M/S. Laxmi Narayan Agarwal, Hyderabad vs Assessee

This is an appeal filed by the assessee against the order of the CIT(Appeals)-IV, Hyderabad, dated 30-09-2010 for the AY 2008-09 raising the following grounds of appeal:

1) The Honourable CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer by making addition of following amounts to the returned income relating to the blank cheques found during the search operations as no loan was advanced by the assessee. And during the course of assessment proceedings all the above mentioned persons also admitted that they did not receive any amount towards the loan.

ITA No. 1392/Hyd/2010 :- 2 -: Sri Laxmi Narayan Agarwal

SI No Name Of The Person Issued Cheque Amount 1 Sri Ram Pratap Agarwal 7,00,000 2 Sri Raja Rajeswari Steel Traders 54,00,000 3 Agarwal Enterprises 3,57,000 4 Sri Manish Agarwal 4,00,000

2) The CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer by making the addition of Rs. 44 lakhs to the returned income relating to the advances received by the assessee towards sale of scrap without considering the explanation offered by the assessee which is not correct, not justified and bad in law.

3) The assessee has received the above Amount from persons engaged in the same line of business. And it is a common practice in business to give advances for purchase and sale of scrap. In the same manner assessee also received advances from said persons in the form of cheques as a part of prudent business practice. Hence the assessee is praying to consider that the cheques were received as advance for scrap and to delete the addition made to assessed income.

4) The CIT(A)-IV has erred while confirming the Order of the Assessing Officer wherein the A.O. has failed to appreciate that the amount received as commission on sale transaction but considered the same as sale transaction of assessee which is not correct and not justified. We, hereby, submit you to kindly consider the commission income only and calculate tax on such Income.

5) The assessee has claimed the deduction under section 80U of Rs 50,000/- for physical disability and submitted a certificate issued by the civil surgeon, Gandhi Hospital in support of the claim. The CIT(A) erred by making the disallowance of said amount without considering the explanation offered by the assessee which is not correct, not justified and bad in law.

6) The assessee is praying to give a fresh opportunity to produce the certificate regarding the disability and to take the same in to account while assessing the total income of the assessee and to decide the matter in favour of the assessee.

7) The CIT Appeals - IV, Hyderabad erred while confirming the order passed by Assessing officer while not considering the explanation given by the Assessee Company and initiated penalty proceedings under section 271 (1)( c) which is not correct, not justified and bad in law.

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8) The Order of the CIT Appeals may be set aside and sent back to Assessing officer for redoing the same.

9) We would like to submit that the Assessee has not concealed any income or not furnished inaccurate particulars to the A.O. Hence, the penalty proceedings u/s. 271(1)(C) may not be initiated.

10) The Assessee may add, alter or substitute any other points to the grounds of appeal before or at the time of hearing of the case / appeal".

Precise and additional grounds of appeal:

"1. The learned CIT (A) erred in sustaining the additions made by the assessing officer for the assessment year under consideration.

2. The learned CIT (A) erred in upholding the additions made to the income of the assessee based on the loose sheets and dumb materials which has no evidential value.

3. The learned CIT (A) ought to have applied the principle of Telescoping of the income determined in the earlier years against the expenditure of subsequent years.

4. The learned CIT (A) ought to have applied the principle of Telescoping of unexplained expenditure against the income of the appellant.

5. The CIT (A) erred in sustaining the addition of Rs. 1,12,57,000/- made towards unaccounted loan.

6. The CIT (A) erred confirming the disallowance of claim of deduction Us 80U of the Act of Rs. 50,000/-.

7. The CIT (A) ought to have appreciated the fact that no additions can be made to the income of the assessee without there being any incriminating material in search assessment.

8. The assessee may add, alter or modify any of the points to the grounds of appeal at any time before or at the time of hearing of the appeal".

2. Briefly, the facts of the case are that, the assessee is an individual engaged in the business of trading in scrap. Search and seizure operations u/s. 132 of the Act were conducted on 07-11-2007. Subsequently, notice u/s. 153A was issued calling upon the appellant to ITA No. 1392/Hyd/2010 :- 4 -: Sri Laxmi Narayan Agarwal

file the return of income. In response to which, the appellant filed return of income on 25-09-2009 disclosing income of Rs. 4,11,320/-. Against the said return of income, assessment came to be completed u/s. 143(3) r.w.s 153A of the Act vide order dt. 30-11-2009 at a total income of Rs. 1,17,18,320/-. While doing so, the AO made addition of Rs. 1,12,57,000/- by holding that the appellant had advanced sum of Rs. 1,12,57,000/-as loan to the following persons:

S.No. Name of person issued the cheque Amount (Rs.)

1. M/s. Sree Ganesh Steel Trading Co 5,00,000

2. Sri Ram Pratap Agarwal 7,00,000

3. M/s. Sangeetha Engg. Works 6,00,000

4. M/s. Sri Raja Rajeswari Steel 54,00,000 Traders

5. M/s. Sri Krishna Metals 4,00,000

6. M/s. Sree Ganesh Steel Trading Co. 6,00,000

7. M/s. Agarwal Enterprises 3,57,000

8. M/s. Sri Padmavati Motors 50,000

9. Sri Virenderkumar Panday 15,00,000

10. Smt. Sheela Agarwal 2,50,000

11. M/s. Venkateswara Scrap 5,00,000 Merchants

12. Sri Manish Agarwal 4,00,000 Total: 1,12,57,000

The addition is made based on the blank cheques and promissory notices obtained from the above persons seized vide Annexure A/LNA/RES/01. The AO had concluded that the appellant is engaged in money lending business and advanced a sum of Rs. 1,12,57,000/- and made addition of amount as unexplained investment.

3. On appeal before the CIT(A), it was submitted before the CIT(A) that those blank cheques were obtained from the persons, who intended to borrow from him. However, the appellant stated that he never advanced any money to the said person therefore, no addition was called for. The Ld.CIT(A) after examining the explanation had disbelieved the ITA No. 1392/Hyd/2010 :- 5 -: Sri Laxmi Narayan Agarwal

explanation offered by the appellant and finally held that the appellant was using his own unaccounted money in providing unaccounted loans against security of promissory notice and cheques and therefore, upheld the addition.

4. It was contended before us that the documents seized are only dumb documents and therefore, no addition can be made. On the other hand, Ld.CIT(A) had placed reliance on the lower authorities and submitted that the seized documents cannot be called dumb documents since the documents are duly signed and filled up. Since the assessee had failed to explain satisfactorily under what circumstances, the blank cheques came into his possession of the appellant, the addition should be upheld.

5. We heard the rival parties and perused the material on record. It is clear from the perusal of material on record that the seized material consist of blank cheques and promissory notes executed by various parties. Each document is discussed below:

i. M/s. Sree Ganesh Trading Co. : The AO found two cheques bearing No. 295713 dt. 03-11-2007 and Cheque No. 295715 dt. NIL drawn by M/s. Sree Ganesh Trading Co. The Xerox copies of the above two cheques were seized by the AO vide Annexure No. A/LNA/Res/01 dt. 07-11-2007. On query to the assessee as to how the above cheques came into possession of the appellant. He submitted that the cheques were obtained as security for supply of steel scrap but the supply never took place. Even the AO examined the proprietor of M/s. Sree Ganesh Trading Co. i.e., Shri Ashok Kumar Jainwal, who confirmed having issued those two cheques in favour of the appellant as a security for supply of iron ITA No. 1392/Hyd/2010 :- 6 -: Sri Laxmi Narayan Agarwal

ore. However, he denied having issued any promissory note to the assessee. Therefore, the AO drawn an adverse inference that Mr. Ashok Kumar Jainwal's statement cannot be relied upon and concluded that appellant is engaged in the business of money lending and treated Rs. 11 Lakhs as unexplained investment and brought to the tax. On appeal before the CIT(A), the plea of the assessee was not accepted and addition was confirmed by the CIT(A) on the ground that the appellant is engaged in money lending business and the cheques and promissory notes were obtained only as a security for advancing the money. On perusal of the seized material, it is clear that promissory note though singed by Mr. Ashok Kumar Jainwal, which do not contain the amount, date, rate of interest or other particulars. The statement given by Mr. Ashok Kumar Jainwal that the cheques were issued only as a security for supply of the iron scrap which in fact did not materialize remain uncontroverted. There is no positive evidence on the record to establish that the appellant in fact advanced the money. Probably, presumption can be raised in the given circumstances that the appellant is engaged in money lending. Based on presumptions, no decisions can be made. Therefore, we delete this addition of Rs. 11,00,000/-.

ii. Sri Ram Pratap Agarwal (RPA): Cheque bearing No. 194404 dt. NIL for Rs. 7 Lakhs was found during the course of search and seizure proceedings. It is clear from the cheque that the details of payee and date were not mentioned. Apart from the cheque, a promissory note for equivalent amount of Rs. 7 Lakhs dt. 11th July, 2007 was found executed by Sri Ram Pratap Agarwal. He stated that he issued the said cheques and executed the promissory notes with an intention to obtain a loan. However, the ITA No. 1392/Hyd/2010 :- 7 -: Sri Laxmi Narayan Agarwal

loan was never granted by the appellant and he denied having received any loan from the assessee. However, the AO had not believed the statement by holding that the statement was given by Sri Ram Pratap Agarwal with an intention of helping the appellant. The CIT(A) also confirmed the addition. We notice that the cheque found did not contain the details of payee and date. It was further observed by the AO that the signature on the promissory note and on the cheque does not tally. In our considered opinion, the material on record does not prove conclusively that the appellant had advanced the money of Rs. 7 Lakhs to Shri Ram Pratap Agarwal and therefore the addition is hereby deleted.

iii. M/s. Sangeetha Engineering Works: Vide page No. 29 of annexure A/LNA/Res/01 dt. 07-11-2007, signed cheque bearing No. 375994 dt. NIL for Rs. 3 Lakhs drawn in favour of the appellant and vide page No. 46 & 47, two promissory notes were executed by one Mr. Dinesh Gupta for Rs. 3 Lakhs each was found. The promissory note seized vide page No. 46 does not contain date or other particulars whereas the other promissory note seized vide page No. 47 dt. 26th April, 2006 contained full particulars. When this information was confronted with the appellant, the assessee stated that the cheques were obtained as a security for supply of iron scrap but the supply was never made. Even Mr. Dinesh Gupta on examination on 22nd Sept, 2009, confirmed the samething. The AO made addition by holding that the statement was made by Mr. Dinesh Gupta under influence of the appellant and therefore not believed the statement of Mr. Dinesh Gupta and brought to adiditon an amount of Rs. 6 Lakhs the CIT(A) confirmed it. After perusal of material on record, we are of the opinion that the material relied upon by the AO does not conclusively prove that ITA No. 1392/Hyd/2010 :- 8 -: Sri Laxmi Narayan Agarwal

the appellant advanced the sum of Rs. 6 Lakhs to Mr. Dinesh Gupta. Though a presumption can be probably raised that the appellant would have advanced money to the appellant but in the absence of any clinching evidence, the addition can't be upheld.

More particularly, when Mr. Dinesh Gupta's statement that no loan was granted to him remains un-controverted. Thus, the addition of Rs. 6 Lakhs is also deleted.

iv. M/s. Raja Rajeswari Steel Traders: Vide page Nos. 30 & 31 of Annexure A/LNA/Res/01 copies of Cheque No. 057007 dt. NIL for Rs. 12 Lakhs; Cheque No. 436332 dt. 18-05-2007 for Rs. 5 Lakhs; Cheque No. 151067 dt. 02-09-2007 for Rs. 10 Lakhs and Cheque No. 436345 dt. NIL for Rs. 27 Lakhs, it was submitted by the appellant during the course of assessment proceedings that those cheques were obtained by him as security for the amount to be advanced. However, the amounts were never advanced. In response to summons u/s. 131 issued by the AO to Shri G. Rajeswara Rao, proprietor of M/s. Sri Raja Rajeswari Steel Traders, one Mr. G. Ram Mohan appeared and stated that where abouts of Mr. G. Rajeswara Rao were not known as he ran away from Hyderabad due to pressures from the debtors and he stated confirmed that the signatures that were found on cheques seized were that of Mr. Rajeswara Rao. In our considered opinion, the material on record does not conclusively prove that the appellant had advanced Rs. 54 Lakhs to M/s. Raja Rajeswari Steel Traders especially the statement of the proprietor of the M/s. Raja Rajeswari Steel Traders could not be obtained. Therefore, the material on record does not indicate that the appellant had advanced Rs. 54 Lakhs to M/s. Raja Rajeswari Steel Traders. Hence, the addition is hereby deleted.

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v. M/s. Krishna Metals: The department has seized Cheque No.

171531 dt. NIL drawn in favour of the appellant for a sum of Rs. 4 Lakhs vide page No. 3 of Annexure A/LNA/Res/01. During the course of assessment proceedings, the AO examined Mr. Rajesh Gupta, Proprietor, M/s. Krishna Metal who had confirmed having issued the blank promissory note for Rs. 4 Lakhs along with the above cheque and he further stated that these two instruments were handed over as a security for the purpose of obtaining the scrap material from the appellant. The statement was dis-believed by the AO and made addition of Rs. 4 Lakhs as un-explained investment. The CIT(A) also confirmed the addition. The statement of Mr. Rajesh Gupta, Proprietor, M/s. Krishna Metal, that those instemnets were handed over to the appellant as a security for the purpose of scrap remains un-controverted and the material on record does not prove conclusively that the appellant made a loan of Rs. 4 Lakhs to M/s. Krishna Metals and therefore, the addition is deleted.

vi. M/s. Agarwal Enterprises: The department seized Cheque No. 302280 dt. 06-11-2007 drawn on Indian Overseas Bank, MG Road, Secunderabad for Rs. 3,57,000/- drawn by M/s. Agarwal Enterprises. During the course of assessment proceedings, Mr. Satish Agarwal, Proprietor of M/s. Agarwal Enterprises was examined, wherein he has stated that the said cheque for Rs. 3,57,000/- and promissory note was handed over to the appellant as a security for the purpose of obtaining loan. However, the loan was not advanced as the search and seizure operations by the IT department were conducted on the very next date. The statement was dis-believed by the AO and held that the amount of Rs. 3,57,000/- is unexplained investment. In our considered opinion, ITA No. 1392/Hyd/2010 :- 10 -: Sri Laxmi Narayan Agarwal

the material does not conclusively prove that the appellant had advanced the same. Therefore, the addition cannot be upheld.

vii. M/s. Padmavathi Motors, Sri Virendra Kumar Pandey, Smt. Sheela Agarwal, M/s. Venkateswara Scrap Merchants and Sri Manish Agarwal:

All the above persons have confirmed that cheques have been handed over to the appellant only as a measure of security for supply of scrap or for the purpose of obtaining the loan, but all of them have denied having obtained any loan from the appellant. The statements given by those people remains uncontroverted. Though the AO is justified in entertaining doubt that the appellant is engaged in the business of money lending and the cheques have been obtained, only after the amounts were advanced since in the absence of any positive evidence in support of the appellant having lent money to the above persons, we are not in a position to confirm the addition. Accordingly, the additions are deleted.

6. On the issue of claim of deduction u/s. 80U of the Act, we find that the claim was withdrawn before the AO and therefore, the CIT(A) is perfectly justified in rejecting the claim of the appellant. Hence, this ground of appeal is dismissed.

7. In the result, this appeal is partly allowed.

Order pronounced in the open Court on 17th June, 2015

Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 17th June, 2015 TNMM ITA No. 1392/Hyd/2010 :- 11 -: Sri Laxmi Narayan Agarwal

Copy to :

1. Sri Laxmi Narayan Agarwal, C/o. P. Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.

2. The Asst. Commissioner of Income Tax, Circle-6(1), Hyderabad.

3. CIT(Appeals)-IV, Hyderabad.

4. CIT-III, Hyderabad.

5. D.R. ITAT, Hyderabad.

6. Guard File.