HEMA MOHNOT,CHENNAI vs. AIT, CHENNAI

आदेश / O R D E R

Grounds taken by the assessee are reproduced hereunder:- 2. 1. ‘’The order of the learned Commissioner Of Income Tax (Appeals)-4, is wrong, illegal and is opposed to law and facts of the case. 2. The learned ClT(A)-4 erred in treating the gift received by the appellant as not genuine and added the same as undisclosed

ITA No.1730/Mds/2016. :- 2 -: income of the appellant. 3. The learned ClT(A)-4 erred in confirming an addition of Rs.40,000/- as undisclosed income of the appellant on the basis of pronotes found during the course of search. The appellant had never advanced any sums to the said parties and the same has been affirmed by them.

4. The learned Commissioner Of Income Tax (Appeals)-4, Madurai erred in law in disallowing a sum of Rs.17,16,400/- by invoking section 40A(3) of the Income Tax Act.

5. The learned Commissioner Of Income Tax (Appeals)-4 erred in law in not considering the business expediency and other factors before invoking section 40A(3) of the Income Tax Act. 6. The learned Commissioner Of Income Tax (Appeals)-4 ought to have seen that the appellant has discharged his primary onus both during the assessment proceedings and first appellate proceedings to demonstrate the fact that the cash payments made by the appellant fall under rule 6DD(K).

7. The learned CIT(A)-4 erred in law in confirming an addition of Rs.1,50,OOO/- under the head Inflation of purchases. 8: The learned CITA) erred in disallowing as sum of Rs.86,287/- being the commission paid by the appellant to M/s.Singvi International‘’.

3. Before adverting to the grounds raised by the assessee, it will be apt to recall the facts giving rise to this appeal. Assessee was engaged in a business of purchasing and selling portable generators.

Original assessment was completed u/s. 144 of the Income Tax Act, 1961 (in short ‘’the Act’’). Ld. Assessing Officer had proceeded to make a best of judgment assessment since assessee did not comply with the various notices issued by him. It is noted that assessment proceedings were initiated on the assessee, pursuant to a search conducted at her

ITA No.1730/Mds/2016. :- 3 -: husband’s premises. Her husband Shri. N.K.Mohnot was a tax professional. Assessee had moved in appeal before the ld. Commissioner of Income Tax (Appeals) against the best of judgment assessment, but assessee did not meet with any success. Thereafter assessee had moved in further appeal before this Tribunal and this Tribunal had set aside the assessment and directed the ld. Assessing Officer to redo the assessment after considering the information furnished by the assessee. Accordingly, fresh assessment proceedings were initiated by the ld. Assessing Officer. Assessee’s husband who was a tax professional had appeared before the ld. Assessing Officer and gave certain explanations. The assessment was thereafter completed inter-alia making additions for certain gifts claimed by the assessee, unaccounted advances, disallowance u/s. 40A(3) of the Act, addition for inflation for purchases and disallowance of a claim of commission.

4. Now before vide ground No.2 of its apepal, assessee is aggrieved on the addition of gifts. Gifts shown by the assessee in her capital account which were subject matter of the addition were as under:-

ITA No.1730/Mds/2016. :- 4 -:

‘’Sl.No Date Particulars Amount � 1 1.11.82 By Gift from 25,000 2 -do- By Gift from 25,000 3 2.9.82 -do- 5,000 4 1.5.83 Sri Prakashchand K. Jain 10,000 5 1.5.83 Kishanmal Jain 10,000 6 3.5.83 Sri. Mohanlal Jain 10,000 7 3.53.83 M. Joshilal 10,000 8 6.8.93 M. Santalchand 10,000

--------------- 1,00,000/- ---------------- Ld. Assessing Officer had required the assessee to file evidence for the above gifts. It seems assessee furnished declaration of gifts for the parties mentioned at Sl. Nos. 4 to 8 above. Ld. Assessing Officer noted that these parties were clients of assessee’s husband and the returns of income were filed by the said parties only after the date of search in his premises. Assessee was required to produce donors. Assessee was unable to do so. Addition was made by the ld. Assessing Officer considering the gifts as undisclosed income of the assessee.

Assessee moved in appeal before ld. Commissioner of 5. Income Tax (Appeals) but did not meet with any success. ITA No.1730/Mds/2016. :- 5 -:

ITA No.1730/Mds/2016. :- 6 -:

Ld. Assessing Officer, based on a promissory note executed by one Shri. J. Madanagopal and Shri. T.M. Mohanakrishnan came to a conclusion that assessee had given unaccounted advances. Before the ld. Assessing Officer assessee had stated that no such advances were paid and the promissory note as such could not be considered as an evidence for giving any such advance. Shri. T.M. Mohanakrishnan was the father of Shri. J. Madanagopal. However, ld. Assessing Officer held that promissory note was a valid documentary evidence for advance given by the assessee to the above persons. He made an addition of �38,500/- comprising of principal of �35,000/- and interest of �3,500/-.

ITA No.1730/Mds/2016. :- 7 -: from the assessee. Ld. Counsel also placed on record a clarification dated 24.11.1993 given by Shri. T.M. Mohana Krishnan to the ld. Assessing Officer.

Per contra, ld. Departmental Representative strongly 12.

supported the orders of the authorities below.

I have considered the rival contentions and perused the 13. orders of the authorities below. It is not disputed that promissory note for �35,000/- executed by Shri. J. Madanagopal and his father Shri.

T.M. Mohanakrishnan were found at the time of search of the premises of assessee’s husband. It is also not disputed that the promissory note was issued in favour of the assessee. What was stated by the Shri T.M.Mohana Krishnan in his letter dated 24.11.1993 before the ld. Assessing Officer is reproduced hereunder:-

‘’Sub: Clarification regarding pronote of �35,000/- executed by me and my father and found in the premises of Shri. N.K. Mohnot group- Reg.

Shri. N.K. Mohnot is my best friend. As I was in need of some finance to develop my business, I requested Shri. N.K. Mohnot to arrange some finance for me. Since he is an Auditor, and many of his clients engaged in fiancé business, this request was made to him. But unfortunately the deal never struck, since he could not arrange the finance. I was t get back my pronote from him, but as already sated that since he is very close friend of me, I have not cared to collected the pronote from him. In the meanwhile, I heard there was a search in his premises by your officials and my

ITA No.1730/Mds/2016. :- 8 -: promotes referred above was seized. After some time from search he was kind enough to return my pronote himself.

I am furnishing this certification at his request, since he said that Department has treated the sum of �35,000/- and interest thereon as his income.

I once again clarify that I have not borrowed any money from Shri. N.K. Mohnot whatsoever’’.

I am of the opinion that when concerned persons had denied receipt of any sum, an addition could not have been made solely on the basis of promissory note. Shri. T.M.Mohana Krishnan had denied receipt of any money from the assessee. There was no entry found in the books of the assessee for having advanced any loans. In my opinion the addition was not warranted. Such addition stands deleted.

Ground No.3 of the assessee stands allowed.

�25,67,100/- were shown. As per the assessee purchases of generators were made from one M/s. Emkay Enterprises which was under the proprietorship of one Shri. V. Narashim Das.

Address given by the assessee was 28, Ganga Nagar, Madras 600 024 which was later changed to 8, Ganga Nagar, Madras 600 024. Ld. Assessing Officer made enquiry with above premises and found a person named Shri. V. Narashim Das at 8, Ganga Nagar, Madras-24 one Shri. V. Narashim Das and summoned him. However, Shri. V.

Narashim Das did not enter a personal appearance but filed a letter on 05.03.1994. In the said letter, Shri. V. Narashim Das gave his PA Number as GIR No.71871-N/City Circle VII(1), Madras. Ld. Assessing Officer found that the said GIR did not belong to Shri. V. Narashim Das but to another person. Out of the total purchases, the purchase claimed to have been effected from M/s. Emkay Enterprises came to �17,16,402/-. Ld. Assessing Officer also found that the payments were made otherwise by way of Cheques/Demand Draft and there was violation of Sec.40A(3) of the Act. When the assessee was put on notice of the above, its reply was as under:-

‘’As regards to your proposed disallowance under section 40A(3), the assessee strongly objects the same, since the purchase of generators were imported items for which immediate payment was required for their subsequent import, duty payments etc., In the circumstance those payments wre made through bearer cheques at the request of M/s. Emkay Enterprises,

ITA No.1730/Mds/2016. :- 10 -: hence assessee’s case squarely falls under the condition laid down in rule 6DD as the payment under the conditions laid down in rule 6DD as the payment under the crossed cheque or draft feasible or would have caused genuine difficulty to the payee and undue hardship in importing the material’’.

Ld. Assessing Officer was of the opinion that assessee could not produce evidences to show how it fell within exemptions given under Rule 6DD of the Income Tax Rules, 1962. Applying Sec. 40A(3) of the Act, he made a disallowance of �17,16,400/-

Assessee’s appeal before the ld. Commissioner of Income Tax 16.

(Appeals) did not meet with any success.

Now before me, ld Authorised Representative submitted that 17. assessee was forced to make payments in cash due to insistence of the supplier M/s. Emkay Enterprises. Copy of a letter dated 05.03.1994 issued by M/s. Emkay Enterprises was filed in this regard.

As per ld. Authorised Representative ld. Assessing Officer had accepted the sales of generator made by the assessee. According to him, seized papers itself showed that 420 generators costing �20,93,096.94 were purchased. Thus, according to him, disallowance u/s. 40A(3) of the Act

ITA No.1730/Mds/2016. :- 11 -: was not warranted. Specific reliance was placed on Rule 6DD of the Income Tax Rules.

Further, according to him, payments to M/s. Emkay Enterprises were made not by account payee cheques or demand drafts and Section 40A(3) of the Act stood attracted. Thus, according to him, disallowance made u/s. 40A(3) of the Act was justified.

I have considered the rival contentions and perused the 19. orders of the authorities below. Ld. Assessing Officer after giving a finding that assessee could not be establish the identity of the seller M/s. Emkay Enterprises, had resorted to make a disallowance u/s. 40A(3) of the Act. Ld. Assessing Officer himself had accepted at para 24 of his order that purchases worth �20,93,096.94 representing cost of 420 generators, were found during the search at the premises of assessee’s husband. He had considered the profit and loss account filed by the assessee and made an addition of �1,50,000/- for the excess purchase shown in the profit and loss account. Once it is admitted that assessee was trading in generators purchases could not have been treated as not genuine. Letter dated 05.03.1994 filed by ITA No.1730/Mds/2016. :- 12 -:

M/s. Emkay Enterprises before the ld. Assessing Officer, states as under:-

Ref: Your letter dated 16/12/1/3/94 alongwith summon u/s. 131 of even date in connection with assessment proceeding of Mrs. Hema Mohnot, Madras -6. P.A. No.47-053-PX-5462/A.Y.1984-85.

Kindly refer to the above, It is true that I had business transaction during the financial year 1982-83 with M/s. Hindustan Electronics of which Mrs. Hema Mohnot is Proprietix. I furnish herewith the details called for by you parawise:-

Sl.No Invoice No Date Amount 1 001 11.01.1983 9,35,208.59 2 002 29.03.1983 99,729.20 3 003 29.03.1983 6,81,464.00 4 005 31.03.1983 7,526.00

5 Vide debit note 31.03.1983 1,50,000.00

Kindly find the above information in order and take the same as proper compliance to your summon referred above’’.

ITA No.1730/Mds/2016. :- 13 -:

A reading of the above letter clearly indicate assessee had purchased portable generators from M/s. Emkay Enterprises. That apart, it is an admitted position that Shri. V. Narashim Das, Proprietor of M/s.

Emkay Enterprises was found at No.8, Ganga Nagar, Madras 600 024.

Thus in my opinion the purchases could not have been treated as not genuine. Coming to the question of application of provision of Sec.

40A(3) of the Act, the said Section as it stood at the relevant point of time read as under:-

‘’Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March, 1969) as may be specified in this behalf by the Central Government by notification in the Official Gazette, in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, such expenditure shall not be allowed as a deduction’’.

Claim of the ld. Authorised Representative is that assessee fell within Sub Rule (j) of Rule 6DD as it stood at relevant point of time. The said sub Rule (j) is reproduced hereunder:-

‘’(j) in any other case, where the assessee satisfies the Income-tax Officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft-- (1) due to exceptional or unavoidable circumstances, or ITA No.1730/Mds/2016. :- 14 -:

(2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof, and also furnishes evidence to the satisfaction of the Income-tax Officer as to the genuineness of the payment and the identity of the payee’’.

Exceptional circumstances sought to be canvassed by the assessee is the one appearing at para No.4 of the letter dated 05.03.1994 of M/s.

Emkay Enterprises reproduced by us above. In my opinion the said para does indicate that seller had insisted on cash payment. Thus exemption clause (j) of Rule 6DD, in my opinion will apply in assessee’s case, especially since genuineness of the payment and identity of the payee are established. I therefore set aside the orders of the lower authorities in this regard and delete the addition made u/s. 40A(3) of the Act. Grounds 4 to 6 of the assessee are allowed.

Vide ground No.7, grievance of the assessee is on an 20. addition made for inflation of purchases. Addition of �1,50,000/- was made by ld. Assessing Officer, on a debit note issued by M/s.

Emkay Enterprises. As per assessee such payments were made for settling the custom duty on import of generators. However, no evidence whatsoever were furnished to the ld. Assessing Officer in this regard. The nature of the expenditure was not demonstrated

ITA No.1730/Mds/2016. :- 15 -: before the lower authorities. Therefore I am of the opinion that such disallowance was rightly made. Ground 7 of the assessee stands dismissed.

Vide ground 8, assessee is aggrieved on disallowance of a 21. sum of �86,287/- being commission paid to M/s. Singhvi International.

Ld. Assessing Officer made the disallowance for a reason 22. that generators sold by the assessee where directly delivered to its customers and no service whatsoever was rendered by M/s. Singhvi International. Ld. Commissioner of Income Tax (Appeals) had confirmed the disallowance.

rightly disallowed. Ground 8 of the assessee is dismissed. In the result, appeal of the assessee is partly allowed. 24. Order pronounced on Monday, the 28th day of August of 2017, at Chennai.