Commissioner of Income Tax vs Popular Automobiles

Arijit Pasayat, C.J.—Pursuant to the direction given by this court in O. P. No. 3020 of 1993, the following questions have been referred for opinion u/s 256(2) of the Income Tax Act, 1961 (in short "the Act") :

"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in coming to the conclusion that the debit of Rs. 52,66,963 in the profit and loss account for the year ended April 30, 1986, relevant to the assessment year 1987-88 represented the amount offered for assessment under the amnesty scheme for the earlier years in respect of understatement of stock as corrected and included in the value of closing stock as on April 30, 1986 ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in admitting the redrafted trading and profit and loss account for the year ended April 30, 1986 ; the description of which was changed by the assessee in accordance with his plea that the income declared under the amnesty scheme for the assessment years 1984-85 to 1986-87 was with respect to understatement of stock ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the accumulated income which remained escaped was hidden under stock ?"

The background facts necessary for adjudication of questions as referred to by the Income Tax Appellate Tribunal, Cochin Bench (in short "the Tribunal"), are as follows : The assessee is a partnership firm. For the assessment year 1987-88, its previous year ended on April 30, 1986, in the profit and loss account originally filed along with a return of income for the said assessment year, three items were found debited as relating to income declared in the returns filed under the amnesty scheme for the previous years ending on April 30, 1983, April 30, 1984 and April 30, 1985, totalling Rs. 52,66,963 and the net profit was transferred to the appropriation account for the purpose of computing the total income. The Assessing Officer took the net profit as per account and added the aforesaid sum of Rs. 52,66,963 which was debited in the profit and loss account. The reasons indicated by the Assessing Officer for making such addition are as follows :

"(a) The assessee had not stated that the income declared under the amnesty scheme in its letter dated October 28, 1985, represented understatement of stocks ;

(b) There was no independent evidence to show that the amount was represented by stocks ; and

(c) It was against the accounting principles to debit the amount offered for assessment in the earlier years to the profit and loss account."

The assessee''s explanation was that the aforesaid amount offered for assessment under the amnesty scheme was corroborated and included in the value of closing stock as on April 30, 1986. Such plea was not accepted by the Assessing Officer who also did not accept the explanation that the additional stock representing income declared was included in the accounts only in the year ended April 30, 1986. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals) (in short "the CIT (A)"). Before the said authority, it was submitted that under the provisions of the amnesty scheme, it was under no obligation to satisfy the manner or form in which the additional income offered for assessment was held by it. It was also indicated that the assessee had made necessary entries in its account for the previous year ending April 30, 1986, immediately after filing the amnesty petitions and the additional income declared under the amnesty scheme did not exist in any other form with the firm or with partners either in the form of cash or other assets except in the form of stock. The Commissioner of Income Tax (Appeals) maintained the additions holding that there was no material to show that the closing stock declared was inclusive of the unaccounted stock of the earlier years and there was no justification for the assessee to treat the income declared for the earlier years under the amnesty scheme as an outgoing in the profit and loss account for a subsequent year. The affidavit filed by Shri John Paul, son of K.P. Paul, reiterating the contention of the firm that the undeclared income was in the form of stock was held to be without any supportable material. The matter was carried in appeal before the Tribunal.

It was noticed by the Tribunal that no new figures were introduced in the redrafted account. The only change that had taken in the redrafted statement was to put the three items amounting to Rs. 52,66,963 in the trading account instead of its original place in the profit and loss account, i.e., above the line as against below the line. Another change is that originally these items were described as income declared under the amnesty scheme in the profit and loss account. But in the redrafted account, these were stated specifically as stocks in the years ended on April 30, 1983, April 30, 1984 and April 30, 1985. The change in the description is in accordance with the plea of the assessee that the income declared under the amnesty scheme for the assessment years in question was in respect of understatement of stock. Besides such understated stocks have been duly reflected by entries in the journal. The Revenue''s stand was that in the revised returns filed with the Department for the assessment years 1984-85, 1985-86 and 1986-87, there is no mention about any understatement of stocks. Therefore, it was pleaded that the plea of the assessee should be dismissed as a convenient afterthought. The Tribunal noticed that in the petition dated July 20, 1985, offering Rs. 60 lakhs under the amnesty scheme, the following was described :

"As our accounting year closes on April 30, and the offer being made hereby takes into account the income that has accumulated up to the time of the offer, the disclosure will bring within its amplitude the assessment year 1987-88 also, the previous year relevant to which commences on May 1, 1985, and ends on April 30, 1986. This aspect will be taken care of when estimate for the payment of advance tax is filed for the assessment year 1987-88."

With reference to the materials on record more particularly the format in which the declaration for the amnesty scheme was to be given, it was observed that the assessee was entitled to deletion of the addition made by the Revenue authorities.

Learned counsel for the Revenue submitted that the assessee''s stand was prevaricating and particular stress is laid on a letter dated January 20, 1990, addressed to the Assistant Commissioner of Assessment, Circle-II, Ernakulam, which, inter alia, stated that no records relating to stocks which represented income declared under the amnesty scheme have been kept or are available now. It is further submitted that in the revised returns filed for the assessment years 1984-85, 1985-86 and 1986-87, the assessee had not taken the present stand. Therefore, it is submitted that the Tribunal was not justified in holding that the accumulated income which remained escaped, was hidden under stock. Learned counsel for the assessee submitted that the case of the assessee was not dealt with by the Assessing Officer and the first appellate authority in the proper perspective. In any event, the Tribunal has come to a conclusion on the facts after analysing the factual position and, therefore, no question of law arises.

For appreciating the rival submissions, it is relevant to take note of certain factual aspects highlighted by the assessee. The Tribunal has noticed that in or around October, 1985, the assessee submitted a proposal before the Commissioner of Income Tax for declaration of higher income under the amnesty scheme for a total amount of Rs. 60 lakhs and pleaded for its consideration for the assessment years 1983-84 to 1987-88. Pursuant to the filing of the petition to the Commissioner of Income Tax on October 28, 1985, discussions took place and the assessee furnished a statement on November 4, 1985, indicating the years in which higher income is to be assessed and that was for the assessment years 1984-85 to 1987-88. It is to be noted that unlike the Voluntary Disclosure Scheme, 1975, there was no stipulation in the amnesty scheme for indicating the manner in which the concealed income is kept. That being the position, the assessee had not indicated details when the petition was placed before the Commissioner on October 28, 1985. After discussion and, according to the assessee, at the suggestion of the Commissioner, the spread over was limited from the assessment year 1984-85 onwards. When the assessment for the assessment year 1984-85 was taken out by the Inspecting Assistant Commis- sioner of Income Tax (Assessment), the assesses specifically stated that the declared income was in the form of stock. A copy of the letter is annexure-F in the paper book and under the heading "Disclosure of income" details have been given. Again, in the course of assessment, the assessee had clearly stated that the records were not maintained for stocks and no details were kept which necessitated disclosure to be noted. The Tribunal also noticed that in the journal entries for bringing into record understatement had been effected. An affidavit was also filed to the effect that there was understatement of stock and, therefore, income had escaped assessment which necessitated disclosure under the amnesty scheme. The Tribunal has referred to Form No. A under Rule 3 of the Voluntary Disclosure Scheme, 1975, where in serial No. 5 certain details were required to be given. It compared relevant details which were required to be given under the said scheme and the amnesty scheme. Reference was also made to Circular No. 423 dated June 26, 1985, and Nos. 432, 439, 440 and 441, dated November 15, 1985, more particularly question No. 31 and the answer thereto which read as follows :

"(Q) If an assessee has declared income, would he be required to give evidence of entries in the books of account, etc. ?

(A) He would be well advised to do so."

Obviously, till the clarification was issued, as has been rightly observed by the Tribunal, there was no requirement on the part of the assessee to declare the form or the manner in which the voluntarily disclosed income was kept. Letter dated February 17, 1987, clearly indicated the factual position. By that time entries in the journal had been made. Certain other factual aspects have been noticed by the Tribunal more particularly the fact that more than 90,000 items were being dealt with by the assessee, which rendered maintenance of day-to-day stock register impracticable. It was further noticed that on an estimate basis or otherwise, inventories were prepared ; but no regular records were maintained. That precisely was the reason why the assessee felt that there had been escapement of income in the form of understatement of stock and filed the return under the amnesty scheme. The question and answer in respect of Circular No. 441, dated November 15, 1985, were not available to the assessee and, therefore, the stand of the assessee that it could not indicate the form in which understatement had taken place appears plausible and has been accepted by the Tribunal. The return for the assessment year 1986-87 was filed on June 3, 1987, and by that time, the clarification had come. The returns for the assessment years 1984-85 and 1985-86 were filed on January 21, 1986. Entries were passed in the books of account bringing on record the understatement of stock on April 30, 1986, relevant to the assessment year 1987-88. When the petition was given to the Commissioner on October 25, 1985, some details were available and with bona fide impression the statements were filed.

As the recital of the factual position would go to show, the Tribunal had considered relevant materials. The conclusions arrived at by it are factual. It cannot be said to be a case where relevant materials were kept out of consideration and/or irrelevant materials were taken into account for arriving at a conclusion. That being the position, no question of law arises.

We, therefore, decline to answer the questions which are factual in nature. They are to be treated as answered in favour of the assessee and against the Revenue.