TMI Blog1997 (7) TMI 222X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid manufacturing units as well as at its Offices at Market Yard, Gultekadi, Pune and also at Ashok Chambers, Mumbai. Similar action was also taken at the premises of its sister concern M/s Parakh Food International (hereinafter referred to as 'PFI') a partnership firm constituted by S/Shri Harakchand K. Parakh, Prakash Parakh and Suresh H. Parakh, who, inter alia, are also the Directors of the assessee-company. 4. In response to notice under section 158 BC dated 30-8-1995, a return for the block period was filed by the assessee on 22-5-1996 declaring undisclosed income at Rs. 6,89,349. In the course of assessment proceedings, the assessee filed a revised return on 1-7-1996 declaring undisclosed income at Rs. 52,62,268. On the basis of seized material as well as materials obtained in the course of assessment proceedings by the Assessing Officer from the assessee, various additions were proposed by the Assessing Officer vide his letter dated 3-7-1996 addressed to the assessee. The assessee was asked to file objections with evidence by 12-7-1996. It was also advised to seek the hearing before the CIT, Pune, if so desired. Simultaneously the Assessing Officer prepared a draft orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, while the second part provides a boundary for finding out the undisclosed income. According to him, the assets or entries specified in the first part must represent wholly or partly the property or income which the assessee had not disclosed before the date of search either in the return or in the course of assessment proceedings and where the return has not become due then, the assets or entries are such that the same would not have been disclosed if the search had not taken place. In this connection, he referred to the meaning of the word 'definition' as given in Webster's Dictionary to support his contention that definition clause not only provides the meaning of a word but also its boundaries. He also relied on the decision of Andhra Pradesh High Court in the case of Addl. CIT v. ITAT [1975] 100 ITR 483. Hence, he submitted that section 158B would not include that income in respect of which assessee has disclosed prior to search or in respect of which assessee would not have disclosed if search had not taken place. What is required to be disclosed is the primary facts and not the inferential facts as laid down by the Hon'ble Supreme Court in the case of Indo-Aden Salt Mfg. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e if the material is gathered by the Assessing Officer in the normal course of enquiry without having any nexus with the seized material. He emphasised on the word 'such' used by the Legislature in section 158BB. In support of his stand he referred to the Dictionary meaning of the word 'such'. He submitted that the Legislature used the words 'such other material or information' after the words 'on the basis of evidence found as a result of search or requisition of books of account or documents'. Therefore, "such other material or information' must have some nexus with the material found as a result of search. For example, a loose paper may be found at the time of search containing entries "Rs. 50,000... X". This entry does not explain anything. Therefore, if the Assessing Officer makes further enquiry and finds that the assessee had received consideration from 'X', which is of revenue nature then the Assessing Officer can assess the said income as undisclosed income. He, therefore, concluded that under the provisions of Chapter XIV-B it is only that income which is discovered as a result of search which can be assessed as undisclosed income under Chapter XIV-B. 8. His next conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention raised by Dr. Pathak. His first contention was that the definition in clause (b) of section 158B is inclusive one and, therefore, it is wider in sense. According to him, each and every income which has not been disclosed by the assessee in his return can be assessed as undisclosed income. There is no restriction clause by the Legislature. There is nothing in definition clause to suggest that the undisclosed income must spring as a result of search. According to him, any sum which can be assessed as income of the assessee and which has not been returned by the assessee would be undisclosed income. It was also submitted by him that in the case of inclusive definition, what is included therein has to be considered in addition to the normal meaning of the word. In such cases, Legislature merely enlarges the normal meaning. Therefore, meaning of the word in the inclusive definition cannot be restricted to what is included therein. Reliance was placed on the following decisions : (1) Father Epharam v. CIT [1989] 176 ITR 78 (Ker.) ; (2) CIT v. Vijay Kumar Budhia [1975] 100 ITR 380 (Pat.) ; (3) Raja Ragavendra Singh v. State of Punjab [1976] 102 ITR 40 (Punj. Har.) ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion itself. The remaining amount has to be treated as undisclosed income. According to him, such provisions could also be used to define the words for which only inclusive definitions is given. He relied on decision of Patna High Court in the case of CIT v. Vijoy Kumar Budhia [1975] 100 ITR 3 80. He further submitted that section 158BB specifically states that the total income has to be computed in accordance with the provisions of Chapter IV and, therefore, deduction referred to in Chapter VI-A cannot be allowed. He also submitted that there cannot be two different meanings of the words 'total income', i.e., one for the block assessment and the other for regular assessment. He also referred to the judgment of the Kerala High Court in the case of N. T. John for the contention that once the proceedings under this Chapter are commenced then no assessment be made by way of regular assessment. 15. He also contended before us that concept of block assessment was introduced to overcome the difficulty faced by the Government in the past. He submitted that in the past, there were disputes between the assessee and the revenue with respect to the year to which the income belongs. If the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act. 158BA. (1) Notwithstanding anything contained in any other provisions of this Act, where after 30th day of June, 1995, a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter. (2) The total undisclosed income relating to the block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or years to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not. (3) 158BB. (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assistant Commissioner. (Provided that no such order shall be passed without the previous approval of the Commissioner or Director, as the case may be). 158BH. Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter." 20. Firstly, we shall deal with the scope of definition clause (b) in section 158B. The definition clauses are introduced in the enactments by the Legislature in order to clarify the meaning of various words used by it in the enactment. It indicates the intention of the Legislature. Words are defined by the Legislature in various Acts. Sometimes exhaustive meaning is given in the definition clause by using the words 'means' or 'means and includes', while in some enactment it does not define a word, but it enlarges the natural meaning of the word. In such cases, it uses the word 'includes'. While in some other cases, it neither defines nor enlarges the meaning but it merely restricts the natural meaning of a word or excludes, something out of the same. 21. In the present case, we are concerned with the definition clause, which is inclusive as well as restrictive. It is inclusive in the sense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ambiguous. There is nothing in the language used in section 158B(b) to suggest what has been contended by Mr. Pathak. In our opinion, the language of the section is clear and unambiguous and, therefore, resort to marginal notes or Finance Minister's Speech, etc., is not required for the purpose of determining the scope of section 158B(b). Since the definition clause is inclusive as well as restrictive one, this, in our opinion, would include the natural meaning of the words 'undisclosed income' in addition to what has been specifically included therein, subject to the restrictions mentioned in the second part. 23. Now the question arises, what is the natural meaning of such word. The word 'undisclosed' has not been defined in the Act. Therefore, it has to be understood in accordance with its dictionary meaning. The word 'undisclosed' means 'not disclosed'. The words 'disclosed' and 'undisclosed' have been defined in the various dictionaries as under : Meaning as per Webster's Third New International Dictionary : Disclose : To open, to open up, unclose, to expose to view, lay open or uncover (something hidden from view), to make known, open up to general knowledge, to reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 158B. We have already expressed our view that the language of section 158B is clear and unambiguous and, therefore, it would include every kind of income which is hidden from the knowledge of the department. If the contention of Mr. Pathak that undisclosed income must be that which is detected as a result of search is accepted, then it would amount to restrict the natural meaning of the word undisclosed income in section 158B(b). 24. We are also unable to accept the contention of Mr. Pathak that undisclosed income must be assessed on the basis of material found as a result of search, or other material having nexus with the seized material. According to him, the words 'such other material' used in section 158B suggests such interpretation. He has referred to the meaning of the word 'such' as given in the dictionary. According to him, it must relate to the preceding words. In our opinion, the word 'such' may not necessarily refer to the word or words preceding to it. It is the settled law that words used by the Legislature should be interpreted in the manner which advances its object and not which frustrates it. The object of the Legislature is to find out all the hidden in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee will be able to get refund of the excess advance tax paid ? Such absurd situations could not have been contemplated by the Legislature. On the contrary, in our opinion, there is no anomaly in the provisions of the Act. Chapters XIV and XIV-B have their own fields. Undisclosed income as defined in section 158B has to be assessed under Chapter XIV-B and the same cannot be assessed under Chapter XIV. Similarly, income other than the undisclosed income has to be assessed under Chapter XIV. We, therefore, hold that proceedings under both the Chapters are mutually exclusive and can be exercised independently and simultaneously. 26. In view of what we have expressed above, we are unable to accept the contention of Mr. Gupta, learned departmental representative that any income which is includible in the total income but not returned by the assessee would be undisclosed income under section 158B. Such contention of Mr. Gupta is too extreme to be accepted. Even at the cost of repetition it is clarified that if the assessee has disclosed the particulars of income before the date of search and the Assessing Officer draws an adverse inference and intends to assess the same as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of regular assessment or reassessment, as the case may be, in accordance with law. 28. No case law is available to interpret the meaning of undisclosed income, except the decision of the Delhi High Court which happened to consider the meaning of the word 'undisclosed' as defined in section 132(1)(c). The following observations are quoted for the benefit of this order : L.R. Gupta v. Union of India [1992] 194 ITR 32, 34 (Delhi) "Sub-clause (c) of section 132(1) pertains only to movable and not immovable assets. Secondly, it pertains to those assets which, wholly or partly, represent what should have been income. The expression 'income' which has not been, or would not be, disclosed for the purposes of 'the Income-tax Act' would mean that income which is liable to tax but which the assessee has not returned in his income-tax return or made known to the Income-tax Department. The sub clause itself refers to this as 'undisclosed'. In that context, it must mean income which is hidden from the Department. Clause (c) would refer to cases where the assessee knows that the movable asset is or represents income which is taxable but which asset is not disclosed to the department for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient to dispose of the present appeal. We, therefore, refrain ourselves from expressing our views on the other aspects argued by the parties. 30. Issue regarding the clubbing of income of Parakh Food International : The brief facts of the case are these : M/s Parakh Food International (hereinafter referred to as PFI) is a sister concern of the assessee. It is a partnership firm consisting of three partners, viz., S/Shri Harakchand Parakh ; Prakash H. Parakh and Suresh H. Parakh which was formed on 23-1-1990 with a view to start the business of import and export in all kinds of goods. The partners of the firm are also the Directors of the assessee-company. The said firm is duly registered under the provisions of Indian Partnership Act, 1932. It started the business of import and export in various goods. Later on, it restricted to export business in pulses. The said firm has been registered under the provisions of the Income-tax Act, 1961 and continuation of its registration has been granted in the subsequent years. The premises of the assessee as well as M/s PFI were search under section 132 on 12-7-1995. As per the provisions of Chapter XIV-B, the block assessment of bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat PFI is merely a branch of the assessee-company. Consequently, the income of PFI relevant to assessment years 1991-92 to 1994-95 was clubbed in the hands of the assessee-company which amounted to Rs. 5,52,95,926. 32. The learned counsel for the assessee has vehemently assailed the finding of the Assessing Officer that the partnership firm PFI is a merely branch of assessee-company. It was submitted by him that the firm was constituted on 23-1-1990 by the three persons with a view to carry on the business of import and export of various items which were entirely different activity from the activity of the assessee-company. The assessee-company was not in the line of export business. He drew our attention to the fact that in the financial year 1990-91, the partnership firm exclusively dealt in the export business of onions. On the contrary, the assessee-company never dealt in purchase and sales of onions. In the financial year 1991-92, the assessee exported goods of general merchandise as much as 61 items, a list of which is given at page 24 of the paper book. In addition to these items, it also exported gram dal yes dal and tur dal. Then in the subsequent years up to financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such job work of another firm of M/s Eastern Overseas Corporation on the same terms and conditions. It was also stated by him that the processing charges were paid in kind in order to take care of the inflation in the cost. It was also submitted by him that it was not necessary to set up its own plant. Getting the goods manufactured by others is a general and known practice of business. He also drew our attention to the judgment of the Bombay High Court in the case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 to support his submission. Regarding direct receipt of the raw materials at and despatch of processed goods from Washi unit, it was submitted by him that assessee's purchases were by way of import from other countries and goods were to be brought from Bombay Port. Since Washi unit is on the National Highway between Bombay and Pune, no prudent man would have decided to bring the goods first from Port to Pune and then transport it back to Washi for processing. It was convenient and economical to bring the goods directly from Port to Washi. Similarly, the decision of despatching the processed goods directly from Washi to Bombay Port was in the interest of business. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1992-93, it was submitted by him that these monies were given to the company for allotment of shares as share application money. Finally, all the partners got the allotment of the shares. Dividends against such shares have also been duly included in the income of these partners. He further drew our attention to page No. 779 of the paper book to show that the partners of PFI not only invested in the assessee-company, but also invested money in shares of Parakh Food International Ltd., Parakh Oils Ltd., Parakh Agro Industries Ltd., Indian Tanners Ltd. and Hotel Leela Venture. These investments amount to more than Rs. 67 lakhs by each partner. Besides this, Prakash Parakh and Mr. Suresh Parakh had advanced money to other persons. Mr. Prakash Parakh had also purchased land at Mundhawa, and a motor car worth Rs. 7.7 lakhs and Rs. 3.03 lakhs respectively. From these facts, he pointed out that fruits of the partnership firm had been enjoyed by the partners personally and there is not a single evidence to show that other shareholders and directors of the assessee-company enjoyed the profits of the firm. According to him, this fact is very much essential to be established by revenue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the infrastructure facilities, it was submitted by him that the assessee was maintaining separate office, telephone, telex and employees. The office was undoubtedly in the same building, but there is nothing wrong in having office in the same building. The offices of the assessee and PFI were entirely different. The activity of export and import was handled by the clearing agents in Bombay who were paid for their services. For the routine work, PFI had its own employees. 40. Besides above, it was also stated by him that the customers of PFI were different from the customers of the assessee. There is also nothing on the record that PFI sold goods at higher price than sold by the assessee to the similar customers. Goods were sold by PFI in accordance with the International market price. The assessee was not in the line of export business. Therefore, he submitted that if some of the shareholders/ directors intended to start a different kind of business, no adverse inference could be drawn. 41. On the legal aspect, it was contended by him that it is settled law that burden lies on the person who alleges that a particular concern is a benamidar of the other. Reference was made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer who assessed PFI was also the assessing authority of the assessee-company. Therefore, it cannot be said that any fresh fact came to the knowledge of the revenue. Hence, on the same set of facts, no addition was warranted under Chapter XIV-B and, if any addition was warranted, that could have been made by the Assessing Officer in accordance with the provisions of Chapter XIV only. 43. On the other hand, Mr. Sanjay Prasad, the learned departmental representative, has vehemently opposed the contentions of the learned counsel for the assessee. According to him, the case of the department is that PFI is benamidar of the assessee-company and the businesses of the assessee and PFI are the same. At the outset, it was submitted that each fact by itself may not be conclusive proof, but cumulative effect of all the facts and circumstances of the case would prove the case of the revenue. For this proposition, he relied on the decision of the Madras High Court in the case of E.A.E.T. Sundararaj v. CIT [1974] 95 ITR 454. He elaborated the various factors taken into consideration by the Assessing Officer. He tried to point out that there was unity of control, management and fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances do indicate that the entire management and control of PFI vested in the assessee-company. 45. He further submitted that Finance of PFI was dependent on the assessee-company and there was free flow of funds between these two concerns. The partnership business was started with a meagre sum of Rs. 4,500 only. 90 days credit facility by foreign suppliers and bank finances would not have been possible but for the goodwill of the assessee-company. The assessee-company had also stood as guarantor for PFI to the bank. Besides this, funds of Rs. 3 crores were diverted from PFI to the assessee-company. He referred to page 779 to show that each partner withdrew Rs. 1 crore each from PFI and deposited the same with the assessee-company. Though it has been mentioned by the partners that this money was given as share application money, but from the balance sheet of the assessee-company it appears as a loan. Reference was made to page 127 of the paper book. If the assessee-company had received the money as share application money, it was required to show as such in its books of account, as provided under the company law and not as a loan. No interest on such loan was pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee's counsel. He had only recorded the statement of the assessee. He referred to pages 6 and 17 of the inventory to show that wherever the imported material was there, it was mentioned as such. He also referred to Annexure 'K' of assessment order to show that there was nothing to indicate that there was any imported material. He further submitted that the assessee's counsel has merely assumed that stock of 2100 bags belonged to PFI. So his contention was that there was intermingling of stock. 48. He then referred to certain other details which had some discrepancies. He referred to pages 747 to 756. According to him, the sugar appeared to be imported by PFI, while contract was with the assessee-company. He also referred to para 13.4 of the assessment order to indicate that the assessee did not have proper system of maintaining stock of Bardana. Bardana of both the concerns got mixed up. It was also submitted by him that the plastic sheet is inserted in the gunny bags for export of dal but the cost of the same has not been shown. He also pointed out that packing expenses for 275125 onion bags and 14729 chana bags would have been much more than shown by the PFI. Hug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the case law relied upon by the assessee were distinguishable on facts. In G. L. Chabada's case, it was held by the Tribunal that the alleged firm held to be benami was formed prior to the firm in whose hands income was clubbed. In Prakash Textiles Associates' case, U. P. Tractors' case, Shri Gila Tea Trading Co.'s case, department was not able to prove regarding the intention and enjoyment of profits, etc. In Padinjarekara Agencies (P.) Ltd.'s case, facts were totally different. In Ghanshayambhai R. Thakkar's case intermingling of stock was not proved. 52. Lastly, Mr. Manish Gupta opposed the contention of Mr. Pathak that addition cannot be made under Chapter XIV-B. He maintained that any addition made by the Assessing Officer which is not shown by the assessee can be assessed as undisclosed income. Further there was no question of change of opinion as there was no existing opinion of the Assessing Officer in this regard. This issue has never been discussed in any earlier assessment year. He also submitted that if addition by way of clubbing of income can be made under section 148 then there is no reason why it cannot be made under Chapter XIV-B. In support of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kept separately. Employees of assessee were always aware about the stock of PFI. It was further submitted by him that no specific question was asked by search party about separate stocks of PFI. Reply would have been given if such question had been asked. Regarding the organisation and infrastructure of PFI, it was stated by him that building at Plot Nos. 1 and 2, Gultekadi, Pune, belongs to Parakh Agro Industries. Wherein PFI as well as the assessee are having separate offices. PFI had also clerical staff of 3 persons at Pune. The said firm had also paid telephone, telex expenses which were debited to P L a/c in assessment years 1990-91 to 1992-93. It was also pointed out by him that rent of Rs. 12,000 was paid by PFI for furnished office and, therefore, separate furniture was not shown in the accounts of PFI. Besides this, PFI had reimbursed the assessee towards telephone, telex as well as office and general expenses, etc., on ad hoc basis. PFI has also reimbursed the Parakh Agro Industries. For example in assessment year 1991-92 Rs. 24,000 and in 1992-93 Rs. 8,400 towards general expenses. All the work related to dock in respect of import and export business was mainly handle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kh and Mrs. Asha Parakh as well as a nominee of ISCOM. This fact also is not disputed. From the list of shareholders furnished at page 742 of the paper book, it is also clear that shareholdings of the partners of PFI were mere 7311 shares out of total shareholdings of 26500 shares which means that partners of PFI were holding only 27.59% of the shares of the assessee-company, while rest of the shares were held by other shareholders. These facts clearly show that all the shareholders of the assessee-company were neither interested nor involved in the affairs of the partnership business. No doubt the other shareholders are related to the partners of PFI, but no material is brought on record to show that the other shareholders enjoyed profits of PFI in any manner. It is well-settled that shareholders, directors, etc., are separate and distinct entities from the company and there is no legal restriction for carrying on separate business by shareholders or directors, unless there is a specific agreement to the contrary. Therefore, the fact that partners of PFI were also the Directors of assessee is not relevant for deciding the issue. Moreover, we find that PFI was formed for carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une to Washi as it would have been not only inconvenient but also uneconomical. Hence, this factor is also not relevant for deciding the issue. 60. The next objection of the Assessing Officer is that there was no agreement between the assessee and PFI for processing of the goods. This objection too is without any basis and is contrary to the facts. In the commercial world so many transactions are, effected under oral agreements/understanding which are not legally prohibited. The fact that there was oral agreement/understanding between the assessee and PFI for processing of goods is accepted by the department, as is apparent from the order of assessment for assessment year 1992-93 in the case of PFI appearing at pages 71 to 73 of the paper book. At page 2 of the order, this fact has been taken cognizance of and accepted by the Assessing Officer. It is pertinent to note that the Assessing Officer of PFI and the assessee was the same Officer. Therefore, we vacate this finding of the Assessing Officer. 61. The next objection of the Assessing Officer is that the consideration for processing of the goods is not in monetary terms, but is the form of chuni and husk obtained in the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such decisions. On the contrary, in the block assessment of PFI same Assessing Officer at page 5 has held that consideration paid by PFI was substantially excessive and consequently disallowed expenditure to the extent of Rs. 68,55,073 under section 40A(2) and, therefore, this objection of the Assessing Officer that consideration paid by PFI is in kind and is not consistent is irrelevant for deciding the present issue. 62. The next objection of the Assessing Officer that no separate production record is maintained by the assessee to distinguish the product of the assessee and PFI. Even stock of raw material is not kept separately. Since raw material is always in the pipeline, it is not possible to differentiate the processing meant for inland sale and export. After hearing both the parties, we agree with the Assessing Officer that the assessee has not maintained any record to distinguish the stock of PFI and the assessee kept at Washi. It has been submitted by the learned counsel for the assessee that no manufacturing on behalf of PFI was done at Khopoli. The processing was only done at Washi unit which has not been disputed by the learned departmental representative. But the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under section 80HHC, rest of the shareholders who had majority of the shareholdings would not have allowed these three partners to eat away the entire profits of the firm. There is no evidence on record that the other shareholders of the company enjoyed any part of the profits of the firm. The learned counsel for the assessee appears to be correct in contending that the lady shareholders/directors of the assessee-company did not want to be involved in the business of exports on account of stringent provisions of the Foreign Exchange Regulation Act. The claim under section 80HHC, in our opinion, is the consequence of the decision of the male directors to carry on separate business in partnership and not the motive. The explanation of the assessee in this regard is plausible one and the same is accepted. 64. The next objection of the Assessing Officer is that the partnership business was started with a small capital and there was free flow of funds between the assessee and PFI. Admittedly, the business of PFI was started with a small capital, but that cannot be a reason for holding that such firm is benami of the assessee. There is no evidence that capital was contributed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced the same as loan to the assessee. The explanation of the assessee was that the said amount was given to the assessee as share application money. The materials placed before us have been perused. We find from the balance-sheet of the assessee-company for the period ending 31-3-1993 that the said sum has been shown as loan from the directors. If the company had received this sum as share application money, it was required under the law to show as such. Therefore, the learned departmental representative is right in submitting that the sum of Rs. 3.00 crores was advanced by the partners who are also directors of the assessee-company by way of loan. However, that is not the end of the matter. Further perusal of the record shows that this amount was converted into share application money, as is apparent from the balance-sheet of the assessee for the year ending 31-3-1994. This shows that the amount of Rs. 3.00 crores was utilised by the assessee as loan for one year approximately and ultimately, the said sum was converted into share application money. There is also no dispute of the fact that finally shares were allotted to the partners of PFI and the amount of Rs. 3.00 crores was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - --------------------- --------------------- 90,00,000 72,00,000 74,00,000 ------------------- --------------------- --------------------- The fact that the sum of Rs. 1,09,91,600 only has been given as loans by the partners is corroborated by Schedule 4 to the balance-sheet of the assessee-company as on 31-3-1995, appearing at page 136 of the paper book. It also appears from this Schedule that substantial amount has been returned by the assessee to these partners, inasmuch as loans from the directors as on 31-3-1995 is reduced to Rs. 51,93,000. The statement in Schedule 4 given with the balance sheet as on 12-7-1995 shows further reduction from Rs. 51.93 lakhs to Rs. 34.96 lakhs (see page 139 of the paper book). These facts clearly show that the substantial amount given as loan has been subsequently received back by the partners of PFI. The Table given above also shows that these partners had also invested in other companies. Details at page 780 of the paper book also show that Mr. Prakash Parakh had also invested in the purchase of a motor car as well as land at Mundhwa. The narration given in the capital account of the partners in the books of account that the amounts wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee should have paid customs duty on the proportionate quantity of import or purchased goods locally. There is nothing on record to show that any customs duty was paid by the assessee. On the next hearing, it has been clarified by the assessee's counsel that the assessee had also imported raw pulse after paying custom duty and the same has been either included in the cost of goods or has been debited to the head 'Forwarding and clearing expenses'. Specimen copies of the "Bill of Entry for home consumption" have been furnished in the paper book filed on 21-4-1997. Relevant books of account were also shown to the departmental representative to verify this fact. Since this fact has been verified, no discrepancy exists. 70. Regarding the infrastructure facilities, we find that the assessee has its own separate office, furniture and necessary staff. No doubt the address of both the assessee and PFI is the same, but that is because of the fact that such offices arc in the same building. The building belongs to M/s Parakh Agro Industries Ltd. which had leased out the separate premises to both the parties. Rent is paid for such premises. It has also been clarified that rent paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich includes all expenses from the stage of unloading of raw material till the stage of dispatching of processed goods, except the cost of packing material which is supplied by PFI. Similar practice is also adopted by the Food Corporation of India. (7) That raw pulses of PFI are directly unloaded at the premises of the assessee and after processing directly despatched to the port. (8) That all dock-related activities are carried on by the Clearing and Forwarding Agents for which due remuneration is paid by PFI. (9) That separate infrastructure facilities are available with PFI, such as office, employees, telephone, etc. (10) That it is not proved that stocks belonging to PFI and assessee were kept separately. Even there is no production register maintained by the assessee. No stock register is also maintained. (11) That to some extent there was transfer of funds between the assessee and PFI. Funds were initially transferred from assessee to PFI to small extent, but later on loans were advanced by PFI to assessee. (12) That there is no ploughing back of funds from PFI to assessee's coffer. 73. Now the question arises whether the revenue has been able to charge its onus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The control of the business of PFI exclusively vests in the partners of PFI. There is no evidence to establish that business of PFI was ever conducted by any of the employees of the assessee, except processing activity for which due consideration has been paid by PFI to the assessee. There are separate office premises and telephone facilities available with the PFI. Where such facilities of assessee have been utilised the same have been reimbursed. There is also no proof that profits of PFI have been enjoyed by any shareholder of the assessee-company except partners of PFI. Mere transfer of funds for a short period is no ground for holding that profits were enjoyed by the assessee-company. The amount of Rs. 3.00 crores remains invested in the shares of the assessee-company. A major amount out of Rs. 2.36 crores withdrawn by the partners has also been invested by the partners in purchase of shares of other companies, land and motor car, as is apparent from pages 779 to 780 of the paper book. The amount given by these partners as loan to the assessee-company has slowly been returned as discussed earlier. Besides, the genuineness of the firm is also proved by the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case has taken note of it. The fact that partners of PFI are directors of the assessee-company was duly within the knowledge of the Assessing Officer as both the parties were assessed by the same Assessing Officer. Therefore, it cannot be said that the primary facts were hidden from the knowledge of the revenue. Perhaps, Assessing Officer was also satisfied about the genuineness of PFI, inasmuch as he had assessed the assessee-company for assessment year 1993-94 by way of regular assessment on 27th March, 1996, i.e., much after the date of search without including the income of PFI. There is not even a whisper expressing any doubt about the non-genuineness of PFI. Further no addition was proposed by him till 18th July, 1996, as is apparent from the letter of the Assessing Officer dated 8-7-1996 and draft assessment order dated 18-7-1996. For the first time, notice was issued by him on 22nd July, 1996 proposing the clubbing of income of PFI with the assessee and the assessee was asked to reply within 24 hours and the assessment was completed within a week including the time taken for approval from the CIT. No reason has been given for making such addition at the fag end of perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning to assessment years 1989-90 to 1995-96. However, in respect of earlier years, it was submitted by the assessee that details were not available as regards were destroyed in a fire which took place at the office premises on 10-2-1988. It was also stated therein that, apart from the purchases made from the open market, the assessee also received bardana along with the material purchased which was used by the assessee for the following purposes : (a) Packing of the finished goods; (b) Using the same in the material handling process in the factory. The bardana which is used in material handling assumes the character of the Plant because this bardana is used as material handling equipment. (c) Laying the same on the ground as well as the bottom of the trucks during the rainy days; (d) Certain quantity of bardana forms part of the closing stock including raw material. (e) Certain bags do not torn while opening the same for taking out the raw material and these bags become useless for the purpose of making no use of them. (f) Certain bardana after wear and tear is disposed of in toto. All the details were filed by the assessee which form part of the assessment order as A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regular assessment for assessment year 1993-94. Hence, the net addition for the block period amounts to Rs. 1,17,06,872. 79. The learned counsel for the assessee, Mr. Pathak challenged the above additions on various grounds. He first assailed the addition on account of closing stock. His submission was that the assessee had been debiting purchases of new bardana and claiming the same as expenditure under section 37 in accordance with the accounting standard prescribed by the Institute of Chartered Accountants. He referred to AS 2 prescribed by the Institute. He further submitted that these are selling expenses and not manufacturing expenses, since the gunny bags are used after manufacturing process. However, it has to be treated as past manufacturing expenses which is allowable under section 37. Therefore, question of valuing closing stock does not arise. He further argued that expenditure under section 37 is to be allowed when it is incurred during the previous year even on the last day of the accounting year. In this connection, he relied on the decision of the Tribunal, Bangalore Bench in the case of Motor Industries Co. Ltd. v. IAC [1995] 55 ITD 465, decision of Bombay Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchases are duly recorded and no material adverse to the assessee was found at the time of search. Therefore, there cannot be any undisclosed income in respect of bardana. 82. Mr. Sanjay Prasad, the learned departmental representative, has strongly opposed the contentions of the assessee's counsel. It was stated by him that details filed by the assessee are without any basis. There is no basis of 25% loss of bardana received with the material. There is no basis even for the opening stock of bardana, i.e., 1,40,000 bags as on 1-7-1986 It was submitted by him that figures have been prepared by the assessee on backward basis by taking into consideration the stock found at the time of search and bardana loss at the rate of 25% of bardana received along with the material purchased. Even the loss shown by the assessee is not consistent. If the figures are not consistent, then the question arises how the figure of loss was arrived at. In the absence of record, reconciliation of the stock of bardana and the loss of bardana is not reliable. In this regard he took us through various figures which formed part of paper book and assessment order. He also submitted that even in the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. Cotton Spg. Wvg. Mills Co. Ltd. v. STO [1965] 16 STC 563 and the decisions of the Karnataka and Calcutta High Courts in CIT v. Baraka Overseas Traders [1993] 201 ITR 827/67 Taxman 188 and CIT v. Union Carbide India Ltd. [1987] 165 ITR 550, respectively. He also relied on the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44/54 Taxman 499 for the proposition that if the system of accounting is wrong and does not give true picture of profits and losses, then the same can be rejected by the Assessing Officer despite the fact that it was constantly adopted by the assessee in the past. He further submitted that gunny bags used by the assessee for the sale of goods is a primary packing, inasmuch as processed goods could not have been sold without such packing. He relied on the decision of Supreme Court in the case Eastern Paper Industries 43 ELT 201 and the decision of the Rajasthan High Court [1983] ELT 6 wherein it has been held that primary packing is part of direct cost. He also refuted the contention of Mr. Khandelwal by submitting that the assessee had never claimed bardana as plant nor it has been shown as such in the balance shee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale consideration. In making this exercise, it is the proportionate cost which is to be deducted from the sales of final product and not the entire cost. It is on the basis of this principle that gross profit has to be arrived at after taking into consideration the opening stock and closing stock of all the material which are used in making the goods marketable. Absurd result would follow if such an exercise is not made. In our considered opinion, section 28 speaks of such commercial profits which are further to be computed in accordance with the provisions of section 29. Bardana is a necessary component of the product sold by the assessee and consequently proportionate cost of bardana has to be deducted from the sale consideration of the final product. It is on the basis of this principle that all the direct costs relating to the final product are deductible under section 28. Since all the proportionate expenses which are necessary to make the goods marketable are deductible under section 28 itself, the contention of Mr. Pathak that only expenditure up to the stage of manufacture should be taken into consideration while computing the gross profit is without force. Since bardana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... going through AS-II, we do not find any statement which authorises the assessee to charge the entire expenditure on packing material to the profit and loss account without taking into account the valuation of the inventory of the same. AS-H provides the manner of valuation of all kinds of inventory, except those items which are fisted in para 5. None of the items excluded in para 5 relates to the packing material. Impliedly, it means that the inventory of the packing material has to be valued at the end of the year. The view of ours is rather supported by the opinion expressed by the Expert Advisory Committee of the Institute of Chartered Accountants of India which is reported in the ICAI Compendium of Opinions, Vol. IV, 1st Edn. In that case, the querist was engaged in the manufacture of PVC compound and allied plastic products who was purchasing raw materials in iron drums/polythene bags. The empty drums/bags in hand at the end of the year were not reflected in the trading account and the balance sheet of the company. This practice had been followed consistently in the past. The following query was raised : (i) Should the amount in respect of empty drums/bags be reflected in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld by us on the scope of provisions of Chapter XIV-B, it is not possible to uphold the addition as undisclosed income under Chapter XIV-B. We hold accordingly. In view of the above discussions, we delete the addition of Rs. 35,29,288 on this account. 89. Let us now examine the other addition of Rs. 1,02,84,531 on account of 25 per cent loss of Bardana. After considering the rival submissions of the parties, we do not find any merit in the main submission of the assessee's counsel. Admittedly, the assessee neither maintains stock register nor any details on the basis of which stock of Bardana at the end of the year could have determined. There is also no material on record to show the basis on which 25 per cent loss of Bardana could be determined. There is also no basis of the opening stock of Bardana taken by the assessee as on 1-7-1986 for assessment year 1988-89. Mr. Prasad is right in submitting that reconciliations appearing at pages 180 to 195 had been prepared by the assessee on backward basis on the basis of stock found at the time of search. The figures mentioned in such reconciliations also show that loss of Bardana had been quantified according to its own convenience. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, we hold that the disallowance has to be restricted to the value at which it has cost to the assessee. 91. The last contention of Mr. Pathak that such addition cannot be made as undisclosed income under Chapter XIV-B cannot be accepted. In our opinion, Such income was hidden from the knowledge of the department. The assessee had never given any details of Bardana lying with the assessee at the end of the year which is material fact for determining such loss of Bardana such income could not have been detected, if the Assessing Officer had not made thorough enquiries in this regard. 92. In view of the above discussion, we hold that the Assessing Officer was justified in determining the undisclosed income on account of loss of Bardana. However, we restore the matter to the file of the Assessing Officer to re-determine the value of loss of Bardana in accordance with average cost of Bardana received with the raw material. The correctness of the figures furnished before us may be examined by the Assessing Officer. The assessee is also directed to furnish copy of these details to the Assessing Officer. 93 to 159. [These paras are not reproduced here as they involve minor iss ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
