Disallowance of business expenditure, unexplained expenditure and unexplained investments
April, 04th 2007
Embee Clearing and Shipping Services (P) Ltd. vs ACIT
2007 12 SOT 227
Disallowance of business expenditure
Expenditure not claimed as deduction
Block Period 11 November 1996 03 December 1999. The assessee company was engaged in the business of customs house clearance of imports and exports on behalf of its clients. Since the expenses incurred by it on payments to certain authorities for clearing consignments for and on behalf of its clients were not claimed as deduction, no part of the amounts paid could be disallowed.
S.37(1) of the Income Tax Act 1961
Scope of presumption under s.132(4A), Interpretation of seized document
The figures mentioned in the seized document were not indicative of the actual expenditure incurred by the assessee on renovation of its office premises because the document did not indicate the year in which the renovation was carried out and some of the items in the document were not in existence at office during the search.
S.69 and s.158B(b) of the Income Tax Act 1961
Jottings in codified form on loose sheet, Assessees explanation
The amounts mentioned on loose sheet of paper seized during a search could not be added to the assessees income without considering its explanation that the figures in the sheet represented a rough list of its debtors and their addresses along with a request to call them for verifying the genuineness of the transactions and without examining the parties who had filed their affidavits.
S.69 and s.158B(b) of the Income Tax Act 1961
Embee Clearing and Shipping Services (P) Ltd. vs ACIT
IT (SS) Appeal Nos. 435 and 546 (Mum.) of 2003 Block Period 11-1-1996 to 3-12-1999
G.C. Gupta, Judicial Member and D.K. Srivastava, Accountant Member
26 September 2006
J.P. Bairagra for the Appellant Arvind Pinto for the Respondent
D.K. Srivastava, Accountant Member. - these are cross appeals filed by both the parties against the order passed by the CIT(A) on 24-3-2003. We find it convenient to dispose of both the appeals by a consolidated order.
ITA No. 546/Mum./2003 (Department's Appeal)
2. the Department has taken the following grounds of appeal :
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 35,77,500 claimed by the assessee to have been paid on behalf of their client without appreciating that these payments are nothing but illegal payments made in the form of bribes to employees and therefore not allowable as deduction under section 37 of the Income-tax Act, 1961.
2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition by way of disallowance of Rs. 35,77,500 mentioned in Ground No. 1, claimed by the assessee as reimbursement of expenses paid on behalf of their client without appreciating that these payments made in the form of bribes to employees and, therefore, not allowable as deduction under section 37 of the Income-tax Act, 1961."
3. the assessee-company is engaged in the business of customs house clearance of imports and exports on behalf of its clients. It provides package of services to the exporters and importers in the matter of clearance of their imports and exports. Search and seizure operation under section 132 of the Income-tax Act was carried out on 2-12-1999 at the office premises of the assessee as well as residential premises of its Directors. During the course of search, certain loose papers and notebooks were found and seized. However, no valuable was seized except a sum of Rs. 2 lakhs in cash from the residence of a Director and a cash of Rs. 52,866 from the office premises of the assessee. During the course of search, it was stated by the Director that they had paid Rs. 800 to Rs. 1,000 per consignment to various authorities for having the consignments cleared. It was also stated that a sum of Rs. 2,500 to Rs. 3,000 was spent in the Docks in cash per consignment on account of processing and handling charges, container de-stuffing charges, container retainer charges, mutilation charges etc. on behalf of the customers. At the time of search, a sum of Rs. 1.50 crores was declared as undisclosed income in the hands of the assessee-company and its associate concerns namely M/s Embee Road Services Pvt. Ltd. and Embee Freight Carriers on account of the aforesaid expenses. However, the said declaration was later retracted by a notarized affidavit dated 31-12-1999 signed by Shri Shyam Sunder Makkar, Director in the assessee-company.
4. Block return was filed declaring nil income. However, the Assessing officer has computed the undisclosed income at Rs. 1,74,72,168, which includes addition of Rs. 1,68,73,433 being cash expenses. As evident from the grounds of appeal taken by the Department before us, the case of the revenue is that a sum of Rs. 35,77,500 out of the aforesaid cash expenses represented payments which were illegal being in the form of bribes to the employees of the Government and its agencies and hence their deduction was specifically hit by the Explanation to section 37(1) of the Income-tax Act. the case of the assessee, on the other hand, is three-fold : one, the assessee is only an agent of its clients and hence it receives only commission and nothing else from them; two, the assessee being agent of its clients receives money from the principals, i.e., its clients and incurs cash expenses on their behalf for having their consignments cleared and hence the expenses incurred by its principals cannot be said to have been incurred by the assessee; and three, the amount that the assessee receives from its clients for meeting handling expenses at the port are spent on their behalf without claiming any deduction for them in its P and L Account. It is submitted by the assessee that Explanation to section 37(1) can be invoked only when the assessee claims allowance or deduction for certain expenses. It is reiterated by the assessee that it has neither booked the impugned expenses in the PandL Account nor otherwise claimed any deduction for the same before the Assessing officer and hence the Assessing officer was not justified in making the impugned disallowance.
5. We have heard the parties. the revenue has challenged the deletion of impugned disallowance of Rs. 35,77,500 on the short ground that the payments in respect of which impugned disallowance has been made are nothing but illegal payments made in the form of bribes to employees and therefore not allowable as deduction under section 37 of the Income-tax Act, 1961. Section 37 provides for allowance of any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession carried on by the assessee. Explanation to section 37(1) bars deduction of any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. Section 37 or its Explanation cannot therefore be pressed into service unless the assessee seeks deduction for the expenditure. Disallowance of expenditure can arise only when there is a claim for its allowance. If the assessee does not claim allowance for any expenditure in the Profit and Loss Account, the question of disallowance of such expenditure cannot arise. In the matter before us, it is the claim of the assessee that it has not claimed any deduction for the impugned expenditure in its Profit and Loss Account and hence the Assessing officer was not justified in disallowing the same. the Department has not placed any material before us to controvert the aforesaid submission made on behalf of the assessee. In this view of the matter, the appeal filed by the Department is liable to be dismissed. We order accordingly.
ITA No. 435/Mum./2003 (Assessee's appeal)
6. Ground No. 1 taken by the assessee reads as under :
"Addition of Rs. 7,77,480 on alleged renovations at office premises
On facts and circumstances of the case and in law, the ld. CIT(A) has erred in upholding the additions made by the Assessing officer on account of alleged renovation made at the office premises on the basis of a seized loose paper bearing page No. 18 of Annexure "A-1". In doing so, the ld. CIT(A) has erred in not considering the fact that the items of renovation work mentioned in the paper do not correlate with the actual renovation work carried out by the appellant."
7. During the course of search and seizure operation, a loose paper marked Sl. No. 18 in Annexure I of the seized documents was seized from the residence of Shri Shyam Sunder Makkar, a Director of the assessee-company. According to the Assessing officer, the said document contains details of additions and alterations made to Masjid Bunder office at the cost of Rs. 7,77,482. the Assessing officer took note of the statement of Shri Shyam Sunder Makkar recorded at the time of search on 3-12-1999 in which he had admitted that the aforesaid seized paper pertained to renovation of office at Masjid for a sum of Rs. 7.77 lakhs. He also took note of another statement of Shri Shyam Sunder Makkar recorded on 29-12-1999 in which he stated that the aforesaid paper was only an estimate of renovation of the assessee's office premises at 105, Abhay Steel House. In his statement recorded at the time of search on 3-12-1999, Shri Hemal Makkar, another director stated that they had renovated the office premises at the cost of Rs. 7,77,480 which were duly accounted. the Assessing officer felt that the aforesaid paper was indicative of the actual expenditure incurred on the renovation of the office premises of the assessee. He therefore rejected the plea of the assessee that it was a mere estimate of renovation expenses. It is in this background that the Assessing officer has made the impugned addition of Rs. 7,77,480 being un-explained investment on renovation of office premises of the assessee. On appeal, the learned CIT(A) has confirmed the aforesaid addition for the reasons given in para 6 of his order with the following observations :
"6.3 On perusal of the loose papers being page No. 18 of Annexure A-1, it is seen that the appellant has not brought any verifiable material on records to refute that the renovations amounting to Rs. 7,77,480 were made by it. the appellant has only relied upon legal decisions to substantiate its claim. the appellant has not been able to dislodge the presumption as mentioned in section 132(4A) of the Income-tax Act. Considering this, I find that the Assessing officer has correctly made the addition of Rs. 7,77,480 in the hands of the assessee. I, therefore, confirm the addition made by the Assessing officer thereby taxing the amount of Rs. 7,77,480 as undisclosed income of the appellant. the Assessing officer has telescopically adjusted the addition of Rs. 7,77,480 in the addition of Rs. 1.68 crores. Considering the fact that I have granted relief in respect of the addition made of Rs. 1.68 crores, the telescopic adjustment of Rs. 7,77,480 cannot be made. Considering the same, the amount of Rs. 7,77,480 is taxed as the appellant's undisclosed income. Thus, this ground of appeal is dismissed."
8. We have heard both the parties. We have also perused the copy of the aforesaid seized paper, which has been placed by the assessee at pages 33 and 34 of its paper book submitted before us. the aforesaid papers do not give any indication about the year in which alterations were carried out or about the place at which they were carried out. Some of the items are recorded date-wise without recording the year while many other items do not carry even the date. then there are items showing certain amounts against items like kitchen fan, temple, Italian marbles, curtains, bathroom works etc. It was claimed by the assessee before the Assessing officer that the items mentioned in the said loose papers were non-existent at the office premises. It was also the case of the assessee before the Assessing officer that the aforesaid paper was only an estimate of the expenses. the Assessing officer did not agree with them with the result that he made the impugned addition on the basis of the statement recorded at the time of search. In our view, the aforesaid papers as also the statements made at the time of search simply provided a clue to the Department to investigate the matter further and verify as to whether any alteration was at all carried out at the office premises and if so, the expenditure incurred in carrying out those renovations. This was all the more necessary when both the directors had retracted from their statements and when it was stated before the Assessing officer that the items mentioned in the seized papers were non-existent at the office premises. Since the Department has not linked the contents of the seized paper with the actual renovations allegedly carried out at the office premises, it is difficult to sustain the addition. Rebuttable presumption raised by section 132(4A) is restricted to accepting the genuineness of the document found at the time of search and not to the interpretation of those documents. In this view of the matter, the impugned addition made by the Assessing officer and sustained by the learned CIT(A) is deleted. Ground No. 1 is allowed.
9. Ground No. 2 taken by the department reads as under :
"Addition of Rs. 36,28,700 on account of alleged unexplained loans and Rs. 5,98,735 on account of alleged undisclosed interest income.
On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in upholding the addition made by the Assessing officer on account of unexplained loans amounting to Rs. 36,28,700 and Rs. 5,98,735 as alleged unexplained interest income. the addition aggregates to Rs. 42,27,435. In doing so, the ld. CIT(A) has erred in not considering the evidence submitted by the appellant in support of its claim."
10. the impugned addition is based upon the notings in the loose paper marked page No. 15 of Annexure A-1 of the documents seized from the residence of Shri Shyam Sunder Makkar. A copy of the said paper has been placed at page 35 of the paper book submitted by the assessee before us. the said paper carries only 3 digits without any zero suffixing them. Shri Shyam Sunder Makkar admitted in his statement recorded on 3-12-1999 that the figures mentioned in the said paper were in codified form and therefore should be read by adding three zeroes to them (i.e. 297 denoting Rs. 2,97,000). the said paper is in the handwriting of Shri Om Prakash Makkar, who is handling the business of the assessee at Panipat. In its explanation dated 10-11-2001, the assessee explained before the Assessing officer that the said paper contained rough list of assessee's debtors. Along with the said letter, the assessee also filed a list of parties together with their addresses before the Assessing officer in respect of whom the jottings were made on the seized paper. the assessee requested the Assessing officer to call the aforesaid parties for confirmation about the genuineness of the business transactions of the assessee with them. the Assessing officer, however, observed that since the assessee had carried out the transactions outside the books and hence the concerned parties would have also not recorded them in their books. According to him, the transactions recorded in the said paper were, therefore, not capable of verification with the records of the parties mentioned therein. In this view of the matter, he therefore did not summon those parties. the Assessing officer also observed that total outstanding of all the aforesaid parties as on 21-4-1999 (i.e. the date mentioned on the seized paper) was much more than the amounts stated in the seized paper. the Assessing officer therefore rejected the explanation of the assessee and treated the amounts mentioned in the seized paper as unexplained investment outside the books of account for which he made the impugned addition amounting to Rs. 36,28,700. Besides, he added another sum of Rs. 5,98,735 being interest earned on the aforesaid unexplained investments. This is how the impugned addition works out to be Rs. 42,27,435.
11. On appeal, the assessee explained before the learned CIT(A) that the seized paper was in the handwriting of Shri Om Prakash Makkar who was a director in the assessee-company as also a director in another group company, namely, Embee Road Services Pvt. Ltd. the assessee also explained before the learned CIT(A) that the said paper was prepared to review the position of debtors of both the businesses and hence it was in the nature of a management information sheet of debtors. the assessee invited the attention of the learned CIT(A) to the affidavits filed before the Assessing officer confirming the fact that neither any loan was taken by the debtors nor was any amount received by them as interest thereon. It was pointed out before the ld. CIT(A) that 90 per cent of the parties mentioned in the seized paper had given the affidavit while remaining 10 per cent filed their affidavits before the CIT(A). Ld. CIT(A), however, confirmed the order of the Assessing officer with the following observations:
"7.3 On going through the loose papers and the above submissions of the appellant as well as the contentions of the Assessing officer, I find that the Assessing officer has correctly made the addition of Rs. 42,27,475. I therefore, confirm the addition made by the Assessing officer. the Assessing officer has telescopically adjusted the addition of Rs. 36,28,700 in the addition of Rs. 1.68 crores. Considering the fact that I have granted relief in respect of the addition of Rs. 1.68 crores, the telescopic adjustment of Rs. 36,28,700 cannot be made. Considering the same, the amount of Rs. 36,28,700 is taxed as the appellant's undisclosed income. Insofar as the interest amount of Rs. 5,98,735 is concerned, the Assessing officer has not telescopically adjusted this addition. Hence, the Assessing officer is directed to make this addition of Rs. 36,28,700. Thus, this ground of appeal is dismissed."
12. We have heard the parties and also perused a copy of the seized paper placed in the paper book filed before us. Section 69 empowers the Assessing officer to treat the investments made by the assessee in a given financial year as unexplained investment of that year if the investment so made by him is not found recorded in the books of account maintained by him and the assessee fails to offer a satisfactory explanation about the nature and source of such investments made by him. In order to bring the case within the ambit of section 69, the Assessing officer must bring sufficient materials on record to establish that (i) the assessee has made investments and, if so, the form of investments and the amount of money that has gone into making the investments; (ii) identify the financial year in which investments have been made; (iii) the fact that the investments so made are not recorded in the books of account maintained by him for any source of income; and (iv) there is a failure on the part of the assessee in satisfactorily explaining the nature and source of such investments. Mere jottings in codified form on a sheet of paper do not lead to the presumption that such entries or jottings are investments hit by section 69 of the Income-tax Act. In the matter before us, the assessee had filed a list of parties along with their addresses in respect of whom the jottings were made in the seized paper and requested the Assessing officer to examine them. It was therefore for the Assessing officer to find out as to whether the jottings made in the seized paper really pertained to the debtors recorded in the assessee's books of account. Secondly, the assessee had filed affidavits of the parties mentioned in the seized paper and requested the Department to summon them and verify the facts, which the Assessing officer did not do. Thirdly, it is not a case where the assessee has not offered any explanation about the nature and source of the transactions shown in the seized papers. If the Department was keen to reject them, it was open to them to do so after examining the executants of the affidavits and after rebutting the explanation given by the assessee. the Assessing officer presumed the unexplained nature of jottings made in the said seized paper without examining the concerned parties who have filed their affidavits. Additions cannot be made on the basis of conjectures and surmises. In our view, the materials brought on record by the Assessing officer are not sufficient to bring the case of the assessee within the ambit of section 69 of the Income-tax Act. Ground No. 2 is allowed.
13. Appeal filed by the assessee is allowed.
14. Before parting with both the matters, we may mention that all the submissions made by the parties including the authorities referred to by them at the time of hearing as also those mentioned in their written submissions have duly been considered though they may not have specifically been discussed in this order.