ORDER
H.L. Karwa, J.M.
1. These three appeals filed by the assessee raise the common contention. They were, therefore, heard together and are being disposed of by this common order for the sake of convenience.
2. Briefly stated the facts of the case are that the assessee-firm is a commission agent of fruit on wholesale basis. A search was conducted at the business premises of the assessee on 1st December, 1987. During the course of search books of accounts of the assessee-firm relevant to assessment years under consideration were also seized. After that the Department also conducted search at the residential premises of one Shri Bhailalbhai Manilal Patel, A/1/42, Chaitanya Society, Ahmedabad. During the course of search proceedings at the residential premises of Shri Bailalbhai Manilal Patel (hereinafter Shri B. M. Patel), some promissory notes were found and seized by the IT Department. From the promissory notes it was found that the assessee executed the following promissory notes and received the amount of loan as under : Date S.Y. Amount (Rs.)
01-09-85 2041 5,00,000
02-08-86 2042 5,00,000
18-09-86 2043 2,00,000
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12,00,000
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According to the AO the assessee had not accounted for the aforesaid amounts in the regular books of accounts. On being asked to explain the stand regarding the said promissory notes the assessee submitted that the disputed amount was not borrowed from Shri B. M. Patel, but was taken against banakhat money for the sale of property of their family members. It was also the contention of the assessee that the amount so received was not an income because no sale deed was executed and registered in favour of Shri B. M. Patel and ultimately no income has arisen to the assessee’s family members or any of their business firm. It was specifically claimed that Shri B. M. Patel had already offered the disputed amount for taxation and had also paid the due tax thereon. It was also claimed that the partners of the assessee-firm belonged to a reputed family of Muslim and financially well off and they are under moral obligation to help the needy people of their community. The assessee’s family was providing financial assistance to various persons of their caste at the time of religious as well as other occasions. It was also claimed that in fact borrowed funds were utilised for the welfare of their community and caste people. These funds were not bearing any interest because according to Muslim religion and custom, they cannot charge interest or they cannot advance money on interest following the principles of ‘Kuran’. The assessee’s claim was that it had never charged interest from anybody and hence there was no question of earning any income by way of interest. The AO was of the view that the assessee had borrowed money from Shri B. M. Patel and also executed the promissory notes in his favour. Thus, the assessee enjoyed the fruits of the advance so received from Shri B. M. Patel at various points of time and the assessee was doing the business out of books of accounts maintained by it. The AO, therefore, came to the conclusion that for asst. yr. 1986-87, the assessee had earned income of Rs. 24,000 @ 24 per cent per annum on the amount of Rs. 5,00,000 received by the assessee from Shri B. M. Patel. The said amount of Rs. 24,000 was treated as concealed income earned from utilising borrowed funds. For asst. yr. 1987-88 the AO’s working is as under :
Amount (Rs.) Period Interest (Rs.)
5,00,000 For the whole year 1,20,000
5,00,000 2-8-86 to 2-11-86 (3 months) 30,000
2,00,000 18-9-86 to 2-11-86 5,600
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1,55,600
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As per the above working of AO Rs. 1,55,600 was added to the total income of the assessee treating the same as concealed income earned from utilising the borrowed funds from Shri B. M. Patel. Similarly, for asst. yr. 1988-89, the AO added Rs. 2,88,000 as concealed income earned from utilising the borrowed money amounting to Rs. 12,00,000 from Shri B. M. Patel to the total income of the assessee. The assessments for all the years under consideration were completed by the AO on 29th December, 1989, under ss. 143(3)/147 of the IT Act, 1961. The AO also initiated penalty proceedings under various sections of the IT Act.
3. On appeal, the CIT(A) has partly confirmed the additions observing as under :
“I have carefully considered the facts of the case and submission of the learned counsel for the appellant. In such cases where direct and positive evidences of earning of income are not available, one has to go by the principle of pre-ponderance of probabilities. It is difficult to believe that a businessman would keep idle a huge amount of Rs. 5 lacs to Rs. 12 lacs. The preponderance of probability is that such funds must have been utilised for business. The argument of the learned counsel for the appellant that no evidence to this effect was found during the course of search does not prove the point. If there was no evidence found for the utilisation of these funds in business, there was also no evidence found of such funds having been utilised for the welfare of needy persons of the community to which the partners of the firm belong. Therefore, a reasonable view has to be taken according to which it is justifiable to presume that a prudent businessman would not keep his funds idle but would utilise it for business. I would, therefore, hold that the AO was fully justified in estimating income from utilisation of borrowed funds.
Now coming to the quantum, from the details of capital employed and net profit earned, filed before me I have found that no profit earned by the appellant firm on the utilisation of its capital in the last three years comes to about 10 per cent. I would, therefore, think it fair and reasonable that the no profit on the utilisation of borrowed funds should be taken at 10 per cent only. However, for the sake of convenience, to work out the figures of net profit I am adopting the net profit rate at 12 per cent and accordingly while 50 per cent of the addition made by the AO will be confirmed and balance 50 per cent will be deleted in all the three years. The addition confirmed in all the three years under consideration, therefore, will, be (1) asst. yr. 1986-87 Rs. 12,000, (2) asst. yr. 1987-88 Rs. 77,800 & (3) asst. yr. 1988-89 Rs. 1,44,000.”
4. Before us, Shri S. N. Soparkar, learned counsel for the assessee, reiterated the submissions, made before the authorities below. The learned counsel for the assessee further contended that the CIT(A) was not legally correct in upholding the action of the AO. He also submitted that the CIT(A) has committed glaring error of law while holding that the funds received from Shri B. M. Patel as advances on agreement to sell off immovable property which ultimately did not materialise, were utilised by the assessee for income-earning activities on pre-ponderance of probabilities when the CIT(A) ought to have held that in absence of any evidence having been brought on record by the AO in support of his action, there was no justification for such presumption more particularly when the CIT(A) has accepted the fact of absence of any evidence having been brought on record by the AO to that effect.
5. The learned counsel also submitted that the CIT(A) has without any basis and without any material on record held that the assessee had earned income of Rs. 12,000, Rs. 77,800 and Rs. 1,44,000 @ 12 per cent per annum for asst. yrs. 1986-87, 1987-88 and 1988-89, respectively, on the amount received from Shri B. M. Patel. According to the learned counsel, there is not an iota of evidence on record to show that the funds so received by the assessee, were utilised for income-earning activities. The learned counsel also invited our attention to para 6 of the impugned order and submitted that there was absolutely no justification for estimating the alleged utilisation of the funds @ 12 per cent for the sake of convenience of working out the earnings when he has specifically given a finding that “I would, therefore, think it fair and reasonable that the net profit on the utilisation of borrowed funds should be taken at 10 per cent only.”
The learned counsel placed reliance on the following decisions :
(1) Rajmohan Shaha & Ors. vs. CIT (1964) 52 ITR 231 (Assam); and
(2) Kishanchand Chelaram vs. CIT (1980) 125 ITR 713 (SC)
The learned counsel for the assessee also submitted that the CIT(A) was not justified in holding that grounds of appeal relating to charging of interest under ss. 139(8) and 217 of the Act were only consequential. According to the learned counsel, the CIT(A) should have decided the issue regarding the chargeability of such interests under ss. 139(8) and 217 of the Act, rather treating the same as consequential.
According to the learned counsel, the assessee’s stand from the very beginning was that in the present case no interest was chargeable under these sections. He also relied on the following decisions :
(1) CIT vs. Multi-metals Ltd. (1991) 187 ITR 98 (Raj);
(2) Modi Industries Ltd. & Ors. vs. CIT (1995) 216 ITR 759 (SC); and
(3) CIT vs. Bharat Machinery Hardware Mart (1982) 136 ITR 875 (Guj).
On the other hand, Shri V. K. Mathur, the learned Departmental Representative strongly supported the orders of the authorities below and further submitted that in the facts and circumstances of the present case, the impugned addition was justified. He, therefore, urged that the order of the CIT(A) deserves to be upheld.
6. In rejoinder the learned counsel for the assessee submitted that the assessee’s books of accounts were not rejected by the AO and moreover, no document was found and seized from the assessee’s premises indicating that the borrowed funds were utilised for earning income.
7. We have carefully considered the rival submissions and have also perused the materials on record to which our attention was drawn during the course of hearing of the appeals. After considering the rival submissions, we find that the Revenue has failed to controvert the assessee’s plea that the amount in question was not borrowed fund but in fact the same was received from Shri B. M. Patel as advance money on agreement to sell of immovable property which ultimately did not materialise. The AO has not examined Shri B. M. Patel during the course of assessment proceedings. We also find that there is no material on record to suggest that the amounts so received were utilised for income-earning activities by the assessee. Even the CIT(A) has held that in the instant case no direct evidence of earning income is available. We find substantial force in the submissions of the learned counsel for the assessee that the no evidence whatsoever, was found during the course of search conducted at the business premises of the assessee showing that the assessee was carrying on the business outside the books of accounts. The CIT(A) has held that no evidence was found to prove this fact that the disputed funds were utilised in assessee’s business. IT is also the assessee’s case that the disputed funds were utilised for the benefit of the community to which the partners of the assessee-firm belonged. It is also the assessee’s case that the religious dictates of the Muslims do not permit a Muslim to advance money for earning interest. According to the assessee no interest was earned. It is well settled that while making the assessment, the AO is supposed to act on material which may not be accepted as evidence in a Court of law, but the AO is not supposed to make a pure guesswork and make an assessment without reference to any evidence or material at all. There must be something more than the bare suspicion to support the assessment. In the instant case the AO made the addition on the basis of pure guesswork without bringing out any material on record in justifying the amounts of additions and which action of the AO has been confirmed by the CIT(A) without bringing the facts of the case. The CIT(A) was also not correct in estimating the income of assessee @ 12 per cent per annum on the amounts so received by the assessee from Shri B. M. Patel. The estimate of CIT(A) is also without any, basis. Such additions are not tenable.
8. In the case of Rajmohan Shaha & Ors. vs. CIT (supra) the facts of the case before the Hon’ble Assam High Court were that the assessee was a firm with head office at Agartala and purchasing centre at Calcutta. During the course of the assessment it was discovered that various sums were remitted from Agartala to Calcutta and these remittances were not shown in the accounts books. The ITO held that the assessee was carrying on an undisclosed business having turnover of Rs. 4 lacs and remitted the income from such undisclosed business at 5 per cent. On the said turnover of Rs. 4 lacs, the ITO added a sum of Rs. 20,000 to the income returned. The Hon’ble High Court of Assam has held that there was no material from which the Tribunal could come to the conclusion that the assessee was carrying on some undisclosed business with a turnover of Rs. 4,00,000 nor was there any material to support the findings that the income from the said turnover of Rs. 4 lacs would be 5 per cent of the said turnover. The Hon’ble High Court further held that these findings were based on mere guess and cannot be supported.
9. In the instant case also the AO has not brought any material on record to show that the funds so received were utilised for income-earning activities or that the assessee was doing some undisclosed business with the amounts received from Shri B. M. Patel. Moreover, there is no material on record to suggest that the assessee was earning interest @ 24 per cent or 12 per cent as income on the amounts received from Shri B. M. Patel. In view of the above discussions, we do not see any justification in sustaining the additions by CIT(A). In the facts and circumstances of the present case, the CIT(A) ought to have deleted the entire additions made by the AO. Consequently, we delete the additions sustained by the CIT(A) for the assessment years under consideration.
10. As regards charging of interest under ss. 139(8) and 217 we note that while deciding this issue the CIT(A) has held that charging of interest under ss. 139(8) and 217 are of consequential nature and he, therefore, directed the AO to recompute the interest so charged after giving effect to the appellate order. We have heard the parties. The contention of the learned counsel for the assessee is that in view of the above cited decisions, the charging of interests under ss. 139(8) and 217 of the Act were uncalled for. We also note that CIT(A) has not given any findings, that how and in what manner interests under ss. 139(8) and 217 of the Act were chargeable. We also find substance in the submissions of the learned counsel for the assessee that the CIT(A) has without appreciating the facts of the case as well as without affording an opportunity to the assessee held that charging of interest under ss. 139(8) and 217 are of consequential nature. In the facts and circumstances of the present case, we deem it fit to send this issue to the AO who will decide the issue regarding the charging of interests under ss. 139(8) and 217 of the Act, in accordance with law after providing an opportunity of being heard to the assessee. Accordingly, the findings of the CIT(A) on this issue are set aside. This ground is disposed of accordingly. At the time of hearing of the appeals, no other point was urged or argued.
11. In the result the appeals are disposed of in the manner as indicated above.