Commissioner of Income Tax vs Saraf Trading Co. and Others

Heard Sri Shambhu Chopra, learned counsel for the appellant for admission. None is present on behalf of the respondent. These appeals have come up for admission under sub-section (2A) of section 260A of the Income-tax Act, 1961 (hereinafter referred to as "the Act, 1961").

These appeals have arisen at the instance of the Revenue aggrieved by the order dated July 13, 2006, passed by the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, in Income Tax Appeal No. 558/Alld/05 and Income Tax Appeal No. 617/AM/05, dismissing the same. Block assessment period in all the aforesaid appeals is the same, i.e., April 1, 1986, to February 12, 1997.

The appellant in Income Tax Appeal No. 81 of 2007, has formulated the following five questions contending that the same constitute substantial questions of law arising from the order impugned in this appeal passed by the Tribunal :

"1. Whether the hon''ble Income-tax Appellate Tribunal has erred in law in holding that the peak of unexplained debit of Rs. 35,81,988 in the assessment year 1995-96 would be subsumed in the higher debit of Rs. 48,01,158 in the assessment year 1996-97 and in thereby deleting the addition on account of the unexplained peak credit of Rs. 35,81,988 for the assessment year 1995-96, without appreciating the ratio of the decision of the hon''ble Madras High Court in the case of Commissioner of Income Tax Vs. K. Palaniappan, (2000) 242 ITR 719 in which the hon''ble High Court has held that the concealed income detected in an earlier year cannot be a source of any credit entry for the subsequent year as otherwise the purpose of the provisions of section 68 of the Income-tax Act would be defeated ?

Whether the hon''ble Income-tax Appellate Tribunal has erred in law in allowing the peak credit of the assessment year 1995-96 to be set off against the peak credit of the assessment year 1996-97 without appreciating that the hon''ble Income-tax Appellate Tribunal in its order dated February 13, 2004, had never directed that the benefit of inter-year peak credits should be allowed to the assessee ?

Whether the hon''ble Income-tax Appellate Tribunal has erred in law in not appreciating that from the accounts prepared in pursuance of the aforesaid order of the hon''ble Income-tax Appellate Tribunal, it was never established that the peak credit of the assessment year 1995-96 was available for induction in the assessment year 1996-97 ?

Whether the hon''ble Income-tax Appellate Tribunal has erred in law in holding that the peak of the unexplained debits in the assessment year 1996-97 will explain the peak of unexplained credits in the subsequent assessment year 1997-98 without giving any finding that the amount representing the peak debits of the assessment year 1996-97 were available with the assessee in the assessment year 1997-98 and without appreciating the ratio of the decision of the hon''ble Commissioner of Income Tax Vs. K. Palaniappan, (2000) 242 ITR 719 referred to above ?

Whether the hon''ble Income-tax Appellate Tribunal has erred in law in not appreciating that consequent to its order the total income of the assessee has become less than the undisclosed income shown by the assessee in the block return which is in violation of the provisions of section 156BC expressly debarring the assessee from revising the block return ?"

In Income Tax Appeal No. 332 of 2012-CIT v. Fertilizers Traders Gandhi Nagar Golghar, the questions formulated are the same as above.

In Income Tax Appeal No. 160 of 2012-CIT v. Sarraf Trading Co. Ltd., the questions formulated are as under :

"1. Whether admittedly neither any ground having been raised regarding non-issuance of notice under section 143(2) of Income-tax Act, 1961 before the Assessing Officer or before the Commissioner of Income-tax (Appeals) nor there being any decision against the assessee on the effect of non-issuance of notice under section 143(2), the Tribunal was not justified in permitting the additional ground of the assessment order being illegal on account of non-issuance of notice under section 143(2) of Act, 1961 ?

Whether the Income-tax Appellate Tribunal was right in law in allowing the assessee to admit the additional ground of appeal, especially when the assessee has filed only cross-objection and was not in appeal ?

Whether in view of the facts and in the circumstances of the case, the hon''ble Income-tax Appellate Tribunal was right in law in allowing the assessee to raise additional grounds of appeal, which does not arise from the order of the Commissioner of Income-tax (Appeals), when it has filed only cross-objections ?

Whether the Income-tax Appellate Tribunal was right in following rule 11 and rule 22 of the Income-tax (Appellate Tribunal) Rules, 1963, to allow the additional ground of appeal, which is contrary to the express provisions of section 253(4) of the Income-tax Act, 1961 ?

Whether, in view of the facts and in the circumstances of the case, the hon''ble Income-tax Appellate Tribunal was right in law in admitting additional ground of appeal, especially when the assessee is not in appeal, after a period of one and a half year, without passing any order on the issue of condonation of delay ?"

In Income Tax Appeal No. 96 of 2003-CIT v. Fertilizer Traders, the questions formulated are the same as in Income Tax Appeal No. 160 of 2012.

Question formulated in Income Tax Appeal No. 87 of 2007-CIT v. Sarraf Trading Co. and Income Tax Appeal No. 333 of 2012-CIT v. Fertilizer Traders, is common and is reproduced below :

"Whether the Income-tax Appellate Tribunal has erred in law in quashing the order of the Assessing Officer under section 158BC/154/251 dated September 12, 2003, relying on their earlier order dated February 13, 2004, without appreciating that the order of the Income-tax Appellate Tribunal dated February 13, 2004, has not been accepted by the Department and appeal under section 260A has been filed which is sub judice ?"

Brief facts necessary to understand the dispute may be stated as under :

The assessee, M/s. Sarraf Trading Co., Gandhi Nagar, Gorakhpur (hereinafter referred to as "M/s. Sarraf Trading Co."), deals in fertilizers and is a partnership firm. Search and seizure operation was conducted on February 12, 1997, under section 132(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act, 1961"). Several documents along with computer print outs were found and seized during the course of search and seizure operation. Similar search and seizure operation on the same day was conducted at the business premises of the sister concern of the assessee, i.e., M/s. Fertilizers Traders, which also deals in fertilizers. Original block assessment was completed on February 24, 1999, under section 158BC(c) of the Act, 1961 for both firms, i.e., the assessee and its sister concern together and bifurcated at Rs. 66,71,000 and Rs. 1,14,39,192, between M/s. Fertilizers Traders and the assessee, respectively, against the undisclosed return income of Rs. 45,47,560 and Rs. 78,09,940.

The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Varanasi (hereinafter referred to as "the CIT(A)"), who, vide Order dated May 18, 1999, granted partial relief to both the firms to the tune of Rs. 34,94,203, which included reduction in peak of Rs. 1,79,57,409 by Rs. 31,89,238.

The Assessing Officer noticed arithmetical error in calculating the peak credit of Rs. 1,79,57,411 as on March 31, 1996. He rectified the block assessment order under section 154 of the Act, 1961, vide order dated October 4, 2000, working out the peak at Rs. 3,90,71,218. After deduction of relief allowed by the Commissioner of Income-tax (Appeals), vide order dated May 18, 1999, the Assessing Officer revised bifurcated income at Rs. 1,23,96,279 as against Rs. 46,26,198. In the case of M/s. Fertilizers Traders, revised income in respect to the assessee came to be Rs. 2,12,88,936 as against Rs. 79,44,989.

Again, the assessee preferred an appeal against the order dated October 4, 2000, passed by the Assessing Officer under section 154 of the Act, 1961, being Appeal No. 263/CC/GKP, before the Commissioner of Income-tax (Appeals), contending that the original block assessment order has merged with the appellate order, leaving no authority or jurisdiction to the assessing authority to make any modification with respect to the income already been assessed. Alternatively, it was contended that the revised block peak has been calculated erroneously. The issue of merger of assessment order in the appellate order was answered by the Commissioner of Income-tax (Appeals), against the assessee, vide his order dated August 14, 2002, but on the point of working of peak, he remanded the matter to the Assessing Officer with certain directions.

The Assessing Officer, allegedly, complied with the appellate order dated August 14, 2002, vide his order dated September 12, 2003, reiterated his determination of income as was done, vide order dated October 4, 2000.

In the meantime, the Department filed appeals before the Tribunal against the Commissioner of Income-tax (Appeals)''s order dated May 28, 1999, i.e., Income Tax Appeal No. 762(Alld)/1999 and 763(Alld)/1999.

The assessee as well as its sister concern filed cross-objections. Two more appeals were filed by the assessee and its sister concern, assailing the Commissioner of Income-tax (Appeals)''s order dated August 14, 2002, i.e., Appeal No. 304(Alld)/2002 and 305(Alld)/2002.

All these appeals have been decided by the Tribunal by a common order dated February 13, 2004.

The Tribunal, while deciding the Department''s appeal, restored the issue relating to computation of part of undisclosed income with certain directions. Two appeals preferred by the assessee and its sister concern were allowed and order dated October 4, 2000, passed by the Assessing Officer and August 14, 2002, passed by the Commissioner of Income-tax (Appeals) were quashed.

Directions given by the Tribunal for computation part of undisclosed income, to be considered by the Assessing Officer are as under :

"(i) Each credit/debit appearing in the computer print outs for the financial years 1994-95 and 1995-96 and the computer print outs for the financial year 1996-97 (as segregated by the Assessing Officer himself at the original stage of computation of undisclosed income) shall be arranged chronologically and date-wise.

(ii) From the aforesaid figure the day-to-day cash book should be prepared (as is shown by the assessee) so as to find out the negative cash balance as on different dates.

(iii) Thereafter, in order to work out the computation of the undisclosed income, the receipts as well as the payments as would be appearing in the cash shall be arranged date-wise chronologically.

(iv) While making such arrangements, the Assessing Officer, so far as the financial year 1996-97 is concerned, shall exclude the amounts, which had already been segregated by him in the copies of computer print outs as had been available to the assessee on the grounds that segregated items were verifiable from the manual account.

(v) The undisclosed income so worked out in the aforesaid manner shall be allocated between the two firms in the same ratio as had been done earlier at the time of the block assessment, vide order dated February 24, 1999."

The Assessing Officer completed the assessment under section 158BC/154/251/254 of Act, 1961, vide order dated October 20, 2004, for the block period and assessed the unexplained peak of debit and credit of the assessee and its sister concern as under :

The aforesaid amount was divided in the ratio 63.2 per cent and 36.8 per cent between the assessee and its sister concern, i.e., at Rs. 80,94,013 and Rs. 47,12,970, respectively.

There against, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), and, vide order dated September 20, 2005, the Commissioner of Income-tax (Appeals) restricted addition of peak debit to Rs. 48,01,158 for the assessment years 1995-96 and 1996-97. It confirmed the peak credit of Rs. 31,94,789 for the assessment year 1997-98 and deleted the addition of Rs. 17,50,000 for the assessment year 1997-98, which was included by the Assessing Officer, first time, in order dated October 20, 2004, observing that the aforesaid amount represented unexplained debit balance in the account of M/s. Hari Prasad Gopi Kishan, noticed by the assessing authority during assessment.

The Commissioner of Income-tax (Appeals) gave its reasons for making alteration in the peak debit for the assessment years 1995-96 and 1996-97 and maintaining the peak credit for the assessment year 1997-98, observed as under :

"It may be recapitulated that the first two years, i.e., the assessment years 1995-96 and 1996-97, the receipts exceeds the payment meaning thereby that the undisclosed income takes care of the payments made by the assessee. However, in the last year, i.e., the assessment year 1997-98 there is excess of payment by Rs. 31,94,289 which means that in this year the undisclosed income of Rs. 48,01,158 was not sufficient to cover the payment made by the assessee and the assessee made payments far in excess of his undisclosed income of the earlier two years and determined the peak credit. In other words, the amount of undisclosed amount of Rs. 48,01,158 was exhausted and the assessee further invested Rs. 31,94,789 which was to be added separately. We are engaged in computing the undisclosed income and unexplained credit appearing in the books of the assessee. If in all the three years, there was excess of receipts over payments then there would have been one common peak credit for all the years but the computation even from the duplicate books reveals that there was unexplained investment in the third year, of different fashion which further merits addition. I am unable to agree with the learned counsel that there should be one peak credit because the treatment of debit and credit entries in similar way would be against the principles of accountancy. Therefore, the Assessing Officer is directed to restrict the addition of peak credit of Rs. 48,01,158 and Rs. 31,94,789."

The Department as well as the assessee both preferred appeals which have been decided, vide judgment dated July 13, 2006, impugned in this appeal.

It is contended that the Tribunal has erred in law by observing that the higher undisclosed income would take care of lower peak credit of the previous year. It is not correct and contrary to what has been said by the Madras High Court in Commissioner of Income Tax Vs. K. Palaniappan, (2000) 242 ITR 719 .

Having gone through the aforesaid judgment, we do not find that it has laid down such a proposition of law at all. Therein, the assessee, K. Palaniappan, an individual, submitted a declaration on December 29, 1975, under the Voluntary Disclosure of Income and Wealth Act, 1976, declaring an income of Rs. 50,000 in different years from 1968-69 to 1972-73 at Rs. 10,000 per year. The declaration was received in the Office of the Commissioner of Income-tax after cut-off date, therefore, it was not only accepted by the Department but it also refunded the tax deposited by the assessee. The Income-tax Officer initiated assessment proceedings in the assessment year 1976-77, requiring the assessee to explain the source of credit entry of Rs. 50,000, made on December 29, 1975. He ultimately included a sum of Rs. 50,000 in the income and the order of the Assessing Officer was confirmed by the Commissioner of Income-tax (Appeals). The Tribunal, however, reversed the decision of the Assessing Officer and the Commissioner of Income-tax (Appeals) and one of the grounds was that assessment record of the previous year gives an impression that there might be possibility of some income escaped assessment in those years. In appeal, the Madras High Court referred to section 68 of the Act, 1961, whereunder onus lies upon the assessee to offer explanation whether any sum is found credited in the books of account and if the assessee has given no explanation or his explanation is not found satisfactory, the same credit is liable to be treated to be under taxed income of the assessee of that previous year. The High Court held that the Tribunal has proceeded on assumption, conjectures and surmises, that there may have been some escaped income. This is nothing but a sheer possibility based on no material on record. The court noticed that various courts have taken a view, where certain additions were made in the earlier years, that would constitute source for the credit entry in subsequent years. But, having said so, found that in the case which was came up for consideration before the Madras High Court, there was a concealed income which was neither disclosed in the assessment proceedings nor in any other ancillary proceedings for any earlier year and, therefore, there can be no occasion to constitute it a source for subsequent credit entry. The court said that the explanation of the assessee that source credit entry of undisclosed income of the earlier years is included then it will open doors of tax evasion and purpose behind the enactment of section 68 will be easily defeated as it will be open to anyone to point out that the credit entry came from some undisclosed and unassessed income of prior year.

That is not the case hereat.

Block period in question is from April 1, 1986, to February 12, 1997. Entire summary chart was available before the Tribunal. Therefore, in the present case, the Madras High Court''s decision which distinguishes other decisions taking different view, has no application and the view taken by other courts as noticed by the Madras High Court would be applicable in the case in hand. It reads as under (page 726 of 242 ITR) :

"That apart, the courts have taken a view that where certain intangible additions were made in the earlier years, that would constitute the source for the credit entry in subsequent year, but, however, we are of the opinion that a concealed income which was neither disclosed in the assessment proceedings nor in any other ancillary proceeding for any earlier year can hardly constitute a source for a subsequent credit entry and if the explanation of the assessee that the source of the credit entry is the undisclosed income of the earlier years is accepted, it will open the doors to tax evasion and the purpose behind the enaction of section 68 will be easily defeated as it will be open to anyone to point out that the credit entry came from some undisclosed and unassessed income of prior year."

Issue, therefore, raised therein has been decided in the facts of the case in hand.

We may also notice that against the Tribunal''s earlier order dated February 13, 2004, the Department filed an appeal under section 260A before this court. We are informed that these appeals preferred by the Department have also been dismissed by this court. These appeals, i.e., I.T.A. No. 179 of 2004 and other connected appeals have been dismissed by a Division Bench, vide judgment dated December 13, 2013. Therein the court in paragraphs 14 and 15 has said:

"14. Regarding the peak theory, it may be mentioned that the peak theory was defined in the Sampath Iyengar''s Law of Income-tax, volume 3, ninth edition, page 3547. Accordingly, ''Peak credit'' theory-One of the commonest defects of an assessee, where a single credit or number of credits appear in the books in the account of any particular person side by side with a number of debits is that they should all be arranged in serial order, that a credit following a debit entry should be treated as referable to the latter to the extent possible and that, not the aggregate but only the ''peak'' of the credit should treated as own explained. To give a simple example, suppose there are credits in the assessee''s book in the account. A or Rs. 5,000 each on October 1, 1990, and again on November 5, 1990, but there is a debit by way of repayment shown on October 27, 1990, the explanation will be that the credit appearing on November 5, 1981, has or could have come out of the withdrawal/repayment on October 27, 1981. This plea is generally accepted as it is logical and acceptable (whether the creditor is a genuine party or not), provided there is nothing in the material on record to show that a particular withdrawal/repayment could not have been available on the date of the subsequent credit.

A refinement or extension of the plea occurs where the credits appear not in the same account but in the accounts of different persons. Even then, if the genuineness of all the person is disbelieved and all the credits appearing in the different account are held to be the assessee''s own moneys, the assessee will be entitled to set off and a determination of the peak credit after arranging all the credits in the chronological order."

In view of the discussion made and the proposition of law referred, the questions aforesaid are answered against Revenue. Appeals are hereby dismissed.