Income Tax Appellate Tribunal - Cochin
Joseph Michael And Bros. vs Income-Tax Officer on 4 June, 1992
Equivalent citations: [1992]43ITD131(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee against the reassessment made under Section 147(a) of the Income-tax Act, 1961.
2. The assessee is a partnership firm, having financial year as previous year. The assessment for the assessment year 1977-78 was completed under Section 143(3) on 29-4-1980 accepting the loss at Rs. 3,81,030. The assessment was reopened under Section 147(a) of the Act. The reason for reopening the assessment is stated as follows :
The assessee-firm is engaged in abkari business. For this year, it has paid a sum of Rs. 1,92,86,700 as kist (rental) on arrack and foreign liquor shops. As per the Abkari Rules, this amount is to be paid in 10 monthly instalments. Further 30% of this amount is to be deposited as advance kist in the month of March of the earlier year and this advance kist is adjusted against the last three instalments of kist amount payable. Till the advance is so adjusted, the amount stands credited in Treasury Savings Account in assessee's favour and thus earn interest at 6%. Thus the kist advance deposited by the assessee in March of earlier year earned interest. An amount of about Rs. 2,47,130 accrued to the assessee as interest during the year on the advance and this is assessable as its income. But the assessee has not included this item in its return of income. Nor did it disclose it at the time of assessment.
A proposal was made to the assessee proposing reopening of the assessment under Section 147(a) of the Income-tax Act for bringing to tax the above mentioned interest income. The assessee has however objected to the proposal stating that it is following cash system of accounting with regard to interest from kist deposit, that the interest received has been deducted from interest paid and bank charges and that thus there is no omission or mistakes in the assessment already completed.
The assessee has not given any details or materials to show that it is following cash system of accounting as regards the interest income. The assessee has not also shown on which dates, if any, the interest was received, how much of it was deducted from the interest payable, whether the entire amount due has been received and accounted etc. The factual position is that the assessee is not following any regular system of accounting as regards this item. In the circumstances, the income by way of interest on the kist deposit has to be assessed on accrual basis only. As already stated the assessee has not disclosed the income or material facts relating to it in the return of income or during the course of the assessment. Thus, by reason of the assessee's failure to disclose fully and truly all materials facts necessary for its assessment for this year, I have reason to believe that, income chargeable to tax has escaped assessment and action under Section 147(a) is necessary.
From the records it is seen that prior to the issue of notice under Section 147(a), there was an audit objection from the Audit Party, which scrutinized the accounts of the assessee for the succeeding assessment years herein it came across the receipt of interest by the assessee, which have been duly accounted for in those years. The Audit Party was of the view that the amount should be included on accrual basis. It is at the instance or at the alert given by the Audit Party that the Income-tax Officer initiated action under Section 147(a) of the Act. After reopening the assessment in the above manner, he found fault with the assessment done by his predecessor in that a number of items which should not have been allowed as deduction, had in fact been allowed. such items of expenditure that are in dispute in this appeal are as follows :
(a) Disallowance of special exps.
& commission Rs. 21,13,790 (b) Educational expenses Rs. 15,410 (c) Car expenses Rs. 25,000 (d) Bar licence fee Rs. 50,000
The disallowance was either for want of verifiable vouchers or on the ground that there was no need for incurring such expenditure.
3. The Income-tax Officer also made an addition of Rs. 2,37,246 being the interest on kist deposits for the inclusion of which the assessment was reopened.
4. The CIT (Appeals) dismissed the appeal of the appellant. The reason for sustaining the reassessment was that the assessee did not disclose in the profit and loss account filed along with the return on 15-9-1989 at the time of original assessment, any details of kist deposit. Since this was not disclosed in the return of income and the assessee was maintaining the accounts on Mercantile basis, there was failure on the part of the assessee to disclose the primary facts resulting in reassessment under Section 147(a) of the Act. As regards the disallowance made by the Income-tax Officer, once the assessment was reopened he felt that those disallowances were warranted in the facts of the case, in the absence of verifiable vouchers or in the absence of need for incurring such expenditure and in this view of the matter, he sustained the disallowances. The assessee is aggrieved.
5. Shri Jacob, the learned counsel contended that there was no failure on the part of the assessee to disclose any material for computation of income fop the assessment year 1978-79. The kist deposit was not made in the relevant previous year but it was made in the preceding year. Therefore, in the impugned year of account, it cannot figure as a separate item since the kist deposit made earlier would have been adjusted by the Excise Department against the dues from the assessee in the last three instalments. Therefore, there is no merit in the observation of the learned CIT(A) that the assessee had not disclosed the kist adjusted in the impugned year of account. It is on this ground the reopening was sustained by the first appellate authority, but as this ground is based on incorrect appreciation of facts, the order of the CIT(A) is unjustified.
6. The information came to the possession of the Income-tax Officer that the assessee had received interest only from a scrutiny of the accounts for the succeeding year when the interest on the kist was credited in the accounts on receipt basis. This was pointed out by the Audit Party, which expressed a doubt as to its taxability in that year. It is on the basis of this objection of the Audit Party that the Income-tax Officer initiated action under Section 147(a) of the Act. Such course of action is not permissible in the light of the decision of the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996. Even assuming that such a course was permissible on the plea that the Audit Party gave only information, the reassessment can be made only on the basis of Section 147(b) of the Act and not under Section 147(a) of the Act. The time limit having expired for action under Section 147(a), the reassessment should be held to be bad in law.
7. Further, he contended that in the reasons recorded for reopening the Income-tax Officer while adverting to the objections of the assessee that for this particular source of income the assessee has been adopting the cash system, he had observed that there was no evidence for that thus, conveniently over-looking the fact that the very information he got about the receipt of interest was from the books of the assessee themselves wherein such receipts are accounted for on actual receipt basis. Therefore, the ITO's belief that there was no material in support of the assessee's contention of cash system of accounting for interest receipts did not have any basis or nexus with the information. In other words, he had no reason to believe and hence the action under Section 147(a) was erroneously initiated.
8. Lastly, he contended that the Income-tax Officer who is dealing with a number of Abkari cases and familiar with the Abkari Rules should be aware that the kist deposits are assigned to the Excise Department and during the period of assignment even if the interest accrued it would be only to the credit of the assignee and not to the assignor. It is only upon the reassignment of the deposits in favour of the assessee after adjusting the same against the last three instalments of kist, the assessee is entitled to any interest that was left over. This is ascertainable from the rules and practices obtaining in abkari transactions. Therefore, absolutely there was no basis for the Income-tax Officer to draw a conclusion that the interest had accrued to the assessee and the assessee had committed a fault in not disclosing the same during the impugned assessment year. It will be evident from the fact that the Tribunal even as early as 4-11-1988 in ITA No. 829/Coch./86 had held that deposits stood initially in favour of the Excise Department and the interest accrued during that period cannot be taxed in the hands of the assessee. This legal position as laid down by the Tribunal must be deemed to be in the knowledge of all the Income-tax Officers working in the State of Kerala and therefore, there was no basis for the formation of belief at all that the income had escaped assessment in respect of the interest on the kist deposits. Even assuming that the reassessment proceedings were validly initiated, it is not for the Income-tax Officer to substitute his own opinion in respect of the expenditures accepted by his predecessor as the original assessment was also an assessment after scrutiny of the books of accounts under Section 143(3) of the Act. The book results, no doubt, were accepted but that doesn't mean that the Income-tax Officer sitting in original assessment had blissfully ignored the nature of the vouchers that were kept by the assessee. In fact, the ITO's dealing with abkari cases do know that many of the vouchers like the case of the contractors are not capable of being verified especially in arrack and toddy business. It is normal practice in this trade not to issue sales bills for the sales made. It is also a normal practice that no day-to-day stock registers will be maintained. These defects are very well known to the department as they are conversant or familiar with a large number of abkari cases. Therefore to say now that this item of expenditure is not supported by verifiable voucher is only to have a change of opinion on the same set of facts.
9. The raids are organised only to protect the business interests of the assessee. The raid is conducted by the Police and the excise authorities and the assessee in order to guard itself against un-social practices of hootch manufacturers will either provide information to the Police or to arrange escort to these officials so that they can conduct raids on illicit distilleries and other un-social manufacturing centres. This is not only in the assessee's own business interest but also in public interest. Obviously for such raids amounts will have to be spent for men and material in providing the infructure to the Government officials and pucca vouchers will not be forthcoming. These expenditures were disallowed simply on the ground that they are not in the business interest of the assessee and Shri Jacob lamented that if these are not in the business interests of the assessee what else could conceivably constitute business interest?
10. Dealing with other items of disallowances, Shri Jacob made some submissions and then concluded that the entire approach of the Income-tax Officer in the reassessment proceedings was to take a different view on the same set of facts, which he is not permitted to do. He relied on a number of case laws, such as -
1. S. Narayanappa v. CIT [1967] 63 ITR 219 (SC),
2. Al.Vr.St. Veerappa Chettiar v. CIT [1973] 91 ITR 116 (Mad.),
3. ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC),
4. CIT v. Simon Carves Ltd. [1976] 105 ITR 212 (SC),
5. Indian & Eastern Newspaper Society's case (supra),
6. Indian Oil Corporation v. ITO [1986] 159 ITR 956 (SC),
7. Chunnital Surajmal v. CIT [1986] 160 ITR 141 (Pat),
8. Equitable Investment Co. (P.) Ltd. v. ITO [1988] 174 ITR 714 (Cal.), and
9. Smt. Sharmishthabai Holkar v. CWT [1987] 33 Taxman 314 (MP).
11. He also submitted that in a reassessment levy of interest under Sections 139(8) and 217(1A) is not justified.
12. Shri Abraham, learned Senior Departmental Representative, justified the reassessment proceedings by relying on the orders of the Income-tax Officer and the CIT(A). He emphasised that the assessee has not disclosed the kist deposit in its accounts in the relevant previous year. It did not even submit the balance-sheet for the relevant previous year nor any evidence was let in that the cash system of accounting was followed with regard to the interest on kist deposit. Therefore, the reassessment proceedings were validly initiated. Though the Audit Party had found that interest was accounted for by the assessee in the succeeding year and altered the ITO about the taxability of the same in the impugned assessment year, it did not express any opinion on the legal position. Therefore, the decision of the Apex Court in Indian & Eastern Newspaper Society's case (supra) will not apply to the facts of the case. The ITO had prima facie satisfaction that in view of the Mercantile system of accounting adopted by the assessee, the interest on kist deposit had accrued to the assessee in the relevant previous year and as there was a failure on the part of the assessee to disclose the same, action under Section 147(a) was resorted to. It is a quite different thing that subsequently it is found that the interest is not taxable. That will not invalidate the reassessment proceedings, though on merits, one may not have a case. Then once the assessment is reopened, there is no limitation of powers of the ITO. The whole assessment is at large. He relied on the decision of the Kerala High Court in CIT v. K. Kesaua Reddiar [1989] 178 ITR 457. It is not as if the ITO was changing his views on the same set of facts when he was in seisin of reassessment. He looked into each and every aspect of the case and held that in the absence of verifiable records for in the absence of need for incurring the expenditure certain disallowances were called for and he made such disallowances. It cannot be construed as a mere change of opinion on the same set of facts. Such a proposition may be relevant for testing the initiation of reassessment proceedings but once the reassessment is made, certainly the ITO can look in great detail and need not confine himself to escaped income only. On merits, he supported the disallowances.
13. Thus, we heard rival submissions and perused the records. It is not in dispute that the security kist deposit was paid by the appellant not in the previous year relevant to the assessment year 1978-79 but in the month of March of the preceding previous year. In terms of Abkari Shops (Disposal in Auction) Rules, 30% of the bid amount or such other higher amount as fixed by the Officer conducting the sale will be the kist deposit amount. Clause (18) of Rules 5A is to the effect that the privilege sold represented the dues for the period from 1st April of the year to 31st March of the year following. The deposits made under Sub-Rule 10 is to be read as security for the due performance of the conditions of the licence and the same will be credited towards the kist dues for the two or more instalments as the case may be unless appropriated under the Rules. Thus the deposit made in the preceding previous year is to be adjusted against the kist due in the relevant previous year in two or more instalments, as the case may be. Therefore, the deposit will not appear as a deposit in the accounts for the year ended 31-3-1978, as the same would have been adjusted against the dues. Hence, there is no substance in the contention of the revenue that the deposit amount did not figure in the profit and loss account or in the statements furnished to the Income-tax Department, in respect of the previous year relevant to the assessment year 1978-79.
Further such deposits are assigned in favour of the Excise Commissioner to enable him to make appropriation against the arrears of rent or other sums due to the Government from the appellant. Once the deposit is understood as an adjustable one against the kist and is assigned in favour of the Excise Commissioner, the assessee's right over the deposit is temporarily lost. Therefore, any interest accrued during that period when the deposit stood assigned to the Excise Commissioner cannot in law be taken as interest accrued to the assessee. On a perusal of the Abkari Rules, no specific rate of interest has been prescribed for interest on deposits though rates have been prescribed for interest to be recovered in case of clues to the Government. Such being the case it cannot be said that the assessee is entitled to any interest on deposits which stood assigned in favour of the Excise Commissioner during the relevant previous year. The revenue cannot be said to be unaware of the requirement of making deposit, the assignment of such deposits and adjustment of such deposits against the rentals or kist, as it deals with a large number of cases of Abkari contractors year after year. The revenue cannot plead ignorance of the provisions of Abkari Act, the Rules, thereunder, the procedures and formalities emanating from the same. The legal presumption about the awareness of such provisions can be enacted considering the fact that the revenue is dealing with the assessment of a large number of Abkari contractors. Looked from this view also we hold that there was no basis even for a prima facie belief that the interest had accrued to the assessee in the impugned assessment year.
14. It is seen from the order sheet entry for initiating reassessment proceedings that the Income-tax Officer appears to be aware of the Treasury Savings Account. It is seen from the record that there is no material before the Income-tax Officer to say that the assessee has earned interest at 6% on the Treasury Deposits representing 30% of the kist deposited assigned in favour of the Excise Department. No doubt, Treasury deposits carries 6% but where was the primary material for the Income-tax Officer to conclude that interest was in fact earned during the relevant previous year, the omission of which would give rise reassessment proceedings ? On the contrary the reassessment appears to have been triggered by the objection of the audit party in relation to the succeeding assessment year when the assessee had accounted for the interest on kist deposits on receipt basis. This was the initial provocation for the Income-tax Officer to visualise the reassessment proceedings. As a matter of fact, he had called upon the assessee as to why he should not proceed to reopen the assessment to rope in the interest that accrued to the assessee. The assessee had replied that it has not accrued to him and that he was accounting for the same on cash basis. The Income-tax Officer was of the view that there was no material for him to conclude that the assessee was adopting the cash system in respect of the interest income on kist deposit. This plea is not warranted in the face of the materials before him. As a matter of fact, he derived information from the accounts of the succeeding assessment year where the assessee had accounted for the interest income on kist deposit on receipt basis. Therefore, the learned Income-tax Officer cannot take the plea that there was no basis that the assessee was adopting cash system of accounting in respect of interest receipts. Thus we hold that there was no material for the Income-tax Officer to have a prima facie belief that there was omission on the part of the assessee or that income has escaped assessment in respect of the interest on kist deposit. Thus, the reassessment proceedings are held to be bad in law.
15. Shri Abraham vehemently contended that it is not for the court to look into the adequacy of the reasons for initiating reassessment proceedings though such reasons can be gone into on merits, once the assessment is reopened. No doubt, he is right in his contention. In the preceding paragraphs our endeavour was to show that there was no failure on the part of the assessee to place any primary fact necessary for the computation of the income for the relevant assessment year and the Income-tax Officer did receive the information only at the instance of the audit parry which scrutinized the accounts of the succeeding year and the very fact that the interest income was accounted for in the succeeding year on the receipt basis would militate against the view of the Income-tax Officer that the assessee was not adopting the cash system for this source of income and thus there was no basis for the prima facie belief on his part. Further our endeavour was to show that in terms of Abkari Act, Rules, Regulations and the Practices, it cannot be said that the interest on kist was earned by the assessee during the currency of the Abkari contract. We have already held that the revenue which deals with a large number of abkari cases, must be deemed to have the knowledge of such Rules, Regulations and the procedures prevailing with the Excise Department as respects abkari contracts. It is on a review of this we have come to the conclusion that there was no reason for the Income-tax Officer not even prima facie reasons to hold that income has escaped assessment warranting action under Section 147(a) of the Income-tax Act, 1961.
16. Having held that action under Section 147(a) would not lie against the assessee, we proceed to examine whether the action could be sustained under Section 147(b) of the Act. Initially the assessment was made on 29-4-1980 for the assessment year 1978-79. Section 153 deals with the time limit for completion of the assessment and reassessment. Section 153(2)(b) reads as follows :
153(2). No order of assessment, reassessment or computation shall be made under Section 147-
(a) ** ** **
(b) Where the assessment, reassessment or recomputation is to be made under clause (b) of that section, after-
(i) the expiry of four years from the end of the assessment year in which the income was first assessable, or
(ii) the expiry of one year from the date of service of the notice under Section 148, whichever is later.
The assessment year is 1978-79. Four years from the end of the assessment year will expire on 31-3-1983. 148 notice was issued on 14-11-1986. The reassessment order was passed on 6-12-1989. Therefore, we hold that the reassessment even if it is held to be under the provisions of Section 147(b) cannot be sustained as it is time barred. Thus, from any view of the matter, we have to hold that the reassessment proceedings are bad in law, in the case of the assessee. The same is cancelled.
17. Shri Jacob contended that in a reassessment proceeding, the assessing authority has no right to go into the issues decided in favour of the assessee, in the original assessment. To put it more explicitly it was his submission that the Income-tax Officer having considered the nature of the business and kind of vouchers that are being maintained, with all its imperfections had not chosen to disallow any of the expenditure claimed by the assessee, but in the reassessment proceedings the learned Income-tax Officer had taken a different view on the very same vouchers evidencing the expenditure and has chosen to disallow the same. This would amount to change of opinion on the same set of facts, which the Income-tax Officer is not permitted to have in the reassessment.
18. Shri Abraham, on the other hand, contended that once the assessment is validly reopened, there are no fetters on the ITO to have a second look at the entire assessment.
19. We uphold the contention of the learned Sr. Departmental Representative. In the ratio of the decision of the Kerala High Court in K. Kesava Reddiar's case (supra), it has been held that when the assessment is validly reopened, the entire assessment is at large and the assessing authority is bound to determine the income de novo. However, in this case as we have held that the reassessment is bad in law, we do not go into the merits of the disallowances made by the assessing authority in the reassessment, as it would be a futile exercise.
20. In the result, the appeal of the assessee is allowed.