Calcutta High Court
Commissioner Of Income-Tax vs Soorajmal Nagarmull on 22 December, 1988
Equivalent citations: [1990]181ITR340(CAL)
JUDGMENT Ajit Kumar Sengupta, J.
1. At the instance of the Commissioner, the following two questions have been referred to this court under Section 256(2) of the Income-tax Act, 1961 ("the Act"), for the assessment year 1957-58 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal ignored relevant evidence and relied on irrelevant materials in holding that the jewellery found in the premises occupied by the assessee as its business premises did not belong to the assessee, and in that view upholding the order of the Appellate Assistant Commissioner deleting the addition of the value of the jewellery included in the assessment of the assessee ?
(2) Whether, on the facts and in the circumstances of the case, and having regard to the fact that the Appellate Assistant Commissioner had upheld the validity of the proceedings initiated under Section 147(a) of the Income-tax Act, 1961, and the assessee did not challenge before the Tribunal such finding of the Appellate Assistant Commissioner, the Tribunal misdirected itself in law in holding that the expenditure incurred in purchase of loom-hours could not be disallowed in the assessment made in pursuance of such proceedings even though such expenditure was in the nature of capital expenditure ?"
2. In our view, the questions have not been properly framed by the Revenue. They should be reframed as follows :
"(1) Whether the Tribunal ignored relevant evidence and relied on irrelevant materials in holding that the jewellery found in the course of search and seizure did not belong to the assessee and in that view upholding the order of the Appellate Assistant Commissioner deleting the addition of the value of the jewellery included in the assessment of the assessee ?
(2) Whether the expenditure incurred in purchase of loom-hours is revenue expenditure allowable as deduction and whether such expenditure can be disallowed in the assessment reopened under Section 147(a) of the Income-tax Act, 1961 ?"
3. The facts relating to the first question are that the original assessment for the assessment year 1957-58 was completed on June 22, 1962. Premises Nos. 61, 57, Harrison Road, and 212, Cornwallis Street, were searched by the Customs Department and the officers of the Income-tax Department from July 4, 1956 to July 7, 1956. The business of the assessee was carried on from the premises No. 61, Harrison Road (Mahatma Gandhi Road). During the search of the premises, No. 61, M. G. Road, a large quantity of jewellery was found therein. The assessment was reopened under Section 147(a) of the Act on the ground that income had escaped assessment.
4. The Income-tax Officer wrote a letter to the assessee to show cause why the value of the jewellery should not be treated as the income of the assessee. The assessee denied that the jewellery was found in the business premises of the assessee. It pleaded that the jewellery was found in the residential portions of some of the partners of the assessee-firm. Shri D. K. Jalan, one of the partners of the assessee, informed the Income-tax Officer that all the Jalan partners resided in the premises and that the guddy of the assessee used to be in the premises No. 61, M. G. Road. He admitted that he resided in a portion of the premises and that the entire office of the firm was situated therein. He further stated that substantial portion of the said jewellery belonged to the firm. All other partners denied that any jewellery was found in the portion occupied by them. The Income-tax Officer rejected the explanation of the assessee that the jewellery was not found in the premises of the assessee for the reasons given by him in his order. He held that the jewellery in question was purchased out of the undisclosed income of the assessee. He estimated the value of the jewellery at Rs. 6 lakhs and made an addition thereof to the income of the assessee.
5. In appeal before the Appellate Assistant Commissioner, the assessee objected to the reopening of the assessment under Section 147 but that objection was overruled by the Appellate Assistant Commissioner. The assessee next objected to the addition of Rs. 6 lakhs to its income. It was urged that only a part of the premises of 61, M. G. Road, was used as business premises and that no jewellery was found in the premises of the assessee-firm. It was urged that the value of the jewellery found in the portion occupied by the partners was included in their assessments and reference was made to the assessment order of the partner, Shri D. N. Jalan. The Appellate Assistant Commissioner accepted the assessee's contention and deleted the addition of Rs. 6 lakhs.
6. The learned departmental representative submitted that the premises No. 61, M. G. Road, was used as the business premises of the assessee and the jewellery was found therein. He pointed out to the search warrants as referring to the premises No. 61, M. G. Road, as the business premises of the assessee. He urged that it was for the assessee to prove that the jewellery did not belong to the assessee-firm. According to him, the departmental case was that the partners did not reside in the aforementioned premises. He also relied upon the admission of a partner, Shri D. N. Jalan, in support of his contention. He urged that the partners were collectively responsible for proving that jewellery did not belong to the firm and that they failed to do so. He urged that the Appellate Assistant Commissioner upheld the reopening of the assessment and he could not come to the conclusion that the addition of Rs. 6 lakhs was not justified. He further urged that the assessee made a disclosure before the Income-tax Investigation Commission of the firm having purchased jewellery worth Rs. 25 lakhs for the marriage of the members of the partners' families.
7. Learned counsel for the assessee argued that there was no bar for the Appellate Assistant Commissioner to delete the addition even if the reopening of the assessment was not held invalid. According to him, only a portion of the premises No. 61, M. G. Road, was used as business premises of the assessee and the remaining portion was occupied by the partners and that the jewellery was found In the portion occupied by the partners. He also referred to search-lists in support of his contention. It was also urged that an addition had been made to the value of the jewellery in the hands of the partner, Shri D. N. Jaian, on the ground that the same was found in the rooms occupied by the wife and his mother.
8. Our attention has been drawn to the finding of the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was satisfied that, according to the search-lists, no jewellery was found in the premises of the assessee-firm. He also found that the partners and their wives individually disclosed jewellery worth large sums in their respective assessments. The Appellate Assistant Commissioner also found that the Income-tax Officer could not satisfactorily show that the jewellery belonged to the assessee-firm or that it was purchased or acquired during the previous year. There was no evidence before the Income-tax Officer to come to a finding either with regard to valuation of the jewellery or with regard to acquisition and possession of the said jewellery even in the course of search and seizure. This fact has not been challenged before the Tribunal. The Tribunal also found that, according to the search-list, the jewellery was found in the room occupied by Smt. Krishna Jalan, wife of Shri D. N. Jalan, and the room occupied by the widow of the late Shri B. N. Jalan and, accordingly, no inference could be drawn that because the partner or partner's wife was having jewellery in his or her possession, it must be belonging to the assessee-firm. The Tribunal, after considering the facts and circumstances of the case, held as follows :
"Premises No. 61; Mahatma Gandhi Road, were searched in accordance with the directions issued by the Commissioner. The search-lists of which copies have been produced before us show that the jewelleries were found in the rooms of Smt. Krishna Jalan and the widow of the late Shri B. N. Jalan. Smt. Krishna Jalan is the wife of partner, Shri D. N. Jalan, and the other lady is his mother. The assessee denied that the jewelleries were found in its business premises. It pleaded that the same were found in the portions of the building occupied by some partners of the firm. We are unable to agree with the learned representative of the Department that from the fact that the business of the assessee was carried on from premises No. 61, Mahatma Gandhi Road, an inference can be drawn that the whole of the building was used for the purpose of the business of the assessee or that no partner resided therein. The building of premises No. 61, Mahatma Gandhi Road, is a four-storeyed one and it has been urged by the assessee that its business was confined to the ground floor of the building. It was for the Department to establish that the whole of the premises No. 61, Mahatma Gandhi Road, was the business premises of the assessee. If such a fact were established, then only an inference could be drawn that no part thereof was used for purposes of residence of any partner. In the search-lists, specific reference was made to the persons in whose possession the rooms were, wherein the jewelleries were found. The Department tried to bring to tax the value of the jewelleries in the hands of partner, Shri D. N. Jalan, on the grounds that the jewelleries found in the rooms occupied by his wife and his mother, the widow of the late Shri B. N. Jalan, belonged to him. The addition was made after reopening the assessment of Shri D. N. Jalan but the Tribunal cancelled the reopening of the assessment. It is, therefore, difficult to place any value on the statement of Shri D. N. Jalan that substantial jewelleries belonged to the assessee-firm. The earlier disclosure of the firm before the Income-tax Investigation Commission of the purchase of jewelleries for Rs. 25,00,000 for the marriage of the members of the families of the partners does not help the Department in connecting the jewelleries in question with the assessee. We, therefore, agree with the Appellate Assistant Commissioner and affirm his action."
9. In view of such finding, we are of the view that it cannot be said that the Tribunal relied on any irrelevant material in holding that the jewellery found in the premises in question did not belong to the assessee-firm. It was for the Department to prove that any part of the jewellery found in possession of the partner or his wife, in fact, belonged to the assessee. Merely because the partners were also residing in the said premises in question where the assessee-firm was also carrying on the business, the jewellery found in the course of such search and seizure cannot be held to be belonging to the assessee-firm. On the contrary, it would appear that the seizure was made from the possession of the partners and their wives and not from the place where the assessee-firm was carrying on the business. This would, prima facie, raise a presumption that those who are found in possession are the owners of such jewellery unless that presumption is rebutted by cogent evidence which, in fact, was not there. The Tribunal was justifed in coming to the conclusion that the value of the jewellery could not be added to the income of the assessee-firm.
10. For the reasons aforesaid, we answer the first question, as reframed, in the negative and in favour of the assessee.
11. So far as the second question is concerned, it is now concluded by a decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. It may be mentioned that in the original assessment, this expenditure was allowed as revenue expenditure, but in the reassessment proceedings, the said expenditure was sought to be disallowed on the ground that it is capital expenditure. In view of the decision of the Supreme Court in Empire Jute Co. Ltd.'s case [1980] 124 ITR 1, holding that such expenditure is revenue expenditure, the Income-tax Officer was justified in allowing the expenditure as revenue expenditure in the original assessment. Accordingly, the question is answered in favour of the assessee by saying that the expenditure incurred in purchase of loom-hours is revenue expenditure allowable as a deduction and such expenditure cannot be disallowed in the assessment reopened under Section 147(a).
12. There will be no order as to costs.
J.N. Hore, J.
13. I agree.