Meenakshy Lucky Centre vs Joint Cit on 30 November, 2000

[Cites 7, Cited by 0]

Income Tax Appellate Tribunal - Cochin

Meenakshy Lucky Centre vs Joint Cit on 30 November, 2000

ORDER

M.V.R. Prasad, A.M. This appeal is directed against the order of the assessing officer dated 28-3-2000, for the block period 1-4-1985 to 19-3-1996, passed under section 143(3) read with section 158BC of the Income Tax Act. The appeal is barred by limitation by five days, but the assessee has, vide its letter dated 12-5-2000, sought for the condonation of the delay. The letter is accompanied by an affidavit by Shri T. Murugan, managing partner of the assessee-firm, dated 12-5-2000, in which it is mentioned that during the relevant period he was hospitalised and so could not contact the concerned auditors in time for filing the appeal. We have perused the affidavit and we hereby condone the delay in filing the appeal. The appeal is admitted.

2. Before us, the appeal has been seriously contested. The learned counsel for the assessee has filed as many as 11 paper books and an argument note running into 22 pages, exclusive of schedules. The learned Departmental Representative has also filed a detailed argument note running into 18 pages and also a paper book. The learned counsel for the assessee has also filed his separate comments on the reasons given by the assessing officer, and also his comments on the argument note filed by the learned Departmental Representative.

3. The assessee has filed originally various grounds running into ten pages. These grounds are of an argumentative nature. Subsequently, the learned counsel for the assessee has filed revised grounds, which are 12 in numbers. We do not find it necessary to reproduce all the grounds. The gist of the grounds is that each of the additions made by the assessing officer has been arranged.

4. This is a case which illustrates the extent of damage that can be done by an ill-informed and ill-trained, and possibly overworked part-time accountant.

5 The assessee-firm is engaged in the business of purchase and sale of lottery tickets from 1991 onwards. It is one of the authorised principal agents of Kerala State lottery tickets. It is also authorised agent of lotteries run by other State Governments to sell their tickets within the State of Kerala. The lottery tickets are distributed among the various sub-agents operating at the District level. The district level sub-agents distribute the tickets through sub-agents at different localities. Substantial commissions are given to the persons who actually sell the tickets to the ultimate consumers. It is claimed that the assessee-firm gets a commission of less than 1 per cent, though its turnover is in crores.

6. An action under section 132 of the Income Tax Act was conducted on the assessee on 19-3-1996, and in response to the notice under section 158BC dated 6-2-1997, the assessee filed the block return on 26-3-1997, and the original block assessment had been passed on 31-3-1997. It may be observed that the notice under section 158BC, calling for the block return itself had been delayed and the first assessment had been completed in a hurry, as it was getting barred by limitation. Substantial additions had been made in the original assessment and when the matter reached the Tribunal, the Tribunal vide its order dated 18-11-1997, set aside the assessment and remanded the matter to the file of the assessing officer with a direction to redo the matter. The concluding remarks of the Tribunal were as under :

"5. Where an addition of Rs. 1,57,30,590 has been made without considering the submissions, the assessment order cannot be held just and proper. A reasonable opportunity was required to be given to the assessee. However, it appears that the assessing officer was in a hurry to complete the time barring assessment and that made him to reject the request of the assessee's representative. Apart from not allowing to produce whatever evidence the assessee wanted to produce, the assessing officer has also not considered the affidavit filed on 31-3-1997.

6. After considering the arguments of both parties and the facts available on record, we are of the opinion that without allowing a fair opportunity of being heard to the assessee and allowing the assessee to produce whatever evidence it wants to produce in order to substantiate its claim, no fair justice can be done nor the addition made by the assessing officer can be appreciated. In this view of the matter, the following order is passed :

7. The assessment order, dated 31-3-1997, made under section 143(3) read with section 158BC of the Income Tax Act, 1961, for the block period 1-4-1985 to 19-3-1996, is hereby set aside. The assessing officer is directed to make a fresh assessment after an opportunity of being heard given to the assessee and enable the assessee to produce whatever evidence it would like to produce to substantiate its claim with proper application of mind.

8. In the result, the appeal is allowed for statistical purposes."

7. It may be mentioned that in the first block assessment made on the assessee, a substantial addition made of as much as Rs. 1,15,41,397 relates to the assessment year 1995-96. For this assessment year, the assessee had filed the return in the normal course on 31-10-1995, i.e., on the due date for filing of the normal return. In other words, the normal return for this year had been filed much before the block return had been filed, even though no assessment seems to have been framed under section 143(3) before the first block assessment had been completed. This fact is of some relevance, as it will be apparent in the course of this order.

8. In pursuance of the directions given by the Tribunal in its order dated 18-11-1997, the assessing officer had completed the block assessment a second time vide his impugned order dated 28-3-2000, and that is how the matter is again before us. In the second block assessment made by the assessing officer he has almost verbatim repeated all but one of the additions made in the first assessment. The only exception is the deletion of an addition of Rs. 10 lakhs on the basis of an estimate made in the original assessment. All the other additions aggregating to Rs. 1,46,20,170 have been repeated and the computation of undisclosed income given in the assessment order dated 28-3-2000, is as under :

"The total undisclosed income for various assessment years are therefore, as below :

Assessment Year 1992-93 Rs.

Unaccounted bank balance as discussed in para 7 27,132 Assessment Year 1993-94 Unaccounted bank balance as in para 7 280 Assessment Year 1994-95 Nil Assessment Year 1995-96 Rs.

(i) Understatement of debtors as discussed in para 5 49,83,287

(ii) Understatement of cash balance as discussed in para 9 65,58,110 1,15,41,397 Assessment Year 1996-97

(i) Unexplained cash as para 10 24,81,361

(ii) Unaccounted income from sale of lottery tickets as per para 11 5,70,000 30,51,361 Total undisclosed income 1,46,20,170 Income Tax thereon at the rate of 60 per cent ..............................

87,72,1 This should be paid as per notice of demand and challan enclosed."

9. To understand the nature of the additions made by the assessing officer and the submissions made in regard thereto by the respective parties, it is necessary to give a few facts regarding the organisation and the business of the assessee, and the accounting method followed by the assessee. The assessee has a head office at Kottayam and two branches, one at Kollam and the other at Kumili. The assessee has maintained separate books of accounts for the head office and each of the two branches. The accounts are maintained in English, but the ledger (hereinafter called the fair ledger, to distinguish it from another personal ledger) is maintained according to the Indian system, i.e., the credits figure on the left side and the debits figure on the right side of the account. To add to the complication, in the personal ledger described as MMC 11 and MMC 16 by the assessing officer at pages 3 and 4 of his order, the debits are on the left side and the credits on the right side, as in the usual English system. The most distinguishing feature of the accounting system followed by the assessee is that the cash balance shown in the day book (cash book) includes not only the cash as such, but also the prize winning tickets (hereinafter referred to as PWTs) received. In the written submissions filed before us, the assessee has explained this aspect of the matter at pages 10 and 11 of its argument notes, which reads as under :

"(b) Settlement Procedure In a raffle, number of lottery tickets (more than 1,00,000) win prizes of smaller value. In a majority of the cases, the value of the prizes will be less than Rs. 100. To claim the prize, the person holding the prize winning ticket should present the ticket in the office of the Directorate of State Lotteries. With regard to the prizes of the lotteries run by other State Governments the claim has to be made at the respective States. As the value of the prize is less than Rs. 100, it will not be economical to personally claim the prizes at the respective places. So to receive prize money at the earliest, the prize winning tickets will be given to the local agent. He will purchase such prize winning tickets and will take a nominal commission for such services rendered. The prize winning tickets so collected from several such persons will be given to the main agents operating at the district level. The value of such prize winning tickets will be adjusted against the dues payable to the main agents by these sub-agents. Now the agents working at the district level will give all the prize winning tickets received from various sub-agents towards the settlement of the dues to the principal agents, viz., the appellant-firm.

The average value of a prize winning ticket is about Rs. 50 per ticket. The appellate firm receives prize winning tickets for a value of about Rs. 5 lakhs every day and the number of tickets for this value will be 10,000. On receipt of such prize winning tickets the appellant-firm has to verify the ticket number, serial number, the concerned State Government, value of the prize, etc., by referring to the relevant newspaper containing the results. Only after confirming the genuineness, correctness and validity of the tickets and prize money, the appellant firm will give credit to the agent.

The appellant-firm after verifying the above facts will forward these tickets to the respective creditors being the major agent operating at other states towards the settlement of the dues. Those creditors will also take some time for the verification of the tickets. Those creditors accept and account the receipt of prize winning tickets only after verification. Sometimes there will be mistakes or errors in the accounting of prize winning tickets and such mistakes are rectified on detection or at the time of the finalisation of the accounts after the close of the accounting year whichever is earlier.

As these prize winning tickets are valuable assets, it is treated at par with cash. Therefore, the appellant-firm was treating prize winning tickets as equivalent to cash. Prize-winning tickets are accounted in the cash book. Thus, the cash balance shown in the cash book on each day represent the total of the value of the prize winning tickets and cash on hand.

This is the accounting procedure regularly followed by the appellant from 1991 onwards. This method of accounting was accepted by the assessing authorities for all assessment years.

Even after the search, in the subsequent years also, the appellant-firm followed the same accounting procedure and was accepted by the department."

(Emphasis, italicised in print, supplied)

10. There are more controversies about the reflection of the PWTs in the accounts. Some of the prize winning tickets have been ledgerised, whereas the others have not been ledgerised. This is an aspect of the matter which has been argued by the learned Departmental Representative before us, but this has no relevance so far as the additions made by the assessing officer are concerned and so we shall revert to it subsequently. At this stage, suffice it to state that the cash balance recorded in the day books includes the value of the PWTs.

11. During the search action a number of registers were seized and they include the following :

(i) Day book for financial year 1994-95.

(ii) Fair ledger for the year 1994-95.

(iii) Day book for the year 1995-96.

(iv) Another ledger (hereinafter referred to as personal ledger) for 1995-96 (MMC 11 & MMC 16).

It may be mentioned that the ledger for 1995-96 was not among the seized ledgers and the claim of the assessee is that it had not been written even up on the date of the search.

12. It is also necessary to mention the nature of the so-called personal ledger for the year 1995-96, which forms the basis for a substantial portion of the addition made by the assessing officer in the block assessment. It is in two parts described in the assessment order at pages 3 and 4 as ledger No. MMC 11 and MMC 16. The claim of the assessee is that this is a ledger of the nature of a personal memorandum, in which the debts owed to the assessee-firm by different parties have been noted. This ledger is maintained year-wise.

13. The assessing officer compared the opening balances of the sundry debtors as recorded in the above-mentioned personal ledger with the closing balances in the fair ledger for 1994-95. According to him, the opening balance in the personal ledger for 1995-96, i.e., as on 1-4-1995, should tally with the closing balances in the fair ledger for 1994-95, i.e., as on 31-3-1995. According to him, the aggregate of the opening balances in the personal ledger for 1994-95 exceeded the closing balances in the fair ledger for 1994-95 by as much as an amount of Rs. 49,83,287, which he brought to tax as undisclosed income for 1995-96. While doing so, he rejected the contention of the assessee that the personal ledger in both of its parts does not reflect the balances due to the assessee as on 31-3-1995, but is inclusive of so many right offs, discounts given and other adjustments made earlier in respect of those parties and is in the nature of a register of a non-performing assets, which is maintained only for supervision or management purpose with the fond hope that at some point of time in future the debtors might return the dues in the contingency of their winning a lottery.

14. The next major addition made by the assessing officer is an amount of Rs. 65,58,110 under the head "understatement of cash balance" for the assessment year 1995-96. The assessing officer noticed that there is a discrepancy between the closing cash balance as on 31-3-1995 in the seized day book for the year 1994-95 and the opening cash balance as on 1-4-1995, in the seized day book for 1995-96. He was of the view that the cash balance recorded in the day book for 1995-96 as on 1-4-1995, reflected the correct balance and there was an understatement of assets for the year 1994-95 being the understatement of cash balance by the said difference of Rs. 65,58,110 and accordingly brought to tax the so-called understatement of cash balance as undisclosed income for assessment year 1995-96. The contention of the assessee before the assessing officer was that the part-time accountant of the assessee, Shri Gopalakrishna Iyer, committed some egregious accounting blunders and that the partners of the assessee-firm being illiterate and ignorant could not notice those blunders initially. The accountant maintained the day books for 1994-95 and 1995-96 continuously and in the day book for 1995-96 as on 1-4-1995, he brought forward the cash balance as on 31-3-1995, in the day book for 1994-95. He, however, noticed some of his egregious blunders only at the time of finalisation of accounts for the year 1994-95, i.e., in September, 1995, for the purpose of filing the income-tax return for the assessment year 1995-96. The blunder noticed was that the prize winning tickets (PWTs) received from different parties had been issued to other parties, i.e., creditors, but they were not recorded in the day book. While the receipts of PWTs were recorded regularly, the issue of PWTs, though effected, was not reflected in the day book. Consequently, there was an overstatement of cash balance, which, as already mentioned, included the PWTs matched by a corresponding overstatement of creditors because their accounts were not debited in the books for the PWTs issued to them. So, when this blunder was noticed in about September, 1995, he recorded the issue of PWTs in the day book for 1994-95 as on 30th and 31-3-1995, and so by this process he arrived at the correct cash balance of Rs. 84,074.94 as on 31-3-1995, as against the inflated cash balance of Rs. 66,42,185.76 shown earlier and which had been carried forward as on 1-4-1995, in the day book for the year 1995-96. This is the amount shown as cash on hand in the balance sheet filed along with the normal return that had been furnished on 31-10-1995. Now, the question is as to how the discrepancy between this figure of Rs. 84,074 shown in the day book for 1994-95 as on 31-3-1996, and the figure of Rs. 66,42,185 shown as carried forward balances as on 1-4-1995, in the day book for 1995-96 had arisen. The version of the assessee is that by the time the accountant noticed the inflated cash balance as on 31-3-1995, in the day book for 1994-95, i.e., in the month of September, 1995, the day book for the year 1995-96 had been written upto 31-5-1995. In other words, the day book for 1995-96 had not been written up for the period 1-6-1995, to 30-9-1995, or so. The accountant had to correspondingly reduce the cash balance as on 1-4-1995, in the day book for 1995-96. As the day book had already been written up to 31-5-1995, he chose to effect the rectification entries as on 31-5-1995, in the day book for 1995-96. In other words, the rectification entries had to be passed in the set of books for 1994-95 and also in the set of books for 1995-96. While the rectification entries were passed for the year 1994-95 in the day book of that year as on 30-3-1995, and 31-3-1995, the corresponding rectification entries in the day book for 1995-96 had been passed only on 31-5-1995, and not earlier. At this stage, we may also mention that the version of the assessee is that while by September, 1995 the day book for 1995-96 had been written upto 31-5-1995, the ledger for 1995-96 had not even been started. This aspect of the matter is also relevant to discuss other issues thrown up in this appeal and we shall revert to it later. The claim of the assessee is that as the day book for 1995-96 had been seized and as rectification entries passed on 31-5-1995, in the day book can be verified therefrom, there is no reason to doubt his version in this regard. The further claim of the assessee is that while the assessing officer has chosen to make an addition of Rs. 65,58,110 on the ground of discrepancy between the cash balances on the basis of the figures recorded in the seized day books for 1994-95, 1995-96, he totally ignored the day book for 1995-96 and the rectification entries passed therein while making the other addition of Rs. 49,83,287 towards understatement of debtors, which has been discussed by us hereinabove. For making that addition, the assessing officer took into account only the personal ledger for 1995-96 and totally ignored the rectification entries passed both in the day book for 1994-95 as on 30th and 31-3-1995, and the day book for 1995-96 as on 31-5-1995. So, the claim of the learned counsel for the assessee has been that the assessing officer had selectively relied and ignored the seized material to draw adverse inferences instead of taking a holistic view.

15. The story of the egregious blunders committed by the accountant does not stop here. As mentioned above, some of the blunders were rectified in September/October, 1995 while filing the income-tax return for 1995-96. The results of the rectification entries had also been incorporated in the final accounts filed along with the return for the year 1995-96. Thereafter, after the search action the accountant noticed that he had committed some more blunders. One of the blunders was committed while passing the rectification entries as on 30th and 31-3-1995, as mentioned before. He noticed that he credited Rs. 14 lakhs in the account of a debtor Shri Hariharan of Tellicherry for the receipt of PWTs, though no PWTs were received by him. By this erroneous credit, he understated the debit balance in the case of Shri Hariharan by Rs. 14 lakhs. Instead of showing it at the correct balance of Rs. 14,94,272, he erroneously shown it at only Rs. 94,272. Similarly, the debit balance in the account of another debtor Shri M.M. Khan was understated by Rs. 2,80,224. Instead of showing the debit balance in the account of M.M. Khan at the correct balance of Rs. 4,46,886, it was shown only at Rs. 1,66,634. It is not only that these two debit balances were understated in the original balance sheet filed along with the return. The accountant failed to record even the drafts received from parties which were deposited into Canara Bank, Kottayam. The drafts received from debtors were deposited into the bank accounts, but they were not shown in the day book as having been deposited into the bank account. On the other hand, such drafts were treated as PWTs and were shown as having been sent to certain creditors like Madhangi Lottery Agencies and Harsha Agencies. As the drafts were treated as PWTs and shown as having been sent to the above two creditors, the result is that the bank account into which the drafts were deposited was not shown in the books and similarly the creditors were artificially reduced by erroneous debits to their accounts for PWTs which were not sent to them. In other words, there is an understatement of assets of Rs. 40,08,241, which is matched by a corresponding understatement of creditors. The details of such debits and credits understated in the original balance sheet are as under :

Rs.

Debtors : Difference in Hariharan's account 14,00,000 Difference in M.M. Khan & Bros.

2,80,254 Bank account-Canara Bank difference 23,27,987 40,08,241 Creditors : Difference in Harsha Agencies 20,58,873 Difference in Madhangi Lottery Agency 19,49,368 40,08,241 It may be noticed that the aggregate of the understated debits of Rs. 40,08,241 equals the aggregate of the understated credits in the name of two creditors. Now, the question is how are these rectification entries effected. The version of the assessee is that as these blunders in question were noticed after the search action and as the day books of both the years 1994-95 and 1995-96 along with the fair ledger for 1994-95 had been seized by the department and as such were not available to the assessee, it could not effect the necessary rectification entries in respect of the above five accounts (three debits and two credits) only in the fair ledger for 1995-96. The blunders in question in the above five accounts were noticed in about March, 1997. He incorporated the correct balances in the above five accounts (3 assets & 2 creditors) as opening balances in the ledger for 1995-96, as this ledger was not even started upto that date. As the total of the three assets is matched by the total of the two creditors, it did not make any difference for the tally of the trial balance. Even without a corresponding entry in the day book for 1994-95 or the ledger for 1994-95, the assessee incorporated the above assets and liabilities and filed a revised balance sheet as on 31-3-1995. The sundry debtors shown in the first balance sheet filed along with the normal return in October, 1995, was only Rs. 10,22,036, whereas the sundry debtors shown in the revised balance sheet in respect of Kottayam head office was of the order of Rs. 27,03,192. At this stage, we may mention that the assessee has filed before us the balance sheets of the two branches, Kollam and Kumili and of head office at Kottayam and also a consolidated balance sheet incorporating the assets and liabilities of both the head office and the branches. The total of the debtors in the consolidated balance sheet is of the order of Rs. 27,91,485. At this stage, we may also give the differences between the first balance sheet and the revised balance sheet;

Creditors Debtors Canara Bank Balance Rs.

Rs.

As per original balance sheet as on 31-3-1995 29,65,805 10,22,936 Nil As per revised balance sheet of head office Kottayam as on 31-3-1995.

69,74,046 27,03,190 23,27,987 The difference in creditors as per the revised balance sheet and the original balance sheet is Rs. 40,08,241. This is balanced by the difference on the assets side. Considering the debtors and bank balance together of Rs. 40,08,241, this is the difference between the two balance sheets, i.e., original and revised of Kottayam head office. The debtors as per the consolidated balance sheet after revision is of the order of Rs. 27,91,485.

16. The assessing officer made an addition of Rs. 27,132 for the assessment year 1992-93, of Rs. 280 for the assessment year 1993-94 and an addition of Rs. 24,81,361 for the assessment year 1996-97 with the following remarks :

"7. As mentioned in para 4 of this order the assessee has taken into account the bank balance with Canara Bank, Kottayam, in the revised balance sheet filed to explain the assessee's version. Here also the fact that the bank balance was not disclosed in the balance sheets filed for the assessment years 1992-93 to 1995-96 along with the returns of income filed remains. In their letter dated 21-2-2000, the assessee seeks to explain that various demand drafts received from Hariharan Tellicherry from 2-7-1994 to 1-3-1995, aggregating to Rs. 24,81,467 (Vide annexure II) were actually treated as prize winning tickets in assessee's accounts, but sent to bank for collection and credited to bank account. However, in the accounts the facts that they were drafts received and were sent to bank were not recorded as such. If that was so, there would be an inflation in cash/prize winning tickets in the cash book as the remittances to the bank were not routed through cash book. The inflation in cash Rs. 24,81,467 will be separately considered. The unaccounted bank balance for assessment years 1992-93 to 1995-96 are considered as undisclosed income as under :

Assessment Year Rs Rs 1992-93 : Unaccounted balance 27,132 1993-94 : Unaccounted balance 31-3-1993 27,412 Less : Considered in 1992-93 27,132 1994-95 : Unaccounted balance 31-3-1994 27,412 280 Less : Considered in 1992-93 & 1993-94 27,412 Balance Nil 1995-96 : Considered separately under inflation in cash balance for 1996-97. Hence unaccounted balance assessable is considered as Nil Nil .........

10. Inflation in cash : While considering the unaccounted bank balance in the account of Canara Bank, Kottayam, an amount of Rs. 24,81,467 is stated to be drafts considered as prize winning tickets. In that case the cash balance as on 31-3-1995, would be reduced to that extent. If the cash had gone to the bank as claimed by the assessee, it would be interesting to note the subsequent cash balance as per cash book for the financial year 1995-96. On various dates, the cash balance in the accounts are very low as noted below :

Rs. 106 Rs. 3,801 The above cash balances are when the cash balance as on 1-4-1995, is taken as Rs. 66,42,185. If the cash balance is reduced by Rs. 24,81,467 there would be a negative cash balance as on 7-9-1985, to the extent of Rs. 24,81,361 which the assessee will have to explain. As there is no explanation for this position the amount of Rs. 24,81,361 will have to be assessed undisclosed income for the assessment year 1996-97."

It may be seen that the above-mentioned additions of Rs. 27,132 for the assessment year 1992-93, Rs. 280 for 1993-94 and the addition of Rs. 24,81,361 for the assessment year 1996-97 are linked. All the additions emanate from the fact that the balance in the Canara Bank account has not been disclosed in the first place. While making these additions, the assessing officer did not take into consideration the contentions of the assessee about the blunders committed by the accountant and the consequent filing of the revised balance sheet, in which the bank balance in the Canara Bank was correctly reflected.

17. The assessing officer also separately made an addition of Rs. 5,70,000 for the assessment year 1996-97 as unaccounted income with the following remarks :

"The other issue in dispute is the unaccounted income of Rs. 5,70,000 for unaccounted purchase and sale of lottery tickets. On a scrutiny of the books of accounts seized from the assessee, it was found that in respect of those sundry debtors, not finding a place in the list above (vide parties ledger No. 6 MMC 11), regular transactions have been entered in the ledgers, but such transactions do not find a place in the day book. From this, it was inferred that the sales to the said parties and the receipts of moneys credited in their accounts have not been routed through the day book, and the same have remained outside the books. Thus, it is clear that there has been a systematic suppression of sales as well. The extent of sales thus made outside the books amount to Rs. 5,70,00,000. Taking the percentage of profit in comparable cases of lottery agents the income earned by the assessee out of the sales outside the books of accounts was estimated at 1 per cent of the sales. Thus, an addition of Rs. 5,70,000 was made in the case of the assessee."

18. Before us, the learned counsel for the assessee mentioned the background of the assessee, in the argument notes given by him, in the following terms :

"Background of the assessee : For the purpose of more clarity and easy understanding, background of the appellant-firm and its partners are given below :

The appellant is a partnership firm consisting of the following partners :

1. Mr. T. Murugan

2. Mr. T. Selvaraj

3. Mrs. Palthurachi

4. Mr. T. Sengottal Singam

5. Mrs. Madathiammal Out of these, Mrs. Madathiammal is the mother of the other four partners. She migrated to Kerala seeking livelihood and accepted the employment as a casual and domestic worker in various houses. She could give only primary education to her children. The eldest son Sri Murugan, at the age of 20 years, was searching for an employment to have his livelihood. Due to lack of education and any kind of support or encouragement from anybody in the society, he did not get any job. He started his career in life earning income by selling his blood for a nominal price to those patients who were admitted in the District Hospital/ Medical College, Kottayam. On his visits to Medical College, he had the occasion to see the boys selling lottery tickets to the people assisting the patients. On realising that on sale of such lottery tickets the boys earn a commission of about 25 per cent, Shri Murugan also decided to engage in such a job. Accordingly, the amount received by him against sale of the blood was utilized to purchase lottery tickets. Such tickets were sold to the various people visiting the District Hospital/Medical College. He was earning commission of about Rs. 30 to Rs. 40 per day."

The four brothers were selling lottery tickets separately, but in 1991, they came together and constituted the partnership. The turnover increased year after year. Even though the turnover increased, the partners being ignorant of any accounting matters, they could not oversee the work of the part-time accountant and were totally dependent on him. It is claimed that the assessee's share of commission was not more than 1 per cent of the turnover and it is unimaginable that the assessee could have derived income of the order of Rs. 1,46,20,170 for the block period determined by the assessing officer. It is further stressed that excepting the accounting registers mentioned by the assessing officer, no assets of any substantial value were seized during the raid. The learned counsel for the assessee has also filed a statement showing gross total assets owned by the partners upto 15-3-1996, i.e., the date of search, and the details as given at page 14 of the paper book No. 9 are as under :

Rs.

1.

T. Murugan

7,27,383.00

2. T. Selvaraj

9,39,796.50

3. T. Sengottu Singham

5,36,275.00

4. Palthuraichi

5. Madathi Ammal

3,44,428.00 Total

25,47,882.50 He has also given a statement showing the sources available to the partners for the acquisition to the above-mentioned assets and the details given by him at page 19 of the paper book No. 9 are as under :

Sl. No. Name of partner Drawings from the firm.

Separate income offered (by way of winnings from lotteries during assessment years 1989-90, 1990-91, 1991-92 & 1993-94 Total Rs.

Rs.

1.

T. Murugan 3,97,206.85 6,04,497.00 10,01,703.85

2. T. Selvaraj 4,94,211.50 5,44,994.00 10,39,205.50

3. T. Sengottu Singham 5,35,792.15 2,43,492.00 7,79,284.25

4. Madathi Ammal 48,337.00 48,37.00

5. Palthuraichi 1,72,237.00 1,72,237.00 Total 16,47,784.50 13,92,983.00 30,40,767.50 The thrust of the argument of the learned counsel for the assessee is that if the firm or the partners have made income of the order of Rs. 1,46,20,170 during the block period, it would have surfaced as assets acquired during the block period. As there is no acquisition of unexplained assets, it is pleaded that the income returned in the block return deserves to be accepted.

19. Now we shall turn to the separate additions made by the assessing officer. In respect of the addition of Rs. 49,83,287 made for the assessment year 1995-96, it is mentioned that the correct balance as per the personal ledger, i.e., the totals of MMC-11 and MMC-16 referred to by the assessing officer at pages 3 and 4 of his order, work out to Rs. 62,16,225 and not Rs. 60,06,224 mentioned by the assessing officer. The reconciliation of these two figures with the balance of sundry debtors as shown in the original balance sheet of Rs. 10,22,936 is given by the learned counsel for the assessee along with his argument notes and the relevant details are as under :

Reconciliation of Sundry Debtors Particulars Amount Amount Amount Rs.

Rs.

Amount as determined by the ADI/ Assessing authority. Debtors as per Table 1 (page 3 of assessment order) 15,03,627.50

-do-

Table II (page 4 of assessment order) 45,02,596.97 60,06,224.47 Add: Casting Mistake

(i) Table 1 Correct Total 16,93,627.75 Total adopted by assessing officer 15,03,627.50 1,90,000.25

(ii) Table II Correct Total 45,22,597.47 Total adopted by the assessing authority 45,02,596.97 20,000.50 2,01,000.75 Correct Balance 62,16,225.22 Less : Discounts and other incentives to agents already adjusted in earlier years and approved by the department 15,29,908.25 Less : Bad debts written off in earlier years and approved by the department 2,25,095.50 17,55,003.75 Less : Omission to account the receipts of cash/prize winning tickets on the date of receipts, but rectified subsequently on 30-3-1995 and 31-3-1995, not recognised and taken into consideration in the personal ledger 11,90,600.08 Less : Inter-branch balances wrongly considered as debtors by the assessing authority 5,67,430.70 17,58,030.78 Less : Understatement of debtors with corresponding understatement of creditorsrectified in the revised balance sheet as on 31-3-1995.

(a) Hariharan Tellicherry 14,00,000.00

(b) M.M. Khan & Bros. Tvm.

2,80,254.00 16,80,254.00 51,93,288.53 Balance as per original balance sheet 10,22,936.69 If we add the amount of Rs. 16,80,254 being the understatement of the debts owed to Sri Hariharan and M.M. Khan & Bros. to the above-mentioned figure of Rs. 10,22,936, we arrive at the debtors as per the revised balance sheet of Rs. 27,03,190. The reconciliation can be seen in the following manner also :

Rs.

Balance of debtors in MMC-11 and MMC-16 adopted by the ADI and the assessing officer 60,06,224 Error in the figure adopted by ADI and assessing officer 2,10,000 Correct balance of debtors in MMC-11 and MMC-16 62,16,225 Less : Adjustments made in the accounts before filing the first balance sheet or before search 35,13,333** Balance as per revised balance sheet 27,03,192 Less : Debtors as per original balance sheet 10,22,936 Difference in the debtors between the first balance sheet and the revised balance sheet or total of adjustment made after search 16,80,256@@ Rs.

**Discounts, etc., written off (Col. 3 of Annexure-1 to assessment order) 15,29,853 Omissions in accounting for receipts, etc., rectified subsequently (Col. 7 of Annexure-1 to assessment order) 17,58,085 Amounts written off as bad debts 2,25,095 35,13,333 @ @ Increase in the debit balance in the account of Shri Hariharan, Tellicherry, as mentioned in the bottom of Annexure-1 to the assessment order 14,00,000 Similar increase in the account of M.M. Khan & Bros. mentioned at bottom of Annexure-1 to assessment order 2,80,256 Total 16,80,256 Yet another mode of reconciliation is as under

Rs.

Correct receivables as per MMC-11 and MMC-16 62,16,225 Less: Casting mistake by ADI & assessing officer 2,10,000 60,06,225 Less : Addition made by assessing officer being excess of receivables in MMCs-11 & 16 49,83,287 Balance of debtors in the original balance sheet 10,22,938 In other words, the position can be summarised as under Rs.

Correct balance as per MMC-11 and MMC-16 62,16,225 Less : Balance of debtors as per revised balance sheet 27,03,190 Adjustments made before the search action in regular accounts, but not effected in MMC-11 and MMC-16 35,13,085 The learned counsel for the assessee invited our attention to Annexure-I to the assessment order in which the details of the above adjustments made in the regular accounts, but not reflected in MMC-11 and MMC-16 aggregating to Rs. 35,13,085 were furnished to the assessing officer. The totals of cols. 3+7+8 being discounts written off and omissions in accounting for receipts and amounts written off equal to the total of the adjustments made and the aggregate of such adjustments coupled with the total of col. 6 in the annexure, i.e., the debtors as per the revised balance sheet equal to total of col. 2, which is the correct balance as per MMC-11 and MMC-16. It is pointed out that the clarification about MMC-11 and MMC-16 being only a personal ledger meant for management purposes and they not being part of the regular set of books of accounts had been given even before the original assessment and in this context attention is invited to assessee's letter dated 26-3-1997, given in paper book No. 10, at pages 16 to 18, which reads as under :

"Dear Sir, Sub : Income-tax assessment of our own for the block period 1985-86 to 1995-96.

Kindly refer to the return of income filed by us for the block period 1985-86 to 1995-96 and the hearing conducted on various occasions to offer our explanations and clarifications on the several matters stated in the return and the forwarding letter. Now we submit the following additional clarifications, explanations and furnish the evidences to enable your goodself to complete the assessment for the block period in a realistic and fair manner by taking into consideration justice and equity.

It appears your goodself proposed to complete the assessment and determine the income for the block period on the basis of the finding made by the ADI, Kottayam, in his appraisal report. The ADI in finalising the appraisal report did not give us an opportunity to offer our explanations on the various matters relied on by him. It is understood that by referring to a rough book taken from the place of business of our firm the ADI had prepared a statement of certain balances as appeared in the name of some lottery sub-agents and came to a conclusion that those amounts represent the actual receivables from them. As already stated by us, this statement prepared by the ADI contains even the balances in the name of our own branches at Kottayam, Kumili and Koliam. The balances in the name of most of the agents were to be adjusted to account for various credits and debits against the incentive commission and other claims of the agents.

We have filed the revised balance sheet as at 31-3-1995. Now we are filing herewith affidavits from all the debtors and creditors shown in the balance sheet confirming the balance due from them the adjustment entries passed for the various transactions. Wherever there are no amount payable to us the parties have confirmed accordingly. The list of the parties whose affidavits are now enclosed is attached.

We are also enclosing herewith the confirmation letters from the following creditors :

Rs.

Madhengi Lottery Agencies 19,49,868.45 Harsha Agencies 20,58,873.00 From the above your goodself can kindly note that the findings and conclusions made by the ADI in his report are not correct and cannot be taken as a basis for determination of the alleged undisclosed income for the block period as the findings were made without understanding the actual transactions or the nature of the various balances adopted and information relied on by him. He also did not ask us to give any clarifications even though our managing partner and the authorised representative appeared before him on several occasions.

We were given a rough idea of those findings and conclusions of far-reaching consequences only about 5 days back. Within a short time we contacted all the agents and explained to them the matter. All of them furnished affidavits duly attested by the Notary Public to confirm the balance of the amount in their books. We can furnish any further information/evidences/ clarifications that your goodself may require on any matter.

Now we request your goodself to kindly consider the evidences, affidavits/explanations given by us and our authorised representatives at the time of the hearing orally and the written submissions made from time to time to complete the assessment by determining the income for the block period.

We further request your goodself to complete the assessment in accordance with the return of income filed for the block period.

Thanking your goodself. "

(Emphasis, italicised in print, supplied) It is mentioned that the true nature of MMC-11 and MMC-16 had been explained to the assessing officer during various appearances before him and the details of the adjustments made as per Annexure-I to the assessment order had also been furnished. The balances of debtors as reflected in the revised balance sheet and mentioned in Annexure-1 had also been supported by affidavits of the concerned parties, which had been filed before the assessing officer even before the first block assessment had been made. It is to verify the correctness of these affidavits, if doubted, that the Tribunal had set aside the block assessment in the first round. The assessing officer apparently did not doubt the affidavits. So he did not make any attempt to examine the deponents or to throw doubt on their version. Having accepted the affidavits, it is pleaded that the assessing officer was totally wrong in rejecting the contention of the assessee that the MMC-11 and MMC-16 did not reflect the correct balances due from the various parties. The learned counsel for the assessee has also furnished before us the affidavits filed by the different parties, which are contained at pages 1 to 112 of the assessee's paper book No. 1. He has also filed the details of the adjustments made of Rs. 15,29,853 (col. 3 of Annexure-1 to the assessment order) and of Rs. 2,25,095 (col. 8 of Annexure-1 to the assessment order) at page 1 of paper book No. II and the relevant details of the aggregate of these two amounts are as under :

Rs.

Amounts written off prior to 1-4-1991, i.e., before the firm was constituted and the business was done in a proprietary capacity 14,75,900 Written off in 1991-92 1,156 Written off in 1992-93 7,061 Written off in 1993-94 59,581 Written off in 1994-95 2,11,304 Total 17,55,002 (This is slightly more than the aggregate of cols. 1 & 8 in Annexure-I of the assessment order of Rs. 17,54,948).

The learned counsel for the assessee has also enclosed the relevant account copies of the parties in respect of whom the write offs were effected, both from the fair ledger and the personal ledger. Similarly, he has given the details of the parties in respect of whom the receipts were accounted only subsequently, i.e., on 30-3-1995, and 31-3-1995, and where such amounts were not recognised in the personal ledger in paper book No. 3. Such amounts aggregate to Rs. 11,90,600 and along with the inter-branch balances wrongly considered as debtors by the assessing authority of Rs. 5,67,430 amount to Rs. 17,58,030 and are reflected in col. 7 of Annexure-1 to assessment order. The inter-branch balances are the following :

Rs.

Meenakshy Lucky Centre, Kollam 1,87,260 Meenakshy Lucky Centre, Kumily 3,80,170 Total 5,67,430 In respect of the amount of Rs. 11,90,600, the relevant entries are claimed to have been made in the day book for 1994-95 on 31-3-1995, and correspondingly in the day book for 1995-96 on 31-5-1995. The learned counsel has included the relevant copies of the accounts in the fair ledger for 1994-95 and also the copy of the day book as on 31-3-1995, in paper book No. 3. It is claimed that even though the claim in respect of the adjustments made in the day book for 1994-95 was made before the assessing officer and the relevant details were also furnished as per Annexure-I to the assessment order-the assessing officer has simply rejected the explanation without any basis. He rejected the explanation even though the day books for 1994-95 and 1995-96 were also seized and the rectifications aggregating to Rs. 11,90,600 were effected on 31-3-1995, in the day book for 1994-95 and on 31-5-1995, in the day book for 1995-96.

20. The learned counsel for the assessee, mentioned that the assessee had furnished confirmation letters about the correct credit balances in the name of Madhangi Lottery Agencies and Harsha Agencies. The confirmation in the name of Madhangi Lottery Agency, dated 8-1-2000, given on 24-1-2000, to the assessing officer, reads as under:

"Dear Sir, Sub : Confirmation of balance for the Accounting year 1994-95.

Ref. Your letter dated 4-12-1988.

We do hereby confirm that a sum of Rs. 18,85,619.60 (Rupees eighteen lakhs eighty-five thousand six hundred nineteen and paise sixty only) is outstanding, as per our records, as payable to us by you as on 31-3-1995, against the value of lottery tickets sold to you.

Our Income Tax No. (OLD) PAN: 45-52-PQ-2965/DC/Company Circle-11(1)/CBE and NEW PAN: ADJPM0921E.

Thanking you and assuring you of our best cooperation always."

It may be noticed that the confirmation is for Rs. 18,85,619, whereas as per the revised balance sheet the amount owed by the assessee is of the order of Rs. 19,49,368. The confirmation given by M/s. Harsha Agencies, dated 13-1-2000, which was handed over to the assessing officer in January, 2000 reads as under :

"Sir, Sub : Confirmation of balance for the accounting year 1994-95.

We do hereby confirm that a sum of Rs. 20,58,873 (twenty lakhs fifty eight thousand eight hundred and seventy-three only) is outstanding as (sic) to us from M/s. Meenakshy Lucky Centre, YMCA Road, Kottayam, as on 31-3-1995 against the value of lottery tickets sold to them. Certified further that the settlement of the value of lottery tickets sold to M/s. Meenakshy Lucky Centre, Kottayam, are mostly done by exchange of prize winning tickets and the above balance of Rs. 20,58,873 (twenty lakhs fifty-eight thousand eight hundred and seventy-three only) is reflected in our books of account."

So, it is claimed that there was no reason for the assessing officer to have doubted either the first balance sheet or the revised balance sheet filed by the assessee and to have solely relied upon the so-called personal ledger (MMC-11 and MMC-16), and thus to make the impugned addition of Rs. 49,83,287 by ignoring the real nature of MMC-11 and MMC-16, as explained hereinabove.

21. In respect of the other major addition of Rs. 65,58,110 on the ground of understatement of cash balance as on 31-3-1995, in the day book for 1994-95, we have already mentioned the explanation given by the assessee before the assessing officer and before us in this regard. The assessing officer himself has enclosed to the assessment order the statement of reconciliation between the cash balance as per balance sheet as on 31-3-1995, of Rs. 84,074 and the cash balance as per the day book as on 1-4-1995, of Rs. 66,42,185 and the difference between which two figures of Rs. 65,58,110 has been added by the assessing officer. The said statement of reconciliation figures as Annexure-III to the assessment order and reads as under :

Rs.

Cash balance as per balance sheet as on 31-3-1995 84,074.94 Add : Adjusting entry passed 30-3-1995 P.W.T. (Prize winning tickets) 9,66,333.33 31-3-1995, Madhangi Agencies 55,13,620.25 Bharat Lottery Agencies (PWT) 21,696.27 Other payments made to parties before 31-3-1995 56,460.97 65,58,110.32 Cash balance as per books on 31-3-1995 66,42,185.00 The claim of the assessee is that the rectification entries to the extent of Rs. 65,58,110 were passed on 30th and 31-3-1995, by way of recording the despatches of PWTs to Madhangi Lottery Agencies and other parties and thus the total of cash balance plus PWTs has been reduced from Rs. 66,42,185 to Rs, 84,074 as shown in the above reconciliation statement. We have already mentioned that the corresponding entries in the day book for 1995-96 had been made on 31-5-1995, for the reasons already mentioned hereinabove. Before us, the learned counsel for the assessee has enclosed the day book entries on 30-3-1995, and 31-3-1995, in paper book No. 6 in support of the above entries. It is claimed that the addition of Rs. 65,58,110 is totally unjustified, as the said entries were made before the search and are evidenced even by the seized records.

22. With regard to the addition of Rs. 24,81,361 for the assessment year 1996-97 and the linked additions of Rs. 27,132 for 1992-93 and Rs. 280 for the assessment year 1993-94 as unaccounted bank balances, we have already referred to the explanation of the assessee that the bank balances in the Canara Bank has been reflected in the revised balance sheet filed by the assessee. This was filed subsequent to the search. But as already mentioned, certain debit balances inclusive of the cash balance in the Canara Bank have been understated and such understatement of debit balances is matched by the understatement of credit balances in the names of Madhangi Agencies. The said credit balances have been confirmed by them and there is, no reason to doubt the version of the assessee that it is only the blunders of the part-time accountant that occasioned the filing of the revised balance sheet. So it is claimed that there is no basis for any of the additions included in the total undisclosed income of Rs. 1,46,20,170 determined by the assessing officer. The learned counsel for the assessee has also enclosed an affidavit dated 27-9-2000, from the concerned part-time accountant, Shri K.V. Gopalakrishna Iyer which ends with the following confessions :

"37. The accounts of the firm for the year ended 31-3-1995, were finalised and completed by me in consultation with the auditors. I did not inform Shri T. Murugan or the auditors about the mistakes/adjustment entries made by me as stated above. In fact, I was very much afraid that I may lose my employment/major source of income if Shri T. Murugan is informed about my ignorance/lack of knowledge/experience and the nature of mistakes committed by me.

38. All the mistakes and defects in the books of account of Meenakshy Lucky Centre for the year 1994-95 as stated above were on account of various omissions and commissions made by me due to my ignorance and lack of expertise, experience and knowledge about accounting principles and Shri T. Murugan is not aware of any such mistakes committed by me.

All what is stated above is true and correct."

It is pleaded that the assessee should not suffer so much for the ignorance of the part-time accountant.

23. The learned Departmental Representative, on the other hand, filed one paper book consisting of the following :

1. Copy of letter dated 27-9-2000, from Deputy Commissioner, Coimbatore.

2. Copy of letter dated 3-10-2000, from Joint Director of Income-tax, Coimbatore.

3. Copy of letter dated 27-9-2000, from DDI (Inv.), Bangalore.

4. Copy of letter dated 6-10-2000, from Deputy Commissioner, PaIghar.

The letter at No. 1 above of Deputy Commissioner, Com. Circle-II(1), Coimbatore, addressed to the Sr. authorised representative (Sr. D.R.), reads as under :

"This has reference to the telephonic request from your office.

2. M/s. Mathangi Lottery Agency, Prop. Shri S.S. Manian, is assessed in this Circle.

3. The total sundry debtors for the assessment year 1996-97, financial year 1995-96 is Rs. 52,75,36,277, out of which the debts appearing against M/s. Meenakshi Lucky Centre, Kottayarn is Rs. 18,85,619. Copy of account of M/s. Meenakshi Lucky Centre is not available in the case records.

4. This amount payable by M/s. Meenakshi Lucky Centre to my assessee has not changed during the next year and the balance as on 31-3-1997, is also shown at Rs. 18,85,619. "

The letter of Deputy Director of Income Tax (Inv.), Bangalore, dated 27-9-2000, referred to at No. 3 above reads as under :

"Sir, Sub : Confirmation of balance in the case of M/s. Harsha Agencies-Reg.

As directed by the Addl. Director of Income Tax (Inv.), Unit-I, Bangalore, two Inspectors were deputed to cause an enquiry at M/s. Harsha Agencies, Power Green Building, Paris Corner, Bangalore. Please find enclosed Inspector's Report which is self-explanatory.

REPORT As directed by the Deputy Director of Income Tax (Inv.), Unit-1(3), Bangalore to collect the account extract of Meenakshi Lucky Centre from M/s. Harsha Agencies, said to be situated at Power Green Building, Paris Corner, Bangalore, we went to 'Paris Corner' Building. It is ascertained that there is no such business concerned in the building known as 'Paris Corner' which accommodates so many other lottery agencies. 'Paris Corner' building is situated just behind Majestic Theatre (back side of building the building is facing Killari road). Discreet enquiries from various lottery agencies as well as direct enquiry from the beat postman was made. These enquiries reveals the following :

(a) There is no building by name 'Power Green Building'.

(b) Building name is 'Paris Corner'.

(c) There is no concern by name M/s. Harsha Agencies.

(d) There is no person by name Ramesh M. Further, owner of 'Paris Corner' building Shri Govind was contacted who has stated there are no such said concern. He also stated that the tenants some times take the premises on rent on individual capacity. Shri Govind's phone No. are as follows : (0)2879668, 98440-28122, Lodge Karthik 670 6171."

The learned Departmental Representative requested that the above four letters should be admitted as additional evidence under rule 29 of the ITAT Rules, 1963. His request is in the following terms:

"The above reports received by me also go to the root of the matter in as much as they disprove the veracity of the assessee's claims with regard to the transactions in the accounts of M/s. Madhangi Lottery Agency and M/s. Harsha Agencies. As these evidences are necessary to enable the Tribunal to pass orders in this case, it is requested that Tribunal may kindly admit the additional evidence under rule 29 of the ITAT Rules."

It may be observed that the above letters were obtained by the learned Departmental Representative during the course of the hearing of the appeal by us. They had never been put to the assessee by the assessing officer. If the practice of making enquiries at the time of hearing before the Tribunal and requesting the result of such enquiries to be admitted as additional evidence is permitted, we are of the view that there will be no end to the hearings, besides the fact that it can cause untold damage to the interests of the assessee, as the canons of natural justice are totally violated. So, we decline to admit the evidence of the above four letters. We may, however, mention that we have reproduced the contents of the two letters on which the learned Departmental Representative specially wanted to rely. The other two letters do not add anything further to the stand of the department. It may be observed that actually the Deputy Commissioner Coimbatore has also confirmed the credit balance in the name of Madhangi Lottery Agency to the extent of Rs. 18,85,619 as on 31-3-1995. The credit balance shown by the assessee in the name of Madhangi Lottery Agency in the revised balance sheet as on 31-3-1995 is slightly higher, i.e., Rs. 19,49,368. This difference is explained by the learned counsel for the assessee before us as having been due to certain discounts claimed by the assessee which were allowed by Madhangi Lottery Agency subsequently, but not intimated to the assessee as on 31-3-1995. So far as the Inspector's report regarding M/s. Harsha Agency is concerned, the learned counsel for the assessee pointed out that possibility mentioned in the said letter of the tenants taking the premises in their individual capacity. At any rate, it is mentioned that the assessee did not have any further interest in M/s. Harsha Agency after settling the account with then in May, 1995. As already mentioned, we are of the view that it is totally unfair to the assessee to filing some enquiries in its face at the time of hearing before the Tribunal. Accordingly, we decline to admit the above letters. Though we are of the view that they do not take the case of the department far, and actually some of them may even be in favour of the assessee, as in the case of the confirmation by Madhangi Agency contained in the letter of the Deputy Commissioner, Coimbatore.

24. The learned Departmental Representative has filed argument notes running into 18 pages before us. The thrust of his argument is that the assessee has chosen to file the details of the various rectifications and write offs in respect of the addition of Rs. 49,83,287 being understatement of debtors only before the Tribunal. It is claimed that this is of the nature of fresh evidence and should not be admitted. It is also claimed that the veracity of various affidavits of the concerned debtors filed before the assessing officer by the assessee is very much doubtful, as they are all in English and have been written in an identical format. He also invited our attention to a sworn deposition taken by the assessing officer from one Shri Moideen, one of the debtors, and mentioned that he could not remember the amount owed by him to the assessee-firm while giving the deposition, but he remembered the exact figure while giving the affidavit. It is, however, admitted by the learned Departmental Representative that this deposition was never put to the assessee. Similarly, the learned Departmental Representative referred to certain other sworn depositions, which were also admitted not to have been put to the assessee. It is also mentioned that in his sworn statement given under section 132(4), Shri Murugan, the managing partner, admitted that the opening balances shown in ledger MMC-11 and MMC-16 as on 1-4-1995 were correct balances. So, the argument advanced by the learned Departmental Representative is that if they were correct balances, how different balances are shown in the fair ledger. It is also claimed that some of the rectification entries and write offs and discounts are not verifiable from the papers enclosed by the learned counsel for the assessee in the paper books. It is also claimed that while the assessing officer has wrongly included inter-branch transfer of Rs. 5,67,438, he had not included another debit balance standing in MMC-16 of Rs. 4,46,888 and so this amount at least should be included. The claim is that actually considering the casting mistake of Rs. 2,10,000, there would be a net enhancement of Rs. 89,458. The learned Departmental Representative also mentioned that the confirmation given by M/s. Madhangi Lottery Agency cannot be accepted at its face value because they were confirming a balance of Rs. 18,55,619, whereas the balance as per the revised balance sheet of the assessee as on 31-3-1995, is of the order of Rs. 19,49,369. However, the main thrust of the argument of the Departmental Representative is directed against the objections of the assessee to the addition of Rs. 65,58,110 and the arguments advanced are so tangled, we find we have no alternative except to reproduce the relevant portion of the argument, though it is somewhat too expensive :

"10. The objection of the assessee to the additions of Rs. 65,58,110 is based on the grounds that it is due to omission in accounting the issue of prize winning tickets to the creditors for the supply of lottery tickets on the actual date of issue. It is alleged that the mistake was identified in October, 1995, but by that time the opening balance had been brought forward in the cash book for the year 1995-96 at Rs. 66,42,185. It is claimed that this amount includes the value of PWT for Rs. 65,58,110 already issued and given to the creditors before 31-3-1995. It is further stated that the issue of PWT to M/s. Madhangi Lottery Agency for a total sum of Rs. 85,27,672 was correctly shown on 30-5-1995. It is said that an amount of Rs. 19,49,368 actually payable to them as on 1-4-1985 was also paid on 30-5-1995. The assessee has filed the summary of transactions in Annexure V and the assessee's account copy of Madhangi Lottery Agency in Annexure-IV. In the assessment, the assessing officer has dealt with this issue in para 9 of his order. In the argument notes, the assessee has not met the point raised in the assessment that if the cash balance is to be taken at Rs. 66,42,185 as stated by the assessee, there would be a credit balance of Rs. 64,79,953 in that account as on 31-3-1995. Similarly, other payments also would be remaining as credit balances. Since these are not genuine, they will have to be again assessed as income. Further, the confirmed credit balance is only Rs. 18,85,619 and the difference in the credit balance was for Rs. 45,94,334. Instead of meeting this point, the authorised representative has raised, the issue of certain accounting entries in the financial year 1995-96 which were not raised in the course of the assessment proceedings. (Page 19 of the authorised representative argument notes). The authorised representative has also wrongly quoted a ground for addition mentioned by the assessing officer while adding the unexplained bank balance of Rs. 24,81,361. Therefore, argument of the authorised representative in page 19 with regard to this point is baseless and irrelevant. As regards the accounting entries in the financial year 1994-95, notwithstanding the fact that this is a new ground taken for the first time before the Tribunal the following facts are relevant.

11. It is claimed that the inflation in cash balance as on 1-4-1995 of Rs. 65,58,110 was noticed in the month of October, 1995. This inflation is claimed to have been corrected immediately in May, 1995, till which date the cash book had been written up at that time, by passing rectification entries for a total amount of Rs. 1,11,77,992 (Rs. 26,50,320 on 29-5-1995 and Rs. 85,27,672 on 30-5-1995). At this moment, the first question to be answered by the assessee is why is it that the alleged inflation of Rs. 65,58,110 on the debit side of the cash book on 1-4-1995, if that be so, not cancelled by a simple credit entry in the cash book on 29-3-1995 of an equal amount clarifying that the mistaken debit in the cash book was removed by the rectification entry.

The assessee has not answered this point. The second question is why is it that the assessee has made a credit entry of Rs. 65,36,414 on 1-4-1995, in the account of M/s. Madhangi Lottery Agency in the financial year 1995-96, while already this account had been squared up in the books of financial year 1994-95. The further question is, how is that the assessee became aware of the opening balance of Rs. 19,49,368 in October, 1995 while the assessee claims that it became aware of this opening balance in March, 1997, when it filed a raised balance sheet as on 31-3-1995, before the assessing officer. How is it that the assessee completely wiped out the alleged credit entries as on 1-4-1995, by the debit entries of Rs. 1,11,77,992 consisting of two amounts on 29-5-1995 and 30-5-1995, while the alleged credit total till that date in that account was only of Rs. 84,85,783. What is the nature and source of other credits of Rs. 26,92,209 as on 26-3-1996, in that account and how is it that the assessee had squared up this credit entry in advance in May, 1995, by the alleged rectification entries. The assessee has nowhere furnished a cogent and correct explanation for all these entries. It is the duty of the assessee to explain the business transactions and the accounting entries in the account of M/s. Madhangi Lottery that generated the opening balance of Rs. 19,49,368 and corelate the same to the confirmed balance of Rs. 18,85,619 appearing in the party's account. The assessee has not filed any copy of the account obtained from that party and explained the balance in both accounts by entry by entry reconciliation in both accounts. Without discharging its duty of explaining the credits and the squaring up of the accounts, the assessee has raised only hollow arguments stating that the inflation in cash balance was detected in October, 1995 and cancelled in May, 1995 in the books and that a credit balance of Rs. 19,49,368 was noted in March, 1997, while already the whole account had allegedly been squared up in May, 1995. It is humanly impossible that a so-called inflation in cash balance of Rs. 65,58,110 can go unnoticed till October, 1995 and get neutralised by another set of highly improbable transactions in May, 1995. It is against all human probabilities as stated by the Supreme Court in the case of Sumati Dayal v. CIT (1995) 214 ITR 801 (SC). Hence,-the claims of the assessee with regard to the addition of Rs. 65,58,110 have to be rejected as baseless and unproved."

The learned Departmental Representative also mentioned in para 14 of his argument notes that the PWTs were given two types of treatments in the ledger. Some of them are ledgerised and the others are not ledgerised and he mentioned that the unledgerised PWTs work out to Rs. 1,09,81,290. It is also mentioned by the learned Departmental Representative in para 15 of his argument notes that the claim of the assessee that the balance in the Canara Bank of Rs. 24,81,467 represents drafts received is incorrect and baseless. He also doubted the increase in the credit balances in the case of Madhangi Agencies and Harsha Agencies on the one side and increase in the debit balances of Shri Hariharan and M.M. Khan & Bros. on the other.

25. The learned counsel for the assessee has filed before us a separate paper book containing his comments on the observations of the assessing officer and the learned Departmental Representative. In his rejoinder it is mentioned that no details were asked from him about any of his claims contained in Annexure-1 of the assessment order, even though he appeared many times before the assessing officer. He further mentioned that the assessee-firm has claimed substantial amounts in different years under the head "agency bonus and commission" and the various write offs, inclusive of bad debts, are included under this head in the profit & loss account of different years.

26. We are of the view that the explanations offered by the assessee have been rejected without any basis, it does not mean that they are false. We are in agreement with this contention of the learned counsel for the assessee. As the assessing officer has not made any effort to even question the deponents in spite of a specific opportunity having been granted by the Tribunal vide its earlier order dated 18-11-1997, we infer that the assessing officer has implicitly accepted the affidavits. We also find that the assessee has claimed substantial amount under the head "agency bonus and commission" in different years, as is evident from the profit & loss account filed by the learned counsel for the assessee in paper book No. 9. The details are as under :

Rs.

Year ended 31-3-1992 13,560 Year ended 31-3-1993 26,38,733 Year ended 31-3-1994 53,98,042 Year ended 31-3-1995 64,95,308 The relevant profit & loss account were all filed before the search action in the course of the normal assessments. It is not the case of the department that any substantial disallowance of the said claims has been made in any of the years in the regular assessments. Further, a major portion of the write offs is claimed to relate to the years earlier than 1991-92 when the business was carried on in a proprietary status. The details for those years were not called for by the assessing officer and are also not filed before us. In the circumstances, we have no reason to reject the version of the assessee and sustain the addition of Rs. 49,83,287 made by the assessing officer. We, however, are of the view that in view of the fact that the various write offs and discounts are not established, it is a case for estimate of the profits, to which we shall revert later. In other words, the version of the assessee is neither disproved, as held by the assessing officer nor proved, as contended by the assessee. We are, therefore, of the view that for this and other reasons, which we shall mention hereafter, this is a case only for rejection of accounts and estimate of income.

27. Before we turn to the next major addition, we may also refer to the remarks made by the assessing officer towards close of para 5, page 8 of his order that if the claims of adjustments and write offs in Annexure-1 are accepted along with the alleged difference in the accounts of Shri Hariharan of Rs. 14 lakhs and M.M. Khan & Bros. of Rs. 2,80,254 (wrongly mentioned as Rs. 1,66,634), the total of such debit balances would exceed the excess debit balance of Rs. 49,83,287 worked out by the assessing officer and added as undisclosed income. This is only because of the casting errors and other omissions in the computation adopted by the assessing officer. We have given the reconciliations hereinabove and we need not have to traverse this ground again. The relevant details are also at item 3 of the assessee's paper book containing the explanations of the various defects stated by the assessing officer. We find, this is an unfounded remark.

28. Next, coming to the major addition of Rs. 65,58,110 being the understatement of cash balance, we are of the view that the elaborate objections taken by the learned Departmental Representative, which we have extracted hereinabove, proceed from a failure of comprehension of the relevant accounting entries. The summary of the copy of account of Madhangi Lottery Agency in the ledger for 1995-96, as given by the learned counsel for the assessee at page 17 of his paper book No. 6 stands as under :

Date Particulars Amount Amount Rs.

Rs.

1-4-1995 Opening balance 19,49,368.45 Excess credit for the transfer entries effected on 31-3-1995 65,36,414.55 84,85,783.00 26-3-1996 Other credits 26,92,209.00 Rectification entry passed for the issue of prize winning tickets 1,11,77,992.00 29-5-1995 26,50,320.00 30-5-1995 85,27,672.00 Closing balance.

11,177,992.00 The exact ledger page is at page 18, but it is not convenient to reproduce it and so we prefer to go by the above summarised extract. The correctness of the above summarised extract is not disputed before us and we find, it tallies with the ledger copy of the account. The above entries need some explanation. We have already mentioned that as the day books for 1994-95 and 1995-96 were seized, the opening balance of Rs. 19,49,368 could be reflected only in the ledger for 1995-96. We have already mentioned hereinabove as to how this reflection of the opening balance in the ledger account does not distort the picture because of the other matching entries on the debit side similarly reflected in the relevant ledger accounts. Then the next question in this regard is the nature of the credit for the transfer entries effected on 31-3-1995, to the tune of Rs. 65,36,414. This represents the amount of PWTs sent to Madhangi Lottery Agencies earlier, but recorded in the day book for 1994-95 only on 30-3-1995, and 31-3-1995, after the notice of this omission by the accountant in October, 1995, as mentioned by us hereinbefore. By this entry, the cash balance had been reduced in the day book for 1994-95 and the liability to Madhangi Lottery Agency had also been reduced in the ledger for 1994-95. However, as the inflated cash balance had been brought forward in the day book for 1995-96, correspondingly the liability to Madhangi Lottery Agency in the ledger for 1995-96 had also been increased to match the inflated cash balances. Otherwise, the trial balance for 1995-96 would not tally. So the assessee had to give a credit of Rs. 65,36,414 in addition to Rs. 19,49,368 to Madhangi Lottery Agency. The other credit of Rs. 26,92,209 is for supplies received in the year 1995-96 and has nothing to do with the rectification entries passed on 31-3-1995, in the day book for 1994-95. The account of Madhangi Lottery Agency was settled on 30-5-1995, but a substantial portion of Rs. 1,11,77,992 shown as paid on 29th and 30-5-1995, is not an actual payment in the year 1995-96, but only a mirror image of the payments effected on 30th and 31-3-1995, in the day book for 1994-95. Such mirror image is to the extent of Rs. 65,36,414. In other words, the credit balance in the ledger account of Madhangi Lottery Agency for 1995-96 has first been artificially increased and then decreased. The payment of Rs. 65,36,414 is recorded in the day book for 1995-96 on 30-5-1995, corresponding to the entries made in the day book for 1994-95 on 30th and 31-3-1995. The increase in the credit balance has, however, been effected on 1-4-1995, itself in the ledger account corresponding to the inflated cash balance brought forward in the day book on 1-4-1995. The above version can also be verified from the summary of transactions recorded in the day book for 1995-96 on 30-5-1995, and the summary is available at page 14 of the assessee's paper book No. 6, as under :

Rs.

Opening balance 1,17,48,857.44 Add: Receipts during the day Sales 17,59,184.00 Others 2,04,857.00 19,64,041.00 1,37,12,898.44 Less : Payments made during the day excluding Madhangi and Harsha Agencies 26,03,510.11 Less: Payment to Madhangi Lottery Agency 85,27,672.00 Payment to Harsha Agencies 13,12,000.00 1,24,43,182. 11 Closing Cash balance 12,69,716.33 The payment of Rs. 85,26,672 to Madhangi Lottery Agency includes the payment by way of issue of PWTs of Rs. 65,36,414 recorded in the day book for 1994-95 on 30th and 31-3-1995. In other words, Rs. 65,36,414 is the amount which has initially been added to the opening balance of Rs. 19,49,368 to correspond to the brought forward inflated cash balance in the day book for 1995-96. In the light of the above clarifications given before us, with which we see no reason to differ, we see no merit in the contention of the learned Departmental Representative about the addition of Rs. 65,58,110.

29. The learned Departmental Representative mentioned that the assessee has not met the point raised in the assessment order that if the cash balance is to be taken at Rs. 66,42,185, there would be a credit balance of Rs. 64,79,983 in the account of Madhangi Lottery Agency as on 31-3-1995. We do not see the import of this statement. It appears both the assessing officer and the Departmental Representative are referring to the cash balance with PWTs in the day book for 1994-95 on 31-3-1995. The case of the assessee, as we have already mentioned, is that the PWTs has been issued to Madhangi Lottery Agency earlier, but were not recorded in the day book and so both the cash balance in the day book and the credit balance in the ledger in the name of Madhangi Lottery Agency stood at inflated figures. Both got reduced after the rectification entries were effected on 30th and 31-3-1995. In the light of this explanation, the comment of the assessing officer repeated by the learned Departmental Representative has no merit whatsoever. Similar is the position about his comment that the confirmed credit balance of Madhangi Lottery Agency is only Rs. 18,85,619, whereas the credit balance in this account would be Rs. 64,79,953 without taking into consideration the payment of Rs. 9,66,333 on 30-3-1995, and of Rs. 55,13,620 as on 31-3-1995, shown as having been made in the day book for 1994-95 and so there would be a difference of Rs. 45,94,333 in the credit balance of this account. These comments are contained in para 9 of the assessment order and in para 10 of the department's argument note. We have already extended the relevant portion of the argument notes of the learned Departmental Representative. Both the assessing officer and the learned Departmental Representative seem to entertain some wrong notions. The credit balance in the name of Madhangi Lottery Agency got reduced to the extent of Rs. 64,79,953 when the cash balance in the day book also got reduced correspondingly on 30th and 31-3-1995. However, there was one more mistake in the entries passed in this regard inasmuch as the credit balance in the name of Madhangi Lottery Agency was reduced to nil, whereas the actual credit balance as on 31-3-1995, was of the order of Rs. 19,49,368. This credit balance is part of other rectification entries which we have referred to earlier in the context of the filing of the revised balance sheet by the assessee. We do not think it is necessary for us to cover this field once again. The other question posed by the Departmental Representative is as to "why is it that the alleged inflation of Rs. 65,58,110 on the debit side of the cash book on 1-4-1995, if that is so, not cancelled by simple credit entry in the cash book on 29-5-1995, of an equal amount clarifying that the mistake in the debit in the cash book was removed by the rectification entry". We have already explained the entries passed in this regard and in the light of the explanation offered by the assessee in this regard, we see no merit in this poser. We do not think it necessary to cover this ground once again.

30. The next question posed by the learned Departmental Representative is as to why is it that the assessee had made a credit entry of Rs. 65,36,414 on 1-4-1995, in the account of Madhangi Lottery Agency in the financial year 1995-96, while already this account had been squared up in the books of financial year 1994-95". This question also we have answered hereinbefore. The credit entry is passed to balance the inflated cash balance as on 1-4-1995. The matter has to be considered in the context of the day book for 1995-96 having been written upto 31-5-1995 by October, 1995 when the assessee noticed the inflated cash balance in the day book for 1994-95 and the non-recording of the issue of PWTs to Madhangi Lottery Agencies. The next question of the learned Departmental Representative was that it was humanly impossible that the so-called inflation in the cash balance of Rs. 65,58,110 could go unnoticed till October, 1995, Actually, this was the observation of the Bench in the course of the hearing, which seems to have been adopted by the learned Departmental Representative. Similarly, the question as to how the assessee discovered that it owed Rs. 19,49,368 to Madhangi Lottery Agency in March, 1997, was also a doubt raised by the Bench. It also seems to have been adopted by the learned Departmental Representative. The learned counsel for the assessee explained that had the day book reflected only the cash balance, possibly the partners would have noticed the inflation in time. But as the cash balance in the day book included the value of PWTs and each day the assessee received PWTs of the value of Rs. 5 lakhs, the inflation in cash balance went unnoticed till October, 1995, when finalisation of the accounts was taken up. Similarly, the correct balance owed to Madhangi Lottery Agency of Rs. 19,49,368 as on 31-3-1995, was noticed only after the search action when some egregious blunders, like the omission of the Canara Bank balance in the balance sheet was considered. The entire issue, it is stated, has to be considered in the context of ignorance of both the part-time accountant and the partners and their background. The question is not as to how the assessee discovered the errors. The question is whether the rectified position as reflected in the revised balance sheet reflects the correct position or not. We find, the department has not brought forth any material that can persuade us to reject the version of the assessee that the revised balance sheet reflected the correct position. The only difference noticed by the department is that the assessee showed the credit balance of Madhangi Lottery Agency as on 31-3-1995 to Rs. 19,49,368, whereas the creditor confirmed it at Rs. 18,89,619, This is a marginal difference and no mountain can be made out of this molehill. We have already referred to the explanation given by the assessee that the difference is due to some delayed accounting of the discount claim.

31. For the above reasons, we find no merit in the addition of Rs. 65,58,110. This is not, however, to say that the results disclosed by the assessee are to be accepted in toto. We shall revert to this aspect of the matter. We have also to comment upon the argument of the Departmental Representative that some PWTs of the value of Rs. 1,09,81,290 have not been ledgerised. His comments in this regard are at para 14 of his argument notes. This is a matter raised by the learned Departmental Representative for the first time before us. The assessing officer did not touch upon this aspect of the matter at all. So, this is one more instance where like the enquiries he made during the course of the hearing the learned Departmental Representative has brought out new material by the examination of the books of accounts in his possession. To our mind, it is totally unfair to the assessee to ask it to face in the course of the hearing before the Tribunal new material which was never put to him in the course of the assessment proceedings, The assessee furnishing some additional material in support of a claim already made before the assessing officer, as is done in the present case, stands on a totally different footing from the department facing him with allegations/material for the first time in the course of the hearing before the Tribunal when such material had not been put to the assessee by the assessing officer. While we have all appreciation for the hard work of the learned Departmental Representative, we cannot throw overboard the canons of natural justice. The hearing before the Tribunal cannot be turned into another assessment proceeding. We, however, have considered the contention of the learned Departmental Representative in this regard. To complicate matters, the assessee had followed three different methods in respect of PWTs. Some of them, as already mentioned, are equated with cash, and the receipt and issue of such PWTs is recorded in the day book on par with cash. Some PWTs have been treated as stock of the assessee and such PWTs are ledgerised. There are also occasions when PWTs were received but pending the ascertainment of the identity of the party concerned, they were entered in the day book as receipts on suspense account, but not ledgerised. Subsequently on the ascertainment of the particulars of the party who sent them, they were first removed by a contra-entry in the day book and again entered as receipts and credited to correct parties. It is such PWTs which were not ledgerised that are now culled out by the learned Departmental Representative before us. Even in the course of the hearing, the learned counsel for the assessee could point out some of those contra-items. In his written submissions, being his comments on the contentions of the learned Departmental Representative, it is mentioned as under :

"However, it was brought to the information of the Hon'ble Tribunal that it appears these entries represented contra items and hence not posted in the ledger. For exemple, a sum of Rs. 12,87,635 received on 30-7-1994 (page No. 147 of the cash book folio) is credited to the account of Kumaly Branch in the ledger folio No. 83. Similarly, the receipt of the prize winning ticket on 20-8-1994, for Rs. 4,82,550 is represented by a contra entry shown on the same date in the same line. These entries were shown to the Hon'ble Tribunal on 11-10-2000 itself. All these items mentioned by the learned Departmental Representative represent the value of prize winning tickets received from the agents the details of which were not known at the time of receipt. So, this was treated as 'receipt of prize winning tickets under suspense'. Subsequently, when the particulars are correctly ascertained these entries are reversed and the account of the parties are correctly credited.

At any rate, this new ground shall not be accepted as has been held in several judgments of the High Courts the Apex Court."

As this is a totally new material, we decline to admit it.

32. The learned Departmental Representative also objected at para 15 of his argument notes, to the claim of the assessee that the bank balance in the Canara Bank of Rs. 23,27,987 reflected in the revised balance sheet represented the drafts received from various parties. His objections are as under :

"15. The next objection of the assessee is against the addition of unexplained bank balance of Rs. 24,81,467. The assessee states that the unexplained balance is only Rs. 23,27,987.

This is not correct. However, the claim of the assessee that this represents the DDs received from Hariharan, Tellicherry and deposited in the bank is both incorrect and baseless. The Annexure-VII shows the alleged receipts of DDs on various dates by the assessee. How the assessee could identify these amounts from the cash book has not been explained? In fact, the assessee has maintained a personal ledger which shows all the receipts from M/s. Hariharan, Tellicherry and also the sales made to it. The assessee has mentioned the receipt numbers of the receipts issued by it for all receipts. These receipts have not been tallied with those mentioned by the assessee in Annexure-VII. Further, it is seen that the receipts in many cases do not correspond to the dates of deposit. Coupled with this, there is the additional problem that the cash balance in the cash book on 7-9-1995, and 23-12-1995, will become negative if the assessee's version that the PWTs are DDs deposited in bank is accepted. As such, the explanation of the assessee is baseless and has to be rejected. The assessee has not in fact met the point raised by the assessing officer, in the argument notes."

We find no merit in the above contentions. It has never been the contention of the learned counsel for the assessee that the drafts were received from Shri Hariharan of Tellicherry. It was only mentioned that they were received from various parties and were deposited in the bank, but in the day book they were shown wrongly as having been sent to different creditors. The relevant portion of the argument notes of the learned counsel for the assessee reads as under :

"The alleged understatement of cash/bank balance is only for Rs. 23,27,987 and not Rs. 24,81,361 as stated by the learned Joint Commissioner. This is represented by understatement of liabilities for an equal amount of Rs. 23,27,987.

During the year 1994-95,s the appellant firm received credit payments from agents on various dates by way of demand drafts drawn on banks. These demand drafts were deposited with Canara Bank. However, in the cash book all these receipts by way of demand drafts were shown as prize winning tickets. This wrong accounting resulted in an inflated cash balance/prize winning tickets. To rectify this mistake, the accountant showed payment of prize winning tickets to Harsha Agencies and Madhangi Lottery Agencies. He did not realise that this inflated cash balance represents drafts deposited with bank and are held as balance with Canara Bank. Hence, the rectification entry should have been made as under :

(1) Canara Bank Dr.23,27,987 To cash/prize winning tickets (being the drafts deposited in Canara Bank, wrongly shown as prize winning ticket now rectified) 23,27,987 Instead, he showed it as payment to creditors, i.e., he passed the following entry (2) Creditors for supply of lottery tickets Dr. 23,27,987 To prize winning tickets/cash 23,27,987 Because of this wrong entry passed in the books of account, the liabilities payable to the creditors for supply of lottery tickets as well as the balance with the Canara Bank were understated to the extent of Rs. 23,27,987."

In the light of the above, it is quite evident that the observation of the assessing officer reiterated by the learned Departmental Representative, before us, that if the version of the assessee that the DDS were deposited in bank is accepted it would result in deficit cash balance on certain days is totally misconceived. The DDs are entered in the day books and instead of being shown correctly as deposit in the Canara Bank account, they are shown as having been issued to the creditors as PWTs. Resultantly, there is no effect on the cash balance in the day book. There is a debit, but to the wrong account. Instead of the bank account having been correctly debited, there is a wrong debit to the account of the creditors. Consequently, both the bank balance and the creditors are understated. But there is no effect on the cash balance as reflected in the day book. In para 15 of his argument notes, the comment of the learned Departmental Representative that the assessee has maintained personal ledger for 1994-95 is also baseless. What was seized was the personal ledger (MMC-11 and MMC-16) for 1995-96. The case of the assessee all along has been that the personal ledger of the earlier years is destroyed because the balances are carried forward to the personal ledger of the next year. Similarly, the comment of the learned Departmental Representative that how the assessee could identify the demand drafts among the PWTs entered in the day books is also a little off the mark. The assessee filed the relevant details of the drafts received and entered in the day book and also the details of the deposits in the Canara Bank before the assessing officer and such details have been annexed by the assessing officer himself as Annexure-II to the assessment order. The so-called Annexure-VII (paper book) filed by the assessee before us is only a copy of Annexure-II attached by the assessing officer himself to the assessment order. The assessee has also filed the copy of the pass book issued by the Canara Bank for the account in question and the relevant deposits in the pass book are all described as by cheques, which means only drafts, as explained before us. After all, a draft is only a banker's cheque. We do not see why it is impossible to cull out the drafts from the day book and link them with the deposits in the bank account. Actually in the receipts issued by the assessee to different parties the drafts are described as such and not as ours. So by verification of the day book and receipts and the pass book, it is quite possible to link the drafts received to the deposits in the Canara Bank account. At any rate, the assessing officer did not express any such misgivings about the drafts having been entered in the day books. His only objection was that if the version of the assessee that the drafts are deposited in the bank account is accepted, it could result in a deficit cash balance. We have already met this argument. In the circumstances, we see no merit in the contention of the learned Departmental Representative in this regard.

33. Regarding the addition of Rs. 5,70,000 made by the assessing officer for 1996-97, the assessing officer mentioned that the various transactions in the accounts of the various parties in the seized personal ledger MMC-11 during the period after 1-4-1995 have not been entered in the day book for 1995-96, financial year. Apparently, the assessing officer has not put any such omissions to the assessee. The remarks of the learned counsel for the assessee on this comment of the assessing officer, as contained at item No. 6 of his explanations for the defects stated by the assessing officer, are as under :

"The assessing officer did not give any proposal to estimate the income of Rs. 5,70,000 against the alleged estimated unaccounted sales of Rs. 5,70,00,000. In the absence of a specific instance of suppression being detected either in the purchases and the sales, the estimation of the undisclosed income at Rs. 5,70,000 against unaccounted sales for the assessment year 1996-97 is not correct.

All the sales made to the parties as shown in the personal ledger are recorded as cash sales in the books of accounts for the year 1995-96. Hence, this estimate of undisclosed income of Rs. 5,70,000 is against facts and law and to be deleted."

As the omissions, if any, have never been put to the assessee and such alleged omissions are totally denied by the learned counsel for the assessee before us, and the learned Departmental Representative has also not pointed out any such omissions during the hearing, we hold that there is no basis for the addition of Rs. 5,70,000. We may also mention that the regular assessment for 1996-97 has already been completed and the assessing officer has not pointed out any such omissions even in the regular assessment.

34. In view of the above, we are of the view that there is no valid basis for the different additions made as undisclosed income in the block assessment.

35. One of the major objections of the learned Departmental Representative before us has been, as already mentioned, that the assessee had adopted to file all the relevant details only before the Tribunal and they were not furnished before the assessing officer. Replying to this allegation, the learned counsel for the assessee invited our attention to the letter dated 7-1-2000, received from the assessing officer in the course of the reassessment proceedings. The operative portion of this letter reads as under :

"2. As per para (7) of the Tribunal's order dated 18-11-1997, you are now given an opportunity to produce all the evidences you rely upon against the block assessment already made. Such evidences may be produced on the hearing date positively. In cases where evidences already filed in connection with block assessments and subsequently, a brief note indicating the details may be filed.

3. You are also requested to produce the cash books and ledgers for the financial years 1994-95 and 1995-96."

(Emphasis, italicised in print, supplied) The learned counsel for the assessee stressed that what was wanted from him was only a brief note at that stage. He furnished his reply vide letter dated 24-1-2000, which reads as under :

"We are in receipt of the above-mentioned communication. In this connection, we give below the following clarifications and explanations required by your goodself.

At the time of the completion of the original assessment for the block period, the learned assessing authority did not take into consideration the various evidences/documents furnished by us in support of the return of income filed and contention raised by us. The particulars of the evidences furnished by us are given below :

1. The revised balance sheet of our firm as on 31-3-1995, showing the correct amount of cash and bank balances, receivables, and liabilities due to creditors for the purchase of lottery tickets.

2. Explanation and circumstances for the submission of the revised balance sheet as at 31-3-1995 with full particulars of the amendments/rectifications made to the original balance sheet.

3. Explanation for treating as not recoverable certain debts due from various lottery agents (as stated in the assessment order amounting to Rs. 49,83,287 to whom we have supplied lottery tickets on credit basis during earlier years. Affidavits duly executed by these agents were also submitted confirming the fact that all these debts became irrecoverable due to financial incapacity/virtual insolvency of the concerned debtors.

4. Reconciliation of the list of sundry debtors as prepared by the ADI/stated in the assessment order and the actual amount of receivable as on 31-3-1995 explaining the alleged understatement of debtors amounting to Rs. 49,83,287. It may kindly be noted that these debts do not represent any receivable and we did not receive any amount against these debts.

5. Reconciliation of the balance under the cash and prize winning tickets as revealed in the rough day book (Rs. 65,58, 111) and the final books of account and supporting registers.

6. It was explained that this difference represent the value of the prize winning tickets given to the creditors on several occasions during the year for supply of lottery tickets and adjusted in the books of accounts at the time of the preparation of the financial statements at the end of the year.

7. Explanation regarding the balance with Canara Bank amounting to Rs. 24,00,000 as per the revised balance sheet.

8. The balance with Canara Bank, amounting to Rs. 24,00,000 is correctly shown in the revised balance sheet.

9. Thus, we furnished all informations and explanations required for the purpose of assessment. Documentary evidence in support of these explanations and clarifications were also furnished at the time of hearing of the case.

10. Explanation regarding the alleged income from sales outside the books of account amounting to Rs. 5,70,000. It is respectfully submitted that this is a vague estimate made by the assessing authority without referring to the books of account of this period or any other document or evidences furnished by us or materials gathered by the department. Once again, we submit that the slight variation mentioned by the assessing authority with regard to certain items forming part of the balance sheet in the assessment order was on account of certain clerical mistakes and the delay in incorporating certain entries regarding the price winning tickets given to the suppliers of lottery tickets towards settlement of accounts.

11. We further submit that the assessment for the year 1996-97 which contains the transactions for the period from 1-4-1995, to 10-1-1996, being the date of search was completed by making an addition of only a sum of Rs. 50,000 to the income offered by us in the return of income. The assessing authority did not detect any suppression or concealment of income during this period or defect in the accounts.

We shall furnish any further information, clarifications/particulars/ explanation that your goodself may require in this connection.

In case your goodself needs any specific details with regard to any matter, we shall furnish the same.

Now, we request your goodself to kindly complete the assessment in accordance with the return of income filed by us by taking into consideration the various evidences furnished by us and explanations given above."

It is also explained that the counsel had attended hearing before the assessing officer on various dates, like 23-9-1998, 24-11-1999, 3-12-1999, 1-1-2000, 20-1-2000, 27-1-2000 and 7-2-2000. It is claimed that no particulars were asked for which were not furnished before the assessing officer. It is also stressed that most of the relevant details were furnished even before the completion of the first block assessment in this case, as mentioned in the letter of the assessee dated 24-1-2000. The assessee furnished further details before the Tribunal only to support the claim already made before the assessing officer vide Annexure-I to the assessment order. In the light of these contentions made out by the learned counsel for the assessee, we are of the view that there is no merit in the contention of the learned Departmental Representative that the relevant details were not furnished by the assessee before the assessing officer. The assessee can furnish the details only when called upon, or required to do so.

36. Because of the variation noticed by the department between the sundry debtors recorded in the personal ledger (MMC-11 and MMC-16) and the first balance sheet as on 31-3-1995, the onus of explaining the discrepancy was upon the assessee. However, when it filed the revised balance sheet and also Annexure-l of the assessment order and the affidavits of the debtors and the confirmatory letters from the creditors. Madhangi Lottery Agency and Harsha Agencies, the onus of disproving the explanation offered by the assessee shifted to the department. The department did not examine the deponents of the affidavits, nor did bring any other material to dislodge the explanation offered by the assessee. It is also to be noticed that the assessee had filed audited balance sheet even before the search action. The revised balance sheet changes the balances only in five accounts, i.e., Canara Bank balance, Hariharan and M.M. Khan & Bros. on the debit side, and Madhangi Lottery Agency and Harsha Agency on the credit side . As mentioned by us hereinbefore the three debit balances counter-balance the two credit balances and so even the revised balance sheet is also as good as an audited balance sheet. So, we find no legal basis for the additions made by the assessing officer in the way he has made.

37. Having said that, this is not to give a clean chit to the assessee. We are of the view that the book results cannot be accepted for various reasons. Firstly, the books were not written up in the regular course of business. This is evident from the admission of the assessee all along that the day book for 1995-96 had been written up only upto 31-5-1995, even as late as October, 1995. The ledger was not written up even in March, 1997. The accounting blunders admitted, as we have described them earlier, are of an egregious nature and it passes one's imagination as to how such blunders could be committed by anybody passing for an accountant. We do not see how bank drafts deposited into the bank account can be treated as PWTs sent to creditors. We also do not see how PWTs not received from certain debtors like M.M. Khan & Bros., and Shri Hariharan are recorded as having been received and their debit balances are understated. How did the assessee hit upon the fact that it owed as much as Rs. 19,49,368 to Madhangi Lottery Agency and Rs. 20,58,873 to Harsha Lottery Agency only as late as March, 1997. We enquired of the assessee whether there was any contemporaneous correspondence between the assessee and the said parties and the only explanation was that because of the credit facilities extended by the said creditors to the assessee and as there were periodical transactions between the assessee and the said parties, there was no pressure from the said parties for expediting the payments. While we cannot totally brush aside this explanation, still the fact remains that the assessee had not explained as to how exactly it hit upon the fact that it owed money to the said parties only in March, 1997. Similar is the position with the monies owed to M.M. Khan & Bros., and Shri Hariharan. It is also incredible that the accountant had not debited the parties to whom the PWTs had been sent even though they were actually sent and that the entire omission came to notice only in October, 1995. Further, the fact remains that under the method of accounting adopted by the assessee, it is not possible for the department to verify the daily cash balances, as admittedly the cash balance reflected in the day book is inclusive of the value of PWTs and the daily balances or cash are neither available nor verifiable from the day book. The write offs and discounts claimed to have been allowed are also unverifiable, because a substantial portion relates to the assessment years earlier to assessment year 1991-92, when the business was conducted as a proprietary concern. It is also not clear as to how the personal ledger (MMC-11 and MMC-16) contains the debtors relating to the assessee-firm and also the earlier propriety business. It is also not clear how some PWTs are treated on par with cash and others are accounted as stock. This is apart from those PWTs which are not ledgerised. Further, for the assessment year 1992-93, the assessing officer has also mentioned that there is no stock register maintained by the assessee of the tickets bought and sold. For these reasons, we are of the view that even though the assessee has filed arithmetically accurate and audited final accounts, they are not acceptable because they are at least not complete and their accuracy is unverifiable. So, the provisions of section 145 are attracted to this case, in the light of the decision of the Apex Court in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC) in which it has been held that if the system of accounting adopted by the assessee does not disclose true and proper income, the assessing officer is not only entitled but has a duty to adopt appropriate computation to determine true income and in such a circumstances, he can take recourse to the provisions of section 145 of the Income Tax Act. We find that the regular assessments have already been made for the assessment years 1992-93, 1993-94 and 1996-97. The assessments were completed after making the following additions :

Rs.

1992-93 50,000 1993-94 1,00,000 1994-95 50,000 Even though for some of the years included in the block period the assessments have been completed after invoking the provisions of section 145, it has to be seen that when the regular assessments were completed, the seized materials were not available and so the assessments were completed by making very moderate additions. Considering the various discrepancies that have come to the notice of the department because of the seized material like the unaccounted bank balance in the Canara Bank and the fact that the books were not maintained in the regular course of the business and other materials like personal ledger, we are of the view that a further addition under the provisions of section 145 is warranted in this block assessment. Most of the variations noticed by the assessing officer during the block assessment relate to the assessment year 1995-96. The relevant details upto the financial year 1994-95 since commencement of the assessee-firm, as available in our records, are as under :

1991-92 1992-93 1993-94 1994-95 Total

1.

Sales 5,32,95,513 10,65,32,852 13,96,50,782 16,15,62,864 46,10,42,011

2. Purchases 5,25,01,287 10,49,95,829 13,77,74,941 15,94,11,739 45,46,83,796

3. Net commission 7,94,225 15,37,023 18,75,840 21,51,124 63,58,212

4. Net agency commission 6,68,081 2,89,878 2,44,326 63,766 12,66,051

5. Other receipts 2,09,700 1,97,499 61,362 4,68,561

6. Gross surplus (3+4+5) 16,72,006 20,24,400 21,81,528 22,14,890 80,92,824

7. Percentage of 1 to 6 3.13 1.90 1.56 1.87 1.90

8. Expenses claimed 15,38,990 18,35,980 19,50,064 19,57,423 72,82,461

9. Depreciation 12,830 14,196 12,776 19,010 58,812

10. Expenses depreciation 1551,820 18,50,180 19,62,840 19,76,433 73,41,273

11. Surplus over expenses (6-10) 1,20,186 1,74,220 2,18,688 2,38,457 7,51,551

12. Income assessed 1,20,186 1,79,360 1,56,950 1,84,450 6,40,946

13. Estimated G.P. on sales (Sl. No. 1) at .5 per cent over the G.P. rate at Sl. No. 7).

19,18,638 25,56,788 28,76,806 30,21,225 1,03,73,495 It may be noticed that the rate of gross surplus returned on the turnover (SI. No. 7) has come down from 3.13 per cent in the assessment year 1991-92 to 1.37 per cent in the assessment year 1994-95, for which there is no specific reason given before us. If we estimate the gross profit rate at .5 per cent over the gross surplus rate on the consolidated turnover for these years of Rs. 46,10,42,011, it would give a figure of Rs. 1,03,73,495 (Sl. No. 13). It is in excess of the gross surplus disclosed for these years of Rs. 80,92,824 (Sl. No. 6 of above table) by Rs. 22,80,635. Taking an overall view of the matter, we determine the undisclosed income for the block period at Rs. 20,00,000 (Rs. twenty lakhs). Needless to mention that this is over and above the income returned/assessed in the regular assessment for the block period. The assessee gets a relief of Rs. 1,26,20,170 (Rs. 1,46,20,170-Rs. 20,00,000).

38. In the result, the appeal is partly allowed.

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Income Tax Appellate Tribunal - Cochin

Meenakshy Lucky Centre vs Joint Cit on 30 November, 2000