ORDER
G.S. Pannu, A.M.
1. This is an appeal by the Revenue against the order of the CIT(A), dt. 21st Dec., 2001 pertaining to asst. yr. 1998-99.
2. The grounds of appeal preferred by the Revenue are as follows:
On the facts and circumstances of the case:
(i) The CIT(A) has erred in law in deleting the entire addition made to the trading account without showing as to how the AO was not justified in making addition of Rs. 7,37,750.
(ii) The CIT(A) has erred in law in deleting the addition of Rs. 2,09,37,000 made on account of unexplained public deposit accepted under Section 68 of the Companies Act, especially when the assessee had failed to file corroborative evidence despite of specific requirements as per IT Act, 1961.
(iii) The CIT(A) has erred in law in allowing a relief of Rs. 10,52,231 disallowed by the AO out of foreign travelling expenses without giving any reason whatsoever and without even discussing AO’s order in his order.
(iv) The CIT(A) has erred in law in giving relief of Rs. 6,64,500 disallowed by the AO out of entertainment expenses ignoring the real factual proposition that in absence of evidence possibility of non-business purposes could not be absolutely ruled out.
3. The facts in relation to the first ground are that the assessee company is engaged in the manufacturing of auto components, it filed a return of income declaring an income of Rs. 1,61,62,044, which was accompanied by audited balance sheet and manufacturing and trading account along with necessary annexures, etc. The AO noticed that although the total turnover of the assessee had increased during the year, however, there was a nominal decline of 0.13 per cent in the GP ratio as compared to the preceding year. After considering the explanation of the assessee for such decline, the AO made the addition of Rs. 7,37,750 by increasing the GP ratio by 0.13 per cent, in appeal, the assessee assailed the addition both on facts and in law. The CIT(A) called for a remand report from the AO in this regard. After considering the explanation of the assessee as well as the remand report of the AO, the CIT(A) in terms of his discussion in paras 12 to 12.2 has deleted the addition. The Revenue is in appeal against the aforesaid addition.
4. The learned Departmental Representative has submitted that the addition was justified, inasmuch as, it was based on the past results in the case of assessee itself. The learned Departmental Representative referred to the order of the AO to point out that leakage of revenue could not be ruled out since the GP rate has declined this year. On the other hand, the learned Counsel for the respondent assessee has defended the orders of the CIT(A). The learned Counsel has pointed out that no specific defects were noticed by the AO to conclude that there was a leakage of revenue on account of marginal decline in the GP rate. He has drawn our attention to the paper book filed which, inter alia, contains the submissions made before the lower authorities in this regard. Our attention has been specifically invited to pp. 2 and 8 of the paper book for demonstrating the reason for decline in the GP rate.
5. We have considered the rival submissions carefully. In our view, the ground of Revenue is without any substance for the reasons that a marginal decline of 0.13 per cent in the GP ratio cannot ipso facto be an indicator that there is a leakage of revenue. In the instant case, the assessee is a company under the Companies Act, 1956 whose accounts are statutorily audited and there are no adverse observations in this regard. In fact, the reasons explained for the marginal decline are also reasonable and can be accepted. The AO has reproduced the reply of the assessee made before him wherein the reasons for the decline have been explained. Ostensibly, the assessee explained that the average selling price of one of its products, namely, connecting rods declined in this year. Further, the purchase price of raw material remained the same. None of these explanations has been commented adversely by the AO and yet the addition has been made. Under such circumstances, we are inclined to affirm the conclusions drawn by the CIT(A) that the impugned addition was unwarranted. Accordingly, on the first ground, the Revenue fails.
6. The facts in relation to ground No. 2 are that the assessee company had accepted public deposits from various persons. The amount of such deposits raised was Rs. 2.12 crores. On being asked to justify the source of such deposits, the assessee submitted to the AO that the deposits were raised from the public in terms of Section 58A of the Companies Act, 1956; that the deposits were raised by way of advertisement to general public at large in terms of the approval granted by the respective authorities under the Companies Act, 1956. The assessee submitted list of the deposit holders along with their addresses. The assessee also submitted that the deposits have since been repaid fully and also filed the evidence for the same. As an illustrative instance, the assessee filed deposit application forms in the case of three depositors totalling to Rs. 2,63,000. The AO after considering the explanation of the assessee held that the assessee company had failed to prove the identification, creditworthiness and genuineness of the transaction and he has, therefore, treated a sum of Rs. 2,09,37,000 (i.e., total of Rs. 2,12,00,000 minus Rs. 2,63,000 for which application forms were submitted by the assessee) as income from undisclosed sources, in appeal, the assessee reiterated the submissions that the number of depositors were 1,331; that the entire deposits were raised in terms of a scheme approved by the RoC under the provisions of the Companies Act, 1956; that the assessee was rated by independent credit rating agency ‘CARE’ and, therefore, its public advertisement inviting public deposits received good response; that the details submitted contain the date of deposit, maturity date, amount of deposit, name and address of the depositor and also evidence of repayment. It was, therefore, argued that the addition made was unwarranted. The CIT(A) has deleted the addition on the ground that the repayment of deposits made through account payee cheques was evidenced by the receipts issued by the bankers and thus the deposits stood explained. Against the aforesaid, the Revenue is in appeal before us.
7. Before us, the learned Departmental Representative drew our attention to the discussion made by the CIT(A) in its concluding para 13 on this issue and submitted that the CIT(A) has passed a non-speaking order in this behalf. It was, therefore, contended that such non-speaking order be set aside and the order of the AO be restored. It is further submitted that the assessee had failed to discharge the onus cast on it in terms of the provisions of Section 68 of the Act whereby the onus is on the assessee to justify and prove the identity, creditworthiness and the genuineness of the credit found recorded in the books of account.
8. On the other hand, the learned Counsel appearing on behalf of the respondent assessee had defended the order of the CIT(A) in great detail. The emphasis of the argument of the learned Counsel has been that the entire details along with the requisite evidence were filed before the lower authorities. Our attention was drawn to pp. 9 to 140 of the paper book wherein is placed various material which was furnished before the lower authorities in this regard, namely, details of depositors, copy of advertisement inviting deposits, details of the claim of the public deposits, director’s report, credit rating by the ‘CARE’, etc. The learned Counsel also submitted that at pp. 142 to 303 are placed copies of the bank advise entries by the bankers of the depositors evidencing their repayment. It was, therefore, contended that in the face of the aforesaid uncontroverted material, the CIT(A) has deleted the addition; that the order of the CIT(A) might be brief but certainly is not devoid of the reasoning for deleting the addition. On facts also, it was contended that the material on record clearly indicates that the assessee has been able to demonstrate that the public deposits in question have been received genuinely. That in any case, the assessee has submitted to the AO that if he was not satisfied with the evidence placed before him, it was open to the AO to depute his official for obtaining further evidences, if required, and that the assessee was prepared to bear expenses for conducting such an exercise. For this, our attention has been drawn specifically to communication addressed to the AO, dt. 28th Feb., 2001, which is placed in the paper book at p. 2 onwards.
9. We have considered the rival submissions as also the material on record to which our attention has been drawn during the course of the hearing. The undisputed facts are that the assessee is a company incorporated under the Companies Act, 1956. In terms of Section 58A of the Companies Act, 1956, the assessee, under a scheme approved by the RoC, invited deposits from public. A copy of the said scheme is placed at pp. 132 to 136 of the paper book. The deposit was to be made by way of the prescribed application form, sample copy of which is also placed at p. 135 of the paper book. The application form contains various details, viz., name of the depositor, address, period of deposit, details and mode of payment, nomination details, status of the applicant, income-tax particulars, etc. In terms of the aforesaid scheme, the assessee was found to have invited deposits from various depositors, almost over 1,300, amounting to Rs. 2,12,00,000. The said amount was found as a credit in the books of account maintained by the assessee. The AO, by referring to the provisions of Section 68 required the assessee to prove the nature and source of such deposits. The assessee, as is evident from our discussion from the earlier para, could not submit confirmation from each of the creditors. Certainly, in our view, seeking a confirmation from each and every individual creditor was not an easy task. Nevertheless, it also cannot be disregarded that the credits in question certainly fall within the scope of the provisions of Section 68 of the Act. Section 68 of the Act authorizes an AO to verify the nature and source of the credits appearing in the books of account of the assessee and in case the assessee does not furnish an explanation or furnishes an explanation which is not to the satisfaction of the AO, the credits in question can be assessed as income in the hands of the assessee. The parameters to explain the nature and source of a credit are regarding the identity, creditworthiness of the creditor and the genuineness. However, the above said conventional parameters have to be applied keeping in mind the peculiar circumstances of the case. We may hasten to add here that what we are suggesting is not that the onus is not on the assessee to explain the nature and source of the deposits in question. We are only pointing out the difference in approach in evaluating the evidence, adduced by the assessee in support of his explanation for the nature and source of the deposits in question, that is required under the circumstances. Therefore, with this background, we may examine the material, which the assessee has relied upon in support of its stand before the IT authorities. Firstly, it is to be kept in mind that the deposits have been received by the assessee in terms of a scheme approved by the authorities under a statute under which the assessee is incorporated, namely, the Companies Act, 1956. The assessee has complied with the various guidelines, instructions, etc. in this regard and there is no adverse observation in this regard on record. Thus, the bona fides of the action of the assessee in inviting public deposits cannot be doubted. Secondly, the entire deposits have been received through normal banking channels. We find that the details of the depositors along with their addresses were very much before the lower authorities. The assessee submitted, as an illustration, copies of three application forms whereby it had received deposits for Rs. 2,63,000 which have been accepted as explained. The fact’ that the AO was satisfied about the nature and source of the credit on the basis of the application forms in the case of three creditors itself shows an inconsistency in his approach. If according to him, the vetting of the application form was enough to discharge the onus cast on the assessee under Section 68 of the Act, he ought not to have made any addition. It is starkly evident that if the AO was satisfied that the assessee had discharged the onus cast under Section 68 on the basis of the application forms of three depositors, nothing prevented him from being satisfied with the rest of the deposits also. This is for the reason that there is no denying the fact that the entire deposits in question have been received by the assessee on the basis of the application forms submitted by the depositors.
10. Further, it is clear from the assessee’s communication to the lower authorities that only three application forms were submitted merely to illustrate the manner in which the transaction has been carried out. Moreover, for none of the deposits had the AO taken any suo motu steps to make independent inquiries. This is in spite of the fact that the assessee made a written requisition in this behalf. This approach of the AO, in our view, gives away a premediated effort to make an addition. On this account itself, we are inclined not to sustain the order of the AO.
11. Nevertheless, going further, we notice that in a large number of cases the repayment cheques issued by the assessee have been furnished before the IT authorities. These cheques which are placed at pp. 142 to 303 of the paper book contain an endorsement of the bankers of the depositors, which clearly evidence the repayment. The aforesaid piece of evidence clearly demonstrates the identity of the deposit holders. Now, insofar as the quantum of individual deposit is concerned, we find that the same ranges from Rs. 5,000 to Rs. 15,000 in an overwhelming majority of cases. Considered in the face of the fact that the deposits have been received in response to the public advertisement, through normal banking channels, repayments are evidenced by bank and most importantly, the absence of any adverse material with the Revenue, we see no reason to treat the deposits as unexplained. Therefore, considering the overall gamut of facts and circumstances of the issue, we are inclined to affirm the conclusion of the CIT(A) in deleting the addition made by the AO.
12. The plea of the Revenue that the order of the CIT(A) is non-speaking, we do not find any justifiable reasons to interfere on this count. We find that the CIT(A), after getting the submissions and the material from the assessee, sent the same to the AO and called for a remand report. The AO duly submitted his report. Even at this stage, it was open for the AO to have conducted further inquiries. But, no such opportunity has been utilized. Nevertheless, the CIT(A), after having considered the rival submissions has made the decision to delete the addition. While it may show an absence of a detailed discussion on the part of the CIT(A) in concluding the issue, nevertheless, the CIT(A) has, in extenso referred to the submissions of the assessee as also the remand report of the AO in this regard. Therefore, merely because the order of the CIT(A) is brief, cannot be a reason to interpret it as a non-speaking order. In contrast, a non-speaking order is to be understood as one, which shows a lack of application of mind on the part of the authority writing the order. Having noted the manner in which the CIT(A) has proceeded to examine the rival claims, it cannot be said that there is an absence of application of mind on his part. Therefore, the grievance of the Revenue on this count is misplaced. “Accordingly, the Revenue fails on this ground.
13. The facts relevant to the third ground are as follows. The AO noticed that the assessee had incurred a sum of Rs. 21,25,814 on foreign travelling undertaken mostly by its directors. The assessee explained that the purpose of the visit was for exploring market for its products. The AO disallowed 50 per cent of the expenditure on an estimation basis, not being satisfied with the evidence produced by the assessee. Hence, the addition of Rs. 10,52,231. In appeal, it was contended that the expenditure was incurred wholly and exclusively for business purposes; that it was always not possible to demonstrate tangible results of the expenditure. The learned CIT(A), keeping in view the submissions of the assessee and following the past history wherein such additions were not sustained, has deleted the entire addition.
14. Before us, the learned Departmental Representative has argued that the CIT(A) has passed a non-speaking order as is evident from para 14 thereof. On the other hand, learned Counsel appearing on behalf of the respondent assessee has defended the order of the CIT(A) by referring to the paper book wherein detailed written submissions are placed, which were furnished to the lower authorities. Our attention has been drawn to pp. 3 to 6 of the paper book as also pp. 330 and 331.
15. We have considered the rival submissions. Indeed, a perusal of the assessment order reveals that the addition has been made on an ad hoc basis. The AO has noticed the failure of the assessee to produce concrete results of the foreign, visits so as to justify the expenditure. The approach of the AO to ascertain as to whether the visits have been resulted in earning of profit or not is entirely misplaced. In fact, the CBDT in. Circular No. 4, dt. 19th June, 1950 has opined that while considering the admissibility of visits to foreign country, the same should not be approached from the point of view as to whether such visits result immediately in the earning of profits or not. Therefore, the premise with which AO proceeded on the issue is misconceived. Moreover, we find that no specific instance of any non-business related expenditure has been pointed out by the AO on this count. The order of the CIT(A), even if we agree with the learned Departmental Representative that the same is brief, yet it brings out the reasons adopted by him for deleting the addition. In any case, having regard to our observations above, we are inclined to affirm the conclusion drawn by the CIT(A), albeit on a different ground. Thus, the Revenue fails in this ground.
16. The facts relevant to ground No. 4 are that the AO perused the details of expenditure of Rs. 10.19 lacs claimed by the assessee under the head ‘Entertainment expenditure’. The AO observes in the order that a sum of Rs. 5,64,500 was of unexplained nature and not incurred exclusively for business purposes. Hence, the disallowance of Rs. 5,64,500. In appeal, the assessee submitted that the disallowance was made in an ad hoc and arbitrary basis. The CIT(A), after considering the submissions bf the assessee has deleted the addition on the ground that it was made without any basis. The Revenue is in appeal before us.
17. Before us, the stand of the learned Departmental Representative is on the basis of observations of the AO made in the assessment order.
18. On the other hand, the learned Counsel appearing for the respondent assessee has referred to the paper book pp. 318 to 324 regarding the details of the expenditure in question. He has also referred to p. 6 of the paper book wherein is placed the submission made to the AO. ft is further submitted that the expenses were fully vouched and audited.
19. We have considered the rival submissions, and find that the ground preferred by the Revenue is lacking in substance, inasmuch as, the CIT(A) has correctly concluded that the addition has been made by the AO without any basis. Evidently, the AO has not pointed out any particular voucher or expenditure, which was unrelated to the business of the assessee. There is no instance noticed by the AO, which showed that the expenditure was incurred for personal purpose. Moreover, the accounts of the assessee, as noted by us earlier, are statutorily required to be audited and have been so done. There is also no adverse observation by the auditors in this regard. The disallowance, therefore, was made by the AO on mere surmises and conjectures. Therefore, the CIT(A) appropriately deleted the addition. We hereby affirm the order of the CIT(A) and, therefore, the Revenue fails on this ground.
20. In the result, the appeal of the Revenue is dismissed