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TMI Blog1997 (7) TMI 222X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 order which was sent to the CIT on 18-7-1996 for approval. Subsequently, the Assessing Officer wrote a letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. & Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624. He illustrated his stand by stating three situations. First, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 contention is that the assessment proceedings under Chapters XIV and XIV-B are mutually exclusive and Assessing Officer is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usive 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.) ; (4) CIT v. Jaora Oil Mill [1981] 129 ITR 423/5 Taxman 223 (MP). 11. He further submitted that the marginal note, speech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Court held that the income sought to be taxed did not belong to that year then it was very difficult to tax it again as by that time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 within the block period computed in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search or requisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that it enlarges the meaning of the word 'income', inasmuch as it includes the various assets which otherwise could not have been included in the natural me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 in words (something that is secret or not generally known). Undisclosed---not made known, not named or identified. Meaning as per Chambers 20th Century, Dicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income of the assessee. Therefore, in our opinion, the words 'such other material' has to be understood as 'any other material'. Interpretation suggested by him would again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur 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 income, then, in our considered opinion, such income cannot be treated as undisclosed income. For example, the assessee may claim a particular receipt as not taxable or may c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision 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 purpose of taxation. Those assets must be, or represent, hidden or secreted funds or assets. Where, however, the existence of the money or asset is known to the Income-tax Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 both the concerns were to be completed by 31-7-1996. On 22-7-1996, a notice was issued by the Assessing Officer to the assessee-company to show cause why the income of PFI be not clubbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 year 1994-95, it restricted to export dais only. In 1995-96 it has imported sugar while in 1996-97 it imported edible oils and oil seeds. In view of these facts, it was argued by him that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 also contended by him that the activity of import and export was only by the clearing agents though under the supervision of the partners of the firm PFI. The payment of them is fully supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends 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 order to prove that the partnership firm was the benamidar of the assessee-company. He further submitted that no adverse inference can be drawn merely on the fact that there were some transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the Madras High Court decision in the case of First ITO v. M.R. Dhanalakshmi Ammal [1978] 112 ITR 413. He pointed out that no evidence has been brought on record either to prove that the capital of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 finance. According to him, the Assessing Officer came to know of the several factors after the date of search to suggest that the partnership firm was the branch of the assessee-company. 44. First of all, he referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree 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 provided by the assessee. He also referred to the fact that the assessee had given loan of Rs. 12,62,525 to PFI in assessment year 1991-92 and Rs. 1, 19,514 in assessment year 1990-91. He also referred to para 12 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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. Huge business of onions could not have been possible without the help of the assessee-company. It is also not clear how export orders were obtained by PFI. 49. His next submission was that registration of the firm under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 same, he referred to Sohan Singh v. CIT [1986] 158 ITR 174/23 Taxman 219 (Delhi) and Kirpa Ram Ramji Dass v. ITO [1982] 135 ITR 68/[1980] 3 Taxman 487 (Punj. & Har.) to point out that even under section 148 addition can be made wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion 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 handled by the clearing and forwarding agents which is supported by their bills. Regarding the process charges it was submitted by him that it included the charges for storage, handling and packing of the goods processed. It was also point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 on the business of export in various commodities which was not the business of the assessee-company. The assessee-company had merely imported the goods and sold the processed goods locally. We have also gone through various assessment orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 processing of gram. Besides this, the consideration is not consistent as yield of chuni and husk varies from 22% to 27%. This objection too is not sustainable in law. It is between the parties how the payment is to be made for the services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 fact remains that stock of raw material and finished product pertaining to PFI and the assessee was not identifiable. We have gone through the panchanama prepared at the time of search. The inventory prepared does not indicate that separate st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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 assessee-company. Now the question arises whether the business of PFI was carried on with the funds of assessee-company. We have gone through the various balance sheets of PFI to which our attention was drawn. The balance sheet as on 31-3-1990 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appropriated against allotment of shares. Perusal of balance-sheet as on 31-3-1995 confirms this fact. In view of these facts, it cannot be said that profits of PFI to the extent of Rs. 3.00 crores has been enjoyed by the assessee. If any money has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 were withdrawn for Parakh Foods Ltd. appears to be a clerical mistake. We are therefore of the view that the profits of the firm have really been enjoyed by the partners of PFI and not the assessee-company. There is no iota of evidence that any part of the profits of PF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by PFI is for the furnished office and, therefore, the assessee has not purchased office furniture. It has also been clarified that whenever any expenses were borne by the assessee, the same had been reimbursed by PFI on ad hoc basis. Page 18 of the paper book filed on 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 to establish that PFI is benamidar of the assessee-company. After considering the materials placed before us, facts and circumstances taken as a whole and the rival submissions of the parties, we are of the view that revenue has not discharged its onus to establish the same. There are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. 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 registration as well as continuation of registration have been granted by the Assessing Officer for the earlier years. Perhaps, the Assessing Officer is also not sure about the benami character because registration granted to PFI has not been revoked, though he had power under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 period of limitation. The reasons are best known to the revenue. There is also no material to show that anything was found at the time of search to suggest clubbing. Therefore, we hold that all primary facts were within the knowledge of the Income-tax Department and nothing was hidden from it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases 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 Annexures B2 to B16. 78. After considering the explanation of the assessee (Annexure B1 to the assessment order), the Assessing Officer was of the view that the system adopted by the assessee was faulty and incorrect. According to him, the assessee could claim expenditure either by debiting such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 Bench in the case of Spaco Carburettors (India) Ltd. [IT Appeal Nos. 1767 and 538 (Bom.) of 1983] and the decision of the Special Bench in the case of ITO v. Food Specialities Ltd. [1994] 206 ITR 119 (Delhi) AT] as well as Supreme Court decision in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hearing, different stands have been taken by Mr. Parakh regarding the use of the bardana as dunnage, inasmuch as initially it was stated by him that around 80 bags were required per truck not on the next day he stated that around 20 to 25 bags were required. He, therefore, submitted that loss of 25% sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sheet. It has never been claimed as tools for carrying on business. It has been purchased only as an item of expenditure. Regarding the peak of the closing stock, it was submitted by him that it is the correct method of determining correct undisclosed income. 84. Regarding the last contention of Mr. Pathak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 forms part of the final product sold, its expenditure has to be deducted under section 28 itself. Consequently, its opening stock and closing stock has also to be taken into consideration. The view which we have taken is supported by the decision of the Hon'ble Supreme Court in the case of Poona Electric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the balance sheet ? If yes, then should it be shown under the head 'Stock-in-trade' or under some other head ? (ii) What should be the basis of valuation of empty drums/bags in hand in case they are required to be shown in the balance sheet ? The Expert Committee has given the following opinion, vide para 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. Though the assessee has been claiming loss of Bardana at the rate of 25 per cent for all the years, the reconciliation statements show a different picture. We find from Annexure B-14 to the assessment order that different percentage of loss of Bardana has been shown in respect of each year. It ranges between 19.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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