Income Tax Appellate Tribunal - Cochin
Popular Automobiles vs Assistant Commissioner Of Income Tax. on 26 March, 1991
Equivalent citations: (1993)45TTJ(COCH)227
ORDER
G. SANTHANAM, A.M. :
This is an appeal by the assessee.
2. The first point in dispute is about the addition of Rs. 52,66,963 to the income disclosed by the assessee. In the profit and loss account originally filed alongwith the return of income for the year ending 30th April, 1986 relevant to the asst. yr. 1987-88, three items were found debited as relating to the income declared in the amnesty returns for the previous years ending on 30th April, 1983, 30th April, 1984 and 30th April, 1985 amounting to Rs. 52,66,963 and then the net profit was transferred to the appropriation account. The ITO took the net profit as per the account and added the sum of Rs. 52,66,963 which was debited in the profit and loss account for the purpose of computation of the total income of the assessee. The reasons adduced by the ITO for making the addition may be summarised as follows :
(i) The assessee had not stated that the income declared under the amnesty scheme in its letter dt. 28th Oct., 1985 represented understatement of stocks;
(ii) There was no independent evidence to show that the amount was represented by stocks; and
(iii) It was against the accounting principles to debit the amount offered for assessment in the earlier years to the P&L account.
In the process the assessees explanation that the amount of Rs. 52,66,963 offered for assessment under the amnesty scheme for the earlier years represented the understatement of stock which was corrected and included in the value of the closing stock as on 30th April, 1986 was rejected by the ITO. The assessees explanation that the additional stock representing the income declared was inducted in the accounts only in the year ended 30th April, 1986 did not also find favour with the ITO. The assessee carried the matter in appeal.
3. The assessee contended before the first appellate authority that under the provisions of the amnesty scheme it was under no obligation to satisfy the manner or the form in which the additional income offered for assessment is held by it. However, the assessee had passed the necessary entries in its accounts for the previous year ending on 30th April, 1986 immediately after the amnesty petitions. It was contended that the additional income declared under the amnesty scheme did not exist in any other form with the firm or with the partners either in the form of cash or other assets except in the form of stock. The CIT(A) held that the assessees claim that the income declared was in the form of stock was hollow as there was no material to show that the closing stock declared was inclusive of the unaccounted stock of the earlier years and there was no justification for the assessee to treat the income declared for the earlier years under the amnesty scheme as an outgoing in the profit and loss account for a subsequent year. The affidavit filed by Shri John Paul, son of Shri K. P. Paul, reiterating the contention of the firm that the undeclared income was in the form of stock did not contain any supporting material. It was against the accepted principles of accountancy to deduct the income of the past from the current years income. In this view of the matter, the learned CIT(A) sustained the addition. The assessee is in second appeal.
4. Shri Ramamani, the learned counsel for the assessee, submitted that the authorities did not appreciate the facts of the case in the proper perspective. In the month of October, 1985, the assessee felt that there has been understatement of stock and, therefore, it wanted to straighten its records. At the same time, it was difficult for it to pinpoint the exact amount of understatement in stock in each year. Therefore, it came with a proposal before the Honble CIT for declaration of higher income under the amnesty scheme in a total amount of Rs. 60 lakhs and pleaded for spreadover of the same from the asst. yrs. 1983-84 to 1987-88. Pursuant to the filing of the petition to the CIT on 28th Oct., 1985, discussions took place with the CIT as a result of which the assessee furnished another statement on 4th Nov., 1985 indicating the years in which the higher income is to be assessed and that was for and from the asst. yrs. 1984-85 to 1987-88. No doubt, the assessee did not specifically state in what form the escaped income was being kept by the assessee because unlike in the Voluntary Disclosure Scheme of 1975 there was no stipulation in the amnesty scheme for indicating the manner in which the concealed income is kept. So, this was not done when the assessee presented the petition before the CIT on 28th Oct., 1985. However, in the course of the discussions the assessee explained the reason for coming out with disclosure of higher income voluntarily under the amnesty scheme and it was at the suggestion of the CIT the spread over was shifted from the asst. yrs. 1983-84 to 1984-85 and onwards. Then, when the assessment for the asst. yr. 1984-85 was taken up by the IAC (Asst.) the assessee had specifically stated at para 3 of its letter dt. 17th Feb., 1987 that the declared income of Rs. 60 lakhs was in the form of stock. Again, in the course of assessment for the asst. yr. 1987-88, to a particular question from the ITO whether any records are maintained relating to stock, the assessee had stated that as the stocks were unaccounted for stocks, there was no record for the same as a result of which the disclosure had to be made. That does not mean that the income declared by the assessee did not represent understatement of stocks. If the ITO had found any material that such income was represented in the form of any other investments, the assessee would be having no case, but, no such finding has been given or could even be made in the facts and the circumstances of the case. Amnesty scheme is intended for bringing to tax incomes that remained undetected and, therefore, untaxed by the Revenue and the Circulars issued by the CBDT have assured the public that no probing enquiries would be made and it is under these circumstances the assessee had come forward with the disclosures in order to mend its affairs. May be the assessee was negligent in not stating in what form the concealed income was kept but that does not mean that the assessee was not having the stocks with him about which there was understatement. In fact, it is the assessees personal knowledge that is more important in the voluntary declaration of higher incomes and to accept the statement of the assessee in part that the assessee has understated his income and to refuse to accept his explanation that such understated income was with reference to the stock would go against all the canons of justice. Having accepted the assessees statement that there has been escapement of income to the extent of Rs. 60 lakhs over the years, the Revenue should not turn round and say that the explanation offered by the assessee though subsequently with regard to the manner in which such income has escaped assessment was an afterthought. This apart, the assessees general journal contains in it entries for bringing into record the understatement in the stocks. The partner of the assessee has also filed an affidavit to the effect that there was understatement of stock and thus the income that had escaped the assessment was offered under the amnesty scheme. So the partners statement cannot be dismissed as a self-serving statement as it is supported by the entries in the ledger. Against this, the learned authority had not brought on record anything to say that the statement was false or the entries did not reflect the true state of affairs. It was further contended that it was by mistake that the assessee had displayed the understatement of stock amounting to Rs. 52,66,963 in the profit and loss account portion of the final account. Its normal place is in the trading account rather than in the profit and loss account. That is above the line rather than below the line. A mere mistake in showing the amount in another part of the same account cannot be held against the assessee, because the true character of the income should be the criterion. Accounting display or accounting entries are not determinative of the legal character of the income or deductions. Income that is one assessed cannot be assessed in another year. Therefore, the assessee in order to have a correct display of the items of understatement of stock from the asst. yrs. 1984-85 to 1986-87 has redrafted the training account and the profit and loss account which are to be found in pages 54 to 57 of the paper book and that should be considered as stating the correct picture.
5. Shri A. D. Menon, the learned Departmental Representative, objected to the admission of the redrafted trading account and the profit and loss account as found in pages 54 to 57 of the assessees paper book as the same was not before the ITO or before the first appellate authority.
6. We have carefully considered the matter. No new figures are introduced in the redrafted account. The only change that had taken place in the redrafted statement is to put the three items amounting to Rs. 52,66,963 in the trading account from its original place of P&L Account, i.e., above the lines as against below the line. Another change is that whereas these items were described as income declared under the amnesty scheme in the original profit and loss account, in the redrafted account these are stated specifically as stocks understated in the year ended 30th April, 1983, 30th April, 1984 and 30th April, 1985. The change in the description is in accordance with the plea of the assessee that the income declared under the amnesty scheme for the asst. yrs. 1984-85 to 1986-87 was with respect to understatement of stock. Besides, such understated stocks have been passed through the journal and thus recorded in the accounts at pages 12 to 16 of the paper book. Therefore, we admit these statements which highlight the contention of the assessee.
7. Shri A. D. Menon, the learned Departmental Representative, submitted that the assessees contention that the higher income declared under the amnesty scheme was with respect to understatement of stock is clearly an afterthought. There was no whisper of such understatement in the petition filed by the assessee on 28th Oct., 1985 before the CIT, Cochin. Nor is there evidence to show that the assessee had informed the CIT about the fact of understatement in stock in the course of its discussions with the Honble Commissioner. Nor in the statement filed on 4th Nov., 1985 pursuant to the discussion, there is any mention of understatement of stock represented by such concealed income. In none of the revised returns filed with the department for the asst. yrs. 1984-85, 1985-86 and 1986-87, is there any mention about the understatement of stock. Therefore, the plea of the assessee that the higher income was declared only for the reason of understatement of stock should be dismissed only as a convenient afterthought. The affidavit of the partner of the firm can be described only as a self-serving document. The assessees letter dt. 21st March, 1990 is unambiguous in that the assessee was not having any record of stocks with it and, therefore, the plea of the assessee that the income was represented by understatement in stock should not be accepted. Lastly, it is only the expenditure that is spent for earning the income that can be considered as a proper deduction for arriving at the profit for any one year. The income earned in the earlier years are not valid deductions from the income of the subsequent year. Therefore, the ITO was right in disallowing the same. He also relied on the paper book filed by him containing five items.
8. We have thus heard rival submissions and perused the records. In its petition dt. 25th Oct., 1985 the assessee had offered higher income under the amnesty scheme for the asst. yr. 1983-84 and onwards upto the asst. yr. 1987-88 as seen in para 3 thereof. However, in its statement filed with the CIT on 4th Nov., 1985 presumably after discussions with the CIT, the amount of Rs. 60 lakhs was spreadover the asst. yrs. 1984-85 to 1987-88. Thus, ultimately the assessee had come under the amnesty scheme for and from the asst. yr. 1984-85 instead of 1983-84 as originally proposed. There is no specific mention that the income represented understatement of stock. However, in its petition dt. 28th Oct., 1985 offering an income of Rs. 60 lakhs under the amnesty scheme the assessee has stated as follows :
"As our accounting year closes on 30th April and the offer being made hereby takes into account the income that has accumulated upto the time of the offer, the disclosure will bring within its amplitude the asst. yr. 1987-88 also, the previous year relevant to which commences on 1st May, 1985 and ends on 30th April, 1986. This aspect will be taken care of when estimate for the payment of advance tax is filed for the asst. yr. 1987-88."
The assessees case is that when it referred to accumulated income as on the date of the petition that was offered for assessment under the amnesty scheme, it had in its mind that such income represented by understatement of stock though it was not specifically stated in the petition. The Revenues case is that the understatement of income might be due to a variety of reasons and in the absence of the assessee specifying the form in which the escaped income was held, its explanation that it represented the understatement of stock can be viewed only as an afterthought. This is in short the dispute before us.
9. We have carefully considered the issue before us. We find force in the contention of the learned counsel for the assessee that there is no provision in the amnesty scheme for the assessee to declare the form and the manner in which the concealed income was held unlike the voluntary disclosure scheme of 1975 which had an appendix in Form A under r. 3 of the Voluntary Disclosure Scheme wherein Sr. No. 5 requires the assessee to state specifically the following information :
"5. Statement of voluntarily disclosed income :
S. No. Amount of income declared Assessment year (s) to which the income relates If the income is represented by cash (including bank deposits), bullion, investment in shares, debts due from other person commodities or any other assets Remarts Description of asset Name in which held Amount (1) (2) (3) (4) (5) (6) (7) Thus, the amnesty scheme is in contrast with the Voluntary Disclosure Scheme of Wealth Ordinance, 1975. Of course, there is a clarification issued by the Ministry of Finance, Department of Revenue (CBDT) subsequently in response to questions raised at different places on the Press Note of the CBDT and the Circular No. 423, dt. 26th June, 1985 [published in (1985) 47 CTR (TLT) 30] and Circular Nos. 432, [published in (1986) 50 CTR (St) 1] (439, 440 & 441) [published in (1986) 50 CTR (St) 283] dt. 15th Nov., 1985. Question No. 31 and the answer thereto are as follows :
"Q. If an assessee has declared income, would he be required to give evidence of entries in the books of account, etc.?
A. He would be well advised to do so."
(See pages 69 and 70 of the paper book) Till this clarification was issued, there was no requirement on the part of the assessee to declare the form or the manner in which the voluntarily disclosed income was kept. This clarification is found in the paper book at pages 69 and 70 as contained in the Kerala Kaumudi on 1161 Kumbham 28 (M.E.) (in the month of March, 1986). Therefore, we hold that the assessees failure to specifically state the form in which the concealed income was held when it presented the petition to the CIT on 28th Oct., 1985 or when it filed another statement seeking spreadover of the amount on 4th Nov., 1985 is not fatal to his case. However, as early as on 17th Feb., 1987, the assessee, in the course of the assessment for the asst. yr. 1984-85 has stated specifically in its reply to the IAC (Asst.) as follows :
"3. Disclosure of income An income of Rs. 60,00,000 which had not been assessed before was offered for assessment under the Amnesty Scheme. The disclosure was made before the CIT, Cochin by a letter dt. 28th Oct., 1985. The income thus offered for assessment was lying in the form of stocks at the time of disclosure and consisted of the total of the stocks understated in the closing stock inventories of the accounting years ended 30th April, 1983, 30th April, 1984, 30th April, 1985 and stocks under-estimated in respect of the period from 1st May, 1985 to the date on which the disclosure was made."
In the meanwhile, the assessee has passed entries in its general journal at pages 12 to 16 of the paper book clearly listing out the understatement of the stock for the asst. yrs. 1984-85 to 1986-87. Thus, the understatement of the earlier years for which spreadover was granted had been brought on record in consonance with the clarification issued by the Board cited supra. This is also supported by the affidavit of Shri John Paul, one of the partners, filed before the appellate authority. The affidavit was dismissed as a self-serving statement by the appellate authority. In our view, the affidavit of the partner is supported by the entries in the books of accounts. In this context, it is pertinent to note that the Revenue has accepted the closing stock figure of Rs. 1,33,48,475.87 as on 30th April, 1986, and the veracity of it has not been doubted nor the journal entries in the books of accounts incorporating the understatement of stock was challenged by the Revenue. In Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181 (SC), it was held by the Supreme Court that where an affidavit is filed and the entries in the books are not challenged, it is not open to the Revenue to challenge the correctness of the statement made in the affidavit. Therefore, the affidavit of the partner cannot be brushed aside as not based on material. Nor can it be said to be a self-serving statement. Even in the original petition dt. 25th Oct., 1985 the assessee had referred to the accumulated income that had escaped assessment. From this, it can be reasonably inferred that such income had not been spent out or expended in the years for which spread over had been asked but was still lying with it in an accumulated form at the point of time of the petition to the CIT. Therefore, at least in the preponderance of probabilities it can be held that the accumulated income which remained escaped was hidden under stock as stated by the assessee. It is not the case of the ITO that the escaped income was in the form of cash or bank balance or buildings or machinery or other investments. Thus we uphold the claim of the assessee. In this view of the matter, we reject the Revenues contention.
10. Shri Menon for the Revenue referred to the statement made by the assessee in its reply dt. 21st March, 1990 to the Asstt. Commr. (Asst.), Central Circle, Ernakulam. The statement is as follows :
"No records relating to the stocks which represented the income declared under the Amnesty Scheme have been kept or are available now. The very fact that the said stocks were not accounted rules out the possibility of any records relating to them being available or preserved. We may point out in this connection that assurances had been held out in the various circulars that made up the Amnesty Scheme that no probe would be made into or roving enquiries conducted about the source or the nature of the income declared under Amnesty Scheme. The persons making declarations were also not required in any of the said circulars to indicate at the time of declaration the form in which the income declared was lying."
From this, the learned Departmental Representative wants us to infer that the assessee has no evidence or material to say that the income declared under the Amnesty Scheme referred to understatement of stocks.
11. We have carefully gone through this statement. It is no doubt true that the assessee was not maintaining day-to-day stock register, nor was it having a stock register worth its name in all the assessment years. The assessee pleads that it is a very big dealer in automobile parts having number of branches dealing in as many as 90,000 items of stock and, therefore, it was impractical for it to maintain day-to-day stock register, etc. All that was done was only to take inventories on estimate basis or otherwise and such records are not preserved by it. It was precisely for this reason that the assessee felt that there had been escapement of income in the form of understatement of stock and, therefore, the assessee came forward under the amnesty scheme. The appears to be reasonable in the facts and circumstances of the case. As a matter of fact, the assessments of the preceding years prior to the filing of the amnesty returns were all made under S. 143(3) without invoking the provisions of S. 145(1) even in the absence of stock register. Therefore, there is force in the submission of the learned counsel for the assessee that merely because the assessee had shown under the amnesty scheme higher incomes it should not be put to further tests as to adduce evidence in regard to the exact amount of understatement of stock on the basis of materials. In fact, the understatement itself was estimated in a sum of Rs. 60 lakhs and was again spreadover a period of four years, that too on an estimate basis and, therefore, to call upon the assessee to prove the understatement representing the escaped income would amount to begging the question. Having accepted the statement of the assessee that there has been escapement of income, it is not equitable to refuse to accept the Explanation offered by it merely because of the distance in the point of time between the declaration of higher income and the submission of the explanation. If such a course is permitted, it might amount to "heads I win tails you lose". Further the understatement was brought on record through journal entries in the year ending on 30th April, 1986. Thus, we reject the Revenues contention.
12. Shri Menons submission is that in the revised returns for the asst. yrs. 1984-85 to 1986-87 the assessee had not taken the present stand. The revised returns for the asst. yrs. 1984-85 and 1985-86 were submitted on 21st Jan., 1986. By that time the clarification of the Board of Direct Taxes to question No. 31 was not available with the assessee, and, therefore, it could not have indicated the form in which the understatement had taken place. For the asst. yr. 1986-87 the assessee filed the statement on 3rd June, 1987 and by that time the clarification had come. However, the previous year of the assessee for the asst. yr. 1986-87 ended on 30th April, 1985. But the entries were passed in the books of the assessee bringing on record the understatement of stock only on 30th April, 1986 relevant to the asst. yr. 1987-88. Moreover, the assessee appears to have realised the understatement only by about 25th Oct., 1985 (that is much later on 30th April, 1988) when it presented the petition to the CIT. Therefore, the assessee could have been under the bona fide impression that there was no occasion for it to mention about the stock in relation to the previous year ending on 30th April, 1985 relevant to the asst. yr. 1986-87. Hence, no adverse inference can be drawn against the assessee on the basis of the statement filed on 21st Jan., 1986 or 30th June, 1987 in relation to the asst. yrs. 1984-85 to 1986-87.
13. We have already indicated that a mere display of the items in the profit and loss account portion rather than in the trading account is not fatal to the case of the assessee because at best it can be viewed only as an error in display of the entries in the books of account. For these reasons, we hold that the assessee is entitled to deduction of Rs. 52,66,963 from the income of the previous year ending on 30th April, 1986 and the addition of Rs. 52,66,963 is hereby deleted.
14. The next point in dispute is whether the addition of Rs. 3 lakhs representing the difference between the cost of construction of the building as estimated by the Valuation Officer and the cost of construction as recorded in the assessees books is justified. The assessee bought a residential building on 20th Feb., 1984 and made certain additions and alterations to it in the course of three years. The property was bought for Rs. 6,50,000 out of which Rs. 3,50,000 constituted the value of the building as per the document executed on 20th Feb., 1984.
15. We have heard rival submissions advanced by the learned counsel for the assessee and the learned Departmental Representative. We have also heard the valuer. The valuer very fairly admitted that he did not give an opportunity to the assessee before completing his valuation. All he did was to collect information from the assessee and then go about his exercise as per the rule book. Thus, there is failure of natural justice. Besides, the valuer has stated that he has not independently computed the cost of the building even approximately that was transferred through the document of sale. His cost computation is at the time of his inspection after the assessee had made the alterations and additions in "as is where is condition." Therefore, there is force in the contention of the learned counsel for the assessee that unless the cost of the building at the time of its transfer to the assessee was correctly estimated, it would not be possible to say with exactitude the cost of additions and alterations made by the assessee. To this, the learned valuer submitted that from the overall cost of the building which he had arrived at Rs. 8,23,700, the cost of the building at the time of the transfer could be estimated as a proportion. But then it is only an estimate. Even if the valuers formula is adopted the cost of the pre-existing structure would amount to Rs. 5,48,000 leaving a balance of Rs. 2,75,000 to be explained. Out of this, the assessee had declared Rs. 1,44,834 as its investment. The balance of the investment even according to the valuer would come to Rs. 1,31,000. This difference, it should be remembered, is also based on estimate. The construction was spread over a period of three years and, therefore, we hold that the addition of Rs. 3 lakhs as sustained by the first appellate authority is very excessive and in the facts and circumstances of the case, we maintain a token addition of Rs. 25,000.
16. The last point in dispute is about investment allowance which is not pressed before us and as such dismissed.
17. In the result, the appeal is partly allowed.