ORDER
BY THE BENCH
1. The appeal preferred by the assessee is directed against the order of the CIT(A) for the asst. yr. 1989-90.
2. The learned counsel of the assessee did not press for the grounds 1 and 2 raised relating to reopening of assessment under s. 147 and accordingly the same need no adjudication and are rejected.
3. In ground Nos. 3 to 13 the substantive issue raised is against confirming an addition of Rs. 52,54,635 on account of bogus purchase of rice husk from Shri Balwant Singh. The facts in brief, are that the assessee-company was running a milk plant at Bahadurgarh and for processing of milk for various end products the assessee-company used coal and rice husk for use in the boilers for generation of required steam. There was a search at the business and office premises of the assessee-company. During the course of search certain books of account and documents were seized by the Department. It was revealed during the course of search that the assessee-company made purchases of rice husk from one Shri Balwant Singh of Rs. 52,54,635 during the period from January to March, 1989 relevant to the current assessment year. Shri Balwant Singh supplied rice husk in the name of his proprietary concern M/s Nanak Suppliers. The AO noted that the cheques issued by the assessee-company for purchase of rice husk were deposited in the bank account of Shri Balwant Singh by Shri S. K. Aggarwal and in most of the cases the amount was withdrawn immediately thereafter by him. In certain cases cash was withdrawn by Shri V. K. Kaushal who was senior vice president of the assessee-company at Bahadurgarh. The AO also noted that the bank account was closed during the year 1988-89. The AO therefore required the assessee to produce Shri Balwant Singh; Shri S. K. Aggarwal and Shri V. K. Kaushal for cross-examination. Shri Balwant Singh and Shri S. K. Aggarwal were produced before the AO on 6th March, 1995, and their statements were recorded. Further on 8th March, 1995, Shri V. K. Kaushal was also produced and he was examined. Shri Balwant Singh in his statement accepted having supplied the rice husk and he also pointed out in his statement that Shri S. K. Aggarwal in whose handwriting the cheques were obtained was acting as his accountant. The AO was, however, not convinced about the genuineness of the transaction as in his view Shri Balwant Singh who had not entered into any business transaction with any-body else and had no means to fund such business could not procure rice husk of Rs. 52,54,635 and supply the same to the assessee-company without receiving any payment in the middle of supplies made. The last sale bill was raised on 7th March, 1989, and the payments were received on 9th, 10th and 11th March, 1989. The AO again confronted the assessee and pointed out that Shri Balwant Singh had not maintained any record of payments received. He had no details of sales and purchases made in respect of rice husk and other items. He had not done business with any other company either before or thereafter; some of the payments from the account of Shri Balwant Singh were received by Shri Ramesh Kumar, Shri V. K. Kaushal apart from Shri S. K. Aggarwal; none of the payments were received directly by Shri Balwant Singh from the said bank account and there was found excess consumption of rice husk during the year as compared to other assessment years. In reply dt. 25th March, 1996, the assessee justified the consumption of rice husk on quarterly basis and also gave comparative details of consumption of rice husk for the financial years 1988-89 to 1992-93 duly verified by the chartered accountant as well as the director and vice president of the company. A copy of the assessment order for the asst. yr. 1989-90 passed by the Department in the case of Balwant Singh was also filed so as to show that Shri S. K. Aggarwal in fact was looking after the accounts and other activities of Shri Balwant Singh. The assessee also furnished comparative statement for fuel consumption per M.T. of milk for the years 1989-90 to 1993-94 which indicated that though the cost of fuel consumption for the current year compared favourably with other years but the quantity of consumption of rice husk was found to be higher for the current year as compared to other years. The AO, therefore, considering the fact that Shri Balwant Singh was not capable of handling such volume of business without funds, consumption of rice husk per M.T. of milk shown was higher. Shri Balwant Singh did not supply rice husk to any other party. Shri S. K. Aggarwal, accountant of the assessee-company and Shri V. K. Kaushal, the vice president of the assessee-company withdraw most of the payments from the account of Shri Balwant Singh, came to the conclusion that Shri Balwant Singh and his concern M/s Nanak Suppliers simply acted as an instrument for enhancing the purchase value of rice husk of the assessee-company and the purchases shown from him were not genuine. The AO, therefore, disallowed the purchases shown of rice husk from Shri Balwant Singh of Rs. 52,54,635.
3.1. On appeal the submissions made before the AO were reiterated. It was further contended that Shri Balwant Singh in fact supplied rice husk to the assessee-company. Shri Balwant Singh is assessed to tax and a copy of his assessment order for the current year was also produced before the AO. It was further explained that the assessee-company has followed the same modus operandi for all of its dealers and payments to them was made in the similar manner. Account of the dealer is opened with State Bank of Patiala, Punjab University Branch, in a manner that the payment to supplier is not delayed. In every case supplier withdraws cash from its bank account and such practice is continuing since 1973 onwards. Since the amount involved is substantial the bank wanted a random verification of suppliers. Shri V. K. Kaushal, vice president of the assessee-company did not withdraw any money from the account of Nanak Suppliers but he only verified the identity of Balwant Singh. It was further contended that merely because Shri S. K. Aggarwal was a common accountant of the assessee-company and the supplier of rice husk is by itself no ground to disallow the purchase of rice husk. Shri Balwant Singh was only an agent for supply of rice husk and he was given payment only after the supplies were received. Shri Balwant Singh in turn made payment to the suppliers of rice husk. He in fact incurred loss and stopped the business. It was also explained that suppliers are different each year for milk cream or rice husk. It was also pointed out that there were two winter seasons during the current accounting year from 1st January, 1988 to 31st March, 1989 as it was transitional year and accordingly the consumption of rice husk was higher for heating water as rice husk is burnt to heat water and to generate steam. The assessee-company also installed other boiler during the year and it was a trial year for the boiler. It was also argued that consumption of rice husk in the case of the assessee-company was lower than that of other parties. The CIT(A) enquired whether there were any truck receipts available through which supplies of rice husk had been made by Shri Balwant Singh and in reply it was explained that supply of rice husk was made by Shri Balwant Singh through trucks but payment for the same was made by Shri Balwant Singh and not by the assessee-company. It was also clarified that it was the supplier who made payment to the transporter for delivery of rice husk. The CIT(A) on due consideration of the submissions made confirmed the disallowance of Rs. 52,54,635 on account of purchase of rice husk with the following observations:
“17. After considering the rival submissions it is clear that Shri Balwant Singh never touched the cash himself when it was withdrawn from the bank. Apparently all the cheques issued by the appellant company towards purported payment for rice husk were deposited in a bank a/c and the amount were withdrawn by appellant company’s own accountant Shri S. K. Aggarwal. Lest Balwant Singh disappears with the cash as the amounts were substantial. There were apparent only three payments to Balwant Singh of Rs. 25.50 lakhs on 31st January, 1989, Rs. 16.18 lakhs on 28th February, 1989 and of Rs. 10.85 lakhs on 7th March, 1989.
The entire amounts were withdrawn on 9th March, 1989, 10th March, 1989 and 11th March, 1989. It is unusual that entire amount to the last rupee will be withdrawn from the bank account within four days of the deposit of the last of the three cheques. The contention of the appellant that consumption of rice husk was more this year as there were two winter seasons due to transitional year i.e. from 1st January, 1988 to 31st March, 1989, now needs to be gone into. The appellant has furnished the following details in this regard :
“Details of milk processed vesus husk consumed financial year 1988-89
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S. No. Particulars Milk Husk Consumption
processed consumed rate/MT
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1. January to March 55,963 11,289 0.202
2. April to June 22,359 4,136 0.185
3. July to September 29,409 5,117 0.174
4. October to December 26,157 7,089 0.271
5. January to March 70,405 15,956 0.227
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Total 2,04,293 43,587 0.213
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From the forgoing it is clear that the consumption is highest during the period October to December which are not the coldest months as are January and February The consumption of rice husk shown by the appellant company, therefore, is excessive as compared to other years. The AO has clearly brought out that Balwant Singh has neither made any supplies earlier nor later and that he was only a conduit for showing bogus purchases. He was also assessed only once in his lifetime at a nominal figure of Rs. 27,570 on which a nominal tax was paid before ITO, Ward-4, Patiala. In the facts and circumstances the addition made by the AO, therefore, due to unproved purchases of rice husk of Rs. 52,54,635 is confirmed.”
3.2. The learned counsel for the assessee Shri M. S. Syali reiterated the submissions made before the lower authorities and further submitted that Shri Balwant Singh maintained necessary books of account in the shape of cash book, ledger, etc. and the same were subjected to audit as well as tax audit. Shri Balwant Singh has also been assessed to tax for the current year on the income earned from supply of rice husk to the assessee-company and a copy of the assessment order made by the ITO Patiala had been furnished before the lower authorities. The assessment was made under s. 143(3) after making due scrutiny of the books of account maintained and the Revenue had no doubt whatsoever about the genuineness of the business carried out by Shri Balwant Singh on supply of rice husk to the assessee-company during the current year. The assessment made in his case stands and the Department has not taken any remedial action in the case of Balwant Singh. The Department has taken a divergent view in the case of the assessee-company without appreciating the fact that the Department in the case of Balwant Singh has accepted the genuineness of his business of supply of rice husk and income earned therefrom has been duly assessed after due scrutiny of books of account maintained in the normal course.
3.3. The learned counsel has further submitted that Shri Balwant Singh in his statement recorded accepted the supply of rice husk for the stated quantity to the assessee-company and had received full and final consideration therefor. He also confirmed that he is an income-tax payees and also the reasons as to why he started this business and why he had to close it. Shri V. K. Kaushal in his statement recorded, confirmed the practice of seeking random verification as well as the fact that he had never received any cash out of the account of Shri Balwant Singh. Shri S. K. Aggarwal was a common employee of the assessee-company as well as Shri Balwant Singh and he in his statement has confirmed that he withdrew the amount from bank and handed over the same to Shri Balwant Singh for onward payment to the suppliers. Shri Syali also invited our attention to the statement of Shri Balwant Singh to submit that his statement was of a person well conversant with his business. The statement of Shri Balwant Singh was also duly corroborated by the statement of Shri S. K. Aggarwal and Shri V. K. Kaushal, vice president (finance) of the assessee-company. He also pointed out that Shri Kaushal in fact had written out only one cheque for Balwant Singh which was duly signed by Shri Balwant Singh and was verified by Shri Kaushal. In support attention was invited to a letter from the State Bank of Patiala confirming the procedure of seeking random verification where the cash withdrawals were substantial.
3.4. The learned counsel has also pointed out that assessment of Shri Balwant Singh was completed on 26th February, 1990, and reassessment proceedings in the case of the assessee-company commenced with the issue of notice under s. 148 on 23rd March, 1994. The timing of assessment of Balwant Singh lends considerable support to the stand of the assessee-company.
3.5. The learned counsel further submitted without prejudice that it was wrong on the part of the Department to assume that the bank account of Balwant Singh was closed in the year of account. A copy of account of Shri Balwant Singh in the books of the assessee-company was furnished in rebuttal to point out that payments had been made in the succeeding years as well to Shri Balwant Singh and the same has not been adversely commented upon by the lower authorities. A specific emphasis was laid on the fact that the cheques which are alleged to have been encashed by Shri V. K. Aggarwal did not pertain to the year of account i.e. from 1st January, 1988 to 31st March, 1989. The two cheques based on which a presumption is being raised by the authorities below that the withdrawals had been made by the company’s senior officers and not by Balwant Singh are dt. 29th May, 1990, and 28th June, 1990 respectively. These cheques obviously do not relate to the current year and no adverse comment was either made therein or in the assessment of later years. These, therefore, cannot form the basis of any adverse allegation. The learned counsel has further emphasised that the entire purchase price for the current year of Rs. 52,54,635 was withdrawn by a single cheque dt. 11th March, 1989, duly signed by Shri Balwant Singh and encashed by S. K. Aggarwal. Shri S. K. Aggarwal in his statement recorded has confirmed that he withdrew the amount and handed it over to Shri Balwant Singh in the bank premises itself.
3.6. The learned counsel Shri Syali has further argued that lower authorities erred in holding that the consumption ratio of rice husk in the current year is higher as compared to the past or future years. He further submitted that the analysis made by the CIT(A) of the consumption ratio of rice husk and its observation that if the supplies made by Balwant Singh were reduced, the consumption ratio will compare favourably with the past, was totally misconceived. He also explained that Shri Balwant Singh had supplied 10,509 MT of rice husk in the month of January to March, 1989 @ Rs. 100 per MT. The total consumption for this quarter is 15,956 MT. If the supplies made by Shri Balwant Singh are ignored the husk available for this quarter would only be 5,449 MT (15,956 – 10,509). This gives a consumption ratio of only 0.077 as against 0.195 accepted on annual basis as against 0.271 accepted by the Department in the quarter of October to December 1988. The ratio of 0.77 is not only unrealistic but entirely absurd. The learned counsel submitted that without purchase of rice husk from Balwant Singh production of milk was not possible and accordingly the purchase made therefrom cannot be disallowed in its entirety on that ground.
3.7. The learned counsel arguing further submitted that although for the quarter January to March, 1989 the consumption of rice husk was higher at 0.227 as compared to 0.202 for the quarter January to March, 1988, such increase in consumption of rice husk was on account of the following factors :
(a) Installation of a new furnace/boiler;
(b) Go-slow/labour strike.
3.8. The learned counsel invited our attention to a certificate at p. 147 of the paper book wherein it has been stated that new boiler consumed about 3,376 MT of rice husk during the trial production and giving weightage to the reduced production the consumption of rice husk shown was not higher.
3.9. The learned counsel emphasised that the assessee-company maintained complete set of regular books of account including materials receipt register and details of issue and consumption of fuel. No adverse comments have been made on the books of account maintained by the assessee-company nor the AO as well as the CIT(A) invoked the provisions of s. 145 to reject the book results. It was also pointed out that besides the bills of Nanak Suppliers, complete records were maintained by the assessee-company, the material receipt vouchers duly indicating description of the material received and its quantity is kept. Such vouchers are signed by four different persons, namely, the person who prepares the vouchers, the store supervisor, the inspecting officer; and the material officer. Copies of material receipt vouchers for all the bills have been given in the paper book. The truck numbers and the quantity transported through each truck is duly mentioned with each invoice and with each material receipt. He has further submitted that the AO himself in his notice dt. 14th June, 1995, filed in the paper book accepted in para 6 thereof that per capita consumption of rice husk happens to be on the lower side as compared to other years or other manufacturers. It was only the quantity consumption which is stated to be on the higher side. According to the learned counsel there is no merit in the allegation that the consumption of rice husk is not comparable. He also drew our attention specifically to the fact that for other similarly placed manufacturers the consumption ratio of fuel was much higher as per analysis from their annual reports. Analysis of annual reports was placed before the lower authorities. Since the consumption ratio of the assessee-company was lower amongst other similarly placed manufacturers, such as, Dalmia Dairy; Food Specialities; Smith Beecham Ltd., there was no cause for levelling allegation on the consumption ratio. Our attention was also invited to the written submissions filed before the AO dt. 23rd June, 1995 para 6 to bring home this point. It has also been submitted that the price paid to Balwant Singh favourably compared with that paid to other suppliers.
3.10. The learned counsel proceeding further submitted that for the purchase and supply of rice husk Balwant Singh did not require any capital. He was merely working as a commission agent in which capacity he purchased on credit and after supplies paid his dues on receipt of consideration from the assessee-company. The assessment records of Shri Balwant Singh amply support this stand. The learned counsel has also pointed out that a specific request was made before the lower authorities to summon the records of Shri Balwant Singh for examination but the Department took no steps on the request so made. The learned counsel, therefore, submitted that the Department cannot ignore the assessment order passed by itself in the case of Balwant Singh.
3.11. Coming to the reference made by the CIT(A) about supply of cream by Balwant Singh to assessee-company’s sister concern M/s J. Ice cream, the learned counsel submitted that such reference was misconceived, though an allegation of supply being bogus was initially levelled but it did not survive as is evident from the sales-tax assessment order in the case of J. Ice cream in which the sale made by Balwant Singh to J. Ice cream had been duly accepted.
3.12. Lastly, the learned counsel Shri Syali placed reliance on the decision of the Hon’ble Gujarat High Court in the case of CIT vs. M. K. Bros. (1987) 163 ITR 249 (Guj) and Tribunal’s decisions in the case of ITO vs. Bajrang Oil Industries (1985) 12 ITD 631 (Nag) and Deven Babu (P) Ltd. vs. ITO (1990) 36 TTJ (Ahd) 664 to submit that in the absence of any specific and clear allegation that money has come back to the coffers of the assessee-company, addition on account of bogus purchases cannot be made.
3.13. The learned Departmental Representative, Shri R. S. Malik placed reliance on the orders of the lower authorities and further submitted that evidently Shri Balwant Singh neither deposited the cheque amount received from the assessee-company in his bank account nor he withdrew the amount therefrom. The cheque of sale consideration received from the assessee-company was in fact deposited in his account by Shri S. K. Aggarwal and cash was withdrawn from his account immediately thereafter by Shri S. K. Aggarwal. Shri Balwant Singh was not in the picture at all in receiving the cheque and withdrawal of the amount from the bank. He also placed certain photo-copies of the cheques issued before us for perusal to bring home his point that the amount was withdrawn either by Shri S. K. Aggarwal or through Shri V. K. Kaushal from the bank account of Balwant Singh. He further submitted that Shri Balwant Singh failed to produce any record to substantiate the purchase of rice husk and its supply to the assessee-company. He also failed to give names and addresses of the suppliers of rice husk. The learned Departmental Representative also referred to the material receipt vouchers prepared by the assessee-company copies whereof are placed in the paper book and pointed out certain discrepancies therein and also doubted the genuineness of such vouchers. The learned Departmental Representative also pointed out that the bank account was opened by Shri Balwant Singh only in the month of March and closed the same soon thereafter by withdrawing the last penny. The opening of the bank account was also later than the supply of rice husk. The learned Departmental Representative also argued that the mere fact that Shri Balwant Singh has been assessed to tax is not determinative of the issue. He pointed out that in the case of Shri Balwant Singh a short and cryptic assessment order was made by the AO without conducting detailed and valid enquiries. The assessee, therefore, cannot seek support from such order passed in the case of Balwant Singh. The learned Departmental Representative has also pointed out that Shri S. K. Aggarwal in his initial deposition made before the ADI confessed that he had withdrawn money from the bank account and had given it to the management/company officials. He, however, later on retracted from his statement and blamed one Ramesh Kumar, leader of the workers union of the assessee-company as a cause for earlier statement. The earlier statement recorded was claimed to be under duress but the facts were otherwise.
3.14. The learned Departmental Representative also invited our attention to the two cheques written and encashed by Shri V. K. Kaushal and also raised doubt about bank’s procedure. He rather laid emphasis on the fact that Shri V. K. Kaushal signed the cheques at the back indicating that the withdrawal was made by him and not by Balwant Singh. The learned Departmental Representative, therefore, submitted that on a cumulative persual of the facts and circumstances it is evident that the bank account in the name of Balwant Singh was actually being operated by officials of the assessee-company. He also urged that even on ignoring the purchases from Balwant Singh the consumption ratio of rice husk compares favourably with that of other years. According to him the comparison of consumption should only be on annual basis and not on quarterly basis. The learned Departmental Representative while concluding, submitted that on all counts the genuineness of the purchase of rice husk from Balwant Singh does not stand proved and the lower authorities were fully justified in disallowing and confirming the addition made on that count.
3.15. In reply the learned counsel has pointed out that the assessment order passed in the case of Balwant Singh is not an agreed assessment, rather the addition made by the AO to the returned income was an agreed addition. The learned counsel further explained that the payments for supplies of rice husk were made only after verification of the weight of husk. The assessee-company never made payment in advance for the supply. The opening of bank account later is, therefore, quite in order. He also read out the statement of Shri S. K. Aggarwal to emphasise that Aggarwal’s statement before the DDI was confronted and the AO raised pin-pointed questions thereon. However, being satisfied with the replies of Shri S. K. Aggarwal, no adverse inference of the statement taken by the ADI was drawn. It is thus too late in the day now to declare Shri S. K. Aggarwal a hostile witness. Moreover, Shri Balwant Singh has also deposed that he received the amount and there is no evidence contra to the said statement made by him. The learned counsel again emphasised that but for one cheque of 11th March, 1989, all other cheques related to later or previous years and were not relevant to the year under consideration. The learned counsel has also pointed out that the accounts of the assessee-company had never been doubted. He also pointed out that during the course of search conducted in November, 1992 of the premises of the assessee-company no adverse material was found or seized by the Department which could support the stand of the Revenue.
3.16. We have carefully considered the facts, material evidence on record and submissions made by the learned representatives of the assessee as well as the Revenue. We have also gone through the orders of the lower authorities and the documents placed in the paper book to which our attention was drawn during the course of hearing. We find that this is the case of a limited company. The accounting year being the transitional year was comprised of the period from 1st January, 1988 to 31st March, 1989. The assessee-company follows mercantile system of accounting. The assessee-company during the year maintained books of account comprised of cash book, general ledger, milk control ledger, material control ledger, sale control ledger, sundry debtors’ control ledger, sundry creditors’ control ledger, stores ledger, selling and distribution expenses control ledger, bank book, general book, purchase register, sale register, production register, stores issue register, debit/credit note book, etc. The assessee thus maintained complete quantitative records of consumption of material as well as production of milk. These books of account have been audited by Price Waterhouse & Co. Chartered Accountants. Further, the accounts maintained were also under excise regulations, cost audit, tax audit, etc. The auditors have not made any adverse comments on the books of account maintained by the assessee-company.
3.17. The assessee-company, as mentioned above, was running a milk plant. The assessee-company purchased milk and for its processing it also purchased and utilised the fuel in the shape of rice husk, coal and furnace oil for generation of steam. During the year the assessee-company purchased 2,04,293 MT of milk. Besides it also purchased 43,587 MT of rice husk; 435 MT of coal and 599 MT of furnace oil. The total rice husk purchased of 43,587 MT also included rice husk purchased from Balwant Singh at 10,509.20 MT for a consideration of Rs. 52,54,635 during the last quarter from January to March, 1989. The assessee received rice husk supply from Balwant Singh under the name of Nanak Suppliers through trucks. Details of rice husk received is placed at pages 94 to 110 of the paper book and as per the procedure followed as given by the assessee in its letter dt. 26th February, 1996, placed at pp. 91 to 93 of the paper book. On receipt of husk vehicle the same was weighed to note the weight of rice husk and based upon the weighment, material receipt note of the same recording the details of supplies like name of supplier, date of receipt, gate pass number/date, weight of rice husk, rate of purchase and value of the material received is prepared by the material department of the company. In addition to weighment the quality of rice husk is verified by the inspecting officer from the service/user department and the inspecting officer signs the material receipt notes after the material receipt note has been prepared by the material department and signed by the stores supervisor, material officer and the inspecting officer. The same is forwarded to the accounts department along with party-wise bills for processing. The accounts department compares the data recorded in the material receipt note with the party bill and copy of purchase order with them and passes the bill and vouches the same by preparing the purchase voucher recording the purchase of husk and creating liability in the name of supplier for the value of the supplies. Photo-copies of material receipt notes along with photo copy of voucher No. 341 dt. 28th February, 1989, for Rs. 16,18,260 are placed at p. 94 of the paper book. Necessary entries about the purchases of rice husk is recorded in the regular books of account maintained on the basis of such primary bills and vouchers prepared.
3.18. The assessee thus credited details so prepared in the account of Nanak Suppliers as per details below:
Rs.
Bill No. 1, dt. 20-1-1989 25,50,685
Bill No. 46, dt. 24-2-1989 16,18,260
Bill No. 612, dt. 8-3-1989 10,85,690
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52,54,635
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3.19. The assessee-company made payment to Balwant Singh through A/c payee cheques as per details below :
Rs.
Cheque dt. 8-3-1989 25,50,685
Cheque dt. 10-3-1989 16,18,260
Cheque dt. 11-3-1989 10,85,690
3.20. It so appears, the cheques so issued were deposited by Shri S. K. Aggarwal in the bank account of Shri Balwant Singh maintained with the State Bank of Patiala, Punjab University Branch, and the amount claimed to have been withdrawn in cash by Shri S. K. Aggarwal on the strength of cheque issued by Shri Balwant Singh and the amount was handed over to Shri Balwant Singh for its disbursement to suppliers of rice husk on 11th March, 1989.
There was a search conducted at the business and office premises of the company by the Department in November, 1992 and it so appears that the Department conducted certain enquiries thereafter. The Asstt. Director of Income-tax (Investigation), Patiala, obtained from the bank all the cheques and paying slips in respect of account No. 707 of Balwant Singh in January, 1993, and thereafter on 11th February, 1993, he examined Shri S. K. Aggarwal. Shri Aggarwal deposed that he worked with the assessee-company from March, 1981, to November, 1991, as accountant/senior accountant and he used to report to Shri V. K. Kaushal. When he was confronted with various paying slips and cheques relating to the bank account of Shri Balwant Singh he admitted that some of the cheques are in his handwriting including that of Rs. 52,54,635 and the money was withdrawn by him in cash. The cash was handed over to Shri V. K. Kaushal for the top management. He showed ignorance about Balwant Singh. During the course of assessment proceedings Shri S. K. Aggarwal was produced before the AO and his statement was recorded on 6th March, 1995. He deposed when confronted with his earlier statement recorded on 11th February, 1993 that one Shri Ramesh Kumar, the erstwhile union leader of the assessee-company, had approached him before recording of the statement. He lived near his house and had enough local influence. He was a muscleman and threatened him with dire consequences if he did not depose on his lines. He asked him to implicate seniors. He also admitted that he worked as a part-time accountant with Balwant Singh who carried on business in the name of Nanak Suppliers and also supplied cream to J. Ice Cream (P) Ltd. He admitted having written the cheque for Balwant Singh but after drawing the money he gave the amount to Balwant Singh and not to Shri V. K. Kaushal as stated earlier. He also revealed that Ramesh Kumar in fact was the informer and he threatened him for giving statement against the management for getting some benefit from the company or the IT Department. He had also connection with the local police authorities.
3.21. Shri S. K. Aggarwal in answer to question No. 9 further deposed that Balwant Singh became known to him when he came to the office of the assessee-company and he started helping him in keeping records of his supply of rice husk. He gave him some imprest money for incurring expenses on his on behalf and he was also paid Rs. 500 per month. He also wrote his books of account. The statement of Shri S. K. Aggarwal is placed at pp. 59 to 61 of the paper book. In an affidavit dt. 20th February, 1996, he further deposed that he was associated with Balwant Singh, rice husk supplier, as part-time accountant. His books of account were maintained by him and he used to handle his banking transactions. Balwant Singh filed his income-tax return for the asst. yr. 1989-90 claiming a refund of Rs. 2,300. He also appeared on his behalf being accountant before the AO in response to notice under s. 143(2) on various dates and the assessment was completed by the AO under s. 143(2) creating an additional demand. Copy of the notice is placed at p. 87 of the paper book and a copy of the assessment order of Shri Balwant Singh for the asst. yr. 1989-90 is at pp. 88 and 88A of the paper book. As per the assessment order return was filed by Balwant Singh declaring income of Rs. 18,070. After processing of the return under s. 143(1)(a) the case was selected for scrutiny by the AO. The AO has noted that business of the assessee was to supply rice husk on commission basis. Balwant Singh filed audited accounts which had been verified with the account books produced. The information supplied was test-checked. He also made an addition of Rs. 9,500 subject to no penal action. The income was thus assessed at Rs. 27,570 under s. 143(3) on 26th February, 1990.
3.22. Shri Balwant Singh was also produced before the AO and in the statement recorded he corroborated the claim of the assessee-company. He admitted having supplied the said rice husk and also admitted having supplied cream to M/s J. Ice Cream (P) Ltd. the tune of Rs. 14 lakhs. He discontinued this business as the venture was unprofitable. He also claimed to have started the business with a capital of Rs. 35,000 and on closure of the business he owed Rs. 22,000 to certain parties. His capital was thus totally lost and he incurred loss in the business. He also admitted having employed Shri S. K. Aggarwal as a part-time accountant on monthly salary of Rs. 500 per month for assistance in maintaining the records and bank dealings.
3.23. Shri V. K. Kaushal, vice president (finance) of the assessee-company who was also examined by the AO on 8th March, 1995, admitted having prepared and encashed two cheques. He accepted in the deposition that he happened to visit State Bank of Patiala in connection with the office work where Balwant Singh was waiting for S. K. Aggarwal as he was to withdraw some money. Balwant Singh requested him to help him in writing the cheque as he was not able to write cheque in English. Being known person he wrote the cheques. As regards the receipt of payment, he deposed that no withdrawal was made by him. His signature were obtained by Balwant Singh as counter-signatures as per requirement of the bank. He also accepted that it has been the normal practice of bankers to see random verification of the cheques from any of the company executive in the case of cash withdrawals. He also filed a copy of letter dt. 8th August, 1988, from the manager of the bank wherein it was stated that ordinarily large cash withdrawals by account-holders are not permitted by them. However, it was requested to them by milk contractors and suppliers that they have to make cash payments to farmers in rural area. Therefore, keeping in view their urgent business requirements and their corporate relations with the organisation he permitted them large cash withdrawals from their account with them with random verification by an officer of the company. Shri Kaushal further deposed that in the trade of husk supply, purchases are made on credit and payments are made to the suppliers on receipt of payment from the company. The statement of Shri V. K. Kaushal is placed at pp. 65 to 68 of the paper book and the bank confirmation at p. 70 of the paper book.
3.24. It is evident from the various statements recorded and position explained that Shri S. K. Aggarwal was a regular employee of the assessee-company working as accountant. He admittedly deposited the cheques received from the assessee-company in the bank account of Balwant Singh. He also had written the cheques for Balwant Singh and also obtained payment from the bank in cash. He also admitted in the statement given before the ADI that the amount withdrawn by him from the bank account of Balwant Singh was handed over to Shri V. K. Kaushal for top management but in the subsequent statement recorded he retracted from the earlier statement on the ground that the same was given under threat and duress of Shri Ramesh Kumar, the erstwhile union leader of the assessee-company. The reasoning so given has been accepted by the AO and it is for this reason that he has not made use of the statement given by Shri S. K. Aggarwal initially before the ADI. We, therefore, need not go into the credibility of the earlier statement recorded by the ADI. However, in the subsequent statement recorded Shri S. K. Aggarwal admitted the deposit of the cheque given by the assessee-company in the account of Shri Balwant Singh and withdrawal of the amount and its delivery to Shri Balwant Singh for disbursement to the suppliers of the rice husk. The Revenue has built up its case for disallowance of the total purchase of rice husk of Rs. 52,54,635 from Shri Balwant Singh only on the fact of deposit of company’s cheque in the bank account of Balwant Singh by Shri S. K. Aggarwal and its withdrawal in cash by him though the assessee has given due explanation in support of its claim as also of the higher consumption rate of rice husk in the current year as compared to the other years.
3.25. We examine and consider the genuineness of the claim hereunder :
(i) The assessee-company, as mentioned above, has maintained regular books of account and the same are supported by bills and vouchers maintained in the normal course of business. These books of account have also been tax audited by a reputed company of chartered accountants and they have not pointed out any irregularity in the maintenance of books of account. We find that the AO has also not pointed out any defect or discrepancy in the books of account including the material receipt register wherein the receipt of rice husk got through the trucks was accounted for as per the procedure followed. The credibility of the books of account therefore cannot be doubted nor the AO has rejected the book results by invoking the provisions of s. 145 of the IT Act.
(ii) As per the material receipt notes and vouchers prepared we find that the rice husk was transported to the yard of the assessee-company through trucks. The truck numbers have been given. We note that the Revenue has not made any enquiries from the truck-owners, the place where they loaded the rice husk and weighment made; place where the rice husk was unloaded; how much freight was received and who paid it and in the absence of any such enquiry and also in the absence of any material evidence it has to be accepted that the rice husk was transported to the factory premises of the assessee-company through the various trucks as per details given. It is well established principle that apparent is true unless contrary to that is proved. The onus was on the Revenue to prove and establish that no such rice husk was brought to the premises of the assessee-company through various trucks and the Revenue failing to discharge such onus to prove to the contrary, the position of receipt of rice husk through various trucks at the premises of the assessee-company has to be taken and accepted as true.
(iii) The Revenue searched the business and office premises of the assessee-company in November, 1992 and certain books of account and documents are claimed to be seized. However, no material evidence found and seized goes to establish that the said rice husk was not received at the premises of the assessee-company through the various trucks or the truck numbers given are fake or that no trucks with such number exist. Nor the Revenue has gathered any such material on enquiry and investigation.
(iv) Though it is an admitted fact that the sale proceeds received from the assessee-company through A/c cheques were deposited by Shri S. K. Aggarwal in the bank account of Shri Balwant Singh and the amount was withdrawn by him in cash, according to Shri S. K. Aggarwal and also the assessee-company the amount so withdrawn from the bank of Rs. 52,54,635 was handed over to Balwant Singh for disbursement to suppliers of rice husk whereas according to the Revenue the amount was not given to Balwant Singh but the same was retained by the management. There is, however, no material evidence brought on record by the Revenue to prove that the amount withdrawn from the bank came back in the corpus of the assessee-company nor any such material evidence was found and seized during the course of search. The claim of the assessee-company is otherwise fully corroborated by the evidence recorded of Shri S. K. Aggarwal, Shri Balwant Singh and Shri V. K. Kaushal. The view taken by the Revenue that the amount was not paid to Balwant Singh but was retained by the Management is thus based only on presumptions and conjectures and especially when the rice husk purchased has been received in the premises of the assessee-company and the same has been duly accounted for in the material receipt register maintained in the normal course of business.
(v) The assessee’s claim has been doubted for the reason that Shri S. K. Aggarwal was in fact the employee of the assessee-company but as per the statements of Shri Balwant Singh and Shri S. K. Aggarwal, he was also in part-time employment with Shri Balwant Singh on monthly salary of Rs. 500 and he was also maintaining his books of account and looking after the bank transactions. Shri S. K. Aggarwal being a part-time employee of Shri Balwant Singh was running such services and was paid therefor and the Revenue having not controverted this actual position we see nothing unusual in Shri S. K. Aggarwal depositing cheques in the account of Shri Balwant Singh and withdrawing the amount therefrom in cash on behalf of Shri Balwant Singh the explanation offered in this behalf by the assessee-company conforms to the normal human conduct and behaviour and we see no reason to reject the same.
(vi) We also note that two of the cheques written by Shri V. K. Kaushal, it appears from photo-copies of cheques produced before us for perusal that the amount was withdrawn by him but those cheques relate to the subsequent asst. yr. 1990-91 and not to the current asst. yr. 1989-90 and accordingly no adverse view could be taken based on Shri V. K. Kaushal encashing the said cheques in the current assessment year. We, however, note that the AO while completing the assessment of the subsequent year 1990-91 has not taken any adverse view thereof. We find that Shri Balwant Singh also supplied rice husk in the subsequent asst. yr. 1990-91 in substantial quantity and he also supplied cream to sister concern of the assessee-company M/s J. Ice Cream (P) Ltd. but the purchases so made both of rice husk and cream by the assessee as well as the sister concern have been accepted as genuine and no addition on that account has been made, though dealings through the bank appear to be on identical pattern as compared to the current assessment year.
(vii) In the case of Devan Babu (P) Ltd. (supra) 190 Kg. of rough emerald were purchased by the assessee and this fact was corroborated by the statement of the sellor. The AO disbelieved the capacity of the seller to hold such an enormous quantity of emerald. The assessee made payments through cheques and the same were encashed on the same date. The Tribunal held that all this did not amount to evidence to prove that the amount was given back to the assessee by the seller. Disallowance made of the purchase amount was, therefore, deleted.
(viii) In the case of M. K. Brothers (supra), the assessee made purchases from certain parties of the value of Rs. 52,254. The selling parties subsequently admitted before the ST authorities that they had issued bogus vouchers. The AO, therefore, held the purchases shown as not genuine and the purchase amount was disallowed. The Tribunal found that the assessee made payments by cheques and nothing was shown to indicate that any part of the funds given by the assessee to the said parties came back to the assessee in any form. The disallowance made was deleted by the Tribunal. The Hon’ble Gujarat High Court held that the conclusion arrived at by the Tribunal was supported by evidence on record and the amount of Rs. 54,254 was not assessable as income from undisclosed sources and the deletion of the addition was fully justified.
3.26. Looking to the facts discussed and the ratio of decisions cited we hold that the assessee-company did receive the delivery of the rice husk and the payments made through cheques to Balwant Singh was not received back in any form. There is, therefore, no justification for disallowing the total purchase amount of Rs. 52,54,635.
3.27. Another issue raised is about claim of excessive consumption of rice husk in the current year as compared to the other years. We find that during the current year the assessee-company processed 2,04,293 MT of milk and it utilised the fuel in various forms as under :
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Nature of fuel Quantity in MT Value in Rs.
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Rice husk 43,587 1,47,21,116
Coal 435 4,78,711
Furnace oil 599 20,66,025
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The average consumption of rice husk during the current year was at 0.213 per MT of milk processed. The comparative average consumption for other years is given hereunder :
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Financial year Husk consumed Milk processed Ratio
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1986 22,899 1,13,152 0.202
1987 26,331 1,29,978 0.202
1988-89 43,587 2,04,293 0.213
1989-90 25,799 1,32,037 0.195
1990-91 21,507 1,10,211 0.195
1991-92 34,566 1,87,079 0.185
1992-93 36,861 1,94,959 0.189"
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3.28. The average consumption of rice husk is apparently on higher side as compared to the other years. The assessee has also given quarterwise average consumption of rice husk as per details below :
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S. No. Particulars Milk Husk Consumption
processed consumed rate/MT
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1. January to March 55,963 11,289 0.202
2. April to June 22,359 4,136 0.185
3. July to September 29,409 5,117 0.174
4. October to December 26,157 7,089 0.271
5. January to March 70,405 15,936 0.227
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Total 2,04,293 43,587 0.213
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3.29. According to the assessee rice husk is an agricultural by-product and as such there are no industry norms of power generation therefrom. The value of rice husk depends upon the quality of husk, its moisture contents and dust contents. On an average the consumption of rice husk is 0.19 per cent MT of milk processed whereas during the current year the consumption was 0.21 per cent MT of milk processed. The present accounting year comprised of 15 months being the transitional assessment year. The period from January to March, is peak season for milk processing and during that period atmospheric temperature is quite low. It, therefore, necessities more burning of rice husk. It is also explained that during the year there was a labour strike of forty-two days. During strike period the assessee-company stopped receiving and processing milk from milk contractors and it was only milk from company’s milk centres that was processed. The consumption of rice husk was, therefore, higher during the period. Further, the assessee-company also set up a new boiler in the last quarter and during the trial period it consumed rice husk of 3,376 MT and the production obtained therefrom was nominal. All these factors affected the consumption of rice husk adversely resulting in higher consumption of rice husk during the year.
3.30. We have duly considered the facts and the explanation offered for higher consumption of rice husk during the year. We, however, find from the details extracted above that in the years 1986 and 1987 the consumption of rice husk was 0.202 per MT of milk processed whereas in the current year the consumption ratio has gone up to 0.213 per MT of milk processed and in later years 1989-90 to 1992-93 the consumption ratio varied from 0.185 to 0.195 per MT of milk processed. In our view, even if we consider that there were two winter seasons in the current year and there was strike of forty-two days and a new boiler was on trial the consumption of rice husk during the current year is still considered to be higher and it should not have exceeded 0.206 per MT of milk processed in comparison to the other years. If the consumption ratio is adopted at 0.206 per MT the total consumption of rice husk during the year would work out to Rs. 42,084 MT as against the claim of consumption of 43,587 MT thereby showing the excess consumption of rice husk of about 1,800 MT. Its value @ Rs. 500 per MT comes to Rs. 7,50,000.
3.31. The question of genuineness of the purchase of rice husk from Balwant Singh is also examined from another angle. We have found and held above that the assessee-company did purchase the rice husk of 43,587 MT and the same was delivered and received at the factory premises of the assessee-company through various trucks. The receipt of rice husk has duly been accounted for in the books of account maintained in the normal course. These facts have not been controverted by the Revenue. The assessee claimed that this rice husk was purchased through Balwant Singh and payment was made through cheques. The said cheques were deposited in the bank account of Balwant Singh by Shri S. K. Aggarwal as employee of the assessee-company and the same was also withdrawn by him in cash. There is, however, no details given either by the assessee-company or by Balwant Singh about the parties from whom rice husk was purchased, the quantity of rice husk purchased from each party and the amount of payment made to each party. According to the assessee Shri Balwant Singh arranged the purchase of rice husk from various parties in the capacity of an agent but there are no details available about the commission paid to Balwant Singh by the assessee-company or commission received from various parties who supplied rice husk to the assessee-company. Shri Balwant Singh filed a return with the ITO, Patiala showing an income of Rs. 18,070 but there is no basis given about the income so declared. The facts so stated, therefore, do not repose confidence in us to believe that the purchase of rice husk was made through Balwant Singh but the purchases in such event could be directly made by the assessee-company in the name of Balwant Singh, may be for the reason that the selling parties were not willing to show sales through bills. We also find from page 45 of the paper book that the assessee-company also made purchases of rice husk @ 490 per MT from certain parties during the year though there are purchases at higher rate also from certain other parties. Further the parties willing to sell goods without billing normally charges lower rate. The assessee-company thus as per the modus operandi adopted has inflated the purchase rate by bringing in Shri Balwant Singh as an intermediater. Inflation in purchase rate could be in the range of about 15 per cent and at this rate the inflation in purchase of rice husk would work out to Rs. 7,88,000.
3.32. Considering all the facts and circumstances discussed above it would be fair and reasonable if an addition on this count is sustained at Rs. 7,50,000 and we order accordingly. The assessee would get a relief of Rs. 52,54,635 – Rs. 7,50,000 = Rs. 42,04,635.
4. Ground No. 4 raised by the assessee alleges that the CIT(A) was not justified in not considering the grounds relating to disallowance of club expenses amounting to Rs. 50,000 and disallowance of commission amounting to Rs. 31,025 paid to M/s Shiv Dairy. We find that the AO made such disallowance but before the CIT(A) the ground taken against the disallowances so made were not pressed and the same were therefore rejected by the CIT(A).
4.1. The learned counsel of the assessee failed to give necessary justification for agitating the grounds before us when the same was not agitated and pressed before the CIT(A). Moreover, since the CIT(A) has not decided the said issues on merits in the appellate order, no ground relating to the impugned disallowance arises therefrom. The ground taken is accordingly rejected.
4.2. Ground Nos. 15 and 16 raised by the assessee relate to sustaining the disallowance of the claim of interest amounting to Rs. 56,53,161 under s. 43B
alleged to be paid to the financial institutions.
4.3. The AO noted that in original assessment a sum of Rs. 1,12,75,471 was disallowed under s. 43B in respect of the interest accrued but no due on the deferred payment credit obtained from financial institution IDBI. The AO further from the P&L a/c found that actual debit to the P&L a/c on account of deferred payment credit is only Rs. 1,04,95,408 and total payment out of this sum on actual basis is Rs. 48,42,247. Therefore net amount outstanding on account of interest accrued but not due as on the closing date was Rs. 56,53,161. The AO therefore made a disallowance of Rs. 56,53,161 under s. 43B against the disallowance made in the original assessment at Rs. 1,12,75,471.
4.4. When the matter was carried in appeal the CIT(A) noted that this issue is covered by the appellate order dt. 6th December, 1994, for the asst. yr. 1991-92 wherein it was held that indirectly the instalments had been paid by the assessee-company under the IDBI scheme and interest thereon was paid to the IDBI through the media of other business and the assessee-company could be allowed a deduction in respect of such loan only on payment basis. He, therefore, upheld the action of the AO.
4.5. The learned counsel of the assessee has made a submission that the AO has not appreciated the facts relating to the interest accrued and not due. He has submitted that the provisions of s. 43B were not applicable to the claim of the interest as no interest was paid to any of the financial institution during the year. The assessee has also no arrangement whatsoever with any financial institution regarding any loan or borrowing. The supplier of the equipment, however did have arrangement of bill discounting with the IDBI. There, however, being no borrowings made from the IDBI by the assessee-company and no interest payable to the IDBI the question of disallowing the interest shown as accrued but not due does not attract the provisions of s. 43B. The assessee has, however, made a provision in the books of account of the interest amount on accrual basis in accordance with the mercantile system of account. From the plain reading of s. 43B it is clear and self-evident that the disallowance could only be in respect of any interest becoming payable and not paid on loans/borrowings. A copy of the bill rediscounting scheme has been filed which is placed at pp. 50 to 81 of the paper book. The lower authorities without appreciating the scheme has made the disallowance of interest by invoking the provisions of s. 43B. The learned counsel has further submitted that necessary machinery/equipments were supplied by the HMT. The assessee-company executed requisite hundies for payment to the suppliers duly endorsed by the bankers. HMT had arrangement with IDBI regarding rediscounting of such hundies through their bank but so far as the assessee-company is concerned there was no arrangement with the IDBI. The learned counsel has also submitted that a large number of hundies were encashed by the HMT from their bankers and there is also no information or material on record to show the extent to which actual discounting of hundies was made by the HMT from the IDBI. Moreover, the interest is not payable to IDBI but the same has been provided in the books of account for payment either to HMT or to the company’s bankers who are co-guarantor for encashment of hundies. The learned counsel, therefore, pleaded that the lower authorities without appreciating the scheme as well as the nature of the transactions disallowed and confirmed the provision made for interest accrued but not due under s. 43B of the IT Act. He also submitted that though on identical facts the CIT(A) confirmed disallowance of such interest in the asst. yr. 1991-92 vide his appellate order dt. 6th December, 1994, but his successor CIT(A) for the asst. yr. 1990-91 having properly appreciated the facts and bill rediscounting scheme deleted the disallowance made under s. 43B for similar nature in his appellate order dt. 14th February, 1997. According to the learned counsel the appellate order for the asst. yr. 1990-91 has not been contested in further appeal by the Revenue before the Tribunal. The learned counsel, therefore, urged that the disallowance made deserves to be deleted.
4.6. The learned Departmental Representative on the other hand relied upon the orders of the authorities below and has further submitted that the learned AO while disallowing the interest claimed under s. 43B has relied upon the appellate order for the asst. yr. 1991-92. He, therefore, relied upon the reasoning given by the CIT(A) in his appellate order for the asst. yr. 1991-92.
4.7. We have considered the facts and the rival submissions. We have also gone through the orders of the lower authorities including the appellate orders for the asst. yr. 1990-91 and 1991-92 and also the bill rediscounting scheme of IDBI.
4.8. We find that the bill rediscounting scheme was introduced in April, 1965 by the IDBI which authorised it to accept discount or rediscount bills on exchange and promissory notes of industrial concerns subject to conditions prescribed. The object of the scheme was two-fold-the manufacturer of machinery/capital equipment can push up the sales of their products by allowing deferred payment facilities to the prospective purchasers/users. The purchaser/user of the machinery on the other hand was enabled to utilise the machinery acquired and repay its costs over a number of years. The manufacturer got the value of the machinery within few days of its delivery by discounting with its bankers the bills of exchange/promissory notes arising out of sales of machinery. The mechanism of the scheme has been explained and described as under :
“The intending purchaser used indigenous/imported machinery who is not in a position to offer immediately full cash payment for the required machinery approaches the machinery manufacturer/local agent of foreign supplier seeking deferred payment facility. The latter, in order to promote his sales, agrees to supply the machinery subject to payment of an agreed minimum amount in advance and the balance in half-yearly or yearly instalments. A separate bill/promissory note is drawn/made for each instalment together with interest payable on the deferred instalments. The bills or promissory notes are accepted/guaranteed by/or on behalf of the purchaser, user and delivered to the manufacturer-seller who sets them discounted with his banker thus realising the cost of the machinery; the discount payable by him to his banker is included in the amounts of the bills by way of interest for the period of deferred payment. The manufacturer’s/seller’s banker in turn takes the discounted bills to IDBI and gets them rediscounted thus obtaining the amount paid to the manufacturer-seller. The discounting bank takes back the bills from IDBI against payment, three working days in advance of their due dates and obtains payment thereof from the acceptor/guarantor of the bills/promissory notes on due dates.
Since the seller’s bank is primarily responsible for payment to IDBI, with a view to safeguarding its own position, it normally requires that the bills/promissory notes be accepted/guaranteed on behalf of the purchaser by its banker or a State Financial Corporation or the Industrial Finance Corporation of India or Industrial Credit and Investment Corporation of India Ltd. or an insurance company it is, however, the discretion of the seller’s bank to ask for such acceptance or guarantee or to waive it altogether and rely on the acceptance of the purchaser himself.”
4.9. We find that Hong Kong Bank and State Bank of Patiala are the bankers of the assessee-company. Hong Kong Bank in its letter dt. 21st October, 1987, addressed to the assessee-company referring to the facilities accorded to the assessee-company, has mentioned for a limit of Rs. 5,50,00,000 lakhs for providing bank’s co-acceptance of bills drawn on and accepted by the company under the IDBI scheme for purchases of machinery on deferred payment basis. The bank was to charge co-acceptance fee being @ 1 per cent p.a. and also to charge interest @ 15 per cent/16.5 per cent. Similarly, the State Bank of Patiala as per its letter dt. 19th April, 1986, placed at p. 127 of the paper book sanctioned deferred payment guarantee/co-acceptance facility of Rs. 161.84 lakhs under the Bills Re-discounting Scheme of IDBI. The assessee-company as per terms of credit was required to pay the amount of usance bills drawn by the suppliers of the equipment accepted/guaranteed by the bank under the proposed facility in ten instalments along with interest accrued thereon. The machinery/equipment procured was to be hypothecated with the bank with its net value. The bank was to charge commission @ 1 per cent per annum on deferred payment guarantee. The bank also demanded the personal guarantee of the managing director of the company. Standard Chartered Bank also almost on similar terms sanctioned limit of Rs. 2 crores for deferred payment guarantee. The letter dt. 28th March, 1994, from IDBI is placed at p. 135 of the paper book clarifying that in case bills have not been discounted or rediscounted from IDBI the payment in regard to such bills are required to be made directly to the concerned supplier/banker and the payments relating to the bills once discounted/rediscounted from IDBI is to be made directly to the IDBI by the purchaser/banker as the case may be.
4.10. In the present case the assessee-company purchased machinery/ equipments from HMT. The assessee-company had drawn bills/promissory notes in favour of the supplier. Such bills/promissory notes were accepted/guaranteed by its bankers and the same were delivered to the supplier. The supplier in turn discounted such bills/promissory notes from their bankers and the bankers/supplier finally rediscounted such bills/promissory notes from the IDBI. The assessee-company was required to make the payment in instalments to the suppliers through its bankers as per the terms of the sanction accorded by them. The interest accrued thereon would obviously be payable to the supplier bankers. The company having followed the mercantile system of account claimed interest on the deferred payment amount on accrual basis. It would thus be seen from the arrangement made that the assessee-company had neither taken loans or borrowed funds from the IDBI. It is the supplier who made the financial arrangement with the IDBI through its banker by discounting/rediscounting of the bills/promissory notes drawn by the assessee-company. The assessee-company thus had no direct financial arrangement with the IDBI nor the interest claimed on accrual basis is payable to the IDBI.
4.11. The assessee-company rather obtained limits from its bankers for the purpose of financing the purchase of the machinery/equipments and the assessee-company was required to pay interest thereon and also fee for accepting/guaranting the bills/promissory notes drawn by the assessee-company in favour of the suppliers. There are no details available separately of the amounts for which bills/promissory notes were drawn in favour of the supplier and discounted/rediscounted and the finance arranged by assessee’s bankers from their own resources. However, the interest accrued on the funds utilised in purchase of machinery/equipment is allowable and provisions of s. 43B would not apply as the interest payable is not to financial institutions/IDBI so far as the assessee-company is concerned.
4.12. We also find that though the disallowance of such interest in the asst. yr. 1991-92 was confirmed by the CIT(A) in his order dt. 6th December, 1994, but the CIT(A) in his subsequent appellate order passed on 14th February, 1997, for the asst. yr. 1990-91 has deleted the disallowance of interest made under s. 43B for the detailed reasons given in his order. The learned counsel of the assessee made statement at Bar that the Revenue has accepted the finding of the CIT(A) given in this behalf for the asst. yr. 1990-91 and no appeal there against has been filed before the Tribunal.
4.13. Having regard to all the facts and circumstances discussed we are of the view that there is no merit in the disallowance made of the interest claimed on accrual basis and the same is directed to be deleted.
5. Ground Nos. 17 and 18 as raised by the assessee are as under :
“17. That CIT(A) has erred in not considering claim of investment allowance amounting to Rs. 70,41,166 even though the same issue was raised in the grounds of appeal and detailed arguments were furnished and the same was discussed at the time of hearing of the appeal.
18. That claim of investment allowance is permissible under the and same may kindly be accepted.”
5.1. We find that though the assessee raised ground No. 3 relating to grant of investment allowance before the CIT(A) but the CIT(A) has not discussed and adjudicated upon this issue. According to the assessee apart from raising the ground due submissions were also made and arguments were advanced in support thereof during the course of hearing. The CIT(A) however, failed to adjudicate the issue raised. We under the circumstances direct the CIT(A) to decide the issue involved as raised before him by the assessee-company after affording due opportunity of being heard.
6. In the result, appeal of the assessee stands partly allowed.