Madras High Court
M.Natarajan vs The Assistant Commissioner Of Income ... on 19 July, 2012
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, K.Ravichandrabaabu
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 19.07.2012 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice K.RAVICHANDRABAABU Tax Case (Appeal) No.1172 of 2005 M.Natarajan P/o Tamilarasi Publication 84, T.T.K. Road Chennai 18. ... Appellant -Vs- The Assistant Commissioner of Income Tax Central Circle -II (4) 121, Nungambakkam High Road, Chennai ... Respondent Prayer: Appeal filed under Section 260 A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal "A" Bench, dated 17.6.2005 in I.T.(S.S.)A.No.91/Mds/98 for the Block assessment years 1987-88 to 1997-98 (Upto 24.9.1996). For Appellant : Dr.Anita Sumanth For Respondent: Mr.T.Ravi Kumar Standing Counsel JUDGMENT
(Judgment of the Court was made by CHITRA VENKATARAMAN,J.) The assessee is on appeal as against the order of the Income Tax Appellate Tribunal raising the following substantial questions of law relating to the Block Assessment covering the assessment years 1987-88 to 1997-98 (Upto 2.9.1996).
" 1. Whether on the facts and in the circumstances of the case, the Tribunal did not err in holding that there was no violation of the principles of natural justice or of the provisions of law in regard to the grant of a reasonable opportunity to the appellant by the Assessing Authority before making the assessment ?
2. Assuming during the conduct of the special audit the assessee was heard, would it satisfy the requirements of Law of the Assessing Officer himself providing an opportunity to the assessee on the basis of not only the materials collected by the Special Audit Team during special audit but also the other materials relied upon by the Assessing authority for the first time ?
3. Whether on the facts and in the circumstances of the case, the order of Tribunal is not liable to be set aside insofar as the following contentions which have been raised in the grounds of appeal and pressed in the course of the hearing before the Tribunal have not been adverted to or dealt with in the order under appeal ?
a) Advance to Vivek Rs.
(Total Rs.3,00,000) 1,50,000
b) FD with Canara Bank 1,65,000
c) Difference in cost of construction 5,19,000
d) Personal Expenses 1,94,000
e) Household articles 2,15,000
f) Deposits with Canara Bank 28,53,778
g) Investment in UTI 1,00,000
h) Gift to Master Vivek/Krishna 1,20,000
Priya
i) Investment in Tamilarasi 52,500
j) Land at Thanjavur 2,13,000
k) Deposits in Tamilarasi 2,12,310
l) Interest suspense 4,23,460
m)Capital account credit 10,00,000
n) Credit in the name of Apna 7,80,000
Finance
o) Credit in the name of Ashok 5,76,000
Mehta
p) Credit in the name of
Om Prakash Mehta 4,16,850
q) Credit in the name of
Chandrasekar & Gitanjali 6,50,000
r) Credit card payment 3,15,714
s) Advertisement expenses 1,60,055
t) Electricity charges 33,794
u)Travelling & Conveyance 1,20,370
v) Car maintenance 37,474
w) Preliminary expenses 8,947
x) Depreciation disallowed 4,60,621
y) Donation 1,500
z) Disallowance u/s.40A (3) 1,33,365
za) Scan Tech u/s.41(1) 67,055
zb) Addition on account of Jewellery 2,00,000
zc) Deductions u/s 80L and 80C
Sec.88
2. The assessee is a proprietor of a publication,
which publishes two magazines, one a weekly and the other a fortnightly. On 24.9.1996, there was a search in the business premises as well as in the residence of the assessee leading to recovery of certain documents. A notice under Section 158BC was issued to the assessee on 4.11.1996 and the same was served on 19.11.1996. Subsequently, a notice dated 28.2.1997 was issued under Section 142(1) by the Income Tax Officer calling for certain particulars. In the meantime, on 2.7.1997 the case was transferred to another Assessing Officer, viz., the Assistant Commissioner of Income Tax, Central Circle II (4), Chennai. Again, a notice under Section 142(1) was issued calling for certain particulars, the details for which were enclosed along with the notice. Admittedly, the assessee was granted permission to take copies of the seized materials. Finally on 5.9.1997, the assessee filed his return of income under Section 158BC, wherein the assessee had admitted the total undisclosed income of Rs.3,80,000/-. The assessment proceedings were initiated by issuance of notice under Section 143(2) on 9.9.1997 fixing the date of hearing on 12.9.1997. The assessee received the notice on 11.9.1997. Since there was no representation on 12.9.1997, the case was reposted to 3.10.1997 and on the said date, a Chartered Accountant appeared as
assessee's representative. Admittedly, the said Chartered Accountant appeared on various subsequent dates before the Assessing Officer. In the meantime, considering the complexity of the accounts, the Revenue decided to refer the case to a special audit for the assessments years 1993-94 to 1997-98(upto 24.9.1996), which covers the block assessment period. An order under Section 142(2A) dated 11.9.1997 was passed appointing the Special Auditor for carrying out the special audit . The issues specifically referred to the Special Auditor for his comments were as under:-
1. Whether the quantity of newsprint and art paper purchased and shown as consumed is commensurate with the No. of magazines produced including those to be supplied to the subscribers who have made interest free deposit .
2. Audit of quantitative tally of purchases consumption production and closing stock may be done.
3. Whether based on the various expenses booked is it possible to arrive at the no. of copies of each of the magazine actually printed for each year ?
4. Audit of the scheme by which the assessee has collected deposits for free supply of magazines and its viability.
5. The genuineness of the above scheme and /or collection of deposits reflected in the accounts in each year.
6. Audit report as to whether any of the loans have been used towards interest free advances or for other non-business.
3. The Special Auditor conducted the audit and forwarded his report to the assessee on 23.2.1998. The assessee in turn submitted the report to the Assessing Officer on 24.2.1998. It is seen from the narration in the preamble portion of the assessment order as well as in the text of the assessment order that the notice of assessment was issued to the assessee on 13.2.1998 which was received by the assessee served on 19.2.1998. The assessment order records the dates of hearing as under:
" 7.8.97, 29.8.97, 3.9.97, 5.9.97, 29.1.98, 13.2.98, 17.2.98, 18.2.98, 25.2.98 and 5.3.98".
It is a matter of record that when the enquiry based on the seized materials was going on the Revenue went ahead with the Special Audit reference too. Admittedly, an assessment order was passed on 13.3.1998 after the notice dated 13.2.1998. On the issues raised by the Revenue in the course of the assessment proceedings, the assessee is stated to have answered the queries. The issues on which the such details were called for primarily related to the circulation of magazines and the subscribers' interest free deposits. Based on the materials and the special Audit report, the assessment was thus finalised determining the total undisclosed income at Rs.3,77,41,760 and the tax payable thereon at Rs. 2,26,45,056/-.
4. Aggrieved by the same, the assessee went on appeal before the Income Tax Appellate Tribunal where the assessee took a specific plea as regards the violation of principles of natural justice that sufficient opportunity was not granted in respect of the additions made under different heads before framing the assessment order. The assessee further pointed out that the materials collected behind the back of the assessee had been used against the assessee without even making an indication that they would be used against the assessee. Thus, when the assessment order rested on the materials collected behind the back of the assessee and which were not placed before the assessee to disprove or repudiate the same the assessment suffered fundamental illegality.
5. The assessee further pointed out that several pieces of evidence adduced by the assessee were not properly looked into and the additions were made on the basis of inadmissible pieces of evidence. Thus, the assesee made several allegations in respect of the Special Audit Report on the allegation of non-genuine purchase of newsprint; on the question of subscribers' deposit , Cash Flow Statement, Capital Market; Foreign Tour Expenses; Credit Card Payment; disallowance of expenditure; unexplained jewellery; deduction under Section 80L and 80C and Section 88. According to the assessee in the course of hearing before the Tribunal, submissions were made both on the aspect of violations of principles of natural justice as well as on the merits of the assessment made under various heads. Yet, the Tribunal passed an order as though the assessee did not make any submissions on the merits of the assessment and considered the submissions only on the violation of principles of natural justice. In paragraph 9 of its order, the Tribunal rejected the contention of the assessee as to the violation of principles of natural justice in not affording sufficient opportunity.
6. The Tribunal held that the allegation on the violation of the principles of natural justice must be a matter of substance not of mere form. The Assessing Officer did follow the principle of audi alteram partem and as per the records, more than twenty opportunities were provided to the assessee to explain the case and the assessee had in fact attended the hearings through his representative. Hence, the Tribunal rejected the assessee's contention that the order was made in violation of the principles of natural justice. As far as the merits of the assessment was concerned, the Tribunal proceeded to decide the case on the basis of the contentions raised in the appeal and ultimately held that no exception could be taken to the merits of the assessment. Aggrieved by the same, the present appeal is filed before this court by the assessee.
7. Learned counsel for the assessee attacked the order of the Tribunal and in turn the assessment made against the assessee on two folds.
i) The assessing officer failed to adhere to the principles of natural justice in finalising the assessment. She pointed out that soon after the search, when the enquiry was going on, the transactions relating to the purchase of newsprint was referred to the Special Audit. The terms of the audit was already extracted in the preceding paragraph. Before appointing the Chartered Accountant, there was absolutely no compliance of principles of natural justice in the sense no notice was issued by the Revenue before making reference to the Special Auditor. Thus placing reliance on the decisions of the Apex Court reported in (2006) 287 ITR 91(SC) (Rajesh Kumar and others Vs. Deputy Commissioner of Income Tax and Others) and (2008) 300 ITR 403 ( Sahara India (Firm) Vs. Commissioner of Income Tax and Another), learned counsel contended that failure to give opportunity to the assessee before appointing the Special Auditor strikes at the very root of the proceedings before the Special Auditor and hence the reference is bad in law .
(ii). The second aspect of the violation of principles of natural justice is that when the proceedings are already there before the Assessing Officer, there was a parallel proceedings before the Special Auditor. Thus, the assessee had to face enquiries on two sides one from the Assessing Officer and the other from the Special Auditor. Considering the parallel proceedings going before the Assessing Officer, there is clear violation of principles of natural justice.
8. She further pointed out that apart from the reference to the Special Auditor as is evident form the assessment order, the enquiries were going on behind the back of the assessee and the materials were gathered and used in finalising the assessment. She further pointed out that being a case of block assessment, if the authorities are collecting materials to frame the proposal of assessment under Chapter XIVB, the Assessing Officer has to put the assessee on notice of any of the materials recovered at the time of such enquiries in order to submit his explanation. There are hardly any materials to show that the assessee was granted any such opportunity at the time of assessment or the the assessee was granted an opportunity to cross examine the persons from whom any statement was recorded against the assessee.
9. She further pointed out that the Special Auditor's report was given on 24.2.1998. As is evident from the preamble to the assessment order, the search was conducted on 24.9.1996. After the notice was served on the assessee under Section 158BC, there was transfer of the case to another Assessing Officer. The notice of assessment itself was issued only on 13.2.1998 which was received by the assessee on 19.2.1998. It is seen from the assessment order that except for the date of hearings noted in the assessment order, there were no opportunities granted to the assessee to substantiate his contentions. Thus, the Tribunal committed grievous error in holding that more than 20 opportunities were granted to the assessee by the Officer before finalising the assessment.
10. The second attack of the assessee is on the content of the block assessment. As far as the allegation that the purchase of newsprint was not genuine is concerned, the Assessing Officer treated the purchase from M/s.Unna Agencies, M/s. M.G.K.Stores, M/s.S.M.R.L.Paper and Co., M/s.Raja Traders and M/s.Balaji Traders as non genuine dealings. The Assessing Officer had concluded that on a visit to the address of the above dealers, it was found that they were not in existence therein and thus the Assessing Officer came to the conclusion that the purchases were not genuine. The submission of the assessee is that the subject matter of purchase of newsprint was not an item, which figured in the seized materials. Hence the same cannot form part of an assessment relating to block assessment. In this connection she placed before this court the details regarding the panchanama relating to the seized materials. A perusal of the panchanama evidencing seized materials clearly pointed out that the documents relating to the genuineness of the dealings in newsprint was not a document seized at the time of search. In the circumstances, learned counsel submitted that the block assessment on the issue of alleged non-genuineness of the purchase of newsprint is illegal and unsustainable.
11. As regards the genuineness of the subscribers' deposits are concerned, she pointed out that there was one sided enquiry to hold that the deposits were not genuine and hence it represented undisclosed income. Even here also, there were no materials available among the seized materials. But they were collected at the time of enquiries made subsequent to the search. Since the learned counsel for the appellant raised an issue that the block assessment had been made based on materials other than the seized materials also, this Court called for the files from the Revenue, particularly, the panchanama evidencing the seized materials. Accordingly, the learned Standing Counsel produced before this court the records which reads as follows:-
1. Prohibitory Order Under Section 132 (3) of the Income Tax, 1961 21.9.1996
2. Prohibitory Order Under Section 132 (3) of the Income Tax, 1961 Dated 21.9.1996
3. Prohibitory Order Under Section 132 (3) of the Income Tax, 1961 Dated 21.9.1996
4. Inventory of Pay in slips and cheques found in the office of M/s.Tamilarasi Publications, 84 T.T.K. Road, Madras 18 on 26.9.1996 during the course of action under Section 132 of the I.T.Act 1961.
Sl.No. Name of the Bank Name of the Holder A/c No. and Branch 1 Indian Bank, Abiramapuram Tamilarasi Publications CA 872 2
-do-
Tamilarasi Publications (P) Ltd., II Unit, Puthiaparavai CA 879 3 Canara Bank, Abiramapuram Tamilarasi Noolagam CA 1526 4 Indian Bank (Cheque Book No. 681601 to 681700) Tamilarasi OD 0026 5 Union Bank of India Nungambakkam Tamilarasi (Proprietor) 29043
5. Inventory of Bank A/c and other documents seized during the course of search under Section 132 of the IT Act, 1961 at Mr.M.Natarajan, No.H6/5 Kalashetra Colony, Arundale Beach Road, Besant Nagar on 24.9.96.
1. I.B. Abiramapuram Branch, Madras C.A. 872 and 879 M/s.Tamilarasi Publications (P) Ltd., and M/s.Tamilarasi
2. U.B.I. Nungambakkam A/c/No.29043
3. City Bank Card No. 540175001464002 Master Card Visa 493184901932009
4. Diners Club Card 36559003524017
5. American Express Card 376971869441008
6. L.I.C.Policy belonging to Mrs.N.Sasikala Policy No. 7504057 Rs.2,00,000 Dt. 28.6.90
7. Canara Bank Mylapore Branch S.B A/c No.23573 in the name of Mr.M.Natarjan
12. On the question of purchase of newsprint, on perusing the panchanama, this court again asked the learned Standing Counsel to confirm whether the issue of purchase of newsprint was also drawn out from the seized materials. To the said query, learned Standing Counsel pointed out that considering the voluminous records seized, the same had to be gone through to give a direct answer. Accordingly, we also directed the learned Standing Counsel to file an affidavit on going through the records seized from the assessee. Pursuant to the same, an affidavit has been filed by the Assistant Commissioner of Income Tax before this Court on 18.7.2012. In paragraph 4 the said Officer has stated as follows:-
4. I state that though it appears that the disallowance of purchases as in paras 5.1 to 5.9 of block assessment order is primarily based upon enquiry and Special Audit report u/s.142(2A), since there is no specific reference in the said block assessment order, of the seized material relied upon while dealing with the issue of purchases, considering that the seized material has been relied upon for holding credits as unexplained u/s 68 to the extent of Rs.1,40,47,360/- and that separate addition was not made only due to the fact that it was telescoped into the purchases disallowed, if a view is taken that seized material is not used for the purpose of making disallowance of purchases, atleast to the extent of Rs.1,40,47,360/- it may be construed as addition in respect of which seized materials are relied upon. The relevant seized material referred to in para 4.9 is RLN/B&D/17 &18 and will be produced, if required.
13. In paragraph 5 it is further stated that the assessee's claim of purchases to the tune of Rs.2.35 crores was disallowed based on the detailed enquiries conducted and relying on the special audit report under Section 142(2A) holding that the five concerns from whom the assessee was said to have made purchases, were not in existence in the given address, they having vacated the premises apparently due to failure of business even before the relevant previous years. The affidavit further states that the total turnover reported by these concerns was much less than even the purchase figures reported by the assessee and the payments made to these persons were not supported by any back-up vouchers. The affidavit further adds that none of the parties with their books of accounts, vouchers etc., were produced by the assessee and the affidavits filed by the assesseee from the so called parties were also totally unreliable on the ground that there was difference in signature and the affidavit being signed by other parties.
14. A reading of the affidavit as narrated above, thus makes no secret of the fact that the rejection of the claim of purchase of newsprint as an undisclosed income was not a subject matter flowing from the seized materials in the course of search conducted in the assessee's residence and business premises. A reading of the provisions on the Block assessment under Chapter XIV-B shows that Section 158B(b) defines "undisclosed income". Section 158BB gives the method of computation of undisclosed income of the block period. A reading of the said provision shows that the undisclosed income of the block period has to be necessarily assessed only on the basis of evidence found as a result of search or requisition of books of accounts or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence. If the Assessing Officer is to traverse beyond the materials for the purpose of calculating an undisclosed income, which does not flow out of the seized materials or the materials relatable to the seized materials, then as per Section 158BB it shall not form part of the computation of income for the block assessment. In other words, the said income can be considered only under the regular assessment procedure and shall not form the basis for consideration under the block assessment procedure.
15. Going by the affidavit filed before this court , we agree with the assessee's contention that the subject matter of assessment in respect of genuineness of the newsprint purchase has to be excluded from the block assessment procedure and it can only be considered under the regular assessment. To that extent we agree with the assessee's contention.
16. As far as the plea on the violation of the principles of natural justice is concerned, learned Standing Counsel appearing for the Revenue pointed out that the assessment order itself records the number of hearings granted to the assessee and the text of the order refers to the various consideration given to the various materials filed by the assessee. As regards the contention that the assessment had been made hurriedly without granting the assessee an opportunity to place the materials, learned Standing Counsel submitted that rightly the Tribunal held that there is no violation of principles of natural justice.
17. As far as this aspect is concerned, we differ from the line of reasoning of the Tribunal. As already pointed out, the assessee's residential and business premises were subjected to search on 24.9.1996. While the hearing before the Assessing Officer was in progress, the Revenue had referred the matter to the Special Audit and the Special Audit report was submitted on 24.2.1998. The assessee had filed his return as early as 5.9.1997 before the Assessing Officer in compliance with the notice under Section 158BC. Thereafter, a notice under Section 143(2) was served on the assessee on 11.9.1997 fixing the date of hearing on 12.9.1997. Though there was no representation on the date of hearing, subsequently when the assessment proceedings were reposted to 3.10.1997 the Chartered Accountant of the assessee appeared on the said date. The Assessing Officer also records that the assessee's representative appeared on various other dates and some of the details called for were furnished. It is a matter of record that the Special Audit report was given on 24.2.1998 and the objection was filed by the assessee on 25.2.1998. The assessment order herein was made on 13.3.1998. In the background of the filing of the Special Audit Report on 24.2.1998 and the assessee filing his objection on 25.2.1998, when we look at the next date of hearing, it fell on 5.3.1998 and immediately on 13.3.1998 the assessment order was made. The Revenue submitted during the course of proceedings before this court that voluminous records were seized from the assessee on 24.9.1996. In view of the fact that while the enquiry on the seized materials was in progress, simultaneously, the special audit was also proceeding on a reference made on 11.9.1997, we feel that the assessee should have been granted full opportunity to counter the materials gathered and relied on for the purpose of assessment as well as on the merits of the Special Audit Report submitted on 24.2.1998.
18. It is no doubt true that on 5.3.1998 after the submission of the special Audit Report there was one hearing given by the Revenue. However, on going through the assessment order covering the block period from 1987-88 to 97-98 (Upto 24.9.1996), in the fitness of the proposal made and the claim made by the assessee on the merits of the assessment, we feel that it would be an absolute compliance of the principles of natural justice, if a further hearing was granted to the assessee. We are aware of the fact that a number of hearings were granted to the assessee, but then these were much prior to the reference to the Special Audit. The Special Tax Audit report was filed on 24.2.1998. In view of the same, in fairness to the claim of the Revenue, the Assessing Officer should have complied with the principles of natural justice. The factual position is that the notice issued on 13.2.1998 was received by the assessee on 19.2.1998 and the special audit report was submitted to the Assessing officer on 24.2.1998, which even according to the Revenue is a very elaborate one. Quite apart from that fact, even in respect of the enquiry made with the depositors' account, we do not find from the order that sufficient opportunity was granted to the assessee on the materials gathered with reference to the depositors' account or circulation account. We may note that even though learned counsel for the assessee at the closing stage pointed out that as far as the estimate made on the undisclosed income of the subscribers' deposit was not based on any seized materials, she stood corrected on going through the Panchanama copy produced before this court that the cheques relating to the subscribers' deposit account was also one of the seized documents and hence could be considered for making block assessment.
19. In these circumstances, on going through the assessment order as well as the order of the Tribunal, without expressing any view on the merits of the assessment, we feel that the Revenue should have afforded sufficient opportunity of hearing to the assessee to substantiate his case. In the absence of compliance of the principles of natural justice, we have no hesitation in setting aside the order of the Tribunal and in turn the order of the Assessing Officer. We remand the matter back to the Assessing Officer for deciding the matter afresh after granting sufficient opportunity to the assessee to place his case. The assessee shall extend full co-operation so as to enable the Assessing Officer to complete the assessment within a period of three months from the date of receipt of copy of this order.
20. With these observations, the tax case appeal is allowed. No costs.
(C.V.,J) (K.R.C.B,.J) 19.07.2012 Index:Yes/No Internet:Yes/No krr/ To
1. The Income Tax Appellate Tribunal 'A' Bench, Madras
2. The Assistant Commissioner of Income Tax, Central Circle II (4), Chennai 34 CHITRA VENKATARAMAN,J.
AND K.RAVICHANDRABAABU,J.
krr/ Tax Case (Appeal) No.1172 of 2005 Dated 19.07.2012