TMI Blog2010 (2) TMI 982X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Rs. 76,57,058 out of depreciation and Rs.19,58,456 out of interest claimed by the assessee in respect of bogus addition to fixed assets. The brief facts of the case are that the assessee is a company running a flour mill where it is producing wheat flour chokar, suji, maida, etc. It is also trading in these items. It has filed its return of income on October 28, 2005 declaring a loss of Rs. 42,37,018. The return was processed under section 143(1) on March 31, 2007. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee on July 3, 2006. On scrutiny of the books of account it revealed to the Assessing Officer that the assessee has shown addition to fixed assets amounting to Rs. 4,94,94,852. In order to probe the addition made by the assessee to the fixed assets he directed the assessee to file details of additions made to the fixed assets and the source of investment for the additions made. In response to the query of the Assessing Officer the assessee filed the letter dated July 19, 2007 and supporting bills and vouchers of various assets purchased during the year. With regard to the source of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on these bogus assets and accordingly made an addition. Similarly the Assessing Officer has observed that since the assessee availed of the term loan of Rs. 4.94 crores the interest paid on this term loan to the extent attributable to these bogus assets deserves to be disallowed. He found that the assessee has paid total interest of Rs. 31,58,775 on the term loan and the interest allocable towards such bogus capital addition has been worked out at Rs. 19,58,427. He made the addition of this amount also. Similarly the Assessing Officer was of the opinion that for erecting the capital assets of this magnitude the assessee must have claimed bogus expenses on account of consumables, gas welding, etc. He worked out the expenses of Rs. 25 lakhs alleged to have been claimed by the assessee on this bogus capital erection. He added this amount of Rs. 25 lakhs also in the total income of the assessee. Dissatisfied with the additions the assessee carried the dispute in appeal before the learned Commissioner of Income-tax (Appeals) and contended that it has been maintaining proper books of account, as required by the law. Its accounts have duly been audited as per section 44AB of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly contended that the doubt raised by the Assessing Officer in respect of three concerns were situated diagonally at different directions and inspector possibly cannot visit all the three places in one day. Apart from making the above factual submission it was contended that no addition under section 69 can be made holding that addition to fixed assets is bogus. The assessee while making reference to section 69 of the Act before the learned Commissioner of Income-tax (Appeals) contended that from bare perusal of the section it would be abundantly clear that the said section only applies to any alleged investment made by the assessee which is not recorded in the books of account. Therefore at the threshold first and foremost requirement to make section 69 applicable there should be a factual finding that assets/ investment are not recorded in the books of account. Whereas in a direct contradiction to the above proposition the Assessing Officer in the assessment order himself admits that a total addition of Rs. 4,94,94,852 has been made during the assessment year under appeal, the Assessing Officer has not recorded any finding that fixed assets are not recorded in the books of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly, the Assessing Officer is directed to delete the same. Consequently he deleted the disallowance of depreciation, interest component and also deleted the addition made an estimated basis in respect of consumables. The learned Departmental representative while impugning the order of the learned Commissioner of Income-tax (Appeals) relied upon the order of the Assessing Officer. He pointed out that the assessee might have made expansion of its plant but it failed to prove the purchases made by it and thus the Assessing Officer has rightly disallowed the expenses incurred for the purchase of material in respect of expansion of the capital assets. Learned counsel for the assessee on the other hand reiterated his contention as were raised before the learned Commissioner of Income-tax (Appeals). He apprised us with the table extracted supra exhibiting the enhancement of electric loads, power charges, etc. He also placed on record the copies of the photographs demonstrating the expansion. These photographs are placed on pages 271 to 305 of the paper book. On the strength of the details filed before the Assessing Officer as well as before learned Commissioner of Income-tax ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainable. The learned first appellate authority has observed that there is no provision in the law to contemplate such addition of the value of fixed assets on account of bogus claim. The assessee has not claimed deduction of expenses on account of purchases made by it which can be disallowed by holding bogus claim. Here the assessee has been accounting the assets in its accounts. These are duly recorded in the books then how addition under section 69 can be made. Section 69 read as under : 69. Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. A bare perusal of this section would reveal that in order to attract applicability of this section there should be material indicating the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of expenditure on expansion was Rs. 762.76 lakhs in the certificate as compared to the value of fixed assets addition of Rs. 494.94 lakhs shown in the balancesheet. The difference worked out at Rs. 267.81 lakhs has been treated by the Assessing Officer as unexplained investment by the assessee. He made the addition of this amount. The appeal to the learned Commissioner of Income-tax (Appeals) did not bring any relief to the assessee. The learned first appellate authority while confirming the addition had assigned the reason that the bank is a Government undertaking, it cannot sanction a loan of such magnitude without examining all possible factors which are necessary for efficient functioning of the unit after the expansion programme undertaken by the assessee and security of the loan. According to the learned Commissioner of Income-tax (Appeals) the loan was not sanctioned on the basis of certificate from an agency or a project report of the assessee-company, but the bank official must have undertaken physical inspection of the unit. They must have carried out thorough examination of various assets for sanctioning of loan. The other reason assigned by the learned Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer to verify this aspect. At the premises of the assessee, it has only installed one generator set for the purpose of expansion. He further pointed out that in the report cost of electric connection including security deposit with the DVB valuer has shown a sum of Rs. 50,77,000 whereas the actual amount incurred by the assessee is Rs. 21,54,750. He pointed out that these two items make a difference of more than Rs. 50 lakhs. Similar are the variations between the actual expenses vis-a-vis estimated one by the valuer. He further contended that addition solely on the basis of this certificate cannot be made on account of unexplained investment by the assessee. This document cannot be weighed over and above the details of actual expenditure maintained by the assessee and reflected in the balance-sheet. This document is only an opinion of an expert demonstrating the requirement of expenditure for an expansion. Such type of estimation would always be depending upon the person who is preparing a project report. He further contended that sections 69, 69A, 69B and 69C are deeming sections which enable the Assessing Officer to make a notional addition towards unexplained investment/expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk and it revealed to him that in order to avail of the term loan the assessee has submitted a project report. In support of the project report he submitted a certificate from a valuer namely Magnet Consorium exhibiting the probable expenditure of Rs. 7,62,76,000. The Assessing Officer took the certificate as a gospel truth and arrived at a conclusion that the assessee has made expansion of Rs. 762 lakhs but disclosed in the balance-sheet at Rs. 4.94 crores only. The learned Commissioner of Income-tax (Appeals) while confirming the action of the Assessing Officer has assigned peripheral reasons that bank is a Government undertaking. It would sanction the term loan after considering the feasibility of the project report and margin money contributed by the promoters. The bank cannot sanction a loan of such magnitude without examining all possible factors which are necessary for efficient functioning of the unit after expansion programme undertaken by the assessee-company and security of the loan. The learned Commissioner of Income-tax (Appeals) further concluded that why bank emphasised for contribution from the promoters is that once margin money contributed by the loan beneficiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot find a single defect in the books of account of the assessee. He has not observed that true income cannot be deduced from the accounts of the assessee. The only evidence relied upon by the Assessing Officer for harbouring a belief of unexplained investment by the assessee in the expansion of its project is the certificate submitted by the assessee to the bank demonstrating the expenses required for expansion. In our opinion this certificate is merely an opinion of an expert it cannot be considered a conclusive evidence exhibiting the unexplained investment by the assessee. Apart from the above the assessee has demonstrated as to how this certificate is giving approximate value of all the items. Learned counsel for the assessee while taking us through the certificate appended with the assessment order pointed out that all the figures mentioned in the certificate by the chartered engineer are in round figures which do indicate that these figures are based upon approximate value. He specifically pointed out that in the certificate the valuer has worked out the total value of the assets at Rs. 7,62,76,000. In this letter he took generator 2 x 550 KV at Rs. 50 lakhs. The valuer gave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning and Weaving Co. Ltd. v. CIT [1974] 95 ITR 375 wherein the hon ble Madras High Court has observed that the alleged practice said to be followed by the business houses of declaring large number of stock to the bank for the purpose of getting higher loans or overdraft facilities has neither been shown to exist nor recognised in commercial circles or by courts and even assuming that such a practice exists, the Tribunal is not expected to take judicial notice of such sub-standard morality on the part of the assessee so as to enable them to go back on their own sworn statement given to the banks so as to the stocks held or hypothecated by them in the banks. The hon ble Madras High Court in the latest decision has considered this earlier decision also and held that the assessee s income is to be assessed by the Income-tax Officer on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party, even if it be a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption aga ..... X X X X Extracts X X X X X X X X Extracts X X X X
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