Income-tax---

----Income---Pronote seized during search operations ---Pronote providing for payment of interest---Evidence from books of account of M that such interest had been paid to assessee---Interest was assessable as income of assessee-- Indian Income Tax Act, 1961.

The assessee had advanced a sum of Rs. 5 lakhs on March 15, 1979, on a promote which stipulated interest at 44 paise per thousand rupees per day. The said pronote was recovered during the search of the business premises by the Revenue Authorities. The repayment was made to the extent of Rs.3 lakhs on July 4, 1979, and Rs. 2 lakhs on February 20, 1980. While the advance was entered in the assessee's cash book, the repayment was credited in the bank account maintained by the assessee for recording its transactions with its foreign principal. The assessee contended that the advance of Rs.5 lakhs was free of interest. But, the evidence of one of the partners was that interest was paid on several dates during the period .1979 to 1980.. The pronote also stipulated rate of interest. The Income-tax Officer cross-verified with the foreign principal and found that the advance was not confirmed by the foreign principal and found that interest to the extent of Rs.67,790 was received by the assessee and added the same in the assessment. The Commissioner of Income-tax confirmed the inclusion of interest. On appeal by the assessee, the Appellate Tribunal took the view that there was no satisfactory evidence to indicate the receipt of interest of Rs.67,790 by the assessee and reliance pled by the Department on the entries found in the books of M was considered not sufficient for warranting the addition. On a reference:

Held, that the pronote stipulated payment of interest. The entries in the account books of Min the normal course of business revealed the payment of interest of Rs. 67,790 to the assessee-company. The mere fact that the correct calculation of interest came to Rs. 44,616 as stipulated in the pronote would not render the payment of interest of Rs. 67, 790 false. The payment of interest had been noted in the accounts of M on five different dates and not on a single date. Simply because the assessee's accounts did not reveal the receipt of interest, it could not be concluded that there was no receipt of any interest by the assessee-company. The entries in the account books of M would suffice to prove receipt of interest of Rs.67,790 by the assessee. So, the interest of Rs.67,790 was includible in the assessment of the assessee for the assessment year 1980-81.

C.V: Rajan for the Commissioner.

P.P.S. Janarthana Raja for the Assessee.

JUDGMENT

MRS. A. SUBBULAKSHMY, J.---A sum of Rs. 67,790 has been assessed as interest income received by ,the assessee from Muhammad Ismail & Company on a sum of Rs.5 lakhs advanced to the said company. The assessee had advanced a sum of Rs.5 lakhs on March 15, 1979, on a pronote which stipulated interest at 44 paise per thousand rupees per, day. The said pronote was recovered during the search of the business premises by the Revenue Authorities. The repayment was made to the extent of Rs.3 lakhs on July 4, 1979, and Rs.2 lakhs on February 20, 1980. While the advance was entered in he assessee's cash book, the repayment was credited in the bank account maintained by the assessee for recording its transactions with its foreign principal, namely, Jugolinja Rijeka, Yugoslavia. But, the assessee pleaded that the advance of Rs.5 lakhs was free of interest. But; the evidence of one of the partners is that interest was paid on several dates during the periods 1979 to 1980. The pronote also stipulates rate of interest. The Income-tax Officer cross-verified with the foreign principal and found that the advance was not confirmed by the foreign principal and found that interest to the extent of Rs. 67,790 was received by the assessee and added the same in the assessment. The Commissioner of Income-tax confirmed the inclusion of interest.

On appeal by the assessee, the Appellate Tribunal took the view that there was no satisfactory evidence to indicate the receipt of interest of Rs. 67,790 adduced by the assessee and reliance placed by the Department on the entries found in the books of Muhammad Ismail & Company was considered not sufficient for warranting the. addition and the interest debited in the books of Muhammad Ismail & Company, did not work out the rate stipulated in the pronote and the amount added was much higher than the stipulated rate and Muhammad Ismail & Company, did not have a receipt for the payment of interest. So, the Tribunal found that the statement and entries in the books of Ismail & Company, cannot be accepted in preference to the entries or the absence of entries in the books of the assessee and so, the assessment which was made on mere suspicion is not sustainable and accordingly deleted the addition made on account of interest.

On that, the reference has arisen at the instance of the Revenue and the following questions have been referred to this Court for our opinion:

"(1)Whether, on the facts and in the circumstances of the case and having regard to the mercantile system of accounting followed by the assesses, the Appellate Tribunal was correct in law in deleting the addition made on account of interest receipts stipulated in the pronote seized at the business premises of the assessee?

Whether, the Tribunal's conclusion that there was no firm evidence to show that the assessee had been in receipt of interest of Rs. 67,790 from Muhammad Ismail & Company, is reasonable and sustainable in law on the basis of materials available on record?"

During the search conducted by the Department at the business premises of the assessee on May 20, 1980, it has been revealed that the assesses paid an advance of Rs.5 lakhs to Muhammad Ismail & Company, on a pronote, dated March 15, 1979, and obtained interest of Rs.67,790 from that firm and the assessee did not disclose either the advance or the repayment or the receipt of interest in its accounts. A pronote executed by Muhammad Ismail & Company, in favour of the assesses on March 15, 1979, was also found by the Departmental. Authorities. Even though the assessee alleges that they did not enter the advance of the loan to the firm or the repayment of the loan in the ledger, there is a ledger folio for Muhammad Ismail & Company in the ledger of the assessee wherein the assessee had entered the advance as well as the repayment only in its cash book. But, even in the cash book, they made entries giving an impression that the advance was made by the foreign principals of the assessee to Muhammad Ismail & Company and only the foreign principals got the repayment of the loan. The assesses got repayment of Rs.3 lakhs in cash on July 4, 1979, and Rs.2 lakhs in cash on February 20, 1980. Even though the assessee had stated that the loan was free of interest one Anwar Basha, a partner of Muhammad Ismail & Company, made a sworn statement deposing that the firm received an advance of Rs.S lakhs from the assesses-company on an' interest of 44 paise per thousand rupees per day and the firm paid interest to the assesses-company on several dates, i.e., Rs. 18,360 on August 13, 1979, Rs.16,560 on October 14, 1979, Rs.2,450 December 10, 1979 Rs.10,890 on December 11, 1979, and Rs.19,550 on March 31, 1980, in all a sum of Rs.67,790. It is borne out by the records that Muhammad Ismail & Company paid interest of Rs.67,790 to the assesses-company. The assesses-company admits that advance of Rs.5 lakhs and also about the repayment, but vehemently contends that no interest was received. That contention cannot stand for -a moment because, even the pronote seized from the assessee-company's premises clearly indicates that the assesses had advanced Rs.5 lakhs to Muhammad Ismail & Company for interest at the rate of 44 paise per thousand rupees per day. Even though the assessee's accounts do not reveal any receipt of interest with regard to this amount, the entries found in the books of Muhammad Ismail & Company had clearly disclosed the payment of interest to the assessee- company. Those entries which have been made in the normal course of business must be accepted as true. A partner of that company has also indicated periodical payment of interest on five differed dates. Those entries were not made on a single date and they were made on five different dates. So, it is well-evident that the assesses-company has received interest payment of Rs.67,790.

Counsel for the assessee submitted that even if the interest is calculated at the rate of 44 paise per day per thousand rupees as mentioned in the pronote, the interest amount would come to only Rs.44,616 and not Rs.67,790 and so, the interest payment as stated in the account books of Muhammad Ismail & Company cannot be accepted as true and it led to some suspicion with regard to that interest.

The Tribunal had come to the conclusion that since no entry is found in the account books of the assesses, no interest can be said to have been received by the assessee on this transaction and if Muhammad Ismail & Company had paid the interest to the assessee, it should have also deducted tax on such payments and this admittedly was not done, there is no evidence at all to show that the assesses has received any interest and accordingly deleted the addition of interest.

The pronote stipulated payment of interest. The entries in the account books of Muhammad Ismail & Company in the normal course of business reveal the payment of interest of Rs.67,790 to the assessee- company. The mere fact that the correct calculation of interest comes to Rs.44,616 as stipulated in the pronote would not render that payment of interest of Rs.67,790 false. The payment of interest has been noted in the accounts of Muhammad Ismail & Company on five different dates and not on a single date. Simply because the assessee's accounts do not reveal the receipt of interest, it cannot be concluded that there was no receipt of any interest by the assesses-company. The entries in the account books of Muhammad Ismail & Company would suffice to satisfy with regard to receipt of interest of Rs.67,790 by the assessee. So, the receipt of interest of Rs.67,790 is includible in the assessment of the assesses for the assessment year 1980-81. The Tribunal has committed an error in deleting the addition of interest of Rs.67,790 made by the Income-tax Officer in the assessment of the assessee.

We answer both the questions in favour of the Revenue and against the assessee. No costs.

M.B.A./604/FCReference answered.