C.I.T vs. DIAMOND PRODUCTS LTD

IN THE HIGH COURT OF DELHI AT NEW DELHI . 08.09.2008 . Present: Ms Premlata Bansal, Advocate for the Petitioner. . +ITA No.1004/2008 . This appeal by the revenue is directed against the order of the Income Tax Appellate Tribunal passed on 25.01.2008 in ITA No. 634/Del/2006 pertaining to the assessment year 2002-03. Two grounds were taken by the revenue before the Tribunal. Ground No. 1 pertained to the action of the Commissioner Income- tax (Appeals) in deleting the addition of Rs 23,00,000/- made by the assessing officer under section 68 of the Income Tax Act, 1961 (hereinafter to be referred as ?the Act?) on account of alleged unexplained cash credit. Under ground No. 2, the revenue had challenged the action of the Commissioner Income-tax (Appeals) in deleting the addition of Rs 5,49,189/- made by the assessing officer on account of disallowance of deferred revenue expenditure. The Tribunal confirmed the findings of the Commissioner Income-tax (Appeals) in respect of both the grounds and dismissed the revenue?s appeal. With regard to ground No. 1, the Tribunal noted that the assessing officer had treated the sum of Rs 23,00,000/- appearing in the books of the assessee in the name of M/s Mahamaya Finance Company and M/s Laxmi Finance and Traders as unexplained. The said concerns were proprietary concerns of one Mr Ram Phool. The Tribunal noted that the said Mr Ram Phool had been regularly assessed to income tax and copies of his returns for the relevant year were filed before the assessing officer by the assessee along with his confirmation. Mr Ram Phool also appeared before the assessing officer and furnished all the information and details required by him. He had also produced the books of accounts of his proprietary concerns for verification by the assessing officer. A statement on oath of Mr Ram Phool was also recorded by the assessing officer. As per the statement, Mr Ram Phool admitted having advanced the said sum of Rs 23,00,000/- to the assessee. He had also filed bank statements pertaining to these proprietary concerns indicating that the said sum of money had been advanced to the assessee through bank drafts. The Tribunal noted that even the deposits to the extent of Rs 23,00,000/- made in the bank accounts of his proprietary concerns were explained by him in his statement recorded by the assessing officer. It was indicated that the said amount had been received in cash from M/s Punjab Tractors towards repayment of loan given earlier. The Tribunal also took note of the fact that Mr Ram Phool had filed a copy of the ledger account of the said concern as per his books and had also produced the relevant books of accounts to support and substantiate his explanation. The Tribunal took the view that all that the assessee was required to do to discharge the burden upon him was to explain the relevant cash credits by establishing the identity and capacity of the concerned creditors as well as indicating the genuineness of the relevant transactions. The Tribunal concluded that the assessee had discharged this burden and, therefore, there was no reason for the assessing officer to treat the said cash credit as unexplained merely because M/s Punjab Tractors was not traceable. More importantly, the Tribunal noted that the attempt sought to be made by the assessing officer to verify the whereabouts of the M/s Punjab Tractors was nothing but an attempt to examine the source of the source which was not permissible. Consequently, the Tribunal held . . that the addition of Rs 23,00,000/- made by the assessing officer under section 68 of the Act to the total income of the assessee on account of alleged unexplained cash credit was not sustainable. We have heard the learned counsel for the appellant and have examined the findings returned by the Tribunal as well as those returned by the Commissioner Income-tax (Appeals) and find ourselves to be in agreement with the conclusions arrived at by the Tribunal. The assessing officer is not permitted to examine the source of the source once the assessee has been able to establish that the transaction with his creditors is genuine and that the creditors? identities and creditworthiness have been established. In this case, this had been done, therefore, it was not open to the assessing officer to make the addition of Rs 23,00,000/- after entering upon an examination of the source of the source. Consequently, we feel that no interference is called for on this conclusion in the impugned order passed by the Tribunal. The Tribunal has correctly applied the law on the facts determined by it. No substantial question of law arises on this aspect of the matter. Coming to the second ground, we note that this is a clear finding of fact and the Tribunal has accepted the findings returned by the Commissioner Income- tax (Appeals) and has permitted the deduction of expenses towards advertisement which were admittedly of a revenue nature. The assessee had deferred the revenue expenditure in the year preceding the previous year relevant to the assessment year in question. The advertising expenses had been incurred on account of the franchise agreements. It has been noted in the order passed by the Commissioner Income-tax (Appeals) that during the year under consideration, the appellant conducted the business by appointing franchisees for the showrooms meant for the sale of the footwear but due to some unforeseen circumstances, the agreements with the franchisees got revoked and there was no possibility to carry out or to continue with the franchise business in subsequent years. The Commissioner Income-tax (Appeals), therefore, noted that the assessee had rightly claimed the expenditure during the year in question as the business had been started during that year. It would be relevant to note that in the preceding year, an expenditure of a similar nature had been disallowed by the assessing officer on the ground that the business had not commenced. The finding of the Commissioner Income-tax (Appeals) is that the business has commenced in the year in question. He has also returned a finding that due to certain reasons, the franchisee agreements got revoked in this year also. There was no option left with the assessee but to claim the deduction in this year after having deferred the revenue expenditure in the preceding year. The Tribunal confirmed the findings of the Commissioner Income-tax (Appeals). We do not find any infirmity in the impugned order. In any event, no substantial question of law arises for our consideration. The appeal is dismissed. . BADAR DURREZ AHMED, J . . . RAJIV SHAKDHER, J . September 08, 2008 sb . 4.