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Addition under S. 68 cannot be made for loan taken in earlier years

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ITO Vs. Nasir Khan J. Mahadik (ITAT Mumbai)-Mumbai ITAT has in the following case deleted the additions made on account of opening balances of unsecured loans and the notional interest on such loans. The Tribunal held that only fresh loans or additions to the loans during the year in question can be considered for the purpose of addition. Previous years loans cannot be added to subsequent year’s income by claiming them to be unexplained.

In this case The AO has made arbitrary additions during assessment proceedings, which the Tribunal has deleted by taking strict note of the same and the appeal has been dismissed with costs to the revenue. The AO in this case has made additions on irrelevant grounds.
The Tribunal observed:
“On a plain reading of the provisions of the Income Tax Act, a person with reasonable knowledge of tax laws cannot even remotely venture upon making an addition referable to previous year’s loans in subsequent year, since unexplained cash credit referable to loan taken in the current year only, can be added under section 68 of the Act; Section 68 refers to the cash credit found in the books of account of assessee in the year under consideration. Though the A.O. has not mentioned about application of section 68 of the Act, in the absence of any other provision, it has to be assumed that the A.O. has made the addition under section 68 of the Act.”
The AO did not even mentioned the section in which he had made additions. The additions had been made on such grounds which even a person with a reasonable knowledge of tax law cannot remotely think so.

The full judgement is being produced herebelow:

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

Income Tax Officer – 20(2)(3)

Vs. 

Shri Nasir Khan J. Mahadik

ITA No. 153/Mum/2010, CO No. 77/Mum/2011
Dated – November 30, 2011
ORDER
D. Manmohan, Vice-President –
These cross appeals pertain to A.Y. 2006-07. At the outset it may be noticed that the facts narrated by the A.O. as well as the casual approach of the Revenue authorities in pursuing the appeals, at the cost of the assessee – as well as at the cost of the public exchequer, is a stark example of the fallacy in the working of the Department.
2. The facts necessary for the disposal of this appeal and the cross objection are stated in brief. Assessee, an individual by status, was engaged in the business of export of hardware in the name of M/s. Alliance Exports. In respect of previous year relevant to assessment year under consideration assessee declared total income of Rs.4,93,354/-. Though the return of income was originally processed under section 143(1) of the Act, it was later on taken up for scrutiny by issuing notices under section 143(2) and 142(1) of the Act. In the first paragraph the A.O. mentions in a routine fashion that assessee has filed the return of income accompanied with a tax audit report under section 44AB of the Act and, thereafter, assessee’s representative attended from time to time and furnished the details called for. He further mention that the case was discussed with him and details were verified and kept on record. Having mentioned that all the details, as called for, were furnished, in para 1 of the assessment order he observes that assessee failed to produce books of account. He quickly adds that whatever books are maintained by the assessee, the same are rejected under section 145(3) of the I.T. Act, 1961. It is thus not clear as to whether there was a total failure to produce the books of account, whether any books were called for or some books having maintained by assessee they were incomplete and, therefore, books were rejected under section 145(3), as stated by him. After such inconsistent statements he proceeded to verify the loans taken by assessee and in paragraph 2 he furnishes the following chart: -
During the year under consideration the assessee has taken new loans from the following parties:
Sr. No.
Name of the Parties
As on 31-3-2006
As on 31-3-2005
1.
Khalid Khan
50000
—–
2.
Saabia International
226000
326000
3.
Afzal Mahdik
2867319
2112319
In the body of the assessment order he has nowhere doubted the fact that assessee had taken loans to the extent of Rs.3,26,000/- and Rs. 21,12,319/- from Shri Saabia International and Mr. Afzal Mahadik respectively in the preceding year, which represented closing balances of earlier year and opening balances of the year under consideration.
3. On a plain reading of the provisions of the Income Tax Act, a person with reasonable knowledge of tax laws cannot even remotely venture upon making an addition referable to previous year’s loans in subsequent year, since unexplained cash credit referable to loan taken in the current year only, can be added under section 68 of the Act; Section 68 refers to the cash credit found in the books of account of assessee in the year under consideration. Though the A.O. has not mentioned about application of section 68 of the Act, in the absence of any other provision, it has to be assumed that the A.O. has made the addition under section 68 of the Act.
4. With regard to the loan received from Mr. Afzal Mahadik the closing balance as on 31.03.2006 being Rs. 28,67,319/-, assessee was asked to prove the genuineness of the loan by providing supporting documents and in the absence of furnishing the details to support the genuineness of the loan the A.O. proceeded to add the closing balance of Rs.28,67,319/- (which includes opening balance of Rs. 21,12,319/-) and also added interest component thereon @12%, which works out to Rs. 3,44,078/-. It is not understandable as to under which provision the A.O. seeks to add interest component. It is not the case of the A.O. that assessee was to receive some interest, which he is seeking to make an addition as income. It is also not the case of the A.O. that assessee claimed to have paid interest @12% and claimed deduction thereon, which could have been disallowed; disallowance is quite distinct and different in the Income Tax Act and this simple distinction should have been taken note of by the A.O. while seeking to make an addition of Rs.3,44,078/- and, that too without specifying as to under which section he was seeking to make the addition. Thus an addition of Rs. 32,11,397/- was made by the A.O. referable to the unexplained cash credit in the name of Shri Afzal Khan Mahadik and interest component thereon.
5. Assessee contended before the learned CIT(A) that the A.O. erred in adding to the total income the unsecured loan together with interest. Explaining further, in the statement-of-facts, it was submitted the Shri Afzal Khan Mahadik has extended a short term unsecured loan to assessee. It was also stated that the creditor is a NRI and regular tax payer and hence there is no basis for making addition of the said amount as well as alleged interest component since it was an interest free short term loan wherein the question of interest income does not arise.
6. During the course of hearing the counsel appearing on behalf of assessee submitted that the A.O. sought to make an addition under section 68 of the Act in which event an addition can, at best, be contemplated with reference to current year’s loan. In otherwords the loan taken in the earlier year which was reflected as opening balance in this year and the alleged interest component on the interest free loan cannot be brought to tax under section 68 of the Act. He has furnished before the learned CIT(A) confirmation letters, copies of account of the above mentioned party, bank statement, bank certificate, details of salary received and a copy of the passport in support of his contention that the creditor was an income tax assessee having proper source of income and the amount was lent through banking channel, which was evidenced by the bank statement and no interest was charged on the same. The learned CIT(A) observed that there was an opening balance of Rs. 21,12,319/- as on 01.04.2005. There after assessee had taken a loan of Rs. 1,00,000/- on 17.05.2005, Rs. 3,00,000/- on 08.10.2005, Rs. 1,75,000/- on 28.12.2005 and Rs. 1,80,000/- on 06.01.2006 whereas assessee repaid a sum of Rs. 3,00,000/- as on 29.02.2005. Thus the net outstanding loan as per the confirmation letter filed as on 31.03.2006 is Rs. 25,67,319/- on which no interest was paid or claimed. Even otherwise the opening balance cannot be taken into consideration and the fresh loan of Rs. 7,55,000/- is duly supported by confirmation letter, salary certificate, etc. Under the circumstances the learned CIT(A) concluded that the entire loan taken from Shri Afzal Khan Mahadik is fully explained.
7. The Income Tax Officer, Ward 20(2)(3), Mumbai, the appellant herein, appears to have been aggrieved by the order passed by the learned CIT(A) on the aforementioned issue, presumably because he was of the firm view that atleast the addition of Rs. 28,67,319/- referable to the loan component deserves to be added under section 68 of the Act and hence an appeal was preferred on account of the fact that this appeal was duly authorised by the Commissioner of Income Tax 20, Mumbai under the powers vested in him u/s 253 of the Act. It is a well known principle of law that a power vested in a government official under a statute cannot be treated as a discretionary power unless specifically mentioned therein and in the present circumstances the Commissioner of Income Tax is duty bound to apply his mind as to whether it was a fit case for filing of an appeal or not before authorising the A.O. to prefer an appeal as otherwise the very purpose of giving the power of authorization to a senior officer gets frustrated.
8. Grounds urged on behalf of Revenue are extracted for ready reference: -
 “I.  The learned CIT(A) has erred on facts and in law and in the circumstances of the case in deleting the addition on account of unexplained Cash credit of Rs. 28,67,319/- the unsecured loan outstanding in the name of Mr. Afzal Mahadik.
 II.  The learned CIT(A) has erred on facts and in law and in the circumstances of the case in admitting the new evidence of loan confirmation filed by the assessee before him without calling remand report and not taking cognizance of Assessing Officer in contravention to rule 46A.”
9. At this juncture it is necessary to travel back to the order passed by the A.O. to appreciate the reasons given by him for making certain other additions which were also in dispute before us by way of cross objections filed by assessee – taking advantage of the appeal filed by Revenue.
10. Assessee’s turnover of hardware items was to the tune of Rs. 1,20,59,537/- on which he has declared gross profit ofRs. 21,84,765/- which works out to 15.40% of the turnover. He declared net profit of Rs. 6,02,364/-. The trading account filed by assessee shows that the gross profit works out to 15.41%.
11. The A.O. compared the gross profit of assessee with the immediately proceeding assessment year to highlight that there was a fall in the gross profit to the extent of 7.56%. According to the A.O. the G.P. for the A.Y. 2005-06 works out to 22.96% and therefore the difference was sought to be added. In this regard assessee was asked to furnish the valuation of closing stock and opening stock with books of account, bills of purchase, vouchers and supporting material. However, assessee failed to submit the details to explain the reasons for fall in gross profit. Under the circumstance the A.O. observed that assessee failed to produce the books of account, bills and vouchers. He has adopted the figure of Rs. 27,73,693/- as gross profit declared for A.Y. 2005-06 whereas for the A.Y. 2006-07 the G.P. of Rs,.18,57,737/- having been declared, the difference figure of Rs. 9,19,956/- was added to the income declared by assessee.
12. The A.O. has also noticed that assessee had borrowed loan of Rs. 50,000/- from Shri Khalid Khan and Rs. 2,26,000/- from M/s. Saabia International. It may be noticed here that the sum of Rs. 50,000/- from Shri Khalid Khan was a fresh loan taken during the previous year, relevant to the assessment year under consideration, whereas in respect of M/s. Saabia International the amount payable to the above mentioned party as on 31.03.2005 was Rs. 3,26,000/- and during the previous year relevant to A.Y. 2006-07 assessee had taken fresh loan of Rs. 1,00,000/- and repaid a sum of Rs.2,00,000/- and thus the net balance standing in the name of M/s. Saabia International works out to Rs. 2,26,000/-. The A.O. observed that assessee failed to provide any details or any document or any confirmation to prove the loans and hence he added the closing balance as on 31.03.2006 along with interest @12%, presumably under section 68 of the Act.
13. Assessee incurred certain miscellaneous expenditure under the following heads and it was debited to his P & L Account: -
Sr. No.
 Particulars
Total expenses debited to P & L Account
1
Motor car expenses
 Rs. 56,362/-
2
Computer expenses
 Rs. 23,770/-
3
Travelling & conveyance expn.
 Rs. 91,152/-
4
Sundry expenses
 Rs. 22,360/-
5
Telephone and Mobile expenses
 Rs. 51,123/-
6
Rent, Rates & Taxes
 Rs. 25,000/-
7
Export Promotion expenses
 Rs. 4,03,994/-
8
Freight & Octroi
 Rs. 10,95,159/-
9
Clearing & Forwarding expenses
 Rs. 1,80,319/-
Total
 Rs. 19,49189/-
Admittedly, most of the expenditure incurred in cash was supported by self made vouchers. As regards motor car expenses, etc. personal use cannot be ruled out. Under the circumstances the A.O. disallowed 30% of the expenditure, which works out to Rs. 5,84,756/-.
14. Aggrieved by the order of the A.O. with regard to addition of Rs. 9,15,956/-, Rs. 50,000/- (+interest), Rs. 2,26,000/- (+interest) and Rs. 5,84,956/- assessee contended before the learned CIT(A) that additions made by the A.O. are arbitrary.
15. Regarding G.P. addition it was submitted that the A.O. proceeded on a total unacceptable way of gross profit calculation overlooking the fact that any hardware item’s rate cannot be consistent in every year. In particular, there was lot of fluctuation in dollar rate, which was the main reason for decrease in gross profit and added to that assessee had to sell at lower rate than the normal selling price to attract new customers and thus the A.O. was not justified in taking into consideration the gross profit of the earlier year as yardstick.
16. The learned CIT(A) observed that the assessee has not denied about non-maintenance of the day-to-day stock tally and details required for showing the trading results were also not furnished and hence the addition made by the A.O. was confirmed.
17. As regards cash credit in the name of Shri Khalid Khan and Saabia International, the case of assessee was that Shri Khalid Khan was brother of assessee and he has extended a short term unsecured loan without charging any interest. Shri Khalid Khan was also a NRI. Similarly proprietor of M/s. Saabia International was a family friend and he had extended short term loans. They are regular tax payers. They have also not charged any interest and hence the question of making any addition, in particular, towards interest does not arise.
18. Before the CIT(A) assessee furnished confirmation letters and copy of passport of Shri Khalid Khan. In the case of M/s. Saabia International, the learned A.R. has furnished the PAN of its proprietor and a copy of the return of income filed for the relevant year but no bank account or further evidence was filed. The learned CIT(A) was of the view that the details with reference to the aforementioned two parties having not been furnished before the learned CIT(A), it is a fit case for making an addition under section 68 of the Act. As regards Shri Khalid Khan, he confirmed addition of Rs.50,000/- only. In other words the addition referable to the interest addition made by the A.O. was deleted by the learned CIT(A), though there was no discussion about the unreasonable method adopted by the A.O. He merely mentioned that assessee has neither paid any interest nor claimed any interest expenditure in his P & L Account. As regards the addition referable to cash credit in the name of M/s. Saabia International, a proprietary concern of Shri Mohammed Shahid Ilyas, though assessee has furnished the requisite confirmation letter along with copy of the return of income and PAN, the learned CIT(A) was of the view that in the absence of requisite bank account of the concerned party the loan cannot be stated to have been proved. He, however, mentioned a new figure of Rs. 2,00,000/- which was stated to be outstanding in the name of M/s. Saabia International and therefore confirmed the addition to the extent of Rs.2,00,000/-.
19. As regards the estimated disallowance of 30% on miscellaneous expenditure, the case of the assessee was that it is not possible to maintain bills and vouchers for verification in respect of certain expenditure since many payments were made in cash and some of the expenditure was supported by self-made vouchers. Even if an addition is called for, disallowance of 30% is on the higher side considering the circumstances of the case. The learned CIT(A) was satisfied with the submission of assessee and hence restricted the disallowance to 10% of the expenditure which works out to Rs. 1,94,918/-.
20. Though assessee did not prefer any appeal on the aforementioned additions, since Revenue has preferred an appeal, by way of a cross objection assessee challenged the order of the CIT(A) wherein it was contended that addition of Rs. 9,15,956/- referable to estimation of G.P. is not justified, addition of Rs. 2,50,000/- towards cash credit is not in accordance with law and addition of Rs. 1,94,918/- by way of adhoc disallowance deserves to be deleted.
21. The appeal filed the Revenue as well as the cross objections filed by assessee are taken up. We have heard the learned D.R. and the learned counsel appeared on behalf of the assessee and carefully perused the record. The only issue urged in Revenue’s appeal is with reference to unexplained cash credit in the name of Mr. Afzal Khan Mahadik. The learned D.R. strongly relied upon the order passed by the A.O. to submit that addition of Rs. 28,69,319/- ought to have been confirmed by the CIT(A) under section 68 of the Act and further contended that the learned CIT(A) was not justified in taking into consideration additional evidence in the form of confirmation letters, etc.; No opportunity was given to the A.O.
22. Regarding the issues urged in the cross objections filed by the assessee, the learned D.R. submitted that estimation of G.P. is reasonable and hence the order passed by the CIT(A) does not call for any modification. Similarly, with regard to the addition of Rs. 2,50,000/- towards unexplained cash credit, though the learned D.R. admitted that the addition, if any, should be either the entire closing balance as on 31.03.2006 or the amount taken as loan in this year (but the learned CIT(A) has wrongly taken into consideration only a sum of Rs. 2,00,000/- in the case of Saabia International). He submitted that the fact remains that assessee has not furnished confirmation letters and details of bank account before the A.O. and thus the learned CIT(A) was justified in confirming the addition made by the A.O. As regards disallowance of 10% of the miscellaneous expenditure the learned D.R. submitted that most of the expenditure was supported by mere self-made vouchers and thus the A.O. estimated the amount disallowable at 30% whereas the CIT(A) has sustained the disallowance to the extent of 10% only and thus his order does not call for any interference.
23. While addressing the issue urged in Revenue’s appeal, the learned counsel, appearing on behalf of assessee, submitted that the very basis for making the addition is arbitrary and on account of excessive use of the quasi judicial power vested in the A.O.; therefore it is a fit case where the methodology followed by the A.O. deserves to be highlighted. He further submitted that the A.O. on one hand categorically states that all the details called for were furnished but at the same time states that confirmation letters and supporting material were not furnished, which statement is contradictory in terms. He further submitted that where an assessee has obtained loan free of interest there cannot be addition towards interest since addition towards interest is permissible only when assessee was to receive certain interest from other party which was not declared or assessee claimed deduction towards interest payable which was not paid whereas, in the instant case it was a pure and simple case of loan taken from the Brother, a NRI, who had advanced the amount free of interest and he has sufficient sources to give the loan. Whatever material was called for were furnished before the A.O. Since the A.O. has never called for further details before making the addition, at the first available opportunity i.e. before the CIT(A) assessee furnished all the details who had verified the PAN, etc. and also took note of the fact that the creditor was an employee of Jersey Industrial Company Ltd. Doha, Qatar and in his capacity as General Manager of the said company he was drawing a basic salary of QR 40,000/- per month plus incentives since 1994. He has verified the bank account maintained with Hong Kong & Shanghai Corporation Bank Ltd. wherein the loan amounts received by assessee on several dates were reflected. He also noticed the fact that the A.O. has arbitrarily made the addition of the closing balance ignoring the fact that previous years loan cannot be added under section 68 of the Act in the year under consideration. In fact the A.O. has not preferred any appeal against the so called interest, which in itself indicate that he was aware of the fact that there cannot be any addition towards alleged interest income which highlights the admission of arbitrary action of the A.O. and despite such arbitrary action, which was highlighted by the CIT(A), the same A.O. chose to file an appeal to challenge the addition of Rs. 28,67,319/- which was the closing balance as on 31.03.2006 which includes the earlier year’s closing balance of Rs. 21,12,319/- and such request for filing an appeal was to be properly scrutinised by a senior officer of the rank of Commissioner of Income Tax but he chose to authorise the A.O. to prefer an appeal to challenge the deletion of addition of Rs. 28,67,319/-, which highlights that the Commissioner of Income Tax has not exercised his mind over the issue. Since the authorization under section 253(2) of the Act is without exercise of mind the very proceeding deserves to be annulled. At any rate an addition can at best can be made under section 68, which refers to loan taken in this year from Shri Afzal Khan Mahadik and even at this stage the A.O. was not able to point out as to why he chose to stick to the addition of Rs. 28,67,319/-. He thus firmly submitted that the first appellate authority was justified in cancelling the addition made by the A.O.
24. As noticed from the assessment order, the A.O. was fully conscious of the fact that Rs. 21,12,319/- was the closing balance as on 31.03.2005 and thus current year’s loan was only Rs. 7,55,000/-. We asked the learned D.R., who has to make a fair representation of the matter, to explain as to whether any letter was addressed by him to seek clarification from the A.O. on this issue or whether there was any letter from the A.O. justifying his action of making addition of Rs.28,67,319/- so as to appreciate the view point of the A.O., who is the appellant in the instant appeal. The learned D.R., fairly submitted that the record does not indicate any such material.
25. We have carefully considered the rival submissions and perused the record. Having regard to the peculiar circumstances of the case we are of the firm view that the A.O. not only sought to make an arbitrary addition by including the loan taken in the preceding year also, by roping in section 68 of the Act, but he has further sought to add the so called interest income presumably under section 68 of the Act. Such arbitrary action would result in loss of faith in the administration of Revenue authorities in the eyes of the tax paying public, who are the backbone of our society since the tax paid by the public is the only source of revenue which is utilised for the welfare of the economy. Added to that, at least when the CIT(A) has corrected the wrong doing of the A.O. he had a second chance to properly apply his mind and to introspect as to whether his action is justified but he chose to challenge the deletion of addition of Rs.28,67,319/-, which includes the loan taken in the preceding year which would certainly give undue hardship to an assessee since he has to engage a counsel to ensure proper representation to highlight the facts of the case. In order to avoid such arbitrary filing of appeal by an A.O. the Legislature vested the power of filing of an appeal with a senior officer i.e. Commissioner of Income Tax – who is supposed to verify the record before authorising the Income Tax Officer to prefer an appeal before the Tribunal. In the instant case the Commissioner of Income Tax has mechanically given his approval. A plain reading of the order of the A.O. or the CIT(A) would have highlighted that there was no case for making addition of the closing balance of the preceding year. By virtue of the authorization an appeal was filed by the Revenue which compelled the assessee to engage a counsel to properly highlight the facts before the Tribunal. The case of the A.O. is that new evidences in the form of confirmation letters were accepted by the learned CIT(A) without calling for remand report i.e., in contravention of Rule 46A of the Income Tax Rules. The order of the CIT(A) was passed in 2009 and the appeal was filed by the Revenue on 07.01.2010. Though there was a time gap of more than one year nothing was brought on record to submit that Shri Afzal Mahadik was not the brother of assessee and was not earning any income. Sufficient material was brought on record before the CIT(A) to highlight that all the payments were through bank account and the creditor has sufficient creditworthiness, being a highly paid employee in Doha, Qatar. Having regard to the circumstances of the case we are of the opinion that the order passed by the learned CIT(A) on this issue does not call for any interference. In fact by virtue of an arbitrary addition, which had to be challenged before the CIT(A) and also to be contested before the Tribunal, assessee was put to great stress apart from incurring expenditure in engaging authorised representative at various stages. Since it is attributable to the arbitrary action of the A.O., we are of the view that it is a fit case to award costs. A token amount of Rs. 1000/- is awarded as costs – payable by Revenue. We order accordingly. Appeal filed by Revenue is hereby dismissed.
26. With regard to the cross objections filed by assessee, the learned counsel submitted that though the facts were on record, for want of proper representation certain facts available on record of the A.O. could not be properly focused before the tax authorities. As regards addition of Rs. 9,15,956/- referable to estimation of gross profit the learned counsel submitted that the A.O. has followed an arbitrary method of arriving at the above figure. Explaining further the learned counsel adverted our attention to page 2 of the paper book, which is the income statement filed along with the appeal papers, wherein earlier year’s gross profit was shown at Rs. 13,03,469/- as against Rs. 18,57,737/- in the year under consideration and the net difference, if any, is only to the tune of Rs. 5,54,268/- whereas the A.O. sought to bring to tax a sum of Rs. 9,15,956/- by taking into consideration the gross profit figure plus DEPB for the year ending 31.03.2005 as against the gross profit minus DEPB for A.Y. 2006-07. In order to highlight this aspect he adverted out attention to pages 24 & 25 from where it can be seen that in respect of A.Y. 2005-06 the sales were to the tune of Rs. 80,51,515/- and DEPB receipts were to the tune of Rs. 5,45,769/- and if trading account is prepared by adding the DEPB amount also on the credit side of the trading account the gross profit works out to Rs. 18,49,328/- which comes to a rate of 22.96% whereas excluding the DEPB the gross profit rate works out to 16.19% only. Similarly for A.Y. 2005-06 the trading account prepared by including DEPB on the credit side gives rise to a profit of Rs. 21,84,946/- which gives a rate of 18.11% whereas excluding DEPB the G.P. rate works out to 15.41%. It was thus submitted that the A.O. has followed an arbitrary method in making addition to the gross profit declared by assessee, though these facts are already available on record (page 2 of the paper book). He further submitted that the sales in the immediately preceding year were to the tune of Rs. 80,00,000/- whereas in the year under consideration the sales were to the tune of Rs. 1,20,00,000/- and thus there is substantial rise in the turnover, which can be achieved only by export/selling the hardware items on competitive rates. However, in the absence of proper details and vouchers to support the claim the learned counsel could not support his stand that no addition at all is called for.
27. On the other hand, the learned D.R. submitted that assessee has not highlighted this fact either before the A.O. or before the CIT(A) and no bills/vouchers could be produced in order to prove the claim that sales were made at competitive rates or fluctuation of dollar rate was the reason for decline in G.P. He thus strongly relied upon the order passed by the first appellate authority.
28. We have carefully considered the rival submission and perused the record. We have noticed from the audited trading account and P & L Account filed by the assessee that there is marginal variation in the gross profit i.e. assessee has declared gross profit rate of 15.41% as against 16.19% in the immediately preceding assessment year. However, the A.O., while completing the assessment, has wrongly noted that the gross profit rate works out to 22.96%, which is the rate adopted after taking into consideration the DEPB income also, which in our considered opinion is not in accordance with law. However, the fact remains that assessee has not produced bills, vouchers or any other details in support of his claim that sales were made on competitive rates or fluctuation of dollar rate has given rise to low gross profit. Even if the gross profit as adopted for the immediately preceding year has been adopted for this year also the addition should be in the range of 1% of the sale of this year. On a conspectus of the matter we deem it fair and reasonable to sustain an addition of Rs. 1,00,000/- as against Rs. 9,15,956/- made by the A.O. To this extent the order of the learned CIT(A) is modified.
29. With regard to the addition made under section 68 of the Act the learned counsel submitted that in the case of M/s. Saabia International the opening balance was to the tune of Rs. 3,26,000/- and there was in fact reduction of the balance, in which event no addition is called for whereas the A.O. proceeded to make an addition of Rs. 2,26,000/- referable to closing balance as on 31.03.2006 and also interest thereon. The CIT(A) has committed a further error in sustaining an addition of Rs. 1,50,000/- overlooking the fact that in the year under consideration only a sum of Rs. 1,00,000/- has been taken as fresh loan whereas assessee repaid a sum of Rs. 2,00,000/-. Thus, an addition of Rs. 1,00,000/-, at best, could have been made but in the particular facts of the case even such addition is no maintainable since assessee repaid a sum of Rs. 1,00,000/- on 01.06.2005, which is deemed to be available as on 26.10.2005 if the cash credit is held to be non-genuine. In this regard he referred to page 82 of the paper book. He strongly submitted that the CIT(A) was totally confused in confirming the addition of Rs. 1,50,000/- referable to loan taken from M/s. Saabia International. It was also submitted that the proprietor of M/s. Saabia International is an income tax assessee (Pg. 8 of the paper book) and PAN is available on record and hence the identity and creditworthiness have been proved in the said case. Similarly, as regards the loan taken from Shri Khalid Khan he submitted that PAN and passport copy were filed before the CIT(A) and hence there is no basis for confirming the addition of Rs. 50,000/-.
30. On the other hand, the learned D.R. strongly relied upon the order passed by the learned CIT(A).
31. We have carefully considered the rival submissions and perused the record. Under section 68 of the act the initial burden is on assessee to prove the identity, genuineness and creditworthiness of the creditor. In so far as the cash credit in the name of Shri Khalid Khan the assessee has not furnished any details before the A.O. and even before the learned CIT(A), except submitting confirmation and copy of passport, no other details -such as bank account and other evidence – to prove the creditworthiness of the lender were furnished. Under these circumstances we do not find any infirmity in the order of the learned CIT(A) and thus the affirm the addition of Rs. 50,000/-.
32. However, with regard to addition of Rs. 1,50,000/- we are of the view that apart from the fact that A.O. has made an arbitrary addition of 2,26,000/- plus interest overlooking the fact that only a sum of Rs. 1,00,000/- was lent by the said party in this year, the learned CIT(A) confused himself in confirming the addition of Rs. 1,50,000/-. As noticed from pages 82 to 84 of the paper book the lender Shri Mohammed Shahid Ilyas, proprietor of M/s. Saabia International, is an income tax assessee having substantial income and the loan taken this year is only Rs. 1,00,000/- which was recorded as having been given immediately after repayment of loan of Rs. 1,00,000/- and even if assessee has to prove the source of loan of Rs. 1,00,000/- the same can be said to have been out of the amount shown to have been paid by assessee to M/s. Saabia International on 01.06.2005. Thus, in our considered opinion, the learned CIT(A) has not made out a case for addition of Rs. 1,50,000/-. We direct the A.O. accordingly.
33. This leaves us with ground No. 3 in the cross objections i.e. correctness of the addition of Rs. 1,94,918/- sustained by the learned CIT(A). Admittedly, most of the expenditure was not supported by bills and some of the expenditure was supported by mere self-made vouchers. Under the circumstances the A.O. disallowed 30% of the claim whereas the learned CIT(A) was very reasonable in restricted the disallowance to 10%. In fact the learned counsel, appearing on behalf of assessee, has not seriously challenged the order passed by the learned CIT(A) on this issue. Under the circumstances we affirm the order of the learned CIT(A) and uphold the addition of Rs. 1,94,918/-. Accordingly the cross objections are treated as partly allowed.
34. In the result, appeal filed by Revenue is dismissed with costs whereas the cross objections filed by assessee are partly allowed.

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(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

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