P.M. Jagtap, A.M.

This appeal is preferred by the revenue against the order of Commissioner (Appeals), Jodhpur, dated 8-3-1994.

2. Ground No. 1 relates to the addition of Rs. 2,32,981 on account of unexplained investment in purchase of 40,731 meters. of grey cloth, not recorded in the books of account by the assessee.

3. The facts giving rise to this ground are that the assessing officer worked out month-wise quantitative details of sales and purchases made by the assessee and noticed that sales made by it were exceeding the purchases made during the month of October, 1989. He according concluded that the assessee had not recorded the purchase to the extent of 731 meters of grey cloth against which corresponding sales had been shown. Consequently, the assessing officer added the cost of unrecorded purchases of Rs. 2,32,981 to the income of the assessee while finalising the order under section 143(3). The matter was carried before the Commissioner (Appeals) who deleted the said addition.

4. Aggrieved by the same, the revenue is in appeal before us.

5. The learned Departmental Representative made an attempt to support the order of the assessing officer and submitted that the additions made on account of unrecorded purchases are in noway connected with the additions made in the closing stock. He further submitted that both these additions have been made by the assessing officer on the basis of different issues and hence the same are not linked to each other. He referred to the relevant portion of the assessing officer and contended that the additions made by the assessing officer are well founded and hence his order may be restored.

6. The learned counsel for the assessee submitted that the assessing officer has made the additions in the closing stock to the extent of 77,340 meters of grey cloth amounting to Rs. 4,41,329. He also furnished the quantitative trading account of the assessee for the relevant period and contended that the additions on account of unrecorded purchases are already covered in the additions made in the closing stock and as such further additions made on this account would amount to double taxation. He also submitted that the assessee has declared the excess sale of 40,731 mtrs. amounting to Rs. 39,222 in the books of account in credit side of the trading account and as such the learned Income Tax (Appeals) has rightly deleted the additions of Rs. 2,32,981 being the cost of 40,731 meters of grey cloth considering the same as double additions made by the assessing officer.

He also placed his reliance on the decision of Bangalore Bench of the Tribunal in the case of Industrial Trading Co. v. ITO (1994) 50 TTJ (Bang-Trib) 177.

7. We have considered the rival submissions and also perused the material on record. It is, observed that the learned counsel of the assessee has raised two arguments in support of his contentions. Firstly, he contended that the alleged unexplained/unrecorded investments in the purchase of 40,731 meters of grey cloth stands covered by the additions of Rs. 4,41,329 made in the closing stock on account of undervaluation of stock of grey cloth to the extent of 77,342 meters. We do not find any force in this contention of the learned counsel for the assessee, because both the additions have been made on different grounds. From the perusal of the assessment order, it is seen that the issue of unaccounted purchase was noticed when month-wise quantitative details of opening stock, purchases and sales were worked out by the assessing officer and shortage in the purchase was found during the month of October, 1989. The assessee also admitted this mistake and accordingly offered the amount of unexplained purchase for taxation. It is further observed that the additions in the closing stock has been made by the assessing officer on the basis of purchase made by the assessee during the last 10 days of the relevant previous year, i.e., after 20-3-1990, assuming that goods purchased during these periods could not have been dyed by the firm and accordingly should have been reflected in the closing stock. This finding of the assessing officer was also accepted by the assessee by and large and additions were accordingly made on agreed basis. Thus, it is observed that the basis of making both the additions was entirely different and independent of each other. This matter gets confirmed from the two separate quantitative trading accounts furnished by the learned counsel of the assessee for the period from 1-4-1989 to 31-10-1989 and 1-11-1989, to 31-3-1990. As mentioned above, the shortage in purchases was observed in the first period and consequently the assessee was not left with any stock at the beginning of the next period starting from 1-11-1989. Accordingly in the quantitative trading account, prepared for this period, taking opening stock as nil and also taking closing stock declared by the assessee as well as additions made by the assessing officer along with purchases and sales of the relevant period the surplus available comes to only 14,947 meters. Therefore, the contention of the learned counsel of the assessee that this addition is covered by additions in closing stock, is not tenable. The other contention of the learned counsel of the assessee on this issue is that corresponding sales in respect of unrecorded purchases have been duly recorded by the assessee in his books of account and accordingly the value of purchases including profit thereon has got declared in the income returned by the assessee and as such additions made on account of unexplained investment in such purchases would amount to double taxation. We find force in this contention of the learned counsel of the assessee, inasmuch as the entire amount of sales corresponding to the unrecorded purchases including profit thereon stands declared by the assessee and hence no separate additions on this account is warranted. Even if the additions are made on account of unexplained investment in purchase, similar amount of allowance is required to be granted simultaneously on account of expenditure on purchases not recorded in the books of account of the assessee and as such remained unclaimed. This view also gets support by the decision of the Tribunal Bangalore Bench (supra) cited by the learned counsel for the assessee involving identical facts wherein the Bangalore Bench has held as under :

"....we find that since in this particular case, the Income Tax Officer proceeded with the assumption that all the sales have been accounted for and that only part of the purchases have been made outside the books, there is no scope for making any separate addition on the ground of unaccounted purchases. Whatever addition is required to be made in this regard will have to be again given credit for as a component of purchase, in arriving at the real profit of the business. It is to be remembered that this is not a case where a part of the business consisting of the purchase and sales operations totally are outside the books."

Therefore, considering all the facts of the case, as also the material on record, we find no infirmity in the impugned order of the learned Commissioner (Appeals) on this issue and accordingly decline to interfere with his order.

8. Ground No. 2 relates to the disallowance of interest of Rs. 20,151 being interest to the extent not charged on interest-free advances given by the assessee for non-business purpose.

9. During the course of the assessment proceedings, the assessing officer noticed that the assessee had advanced substantial amount to relatives and sister concerns without any business consideration and not charged interest on the same whereas, on the other hand, he has paid interest to the extent of Rs. 34,194 on the borrowed funds. Accordingly, the assessing officer considered the same as diversion of funds and worked out -interest at 15 per cent on these interest-free advances. Consequently, disallowance to that extent out of interest expenses incurred by the assessee was made by the assessing officer. The matter was subsequently carried before the Commissioner (Appeals) who deleted this addition considering that no nexus could be established by the assessing officer between the borrowed funds and interest-free advances. Aggrieved by the same, the revenue is in appeal before us.

10. The learned Departmental Representative submitted that the advances were given to the relatives and sister concerns free of interest without any business consideration. He also submitted that at the relevant time, the assessee paid interest on the funds borrowed and claimed the same as business expenditure. He, therefore, contended that this is a clear case of diversion of funds and interest attributable to the interest-free advances had been rightly disallowed by the assessing officer and his order may accordingly be restored.

11. The learned counsel of the assessee reiterated the stand taken before the Commissioner (Appeals) and submitted that the assessing officer could not establish any nexus between the borrowed funds and interest-free advances. He further submitted that in the case of the alleged advance paid to M/s. Naresh Kumar & Co. it is actually a current account of the said party with whom funds were exchanged frequently as a matter of temporary accommodation. He also furnished extracts of account of the said party as per the books of the assessee running into five pages and contended that such current account could not be treated as advance. He further submitted that the assessee has not raised any interest-bearing loans during the relevant year and all the borrowed funds available with the assessee were utilised for the business purpose. He further submitted that the assessee had its own funds of Rs. 3,11,963 available to the credit of the partners' capital account which were sufficient to cover the interest-free advances. He, therefore, contended that Commissioner (Appeals) has rightly deleted the additions on this account and his order may be upheld. He also cited the following decisions in support of his contentions :

(i) Secheron Electrode (P) Ltd. v. CIT (1983) 13 Taxman 372 (MP) D&H;

(ii) Appollo Trade Links v. IT O (1994) 116 CTR (Trib) 359 (Del);

(iii) United Agencies v. ITO (1990) 37 TTJ (Ahd-Trib) 374; and

(iv) Hissaria Bros. v. Asstt. CIT (1999) 22 Tax World 684 (Jp-Trib).

12. We have considered the rival submissions and also perused the material on record, including the decisions cited by the learned counsel for the assessee. It is observed that the interest-free advances have been given by the assessee out of its own funds available in the capital accounts of the partners. It is also observed that there was sufficient amount available in the credit of partners' capital account which was utilised by the assessee for giving interest-free advances. It is also observed that nothing has been brought on record by the revenue to prove that interest-bearing funds available with the assessee were not utilised for the purpose of business but were given as interest-free loans or advances. As against this, the availability of own funds in the hands of the assessee is very much evident from the extract of partners' capital account furnished by the assessee. On the perusal of ledger account extract of M/s. Naresh Kumar, we are of the view that this current account of the said party clearly reflects the nature of the transactions and hence cannot be treated as loan/advance. Further all the decisions cited by the learned counsel of the assessee (supra) also support the assessee's case. Therefore, considering all the facts and circumstances of the case, we are of the view that no material has been brought before us to take any contrary view and Commissioner (Appeals)'s order is, therefore, upheld.

13. In the result the appeal of the revenue is dismissed.