IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES , HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA No. Asst. Year Appellant Respondent 1042/Hyd/2011 2004-05 Income Tax Officer, M/s. Sri Ward-1, Venkateswara Chit Nalgonda Funds, Nalgonda [PAN: AAZFS9604F] 1314/Hyd/2011 2004-05 M/s. Sri Addl. Venkateswara Chit Commissioner of Funds, Income Tax, Nalgonda Range-9, [PAN: AAZFS9604F] Hyderabad For Revenue : Shri A. Sitarama Rao, DR For Assessee : Shri S. Rama Rao, AR Date of Hearing : 29-08-2016 Date of Pronouncement : 16-09-2016 ORDER PER B. RAMAKOTAIAH, A.M. : These two are cross-appeals by Assessee and Revenue against order of Ld. Commissioner of Income Tax (Appeals)-VI, Hyderabad, dated 15-02-2011. appeal by assessee was filed with delay of 44 (Forty Four) days. Assessee filed petition for condonation of delay explaining reason that during relevant period, business of assessee remain closed and staff have left services. There were court cases also by prized bidders and cheque bouncing cases. Managing Partner alone was looking after affairs and delay was due to many I.T.A. Nos. 1042/Hyd/2011 :- 2 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds factors including ill-health of Managing Partner. Considering prayer and objection of Ld. DR, we hereby condone delay as assessee has reasonable cause in not preferring appeal in time. Appeal is admitted. 2. Briefly stated facts are that assessee is partnership firm carrying on chit fund activity. For AY. 2004-05, it filed its return of income on 29-11-2004 admitting income of Rs. 42,400/-. said return was originally processed u/s. 143(1) of Income Tax Act [Act]. Assessing Officer (AO), thereafter, conducted survey u/s. 133A of Act at premises of assessee on 30-09-2007. AO during course of survey, impounded certain books of account showing suppression of receipts and inflation of expenditure. AO accordingly issued notice u/s. 148. AO mentions that on verification of accounts it is revealed that some of entries made in books of account are not considered while preparing return of income; certain transactions were not at all reported to department; P&L A/c prepared and annexed to return of income did not tally with books of account maintained by assessee; there is also discrepancy between books of account of one year and another year as opening and closing balances are not tallying; some of entries are not made in books of account. AO also found that there is account partners sitting fee which is imprest account maintained by Managing Partner and that some of expenditure recorded therein is not admissible as per law. Accordingly, he passed assessment order determining total income at Rs. 50,02,650/-. He made following additions: I.T.A. Nos. 1042/Hyd/2011 :- 3 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds Rs. 1. Unexplained credit in opening balances 5,74,132 2. Unexplained credit in accounts of partners 10,00,000 3. Disallowance of salary of K. Mohan Reddy 18,000 4. Unexplained credit towards excess of liabilities 25,11,297 in books 5. Unexplained credit for deficit of assets in 83,242 books 6. Addition for suppression of income 1,082 7. Addition for inflation of expenditure 6,01,860 8. Disallowance of part of expenses of partner s 1,72,900 sitting fees 9. Disallowance of depreciation 4,705 10. Disallowance of donations 7,000 3. Assessee preferred appeal before Ld. CIT(A) and submitted that AO was not correct in considering amounts from incomplete books of accounts and final statements filed before department and also considering assets and liabilities and debits and credits separately without re-conciling them. It was also submitted that certain cash transactions including credit by partners were not entered in books of account which are not complete but adjusted in final accounts prepared. difference arose due to these factors. 4. Ld. CIT(A) considering explanation and documents placed on record, deleted fully/ partially following additions: Rs. 2. Unexplained credit in accounts of 10,00,000 Full partners 4. Unexplained credit towards excess of 25,11,297 Partial relief liabilities in books to extent of Rs.20,28,000 8. Disallowance of part of expenses of 1,72,900 Partial relief partner s sitting fees to extent of Rs.1,20,000 I.T.A. Nos. 1042/Hyd/2011 :- 4 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds Balance of additions were confirmed by Ld. CIT(A). Hence both parties are aggrieved. 5. Ld. Counsel submitted that AO has compared final statements filed in earlier year and incomplete books of this year and also final statements of this year filed with return of income. It was submitted that partners cash introduced as capital was adjusted in final accounts last year as well as in this year and same resulted in various differences in capital accounts, expenditures and claims etc. Not only that in trial balance, assets and liabilities were shown separately whereas in final accounts, these were shown at net amounts. Therefore, CIT(A) was not correct in accepting partly where as all additions are explainable. 6. Ld. DR however, explained details of additions made from assessment order and submitted that survey has been conducted after three years and so assessee s statement that books of accounts were not closed or final entries were not made is not correct. acceptance of assessee contentions by Ld. CIT(A) is not correct and supported grounds raised by Revenue. 7. We have considered rival contentions and perused paper book placed on record. Certain facts are to be noted before adjudicating various additions: Assessee even though has maintained Books of Account, they are not complete as final entries have not been I.T.A. Nos. 1042/Hyd/2011 :- 5 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds incorporated by way of journal entries in Books of Account; Assessee has not subjected Books of Account to audit as assessee s turnover is less than Rs. 40 Lakhs and compulsory audit was not prescribed; AO himself accepts vide para VI in page 9 of order that Managing Partner has maintained separate cash imprest account and AO has verified those amount also. In fact, his finding on this is as under: This book is accepted as evidence because account is present in original ledger, there is evidence of amounts drawn through bank cheques and some entries are variable like payments to Registrar Office and interest to partners etc. Part of rent, travelling expenses, vehicle hire charges, cash discounts, general expenditure, agents meeting expenses, staff welfare and hospitality etc., are made through this account. That is why some of accounts shown in P&L A/c are missing from main ledger. With these findings, AO has accepted certain transactions which indicate that Books of Account are not complete in all respects. AO instead of reconciling accounts with that of journal entries or asking for explanation for missing entries/difference in amounts, simply added all amounts; both on Assets side as well as Liabilities side in Balance Sheet. Not only that, differences in receipts as well as payments, not only of final statements filed along with return of income and Books of Account I.T.A. Nos. 1042/Hyd/2011 :- 6 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds but also from final accounts of previous year were added; AO has not reconciled final statements of earlier year s return with that of final statement of this year s return. Keeping above facts as culled out from orders and documents on record, we have examined various contentions and findings on each of addition made by AO in assessment order are as under: Addition of un-explained credit in opening balance of Rs. 5,74,132/-: 8. AO has added amount of Rs. 5,74,132/- on difference between closing balance in certain items as on 31- 03-2003 i.e., final accounts enclosed to return of income in AY. 2003-04 and opening balance as on 01-04-2003 in Books of Account for this year. AO has listed difference in Liabilities side and Assets side and major difference is with reference to arrear of chit subscriptions and cash in hand. difference of Liabilities side is only Rs. 446/-. It was explanation of assessee before Ld. CIT(A) (as well as before AO) that final statements filed along with return of income are after adjusting partners capital accounts, wherein each of partners have contributed Rs. one Lakh each totalling to Rs. 5 Lakhs during that year and those amounts have not been carried over as opening balance in Books of Account for this year. Since entries are shown in final accounts filed for earlier year, discrepancy of Rs. 5 Lakhs in cash receipt has I.T.A. Nos. 1042/Hyd/2011 :- 7 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds come in opening cash balance of this year. Further, amount of Rs. 79,312/- was collected from subscriptions on chits, which was shown as difference in statements, whereas this amount collected was adjusted in final accounts. Thus, total amount of Rs. 5,79,312/- has affected not only cash difference but also various other accounts. Since partners have contributed amount in earlier year which was already accepted, amount of Rs. 5 Lakhs cannot be considered as discrepancy in this year. With reference to amount of Rs. 79,312/- collected from various subscribers, this has come in for adjustment in various chit subscriptions account, therefore, as per Books, chits subscription amount was at Rs. 25,93,234/-. But in final statements it was Rs. 25,93,234/-. Since these amounts have been reconciled/reconcilable, addition is not warranted. Ld. CIT(A) did not agree with contention and upheld addition and assessee has raised ground on this. 8.1. After considering explanation of assessee and examining record, we are of opinion that addition cannot be sustained. explanation is proper as per final accounts submitted to department not only this year but also in earlier year. In view of this, ground of assessee is allowed. Un-explained credit in accounts of partners Rs. 10 Lakhs: 9. This addition was made by AO in para 2 of order. AO was of opinion that in capital account of each partner, Rs. 2 Lakhs cash was shown in final accounts filed with IT I.T.A. Nos. 1042/Hyd/2011 :- 8 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds return, but in ledger for year, no account is present for any of partners and also in cash book, no such cash introduction was seen. He however, called for explanation and found that trial balance filed on 12-12-2008 partners account is shown at Rs. 2,66,000/-. He was of opinion that there is no basis for figure of Rs. 2,66,000/- in each partner s account. Therefore, Rs. 10 Lakhs i.e., five partners at Rs. 2 Lakhs each was added u/s. 68 as unexplained cash credit . However, he did not disturb interest worked out on entire capital. Ld. CIT(A) has accepted assessee s submission that each of partner has introduced Rs. 2 Lakhs during year and these were carried over in final accounts and reconciled with returns filed by partners in their individual hands, not only in this year but also in earlier years. Ld. CIT(A) has accepted fact that partners have introduced Rs. 2 Lakhs each and they have sources and shown in their return of income. addition was deleted. Hence, Revenue is aggrieved and preferred ground on this issue. 9.1. After considering rival contentions, we do not see any reason to interfere with order of Ld. CIT(A). First of all, we are unable to understand how AO could make addition of Rs. 10 Lakhs, when he himself gives finding that there is neither cash introduction in Cash Book nor there is ledger account in Books of Account, so relied upon by him. addition u/s. 68 is not warranted as there is no such credit in books of account . Be that as it may, assessee in final accounts has shown Rs. 2 Lakhs credit in name of each of partners and has filed returns in their individual capacities admitting cash credits. AO could have verified these in individual hands but not in I.T.A. Nos. 1042/Hyd/2011 :- 9 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds firm s hands. Therefore, CIT(A) s order is correct not only on facts but also on law. There is no merit in Revenue s ground, accordingly same is dismissed. Disallowance of salary of Shri K. Mohan Reddy: 10. amount of Rs. 18,000/- was disallowed as salary paid to one of partners Shri K. Mohan Reddy. According to AO, said partner is not working partner and therefore, salary to him is not allowance, in view of provisions of Section 40(b) of Act. AO relied on statement recorded from said partner who stated that he has no active role in chit fund company. Ld. CIT(A) also confirmed disallowance. 10.1. After considering rival contentions and examining statement placed on record at pgs. 33-35 of Paper Book, we are of opinion that disallowance is not warranted. First of all, statement recorded u/s. 131 clearly indicates that Shri Mohan Reddy is aware about his partnership in firm and admits that he is responsible as partner for all affairs of firm. In fact, Question No. 3 itself asks him about active role in day-to-day affairs of chit fund for which he replied that he has no active role as it was looked after by Shri A. Venkatesh. This answer given to specific question does not mean that he is not working partner. Managing Partner and Working Partner have different roles. As seen from P&L A/c amount of Rs. 54,000/- was paid as salaries to partners and three of five partners are getting Rs. 18,000/- each. Only salary paid to Shri Mohan Reddy was disallowed on basis of so called I.T.A. Nos. 1042/Hyd/2011 :- 10 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds statement. We do not agree with observation of AO as disallowance has no basis. AO is directed to allow amount as claimed. Ground is allowed. Unexplained credit towards excess liabilities in Books Rs. 25,11,297/-: 11. AO observed that there are certain discrepancies and there is excess of liabilities in Books of Account of Rs. 25,11,297/-. AO made addition vide para 4 of assessment order by comparing figures admitted in return of income and figures found during course of survey in Books of Account. Assessee explained before CIT(A) that Assets and Liabilities are to be reconciled. It was submitted that difference on account of liability on own chits was worked out at Rs. 28,13,000/-, whereas investment on own chits was at Rs. 20,28,000/-. If these amounts are reconciled, there would be no difference. However, Ld. CIT(A) while accepting deduction of Rs. 20,28,000/-, confirmed addition of Rs. 4,83,297/-. Both Revenue and assessee are aggrieved on this. 11.1. After considering rival contentions, considering that Books of Account are not complete even though they are impounded after three years of closure of accounting year, reconciliation given by assessee was not correctly appreciated by AO or CIT(A). Since final accounts are tallying, so called discrepancies on basis of incomplete Books cannot lead to addition that too, when assessee was explaining that both assets and liabilities are to be reconciled. Considering reconciliation filed by assessee before CIT(A), we are of I.T.A. Nos. 1042/Hyd/2011 :- 11 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds opinion that there is no need for any addition on this account. Accordingly, order of CIT(A), deleting amount of Rs. 20,28,000/- was confirmed and balance confirmed amount of Rs. 4,83,297/- is also directed to be deleted. Revenue s ground is accordingly dismissed and assessee s ground is allowed. Addition of suppression of income of Rs. 1,082/-: 12. AO by briefly stating that amount of Rs. 1,082/- was short computed in dividend account made addition which assessee contends that dividend is correctly accounted. There is no clarity in addition of AO. As seen from para 4 of order, so called discrepancies between Books and entries in final statements on Liabilities side, there was difference of Rs. - 450/- in dividend payable account. On Assets side, there is no discrepancy on this account but in income on chits, there is discrepancy of Rs. 1203.99, as per AO in table provided. Instead of reconciling dividend payable and dividend on chit accounts and further without verifying final statements, AO has arrived at so called discrepancy. It is not addition of short computation of dividend income but net of dividend, miscellaneous income and penalties. As far as miscellaneous income is concerned, in final accounts, assessee offered Rs. 57,123/- as income, whereas in Books, it was only Rs. 33,510/-, thereby negative figure of Rs. 23,613/- was arrived at in table. In fact, assessee has offered higher income in final statements. Since AO has not verified final statements and his so called discrepancies are based on incomplete Books of Account, we do not see any reason to confirm net discrepancy so arrived at by AO. Ground is allowed. I.T.A. Nos. 1042/Hyd/2011 :- 12 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds Inflation of expenditure Rs. 6,01,860/-: 13. amount of Rs. 6,01,860/- was disallowed as suppression/ inflation of expenditure by listing out in table under head expenditure . As briefly stated earlier, AO has compared final accounts and incomplete Books of Account. In last column of table itself, AO has given remarks that most of expenditure has met from partners sitting fee account and for each of amounts there was explanation given. ultimate difference between two columns was arrived at Rs. 6,01,860/-. Even though AO has given various explanations in assessment order itself surprisingly, he disallows amount in order. Ld. CIT(A) also confirmed amount stating that assessee s telescoping request cannot be given as appellant did not give proper explanation. 13.1. After considering rival contentions, we are surprised that AO even after reconciling amount as noted down last column of table thought it fit to disallow amount. Considering very same explanation, we are of opinion that no disallowance is called for as so called discrepancies arose because of comparisons under taken on basis of incomplete Books of Account and final statements. There cannot be any inflation of expenditure, when all expenditures were correctly claimed by assessee in final statements. Ground of assessee is allowed. I.T.A. Nos. 1042/Hyd/2011 :- 13 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds Disallowance of part of expenses of partners sitting fees of Rs. 1,72,900/-: 14. According to AO, there is excess payment of interest to partners of Rs. 13,300/- and sitting fee of Rs. 1,59,600/- which was disallowed. Ld. CIT(A) gave partial relief of Rs. 1,20,000/-. 14.1. After considering rival contentions, we are unable to understand how interest at 12% of Rs. 1,59,600/- can be disallowed. As seen from final statements, entire interest on partner s capital claimed was only Rs. 51,800/- and amount claimed in P&L A/c was Rs. 51,800/- only. How amount of Rs. 1,59,600/- could be disallowed is not explainable. Therefore, we do not find any reason to confirm addition so made, based on so called entries in partners sitting fee account in cash imprest maintained by Managing Partner. However, with reference to disallowance of Rs. 15,791/- considered to be miscellaneous expenditure, we confirm disallowance as interest for business purposes is not explained. Therefore, while confirming amount of Rs. 15,791/-, assessee gets relief of Rs. 1,59,600/-. Ground is partly allowed. 15. last ground in assessee s appeal is with reference to discrepancy in depreciation claim and donation. As far as claim of depreciation is concerned, same was disallowed on basis of incomplete Books of Account without considering final statements. Therefore, we are of opinion that there cannot be any disallowance, so long as final statements have not been I.T.A. Nos. 1042/Hyd/2011 :- 14 -: 1314/Hyd/2011 Sri Venkateswara Chit Funds examined properly by AO. As far as donation is concerned, considering nature of amount, we uphold disallowance. 16. In result, appeal of Revenue is dismissed and appeal of assessee is partly allowed. Order pronounced in open Court on 16th September, 2016 Sd/- Sd/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 16th September, 2016 TNMM Copy to : 1. Addl. Commissioner of Income Tax, Range-9, Hyderabad. 2. Income Tax Officer, Ward-I, Nalgonda. 3. M/s. Sri Venkateswara Chit Funds, Nalgonda. C/o. S. Rama Rao, Advocate, 3-6-643, Shriyas Elegance, Flat No. 102, St. No. 9, Himayatnagar, Hyderabad. 4. CIT(Appeals)-VI, Hyderabad. 5. CIT-VI, Hyderabad. 6. D.R. ITAT, Hyderabad. 7. Guard File. Income-tax Officer, Ward-1, Nalgonda v. M/s. Sri Venkateswara Chit Fund