MARIMUTHU SARAVANA,NAMAKKAL vs. DCIT, CENTRAL CIRCLE 1, COIMBATORE

7. The CIT (Appeals) - 20, Chennai failed to appreciate that the quantification of the advances on various facets was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

8. The CIT (Appeals) - 20, Chennai failed to appreciate that the said quantification of advances for the purpose of arriving at the interest income for assessment was not backed up either direct or indirect evidences forming part of the search records, there by vitiating the related findings.

9. The CIT (Appeals) - 20, Chennai failed to appreciate that the assessment of interest income at 15% out of the peak balance with a view to end protracted litigation which was the first alternate plea, was completely over looked and brushed aside, there by vitiating the related findings pertaining to the sustenance of the said addition.

As is evident, the impugned addition stem from search proceedings carried out by the department on assessee. 1.3 The Ld. AR advanced arguments on estimation of income of the assessee and put forth various alternatives. In support thereof, requisite workings / computations have been placed on record. The Ld. CIT-DR also advanced arguments supporting the orders of lower authorities. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 2.1 The assessee being resident individual was subjected to search u/s 132 on 06-03-2014 based on which impugned assessment was framed.

The search action threw up evidences of large-scale unaccounted money lending business of the assessee and also unaccounted investments made by him. During the course of assessment proceedings, notices u/s 153A was issued on 29-04-2015 and the assessee admitted income for various years as under: - A.Y. Date of filing of Income Date of filing Income original return Originally return of income returned of income returned Rs. u/s 153A u/s.153A Rs. 2008-09 26.11.2008 2,56,000 21.08.2015 23,54,990 2009-10 23.03.2010 2,97,270 21.08.2015 27,11,100 2010-11 16.09.2010 2,39,16,700 21.08.2015 2,39,16,700 2011-12 29.02.2012 9,90,700 21.08.2015 37,66,610 2012-13 02.03.2013 14,66,770 21.08.2015 46,59,070 2013-14 29.09.2013 13,61,420 21.08.2015 50,39,340 2014-15 21.08.2015 83,14,780 It is evident that the assessee offered certain additional income in the returns of income filed in response to notice issued u/s 153A. For this year, the income was admitted for Rs.23.54 Lacs as against income of Rs.2.56 Lacs as originally returned. During assessment proceedings, statements u/s 131 was recorded from the assessee on various dates. 2.2 It transpired that the assessee was engaged in usury finance in the name and style of M/s Bannari Amman Finance, M. Saravana and M/s Bannari Amman Textiles. The assessee would lend money for pre- determined fixed period and would charge interest at varied rates depending upon the period of loan, risk involved, amount of loan and urgency of debtor. The rates charged in same cases could touch up-to 20 to 30% for period of 10 weeks. 2.3 The modus-operandi was that the assessee opened up several bank account in his own name as well as in the name of his family members and close associates in several banks which have been tabulated in Para 3.2 of the assessment order. Total of 18 such bank accounts held in various names were identified. It was admitted by the assessee that all banks relate to money lending business. Only two bank accounts were reflected in the regular books of accounts. All the accounts were operated by respective account holders on the directions of the assessee. It was also stated that transactions of these accounts were taken into account while filing return of income u/s 153A. 2.4 The assessee admitted that certain credits were by cheques and certain credits were by way of cash. The assessee was unable to identify the parties from whom the cheques were received. The debits were in the form of cash withdrawals or transfer to some other account or cheques issued to various parties. The assessee was unable to identify individual transactions. The modus operandi as explained by the assessee was that he would draw cash from these accounts and advance the same in cash to various parties after obtaining post-dated cheques. 2.5 To work out interest income starting from AY 2008-09, the assessee worked out opening capital which was employed in money lending business as on 01-04-2007. He took peak credit of each bank account which was operational during FY 2006-07 which came to Rs.139.93 Lacs. On the opening balance, the assessee worked out interest of 15% and estimated the interest income. However, the said working was held to be flawed and not acceptable. 2.6 The Ld. AO noted that during search, Varavu Selavu Books relating to money lending business were seized / impounded and the same contained details of money lending business. Upon analysis of data for the period 01-02-2008 to 31-03-2008 as available, it was found that period of credit ranged from 8 days to 67 days and the interest rate varied from 22% to 365% per annum. The total interest collected for the two-month period from 01-02-2008 to 31-03-2008 was Rs.44.62 Lacs against loans advanced for Rs.811.88 Lacs. The same would translate into interest rate of 5.5% approximately. 2.7 The Ld. AO further noted the submissions of the assessee that most of the loans realized by him were through deposit of post-dated cheques in his unaccounted bank accounts which were operational during the year. The cheque deposits from various parties in the unaccounted bank account for the period from 01-04-2007 to 31-03-2008 aggregated to Rs.61.17 Crores. After deducting loan of Rs.8.11 Crores as per notebooks, the remaining loans would be Rs.53.05 Crores. In the absence of Varavu Selavu books for all but two months of the year, it would be fair to estimate that the assessee had advanced loans to the extent of Rs.53.05 Crores during the period from 01-04-2007 to 31-01- 2008 for which no such notebooks were available during the year. Applying the rate of 5.5% on Rs.53.05 Crores, the unaccounted interest for 01-04-2007 to 31-01-2008 would work out to be Rs.265.27 Lacs. The total interest was thus estimated at Rs.309.90 Lacs (Rs.265.27 Lacs + Rs.44.62 Lacs). Accordingly, Ld. AO proceeded to add additional income of Rs.288.91 Lacs to the income of the assessee, The assessee also collected other charges of Rs.1.83 Lacs in two months which were proposed to be separately added. 2.8 The Ld. AO noted that cash balance as per Varavu Selavu notebooks as on 31-03-2008 was Rs.66.93 Lacs. The debtors balance as on 31-03-2008 was worked out from Varavu Selavu Notebooks based on debtors realized after 31-03-2008 and the same was computed at Rs.415.21 Lacs. The total assets of money lending business as on 31- 03-2008 were at Rs.535.60 Lacs as against Rs.160.92 Lacs shown by the assessee under the head ‘cash balance (search)’ in the Balance Sheet as on 31-03-2008. The differential of the two i.e., Rs.374.68 Lacs do not figure in the Balance Sheet. Out of total money lending assets of Rs.535.60 Lacs, the amount of Rs.139.93 Lacs was covered by opening balance as on 01-04-2007. The difference of Rs.395.67 Lacs was to be explained by the assessee. The assessee admitted income of Rs.20.98 Lacs and therefore, the remining unexplained investment in business would be Rs.374.68 Lacs. 2.9 The assessee assailed the proposed computations, inter-alia, on the ground that notebooks were available only for two months whereas for remaining months, there was no seized material. The application of average rate of interest was arbitrary. The expenditure incurred in money-lending business was not considered at all. The assessee also submitted that it was carrying out money lending business since FY 2004-05 and he was having circulating capital. The debtors balance as on 31-03-2008 may not be considered as debtors that has arisen only during the period from 01-04-2007 to 31-03-2008 since the same arose in earlier years. The assessee, in statement u/s 131 as recorded on 22- 03-2016, also submitted that expenditure on brokerage would be 25% of interest earned. The bad debts would constitute about 30% of expenses. The expenses towards fuel, transportation, salary, telephone, printing and stationery etc. was stated to be in the range of Rs.1 Lacs per month. 2.10 The Ld. AO held that interest rate of 5.5% was arrived at based on data available for two months. There was no sound basis for assessee’s claim of expenditure. However, the amount of Rs.1.83 Lacs as collected as other charges could be treated to be spent towards administrative expenditure of the assessee. The argument on computation of sundry debtors were rejected. The amount of Rs.374.68 Lacs was thus brought to tax in the hands of the assessee as unexplained investment in money lending business. 2.11 The interest income for 10 months was estimated at Rs.265.27 Lacs applying rate of 5.5%. The total interest thus worked out to be Rs.309.90 Lacs out of which the assessee admitted interest income of Rs.20.98 Lacs. The remaining interest was Rs.288.91 Lacs. Since this unaccounted interest was the source of unexplained investment in money lending business, the addition on account of unaccounted interest was telescoped to the addition made on account of unexplained investment and accordingly, no separate addition was made thereof. The Ld. AO made another addition of Rs.2.75 Lacs which represent gifts received by the assessee from his parents. Finally, the income of the assessee was computed at Rs.400.98 Lacs. The addition of Rs.2.75 Lacs was not contested by the assessee any further. Appellate Proceedings 3.1 The Ld. CIT(A) noted the details as contained in the Varavu Selavu notebooks were as under: - Period to which AY Total interest Total % of interest Varavu Selavu collected Rs. advanced earned on total Note relates Rs. loans advanced 01.02.2008 to 2008-09 44,62,904 8,11,88,705 5.5% 31.03.2008 01.04.2008 to 2009-10 59,07,070 11,28,96,435 5.23% 31.05.2008 01.01.2013 to 2013-14 29,99,900 6,64,49,977 31.03.2013 01.04.2013 to 2014-15 96,75,655 14,59,89,779 6.63% 30.09.2013 10.01.2014 to 03.03.2014 2,30,45,529 40,65,24,896 5.66% 3.2 The assessee, in its written submissions, assailed the working of Ld. AO. It was submitted that figure of cheque deposit of Rs.61.17 Crores as taken by Ld. AO include cheques return for Rs.9.42 Crores which would translate in to Cheque return to Cheque deposit ratio of 15.39%. While making computations, this aspect was not considered at all and the estimate of Ld. AO was a faulty estimate and bad in law. 3.3 It was reiterated by the assessee that he was engaged in money lending business since financial year 2004-05 and it would be prudent to assume that any such business would have receivables and as such the assessee had debtors prior to assessment year in consideration in the form of circulating capital. The Ld. AO erred in not considering the fact that the debtors would have been in existence in the course of business for the prior years also. Therefore, Ld. AO erred in considering debtors as on 31-03-2008 while making the computations. The assessee supported its own working which was based on peak credit. The peak credit for this year was worked out to be Rs.139.93 Lacs which would be a fairer estimate since the whole case of Ld. AO was based on the bank statements considering the bank statements to be the books of accounts. Therefore, the estimate of opening capital employed based on peak balance of the previous year’s bank statements must have been given due importance and consideration since it represents the figures as per the bank statements which the AO has relied upon to estimate the income and adopted the base of framing the assessment for block period. Therefore, adoption of Rs.415.21 Lacs as closing debtors as on 31-03-2008 was arbitrary one since the same was already available even during the period ended 31-03-2007 in the form of circulating capital. The peak balance of Rs.139.93 Lacs of bank accounts as on 31- 03-2007 may be treated as opening capital employed for this year since the bank statements were primary proof for framing the entire assessment and Varavu Selavu Notebooks were not available for the period from 01-04-2007 to 31-01-2008. 3.4 The assessee also assailed adoption of interest rate of 5.5% on the ground that the same was based on available data for two months whereas for remaining months no incriminating material was found. Further, the notebooks did not indicate any expenditure incurred in relation to brokerage paid on referrals, expenditure incurred in operating of business, day-to-day expenses, bad debts etc. The notebooks comprise-off only the data in respect of loans advanced, cash withdrawn from bank for advancement of loan and receipt of repayment of loan only. Reliance was placed on various judicial decisions to assail the working of Ld. AO based on extrapolation of data of two months. 3.5 In the alternative, the assessee pleaded for adoption of interest rate of 2.5% of total loans credits and while computing the interest, the cheques returned / dishonored was to be excluded. The capital employed of Rs.139.93 Lacs was to be adopted and the debtors balance as computed by Ld. AO was to be rejected. The cheque dishonored for Rs.942.01 Lacs was to be considered as bad-debts which was to be allowed against estimated interest income. The assessee also pleaded for allowance of brokerage / commission and administrative expenses. 3.6 The adjudication of Ld. CIT(A) is contained in para-7 onwards. The Ld. CIT(A) observed that average interest rate as per Varavu Selavu notebooks was 5.66% computed as under: -

A.Y. Period for which Average rate of interest Varavu Selavu as per seized books books found 2008-09 2 Months 5.50% 2009-10 2 Months 5.23% 2013-14 3 Months 4.51% 2014-15 9 Months 6.63% Average 5.66% interest rate Considering the same, Ld. AO rightly applied interest rate of 5.5% and the same was based on seized material. The argument on cheques dishonored was to be rejected since the assessee was collecting interest at the time of disbursement of loan amount only. Even in case of dishonored cheques, the interest would have been fully collected by the assessee. The Ld. AO considered only such amount which were successfully recovered in the form of cheques. The Ld. CIT(A) also rejected reliance on various case laws and upheld the addition based on extrapolation of data. On the issue of bad-debt claim, Ld. CIT(A) held that the assessee lent money after reducing interest portion from principal amount lent. There was no loss of interest even if principal goes bad. It could not be believed that once the cheque had bounced, the assessee would not take any other measures to recover the amounts. The bounced cheque would not automatically mean a bad-debt unless there was actual evidence thereof. Even after Cheque is rejected, the amount might have been recovered subsequently by taking valid cheques. If collection is through any other valid cheque, it might have been credited to bank account which would form part of loans recorded. But if recovery was through cash, there was no chance of it appearing in bank accounts. The assessee was unable to identify such bad debts. Therefore, the corresponding arguments were rejected. The arguments on allowance of expenditure were also rejected. Only partial relief of Rs.8.82 Lacs was granted against impugned additions for computational error and the balance addition of Rs.365.85 Lacs was sustained. Aggrieved, the assessee is in further appeal before us.

by the assessee stand allowed accordingly.

9. Other issues in AY 2010-11 9.1 In this year, the assessee is aggrieved by addition of alleged undisclosed investment in M/s Rajadheepam Spinning Mills Pvt. Ltd. (RSMPL) for Rs.58.22 Lacs. The same was on the allegation that investment made by six persons aggregating to Rs.58.22 Lacs was sourced by the assessee. The protective additions made in the hands of these persons was deleted by first appellate authority but confirmed in the hands of the assessee on substantive basis. During appellate proceedings, the assessee stated that the investment made in the name of family members and close associates was out of money lending business and therefore, telescoping benefit could be allowed for additional income as offered by the assessee. However, Ld. CIT(A) rejected the same against which the assessee is in further appeal before us.

9.2 In this year, another addition has been made for Rs.188.23 Lacs on the allegation that the assessee has made unaccounted cash payment to erstwhile shareholders of RSMPL. The same was on the basis of a loose sheet found during the course of search. The assessee produced shareholders who denied having received on-money by way of cash over and above cheque payments. The genuineness of the document was also questioned on the ground that Shri M. Mohan and Shri P.R.A. Muthusamy signed at multiple places on behalf of other persons and the document was not witnessed. It was also submitted that the assessee was one of the shareholder in RSMPL and as per loose sheet, he was shown to have received cash amount of Rs.5.85 Lacs as existing shareholder whereas the assessee was the one who took over the company. However. Ld. AO rejected the same on the ground that loose sheet could not be termed as dumb document. It was a document signed on behalf of existing shareholders (numbering 40) of RSMPL confirming receipt of cash on 25-06-2009 to the extent mentioned against their names. The share transfer forms were submitted to ROC on 29-09-2009 subsequent to the date of payment which would show that the payment was towards transfer of shares. In two cases, cash was deposited by the shareholders next day in their bank accounts. Shri M. Somasundaram or Shri S. Mohan could not answer properly as to why they signed acknowledgement slip in cash. The onus was on assessee to rebut the presumption of Sec.292C. Therefore, the addition was confirmed against which the assessee is in further appeal before us. 9.2 We find that aggregate of above two additions is Rs.246.45 Lacs (Rs.58.22 Lacs + Rs.188.23 Lacs). In our considered opinion, without going much deeper, benefit of telescoping could be granted to the assessee against these two additions. Upon perusal of our tabulation in preceding para-8, it could be seen that the assessee has offered additional income of Rs.45.11 Lacs for AYs 2008-09 & 2009-10. Further, we have confirmed addition of Rs.65.44 Lacs (75% of Rs.87.25 Lacs) for this year. The aggregate of the two comes to Rs.110.55 Lacs. In our considered opinion, one-to-one correlation of investment as urged by Ld. CIT(A) is not required on the facts of the present case since the income has been estimated by us. In such a case, no correlation would be required. In fact, the assessee has not maintained complete records and therefore, he could not be put to such an obligation. The alleged investment in the shares of RSMPL has been made in the name of family members and close associates. Under such circumstances, the benefit of telescoping, in our considered opinion could be allowed to the assessee. Proceeding further, upon perusal of loose sheet as placed on Page No.38 to 42 of paper-book, Volume I, we find that assessee himself is shown to be one of the recipients of money which negate the theory of cash payment as put forward by Ld. AO. In our considered opinion, no one would make payment to himself and acknowledge receipt thereof. The assessee denied having made any cash payment and also produced shareholders who denied having received on-money by way of cash over and above cheque payments. Therefore, this addition stem from uncorroborated loose sheet which would not hold much evidentiary value to make impugned additions in the hands of the assessee. For the aforesaid reasons, both these additions stand deleted.

10. Other issues in AY 2014-15 In this year, Ld. AO made addition of Rs.16 Lacs which represent loan taken by assessee from his mother and wife. The same was added as unproved liability. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. This issue has remained unsubstantiated before us also. Therefore, no interference is required in the orders of lower authorities, in this regard. Conclusion 11. All the appeal stands partly allowed in terms of our above order. Order pronounced on 14th November, 2024 Sd/- Sd/- (MANU KUMAR GIRI) (MANOJ KUMAR AGGARWAL) �ाियक सद3 / JUDICIAL MEMBER लेखा सद3 / ACCOUNTANT MEMBER चे3ई Chennai; िदनांक Dated : 14-11-2024 DS आदेशकीTितिलिपअ/ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयु</CIT Coimbatore 4. िवभागीय�ितिनिध/DR 5. गाडAफाईल/GF