I. T. A. No. 654/Coch/2013 (assessment year 2010-11).

N. R. S. GANESAN (judicial Member) and B. R. BASKARAN (Accountant Member), JJ

K Kittu for the appellant.
Smt. Latka V Kumar, Junior Departmental representative, for the respondent.

ORDER

The order of the Bench was delivered by

1 B. R. BASKARAN (Accountant Member):-The appeal filed by the assessee is directed against the order dated Ju1y 19, 2013, passed by the learned Commissioner of Income-tax (Appeals)-V Kochi and it relates to the assessment year 2010-11.

2 The grounds of appeal urged by the assessee give rise to the following issues:

(i) Disallowance of higher rate of depreciation claimed on assets classified by the assessee as "pollution control equipment" ;

(ii) Assessment of loans received as cash credit under section 68 of the Act;

(iii) Disallowance of part of interest expenditure as diversion interest bearing funds ;

(iv) Assessment of profit from commodity trading as cash credit under section 68 of the Act ; and

(v) Rejection of claim of set off of business loss against income assessed as cash credits.

3 The assessee is engaged in the business of manufacture of sponge iron.

The Assessing Officer completed the assessment of the year under consideration by making various additions and they were confirmed by the learned Commissioner of Income-tax (Appeals). Hence the assessee has filed this appeal before us ...

4 The first issue relates to the disallowance of claim of higher rate of depreciation on assets classified by the assessee as "pollution control equipment". The assessee constructed/acquired certain assets in accord­ance with the conditions stipu1ated by the Kerala Pollution Control Board.
The assessee treated those assets as "pollution control equipment" and claimed deprecation in the return of income at higher rate of depreciation, i.e., at 80 per cent. Since the rate of depreciation prescribed for "pollution control equipment" under the Act is 100 per cent., the assessee claimed depreciation at 100 per cent. on those assets during the course of the assessment proceedings. The Assessing Officer took the view that the assets claimed by the assessee as pollution control equipment did not fall in the category of pollution control equipment prescribed in Appendix I to the Income-tax Ru1es. Accordingly, the Assessing Officer restricted the depreciation to the normal rate of depreciation. The Commissioner of Income-tax (Appeals) also confirmed the same.

We have heard the parties on this issue. We notice that the Assessing Officer has made a detailed discussion about the claim put forth by the assessee. For the sake of convenience, we extract the same below:

3.1 The assessee had during the year claimed deprecation at the rate of 80 per cent. on energy saving devices. The assessee was asked to file details of the same. However, during the course of assessment proceedings, the assessee claimed that these are not energy saving devices but pollution control equipment as claimed in, the depreciation statement. The details of the same were called for and filed. Out of the total equipment claimed by the assessee as pollution, control equipment, it was found that the follow­ing asset does not qualify as pollution control equipment. The reasoning given by the assessee vide their letter dated February 18, 2013, are given below: .

The provisions of the Income-tax Act provides for 100 per cent. dep­recation in respect of the following air pollution control equipment.

3.3 Item-wise observation on the above equipment claimed as pollution control equipment is as under :

3.4 All the above assets, in view of the reasons given above cannot be termed as a pollution control equipment. 'They 'are just part of the factory, being either building or plant and machinery. They definitely are not pollution control equipment as contended by the assessee ...

3.5 The contention of the assessee given above have been considered.

However, this cannot be accepted. The first issue is that Appendix I of the Income-tax Rules provide for 100 per cent. depreciation in respect of pollution control equipment. It is not understood as to why the assessee has claimed for only 80 per cent. on depreciation when the assessee is enti­tled for the entire 100 per cent. It needs to mention that Appendix I of the Income-tax Rules speaks of pollution control equipment which includes four systems namely:

(a) Electrostatic precipitation systems, (b) Felt-filter systems,

(c) Dust collector systems,

(d) Scrubber-counter current/Venturi/packed-ed/cyclonic scrubbers, (e) Ash handling system and evacuation system.

3.6 None of the above said assets on which the assessee has claimed deprecation as a pollution control equipment qualifies to be a part of the system as mentioned in Appendix I of the Income-tax Rules 1962. For the purpose of air pollution control equipment, if any civil construction is needed. then of course, it should be a part specifically erected or constructed for housing the air pollution equipment. It cannot be a generalised expense that can be made to be a part of the pollution control equipment.

3.7 I therefore, in view of the facts brought out above, disallow deprecation on the assets mentioned above as pollution control equipment. However, depreciation at normal rates as prescribed is allowed to the assessee. The deprecation claimed in this year is on the written down value of the assets purchased earlier. The assessments for the assessment years 2008-09 and 2009-10 require to be reopened for disallowing the claim of excess deprecation made in that year.

Before us, the learned authorised representative reiterated that these equipment have been installed as per the conditions put forth by the Pollution Control Board. Accordingly he submitted that the assessee has classified these equipment as "pollution control equipment" and claimed higher rate of depreciation. However, we are unable to agree with the said contentions. It is a settled proposition of law that the Income-tax Act has to be construed in a strict manner. The depreciation rates are prescribed under the Act in table given in Appendix I of the Income tax Rules. Under the said Appendix I of the Income-tax Rules, the pollution control equip­ment, which are eligible for depreciation at 100 per cent. have been listed out. We notice that five items of equipment have been listed under the head "Air pollution control equipment" and 17 items of equipment have been listed under the head "Water polluti9n control equipment". We also notice that the following words have been used in the Appendix I, viz., "Air pollution control equipment, being:" "Water pollution control equipment, being". The presence of the word "being" signifies that the pollution control equipment should be falling in the nature or category of the list specified in the depreciation schedule. We notice that both tax authorities have given a finding that the assets, on which the higher rate of depre­ciation has been claimed by the assessee, do not fall in the category of assets listed out in the depreciation table given Appendix I of the Income-tax Rules. Before us, the assessee could not controvert the said finding of the tax authorities. Hence, we do not find any infirmity in the decision taken by the learned Commissioner of Income-tax (Appeals) on this issue and accordingly confirm his order on this issue.

7 The next issue relates to the assessment of loan receipt of Rs. 18 lakhs as cash credit under section 68 of the Act. The Assessing Officer noticed that the assessee has received the abovesaid amount as loan from a person named Shri Marimuthu. Before the Assessing Officer, the assessee did not file any confirmation letter. Hence, the Assessing Officer assessed the same as the income of the assessee. Before the learned Commissioner of Income-tax (Appeals), the assessee submitted that it had received the above said loan by way of two cheques of Rs. 9 lakhs each. It was further submitted that the creditor has signed the statement of accounts, which is equivalent to the confirmation letter. However, the learned Commissioner of Income-tax (Appeals) confirmed the assessment with the following observations :

"3.3 The appellant relies upon the only fact that the amount of loans were received by way of cheque. However, the Assessing Officer has observed that the assessee has not discharged the onus of submitting loan confirmation. Even during the course of appeal proceedings the appellant failed to come forward to furnish the identity of the creditor as well as his creditworthiness. The appellant has failed to produce either the permanent account number of the lender or the copy of his bank account or copy of his income-tax return. The same have not been made available as of now. Only by saying that the amount has been given through cheque does not fulfil the requisite criteria to establish the identity and the creditworthiness of the parties. As a matter of fact, the creditworthiness and the identity are the two essential ingredients other than the genuineness of the transaction and; in order to discharge the onus for a loan to be a genuine one; all three ingredients need to be established before the Assessing Officer. Since the appellant has failed to discharge his onus, in order to prove the genuineness of the credit, the addition made by the Assessing Officer as unexplained credit under section 68 of the Act is upheld and the appeal on this ground is dismissed."
8 We have heard the parties on this issue. Before us also, the learned authorised representative reiterated the contentions placed before the tax authorities. It is a well settled proposition of law that the initial burden of proof to prove the cash credits is placed upon the assessee under section 68 of the Act, Le., the assessee is required to prove cumulatively the three main ingredients, viz., the identity of the creditors, the creditworthiness of the creditor and the genuineness of transactions. As held by the learned Commissioner of Income-tax (Appeals), the receipt of money through the banking channels may prove the genuineness of the transaction, but the assessee has failed to establish the identity of the creditor and also failed to prove the creditworthiness of the creditor. Hence, we are of the view that the decision taken by the learned Commissioner of Income-tax (Appeals) on this issue is in accordance with the law and accordingly confirm the same.

The next issue relates to the disallowance of part of interest expenditure on the ground that a portion of interest bearing funds has been diverted as interest-free advance in the form of "advance for purchase of materials". The Assessing Officer noticed that the assessee has given advance of Rs. 4.14 crores as advance for purchase of raw materials during the year under consideration. The opening balance of such advance account stood at Rs. 2.71 crores. Thus an aggregate amount of advance given stood at Rs. 6.86 crores at the year end. However, it was noticed that the assessee has purchased raw materials to the tune of Rs. 1.96 crores only during the year under consideration. In spite of low amount of purchases, it was seen that the assessee has been given advances. Hence, the Assessing Officer drew adverse inference against the assessee, viz., the assessee has diverted interest-free funds for giving interest-free loans in the form "advance for purchase of raw materials or capital goods". The Assessing Officer also noticed that the assessee has claimed a sum of Rs. 3.33 crores as interest expenditure.

Before the Assessing Officer, the assessee claimed that it was constrained to give advances in order to ensure uninterrupted supply of materials. The said explanation was not convincing to the Assessing Officer. Hence, the Assessing Officer disallowed a sum of Rs. 1.06 crores from out of the interest expenditure claimed as relatable to the interest-free advances given out of interest-bearing funds.

Before the learned Commissioner of Income-tax (Appeals), the assessee submitted an analysis of balance-sheet (described as "cash flow statement") to show that the interest bearing funds were not diverted for giving advances, cited above. It was submitted that the advance given for purchase of materials was met out of own funds without touching upon the loan funds. But the learned Commissioner of Income-tax (Appeals) noticed that the assessee has considered the "interest-free sundry creditors" amounting to Rs. 6.50 crores also as its own funds. The learned Commis­sioner of Income-tax (Appeals) took the view that the amount of interest-free sundry creditors should not be taken as "own funds". Accordingly, the learned Commissioner of Income-tax (Appeals) took the view that the cash-flow statement submitted by the assessee is not sufficient to substan­tiate the claim that the interest-free capital was used to give advance. Accordingly, he confirmed the disallowance made by the Assessing Officer.

12 We have heard the rival contentions on this issue and perused the record. We notice that the assessee has furnished an analysis of balance­-sheet to show that the advance for purchase of raw materials was out of own funds. We notice that the learned Commissioner of Income-tax (Appeals) has taken the view that the "interest-free sundry creditors" cannot be considered as "own funds" and accordingly rejected the analysis furnished by the assessee. The claim of the assessee appears to be that the interest bearing funds have been used for other purposes and the advance for purchase of raw material has been given out of "interest-free funds" (own funds + interest-free sundry creditors). However, in our view, the said claim cannot be substantiated by mere analysis of the balance-sheet as at March 31, 2010. For example, we notice that the assessee has borrowed funds from "Federal Bank" for working capital purpose. The advance given for raw materials also very well qualifies for obtaining the working capital loans. We also notice that the nature of "interest-free sundry creditors" is not given by the assessee. The term "sundry creditors" normally consists of the trade creditors also, i.e., credit obtained on purchase of raw materials. If the "sundry creditors account" includes trade creditors, then the necessity of giving huge "advance for purchase raw materials" needs convincing explanation from the assessee. We notice that the Assessing Officer has not brought out whether the advance was given to related parties or to outsiders, which is also a vital factor to be considered. Accordingly, we are of the view that the tax authorities have not properly examined this issue and the assessee has also failed to furnish proper details relating thereto. Accordingly, we are of the view that this issue requires fresh examination at the end of the Assessing Officer. Accordingly, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue and restore the same to the file of the Assessing Officer with the direction to examine the same afresh by duly considering the discussions made supra and take appropriate decision in accordance with the law. The assessee is also directed to furnish all the details to the Assessing Officer.
13 The next issue relates to the assessment of "profit from commodity trading" as cash credit under section 68 of the Act. The Assessing Officer noticed that the assessee has credited a sum of Rs. 5.13 crores as profit earned from commodity trading. The assessee considered the same as its business income and accordingly adjusted the loss suffered from its main business activity against the same. The Assessing Officer examined the nature of commodity trading transactions and came to the conclusion that they were a sham and bogus transactions. Accordingly, the Assessing Officer treated the income of Rs. 5.13 crores declared by the assessee as "cash credits" under section 68 of the Act. The learned Commissioner of Income-tax (Appeals) also confirmed the same.

We have heard the rival contentions on this issue. We feel it pertinent to extract the observations made by the Assessing Officer in the assessment order with regard to this issue :
"6.1 It is seen from the profit and loss account that a sum of Rs. 5,13,55,093 was found credited in the books of account of the assessee for the year under appeal as commodity trading profit allegedly received from Mis. Vatika Merchants Pvt. Ltd. The said commodity income was adjusted/set-off by the assessee against busi­ness losses of the assessee for the year under consideration. The assessee to (was) asked to file confirmation of the broker through whom the transactions were effected to establish the genuineness of the commodity profit shown in the accounts. In reply, the assessee vide their letter dated January 21, 2013, filed a copy on account of M/s. Vatika Merchants Pvt. Ltd. as appearing in its books for the financial year relevant to the assessment year 2010-11.

6.2 On examination of the confirmation submitted an abnormal feature was noticed in the transaction, that is the assessee had only incurred profits during the year. There was not a single transaction of loss during the whole year. It was also seen that no major investment was made by the assessee during the year. A letter was therefore written on March 12, 2013, to Mis. National Multi Commodity Exchange of India, 4th floor, H K House, Behind Jivabai Chambers, Ashram Road, Ahmedabad, Gujarat-380 009 seeking information on the alleged transactions of the assessee. M/s. National Multi Com­modity Exchange of India vide their letter dated March 23, 2013, replied that M/s. Vatika Merchants Pvt. Ltd. was expelled by the exchange on the ground of issuing fraudulent contract notes to its clients. It further confirmed that the client has to be registered with the exchange and that Mis. Kerala Sponge Pvt. Ltd. with PAN AACCKS060B is a non-existent client under any member of the exchange. Copy of this letter is made part of this order as per annex­ure A Therefore, after considering the materials available on record including the reply furnished by the National Multi Commodity Exchange of India, Gujarat, the impugned transactions showing generation of commodity trading profit of Rs. 5,13,55,093 is a sham and a bogus transaction without any element of genuineness. In view of these facts, I have no option but to treat this commodity profit shown by the assessee as unexplained cash credit and accordingly add the same as unexplained cash credit under section 68 of the Income-tax Act."

15 Before us, the learned authorised representative pointed out that the assessee itself has offered the profit from commodity trading as its income and hence there was no requirement to treat the same as deemed income under section 68 of the Act. He further submitted that the assessee has received a sum of Rs. 1.49 crores only during the year under consideration and the remaining amount out of the profit of Rs. 5.13 crores was received in the succeeding years. Accordingly he submitted that the Assessing Officer was not right in treating the entire amount of Rs. 5.13 crares as having been received during the year under consideration. The learned authorised representative further submitted that the Assessing Officer has taken adverse view without confronting the letter received from national multi commodity exchange to the assessee.

16 However, we notice that the assessee has not furnished any material to controvert the finding reached by the Assessing Officer that the profit from commodity trading declared by the assessee was a sham or bogus transaction. We notice that the Assessing Officer has given the above said finding after making necessary enquiries with the commodity exchange. Hence, we do not find any reason to interfere with his decision on this issue and accordingly hold that the claim of receipt of profit from commodity trading is a sham or bogus one. Further as per section 68 of the Act, it is the responsibility of the assessee to explain about the "nature and source" of any sum found credited in the books of account. In the instant case, the assessee has failed to prove about the "nature of credit". Hence we are of the view that the Assessing Officer has rightly assessed the same as cash credit under section 68 of the Act.

17 The last issue relates to the assessment of cash credits and profit from commodity trading as income not falling under any of the heads and con­sequently rejection of claim of set off of business loss and carry forward business loss/depreciation against them. We notice that the Assessing Officer has taken the view that the claim of set off of losses is admissible against the income computed under any of the heads of income. He has also taken the view that the income assessed under section 68 of the Act does not fall under any of the heads of income and they are included in the total income by a process of "aggregation of income" under Chapter VI of the Act. Accordingly, the Assessing Officer has taken the view that the losses incurred in regular business and also carry forward loss /depreciation are not eligible to be set off against the income assessed under section 68 of the Act. In this regard, the Assessing Officer has taken support from the decision rendered by the Chandigarh Bench of the Income-tax Appellate Tribunal in the case of ITO v. Dulari Digital Photo Services P. Ltd. (order dated March 9, 2012), which he has extracted in the assessment order. On a perpusal of the same, we notice that the Chandigarh Bench of the Income­-tax Appellate Tribunal has taken support for its view from the decision rendered by the hon'ble Gujarat High Court in the case of Fakir Mohmed Haji Hassan v. CIT [2001] 247 ITR 290 (Guj).

We have gone through the facts prevailing in the case of Fakir Mohmed 18 Haji Hassan. The assessee therein was found in possession of gold worth Rs. 48.72 lakhs and Indian currency of Rs. 46,000 and the same' were confiscated by customs authorities absolutely. Since the assessee failed to explain the nature and source thereof, the Assessing Officer assessed the value of gold and Indian currency as the income of the assessee under section 69A of the Act. The assessee claimed before the tax authorities that the confiscated sum should be allowed as trading loss and the said claim was rejected. The Tribunal also held that it was not the case of the assessee that he had derived any income from any business of smuggling and, therefore It could not be said that confiscation of gold represented a trading loss m his hands and as such no deduction could be allowed. In the appeal filed before the High Court, the hon'ble Gujarat High Court held as under (page 293):

"The scheme of sections 69, 69A, 69B and 69C of the Income-tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acqui­sition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained then, the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from 'other sources' which have to be sources known or explained. When the income cannot be so classified under anyone of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of in~ome will not arise. If it is possible to peg the income under anyone of those heads by virtue of a satisfactory explanation being given, then these provisions of sections 69, 69A, 69B and 69C will not apply, in which event, the provisions regarding deductions, etc., applicable to the relevant head of income under which such income falls will auto­matically be attracted."

19 A careful perusal of the decision rendered by the hon'ble Gujarat High Court would show that the decision has been rendered by it relates to the income assessed under sections 69, 69A, 69B and 69C of the Act. The said decision does not talk about income assessed under section 68 of the Act. The provisions of sections 69, 69A, 69B and 69C deals with the cases of unexplained investments, unexplained money, unexplained expenditure etc., which have not been recorded in the books of account and the sources thereof have not been explained. Whereas the provisions of section 68 deals with cash credits found recorded in the books of account, whose nature and source was not explained to the satisfaction of the Assessing Officer. Hence, in our view, the ratio laid down in respect of income assessed under sections 69, 69A, 69B and 69C cannot be applied to the income assessed under section 68 of the Act.

20 We further notice that the claim made by the assessee before the hon'ble Gujarat High Court relates to deduction to be made in computation of income under any of the heads of income, i.e., the assessee claimed the value of confiscated gold and money as deduction on account of ,trading loss. Under these circumstances, the hon'ble Gujarat High Court held that the deductions prescribed under the respective heads of income cannot be allowed to the income assessed under sections 69, 69A, 69B and 69C of the Act.

21 However, the issue before us relates to set off of loss incurred from one head against the income assessed under other heads and also claim of set off of brought forward losses and Unabsorbed depreciation in terms of sec­tions 70 to 72 of the Act. A perusal ot the decision rendered by the hon'ble Gujarat High Court in the case of Fakir Mohmed Haji Hassan [2001] 247 ITR 290 (Guj) would show that the hon'ble High Court did not deal with the claim of set off of loss. On that count also, we are of the view that the said decision is not applicable to the facts of the instant case. We have already noticed that the Chandigarh Bench of the Income-tax Appellate Tribunal has placed reliance on the decision rendered by .the hon'ble Gujarat High Court to conclude that the income assessed under section 68 is not eligible for set off of losses incurred under other heads of income. We notice that the abovesaid distinct points were not brought to the notice of the Chandigarh Bench of the Tribunal.

However, the assessee has placed reliance on the decision rendered by 22 the hon'ble Calcutta High Court in the case of Daulatram Rawatmull v. CIT [1967] 64 ITR 593 (Calcutta) and contended that the additions made under section 68 of the Act should be considered as its business income, since it is the only source of income available with it.

We have gone through the decision rendered by the hon'ble Calcutta 23 High Court in the case of Daulatram Rawatmull [1967] 64 ITR 593 (Cal­cutta) and we extract below the relevant observations made by the hon'ble High Court (page 680) :

"Concealed income is not necessarily an income from sources not disclosed, that is to say, from other sources. In the case of Lakhmichand Baijnath v. err [1959] 35 ITR 416 (SC), the Supreme Court has pointed out that when an amount, held to be concealed income, is credited in the business books, it is not an unreasonable inference to draw that it is a receipt from business. The Supreme Court has further pointed out that the question as to whether a certain sum is the concealed business profits of an assessee is clearly a question of fact which is open to attack in a reference under section 66 of the Income tax Act only when it can be shown that there is no evidence to support it or that it is perverse. In the instant case it cannot be said that the inference of the Tribunal that the fixed deposits were concealed income from business is perverse.

It has also been held by the Calcutta High Court in Mansfield and Sons v. CIT [1963] 48 ITR 254 (Cal), following the decision of the Supreme Court in Lakhmichand Baijnath's case [1959] 35 ITR 416 (SC) that where a credit entry is found in the business account of an assessee and the explanation as to how the amount came to be received is rejected by the income-tax authorities and the amount is taken to be income from an undisclosed source, such income can be treated as business income, if the assessee has no other source of income".

In the instant case, the contention of the assessee is that it has no other 24 source of income other than business income. The said contention was not controverted by the tax authorities. The assessee has credited the loan amount of Rs. 181akhs and the profit from commodity trading of Rt'. 5.13 crores in its books of account. In fact the profit from commodity trading was credited in the profit and loss account and offered as business income. Since the assessee could not explain to the satisfaction of the Assessing Officer the nature and source of loan amount as well as the profit from commodity trading, the Assessing Officer has treated them as deemed income, i.e., as unexplained cash credits under section 68 of the Act. While dealing with the issue relating to the disallowance of interest, the Assessing Officer has pointed out that the assessee has a loan liability of Rs. 21.56 crores and claimed interest expenditure of Rs. 3.33 crores. The Assessing Officer has allowed depreciation of Rs. 2.63 crores. All these figures throw light on the magnitude of operations of the company. Under these set of facts, we are of the view that it may not be unreasonable to treat the loan receipts and profit from commodity trading assessed under section 68 of the Act as receipts from the business activity of the assessee. Accordingly, we are of the view that the assessee is entitled to claim set off current year's loss and also brought forward loss/unabsorbed depreciation against the same in accordance with the relevant provisions of the Act.

25 In view of the foregoing discussions, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue and direct the Assessing Officer to allow set off of current year's business loss as well as the brought forward business loss/unabsorbed depreciation against the income assessed under section 68 of the Act in accordance with the provisions of the Act relating to set off.

26 In the result, the appeal ffied by the assessee is partly allowed.

27 The order pronounced in the open court on this 11th day of April 2014.