M/S INDIAN RICE MILLS STORES,KOLKATA vs. ITO, WD-35(2), KOLKATA, KOLKATA

Ground No.1 raised by the assesee reads as follows :- “l.That on the facts and circumstances of the case Ld. Commissioner (Appeals) erred in making addition Rs 3142138/- received advance from customer as unexplained cash credit u/s 68 of Income Tax Act,1961. “

The Assessee is a partnership firm. It is engaged in the business of trading including exports. During the course of assessment proceedings the AO noticed that the assessee had shown to have received an advance of Rs.31,42,138/- from the following two customers :- (a)A.G.S.Sen Trading Ltd. : Rs.22,39,728/- (b)Al-Burhani International : Rs. 9,02,410/- Rs.31,42,138/- The AO requested the assessee to explain such claim by furnishing :- -M/s. Indian Rice Mills Stores-A.Y.2009-10

AO has set out in paragraph 3.2 of his order, the opportunities given to the assessee to explain the receipt of advances from the customers. There were as many as 8 opportunities afforded to the Assessee by the AO in this regard. The AO after referring to the opportunities afforded to the Assessee, observed that the assessee failed to comply with the directions of the AO and accordingly a sum of Rs.31,42,138/- was added to the total income of the assessee as unexplained credit u/s 68 of the Act.

Before CIT(A)the assessee explained that it could not comply with the directions of the AO in the course of assessment proceedings and requested for an opportunity to produce evidences that was called for by the AO. The CIT() allowed opportunities to the assessee to produce such evidence and called upon the AO to examine the evidence and file a remand report. In the remand proceedings, the AO called for certain details which are listed in paragraph 3 of the CIT(A)’s order in sub-paragraph 4.4. AO in the remand report further submitted that the assessee had filed only the copy of its own bank statement in support of its claim but did not file any evidence in respect of identity of the creditor, creditworthiness and genuineness of the transaction. The CIT(A) after considering the remand report of the AO came to the conclusion that the assessee failed to prove the genuineness of the transaction, identity and creditworthiness of the persons who have claimed to have paid advance to the Assessee etc., and thereby confirmed the order of AO.

Aggrieved by the order of AO the assessee has raised ground no.1 before the Tribunal. ITA No.1053/Kol/2014-M/s. Indian Rice Mills Stores-A.Y.2009-10

At the time of hearing the ld. Counsel for the assessee submitted that the assessee had made supplies to the aforesaid two persons from whom advance was received in the subsequent financial years and that the advance was adjusted against the supplies made subsequently. It was submitted by him that the one of the aforesaid parties is resident of Bangladesh and the other resident of Dubai. It was his submission that it was not possible for the Assesee to comply with the request of the AO to file evidence regarding creditworthiness of the parties. He however submitted that the evidence with regard to the permission of remittance of the aforesaid sums from Bangladesh and Dubai and that of the supplies of goods by the assessee in the subsequent financial year, could be produced to explain the identity, genuineness and capacity of the creditor. He prayed for setting aside the order of CIT(A) and prayed for an order of remand to the AO by affording one more opportunity for the assessee to establish the creditworthiness in question.

The ld. DR while pointing out that the assessee already had enough opportunity, further submitted that the assessee has not even placed documents in support of its claim before the Tribunal so that another opportunity can be afforded to the assessee.

We have considered the rival submissions. As rightly contended by the ld. DR there was complete failure on the part of the assessee to furnish any evidence either before AO or before CIT(A) and even before the Tribunal. The request for a remand is made without any basis or evidence being shown to the Tribunal to justify the order of remand. We have already seen that the AO afforded as many as 8 opportunities in the course of assessment proceedings. In these circumstances we are of the view that the request made on behalf of the assesee cannot be accepted. On the evidence on record, we are of the view that the conclusions of the CIT(A) are just and proper and calls for no interference. Accordingly ground no.1 raised by the assessee is dismissed.

Ground No.2 raised by the assessee reads as follows :- -M/s. Indian Rice Mills Stores-A.Y.2009-10

The assessee during the previous year received unsecured loans totalling Rs.10,00,000/- from the following three parties :- (a) S.D.Dugar : Rs. 75,000/- (b) Hakimuddin Bemat : Rs.8,00,000/- (c) M.K.Dugar & Sons HUF : Rs.1,25,000/- Rs.10,00,000/- The AO requested the assessee to explain such claim by furnishing – (i)Confirmations of such loans. (ii)The following evidences in support of genuineness of loan and creditworthiness of loan creditors :- (a) Bank statement of Loan Creditors (b) Cash flow statement of Loan creditors (c) PAN, copy of I.T. Acknowledgement, P/L Account and Balance Sheet of Loan creditors, For the relevant period.

In the order of assessment, the AO in paragraph 4.2 has set out the opportunities afforded to the assessee to explain the aforesaid unsecured loans and the failure of the assessee to comply with the request of the AO. The AO had afforded about 8 opportunities to the Assessee in this regard. The AO accordingly treated Rs.10,00,000/- as unexplained cash credit u/s 68 of the Act.

Before CIT(A) the assessee filed the following details :-

The CIT(A) called for a remand report from the AO on the additional evidence filed by the Assessee before him. The AO in his remand report to the CIT(A) had reported that on enquiry from the loan creditors it was observed that: i) Mr Hakimuddin Behmat, the loan creditor who was claimed to have advanced the assessee a sum of Rs 8,00,000 did not reply to the letter issued by the AO. ii) The following parties confirmed the claim of the assessee: S.D. Dugar Rs 75,000/- M.K. Dugar & Sons HUF RS.1,25,000/- The AO however reported that the claim of the Assessee explaining the credits cannot be accepted for the following reasons: i) Mr Hakimuddin Behmat the loan creditor who was claimed to have advanced assessee the sum of Rs 800000 did not reply to the letter issued by the office. The onus was on the assessee to furnish the evidences of creditworthiness of the loan creditor Mr H. Behmat and genuineness of such transactions but, the assessee has failed to do so. ii) S D Dugar and M K Dugar & Sons HUF confirmed the claim of the assessee but they did not furnish cash flow statement. The assessee was also unable to furnish the cash flow statement of such loan creditors. There was cash deposit of Rs 45000 in the bank account of M/s M K Dugar & Sons HUF just before issue of cheque of Rs 1,25,000/- by the said party. Similarly, there was cash deposit of Rs 61500 in the bank account of SD Dugar just before issue of cheque of Rs 75000/- by the said party. The AO accordingly submitted that the addition made by the AO should be sustained.

On a consideration of the remand report of the AO, the CIT(A) was of the view that the genuineness of loan transactions and creditworthiness of loan creditors was not been proved by the Assessee and therefore the explanations offered by the assessee could not be accepted as satisfactory. The CIT(A) therefore held that the sum of Rs 1000000 credited in the account of the assessee was rightly added to the total income of the assessee firm for the AY 09-10 as unexplained credit u/s 68 of the Act.

Before us the ld. Counsel for the assessee submitted that Mr.Hakimuddin Behmat, one of the loan creditors, who had given a sum of Rs.8,00,000/- had not responded to the summons issued by the AO owing to strained personal relationship. It was submitted by him that the aforesaid party was now willing to extend necessary ITA No.1053/Kol/2014-M/s. Indian Rice Mills Stores-A.Y.2009-10 cooperation. He therefore prayed that one more opportunity may be afforded to the assessee to satisfactorily explain the unsecured loans received from Mr.Hakimuddin Behmat. As far as the other two unsecured loan creditors are concerned S.D.Dugar and M.K.Dugar & Sons, HUF the ld. Counsel submitted that the AO was always at liberty to examine the aforesaid parties but did not do so. It was submitted by him that the cash deposit of Rs.45,000/- in the bank account of M.K.Dugar & sons HUF before issuing of cheques to the assessee and the deposit of Rs.61,500/- in the bank account of S.D.Dugar before issuing of cheques to the assessee could be properly explained only by the aforesaid two parties and not by the assessee. He prayed that the order of CIT(A) may be set aside and the issue may be remanded to the AO with the direction to the AO to examine of the three creditors. The ld. DR submitted that the assessee had enough opportunity and the request made before the Tribunal should not be accepted.

We have given a careful consideration to the rival submissions. As far as the loan received from Shri Hakimuddin Behmat is concerned the position remains the same that even today confirmation of having given the loan has not been filed. It is therefore not possible to remand the issue on the presumption that Mr.Hakimuddin Behmat would file the confirmation to enable to the AO to make proper investigation. The request made by the ld. Counsel for the assessee in this regard is therefore rejected.

As far as the cash deposits in the bank account of S.D.Dugar and M.K.Dugar & Sons HUF is concerned, we are of the view that the AO ought to have summoned and examined those two persons with regard to the cash deposits in their bank account prior to issue of cheques to the assessee. We therefore accept the prayer for remanding the issue to the AO in so far as the two creditors are concerned. The AO will examine those two aforesaid parties and decide the issue in accordance with law. Thus ground no.2 raised by the assessee is partly allowed., ITA No.1053/Kol/2014-M/s. Indian Rice Mills Stores-A.Y.2009-10

Ground No.3 raised by the assessee reads as follows :- “3. The CIT (appeals) erred in disallowing expenditure towards interest on cash credit loan of SBI amounting to Rs 886927/-.”

The AO noticed that the assessee while computing the total income had claimed deduction of Rs.8,86,927/- which was an expenditure on account of interest on cash credit loan with State Bank of India. The AO examined the allowability of claim of the assessee for deduction of the aforesaid sum in the light of the provision of section 43B (e) of the Act. As per the aforesaid provision any sum payable by the assessee as interest on any loan or advances from a scheduled bank shall be allowed as a deduction in computing the total income only when such interest is actually paid. The AO further noticed that the assessee had not produced any evidence with regard to the payment of interest but noticed that there was a settlement between the assessee and the bank during the previous year 2010-11 and the assessee obtained benefit of Rs.3,48,806/- by way of such settlement with the bank and the same was offered to tax as income in that year. The AO also referred to Explanation 3C and 3D to section 43B of the Act which provides that even if interest payable on loans or advances from a scheduled bank is converted into a loan or advance that will not be the actual payment of interest. The AO accordingly added a sum of Rs.8,86,927/- to the total income of the assessee.

On appeal by the assessee CIT(A) confirmed the order of AO. Aggrieved by the order of CIT(A) the assessee raised ground no.3 before the Tribunal.

At the time of hearing it was pointed out by the ld.counsel for the assessee that the following is the details of the bank transactions in the cash credit account of the assessee.:- Details of Bank transactions of S.B.I. Martinier Branch, Kolkata A/c No.00000011187485784 O.D.Balance on 01.04.2008 Rs.8,786,087.21 Less : Deposits Rs.2,600,000.00 ITA No.1053/Kol/2014-M/s. Indian Rice Mills Stores-A.Y.2009-10

The ld.counsel for the assesse pointed out that a sum of Rs.26,00,000/- has been paid by the assessee towards outstanding balance due and payable to the bank and the same covered the OD interest debited in the profit and loss account. According to him therefore payment of Rs.26,00,000/-ought to be construed as payment of interest which was claimed as deduction by the assessee and no disallowance can be made u/s 43B of the Act. The ld. Counsel for the assessee thus submitted that the disallowance made by the AO cannot be sustained. The ld. DR placed reliance on the order of AO.

We have given a very careful consideration to the rival submissions. From the details given to us it appears that the assessee had deposited a sum of Rs.26,00,000/- in his bank account in which the credit facility in question was availed by the assessee. There are two questions that need to be answered before accepting the claim of the assessee namely what is the outstanding amount of interest and whether the sum of Rs.26,00,000/- paid would cover the interest of Rs.8,86,927/- which was claimed as deduction by the assessee in computing its total income. The second aspect that needs to be seen is as whether this deposit of Rs.26,00,000/- was prior to the accrual of interest on the loan amount in question in which case the benefit of payment of Rs.26,00,000/- cannot be attributed to the repayment of interest of Rs.8,86,927/-. We are of the view that these two issues have to be re-examined by the AO and for this purpose the order of CIT(A) on this issue is set aside and the AO is directed to examine these in accordance with law after affording the assessee opportunity of having heard. -M/s. Indian Rice Mills Stores-A.Y.2009-10

In the result the appeal of the assessee is partly allowed for statistical purposes.