , Hyderabad. 4. Pr. CIT – 1, Hyd. 5. The DR, ITAT, Hyderabad 6. Guard File