Brief of the Case
Bombay High Court held In the case of M/s Harish Textile Engrs. Ltd. vs. DCIT that Section 292 uses the word ‘may presume’ and not ‘shall presume’ or ‘conclusively presume’. The words ‘may presume’ are in the nature of discretionary presumption different from a compulsory presumption. In the present facts the documents found during the course of the search are uncompleted. It does not indicate the person to whom the payment has been made, the address of the recipient, the person by whom the payment is made and the documents itself indicates that it is prepared for either seeking of funds or reimbursement of funds. Therefore even if the presumption u/s 292 is to be applied and the documents are accepted as true, it would not lead to the conclusion that payments have been made in cash so as to claim the expenditure.
Facts of the Case
The appellant is a manufacturer of Textile Machinery. On 12 September 1996, there was a search action under Section 132 on the appellant. Its office premises, factory at Umargaon,Gujarat and residence of two of its Directors were searched by the officers of the revenue. During the course of the search, the stocks lying in premises of the appellant were inventorised. Besides various loose documents, newspapers and books of accounts were seized by the officers of the revenue.
Consequent to the search, a notice under Section 158BC was served on the appellant. Upon service of the above notice, the appellant filed its return of income disclosing its income at Rs.1.15 crores for the block period i.e. 1 April 1986 to 12 September 1996.This undisclosed income declared were interalia unaccounted cash, excess stock, seized jewellery, seized Indira Vikas Patra, seized Kisan Vikas Patra and investment in sundry assets. On 30 September 1997, the Assessing Officer passed an order under Section 158BC(c) determining the appellant’s total income for the block period 1 April 1986 to 12 March 1996 at Rs.6.1 crores. This income was determined by the Assessing Officer on account of the following addition :(i) Undisclosed income on account of on money on sale of textile machinery Rs.4,10,22,595 (ii) Expenditure disallowed Rs.1,82,38,330 (iii) Undisclosed Income on sale of scrap Rs. 8,78,085.
Disallowance of cash expenses
The expenditure in the aggregate was Rs.1.82 crores. The Assessing Officer in his order dated 30 September 1997 did not accept that any expenditure was incurred on the ground that complete evidence in support of payment was not provided. It further added the same as appellant’s income under Section 69C of the Act as the appellant was unable to explain the source of such expenditure.
Contention of the Assessee
The ld counsel of the assessee submitted that the addition of Rs.10 lakhs by the impugned order as being the ‘on money’ received by the appellant for the period 1 April 1986 to 31 March 1989 is not sustainable on account of the following: (i) The assessment in this case has been done consequent to search under Section 132 of the Act. In terms of Chapter XIVB of the Act, the assessment is restricted to only the undisclosed income for the block period computed on the basis of evidence found in the search in terms of Section 158B(b) of the Act. Thus, so far as the period 1 April 1986 to 31 March 1989 is concerned, as no incriminating evidence was found evidencing receipt of any ‘on money’ either by the appellant or it’s agents on the sale of Stenter machines, the addition on account of ‘on money’ is bad. (ii) Any evidence found of receipt of ‘on money’ for the period 1989 to 1996 cannot by itself be the basis of the estimating undisclosed income for the period 1986 to 1989 as has been done in this case; and (iii) The impugned order incorrectly proceeds to uphold addition of Rs.10 lakhs to income of the appellant as ‘on money’ received for the period 1986 to 1989 on the basis of admission by the appellant to the extent of Rs.6 to 7 lakhs.
Disallowance of cash expenses
The ld counsel of the assessee challenges the addition of Rs.1.82 crores on being disallowed as expenditure on the following grounds :(i) No undisclosed assets of the value of Rs.1.82 crores have been found with the appellant. Therefore the natural presumption would be that this amount has been
spent for the purposes as reflected in the seized documents. It was submitted that once the receipt of amount in cash was accepted, the payment in cash should also be accepted. In support, reliance was placed upon the decision of Kerala High Court in CIT Vs. P.D. Abraham @ Appachand1. (ii) In any view of the matter, Section 292 of the Act, which was introduced by the Finance Act, 2007 with retrospective effect from 1 October 1975, raise a presumption that any document found during the course of a search would be presumed to correctly reflect the facts. Thus, the onus to establish the expenditure referred to in the loose documents found is not correct is on the revenue.
The Tribunal proceeded to disallow the expenditure on the basis that the appellants have been unable to prove the expenditure. The basis of the above finding is not correct in view of Section 292C of the Act which has been introduced with retrospecive effect from 1 October 1975. In the above view, it is submitted that the appeal be restored to the Tribunal to reconsider this issue on application of Section 292C of the Act. (iii) In any case, the disallowance of the expenditure in terms of Explanation to Section 37(1) of the Act is concerned, it would only be applicable if the purposes of the expenditure was an offence or if it was prohibited by law. The impugned order does not establish that the purposes for which the expenditure was incurred in cash was an offence or it was prohibited by law, but disallows it only on being opposed to public policy. Accordingly, the application of Explanation 1 to Section 37 of the Act to the present facts was unwarranted.
Undisclosed income on sale of scrap
The ld counsel of the assessee submitted that the amount of Rs.8.78 lacs represents not consideration received on sale of scrap but is in fact consideration paid for purchase of scrap.
The very fact that the documents acknowledging the receipt of money was found in the possession of the appellant is indicative of the fact that the amount would have been paid on purchase of scrap and seller of scrap would have knowledge of the receipt of the same. This receipt is what is found during the course of the search. Thus, the finding of the Judicial Member and the third member is not only erroneous but also perverse. Thus the same has to be deleted.
Contention of the Revenue
The ld counsel of the revenue submitted that (i) It has been admitted by the appellant during the assessment proceedings that the amounts paid in cash and claimed as expenditure were paid out of cash receipts. In particular, he invites our attention to Annexure ‘A’ and ‘C’ to the Assessment order which indicates that payments had been made in cash during the year 1988-89 admittedly out of amounts received in cash by the appellant; and (ii) The appellants in reply to the show cause notice have themselves offered Rs.5 to 7 lakhs as being an amount received in cash as about 10 Stenter machines were sold during the period 1986-89 in Surat Market. The appellants have further stated that they have received cash in respect of sales made by them in Surat Market in accordance with the prevailing practice in Surat. Thus this addition of Rs.10 lakhs by the impugned order cannot be found fault with.
Disallowance of cash expenses
The ld counsel of the revenue submitted that (i) Both the Assessing Officers as well as the impugned order of the Tribunal holds that the assessee has not been able to establish that expenditure was incurred as claimed by them. The documents seized during the course of the search don’t contain the names of the recipients nor their addresses. The findings of the Assessing Officer have also been corroborated by the impugned order of the Tribunal. Each of them separately hold that the appellant has not been able to establish that any expenditure was in fact incurred as claimed.
The finding of the Assessing Officer as well as of the Tribunal in the impugned order that no payment having been made by the appellant so as to claim deduction on account of expenditure, is a finding of fact. This finding of fact has not been challenged on the ground that it is perverse. Consequently, the impugned order of the Tribunal cannot be found fault with.
The occasion to examine the application of the Explanation 1 to Section 37 of the Act would not arise in the present facts. This for the reason that it would arise for examination only after the assessee has been able to satisfy the basic requisites of Section 37 of the Act viz. that expenditure as claimed has been incurred and also that the expenditure has been incurred for the purposes of business. It is only thereafter that the occasion to examine the explanation to Section 37(1) of the Act would arise. It is therefore submitted that in the facts of this case the examination of Explanation to Section 37(1) of the Act is not warranted.
The retrospective amendment to Section 292C of the Act would not come to the aid of the appellant as the same only gives discretion to the revenue authorities, to presume that the documents found during the course of the search are true. Besides, the presumption in Section 292C of the Act is a discretionary presumption. Therefore it is to be invoked by the Authorities under the Act. In any case these documents don’t establish the fact of payments being made.
Undisclosed income on sale of scrap
The ld counsel of the revenue submitted that these findings of fact arrived at by the majority members of the Tribunal confirming the view of the Assessing Officer cannot be interfered with as questions of law. These findings of fact are not perverse as the conduct of the appellant of receiving money outside the books of accounts has been accepted by them for the period 1989-1996.
Thus this Court should not interfere with the order of the Tribunal.
.Held by ITAT
The appellant’s appeal was heard by the Regular Bench of the Tribunal consisting of two members viz. Accountant Member and Judicial Member. However there was a difference of opinion between the two members constituting the Regular Bench. The opinion of the third member was forwarded to the Regular Bench of the Tribunal. By order dated 6 July 2000, the Regular Bench of the Tribunal disposed of the appeal by taking into account the majority view on the three issues as under: (i) On the issue of ‘on money’, the addition of only Rs.10 lakhs out of Rs.40.39 lakhs made by the Assessing Officer was sustained for the period 1986 to 1989; (ii) On the issue of disallowance of expenditure, the amount of Rs.1.82 crores made by the Assessing Officer was sustained; and (iii) On sale of scrap, the addition of Rs.8.78 lakhs made by the Assessing Officer was sustained.
Disallowance of cash expenses
ITAT deleted the addition made by the Assessing Officer to income as unexplained expenditure under Section 69C of the Act. However so far as claim for deduction on account of expenditure was concerned the third member concurred with the view of the Judicial Member and held that the appellant had not established that expenditure had in fact been incurred for the purposes of business. In any view, the third member also held that the same would be hit by the Explanation to Section 37(1).
Held by High Courts
As per section 158B(b), Undisclosed income is defined as any income based on any entry in the books of account or other documents or transactions which have not been disclosed or would not have been disclosed for the purposes of the Act.
It is submitted that in this case, there is no evidence in the form of any entry in the books of account or any other document to establish receipt of ‘on money’ by the appellant. Consequently, the amount of Rs.10 lakhs being added to the appellant’s income as being ‘on money’ received for the period 1986-1989 is unsustainable in law. It is not in dispute that there is documentary evidence of receipt of ‘on money’ by the appellant for the period 1989-96. Thus there was evidence of receipt of ‘on money’ only for the part of the block period on sale of Stenter machines for the period 1989-96. This evidence was extrapolated in the impugned order to conclude that ‘on money’ had been received on the sale of Stenter machines also for the period 1986-89. In this case besides the evidence for the period 1989 to 1996, we have noticed that while justifying it’s claim for expenditure in cash of Rs.1.82 crores, the appellant itself has shown expenditure in cash for the period prior to 1989 out of amounts received in cash according to the appellant.
It is evident that the appellants have themselves admitted that sale in Surat market had to be in cash as the buyers of the Stenter machines would insist on paying the appellant a part consideration in cash. Thus the appellant had no option but to accept the same. Thus undisputedly, receipt of ‘on money’ even for the period 1 April 1986 to 31 March 1989 is admitted by the appellant. The estimate of Rs.10 lakhs on the consideration of the facts is not shown to be perverse.
The fact that there was evidence of receipt of ‘on money’ for the period 1989 onwards would not justify the authorities from extrapolating that ‘on money’ was received by the appellant even for the earlier period. These decisions are of no assistance as the addition on account of ‘on money’ is based on evidence and the admission of the appellant.
We are of the view that the finding reached by officers of the Tribunal is essentially a finding of fact. There was evidence available on record indicating receipt of ‘on money’ particularly for the period 1989 to 1996. This evidence of receipt of ‘on money’ with regard to the sale of Stenter machines is found in the appellant’s letter dated 25 July 1998 is an admission of receipt ‘on money’ for sale for Stenter Machine in Surat Market during the period 19861989. Therefore, it could not be said that there was no evidence on record for the authorities to come to a conclusion that ‘on money’ was received by the appellant so as to hold that the finding is perverse.
Disallowance of cash expenses
We find that before the expenditure can be allowed as deduction under Section 37, the expenditure should have in fact been incurred and that also wholly and exclusively for the purposes of business. The Assessing Officer on detailed examination of the facts has held that the appellants were unable to establish that payments had in fact been made. This on the basis that the identity of the recipients and their addresses is not forthcoming nor is the identity of the persons who made the payment of such huge amounts is forthcoming. Besides the loose papers do not indicate clearly whether or not the money has been paid. The documents indicated seeking of funds and/or reimbursement of funds. This by itself cannot establish that the money has been actually expended. The Assessment Order also records the fact that the appellant had also not produced the individuals who had made said payments and/or produced their details. If the person alleged to have made payments were produced, the cross examination would have possibly thrown light on the genuineness of such claims.
Futher it is clear that the third member to whom the issue of allowablity of the expenditure as deduction was referred to has held that the appellants had not furnished any evidence what so ever to prove the expenditure was incurred and that it was incurred for the purposes of business.
Therefore we notice that the impugned order of the Tribunal has come to a conclusion that there is no evidence produced to prove that the expenditure claimed as deduction was in fact incurred by the assessee. The findings of the authorities under the Act as well as the Tribunal are undisputedly findings of fact. On the basis of available evidence before the authorities and the Tribunal, the findings arrived at cannot be said to be perverse and/or arbitrary. In fact there is no challenge to the aforesaid finding on the ground that it is perverse. It is a plausible view on the basis of the evidence available.
In the present facts, we find that the documents found during the course of the search are inchoate. It does not indicate the person to whom the payment has been made, the address of the recipient, the person by whom the payment is made and the documents itself indicates that it is prepared for either seeking of funds or reimbursement of funds. Therefore even if the presumption is to be applied and the documents are accepted as true, it would not lead to the conclusion that payments have been made in cash so as to claim the expenditure. Thus no purpose would be served in remanding the issue to the Tribunal. Further Section 292 provides that where any documents are found in possession or control of any person in the course of search under Section 132, then it may be presumed in any proceedings under this Act that the contents of such documents are true and correct. It will be noted that the section uses the word ‘may presume’ and not ‘shall presume’ or ‘conclusively presume’. The words ‘may presume’ are in the nature of discretionary presumption different from a compulsory presumption. Therefore this presumption has to be invoked by the authorities passing an order under the Act particularly when the invocation of such presumption is discretionary on the authorities.
Undisclosed income on sale of scrap
We are of the view that the conclusion reached by the majority members of the Tribunal that there was in fact sale of scrap is a possible view. This is particularly so as in normal course of human conduct any purchase of raw material even scrap would be shown in regular books of accounts as the same would be entitled to deduction so as to reduce the taxable profit. No person carrying on business would in the usual course of its activity, deny itself the benefit of any deduction available to it in determining the taxable profit.
Further the reasoning of the authorities that there is a sale of scrap viz. that one normally does not manufacture final products out of scrap, but scrap is certainly generated during the course of manufacturing final products, cannot be faulted. The appellant was manufacturing Stenter machines and in the normal course there would have been scrap generated in the manufacturing Stenter machines. It is the scrap which is likely to be sold in the open market for the consideration received by the appellant. Moreover, the appellant has not produced any evidence before the authorities to indicate who the suppliers of the scrap was or filed their evidence to indicate that they had sold scrap to the appellant. In these circumstances, the finding of facts arrived at by the majority members of the Tribunal upholding the order of the Assessing Officer is a plausible view. The same cannot be said to be perverse and/or arbitrary.
Accordingly appeal of the assessee dismissed.