P. Jyothimani, J.@mdashThe appeal in TCA 656 of 2004 filed by the Revenue was admitted on the following substantial questions of law:
1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the claim of interest
payable to State Bank of India of Rs. 1,15,26,000/- was allowable on actual payment basis overlooking the fact that no payment had been made,
and in not reversing the finding of the Commissioner of Income Tax that the claim was allowable u/s 36(1)(iii) even though the liability was not
ascertainable and enforceable, the assessee had denied the liability and the business for which moneys were borrowed had been discontinued?
2. Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in relying on irrelevant material and
incorrect statement filed by the assessee at the appellate stage and disregarding relevant evidence discovered in the search as discussed in the
order of the assessment and deleting the disallowance of Rs. 17,15,000/- being the peak of money lending investments?
3. Whether on the facts and circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the claim of bad debts
amounting to Rs. 7,60,000/- was allowable on the ground that the books have been written off as irrecoverable, disregarding the fact that the
assessee had not maintained books of accounts and thus, had not complied with the basic requirement of Section 36(1)(vii) and 36(2) of the
Income Tax Act?
4. Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in deleting the disallowance o
fRs.17,51,172/- being unexplained cash and bank balances found at the time of search even though the assessee was not able to prove that the
said balances came out of the realisation from debtors and stock of the discontinued/luminium metal business and the assessee had no other proper
explanation for the source of the said balances?
2. The appeal in TCA 387 of 2005 filed by the Revenue was admitted on the following substantial question of law:
Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that the claim of interest payable
to State Bank of India of Rs. 1,15,26,000/- was allowable on actual payment basis overlooking the fact that no payment had been made, and in
not reversing the finding of the Commissioner of Income Tax that the claim was allowable u/s 36(1)(iii) even though the liability was not
ascertainable and enforceable, the assessee had denied the liability and the business for which moneys were borrowed had been discontinued?
3. The assessee is doing mainly lodging business at the premises called Geethalayam apart from financing and letting out the building at Ranipet. An
action was taken by the Intelligence Wing of the Department by way of search. A sum of Rs. 17,08,672/- and jewelry worth 2302 grams were
seized. The assessee came forward with the disclosure of Rs. 54.77 lakhs. Certain incriminating documents were also available. Ultimately, the
Assessing Authority, after giving notice, has arrived at a conclusion that the total undisclosed income comes to Rs. 1,04,54,542/- and tax has been
imposed to the extent of Rs. 62,72,724/- along with the interest. It was against the said order of the Assessing Authority, the assessee filed an
appeal before the Commissioner of Income Tax (Appeals) and the same came to be allowed partly. Being not satisfied with the same, the assessee
has filed a further appeal before the Income Tax Appellate Tribunal. The Tribunal again has allowed the said appeal partly, but dismissed the
appeal filed by the department. As against the said order, the revenue has filed these two appeals.
4. As far as the first and second questions of law, which relate to the claim in respect of the interest payable to the State Bank of India to the extent
of Rs. 1,15,26,000/- and deleting the disallowance of Rs. 17,15,000/- as peak of money lending investments, the Assessing Authority in his order
was unable to arrive at a conclusion as to whether the assessee has followed the mercantile system or cash system of accounting. Even though it
has been the case of the assessee that what was followed was mercantile system while the revenue''s case was that the system followed was cash
system. It is relevant to extract some of the portions of the Assessing Authority''s order, which is not conclusive in our considered view, which are
as follows:
c.It is also not known from the records whether Lodging expenses and receipts are maintained on cash or mercantile basis.
d. Also from the returns filed for A.Y.1995-96 and 1996-97, from the balance sheet, the system of accounting followed by the assessee dopes not
appear to be on mercantile system but on cash basis. However, in the block return filed the assessee had followed mercantile system. He had
claimed huge bank interest outstanding towards his metal business which is closed long back.
5. A reading of the above stated versions, would show that the Assessing Authority himself has not decided the method of accounting followed by
the assessee. Unfortunately, the Commissioner of Income Tax Appeal as well as the Tribunal, has not chosen to deal with in respect of the block
assessment for the period from 01.04.1988 to 11.12.1997 and give a specific finding regarding the method of account followed by the assessee.
However, by applying the provisions of Section 43(B) of the Income Tax Act, the Tribunal in this regard only referred as follows:
The interest paid on term loan, bridge loan and working capital loan that is on actual payment basis of Rs. 1,15,26,000/- was allowable. The fact
that the loan was borrowed and utilised for purpose of business and was paid during the year not having been controverted, the deletion made by
the CIT(A) is upheld.
Thus, the Tribunal has not given a clear finding in respect of the substantial question No. 1 in TCA. No. 387 of 2005 and substantial question Nos.
1 and 2 inT.C.A. No. 656 of 2004 and therefore, the order of the Tribunal is set aside and the matter is remanded to the Tribunal for fresh
disposal.
6. In respect of the substantial question No. 3 inT.C.A. No. 656 of 2004, which relates to the claim of bad debts amounting to Rs. 7,60,000/- ,
for the assessment year 1998-99 on the basis of a suit filed by the assessee against the debtors, taking note of the fact that the suit was filed in the
year 1998 and not during the block period and also considering the fact that the account books were not proper and complete, the CIT(A) has
disallowed the said claim, however, by referring to Section 36(1)(vii) of the Act, which was amended by Direct Laws (Amendment) Act effective
from 01.04.1989. The Commissioner of Income Tax Appeals allowed the deduction in regard to any bad debts written off. It was in those
circumstances, taking note of the fact that the departmental representative could not place any material to suggest that the suits were decreed in
favour of the assessee, the Tribunal, in our considered view, has correctly passed orders refusing to interfere with the findings of the Commissioner
of Income Tax Appeals. Therefore, the third substantial question of law is answered in favour of the assessee.
7. Insofar as the fourth substantial question of law inT.C.A. No. 656 of 2004 is concerned, which relates to deleting of the disallowance of Rs.
17,51,172/- being unexplained cash and bank balances found at the time of search, the Tribunal has found that the plea of the assessee that
telescoping is called for with the addition made on account of unexplained sources is reasonable and it was in those circumstances, the claim of the
assessee was upheld by the Tribunal with a direction to the Assessing Authority to give credit to the assessee to the extent of the addition made on
account of unexplained sourced of income. We are of the view that the said finding does not warrant any interference and accordingly the said
substantial question of law also answered in favour of the assessee.
8. To sum up, while substantial questions of law 3 and 4 in TCA. No. 656 of 2004 are answered in favour of the assessee, with regard to the first
question of law in both the appeals and the second question of law in T.C.A. No. 656/04, the matters are remanded back to the Tribunal to render
a clear and fresh finding. The appeals are, thus, disposed of. No costs.
