Income Tax Appellate Tribunal - Patna
Deputy Commissioner Of Income Tax vs Dipesh Chandak, Dipesh Chandak And Sons ... on 6 February, 2007
Equivalent citations: (2007)110TTJ(PAT)366
ORDER
1. In all these appeals filed by the Department as well as the assessees, the main issue involved is fraudulent withdrawals from Animal Husbandry Department (AMD), Government of Bihar, in the fodder scam. Therefore, all these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience.
2. The brief history of the case gathered from papers brought on record and submissions made is that Shri Dipesh Chandak was engaged in the criminal conspiracy of systematic fraudulent withdrawals of funds from the State Exchequer in connivance with the officials of AHD, Government of Bihar, and others. The modus operandi to facilitate this was that purchase orders were placed by AHD on the assessee for supply of feed to the Department. The assessee in turn would raise bogus bills of supply of feed on the Department without actually making them. In support of these supplies, the assessee would raise fictitious purchase vouchers as if purchases have actually been made from the farmers and reflect transportation of the same to the various stores/depots of AHD in Bihar without any actual transportation being done. The fraudulent amount so withdrawn used to be drawn from bank account and thereafter divided among the various conspirators whereas in the books of account it would be reflected as if the payment has been made to the farmer-suppliers and the transporters. Shri Dipesh Chandak in this fraudulent withdrawal of fund from AHD used the following companies/concerns for raising bogus bills against non-supply of animal feed, etc.:
(1) Shree Badrinarayan & Co.
(2) Central Roller Flour Mills (P) Ltd.
(3) Quality Chemical Suppliers (4) Maheshwari Feeds & Trading Co.
(5) Ankit Industries (6) Ankit Industrial Gases (P) Ltd.
(7) Laxmi Trading Company (8) Maheshwari Brothers The aforesaid fraudulent withdrawals against bogus supply of feed were made from asst. yr. 1987-88 to asst. yr. 1995-96. Bogus purchases were shown from Ankit Industrial Gases (P) Ltd., only in one accounting year, relevant to asst. yr. 1993-94.
2.1. The fraudulent withdrawals being made from the Sate Exchequer were detected by the Government of Bihar and FIRs were lodged all over the State against the conspirators. Apprehending that the enquiry shall be scuttled, the matter came up before the Hon'ble High Court at Patna for handing over of the investigation to CBI in C.W.J.C. No. 602 of 1996 (R). The Sate of Bihar filed an affidavit in which it stated:
As a matter of fact, it is a case of fraud and forgery and the money fraudulently drawn from the consolidated fund of the State.
The Hon'ble High Court in its order reported in PUR 1996 Vol. 1, p. 561 in C.W.J.C. No. 1656 of 1995 (R) and C.W.J.C. Nos. 459, 541, 602, 687, 1617, 1642, 1.644 of 1996 (R) observed as under:
If money is misappropriated on the basis of fake bills and vouchers it would constitute criminal offence.
If the intention were to cheat at the very inception of the transaction, the person taking loan would be as much liable for criminal action for recovery of the money in the civil action. Likewise, excess drawals of money from Government treasuries may also partake a criminal character, if the intention of the person drawing the money was to cheat the Sate Exchequer.
It is clear that the excess drawals were not isolated acts; they were manifestations and result of well-knit conspiracy to commit loot and plunder of public money in a systematic manner, which could not be possible without the support of high-ups.
All these facts, prima facie, constitute gross financial indiscipline verging on fraud on the Constitution and the people.
The excess drawals were made in the instant case in a systematic manner in districts year after year. Clearly, this would not have been possible without the support of the highups. Possibility of well-knit conspiracy cannot thus be ruled out.
What I have not been able to understand is how excess expenditures/drawals could be possible without tactic support of highups at the Secretariat/Government level.
There cannot be any doubt that the case has got all State ramifications which requires centralised investigations by a body/agency which could go into the entire gamut of the case.
In my opinion, it is the legitimate right of the public to know and feel assured that the investigation is done in the correct perspectives and that no guilty person will be spared.
2.2. Accordingly, the Hon'ble High Court ordered as under:
I would, accordingly, direct the Central Bureau of Investigation (CIB) through the Director, to enquire and scrutinise all cases of excess drawals and expenditure in the Department of Animal Husbandry in the State of Bihar during the period 1977-78 to 1995-96 and lodge cases where the drawals are found to be fraudulent in character, and take the investigation in those cases to its logical end, as early as possible, preferable within four months. The investigations by the State Police in cases already instituted shall remain suspended in the meantime.
I would also direct the IT Department through the Chief CIT, Bihar, to initiate such action as may be considered fit, necessary and expedient under the IT Act, WT Act, etc against persons whom he reasonably thinks to be involved in the 'scam' and possess unaccountable wealth and property, and take the proceeding to their logical conclusions.
2.3. The judgment of the Hon'ble Patna High Court was challenged in the Hon'ble apex Court which, however, confirmed the same with further directions as under:
The question then is whether the direction given by the High Court needs any modification It is pointed out by Shri Nariman, that the State Police have already instituted 40 FIRs against different persons, arrested 44 offenders and attached the properties of 239 persons. There is no gain saying that all persons involved in these offences need to be identified. Not only all the aforementioned persons but also all other persons involved need to be dealt with according to law. This modification shall be made.
We are also of the opinion that, to alleviate the apprehensions of the State about the control of the investigation by the CBI, it should be under the overall control and supervision of the Chief Justice of the Patna High Court. The CBI, officers entrusted with the investigation shall, apart from the concerned criminal Court, inform the Chief Justice of the Patna High Court from time to time of the progress made in the investigation and may, if they need any directions in the matter of conducting the investigation, obtain them from him. The learned Chief Justice may either post the matter for direction before a Bench presided over by him or constitute any other appropriate Bench. After the investigation is over and reports are finalized, as indicated by the Division Bench of the High Court in the impugned judgment, expeditious follow up action shall be taken. The High Court and the Sate Government shall cooperate in assigning adequate number of Special Judges to deal with the cases expeditiously so that no evidence may be lost.
2.4. Consequently, all the cases related to the criminal conspiracy of fraudulent withdrawal from the State Exchequer were taken over by the CBI from the State Police for proper investigation. The CBI made a detailed investigation in all the cases and thereafter filed chargesheets in the designated Special Court of CBI, AHD, Patna, against the various accused including the assessee. The apprehensions of the Hon'ble High Court proved to be correct during course of investigation as the same revealed a well hatched criminal conspiracy of defrauding the State Exchequer by systematic fraudulent withdrawal of funds by the connivance of suppliers, AHD officials, Treasury officials, Budget officials, State Secretariat officials, senior bureaucrats and politicians. The money so defrauded was divided among all these persons. The CBI has made sizeable recovery of the defrauded money from the possession of these conspirators by way of seizures of movable and immovable assets.
2.5. The assessee extended his full co-operation to the investigating authorities during the course of investigation. He revealed full and true disclosures of the circumstances within his knowledge in relation to the entire AHD cases to the CBI and provided documentary evidences to substantiate the same. He made a confessional statement Under Section 164 Cr.PC before the 1st Class Judicial Magistrate on 20th March, 1997 at Dhanbad in which he revealed the true picture of transaction taken place with the AHD, Government of Bihar.
2.6. Thereafter, during the course of criminal proceedings the assessee made an application before the designated Court of CBI, AHD, Patna, to grant him pardon and make him an approver. The application was considered and the said designated Court of CBI has observed in its ordersheet as under:
A petition has been filed' on behalf of Dipesh Chandak, one of the charge-sheeted accused in this case, who is presently on bail, with a prayer to allow him to become an approver in this case by according him pardon in this case, the prosecution in this case as the same will connect the various links of criminal conspiracy and will disclose the inside picture of the same which has been hatched out for defrauding the State Exchequer. He also contended that since Dipesh Chandak is ready to make full and true disclosure of whole circumstances within his knowledge in relation to the offence, his statement be recorded and necessary orders be passed in the matter.
Considered the facts and circumstances of the matter as well as the fact that Dipesh Chandak intends to make a full and true disclosure of the whole circumstances within his knowledge in relation to the offences and is ready and willing to make statement in the Court, thus, I find it just and proper that his statement be accorded before passing any order in this regard.
Dipesh Chandak also made prayer that keeping in view his safety and security, his statement be recorded in camera. Accordingly, keeping in view the submissions made by Dipesh Chandak, I think it proper to record the statement of Dipesh Chandak in chamber. Dipesh Chandak was called in chamber and recording of his statement begins which could not be completed due to paucity of time, put up on 10th Aug., 1998 for recording further statement of Dipesh Chandak.
Further statement of Dipesh Chandak was recorded on oath in chamber which could not be concluded due to paucity of time. Put up on 11th Aug., 1998 for recording of further statement of Dipesh Chandak.
Further statement of Dipesh Chandak was recorded on oath in the chamber which could not be concluded, hence, put up on 12th Aug., 1998 for recording the statement of Dipesh Chandak.
In regard to the application of Dipesh Chandak for according him approver in this case by granting him pardon, put up on 18th Aug., 1998 for order and he is directed to remain present in the Court on the date fixed. The Sr. PP is directed to place necessary documents in this regard on the date fixed.
Consequent upon the filing of a petition by Dipesh Chandak with a prayer to allow him to be an approver in this case by according him pardon as well as he is willing and ready for recording of his statement in this regard, his statement has been recorded by this Court. In his petition and statement, Dipesh Chandak has revealed facts showing that he has been directly concerned and in privy of the offences covered under the case and has knowledge of entire circumstances relating to offences and every person concerned in commission thereof. The prosecution has also filed documents collected during investigation in this regard. According to prosecution, this is a case of criminal conspiracy and the evidence of Dipesh Chandak reveals that he has been directly concerned with offences and has knowledge of whole circumstances relating to it as well as about the persons concerned with it, which will be helpful and beneficial for effective trial of the case.
On perusal of the statement of Dipesh Chandak and documents filed, I find that Dipesh Chandak has made statement revealing facts, basing upon which 1 suppose him to have been directly concerned with and privy to the offence covered under the case with knowledge about whole circumstances relating to same and the persons concerned there within the commission of the offence, in relation to present case. In the facts and circumstances and keeping in view the effective trial, I am satisfied that the evidence of Dipesh Chandak will be beneficial and helpful for coming to logical conclusion of trial for the offences covered in the case.
In the facts and circumstances of the case and in the ends of justice for obtaining evidence of Dipesh Chandak, I am tendering him pardon, on condition of his making a full and true disclosure of the whole circumstances, within his knowledge relating to the offences and every other person concerned, whether as principal or abettor, in the commission thereof, in terms of Section 5(2) of the Prevention of Corruption Act, 1988.
2.7. The assessee (Dipesh Chandak) subsequently filed applications before the concerned designated Courts of CBI for grant of pardon in other related cases and granting the prayer he has been made approver in those other cases also. Even when the IT Department tried to prosecute the applicant on the basis of his statement under Section 306 given before the Special Judge, CBI, Patna, the Hon'ble Supreme Court barred him from being prosecuted on the fear that the valuable evidence of the fodder scam would be lost. The authenticity of the statement made by the applicant was considered to be vital evidence in the AHD scam case by the Hon'ble Supreme Court in their judgment in Criminal Appeal No. 1031 of 2004, dt. 17th Sept., 2004.
2.8. On the above background of the history of the case, we take up Departmental appeals in the case of Shri Dipesh Chandak, first, being ITA Nos. 188, 189 and 191/Pat/2001 for assessment years 1987-88, 1988-89 and 1990-91.
ITA Nos. 188,189 and 191/Pat/2001 (Dipesh Chandak):
3. Basing on the statement made by the assessee before the designated Court of CBI, the AO initiated proceeding under Section 144/147 and passed orders for all the aforesaid assessment years and held that since Shri Dipesh Chandak appears to be the main beneficiary of the payments from AHD in the names of the various concerns controlled by him against which he has not been able to produce any iota of evidence of having incurred any expenses, the whole of the receipts from the AHD, Bihar, against fake bills totalling to Rs. 2,62,92,007, Rs. 1,97,07,541and Rs. 1,38,30,094, respectively for the said assessment years in the names of the following concerns during the relevant previous years as per information available from various sources wore taxed as income of the assessee on substantive basis:
(1) Badrinarayan & Co.
(2) Central Roller Flour Mills (P) Ltd.
(3) Quality Chemical Suppliers (4) Maheshwari Feeds & Trading Co.
(5) Ankit Industries/Ankit Industrial Gases (P) Ltd.
(6) Laxmi Trading Company (7) Maheshwari Brothers (8) R.K. Transport.
4. Being aggrieved, the assessee preferred appeals before the CIT(A) for all the said assessment years. The CIT(A) following his own order in the case of Dipesh Chandak & Sons (HUF) for asst. yr. 1991 92, wherein detailed discussions have been made, has held that the fraudulently withdrawn sum from the AHD did not constitute income of the assessee within the meaning of Section 2(24) of the Act and, accordingly, deleted the additions made in the hands of the assessee-individual. It would be relevant to quote the relevant portion of the order of the CIT(A) in the case of Dipesh Chandak & Sons (HUF), referred to above, while deleting the addition made by the AO, as under:
The fact is that the appellant had no right to the sum of so fraudulently withdrawn and as such it cannot be treated as income in his hands since it is not in the nature of profit of any trade or business. The act of raising fake bills was in the nature of a fraud perpetrated on the State Exchequer and not in the nature of trade or adventure in the nature of trade. The decisions referred to earlier and relied upon by the AO are regarding that profit from business even if illegally carried out in the hands of the recipient. In this case however no trading activity has been involved. There has been no right to receive the sum so withdrawn fraudulently and the matter of recovery is being pursued actively by the investigation agencies and recovery in part has also been made including that from the appellant. It cannot be said that such fraudulently withdrawn sums which are the result of fraud perpetrated by the appellant, constitute income within the meaning of Section 2(24) of the IT Act. I, therefore, hold the sum of Rs. 6,56,48,183 received from the ABD., Government of Bihar, by the appellant does not constitute income in the hands of the appellant in the light of judicial decisions referred to above. Accordingly, the inclusion of income of Rs. 6,66,48,183 in respect of the above receipts is directed to be deleted.
5. Hence, these appeals by the Department. Various identical grounds have been raised. However, the main issue which the Department agitates before the Tribunal, centres round the treatment of AHD receipts. According to the Department, the CIT(A) was wrong in not holding the AHD receipts fraudulently withdrawn from the Government Exchequer as his income for all the said assessment years under appeal. In regard to other grounds involving small additions, the learned senior standing counsel, appearing on behalf of the Department, did not seriously argue on those grounds. He mainly concentrated his arguments on AHD receipts. To summarise, his arguments were in the following manner:
(a) That the assessee is an accused in a number of cases of fraudulent withdrawal from treasury of Government of Bihar. The assessee became approver in the CBI cases and Special Judge of CBI vide order dt. 28th Aug., 1998 had tendered him pardon on the conditions mentioned therein.
(b) That in view of the fact that the case of fraudulent withdrawal is lying sub judiced before different Courts at different level, the CIT(A) was wrong in holding that fraudulent withdrawal cannot constitute income. The CIT(A) failed to appreciate that the CBI had lodged criminal cases against the suppliers of AHD on the premise that the same is fraudulent withdrawal and the issue is yet to be finalized by the competent Court at different level. During pendency of adjudication the GIT(A) has erred in law by holding that the fraudulent withdrawals do not constitute income. Further, the CIT(A)'s view is contrary to the view of Hon'ble Jharkhand High Court in Indraprastha Agencies v. CIT and also consistent view the Tribunal has adopted in the following cases, where it has been held that the AHD receipts constitute income:
(i) ITA Nos. 380 and 381/Pat/2000, order dt. 27th Feb., 2004
(ii) ITA No. 268/Pat/1999, order dt. 13th April, 2006
(iii) ITA No. 251/Pal/2001, order dt. 26th Feb., 2002.
(c) That in his statement, the assessee has admitted to have paid commission of 20 per cent against genuine supply and fake bills to the officers of AHD, Undisputedly, the facts of the case decided by Hon'ble Jharkhand High Court are identical to the assessee's case where the High Court held that the assessee has failed to prove the expenditure and as such the entire receipt is taxable as income. As the assessee in the instant case has not been able to prove the purchases/expenses according to the finding of the AO, the entire receipt was rightly treated as income.
(d) That relying further on the decisions of the Tribunal in the case of Ram Nandan Singh and Ors. (ITA No. 268/Pat/2003, order dt. 13th April, 2006) and other cases like Sushil Kr. Modi v. State of Bihai 1996 (I) PLJR 561 (Pat), State of Bihar v. Ranchi Zila Samta Party 1996 (I) PLJR 97 (SC) and Dy. CIT v. Murrah Live Stock Agency (2004) 84 TTJ (Pat)(TM) 547 : (2004) 91 ITD 198 (Pat)(TM), it was argued that the Tribunal is bound to follow judgment of High Court. It is also settled law that decision of earlier Bench is binding on the subsequent Bench.
(e) That in this background, the order of CIT(A) is fit to be reversed and following decision of Hon'ble Jharkhand High Court and consistent view of the Tribunal, it should be held that the receipt from AHD constitutes income taxable under the IT Act. Finally, the learned senior standing counsel submitted that at least 20 per cent of AHD receipt should be taxed in the hands of Shri Dipesh Chandak as per his own admission before the CBI.
7. The learned Counsel appearing on behalf of the assessees, on the other hand, relied on the orders of the CIT(A), That apart, he argued the case at great length narrating the facts of the case. His submission is summarized as under:
(a) From the order sheet entries of CBI, it is very clear that the statement of Shri Dipesh Chandak before the designated Special Court of CBI reveals the real gamut of the entire conspiracy hatched to defraud the State Exchequer of crores of rupees by way of raising bogus bills without any supply being effected. Alter due concurrence of the investigating agency (CBI) and having verified the authenticity of the statement given by Shri Dipesh Chandak, which is on record, by scrutinising the documents collected during the investigation and finding the same to be full and true disclosure of the whole circumstances, Shri Dipesh Chandak has been admitted as an approver of the Government of India by the CBI Court in case No. RC 20(A)/1996 and such other cases related with AMD scam. Even when the IT Department tried to prosecute the applicant on the basis of his statement under Section 306 given before the Special Judge, CBI, Patna, the Hon'ble Supreme Court barred him from being prosecuted on the fear that the valuable evidence of the fodder scam would be lost. The authenticity of the statement made by Sri Chandak has not been doubted even by the Hon'ble Supreme Court in their judgment in Criminal Appeal No. 1031 of 2004, dt. 17th Sept., 2004.
(b) He referred to judgment dt. 15th April, 2006 in RC-5(A)/2000 delivered by Hon'ble Justice Satya Narayan Prasad, IVth AJC-cum -Special Judge No. II, CBI (AHD) Scam, Ranchi, wherein lull statement of Shri Dipesh Chandak has been incorporated in paras 282 to 329 of the order, which was in earlier occasion has been given on examination-in-chief before the trial Court. Shri Chandak had been made an approver of the Government in this case. The learned Special PP appearing on behalf of Government has also heavily relied on the statement of Sri Chandak, as is apparent from paras 471 and 722 of the impugned order, which are reproduced below:
471. On the other hand, the learned Special PP has argued much on the evidence of Dipesh Chandak (PW-56) approver, particularly paras 12.41 and 427 to show how the aforesaid accused persons, including late Dr. SB Sinha were deeply involved in the present case. It is true that exclusively their evidence of approver (PW-56) cannot be made a basis to establish the prosecution case and it requires corroboration on material points. I find that the aforesaid witnesses have rendered sufficient corroboration of the evidence adduced by PW-56, and as such the evidence adduced by him PW-56 against accused Sri. KN Jha, and Dr. KM Prasad cannot be discarded and disbelieved.
722. On the other hand, the learned Special PP appearing for the CBI has argued that there are strong cir-irrebuttable circumstances to show that there must have taken place transaction of illegal gratification among the accused persons. Though there is no direct evidence to show that any such transaction of bribe or illegal gratification had taken place to the accused persons, but then the question arises as to why the accused persons indulged themselves in such a scam. It goes to show that they must have connived in the present case on account of receiving illegal gratification illegally drawn on the basis of fake and forged allotment letters and bills. Thus, the prosecution has also been able to substantiate the charge against the accused persons also under P.C. Act beside the other offences.
Due to the truthfulness of the statement given by Shri Chandak, the trial was successful and out of 36, 32 accused were found guilty. He reiterated that the authenticity and truthfulness of the statement of Shri Dipesh Chandak was the main testimony of the trial.
(c) Evident from the aforesaid statement and the trial Court judgment shall be that the entire activity of raising of bogus bills and withdrawing of money from Government Exchequer was done in a systematic manner, whereby such fraudulently withdrawn money has been shared amongst Dr. SB Sinha and other various Government officials named in the statement, the assessee himself and the politicians. It is not a case where there has been any actual sale or purchase and that the conspiracy can be treated as any business activity. The admitted position in this case is that a criminal proceeding has been instituted. The accused has been identified and he has admitted all frauds and siphoning of funds. Partial recovery of the money, which was misappropriated, has already been done by the CBI. All the assets of the accused have been put under attachment. Other recipients of the fund have been investigated and the assets have either been seized or under the restrained and the prohibitory order of the CBI. In some cases, jail sentence has been awarded.
(d) In a case like this, where an assessee is not left with any money unto himself, he has already surrendered the sum fraudulently realised, given full account of the money lying with the other persons who are parties with him to such fraudulent act and is not left with anything to suffer tax - by bringing this amount to tax in his hand, what benefit will accrue to the State, except raising a hypothetical, unreal and useless demand? The issue, therefore, has to be examined in the aforesaid parameter.
(e) That Section 4 of the IT Act brings to charge income of an assessee earned during the year. In a case where money which has been fraudulently withdrawn is within the knowledge of the original owner and the original owner is pursuing recovery and the persons involved in the criminal act of fraud have already surrendered and admitted of their crime, in such a scenario how would that amount constitute the receipt which can be termed as income within the meaning of Section 5 to be brought to tax under Section 4 of the IT Act. In order to bring to tax a receipt, as already stated, an assessee should have unflinching right of ownership and disposition, control and user. Here in this case, everything belonging to the accused is under attachment of the State, who is claiming ownership over the money and the ownership over the money is not refuted or denied by the appellant. In such a case, if still another wing of the State wants to tax that amount which belongs to it, that will amount to taxing an amount which belongs to the State and not to the appellant.
(f) Referring to Sections 2(24), 2(45) and 5 of the IT Act, 1961, it was submitted that it is the receipt which bears income character received or deemed to be received, accrues or arises or is deemed to accrue or arise in India during such year or accrues or arises to an assessee outside India during such year and is computed as per the provisions of IT Act under the heads of income as defined in Section 14 can be brought to tax. Admittedly, the defrauded fund, the owner of which is aware of such a fraud and the recipient admitted the same, the Police has already identified the recipient of money and recovered the amount, cannot be considered as income within the meaning of Section 2(24) chargeable to tax under Section 4 and this cannot form the basis of computing total income as per Section 2(45) r/ws. 5 of IT Act, 1961.
(g) That the recoveries of defrauded funds are based on the claim of the State that the money belongs to them and not of those who have withdrawn the money. The conspirators who have fraudulently withdrawn the money do not have any ownership right on the same and, therefore, the money so fraudulently withdrawn be recovered and returned back to the State and those involved in the criminal conspiracy be criminally prosecuted for having indulged into a criminal act under the Indian Penal Code.
(h) Here in this case, everything belonging to the accused assessee is under attachment of the State, who is claiming ownership over the money and the ownership over the money is not refuted or denied by the appellant. In such a case, if still another wing of the State wants to tax that amount which belongs to itself, that will amount to taxing an amount which belongs to the State and not to the appellant.
(i) In regard to AO's allegation that the assessee having falsely debited the cost of purchases against bogus receipt and payment of 80 per cent and further amount spent on AHD officials and others being illegal, the same is disallowable under Section 37 and the entire amount needs to be brought to tax in the hands of the assessee, the assessee's counsel explained that while the appellant was merely raising the bills, others were facilitating payments on the basis of such bills and the withdrawals were being shared amongst all of them. Therefore, it is not the claim of the assessee that he earned income and he has booked bogus expenditure to set off the same against such income. In fact, it was a joint operation by virtue of which the money was fraudulently withdrawn from the Government Exchequer.
(j) Attention of the Bench was drawn to the statement of Shri Chandak recorded under Section 306 of Cr.PC before the Trial Court wherein he has given detailed account of share of booty amongst the various co-conspirators and expenditure incurred on gratification, etc. Out of the total fraudulent receipts, 80 per cent was distributed directly to Dr. SB Sinha and on his instructions to various other AHD officials named in the statement. Further, out of assessee's own share of booty of 20 per cent, 4 per cent was paid to the lower grade office staff of AHD. Further, 4 to 5 per cent was spent on various statutory taxes, office maintenance and settling of bills, etc. In addition to the above, further substantial amount has been spent on gratification to several high officials of AHD, such as, on their tours, travels, lodging and boarding, shopping, etc. over a period of ten years. After incurring all such expenses out of assessee's own share of 20 per cent, the assessee was left with a sum approx. of Rs. 1.34 crores in cash, which was ultimately seized by the CBI on the basis of revelation made by him. Therefore, nothing remains left with the assessee out of his booty of 20 per cent.
(k) The learned Counsel distinguished the case laws/decisions relied upon by the learned senior standing counsel of the Department. According to him, the moot question which requires to be considered in the case of the assessee has neither been considered nor examined in those cases referred to by the Department. In those cases, the assessees had not been accepted as approvers and neither they have made any statement before any inquiry committee or Court of law giving details of gamut of the scam and the ultimate destination of the defrauded sum. Here in the case of the assessee, his statement was found absolutely gainful to the Department as evidence in the trial. Doubt has not been expressed by any authority about the authenticity and truthfulness of the statement recorded under Section 306 of Cr.PC. This truthful statement of the assessee has been made the basis for the trial of case and consequent conviction. Therefore, the scenario of the cases relied upon by the Department is altogether different to the actual state of affairs of the assessee's case.
(1) The learned Counsel endorsed the stand of the learned senior standing counsel that the income taken in the hands of various entities through whom the assessee ventured the scam should not be taxed in their hands. If at all it is taxable on the facts and circumstances of the case and according to law, the same is required to be taxed in the hands of the assessee only. Although on the given facts the same is also not taxable in the hands of the assessee.
(m) The learned Counsel concluded by saying that in a case like the present assessee, where only temporary parking of the defrauded sum remained with the appellant which belonged to the State, the appellant cannot be brought within the framework of Section 5 to constitute income chargeable to tax under Section 4 of the IT Act. In this view of the matter, the reliance on the decisions cited by the Department shall be totally misplaced.
8. We have heard the parties and carefully considered their rival submissions. We have also perused the documents placed in the paper book by either side including the other evidence available on record. Brief history of the case has been given above in this order. The main question put to us is whether a defrauded amount, the owner of which is aware of such a fraud and the Police has already identified the recipients of money, prosecution launched and defrauded sum recovered from the recipients, the assessee having already admitted the fraud, can be considered as income within the meaning of Sub-section (24) of Section 2 chargeable to income-tax under Section 4 of the IT Act, 1961 and can form the basis of computing the total income in terms of Sub-section (45) of Section 2 r/w Section 5 of the IT Act, 1961.
8.1. For this purpose, it is absolutely essential to examine the provisions of Sub-section (24) of Section 2, Sub-section (45) of Section 2, Section 4 and Section 5 and then to proceed further. Section 2(24) defines income as below:
Section 2 (24) "income" includes:
(i) profits and gains;
(ii) dividend;
(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, nor by an association or institution referred to in Clause (21) or Clause (23), or by a fund or trust or institution referred to in Sub-clause (iv) or Sub-clause (v) of Clause (23C), of Section 10:
Explanation. : For the purposes of this sub-clause, "trust" includes any other legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under Clauses (2) and (3) of Section 17;
(iiia) any special allowance or benefit, other than perquisite included under Sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;
(iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living;
(iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;
(iva) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in Clause (iii) or Clause (iv) of Sub-section (1) of Section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary;
(v) any sum chargeable to income-tax under Clauses (ii) and (iii) of Section 28 or Section 41 or Section 59;
(va) any sum chargeable to income-tax under Clause (iiia) of Section 28;
(vb) any sum chargeable to income-tax under Clause (iiib) of Section 28;
(vc) any sum chargeable to income-tax under Clause (iiic) of Section 28;
(vd) the value of any benefit or perquisite taxable under Clause (iv) of Section 28;
(ve) any sum chargeable to income-tax under Clause (v) of Section 28;
(vi) any capital gains chargeable under Section 45;
(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with Section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule;
(viii) [Omitted by the Finance Act, 1988, w.e.f. 1st April, 1988].
(ix) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;
Explanation-For the purposes of this sub-clause,:
(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;
(ii) "card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game;
(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees State insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees;
(xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation.-For the purposes of this clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to Clause (10D) of Section 10;
(xii) any sum referred to in Clause (va) of Section 28.
If we examine each and every clause of this sub-section, it shall be abundantly clear that a receipt of the nature in this case does not fall under any of the sub-clauses listed in Section 2(24), which are (i) to (xii).
Section 2(45) defines total income as under:
Section 2 (45) "total income" means the total amount of income referred to in Section 5, computed in the manner laid down in this Act;
Therefore, the total income has to be computed as referred to in Section 5 and in the manner as laid down in this Act. Now, if we come to Section 5, Section 5 reads as under:
Section 5. Scope of total income-(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which:
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of Sub-section (6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
8.2. From the reading of the aforesaid sections, it is evident that it is the receipt which bears income character received or deemed to be received, accrues or arises or is deemed to accrue or arise in India during such year or accrues or arises to an assessee outside India during such year and is computed as per the provisions of IT Act under the heads of income as defined in Section 14 which can be brought to tax. The word "income" pre-supposes two important conditions-(1) a receipt on which the recipient should have absolute command, control and right of disposition and (ii) the transferor of such funds in the hands of recipient should have divested all rights in favour of the recipient. If the transfer of such income retains a lien or claim over such receipt, then such a receipt shall either be a loan or accommodation or illegal acquisition which can be recovered by the owner by appropriate legal action.
8.3. Now, if we come to the facts of the case in hand, the same are in seriatim as below:
(a) That admittedly no goods were supplied by the appellant to AHD.
(b) The bill raised on AHD was a misrepresented fact of supply of goods. Recording of fake purchases in the books was admittedly made just to give a so-called fair picture of genuine purchase and sale thereof.
(c) Withdrawals made basing on such bills were the result of a conspiracy hatched in connivance with the AHD officials, politicians and the appellant resulting in fraudulent withdrawal of the sum.
(d) The aforesaid scam resulting in fraudulent withdrawal has thus been discovered and legal action initiated for recovery of the fraudulent sum.
(e) The appellant, the recipient of the aforesaid fraudulent sum, along with AHD officials and the politicians, has turned approver, admitted of such fraud and the CBI, on revelation by the assessee has recovered from his possession the remaining defrauded amount to the extent available with him.
(f) His statement accepting such fraud in this act of fraudulent withdrawal has been accepted as true under Section 306 of Cr.PC by the designated CBI Court and on the truthfulness of his statement, he has been granted pardon from criminal prosecution. The Hon'ble Supreme Court of India in its order dt. 17th Sept., 2004 has acknowledged this fact and has stayed prosecution initiated against the appellant by the Department allegedly for making false statement in the original return filed.
(g) The Department also accepts the statement made before the CBI Court under Section 306 by the appellant that the bills raised by him against sale of animal feeds to AHD was a fraudulent act and, in fact, his action was only raising of bogus bill and withdrawing the money in connivance with the officials of the AHD.
(h) The statement given by him has been heavily relied upon as true and full disclosure of the scam and trial has been concluded successfully in RC-05(A)/2000 vide order dt. 15th April, 2006.
(i) The State has accepted that this money rightfully belongs to AHD and should be recovered from the accused.
(j) That CBI has conducted raids on the accused AHD officials, politicians and the appellant and substantial sum has been recovered and properties attached.
(k) That these acts of recoveries are based on the claim of the State that the money belongs to them and not to those who have withdrawn the money. The conspirators who have fraudulently withdrawn the money do not have any ownership right on the same and, therefore, the money so fraudulently withdrawn be recovered and returned back to the State and those involved in the criminal conspiracy be criminally prosecuted for having indulged into a criminal act under the Indian Penal Code.
(1) That according to the statement of the assessee recorded under Section 306 of Cr.PC and in his examination-in-chief before the various Trial Courts detailing distribution of share of defrauded money amongst the conspirators and consequential expenditure incurred during the span of 10 years, which was duly accepted as true, the assessee handed over 80 per cent of the total defrauded sum to Dr. SB Sinha and on his instructions to various other AHD officials named in the statement.
(m) That further, out of assessee's own share of remaining 20 per cent of the defrauded sum, 4 per cent was paid to the lower grade office staff of AHD, 4 to 5 per cent was spent on various statutory taxes, office maintenance and settling of bills, etc. In addition to the above, further substantial amount has been spent on gratification to several high officials of AHD, such as, on their tours, travels, lodging and boarding, shopping, etc. over a period of ten years. After incurring all such expenses out of assessee's own share of 20 per cent, the assessee was left with a sum approx. of Rs. 1.34 crores in cash, which was ultimately seized by the CBI on the basis of revelation made by him.
(n) As regards the taxability or otherwise of the receipts from AHD, we may mention that both the parties before us were in agreement that the AHD receipts taken as income in the hands of several entities floated by the assessee for conducting systematic conspiracy of fraudulently withdrawing money from AHD without making any actual supply of animal feed should be considered in the hands of Shri Dipesh Chandak (Indv.) only and not to those entities. The AO in assessments made by him in respect of those entities has recorded this finding also. Further, this is also evident from the grounds raised in appeal before the Tribunal by the Department in the case of one of the entities of the assessee, viz., M/s Quality Chemicals Suppliers, for asst. yr. 1987-88 onwards wherein specific ground has been taken against the CIT(A)'s holding the receipts from AHD as income of the assessee firm on substantive basis instead of in the hands of Shri Dipesh Chandak (Indv.). For the same assessment years in the case of Quality Chemicals Suppliers, the assessee also is in appeal against the said treatment of receipt by the CIT(A).
(o) Therefore, on this admitted position, it is undisputed that the taxability of fraudulent and illegal receipts from AHD is the concern of the assessee, Shri Dipesh Chandak (Indv.) and not to his all other entities as named somewhere above in this order, which are also subject matter of appeal before the Tribunal.
8.4. On the above factual position, it is to be decided whether the entire sum of fraudulent withdrawals from AHD was to be treated as income and taxed in the assessee's hand or the remaining 20 per cent would be taxed or nothing would be taxed in his hands. As already stated, Section 4 of the IT Act brings to charge income of an assessee earned during the year. In a case where money which has been fraudulently withdrawn is within the knowledge of the original owner and the original owner is pursuing recovery and the persons involved in the criminal act of fraud have already surrendered and admitted of their crime, in such a scenario, such amount cannot constitute income within the meaning of Section 5 to be brought to tax under Section 4 of the IT Act. In order to bring to tax a receipt, as already stated above, an assessee should have unflinching right of ownership and disposition, control and user. Here in this case, everything belonging to the accused is under attachment of the State, who is claiming ownership over the money and the ownership over the money is not refuted or denied by the appellant. In such a case, we are in agreement with the contention of the assessee's learned Counsel that if still another wing of the State wants to tax that amount which belongs to it, that will amount to taxing an amount which belongs to the State and not to the appellant.
8.5. Further, from the statement of the assessee before the CBI, whose statement has been accepted by several authorities as true and full disclosure, the distribution of fraudulent fund and expenditure on gratification during the span of 10 years has become evident. 80 per cent of such fraudulent withdrawal has been straightway given to one Dr. SB Sinha and his other associates on his instruction. Out of the remaining 20 per cent with the assessee, it is seen that 4 per cent has been paid to lower cadre of the AHD officials, 4 to 5 per cent on various statutory taxes, office maintenance, etc.; considerable amount spent on gratification to AHD officials and for self-entertainment with them and the remaining cash of approx. Rs. 1.34 crores found at his residence/office had been seized by the CBI. Therefore, it appears that after the division of defrauded sum amongst the conspirators and subsequent expenditure as indicated above, there remains almost nothing left with the assessee.
8.6. It is pertinent to mention here that in his statement under Section 306 of Cr.PC, the assessee confessed that he used to keep the cash belonging to Dr. Sinha with him for utilising the same as per his instruction. It is also confessed that the said money was handed over to him by the assessee after the break of the AHD scam. The truthfulness of this confession has not been doubted by any authority after considering the evidences/documents seized from the possession of the assessee and moreso, when taking this statement of the assessee as true, the trial was concluded.
8.7. Further, a person is supposed to suffer tax and pay tax out of the income at his disposal, because he is the absolute owner of the sum which he has acquired by way of income and which is his earning. In a case like this, where an assessee did not have at any stage the actual ownership over that defrauded receipt and was ultimately after distribution and seizure left with any money unto himself to suffer tax, given full account of the money lying with the other persons who are parties with him to such fraudulent act-by bringing this defrauded amount belonging to the State to tax in his hand, would result in raising a hypothetical and unreal demand. Therefore, in the view of the facts and circumstances of the case as detailed above, we are of the considered opinion that the money withdrawn fraudulently from the AHD by the assessee having been established to be of the State's Exchequer cannot be treated as income of the assessee in view of Section 2(24) chargeable to income-tax under Section 4 of the IT Act, 1961, and cannot form the basis of computing the total income in terms of Sub-section (45) of Section 2 r/w Section 5 of the IT Act, 1961.
9. The learned senior standing counsel has relied upon some judicial pronouncements in support of the Department's stand. But those decisions, in our opinion, have been rendered on different set of facts than the present one before us.
(i) In the case of CTT v. Piara Singh , the assessee was engaged in the business, though illegal, of smuggling. Therefore, the very concept of earning income is totally different. In the case of the assessee, he was not engaged in any business, legal or illegal, but his activity of withdrawing sum fraudulently from the AHD without making any actual supply of animal feed was the result of systematic conspiracy with other officials of AHD to defraud the State. Further, the ownership of money earned out of smuggling in the case of Piara Singh (supra) vested with that person, whereas in the case of the assessee, it has been admitted that the State has claimed to be owner of the fraudulently withdrawn sum.
(ii) In the case of Little Oak Pharmaceuticals v. Asstt CIT [IT(SS)A. No. 28/Pat/1998, order dt. 21st Dec, 2002], the assessee therein all along claimed that purchases made by it and supplies made to AHD were genuine and expenditure on such transaction was thus genuine. However, investigation conducted by the Department established that both the purchases were bogus and hence the receipts shown by that assessee were taken as income and taxed accordingly. Whereas, in the case before us, it was the claim of the assessee and duly accepted by several authorities conducting enquiry and judging the scam that the purchases and supplies reflected in the books were bogus and were merely a tool to defraud the State Exchequer. Therefore, there is at all no relevancy and similarness in these two cases.
(iii) In the case of Deepak Kr. Singh/Mahendia Pratap Singh v. Asstt. CIT ITA Nos. 175 & 176/Pat/2000 and ITA Nos. 296 & 297/Pat/01, order dt. 24th Jan., 2002 it was the case of the assessee that Jt. Director of CBI in his press release has opined that 20 per cent of the receipts remained in the hands of the alleged supplier while 80 per cent had gone in the pockets of politicians, AHD officials and middlemen and as such the assessee be taxed in respect of his receipt of 20 per cent The Tribunal did not give any weight to such stand of the assessee as the assessee failed to reveal the names of the recipients of that 80 per cent money which was treated by the Tribunal as an illegal act of giving bribe by the assessee. But in the case of the assessee before us, the scenario is something different. The statement of the assessee that out of the total fraudulent withdrawals from AHD, 80 per cent was given to Dr. SB Sinha and other officials of AHD on his instruction named in his statement and out of the balance 20 per cent after meeting all the expenditures on gratification, etc., Rs. 1.34 crores were found and seized from his possession, was found to be true and authenticated on the basis of documents seized from his possession and this statement, as stated above, was the basis of conclusion of trial. Therefore, in the referred case, the Tribunal came to the conclusion on the basis that the assessee could not reveal the names of the recipients and establish the authenticity of its claim, whereas in this case the assessee revealed the names of several recipients of defrauded money and his statement has been accepted as true.
(iv) In the case of Addl. CIT v. Sahay Properties & Inv. Co. (P) Ltd. , the assessee claimed that as the ownership of the house property duly acquired vide a conveyance deed was not registered, the rental income accruing therefrom is not taxable in his hand. The Court held that whether legal or beneficial owner, it would not take away the right of the assessee to remain in possession of the property and to realize and receive the rents and profits therefrom to appropriate the entire income for its own use. In the case before us, the ownership of the defrauded fund was claimed and accepted to be of the State and not of the assessee. In the said case the sale was not denied by the vendor although registered deed was not executed. Whereas in this case, the amount was withdrawn fraudulently from the State Exchequer and the State is pursuing to recover its money. Therefore, the facts and circumstances of both these cases are clearly distinguishable.
(v) Similar was the position in the case Of CIT v. Poddar Cement (P) Ltd. . In that case also, the dispute was about the ownership of the house property and income therefrom. For the reasons stated in (iv) above, this decision of Hon'ble apex Court is not applicable to the case of the assessee.
(vi) In the case of Dipesh Chandak v. Union of India (present assessee) relied on by the Department and , was relating to prosecution under Sections 277 and 278 of IT Act. However, this judgment of Patna High Court has been quashed by Hon'ble Supreme Court in Criminal Appeal No. 1032 of 2004, judgment dt. 17th Sept., 2004, reported as Dipesh Chandak v. Union of India : . The Court opined that the Government should consider not prosecuting the appellant under the relevant sections and further directed that the prosecution will stand stayed till trial of the cases in which pardon is granted is over. The issue before us is apparently totally different.
(vii) In the case of Indraprastha Agencies v. CIT (supra), facts and decision arrived at are similar to that of Deepak Kr. Singh/Mahendra Pratap Singh v. Asstt. CIT (supra) dealt with by us in item (iii) above. For the reasons mentioned therein, the cited case of Hon'ble Jharkhand High Court is distinguishable and does not apply to this case of the assessee.
(viii) Coming to Tribunal, Third Member decision in the case of Dy. CIT v. Murrah Live Stock Agency, (supra), the learned Third Member held that in the face of evidence that assessee was also involved in large scale scam of bogus supplies to the Government, of Bihar in respect of which FIRs have been registered by CBI, the AO was justified in entertaining the belief that the assessee had inflated purchases and expenses requiring reassessment. Here in the case of the assessee, admittedly there was no actual purchase or sale of animal feed. These were shown in the books with a view to use it as tool to defraud the State Exchequer which is admitted by the Department, prosecuting authority and the assessee and found to be correct by the trial Court. There is, therefore, no similarity in these two cases. Similar is the position in respect of Tribunal's order referred to by the Department in ITA Nos. 380 and 381/Pat/2000, order dt. 27th Feb., 2004 in the case of M.S. Bedi v. Jt. CIT in ITA No. 268/Pat/1999, order dt. 13th April, 2006 in the case of Ram Nandan Singh v. Asstt. CIT and in ITA No. 251/Pat/2001, order dt. 26th Feb., 2002 in the case of Dy. CIT v. Hindustan Live Stock Agency.
10. The next grievance of the Department is against deletion of disallowance of interest claimed on loans of Rs. 58,301 in asst. yr. 1987-88, Rs. 82,766 in asst. yr. 1988-89 and Rs. 2,21,576 for asst. yr. 1990-91. The learned senior standing counsel of the Department during the course of argument did not emphasis much on these disallowances being petty in nature. However, after hearing the assessee and consulting the evidence on record, we do not find any infirmity in the order of the CIT(A) on this issue. The disallowances, therefore, stand deleted.
11. The next ground was against the direction of the CIT. (A) to adopt the share income of the assessee from M/s Quality Chemical Suppliers in asst. yrs. 1987-88 and 1988-89 which was not pressed by the Department during course of hearing. The same is, therefore, not considered and the order of the CIT(A) on this issue stands confirmed.
12. The learned senior standing counsel did not press the ground regarding chargeability of interest under Sections 139(8) and 215 of the Act for asst. yrs. 1987-88 and 1988-89 also. That being so, we confirm the order of the CIT(A) on this issue.
13. In view of the above, the Revenue's appeals for asst. yrs. 1987-88, 1988-89 and 1990-91 in the case of Dipesh Chandak (Indv.) stand dismissed.
ITA Nos. 190 and 26 to 29 (Pat) of 2001 (Dipesh Chandak & Sons-HUF)
14. These appeals are by the Department. The main issue common to each of the asst. yrs. 1990-91 to 1994-95 is against the finding of the CIT(A) that the receipts from AHD, Government of Bihar, by way of fake supply of goods do not constitute income in the hands of the assessee-HUF and consequential deletion of addition made in the assessee's hand.
14.1. As stated above in this order, Shri Dipesh Chandak through his various entities, including the present appellant, was engaged in siphoning of the Government fund by way of raising bogus bills of fake supply of animal feed to AHD, Government of Bihar. The issue whether these fraudulent receipts are to be assessed as income in the hands of the Shri Dipesh Chandak as individual or in the hands of various entities including the assessee HUF has already been dealt with in great detail in the case of assessee's individual case in ITA Nos. 188, 189 and 191/Pat/2001. There is no dispute amongst the parties before us that the receipts from AHD, Government of Bihar, are not to be taken for consideration in the hands of the entities through whom scam was conducted by Shri Dipesh Chandak, with which we agree. Further, we have already held in the case of Shri Dipesh Chandak that the receipts from AHD do not constitute income in his hands. In view of the above conclusion, we uphold the order of the CIT(A) on this issue and dismiss this ground of the Department for all the assessment years under appeal.
15. The Department for all the assessment years under appeal agitates that the CIT(A) failed to appreciate that Shri Dipesh Chandak received sum from AHD in name of the assessee HUF controlled by him but has not been able to prove any expenditure against such receipt. As we have already held in the preceding paras that receipt from AHD is not to be considered in the hands of the assessee HUF, the impugned ground raised by the Department has become infructuous and hence dismissed.
16. All other grounds raised by the Revenue in these appeals are, in fact, arguments in support of main issue raised in ground No. 1 above, which we have already dealt with. Therefore, these grounds in argument shape are not required to be considered separately. Furthermore, during course of hearing before us, the learned senior standing counsel of the Department concentrated his arguments on the main issue and did not contest other minor issues specifically. That being so, these grounds for all the assessment years under appeal have rendered infructuous and hence dismissed.
17. In the result, the appeals by the Department in the case of Dipesh Chandak & Sons HUF stand dismissed.
ITA No. 197/Pat/ 2001; asst. yr. 1993-94 (Ankit Industrial Gases):
18. In this appeal by the Department, the first ground reads as under:
1. That the CIT(A)-II, Patna, was not justified in deleting the addition of Rs. 19,89,15,960 being the claimed sale proceeds of yellow maize to M/s Badri Narayan & Co., proprietary concern of Dipesh Chandak & Sons (HUF), since the assessee had failed to prove the purchases of yellow maize in its hands.
18.1. In his statement before the CBI under Section 306 of Cr.PC, Shri Dipesh Chandak revealed the following facts:
The income-tax officials had seized the bank accounts of Shri Badri Narayan & Co. in the year 1992 and out of fear of further seizure, I arranged for all fake purchases to be routed through M/s Ankit Industrial Gases (P) Ltd., one of our other company. In the papers, I have shown all purchases from this company directly from the farmers and these materials were shown to have been sold by this company to Shri Badri Narayan & Co. and in turn Badri Narayan & Co. used to issue cheques for those purported purchases to M/s Ankit Industrial Gases (P) Ltd, and thus the cash was being withdrawn from company's account, the entire cash so withdrawn was taken away by me and Ankit Industrial Gases had not been benefited in respect.
18.2. Basing on the above statement, the AO made addition of Rs. 19,89,15,960 on account of alleged receipts from AHD, Government of Bihar, as income of this assessee. Shri Dipesh Chandak has confessed before several authorities that all these transactions are bogus and were merely a tool to defraud the State Exchequer. It has also been clarified and confessed by Shri Chandak in his statement that all the benefits out of this bogus transaction were enjoyed by him, and his other entities, including the present assessee, were not benefited in any way. As stated above, his this statement was found to be true by all the investigating/judicial bodies. Furthermore, we have already held that Shri Dipesh Chandak is the concern and not his other entities in respect of the impugned receipt out of fodder scam. The learned senior standing counsel of the Department also concentrated his argument on pressing the issue that the receipt should be taken as income in the hands of Shri Dipesh Chandak only and not on other entities. That being the position and for the reasons discussed by us above in the case of Shri Dipesh Chandak (Indv.), the action of the AO in having treated the impugned receipt in the hands of Ankit Industrial Gases (P) Ltd. is quashed and that of the CIT(A) is upheld. We order accordingly. This ground of the Department is thus dismissed.
19. The next dispute of the Department relates to deletion of Rs. 12,65,130 on account of sales-tax deferred liability. As per balance sheet as on 31st March, 1993, the statutory liabilities outstanding were as under:
Bihar Sales-tax 6,58,443
Addl. Sales-tax 2,45,830
Central Sales-tax 3,59,587
Surcharge CST 1,270
Professional tax 617
________
2,65,747
________
The AO for lack of challan disallowed the claim and added the said amount to the income of the assessee. The CIT(A) deleted the addition with the following observation:
Before me, the Authorised Representative has filed the copy of certificate of eligibility for exemption of tax under the Bihar Finance Act, 1981 and the Central Sale-tax Act, 1956 issued by the Commercial Taxes Department in which deferment of sales-tax payment was allowed for five years commencing from 1st April, 1990. The Authorised Representative submitted that the above liabilities were deferred liabilities as per the above circular issued by the Commercial Taxes Department, Government of Bihar. It was pleaded that such deferred amount of liabilities should not be disallowed under Section 438 of the IT Act as also clarified in Board's Circular No. 496 dt. 25th Sept., 1987 [(1988) 68 CTR (St) 109] and Board's Circular No. 674, dt. 29th Dec, 1993 [(1994) 116 CTR (St) 9] reproduced at pp. 2630-2631 of Chaturvedi & Pithisaria's IT Law (Fifth Edition Volume-2). The Authorised Representative submitted that this circular had been upheld also by the MP High Court in the case of CIT v. K.N. Oil Industries (1997) 226 ITR 547 (MP). Keeping in view the above clarification issued by the above circulars of the Board, the disallowance of Rs. 12,65,130 in respect of deferred liabilities of sales-tax made by the Jt. CIT is deleted.
19.1. We have heard the parties and perused the material available on record. The CIT(A), considering the eligibility certificate for deferment of payment of sales-tax issued by the Commercial Taxes Department, Government of Bihar, CBDT circulars and case law, deleted the disallowance. The assessee's learned Counsel also invited our attention to the CBDT Circular No. 496, found reported in (1988) 68 CTR (St) 109 : (1988) 169 ITR (St) 53, in support of the claim of the assessee. After perusing all these documents, we find no reason to interfere with the order of the CIT(A) on this issue. This ground of the Department thus fails.
20. The next issue in this appeal is against deletion of addition of Rs. 5,00,000 on account of share application money received by the assessee company from Prakashnath Towers (P) Ltd. The CIT(A) had restored the matter back to the file of the AO for fresh adjudication. It is found that the AO subsequently vide his order dt. 22nd March, 2002 passed under Section 143(3)/147/251 has accepted the claim of the assessee. Therefore, this ground of the Department has no consequence being infructuous and hence dismissed.
21. The appeal of the Department for asst. yr. 1993-94 fails.
ITA No. 198/Pat/2001- asst. yr. 1996-97 (Ankit Industrial Gases):22. In these appeals, all the three grounds are co-related. The AO made addition of Rs. 5,99,204 in respect of unexplained loan from M/s Shashi Investment & Finance (P) Ltd. Consequential interest on such loan of Rs. 1,72,250 and interest of Rs. 90,396 on further loan has also been disallowed and added to the total income of the assessee. The AO disallowed the claim of the assessee on the ground that the assessee failed to produce any confirmation of account and the ledger copies of the interest paid to the parties. Before the CIT(A), the assessee produced all these documents on the basis of which he deleted the additions.
22.1. We find that the CIT(A), in violation of Rule 46A of the IT Rules has entertained this fresh evidence without affording any opportunity to the AO to examine the same. As a matter of principles of natural justice, he ought to have sent these documents to the AO and call for report. That not being done, the order of the CIT(A) on this issue suffers from nullity. On the given facts, we deem it proper to restore the matter back to the file of the AO with a direction to verify the documents filed before the CIT(A) and further documents, if any, may be filed by the assessee before him. The assessee is also directed to co-operate with the AO in this regard. With these directions, we dispose of the matter as above.
23. This appeal of the Department is partly allowed for statistical purposes.
ITA Nos. 443 to 446/Pat/2004; asst. yrs. 1987-88 to 1990-91 (Dept. v. Quality Chemical Suppliers):
24. The first common ground in the appeals for asst. yrs. 1987-88 to 1990-91 relates to treatment of receipts out of fodder scam in the hands of the assessee. We have already held in the Departmental appeals in the case of Shri Dipesh Chandak (Indv.) that Shri Dipesh Chandak is the concern and not his other entities in respect of the impugned receipt out of fodder scam. The learned senior standing counsel of the Department also concentrated his arguments on pressing the issue that at least 20 per cent receipt should be taken as income in the hands of Shri Dipesh Chandak only and not on other entities. That being the position and for the reasons discussed by us above in the case of Shri Dipesh Chandak (Indv.), the action of the AO in having treated the impugned receipt in the hands of M/s Quality Chemical Suppliers is quashed and that of the CIT(A) is upheld. We order accordingly. This ground of the Department raised in all the aforesaid assessment years is thus dismissed.
25. The next common ground of the Department in these four assessment years pertains to deletion of additions on account of deposits in bank accounts, which are as under:
Assessment Total Name of Out of A.H.D. Out of genuine
Year Deposits (Rs.) the Bank (Rs.) Transactions
(Rs)
1987-88 36,09,533.06 U.B.I., Ranchi 28,50,024.20 7,49,508.86
U.B.I., Bokaro -
1988-89 33,46,114.62 U.B.I., Ranchi 11,97,840.48 21,48,274.14
U.B.I., Bokaro -
1989-90 41,25,813.76 U.B.I., Ranchi 8,71,630.68 32,54,183.08
U.B.I., Bokaro -
1990-91 30,20,246.42 O.B.C., Kolkata - 3,20,350.00
U.B.I., Bokaro 26,99,896.42
The AO made the impugned additions in the hands of the assessee on protective basis and substantive basis in the hands of Shri Dipesh Chandak. The AO's objection was that the CIT(A) without giving any opportunity of examining the details of the bank deposits to the AO in contravention of Rule 46A of the IT Rules has deleted the additions. It is pertinent to mention here that the substantive assessments made in the hands of Shri Dipesh Chandak for the same additions for asst. yrs. 1987-88, 1988-89 and 1990-91 have been sent back to the file of the AO for fresh adjudication. These bank deposits relate to both, i.e. out of AHD receipts and normal genuine business transactions. The AO in the restored matter deleted the addition made on account of bank deposits which were directly related to fodder scam as it would amount to double taxation in the case of Dipesh Chandak for the asst. yrs. 1987-88 and 1988-89 of Rs. 28,50,024 and Rs. 11,97,840, respectively. The AO for the reason of Rule 46A of the Rules for the said two assessment years, i.e. 1987-88 and 1988-89, challenged the action of the CIT(A) in deleting the addition. We find that the AO himself in the reassessments in respect of Dipesh Chandak for the said years has deleted the addition made on substantive basis. Protective assessments were made in the hands of the assessee (Quality Chemical Suppliers). Therefore, once the addition made in substantive assessment has been deleted on the ground that the bank deposits are already included in the total receipts from AHD and the same has been separately considered in the hands of Shri Dipesh Chandak, there remains no justification to add and assess the same very amount on the pretext of protective assessment in the case of the present assessee. In this view of the matter, the additions made of Rs. 28,50,024 and Rs. 11,97,840 are deleted.
25.1. Insofar as asst. yr. 1989-90 is concerned in respect of the bank deposits out of AHD scam, the CIT(A) quashed the addition on the ground that the same was included in the AHD receipt of Rs. 9,00,000 assessed by the AO in the hands of the assessee and this would amount to double taxation on the same amount. It is pertinent to mention here that this very addition made on substantive basis in the hands of Shri Dipesh Chandak has been deleted by the CIT.(A). That being so, there remains no reason to uphold the addition made on protective basis in the hands of the present assessee by the AO for whatever reason may be. We, therefore, delete the addition of Rs. 8,71,630.68 in asst. yr. 1989-90.
26. Coming to additions made on account of bank deposits out of normal transactions made on protective basis in the hands of this assessee, we find that for the same bank deposits, protective assessments have been made in the case of Shri Dipesh Chandak. The assessments framed in the case of Shri Dipesh Chandak were set aside by the CIT(A) for re-decision in respect of these bank deposits for asst. yrs. 1987-88, 1988-89 and 1990-91. In set aside assessments, the AO struck on his earlier stand in making the additions except for asst. yr. 1990-91 wherein the deposits of Rs. 3,20,350 with OBC, Kolkata have been accepted as explained. For the bank deposits with UBI, Bokaro, the AO has made identical observations in the assessment order in respect of Shri Dipesh Chandak and for our convenience we quote below the observations made in asst. yr. 1987-88 vide order dt. 27th March, 2002 as under:
Notice under Section 142(1) of the IT Act 1961, was issued to the assessee on 5th Oct., 2001 to explain the deposits. The assessee submitted the details of deposits vide his letter dt. 15th Oct., 2001. Another notice under Section 142(1) of the IT Act 1961, was issued to the assessee with a letter on 11th Feb., 2002, asking the assessee to submit the books of account of M/s Quality Chemical Suppliers. Shri Vijay Maheshwari, authorized representative of the assessee appeared on 16th March, 2002, with the necessary details of M/s Quality Chemical Suppliers. The assessee also produced books of account for the relevant period for verification. The assessee also submitted the details regarding each deposit. He explained that all the deposits pertaining to UBI, Bokaro Steel City, were payments from Bokaro Steel Plant, Bokaro, against the supply made by M/s Quality Chemical Suppliers. He further stated that all the deposits are through account payee cheques received from the Bokaro Steel Plant. In support of that the assessee furnished the delivery notes. From the perusal of the bank statements it has been observed that all the deposits in the aforesaid account have been made through cheques and all the deposits were reflected in the books of account. But, the assessee failed to furnish the confirmations from the Bokaro Steel Plant. The assessee stated that it is not possible to furnish the confirmation from the Bokaro Steel Plant of such an old period. The onus is on the assessee to establish that the deposits are the payments received from Bokaro Steel Plant. The assessee failed to discharge his primary responsibility. Thus, the deposits amounting to Rs. 21,48,274 are treated as unexplained and added back to the total income as income from undisclosed sources.
27. From the observation of the AO himself as quoted above, it is evident that the assessee made him available all possible evidences in support of the bank deposits. The payments received by the assessee from Bokaro Steel Plant were admittedly through account payee cheques. The transactions have been duly recorded in the books of account which are tallied with the bank statement. These are not disputed. Delivery notes duly receipted by Bokaro Steel Plant were also on record. In spite of all these positive evidence, the AO asked the assessee to produce the confirmation from the principal, i.e. Bokaro Steel Plant. The assessee expressed his inability to do so for the reason that the impugned transaction took place almost 15 years back. We find that the AO could not find any irregularity in the books of account or other documents submitted in support of such bank deposits. It is also not disputed that the account payee cheques issued by Bokaro Steel Plant were deposited in the said bank account. Considering all these documents and the order of the CIT(A) in the case of Shri Dipesh Chandak, we do not find any justified reason to interfere with the order of the CIT(A) passed in the case of Quality Chemicals Suppliers for asst. yrs. 1987-88, 1988-89 and 1990-91 deleting the additions of Rs. 7,49,508.86, Rs. 21,48,274.14 and Rs. 26,99,896.42, respectively.
28. There remains one more addition in respect of bank deposits of Rs. 32,54,183.08 made in the hands of the assessee (Quality Chemicals Suppliers) for asst. yr. 1989-90 on protective basis. The AO made the addition on the ground that the impugned bank deposit was unexplained. The CIT(A) considered the explanation of the assessee and evidence produced before him, which were identical to those of asst. yrs. 1987-88, 1988-89 and 1990-91 in the case of this assessee, deleted the addition. As already stated above, substantive assessment has been made for the same addition in the hands of Dipesh Chandak. Therefore, once the addition has been considered in substantive measure, there is no need to assess the same amount in protective measure and as such we uphold the order of the CIT(A) for this year also deleting the addition made by the AO on protective basis in the case of this assessee.
ITA No. 447/Pat/2004; asst. yr. 1993-94 Dept. v. Quality Chemical Suppliers:29. In this appeal by the Department, the following ground is raised:
1. For that that learned CIT(A), Dhanbad, has erred in deleting the addition of Rs. 25,23,425 under Section 68 of the IT Act on account of unexplained loans admitting the additional evidence in the form of confirmation in contravention of Rule 46A of the IT Rules without giving any opportunity to the AO to examine the genuineness of the aforesaid confirmation.
29.1. The Department's objection is that the CIT(A) admitting and acting on fresh evidence filed by the assessee for the first time before him and without allowing AO to examine the same has deleted the addition. In this case, the assessment was made ex parte. On perusal of the appellate order of the CIT(A) we find that the assessee has filed several documents before him on the basis of which the CIT(A) being satisfied deleted the addition. The assessee's learned Counsel submitted that the assessee vide several communications intimated the AO the difficulties to produce the required documents during assessment proceeding. However, before the CIT(A) these were produced. Before the Tribunal also the assessee has filed several evidence in support of the claim. On the above context, we are of the opinion that the CIT(A) in violation of Rule 46A of the IT Rules has entertained this fresh evidence without affording any opportunity to the AO to examine the same. As a matter of principles of natural justice, he ought to have sent these documents to the AO and call for a report. That not being done, the order of the CIT(A) on this issue suffers from nullity. On the given facts, we deem it proper to restore the matter back the file of the AO with a direction to verify the documents filed before the CIT(A) and the Tribunal. The assessee is also directed to co-operate with the AO in this regard. With these directions, we dispose of the matter as above.
30. As a result, this appeal of the Department is allowed for statistical purposes.
ITA Nos. 384 to 390/Pat/2004; asst. yrs. 1987-88 to 1993-94 Quality Chemical Suppliers v. Department:
31. The common grounds for all the asst. yrs. 1987-88 to 1993-94 raised in these appeals of the assessee relate to treatment of AHD receipts in the hands of the assessee on substantive basis as against protective basis done by the AO. For the sake of convenience, we quote below these grounds from asst. yr. 1987-88:
(1) That the learned CIT(A) acted arbitrarily and against the law in having assessed the receipt of Rs. 34,00,000 from AHD in the hands of the assessee on substantive basis on doubtful presumption, whereas the assessment in the case of the assessee was framed on the assessee on protective measure and substantive in the hands of Shri Dipesh Chandak, partner, and hence this change of view is not only uncalled for but also bad in law.
(2) That further the learned CIT(A) misguided himself in having differed from the view of his predecessor holding that the receipts from AHD do not constitute income of Shri Dipesh Chandak within the meaning of Section 2(24) of the Act relying on Tribunal order in the case of Indraprastha Agencies, (supra) inasmuch as the facts of that case are distinguishable to the facts of the present case and modus operandi was clearly explained, as would be evident from the statement on oath by Shri Dipesh Chandak duly found true by the designated Court of CBI.
(3) That without prejudice to the above, the learned CIT(A) acted on a duel role while confirming the addition of Rs. 34 lacs in the hands of the assessee on substantive basis, inasmuch as, on the one hand the Revenue authorities are basing on the statement of Shri Dipesh Chandak while adding the bogus receipt in the hands of the assessee and, on the other hand, they are adding the alleged receipt from AHD in the hands of the assessee disregarding the statement of Sri Chandak recorded before the designated Court of CBI.
(4) That further the learned CIT.(A) failed to appreciate the fact that if at all anything is to be assessed, that should be considered in the hands of Shri Dipesh Chandak only inasmuch as Shri Chandak himself admitted that the fraud having been committed by him and the receipt out of the fraudulent act having been shared amongst the co-accused persons as named in his statement, the right person to be taxed in this behalf is no one else but Shri Dipesh Chandak, moreso when the Department has also adopted this stand as is apparent from the assessments made for asst. yrs. 1992-93 to 1994-95 in case of Shri Dipesh Chandak. (supra) 31.1. The assessee in the paper book submitted before us copies of the orders of the CIT(A) for asst. yrs. 1992-93 and 1993-94 passed under Section 154 of the Act, whereby the CIT(A) rectified his order and deleted the addition on account of AHD receipts from the hands of the assessee. The relevant portion of the order for asst. yr. 1992-93, dt. 9th March, 2006 is reproduced below:
On perusal of appellate order for asst. yr. 1992-93 in case of appellant as well as in case of Dipesh Chandak, (supra) it is found that the appeal of M/s Quality Chemical Suppliers was decided on 21st Sept., 2004 in ex parte manner because of non-compliance by the appellant. The AO has assessed the receipt from AHD Bihar, by the appellant firm on protective basis. Such receipts were taken as income of Shri Dipesh Chandak, the prime accused in AHD scam cases, on substantive basis by AO. The receipts from AHD, Bihar, by the appellant firm have been taken as income of Shri Dipesh Chandak on substantive basis after due examination in appellate order Nos. 177, 176 and 175/D/2004-05, dt. 20th Dec, 2004 also.
In view of the above facts, the claim of the appellant firm is found correct. There is mistake apparent on record in case of appellant firm. The receipts from AHD amounting to Rs. 2,15,17,895 have already been taxed in the hands of Shri Dipesh Chandak. Therefore, this addition is deleted in case of appellant firm.
31.2. We have already held in the Departmental appeals in the case of Shri Dipesh Chandak (Indv.) that Shri Dipesh Chandak is the concern and not his other entities in respect of the impugned receipt out of fodder scam. The learned senior standing counsel of the Department also concentrated his argument on pressing the issue that the receipt should be taken as income in the hands of Shri Dipesh Chandak only and not on other entities. That being the position and for the reasons discussed by us above in the case of Shri Dipesh Chandak (Indv.), the action of the CIT(A) in having treated the impugned receipt in the hands of M/s Quality Chemical Suppliers for asst. yrs. 1987-88 to 1991-92 is quashed. In view of our above decision, the additions of AHD receipts in the hands of this assessee of Rs. 34,00,000, Rs. 29,83,830, Rs. 9,00,000, Rs. 26,10,471 and Rs. 1,23,02,423 for asst. yrs. 1987-88 to 1991-92, respectively are deleted. For the remaining asst. yrs. 1992-93 and 1993-94, as already quoted above, the CIT(A) himself in his subsequent rectificatory order has deleted the AHD receipts taken in the hands of the assessee. Therefore, the issue for these two years stands concluded by the said order of the CIT(A) and there remains no income out of AHD scam assessable in the hands of the present assessee.
32. The next common ground of appeal for asst. yrs. 1991-92 and 1992-93 is regarding disallowance of expenditure against income of Rs. 1,80,000 and Rs. 1,65,000, respectively on account of trucks and cylinder hiring charges. From the orders of the authorities below we find that depreciation has been allowed on the trucks. Therefore, the hiring out of trucks and cylinders has not been doubted. The dispute was about the quantum of expenditure which was not allowed by the Department for lack of details and evidence thereof. The learned senior standing counsel for the Department did not oppose the argument of the assessee's learned Counsel that some expenditure should be allowed against this income when the hiring out of trucks and cylinders is not in dispute. Considering the facts and circumstances of the case, it would meet the ends of justice to restrict the allowance of expenditure to 50 per cent out of the income net of depreciation.
33. In the result, the appeals for asst. yrs. 1987-88 to 1990-91 and 1993-94 are allowed and those for asst. yrs. 1991-92 and 1992-93 are allowed in part.