1. These are the appeals by the revenue relating to the consecutive assessment years 1974-75 to 1976-77 against the orders of the Commissioner (Appeals). Involving common grounds, all the three appeals are disposed of together by a combined order.
2. The first common ground relates to the disallowance of the expenditure incurred on a Delhi flat. The case of the assessee is that flat No. B-168 had been taken by the assessee in Defence Colony, New Delhi, for holding the meeting of the directors. The assessee claimed the rent and other maintenance charges in connection with that flat.
This flat remained in occupation of the assessee till November 1973 and from December 1973, the assessee took on rent certain premises in Vasant Vihar at New Delhi. The ITO rejected the claim of the assessee relying on the past history. Admittedly, the claim of the assessee was rejected in the past right up to the stage of the Tribunal on the ground that no evidence had been led to establish that the flats had been used for business purposes by the assessee. For the years under appeal, the Commissioner (Appeals) accepted the claim of the assessee observing that there was evidence to show that the flats had been used for business purposes. He observed that the notices for holding the meeting of the board of directors were given by the assessee and they clearly proved that the premises were being used for business purposes, meaning thereby for holding the meetings of the board of directors. We agree with the Commissioner (Appeals) that the decisions relating to the earlier years are distinguishable inasmuch as for the years under appeal the assessee produced the evidence in the shape of the notices pertaining to the meetings of the board of directors. Shri Pandey, the learned representative for the assessee, submits that all the directors belong to the erstwhile royal family and that they always stayed in some prestigious hotels in New Delhi and that the premises having been taken on rent for holding the meetings of the directors could not have been used for residential purposes by the directors. This is how, he argues that on the facts and in the circumstances of the case, it is highly improbable that the premises in question were ever used for personal purposes by the directors. We quite agree with his submissions. For the reasons, we uphold the orders of the Commissioner (Appeals) on this issue.
3. The next common ground relates to the disallowance of interest calculated on compound interest system. The case of the assessee is that no compound interest was charged by the assessee from Citric India Ltd. The IAC, while giving direction under Section 144B of the Income-tax Act, 1961 ('the Act'), observed in para 6(iv) as reproduced in the order of the ITO relating to the assessment year 1974-75 as follows ; (iv) There was a search in the premises of the assessee and among the records seized from the branch office of the assessee situated at Rajmahal, Jaipur, there is a paper bearing No. 107. In this paper, figures of year-wise accrued interest on the loans advanced to Citric India Ltd. have been given. From these figures, it appears that the interest had been worked out by the assessee on the loans advanced to Citric India Ltd. have been given. From these figures, it appears that the interest had been worked out by the assessee on the gross amount of the loans including the accrued interest. This paper was shown by the ITO to the assessee's representative.
Regarding this paper, he has stated that it has no relevance as the figures of the interest shown therein are financial yearwise whereas the accounting year of the assessee ended on 30th June of each year.
He has further stated that the figures of interest shown in this paper do not also tally with the interest provided for in the account books for the assessment years 1967-68 and 1968-69.
4. It is on these facts, the ITO calculated the compound interest purportedly having been received by the assessee from Citric India Ltd. The Commissioner (Appeals) relying on his combined order dated 28-3-1980, pertaining to the assessment years 1971-72 to 1973-74, a copy of which is included in the paper book, took the view that only a simple interest at the rate of 12 per cent was chargeable. He accordingly, directed the ITO to recompute the interest on simple interest basis. This is how the addition was deleted in varying amounts for the years under appeal. Against the combined order dated 28-3-1980 of the Commissioner (Appeals), the Tribunal heard the appeals being IT Appeal Nos. 944 to 947 (Jp.) of 1980, assessment years 1971-72 to 1973-74, and they were decided by the order dated 10-7-1981 (see pages 61 to 63 of the paper book). The said order was delivered by the learned Accountant Member, to which one of us (Judicial Member) was a party. The Tribunal came to the conclusion that there was no evidence to show that compound interest was charged by the assessee from Citric India Ltd. It was clearly held that as per the written agreement of the parties, interest was payable at the rate of 12 per cent only and that no evidence was there to prove that the said agreement was, in any way, modified by the parties. A slip of paper which was seized during the search operation from the premises of the assessee, showed the working of interest on compound interest basis, but the Tribunal took the view that that could not constitute a supplementary agreement modifying the original agreement. The Tribunal, in the order dated 10-7-1981 found as follows : 5. We have heard the rival submissions. A reference to the accounts of the assessee in the books of Citric India Ltd., shows that for the financial year 1965-66, interest was charged at 12 per cent. In the next year, although the opening balance included the interest charged in the earlier years, the entry regarding interest was reversed on 31-1-1967 and then interest up to 31-3-1967 was calculated. This means the principal amount on which the interest was charged for the financial year 1966-67 did not include the interest charged in the financial year 1965-66. Further, no interest has been credited by Citric India Ltd., to the assessee in the accounting years relevant to the assessment years in appeal. A reading of the agreement clearly shows that simple interest was being charged at 12 per cent. In fact, the assessee's claim was that no interest accrued to it but we have held in the appeals against the original assessment orders that interest accrued to the assessee by virtue of its agreement with Citric India Ltd. The point before us is whether the seized paper could be considered as a supplementary agreement enabling the assessee to charge interest on compound interest basis. In our opinion, such an inference cannot reasonably be drawn. The seized paper cannot be taken as an evidence that the assessee was receiving interest under the table over and above what was stipulated in the agreement and the ITO cannot have reasonable belief that income escaped assessment on the basis of these papers. We, therefore, agree with the learned Commissioner (Appeals) that the assessments have been wrongly reopened under Section 147(a). We confirm his orders and dismiss the departmental appeals.
5. Relying on the said order of the Tribunal, we hold that there was no agreement between the parties to charge compound interest and that no compound interest was charged by the assessee from Citric India Ltd. The assessee, however, denied even to having received the agreed interest. For the reasons, we uphold the orders of the Commissioner (Appeals) in this regard.
6. There is one more ground relating to the assessment years 1975-76 and 1976-77 only. The ground relates to the disallowance of the salary having been paid to one Shri Harishchand. The registered office of the assessee-company is at Hauz Khas, New Delhi. Shri Harishchand, according to the assessee, attends to registered office. He is not the regular employee of the assessee-company. The premises, in which the registered office of the assessee-company is situated, belongs to his wife. Shri Pandey submits that Shri Harishchand used to receive the dak of the assessee-company and some other papers and for such service, he was being paid by the assessee-company a meagre amount. There is nothing on record to disbelieve the case of the assessee. Shri Harishchand having actually rendered services to the assessee-company, we hold that the payment made to him is connected with the business and is, therefore, allowable. For the reasons, we agree with the Commissioner (Appeals).
1. I have gone through the combined order passed by the learned Judicial Member. I do not fully endorse the views expressed therein.
There are the following three issues involve d in these appeals by the revenue : 1. Disallowance of expenditure incurred on Delhi flat common for all the three years.
2. Disallowance of salary paid to Shri Harishchand at registered office at Delhi.
2. So far as the first two issues are concerned, I agree with the conclusions arrived at by the learned Judicial Member. I have, however, my own reservations regarding the third issue. I am, therefore, recording my separate decision thereon. It is an admitted fact that during the course of search made under Section 132 of the Act at the business premises of the assessee, inter alia, a paper bearing No. 107 was found and seized. The assessee had loaned certain sums to Citric India Ltd. There is some controversy about charging of interest from Citric India Ltd. by the assessee. The assessee did not show any interest income from this source, even at the simple rate of interest.
This controversy is, however, not before the Tribunal in this appeal.
It is enough to make mention of this fact to have an idea of the background in this case. According to the IAC, to whom a reference was made under Section 144B, the document bearing No. 107 seized during the course of the search showed figures of yearwise accrued interest on the loans advanced to Citric India Ltd. The calculation of interest in this paper is on compound interest basis. It further shows that calculation of compound interest is on the basis of financial years and not the years ending 30th June as followed by the assessee. The figures of interest mentioned in this document also do not tally with the figures of interest provided by the assessee in the books of account maintained by it for the assessment years 1967-68 and 1968-69 where interest for these two years was provided. The ITO calculated compound interest on the basis of this document and included the same in the income of the assessee for the three assessment years under appeal. The Commissioner (Appeals), however, took the view that only simple interest at the rate of 12 per cent was chargeable and directed the ITO to compute the interest income from loans to Citric India Ltd., on that basis. He deleted the interest income calculated at compound interest rate basis our simple rate at 12 per cent. The learned Judicial Member has upheld the order of the Commissioner regarding deletion of the interest income calculated at compound rate of interest. According to him, the seized paper cannot be taken as an evidence that the assessee was receiving interest under the table over and above what was stipulated in the agreement. He has further held in the combined order that there was no agreement between the parties to charge compound interest. The assessee even denied having charged the agreed interest at simple rate. The main argument is that the seized paper has no evidentiary value and the entries in the books of account have to be accepted as correct. This document does not constitute supplementary agreement, nor it suggests more interest received or agreed to be received under the table.
3. I am afraid, I cannot subscribe to the above views. Search and seizure provided under Section 132 is a very drastic measure against tax evaders. It is resorted to by the department, when the authority competent to order search has reasonable belief of suppressed income, assets, documents, account books, etc. To say that a document found during the course of search has no evidentiary value is to forfeit the very purpose of the provisions contained in Section 132. In fact such incriminating material found during the course of search would depict the real state of affairs against the entries in the account books. The drastic action under Section 132, in fact, is with a view to show, with the help of incriminating material found during the course of search, if any, that entries in the account books do not reflect the real state of affairs. I shall now usefully refer to the provisions contained in Section 132(4A), which reads as under : (4A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed-- (i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person ; (ii) that the contents of such books of account and other documents are true ; and (iii) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of, any particular person, are in that person's handwriting, and in the case of a document stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested.
4. A plain reading of these provisions reveal that the ITO may, inter alia, presume (i) the assesses to be the owner of the document, and (ii) contents thereof are true. The ITO has presumed the assessee to be the owner of the said documents and its contents as true. In my opinion, these presumptions are, however, rebuttable and the assessee may adduce evidence to dislodge these presumptions. There is not an iota of eviden-ence to show that the contents of the document are not true, or the assessee is not the owner of this document. The only submissions made on behalf of the assessee were that figures of interest shown therein were financial yearwise whereas the accounting year of the assessee ended on 30th June and further, the figures shown therein also did not tally with those provided in account books for the assessment years 1967-68 and 1968-69. These submissions do not even suggest that the assessee was not the owner of the document or the contents thereof were not true what to speak of any evidence rebutting the same. I, therefore, hold that this document has evidentiary value in view of the discussions made above and contains true state of affairs about interest income from Citric India Ltd. The figures of interest calculated in the document are admittedly on the basis of compound interest. It is immaterial whether these have been calculated on financial year basis or otherwise. The assessee, it appears, kept these details on financial year basis as it was considered convenient.
The fact of charging compound rate of interest is positively established from this document. It is a very vital document for the purpose of considering the accrual or otherwise of interest income from Citric India Ltd. it is, however, unfortunate that neither the revenue nor the assessee has ventured to file a copy of this document in the paper book. It is, therefore, not known as to on what capital interest has been calculated in different years. I am, therefore, not in a position to comment further on this document. Suffice it to say that this document overrides the entries in the account books. In the circumstances, I am unable to sustain the order of the learned Commissioner (Appeals). The same is, therefore, reversed with reference to the compound interest and the orders of the ITO are restored. It may not be out of place to mention that the Jaipur Bench of the Tribunal has already set aside the order of the Commissioner (Appeals) for the assessment year 1976-77 and restored the issue regarding taxability of interest income from Citric India Ltd. on simple interest basis. It would, therefore, be in the fitness of things to restore the issue regarding compound interest also to his file for considering the same afresh. I, therefore, set aside the order of the Commissioner (Appeals) for the assessment year 1976-77 on this limited issue and restore the same to his file for fresh determination.
REFERENCE TO A THIRD MEMBER UNDER SECTION 255(4) OF THE Income-tax ACT, 1961 1. As the members of the Bench differ in opinion on one of the points, we refer the same for decision by a Third Member as follows : Whether, on the facts and in the circumstances of the case, can it be said that there was an agreement between the assessee and Citric India Ltd. to charge compound interest 1. I have gone through the combined order passed by the learned Judicial Member under Section 255(4) of the Act. The issue framed therein, in my opinion, does not cover the real controversy. The issue in the appeals before the Bench was whether the ITO was justified in charging interest at compound rate of interest on loans to Citric India Ltd. The addition made by the ITO is based on a document Sl. No. 107 found by the department at the business premises of the assessee and seized during the course of search under Section 132. This document has been discarded by the learned Judicial Member as having no evidentiary value. I shall, therefore, refer the following points to the Hon'ble President, the Tribunal, for being referred to other Member(s) : 1. Whether, on the facts and in the circumstances of the case, it can be said that document Sl. No. 107 found by the department at the business premises of the assessee during the course of search and seizure under Section 132 of the Act has evidentiary value and overrides the entries in the books of account and other documents relating to loan to Citric India Ltd. 2. If so, whether the ITO was justified in charging compound interest on loans advanced to Citric India Ltd. 1. The learned Members, who heard the above appeals, originally have differed on one issue, namely, whether the loan by the assessee to Citric India Ltd. was advanced on simple or compound rate of interest.
It is pertinent to mention that the learned Members have differed not only on the issue involved but also on the framing of the points of difference. While, according to the learned Judicial Member, the point of difference is : Whether, on the facts and in the circumstances of the case, can it be said that there was an agreement between the assessee and Citric India Ltd. to charge compound interest The learned Accountant Member is of the view that the following two are the points of difference : 1.. Whether, on the facts and in the circumstances of the case, it can be said that document SI. No. 107 found by the department at the business premises of the assessee during the course of search and seizure under Section 132 of the Income-tax Act, 1961, has evidentiary value and overrides the entries in the books of account and other documents relating to loan to Citric India Ltd. 2. If so, whether the ITO was justified in charging compound interest on loans advanced to Citric India Ltd. 2. It may not be out of place to observe that the learned Accountant Member has, as a matter of fact, not decided the issue finally.
Observing that the Tribunal has already set aside the order of the Commissioner (Appeals) for the assessment year 1976-77 and restored the issue of taxability of the interest income from Citric India Ltd. to the file of the Commissioner (Appeals), he has held that it will be in the fitness of things that this issue is also restored to his file for consideration afresh. This is correct also as otherwise, supposing I come to the conclusion that income by way of interest on this amount accrues on compound rate basis, it will be difficult, if not impossible, for the Commissioner (Appeals) to decide the restored appeal with an open mind. Again, the question whether the document, being Exhibit No. 107, seized from the assessee's premises constituted a piece of evidence and, if so, what is its evidentiary value, according to me, is merely an argument in support of the respective views taken by the learned Members. They certainly do not and should not constitute separate and independent points of difference.
3. As a Third Member, I have to agree with the points of difference stated by one or the other Member. In the circumstances, I am inclined to agree with the learned Judicial Member so far as the point of difference is concerned. However, I would like to clarify that in case I do not agree with the learned Judicial Member, the effect of my order would be that I would be, in that case, agreeing with the learned Accountant Member and the issue will be restored to the file of the Commissioner (Appeals) for consideration afresh.
4. Briefly stated, the relevant facts are that the assessee-company agreed to advance loan of Rs. 20 lakhs to Citric India Ltd. in terms of a letter of agreement written by Citric India Ltd. on 27-7-1965 which was confirmed by the assessee. In terms of the agreement, the principal company was to submit credit notes for the interest amount at the end of each year and was also to pay the amount of interest on or before 30th June every year. The contemplated rate of interest was 12 per cent per annum. The amount of Rs. 20 lakhs, it was contemplated, was to be advanced in two instalments of Rs. 10 lakhs each, one to be released immediately on confirmation of the arrangement and the other after six months, i.e., near about February 1966. However, the amounts have been advanced from time to time commencing from 4-8-1965 to 15-10-1969. The assessee, it may be stated, disclosed the interest on the above loan as its income in the assessment years 1967-68 and 1968-69. Subsequently thereto, no interest income has been shown though the ITO has been assessing the assessee on the basis of assumed interest income.
5. In the first two years, i.e., the accounting years ending 30-6-1966 and 30-6-1967, the assessee has charged interest, debited the debtors' account and credited its interest account which has been disclosed as its income as stated above. What has happened in the next four years is not known as the assessee has not filed copies of the debtor-company's account in its books nor has furnished copies of profit and loss account and balance sheet in spite of specifically asking the assessee-company to do so. The audit notes in its profit and loss account and balance sheet for the years ending 30-6-1972, 30-6-1973 and 30-6-1974 indicate that the amounts of interest on this loan worked out to Rs. 3,28,156, Rs. 2,04,876 and Rs. 2,04,876, respectively, but the same was not debited to the debtors' account and/or credited to the interest/profit and loss account. Audit note in the profit and loss account and balance sheet for the year ended 30-6-1975 indicated that the assessee considered the interest as not accruing. The copies of the assessee's account in the books of the debtor-company which have been produced before me indicate a different story. The debtor-company observed financial year as its previous year. For the years ended 31-3-1966 and 31-3-1967, the debtor-company credited the assessee-company's account by way of interest with Rs. 21,369.86 and Rs. 1,27,187.21, respectively. The amount of Rs. 21,369.86 being the interest for the year ended 31-3-1966 had been debited to the liabilities' account for the year ended 31-3-1967 but the same has again been credited to the assessee's account for the year ended 31-3-1968. No entry has been made by the debtor-company in respect of the interest in its books in the assessee's account in any subsequent year. Instead, the debtor-company has issued a sort of confirmatory letter dated 18-6-1975 to the assessee to the effect that it has not paid any interest after 1-4-1967 nor is any interest payable to the assessee in view of the assessee-company not complying with the terms of advancing the loan. It may be stated that the assessee's claim that interest is not taxable in this case after 1-4-1967 as nothing has accrued or being received has not been accepted by the departmental authorities and the Tribunal. Except for the assessment year 1976-77, it has been consistently held by the Tribunal that income by way of interest accrued to the assessee from year to year, of course, on the basis that the interest to be charged is simple and not compound. For the assessment year 1976-77, it appears, the appeal has been restored to the file of the Commissioner (Appeals) for decision afresh, inter alia, because of the new piece of evidence in the shape of the abovesaid letter dated 18-6-1975 issued by the debtor-company. In any event, the issue in the proceedings before me is only whether the assessee is assessable in respect of the interest income on the amount advanced to the debtor-company on the basis of simple or compound rate of interest, i.e., whether the interest had to be calculated on the basis of Rs. 17,05,888, being the amount outstanding as on 30-6-1971, i.e., Rs. 2,04,876, or on the basis of the aforesaid sum plus interest accruing year after year which would mean higher and higher figures of income in all these years.
6. The parties have been heard by me at length. I have also gone through the entire records as is evident from the manner in which I have been able to state the facts in the earlier paragraph. In order to appreciate the rival contentions, it is desirable to make a reference to the debtor-company's letter dated 27-7-1965 to the assessee which incorporates the terms and conditions on which the parties have agreed to land and borrow the said sum of Rs. 20 lakhs. On the face of it, it is not very clear from the terms whether the interest payable is simple or compound. On the other hand, the undertaking given by the debtor-company to the effect that they will issue credit notes and also make the payments yearly, i.e., on or before 30th June every year, indicates that the interest was to be paid yearly and nothing more. In other words, if the interest is not paid as contemplated, what, will happen to the unpaid interest, i.e., whether it will form part of the principal and carry interest or whether it will simply remain as an amount outstanding, is not at all clear from the agreement. The ordinary presumption, according to me, would be that the outstanding interest, if any, will stand as a separate debit to the debtor-company's account and whether it will or will not carry interest will depend upon the parties after mutual agreement, It will not automatically carry further at the rate of 12 per cent per annum as prescribed in the case of the principal amount under the agreement.
7. Then, I come to the document, being Exhibit No. 107 seized from the assessee's premises in the course of the search conducted by the Income-tax Department. A photostat copy of the same is on record. While the said search took place some time in the year 1975, the document hears the signature of the assessee's director who is incidentally also a director of the debtor-company of 1977. The interest calculations are on the basis of the financial year as the accounting year. There is no other signature and the paper is not on a printed form. The figures are typed out. The document having been found in the assessee's premises, it is certainly relevant though its weight or value will depend upon so many other things. Having regard to the facts stated by me above, I am of the view that the only reasonable inference that can be drawn from this document is that it shows the calculations by somebody from the debtor-company of the debtor-company's liability on account of interest from year to year. It does not automatically mean that the assessee is or was entitled to charge interest on the same basis. The assessee's charge-ability will depend upon the assessee's conduct and its understanding of the agreement. It is in this context that the auditors' notes for the different years, as extracted by me earlier, assume importance. For the assessment years 1974-75 and 1975-76, the interest amount has been mentioned at Rs. 2,04,876 while for the assessment year 1976-77, it is shown at nil. The interest having not been credited to the profit and loss account and debited to the debtor-company's account, it is also reasonable to infer that the interest would not be charged or be chargeable on the interest accruing under the agreement mentioned separately in the auditors' notes. Having regard to the above discussion, I am in agreement with the learned Judicial Member that there was no agreement between the parties to charge compound interest and that no compound interest was, in fact, charged by the assessee-company from the debtor-company. The document in the form of Exhibit No. 107 is a relevant piece of evidence.
However, it cannot be inferred from this document that the assessee-company was charging interest on the loan at compound rate of interest or that there was any agreement between the parties to charge compound interest.
8. In the result, my order will now go to the Bench for disposal of the the appeals according to the majority view.
As per the opinion of the majority, it is held that there was no agreement between the parties to charge compound interest and that no compound interest was in fact charged by the assessee-company from the debtor-company and in the result, all the appeals stand dismissed.