Commissioner of Income Tax vs Prima India Products

Badar Durrez Ahmed, J.—This reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ''the said Act''), at the instance of the revenue, relates to the assessment year 1982-83. The following questions of law have been referred to this Court by the Income Tax Appellate Tribunal:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the Commissioner''s order u/s 263 without reversing the Commissioner''s finding that the Income Tax Officer had failed to enquire into the source of deposits / investments made during the relevant accounting period and hence the assessment order was erroneous and prejudicial to the interests of revenue ?

Whether, on the facts and in the circumstances of the case, it was permissible to the Tribunal to hold for the first time that the assessed possessed Rs. 2,40,000/- on 31.3.1981 and that the deposits / investments made by the assessed and its partners during the accounting period relevant to assessment year 1982-83 came out of the aforesaid sum of Rs. 2,40,000/- ?

Whether, the Tribunal was right in holding that the assessed having moved a petition before the Settlement Commission and averring therein that the investments as detailed in Annexure-I to the said petition came out of Rs. 2,40,000/- claimed to be with the assessed as on 31.3.1981, there was no need for the examination of investments and their sources in the proceedings for assessment year 1982-83 ?

The facts are that the assessment in this case was completed u/s 143(3) of the said Act on 29.03.1985 on a total income of Rs 82,220/-. A search was conducted at the business premises-cum-residence of the assessed firm and the partners on 16.02.1982. During the search, various documents, including investments in the form of FDRs and cash, etc. were found. It was also found that the assessed firm had loans and advances to the extent of Rs 2,29,000/-, additions and alterations in the house property to the extent of Rs 1 lakh, cash to the extent of Rs 72,854 and bank balance of Rs 69,602/- which had not been declared to the department. It was noted that the investment in the FDRs, etc. were in the names of various partners of the firm, namely, Smt Santosh Rani, Prince Mohan Aggarwal and Shri Dinesh Kumar Aggarwal. During the course of the assessment proceedings of the firm, the Income Tax Officer had made certain inquiries regarding the source of investments but, according to the Commissioner, failed to take any action and did not assess the said amount which was seized during the search operations in the hands of the firm. According to the Commissioner, the assessment order was erroneous and as such was prejudicial to the interest of the revenue. Consequently, a notice u/s 263 of the said Act was issued. A written reply was submitted by the assessed through its advocates on 13.12.1986. In the said letter dated 13.12.1986, it was contended by the assessed that the action u/s 263 of the said Act was without jurisdiction as the basic conditions specified therein were not satisfied. The assessor�s plea was that an application had been moved before the Settlement Commission wherein a certain amount of cash, FDRs, etc. belonging to the assessed firm relating to the assessment years 1980-81 and 1981-82 had been disclosed. It was contended on the part of the assessed that the same did not form part of the records of the proceedings for the assessment year 1982-83 which is the subject assessment year.

However, after considering the objections raised by the assessee, the Commissioner did not agree with the assessor�s contentions and passed the order dated 19.02.1987, whereby the Commissioner set aside the assessment made by the Income Tax Officer and directed that he should make the assessment afresh after proper examination and investigation regarding the source of investments made in various names by the firm during the relevant accounting period and after allowing proper opportunity of hearing to the assessed to prove the contention that the investment was out of undeclared income of earlier years. The commissioner had considered the letter dated 16.02.1985 which had been written by the assessed to the Income Tax Officer during the assessment proceedings pertaining to the investments made by the partners. In that letter, it had been submitted that the following investments had been made in the names of the partners:

Santosh Rani Rs. 5,000/- FDR dated 20.11.1981 Rs. 80,000/- Bank deposit on 06.01.1982 Rs. 20,000/- loan on 09.02.1982

Prince Mohan Aggarwal; Rs. 25,000/- loan on February, 1982

Dinesh Kumar Aggarwal. Rs. 10,000/- FDR on 20.11.1981.

It was stated in the said letter dated 06.02.1985 that the total investments to the tune of Rs 1,40,000/- in the year under consideration were made out of the accumulated come out of the undisclosed sources of the firm as on 31.03.1981. It was also stated in the said letter that this fact had been disclosed before the Settlement Commission and the same amount had been considered for tax in the previous years. It was also stated that except these investments, there were no fresh investments in the partners'' accounts / names in the year under consideration.

The Commissioner noted in his order that a perusal of the assessment record shows that the Income Tax Officer accepted this contention of the assessee, prima facie, without verifying or investigating or making any inquiry into the contention raised. The Commissioner was also of the view that there was nothing on record to prove the nexus between the undeclared income by the assessed prior to 1981 and the investments made in the names of the partners during the relevant accounting period. The Commissioner was also of the view that the Income Tax Officer was required to examine the contention of the assessed and to investigate the genuineness and veracity of the Explanation offered regarding the source of investments during the relevant accounting year in the names of the partners alleged to be out of undeclared income in respect of the earlier years. It is in this background that the Commissioner had passed the said order dated 19.02.1987 u/s 263 of the said Act.

The said order has been set aside by the Tribunal in the assessor�s appeal being I.T.A. No. 1242/Del/87 dated 08.04.1988. The Tribunal examined the application made by the assessed before the Settlement Commission and noted the terms of settlement offered by the assessee. The same are as under:

i) That it be accepted that the undisclosed income of the assessed firm for the years up to and including the year ended 31.3.1981 amounted of Rs. 2,40,000/- and that the said amount of Rs. 2,40,000/- was available as on 31.3.81 and thereafter in the manner detailed in Annexure I hereto.

ii) That the aforesaid amount of Rs. 2,40,000/- be assessed in the hands of the assessed firm by spreading the same equally over the assessment years 1976-77 to 1981-82 (both inclusive), i.e. an additional amount of Rs. 40,000/- be assessed in the hands of the assessed firm, in each of the above mentioned assessment years, over and above the income disclosed by the books of accounts. Further, that the provisions of Section 245E of the Act be invoked so far as the assessment years 1976-77 to 1979-80 (both inclusive) are concerned, so as to give effect to the aforesaid proposal.

iii) That it be accepted that the cash amounts available as on 31.03.1981, as detailed in Annexure I hereto, were available for making investment advances in the period subsequent to 31.3.1981.

iv) That it be accepted that the assessed firm did not own as on 31.3.1981, any assets other than the assets disclosed in its balance sheet as on 31.3.1981 and the above mentioned undisclosed assets amounting to Rs. 2,40,000/-.

v) That the assessed firm be granted the benefit of registration / continuation of registration for each of the assessment years under consideration.

vi) That interest and penalties chargeable / imposable under the various provisions of Income Tax Act, 1961, be waived for each of the assessment years under consideration, and further that the assessed firm and the partners therein be granted immunity from prosecution under the provisions of the Income Tax Act, 1961 and / or any other law for the time being in force in relation to the various matters covered by the instant application for settlement.

vii) That the assessed firm and the partners therein be granted installments spread over a period of 3 years for making payment of the taxes ultimately determined as payable upon disposal of the instant application for settlement.

The Annexure I referred to in the terms of the settlement, which carries the heading "Details of availability of undisclosed funds as on 31.3.1981", so much as is relevant for the present case, reads as under:

III.

Amount available in Cash with the firm as on 31.3.81 which was invested in banks, loans etc. in the previous year relevant to the A.Y. 1982-83 as under:

a)

Smt. Santosh Rani

1)

F.D.R. dt. 20.11.81

5,000

2)

Bank Deposit on 6.1.82

80,000

3)

Loan to Navin Jain Metal Udyog on 9.2.82

20,000

1,05,000

b)

Sri Prince Mohan.

1)

Loan to Navin Jain Metal Udyog on 11.2.82

25,000

25,000

c)

Shri Dinesh Kumar

F.D.R. Dt. 20.11.81

10,000

10,000

1,50,000/-

2,31,000/-

Rounded off to Rs. 2,40,000/-

After considering the said offer for settlement before the Settlement Commission and the other surrounding circumstances, the Tribunal came to the following conclusion:

In view of the question, about of facts, admitted by the assessed as to undisclosed income of the assessed firm for the year up to and including the year ending on 31.3.1981 about the said amount of Rs. 2,40,000/- and also further the assessed that the said sum of Rs. 2,40,000/- was available as on 31.3.1981 and thereafter in the manner detailed in Annexure I, the same has yet to be taken as proved. The contents of annexure-I, to the order of the learned Commissioner of Income Tax, as such need no further examination / investigation. Since the assessed has already same to the Revenue Department, in this case the settlement Commission, with the disclosure. The investment of Rs. 2,40,000/- made in differents case of the partner of the assessed firm as such is held to have been proved. The impugned order stands cancelled on merits and on facts, with the natural consequent flowing out of these findings to follow.

The appeal succeeds and stands allowed.

In this context, when we examined the questions that have been referred to us, it was apparent that the concern of the Commissioner at the time of issuing the notice u/s 263 and ultimately the order u/s 263 was with regard to the nexus between the undeclared income of the assessed prior to 1981 and the investments made in the names of the partners during the accounting period relevant to the assessment year under consideration. It is obvious that if there was such a nexus, then there would be no occasion to pass the order u/s 263 of the said Act. It is because of the fact that the Commissioner felt that there was no such nexus that a further inquiry was necessary on the part of the Income Tax Officer. However, the Tribunal has taken note of the fact of the disclosures before the Settlement Commission as also Annexure-I to the said application for settlement. The said annexure clearly reflects the FDRs, bank deposits and loans mentioned in the letter dated 06.02.1985 issued by the assessed to the Income Tax Officer. It is in this context that the Tribunal came to the conclusion that in view of the contents of Annexure-I, no further examination was required by the Income Tax Officer. The obvious conclusion is that the Tribunal was satisfied that there was a nexus between the undeclared income which had been disclosed before the Settlement Commission and the investments made in the names of the partners during the accounting period relevant to the assessment year under consideration. It is apparent that by virtue of this, the Commissioner''s finding that the Income Tax Officer had failed to inquire into the source of the deposits/investments stood reversed by necessary implication. Consequently, question No. 1 would have to be answered in favor of the assessed and against the revenue.

With regard to question No. 2, we are of the opinion that the same also has to be answered in favor of the assessed and against the revenue. This is because of the very nature of the provisions of Section 263 of the said Act. While the Commissioner, issuing an order u/s 263 requiring further investigation, has to merely raise doubts and suspicion based on material facts, the Tribunal, if it reverses such an order, has to take a stand and has to return a finding as to whether the said doubts were substantiated or not. It is in this context that the Tribunal in the present case came to the conclusion that the investments made by the assessed and its partners during the accounting period relevant to the current assessment year (1982-83) came out of and had a direct nexus with the sum of Rs. 2,40,000/- as had been disclosed by the assessed before the Settlement Commission.

Question No. 3 also stands answered in favor of the assessed and against the revenue in view of the discussion above. The reference, Therefore, stands answered accordingly.