Madras High Court
P.S. Veerappa vs Commissioner Of Income-Tax, Tamil Nadu on 3 September, 1980
JUDGMENT Ramaswami, J.
1. The assessment of the assessee, a cine actor, for the assessment year 1960-61 was reopened under s. 147(a) of the I.T. Act, 1961. During the previous year ending December 31, 1959, relevant for the assessment year 1960-61, the assessee had shown as having raised the following hundi loans :
Rs.
1. From Dwarkadas Chaithram 20,000
2. From Seth Jethanand Moolchand 20,000
3. From Seth Paleraj Govindram 15,000
2. The interest paid on these loans was Rs. 3,484. The original assessment was completed on April 29, 1961, accepting the returns and treating the loans as genuine borrowings. On the ground that the ITO came to know that the borrowings from hundi bankers were not genuine, he reopened the assessment and assessed the entire loan amount of Rs. 55,000 and interest of Rs. 3,484 paid thereon as the income of the assessee from undisclosed sources. The assessee preferred an appeal to the AAC and contended that there was no material whatsoever on which the ITO could have come to the conclusion that the borrowings were not genuine. The AAC, after noting that the prevailing hundi racket at the relevant time gave a reasonable inference that some assessees were introducing their own secret profits into their accounts in this manner, observed that in that context, it was but reasonable to presume that the assessee too was one among them especially because he too had borrowed from the very same bankers. The AAC further held that the onus of proving that he was a solitary exception to this, squarely lay on the assessee and that he had not discharged that onus by producing the bankers for examination or even confirmatory letters from them. However, on the ground that the assessee was not given a reasonable opportunity of proving the genuine nature of the loans, he set aside the assessment and referred the matter back to the ITO for making a fresh assessment after further detailed enquiry with adequate opportunities to the assessee. The assessee preferred a further appeal to the Tribunal contending that he was not guilty of omission or failure to fully and truly disclose all the materials relevant to the assessment and that he had given full details of the creditors at the time of the original assessment itself and the ITO had reopened the assessment merely on suspicion. The Tribunal observed :
"In the instant case, as a result of investigation and raids conducted by the department from time to time, a number of bankers made admissions in writing that they did havala business and on the basis of such admissions a list pertaining to Madras area was compiled giving the names of such hundi brokers. The name of the hundi banker, Seth Paleraj Govindram, who is alleged to have given a hundi loan of Rs. 15,000 on 2-1-1959 to the appellant, finds a place in the list. A statement has been recorded from the said hundi banker on 9-2-1965 wherein he has categorically admitted that he has been doing havala business. Another list of hundi bankers in Madras, who have not themselves made admission in writing but in respect of whom certain borrowers had stated in writing that their loan transactions with these bankers were bogus, was complied and in this list the name of Dwarkadas Chaithram, who is alleged to have given a loan of Rs. 20,000 to the appellant on 6-3-1959 finds a place. It is on the basis of these investigations conducted by the Income-tax Department, the Income-tax Officer came to know that the hundi borrowals made by the appellant were not true and genuine."
3. The Tribunal then proceeded to state, relying on the decision of this court in M. Varadarajulu v. ITO [1974] 97 ITR 476, that though the appellant had disclosed the names of hundi bankers at the time of making the original assessment, it cannot be stated that he had made a full and true disclosure of all the material facts relating to hundi loans. Accordingly, the Tribunal held that the ITO had sufficient reason to believe that the income chargeable to tax had escaped assessment as a result of the appellant's failure to make a full and true disclosure of the material facts and that the reopening of the assessment was fully justified. At the instance of the assessee, the following question has been referred :
"Whether, on the facts and in the circumstances of the case, the reopening of the assessment for the assessment year 1960-61 under section 147(a) is valid and justified ?"
4. Learned counsel for the assessee contended that there was no material on which the ITO could have entertained any reasonable belief that any of the borrowings shown by the assessee during the accounting year was not genuine and none of the bankers had given any statement that they had not lent the moneys to the assessee. The general statement by the hundi bankers that he has been doing havala business or that some of the assessees had admitted that they had not borrowed moneys from Dwarkadas Chaitram, who is one of the hundi bankers from whom the assessee had stated that he had borrowed moneys, will not be sufficient to hold that the assessee had failed to disclose any material fact relating to his assessment. In M Varadarajulu v. ITO [1974] 97 ITR 476, a Division Bench of this court, to which one of us was a party, had occasion to consider the nature and relevancy of the admissions or statements made by hundi bankers relating to their havala transactions. This court observed (p. 479) :
"It is true that the department had not questioned the persons who were said to have advanced loans to the petitioner with reference to the particular loan transactions shown by him in his account books. But those statements were recorded from them generally about their business and their lending capacity. It is also true that some of them have claimed to have had genuine transactions also apart from the havala transactions. It is, therefore, all the more important for the Income-tax Officer to have satisfied himself with reference to the particular transactions of the assessee before issuing the notice under section 148. There can be no dispute that any fact or circumstance which forms the reason for the Income-tax Officer to believe that there was an omission or failure to disclose fully and truly all material facts necessary for the assessment, must relate to the assessee and in particular to the assessment year in question and not a general doubt based on general information not related to the particular case. If the initiation of the proceedings under section 147(a) is to be permitted on this vague and general doubt, it would be permitting the department to make a fishing or roving enquiry without a reasonable belief that the assessee had omitted or failed to disclose fully and truly all material fact necessary for the assessment."
5. Having made the observation, this court went into the facts further and noted that at least in one instance, a person whose name found a place in the list of persons given by the assessee who were said to have advanced loans to the assessee, had given a statement that he never had any genuine transaction with anybody and that all the transactions in his name were havala transactions. This statement of the hundi banker that he had never advanced loans to any person was taken as sufficient material on the basis of which the ITO could have entertained the belief that the assessee had not fully and truly disclosed all material facts. But, in a later judgment in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437, the Supreme Court had occasion to consider a similar statement by an individual whose name appeared as a creditor in the accounts of an assessee. He had stated that he had not advanced any moneys and that he was doing only namelending. With reference to this statement, the Supreme Court observed (p.447) :
"There is nothing to show that the above confession related to a loan to the assessee and not to someone else much less to the loan of Rs. 2,500 which was shown to have been advanced by that person to the assessee-respondent. There is also no indication as to when that confession was made and whether it relates to the period from April 1, 1957, to March 31, 1958,......... and that it pertains to the loan shown to have been advanced to the assessee, in our opinion, would be rather farfetched."
6. Though the statement or admission of the person who is supposed to have lent moneys to the assessee was not unequivocal, the Supreme Court had definitely proceeded on the basis that that statement was to the effect that he never had any money-lending transaction and that he never lent any money to any individual and that he had been only lending his name. In the circumstances, therefore, we must take it that the ratio of the judgment of the Supreme Court is that even in a case where the individual had given such a general statement that he had never done any money-lending business and every one of the transactions was a havala transaction, there should be a specific reference to the credits appearing in the assessee's books and the year in which the amount was lent; otherwise, that statement cannot be relied on as material for reopening the assessment under s. 147. To the extent that even in a case where there was a general statement it should have specific reference to the assessee's credits and the year of assessment in order to enable the ITO to reopen the assessment under s. 147, it is an extension of the principle in M. Varadarajulu v. ITO [1974] 97 ITR 476 (Mad). These two judgments were noticed by this court in M. Varadarajulu Naidu v. CIT [1978] 111 ITR 301 as not conflicting with each other, but requiring that in order to constitute as "material", the statement by a hundi banker should have a relation to the particular credit of the assessee. But, in a later judgment in Asa John Devinathan v. Addl. CIT , another Division Bench had observed that in view of the decision in ITO v. Lakhmani Mewal Das , the decision in M. Varadarajulu v. ITO [1974] 97 ITR 476 (Mad), to the extent it stated that in a case where a general statement was made by the creditor that he had never advanced any loan, may be taken as having a reference to the loan given to the assessee also, was held no longer good law. But we are inclined to think that the principle that the statement must have reference to the assessee's credit, is the basis of the decision in both M. Varadarajulu v. ITO [1974] 97 ITR 476 (Mad) and ITO v. Lakhmani Mewal Das , the only difference between the two judgments being, while in the earlier judgment of this court, it was taken that a general statement may be taken as a reference to the credit in the assessee's books, the Supreme Court required a direct reference to the credit and the year in which it appeared in order to enable the ITO to reopen the assessment. Thus, the principle is the same, but the difference is only in the applicability of the rule of evidence.
7. Coming to the facts of the present case, we find that neither the fact that the name of Seth Paleraj Govindram who is alleged to have given a hundi loan to the assessee found a place in the list of bankers who did havala business as well, nor the statement of third party assessees that some of their transactions shown as borrowings from Dwarkadas Chaitram were not genuine transactions, would in any way connect the assessee's credit with those bankers as not genuine. If we eschew those facts, there are no other materials on which the ITO could have entertained any belief that the income had escaped assessment by reason of non-disclosure of any material fact.
8. In the result, we have to hold that the reopening of the assessment was not justified. We, accordingly, answer the reference in the negative and in favour of the assessee. The assessee will be entitled to his costs. Counsel's fee Rs. 500.