ITO, WARD-46(1), KOLKATA, KOLKATA vs. ANUPAM NANDI, HOWRAH

Ground No.1 to 3 have been raised by the revenue against the deletion of addition of Rs.1,52,00,082/- made by the ld. AO u/s 28(iv) of the Act.

The brief facts of the case as noted by the AO is that the assessee has shown his capital as on 31.03.2007 at Rs.2,35,07,705/- as against the capital of Rs.14,33,285/- as on 31.03.2006. The AO asked the assessee to explain the huge increase in capital as corresponding income has not been shown in A.Y.2007-08. The assessee while explaining how the capital has increased, admitted that there was mistake in the balance sheet filed originally and so the assessee duly filed audited reconciliation statement before the AO. The assessee’s explanation regarding increase in capital was attributable to inheritance of assets which consists of land and building ( original cost Rs.25,000/- and revalued cost at Shri Anupam Nandi A.Y.2007-08 2 Rs.14.5 lakhs) and gold ornament which were pawned and pledged of 27,927 gms received by the assessee from his grand father Shri Khagendra Nath.Nandi was not believed by the ld. AO. The assessee explained before the AO that on 11.07.1997 his grand father Shri Khagendra Nath .Nandi expired leaving behind his assets in favour of the assessee. It was brought to the knowledge of the AO that the late grand father was an income tax returnee and was in the business of money lending and used to lent money on the basis of gold jewellery being pledged before him as a security and when he died there was 27,927.170 gms of gold ornaments which were pledged gold in the money lending business was transferred to the assessee who took over the business of money lending business after the demise of his grand-father. In order to prove that the assessee inherited the business of money- lending from the late grand father, the assessee produced a copy of the notarised affidavit which was sworn by the uncles of the assessee and father of the assessee, in which it was stated that according to the wish of the late grand father the money lending business and the pawn gold weighing 27,975 gms which was in the possession of the late grand father as pledged gold in the money lending business was transferred to the assessee for doing business. Thus the assessee explained to the AO that pledged gold which was revalued and the land and building got from his grand-father increased the capital of the assessee in the year under consideration, which was not fully accepted by the AO. The AO believed that the land and building was bequeathed by the assessee which was supported by a registered gift deed (original cost of Rs.25,000/- and revalued cost at Rs.14.5 lakhs) and the AO accepted the fact the late grand father of the assessee was an income tax assessee, however according to the AO it was difficult to accept that gold weighing 27,909 gms (28 kgs) came to the assessee from his late grand father. After the AO stating that it was difficult to accept that the 28 kg of gold came to the assessee from late grand father, the AO in his order at page-4 of his order curiously takes an about-turn and states as below:-

Aggrieved the assessee preferred an appeal before ld.CIT(A) and contended that the entire confusion in respect to the increase in capital was caused due to certain mistakes committed by the auditor because of over-sight and that in the instant assessment year, the assessee deviated from the Bengali conversion single entry system to the English double entry systems, so the assets which he got from his late grand father was not reflected in the previous assessment year. The ld. CIT(A) having taking note of the fact that the late grand father of the assessee Shri Khagendra Nath.Nandi was an income tax assessee and died in 1997 and taking note of the audited statement of accounts of the said late Shri Khagendra Nath.Nandi for the year ending 31.03.1997 along with the notes of account specifying the fact of pledged gold weighing 927.170 gms and also taking note into account the physical verification report dated 7.5.1997 of M/s. P.C.Associates, Chartered Accountant regarding pledged stock of gold/jewellery as on 31.03.1997 certifying that the gold weighing 27,927.17 gms of stock of gold was in fact pledged and kept in the custody of late grand father as on 31.3.1997. The ld. CIT(A) also took note of the copy of the pledge stock register of Late Shri Khagendra Nath Nandi for the year 1996-97, 1997-98 and 1998-99 therein the continuity of the pledged items and subsequent release of some items back to borrowers. The ld.CIT(A ) also took note of the statement showing release of pledged gold for the A.Y.1997-98 and 1998-99 which fact was corroborated in the remand report wherein, six persons who have taken back the pledged gold confirmed before the AO the fact of redemption back of the pledged gold. The ld.CIT(A) also took note of the fact that scrutiny assessment orders has been passed in the case of the assessee for A.Y.2001-02, 2002-03 and 2003-04. The ld. CIT(A) also took note of the fact that the assessee is the grand son of Late Shri Khagendra Nath Nandi. The assessee’s father and two of his brothers were in fact could have inherited the property left by late Shri Khagendra Nath Nandi. He took note of the fact that the father of the assessee and his two brothers of the father had by an affidavit which has been notarised has categorically stated that they are Shri Anupam Nandi A.Y.2007-08 5 waiving their share of inheritance in the business of all assets and liabilities including pledged gold weighing 27,909.070 gms in favour of the assessee. The ld.CIT(A) after taking note of the remand report and discussing the law on pledged items demolished the theory of the AO that in the money lending business if the pledger of the gold does not take back the gold pledged then it is forfeited to the pledgee/money lender in this case to the assessee has been found to be on a totally wrong basis both on facts and law. The ld. CIT(A) after discussing the case laws has held that the pledged item can be claimed by the pledgor any time and the pledgee (money lender) has to give back the pledged item after collecting the dues. And in any case if the pledger is not able to retrieve the gold by remitting the amount as agreed upon then the assessee money lender has to give notice to the pledgor about the sale of pawned items and that during the auction the pledgee (money lender) cannot even buy the pledged items. Based on the aforesaid facts the ld. CIT(A) agreed to the explanation given by the assessee that the assessee cannot be termed as the owner of the pawned gold which got transferred to the assessee from his grand father and the same is a contingent liability and cannot be taxed in A.Y.2007-08 and ordered deletion of the addition.

We have heard both the parties and perused the records. The whole controversy is that during the assessment proceedings the AO observed that the assessee has shown in his own capital as on 31.03.2007 at Rs.2,35,09,705/- as against the capital of Rs.14,33,285/- as on 31.03.2006. The assessee pursuant to the notice issued by the AO to explain the increase in the capital, the assessee explained that until 31.03.2006 the accounts of the assessee were maintained in Bengali conversion single entry system and in the instant year the assessee switched on to English double entry system wherein AS-28 and AS-29 of the accounting system was followed. It was pointed out that there was a mistake on the part of the auditor who had admitted the same. The description of the gold items as inherited stock in the balance sheet was not correct because these are the Shri Anupam Nandi A.Y.2007-08 6 very same gold items which have been pawned before the late grand father and later on transferred to him after the demise of grand father and the said gold is appearing in the pledged stock register maintained during the business of the late grand father Shri Khagendra Nath Nandi of the assessee. The auditor clarified that the pledged items were revalued and wrong description of the items as inherited stock of gold was a wrong description. It was also clarified by the auditor that he omitted to mention that the capital includes contingent liability to the extent of revalued pledged items and as per the proper accounting standards the pledged item should have been shown as contingent asset and corresponding entry on the liability side ought to have been made as per AS-28 and AS-29 laid by the Institute of Chartered Accountant of India which was not accepted by the AO who was of the opinion though it was difficult to believe that gold was inherited by the assessee from late grand father, Thereafter, though he rightly noted that the ownership of the pledged gold is that of the borrowers, he went on to hold that if the borrowers does not redeem the pawned items, then by virtues of forfeiture, the gold need to be treated as capital of the assessee as on 01.04.2016. Thus he held that the pledged stock of gold of 27,927.170 gms as income arising on 01.04.2006 u/s 28(iv) of the Act. The ld. CIT(A) took note of the fact that the assessee’s grand father Shri Khagendra Nath Nandi was into money lending business since independence and he died in 1997 and thereafter the money lending business was carried out by the assessee, the grand son and the gold/jewellery weighting 27,927.170 gms was reflected in the notes of the account specifying the pledged stock of gold as on 31.03.1997. This fact according to the ld. CIT(A) has been corroborated by the physical verification carried out by M/s. P.C.Associates, Chartered Accountants regarding the pledged stock of gold jewellery as on 31.03.1997. The ld. CIT(A) also took note of the fact that the assessee got the money lending licence on 21.11.1997 and the ld. CIT(A) has gone through the stock register of the pledged and released items from 1997 onwards and found that it contained the entire list of parties who had pledged jewellery for availing loans Shri Anupam Nandi A.Y.2007-08 7 and the borrowers who have redeemed the pledged gold also. Thereafter the ld. CIT(A) after taking note of the affidavit which was notarised by assessee’s father and 2 uncles (i.e. two brothers of the father) who have waived their share of inheritance in the business with all its assets and liabilities including that of the pledged gold/jewelleries weighing 27,909.070 gms noted that the assessee was running the money lending business after the death of his grandfather and was having the pledged stock of 27,927.170 gms as on 31.03.1997 onwards. The ld. CIT(A) took note of the fact that in the remand report the AO has confirmed from six borrowers who had redeemed the pledged gold from the assessee. The ld. CIT(A) has not agreed with the AO’s conclusion that the gold which has not been redeemed by the borrowers becomes forfeited asset of the assessee. The ld. CIT(A) has observed that the assessee could not have forfeited the pawned items and in any case he cannot own the same. The ld. CIT(A) has taken note that the entire controversy has started because in the year under consideration the assessee changed from the single entry system to double entry system and the pledged gold was wrongly shown as inherited capital in the balance sheet and which was in fact a contingent liability The ld. CIT(A) has taken note of the auditors clarification that the description of the inherited stock of gold as capital was wrong when the fact was that the pledged gold was a contingent liability. The auditor clarified that the capital includes the contingent liability of the revalued pledged items and corresponding entry on the liability side as contingent liability as per AS 28 and 29 was not properly made and so the confusion happened. The ld.CIT(A) after appreciating the fact the assessee’s grand father Shri Khagendra Nath Nandi have been in the money lending business and after his demise in 1997 the assessee’s father and his two brothers have waived their share of inheritance and the money lending business to the assessee and the assessee got the licence for money lending business and the pledged gold which has been revalued in 2007 was the very same pledged gold which has been brought forward from 1997 onwards and which fact has been corroborated by the stock registers from all the pledged items from 1996- Shri Anupam Nandi A.Y.2007-08 8 97 onwards. Based on these facts the ld. CIT(A) has deleted the addition. The impugned findings of the ld. CIT(A) cannot be termed by us as perverse because the ld. CIT(A) has come to the conclusion based on evidence on record which has been perused by us. The whole controversy as explained by the ld. AR was due to the assessee changing in the assessment year under consideration from the Bengali conversion single entry system to the English double entry system and erroneously the auditor has shown the pledged gold in the balance sheet as capital which was in fact the contingent liability. In order to prove that the auditors mistake created the wrong description of the pledged gold, the ld. CIT(A) has reproduced the admission in this respect of the auditor in the impugned order of the ld. CIT(A) in pages 26 and 27. The question whether the assessee is into the money lending business has also been proved by the assessee by producing the money lending licence which is annexed at page 19 of the paper book and we note that licence for money lending was granted to the assessee dated 21.11.1997. The assessee’s grand father Shri Khagendra Nath Nandi was into the business of money lending on the basis of the gold pledge as security is proved by the income tax returns filed by the said Shri Khagendra Nath Nandi and also from the pledged stock register of Shri Khaghendra Nath Nandi for the year 1996-97 and 1997-98 which shows the pledged items and subsequent release of the same which are annexed at pages 55 to 145 of the paper book. On perusal of the audited statement of Shri Khagendra Nath Nandi for the year ended 31.03.1997 which is placed at page 49 and perusal of notes on accounts reveals the fact of stock of gold of 27,927.170 gms as on that date. This fact has been corroborated by the Chartered Accountants M/s. PC Associates who have physically verified the stock has given a certificate dated 7.5.1997 which is placed at page 50 of the paper book and list of gold stock which is placed from 51 to 54 of the paper book wherein the products, number of items, weight in grams have been enumerated. The ld. AR took our attention from pages 55 to 145 of his paper book which is the pledged stock register of late Shri Khagendra Nath Nandi for the year 1996-97, 1997-98 which shows the continuity Shri Anupam Nandi A.Y.2007-08 9 of pledged items and subsequent redemption/release of some of the items back to the borrowers. The ld. AR took our attention to the statement showing release of the pledged stock of gold for the year 1997-98, 1997-98 and 1998-99 which are placed at pages 146 to 163 of the paper book. The ld. AR took our attention the fact that after the death of the grand father the business of money lending was being run by the assessee from his father that he had taken the money lending licence on 21.11.1997 and the affidavit of the legal heirs of Shri Khagendra Nath Nandi dated 08.08.2016 which is placed at pages 46 to 47 of the paper book which has been notarized. The legal heirs of the grand father of the assessee i.e. the three sons of late Shri Khagendra Nath Nandi who is assessee’s father and his two brothers of the father of the assessee have sworn the affidavit that they have waived their share of inheritance in the business with all its assets and liabilities including pledged gold/jewelleries weighing 27,909.070 gms in favour of the assessee. We take note from page nos. 46 and 47 of the paper book the affidavit and so the identity need not be disbelieved because the affidavit has been sworn before a notary public by the legal heirs of the late Shri Khagendra Nath Nandi. So the fact that late Shri Khagendra Nath Nandi expired in 1997 leaving behind stock of gold of 27,909.170 gms which is duly reflected in the stock register maintained in respect to the pledged items of gold have been transferred to the assessee to continue the business of money lending from 1997 onwards and thereafter with the aforesaid documents that has been produced before us the assessee was able to establish that he had 27,927.17gms of gold in 1997 which was duly reflected in the notes forming part of balance sheet as on 31.03.2009 ( page 48 and 49 of PB) . Thereafter we find that the stock register was maintained continuously from 1997 onwards. The ld AR, took our attention to page 22, which is the balance sheet as on 31.03.2009 and we note that the money lended was to the tune of Rs 5,14,857 and inorder to corroborrate the figures the ld AR took our attention to page 146 to 163 of the PB, which are the pledged stock register, wherein we note the entire names of the borrowers with address ,date , weight of gold and amount lended is Shri Anupam Nandi A.Y.2007-08 10 reflected and we take note that opening balance of gold is 27.927 gms and on 31.03.1999 the closing stock of gold pawned was 31,183 gms and Rs.5,14 ,897/- was lended by the assessee, which matches with the figures shown in the balance sheet as on 31.03.1999 at page 22 of the paper book. Thus we note that the pawned jewellery stock of 31,183gms as on 31.3.1999 was reduced to approx 28 kgms as noted by AO as on 31.3.2007 pursuant to various redemptions that had happended during the period from 1999 to 2007. The assessee during the financial year 2006-07 thought it fit merely to revalue the said already accounted jewellery and give the effect of revalued portion of the jewellery to the tune of Rs.1.52 crores and included the same in the jewellery account on assets side and corresponding credit to his capital account. This is merely a book entry passed by the assessee to give effect to the revaluation of the jewellery which was already disclosed in the balance sheet. Hence in any case there is no case made by the AO for framing an addition u/s 28 (iv) of the Act. The assessee was able to explain with the evidence of the auditor who has admitted to have made mistakes in describing the gold pledged as capital of the assessee , whereas, in the eyes of law it is a contingent liability and since the error has been corrected by audited reconciliation statement before the AO at the very first instance itself, we do notfind any infirmity in the order passed by the ld. CIT(A) in directing the deletion of the addition made by the AO u/s 28(iv) of the Act. Therefore we confirm the order of the ld. CIT(A) and dismiss the ground of appeal raised by the revenue on this issue.

The ld CITA appreciated the various contentions of the assessee together with the evidences submitted before him in the paper book and held that no addition u/s 68 of the Act could be made in the year under appeal in the facts and circumstances of the case and accordingly deleted the addition. Aggrieved , the revenue is in appeal before us on the following ground:- “4. That the Ld.CIT(A) has erred in facts and circumstances of the case by allowing relief Rs.49,50,000/- to the assessee though in the assessment stage as well as in remand stage, Sri Anal Kanti Dey was specifically asked to provide details of his transaction (i.e. date and mode of transaction) with the appellant and the said person as well as the appellant assessee failed to discharge the onus not only to prove the genuineness of the transaction but also failed to provide all relevant particulars in this regard.”

We have heard the rival submissions and perused the materials available on record including the relevant pages of the paper book filed by the assessee in this regard. We find that at the outset, that the assessee has been maintaining accounts in Bengali conversion single entry system and the same were duly converted into English double entry system during the financial year 2006-07 relevant to Asst Year 2007-08. The ld AR argued that the advances from Mr Anal Kanti Dey had been received prior to 1.4.2002 which fact has been duly confirmed by him also in the reply letter filed by him before the ld AO in response to notice u/s 133(6) of the Act and proceedings thereafter. This is further ratified by the fact that the assessee had duly recorded the receipt of advances from Mr Anal Kanti Dey in his usual style of Bengali conversion single entry system of accounting and income tax returns filed based on those accounts have been duly subjected to scrutiny assessments in Asst Years 2001-02 , 2002-03 & 2003-04 by the ld AO. These facts are not controverted by the revenue before us. Hence the fact of non- receipt of advances in the sum of Rs. 49,50,000/- received from Mr Anal Kanti Dey during the financial year 2006-07 relevant to Asst Year 2007-08 stands very clearly established. The only basis for the revenue to invoke the provisions of section 68 of the Act in respect of such advance in the sum of Rs. 49,50,000/- is that the assessee had sought to reflect the said entry in the books of accounts for the financial year 2006-07 relevant to Asst Year 2007-08 for the first time. This had been properly explained by the assessee that it had converted its Bengali conversion single entry system to English double entry system during the year under appeal and this fact has also been duly mentioned in the notes on accounts filed along with the balance sheet in the return of income. So it is merely by book entry of bringing the advance from customers into the books of accounts of the assessee, the ld AO is seeking to tax the same by invoking the provisions of section 68 of the Act. It is well settled by the decision of the Hon’ble Supreme Court in 187 ITR 308 (SC) relied upon by the ld AR that the expression ‘sum’ means ‘sum of money’ only . Though this decision was rendered in the context of Shri Anupam Nandi A.Y.2007-08 16 applicability of deduction u/s 80G of the Act for donations given in kind, the principle laid down and observations made by the Hon’ble Supreme Court as reiterated supra would be binding and analogy drawn thereon could be applied to provisions of section 68 of the Act also. It is not in dispute that there was no physical receipt of any money in cash or by cheque during the financial year 2006- 07 relevant to Asst Year 2007-08 from Mr Anal Kanti Dey towards advance for purchase of gold. Hence we hold that the provisions of section 68 of the Act as rightly contended by the ld AR could not be invoked in the facts and circumstances of the case. We find that the decision relied upon by the ld DR in the case of Roshan Di Hatti vs CIT supra is not applicable to the facts of the instant case as it only held that when the nature and source of credit is not properly explained by the assessee, then the same could be taxed u/s 68 of the Act. The issue as to whether the said credit is in the form of sum of money or not was not the dispute or the question before the Hon’ble Supreme Court. We find from the facts before the Hon’ble supreme court in that case , that the assessee thereon was carrying on jewellery business in Lahore and had migrated to India in June 1947 and had brought the value of gold and other jewellery from the said business into India and reflected the same in his balance sheet. The documentary evidences in that case proved the existence of that assessee carrying on jewellery business in Lahore prior to migration to India and hence it was held that the value of those assets (irrespective of it getting taxed in Lahore or not) that were brought into India cannot be added u/s 68 of the Act. Hence we hold that the decision relied upon by the ld DR does not advance the case of the revenue. It is also not in dispute that there was no physical inflow of money either in cash or by cheque in respect of advance received from Mr Anal Kanti Dey during the financial year 2006-07. To support this, Mr Anal Kanti Dey had confirmed to the ld AO in more than one occasion that the said advances were paid prior to 1.4.2002 and were outstanding as on 31.3.2007 with the assessee. Given this fact and the undisputed fact that the assessee was maintaining accounts under Bengali conversion single Shri Anupam Nandi A.Y.2007-08 17 entry system upto Asst Year 2006-07 (i.e immediately preceding previous year) and given the fact that the same were duly converted into English double entry system during the financial year 2006-07 relevant to Asst Year 2007-08 wherein these entries together with other entries were reflected in the books , we are persuaded to believe the version of the assessee in this regard. Respectfully following the Hon’ble Supreme Court’s decision in 187 ITR 308 (SC) supra , we hold that the provisions of section 68 of the Act cannot be invoked in the facts and circumstances of the case and the ld CITA had rightly deleted the addition in this regard. Hence we do not find any infirmity in the order of the ld CITA. Accordingly, the Ground No. 2 raised by the revenue is dismissed.

In the result, the appeal of the revenue is dismissed.