Income Tax Appellate Tribunal - Pune
Triveni Concerns vs Income-Tax Officer on 27 September, 1991
Equivalent citations: [1992]40ITD213(PUNE)
ORDER
M.A. Ajinkya, Accountant Member
1. These cross appeals relate to the assessment year 1982-83. They were heard together and are disposed of by a consolidated order for the sake of convenience.
2. We will first deal with the appeal by the assessee (ITA No. 1918/PN/88). Although as many as 20 grounds are raised in this appeal, the issues broadly contained in these grounds can be summarized as follows:
(1) Grounds No. 1 to 6 challenge the order of the CIT (Appeals) upholding the reassessment under Section 147 of the Act, (2) Grounds No. 7 to 15 challenge the merits of the addition of Rs. 10,79,845 to the total income, and (3) Grounds No. 17 and 18 challenge the leviability of interest under Section 139 and 217.
3. The facts, as stated by Shri S.N. Inamdar, learned counsel for the assessee are as follows. The appellant herein is a partnership firm consisting of three partners which came intoexistence in 1975. Its first assessment was made for the year 1977-78. The business of the firm was to develop a piece of land situated at Nashik and construct a shopping centre thereon and sell the premises so constructed which mostly consisted of shops and offices. Normally in the business of this type, there is always the question of how to determine the profits or gains; whether such prof its should be shown on completed contract basis or whether they should be assessed from year to year on the basis of receipts of the year. The system of accounting was broadly cash system. All expenses including construction cost were debited on actual disbursement. Amounts actually received on shops sold or agreed to be sold were accounted for on receipt basis; closing stock disclosed shops which were under construction but which were not booked. This method of accounting was accepted by the Income-tax authorities for the assessment years 1977-78, 1978-79, 1979-80, 1980-81 and 1981-82. Copies of assessment orders for all these years have been filed and form part of the paper book No. 2. The same method of accounting was followed for the assessment year 1982-83. The business was continued upto 31-3-1982. On 1-4-1982 the firm was dissolved and a dissolution deed was drawn. The first assessment for the assessment year 1982-83 was completed on 30-3-1985 and is to be found at page 6 of the paper book No. 2. The assessment was completed on a total income of Rs. 1,95,560. After stating these facts, Shri Inamdar pointed out that upto the end of 31-3-1982 or till the date of assessment for the assessment year 1982-83 which was completed on 30-3-1985, there was no material fact which affected the calculation of profit which remained to be disclosed by the appellant. The firm was dissolved on 1-4-1982 and a dissolution deed was drawn, a copy of which has been filed at page 35 of the paper book No. 2. In terms of this deed, the liabilities of the firm were to be paid off and recoveries to be effected by the partners. Amounts to be recovered amounted to Rs. 10,79,845 which were to be recovered by the three partners as per the details given in Schedules A, B & C of the dissolution deed. The return for the assessment year 1983-84 was filed (page 10 of the paper book No. 2) showing nil income. On this return, a remark was made that the firm was dissolved on 1-4-1982. The return was dated 12-8-1985 and an assessment was completed under Section 143(1) of the Act by the ITO, A-ward, Nashik on this return on 14-10-1985. Shri Inamdar admitted that notice of dissolution was not given to the department, but according to him, this fact had no effect whatsoever so far as the assessment year 1982-83 was concerned. In 1987, one of the ex-partners, namely, Mrs. Malti D. Varty requested for no objection certificate under Section 230 A. She was asked to furnish details of the dissolution deed, on perusal of which the ITO noticed that three partners of the firm had agreed to takeover the assets of the value of Rs. 10,79,845 at the time of dissolution which, according to the 110 represented the amounts due to the firm in rcspectof shops already sold. Para 7 of the dissolution deed read as follows:
Sale receipts for shops sold were being accounted by the partnership on cash basis as per regular method of accounts followed by it. The partnership had entered into agreements with various parties for sale of its shops. At the lime of dissolution of partnership and closure of its business on 1-4-1982 the amount due as per these agreements for sale of shops was nominal value of Rs. 10,79,845.50. It is agreed by the parties to distribute this asset.
The ITO concluded that if the shops were agreed to be sold as per various agreements, the unrealised amount totalling to Rs. 10,79,845 should have been declared at market value as the closing stock even if the assessee has been adopting cash basis for the purpose of maintaining books of account. Since the value of the assets including the closing stock at the end of 31st March, 1982 was shown at Rs. 56,500 and the balance sheet did not include any amount receivable in respect of sale of shops and other commercial premises, the ITO was of the view that the full value of the unrealised amounts and/or closing stock of the shops left with the assessee was not disclosed. He therefore, took action under Section 147 by issue of notice under Section 148 dated 4-2-1987.
4. Before the ITO a preliminary objection was taken by the assessee's representative challenging the initiation of re-assessment proceedings. It was slated that the firm was being assessed on receipt basis and that, therefore, the question of showing any amount receivable from the parlies did not arise and therefore, such amounts were not disclosed. It was also pointed out that the nominal value of the amounts realisable was Rs. 10,79,845 which was allocated amongst the erstwhile partners, as per Schedule A, B & C respectively, and that, therefore, the provisions of Section 47(ii) and Section 45 were not attracted on assets distributed amongst the partners on dissolution. The ITO observed that the objection raised to the issue of notice under seclion 148 was not tenable. There was, according to him, a clear cut escapement of income which was discovered during the course of 230A proceedings in the case of one of the partners, namely, Mrs. Malti D. Varty only in January 1987. The factum of dissolution of the firm was never declared by the assessee either during the course of original assessment proceedings in March 1985 or on subsequent dates. Moreover, no notice as required under Section 176(3) was given nor a copy of the dissolution deed filed. He, therefore, held that provisions of Section 147(b) were clearly attracted. Having given this finding, the ITO proceeded to bring to lux a sum of Rs. 10,79,845 for the detailed reasons given by him in the body of his order as value of closing stock of shops sold not accounted for.
5. The ITO's finding on both these issues was confirmed by the CIT (Appeals). Hence this appeal before us.
6. While dealing with the issue of re-assessment proceedings, Shrilnamdar pointed out that there was no failure whatsoever on the part of the assessee to disclose relevant facts so far as they related to the assessment year 1982-83. The department had accepted the method of accounting followed by the assessee for the last several years, i.e., from the assessment year 1977-78 onwards. The manner in which the books of account were maintained and the profits shown for the assessment year 1982-83 was the same as that adopted for determining similar profits for earlier years. Whatever had been stated by the CIT (Appeals) while disposing of all the objections to the reopening of assessment in para 6 of his order had no relevance for the assessment year 1982-83. At best, it could have relevance for the assessment year 1983-84. For example, the CIT (Appeals) has observed, vide page 11 of his order (page 18 of the paper book No. 1) that when the ITO originally completed assessment on 31-3-1985 he had no knowledge that the firm was dissolved because no such intimation was given by the assessee. While meeting this point, Shri Inamdar pointed out that it was not necessary to give intimation of dissolution of the firm for the assessment year 1982-83 since the dissolution had taken place in the year relevant to the assessment year 1983-84 and notice of dissolution under Section 176 need not have been given by the appellant for the assessment year 1982-83, although it could have been or should have been given for the assessment year 1983-84. The CIT (Appeals) observed that the assessee was in the knowledge of dissolution which fact should have been intimated or brought on record and this was a primary disclosure which was expected to be made by the assessee and this was not done. He has gone on to observe that the ITO who completed the assessment originally had no occasion to look into the closing stock which should have been shown at the market rate in the accounts for the assessment year 1982-83. Referring to these observations, Shri Inamdar pointed out that the fact that the firm was dissolved was clearly mentioned by the appellant in the return for the assessment year 1983-84 and while completing the assessment, normally the ITO was expected to look into the dissolution deed, if any, or details relating to the dissolution which the ITO did not do, since he accepted the nil return for the assessment year 1983-84 under Section 143(1)ofthe Act withoutmaking any enquiry whatsoever. The CIT (Appeals) had observed that the firm was legally expected to show full closing stock which it had not done. According to Shri Inamdar, this was not a correct position, because the firm had shown the closing stock of unsold or un-booked shops at cost which was the method that it had regularly been following for the last several years. What was brought out in the dissolution deed was the unrealised amount or the recoverables out of the earlier agreements in respect of shops for which agreements had been entered into and in respect of which some amounts were received and accounted for. There was no linkage, according to Shri Inamdar, between these rccoverables amounting to Rs. 10,79,845 and the value of closing stock and it was incorrect on the part of the revenue authorities to proceed on the assumption that such value had jumped from Rs. 56,500 on 31-3-1981 to Rs. 10,79,845 on 1-4-1982. It was never the case of the appellant that this (Rs. 10,79,845) was the closing stock. This could not be treated as stock of the appellant since Rs. 10,79,845 were the recoverables according to the various agreements entered into by the firm with the purchasers of shops and they did not represent, in any way, the closing stock of the assessee. Shri Inamdar placedconsiderablerelianceonthedecisionoftheSupreme Court in thecase of CIT v. British Paints India Ltd. [1991] 188 ITR 44. In that case, the company engaged in the manufacture and sale of paints, had, as a consistent practice, valued its goods-in-process and finished products exclusively at cost of raw materials totally excluding overhead expenditure. For the assessment years 1963-64 and 1964-65, the ITO held that there was no justification to recognise a practice of valuing stock otherwise than in accordance with the well-recognised principle of accounting which required the stock to be valued at cost (viz. raw material plus expenditure) or market price, whichever was lower. He, therefore, calculated the value of the opening and closing slocks by adding the overhead expenditure. The AAC confirmed that order. On appeal, the Tribunal held that there was no evidence to show that the goods in stock deteriorated in value and that there was no justification for excluding the overhead expenditure in valuing the stock, and, if it was in the interest of the business to value stock solely with reference to cost of raw materials and without including overhead expenditure, such valuation was not appropriate to the computation of income chargeable under the Income-tax Act. The High Court, on a reference reversed the decision of the Tribunal holding that, having regard to the consistent practice of the respondent, the Tribunal was not justified in rejecting the respondent's method of valuation of its stock-in-trade. On appeal to the Supreme Court, held reversing the decision of the High Court that even if the assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under Section 145 of the Income-tax Act, 1961 to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to Section 145 of the Income-tax Act, 1961. Relying on these observations, Shri Inamdarargued that if the ITO noticed any specific defect in the valuation of closing stock for the assessment year 1982-83, or in the method of accounting followed by the appellant, the worst that he could have done was to make an estimate of profits under Section 145 by rejecting the method of accounting followed by the assessee. Shri Inamdar further pointed out that this decision primarily dealt with the method of valuation of the closing stock, whether such method could give a true and correct position of profits of the year. In this case, both the opening stock and closing stock were revalued. In the present case, Rs. 10,79,845 was not the value either cost or market of the closing stock of the assessee. It was the total amounts recoverable over a period of years from the various customers of the appellant firm who purchased shops or office premises built by the assessee and with whom the firm had entered into agreements of sale. In respect of all those shops sold, apart of the sale consideration was recovered and offered for taxation on receipt basisand what could not be recovered at the point of time when the firm was dissolved was shown as recoverables and such recoverables were to be received by the three erstwhile partners as per details specified in the Schedules to the dissolution deed. All this material was relevant for the assessment year 1983-84 and not for the assessment year 1982-83 since the dissolution had taken place on 1-4-1982 and the accounts for the year ended 31st March, 1982 were completed on the same method of accounting that was being followed in the past. In that sense, according to Shri Inamdar, there was no failure on the part of the assessee to disclose true and material facts so far as the assessment year 1982-83 was concerned and, therefore, the CIT (Appeals) was not justified in confirming the reopening of the assessment. While concluding his arguments concerning reassessment, Shri Inamdar pointed out that the CIT (Appeals) should have held that this was a case where on the basis of the dissolution which took place in subsequent year the ITO had reopened assessment under Section 147(6) and such reassessment was solely as a result of change of opinion regarding the method of accounting which was regularly adopted by the assessee and, therefore, reassessment so made was totally void and invalid.
7. Coming to the merits of the issue, Shri Inamdar argued that it was not the case of the revenue that the dissolution had in fact taken place on 31st March, 1982. The revenue did not challenge the factum of dissolution on 1-4-1982. It had all along proceeded on the basis that the amounts which were realisable as per the dissolution deed represented the value or market value of closing stock not disclosed. This assumption itself was mis-conceived and incorrect on facts. Shri Inamdar was at pains to point out that the closing stock as per accounts disclosed the cost of flats which were not booked or which were not sold or in respect of which there were no agreements of sale entered. Therefore, there was no question of any comparison between what was shown as closing stock and what was described as recoverables or unrealised amounts in the dissolution deed. These were two different things altogether. The question, therefore, to be decided was whether there was an escapement of income. According to Shri Inamdar, there was no escapement of income on the part of the assessee so far as the assessment year 1982-83 was concerned having regard to the method of accounting that it had regularly followed. Assuming without admitting that there was such an escapement, one has to determine what was the extent of escaped income that could have been brought to tax for the assessment year 1982-83. Shri Inamdar pointed out that the CIT (Appeals) had proceeded on the basis that the value of Rs. 10,79,845 was in the nature of closing stock. The CIT(A) observed that technically speaking an amount of Rs. 10,79,845 cannot be said to be outstanding in the debtors. Shri Inamdar objected to this expression 'technically speaking'which was, according to him, not clear or specific. He argued that unrecovered price of shops already agreed to be sold could not be under any circumstances be treated as part of the stock. The question of valuing such stock at market price, therefore, did not arise. Alternatively and without prejudice, it was Shri Inamdar's argument that if at all Rs. 10,79,845 was to be treated as the closing stock at the end of 31st March, 1982, by the same manner of reasoning, or by the same logic, the total amount of unrealised sale value outstanding at the beginning of the year, i.e., as on 1-4-1982 should also have been taken into account to work out the true extent of income which had escaped assessment, if any. Actually such unrealised amount as on 1-4-1982, according to Shri Inamdar, was more than Rs. 15 lakhs. If the method of valuing closing stock was disturbed, same method should have been adopted for revaluing the opening stock (as was done in British India Paints case) in order to arrive at the correct figure of income that had escaped assessment. If the assessee was guilty of not showing the unrealised amount of Rs. 10,79,845, it was also equally negligent of not showing the outstanding recoveries at the beginning of the year which were in the neighbourhood of Rs. 15,67,830. If these were taken into account, there was no escapement of income.
This aspect of the matter according to Shri Inamdar, was not considered by the CIT (Appeals) at all. Lastly, without prejudice to the earlier argument, Shri Inamdar pointed out that these recoverables did not constitute the income of the assessee for the year ended 31st March, 1982. By their very nature, they represented amounts which could be and were, in fact, recovered over a period of next 5 years upto the assessment year 1989-90 by the three individual partners. Therefore, since these amounts were recoverable over a period of next 5 years a discounted value of the amounts should have been taken into account, if at all they were to beconsidered as value of the closing stock as on 31st March, 1982. This argument which was advanced before the CIT (Appeals) also was not considered or dealt with by the CIT (Appeals). Finally, Shri Inamdar pointed out that the ex-partners consistent with the stand that they had adopted had disclosed the amounts recovered by them as and when they were recovered in their returns of income filed consequent to the dissolution, i.e., from the assessment year 1983-84 onwards, but under a mistaken conception of law had claimed exemption in respect of the amounts so recovered under the impression that these amounts were capital receipts and, therefore, not liable to be taxed. The conduct of the partners established their bona fides and there was no intention whatsoever to withhold any material information from the department relating to the assessment year 1982-83.
8. The last aspect of the matter concerns the chargeability of interest under Section 139 and 217. It would appear that this ground was taken as an additional ground before the CIT (Appeals). It was argued that this was purely a legal ground and it should have been admitted as such it remained to be taken through inadvertence. It is also argued that the CIT (Appeals) erred in confirming the charging of interest under Sections 139 and 217 in rc-assessment and had wrongly distinguished the decision of the Bombay High Court in the case of D. Swamp, ITO v. Gammonlndia Ltd. [1983] 141 ITR 841. It was the case of the appellant that Section 139 and Section 217 authorises levy ofinterest only on regular assessment. Regular assessment is an assessment under Section 143 or 144 or under Section 147 for first assessment as per amended Explanation from 1-4-1985. For the reasons stated by the CIT (Appeals) in para 18 of his order, he refused to entertain this ground as, according to him, no reasons were mentioned for not filing the ground originally. He also distinguished the decision of the Bombay High Court on the ground that there was an amendment with effect from 1-4-1985 to the relevant section. He observed that the interest chargeable as per law could be varied if the assessment was completed after 1-4-1985. There was no need to interfere with the quantum ofinterest. This is challenged in the final ground of appeal.
9. The learned departmental representative, Shri G.M. Shetty, while stating the facts submitted that the land purchased by the firm was brought in as opening stock (page 33 of the paper book No. 2). The closing stock had been shown as unsold land and building. The learned departmental representative argued that nowhere during all these years particulars of unsold land or unsold buildings had been shown. At the time of dissolution of the firm, the assessee firm had with it unsold land, unsold shops and unsold F.S.I. The firm was following a peculiar method of accounting. It only disclosed receipts in respect of shops actually sold. Unsold land or unsold building or unsold right to develop those lands being stock-in-trade of the assessee had not been shown in the books. According to Shri Shelly, the effective date of dissolution was 31-3-1982. Form No. 12 was filed for the assessment year 1982-83 because there was dis-continuance of the business on the last date. Considerable reliance was placed by the learned departmental representative on a decision of the Supreme Court in the case of ALA. Firm v. CIT [1991] 189 ITR 285 & Madras High Court in the case of ALA. Firm v. CIT [1976] 102 ITR 622. He argued that full details regarding dissolution were not disclosed and the market value of the closing stock also had not been shown. Since the agreements were made earlier to 31-3-1982 in all such agreements the price of the shops agreed to be sold was fixed earlier. It was only in 1987 when one of the partners applied for tax clearance certificate under Section 230A and when the copy of the dissolution deed was called for that the details of the unrealizable amounts came to the light. If the details of the agreements entered into had been disclosed in the assessment year 1982-83 indicating the amounts recoverable, perhaps the assessment that was made would have been different. According to the learned departmental representative, these profits embedded in the amounts recovered should have been shown on the dissolution of the firm which had, in effect, taken place on and from 31-3-1982. The difference between the closing stock disclosed in the books, namely, Rs. 56,500 and the amounts shown to have been recoverables of Rs. 10,79,845 which was not disclosed would amount to a ground for reopening the assessment. Shri A.K. Khaladkar, the learned departmental representative, adopted a different line of argument. He pointed out that the dissolution had taken place on 1-4-1982 and not on 31-3-1982. Yet the stamp paper was purchased on 1-12-1979. According to him, the stamp paper purchased had to be used within six months and therefore the aforesaid dissolution deed was non-est. Shri Khaladkar pointed out the premises belonging to the assessee were let out to Federal Bank from 27-1-1979. There was no mention of this property among the assets of the firm. According to him, the dissolution had effectively taken place earlier to 1-4-1982. The closing of the bank account to which reference has been made in the dissolution deed had been anterior to the date of dissolution mentioned in the said deed. If the partnership is at will, then the dissolution has to be effected by giving a notice. Shri Khaladkar, in this context, referred to Section 40 of the Partnership Act. The whole burden of his argument was that the dissolution had taken place not on 1-4-1982 but on 31-3-1982 or any anterior date which falls in the accounting year ended on 31-3-1982. If the dissolution had in fact taken place in the accounting year relevant to the assessment year 1982-83, there was under-statement of stock. Stock should have been revised upward, if the dissolution had taken place as on 31-3-1982. By not giving information that the firm had been dissolved, theappellant had notdisclosed material facts and consequently, mere was escapement of income. Shri Khaladkar relied on the decision of the Bombay High Court in Shankarlal Dhaondiram v. CIT [1965] 56 ITR 435, CIT v. A.I. Rahimtulla [1986] 160 ITR 784 and decision of the Supreme Court in Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624. Shri Khaladkar pointed out that the statement that whatever was unsold was carried forward as stock was a vague statement and not capable of verification. The value of the property let out to Federal Bank was not shown in the balance sheet of this year or earlier years. Relying on the decision of the Supreme Court in British Paints India Ltd.'s case (supra), Shri Khaladkar pointed out that the assessee had incorrectly applied an incorrect method of accounting. The fact that unbooked flats are shown as stock was not borne out by the facts of the case.
10. Replying to these arguments, Shri Inamdar pointed out that even if this (dissolution deed) was treated as unstamped document, it could not be treated as invalid. Both the ITO and the CIT (Appeals) have accepted the dissolution deed as a valid document and it was too late in the day to cast doubts on the validity of the document. Referring to clause 6 of the dissolution deed, Shri Inamdar pointed out that all the three partners were equally joint-owners of the mezzanine floor above the shops in the north-east corner which was the asset to which the learned departmental representative had referred as an asset not disclosed in the balance sheet. Shri Inamdar then drew our attention to the copies of accounts of the firm for the assessment year under appeal, pages 8 and 9 of the paper Book No. 2. He pointed out that the rent received of Rs. 36,046.80 shown in the profit and loss account was from out of let out premises which premises were included in the aforementioned clause 6. Replying to the argument about the closure of bank account before the date of dissolution, Shri Inamdar pointed out that the balance sheet of the firm as on 31st March, 1982 showed balances in two accounts of Dena Bank of Rs. 100 and Rs. 34,540 respectively and account in Federal Bank of Rs. 45,695. Therefore, it was not correct to say that the bank accounts had been closed prior to the date of dissolution. Shri Inamdar pointed out that the figure of closing stock of Rs. 56,500 shown by the assessee has not been disturbed. The valuation of undisclosed closing stock at market rate adopted by the ITO and confirmed by the CIT (Appeals) did not replace valuation of closing stock as per the method adopted by the assessee, but an addition of this amount was made on the basis that the stock was under-stated and not under-valued. Shri Inamdar reiterated that neither the ITO nor the CIT (Appeals) had disputed the fact that the dissolution had taken place on 1-4-1982. The departmental representatives were making up a new case in arguing that effectively the dissolution had taken place at an anterior date. The flats which were not booked were not sold and this was clearly stated before the CIT (Appeals) in the submissions made before him dated 12th August, 1988. While explaining the system of accounting, it was pointed out in para 2.3 of this letter that the system of accounting was cash, i.e., all construction cost and expenses were debited on actual disbursement. During the year, the area of the shops/offices whose booking was made but full price was not received was not taken into account while working out the closing stock. In other words, the balance of construction, i.e., after deduction of construction for which agreements were made was shown as closing stock. The closing stock thus represented these shops whose construction was going on but whose booking was not made. This method of accounting was regularly followed and the same was consistently accepted by the Income-tax Officers who completed the assessments for the assessment years 1977-78 to 1982-83. There was, therefore, no question of showing in the closing stock value of the shops which were booked or sold. What was stated in the dissolution deed was the amounts which were yet to be realised in respect of shops which had been agreed to be sold. Such amounts were not required to be shown as closing stock, according to Shri Inamdar, because they did not represent the cost of unbooked shops. Since the assessee was regularly showing the cost of shops whose construction was underway, but whose booking was not done as closing stock it had disclosed Rs. 56,500 on that basis.
11. We have carefully considered the submissions made on both the sides. The first question to be decided, in the circumstances, is whether the reopening of assessment was justified on the facts. Apparently, it is not clear whether the assessment was reopened under Section 147(a) or under Section 141 (b) of the Act. Whereas in para 4 of his order, the CIT (Appeals) had clearly stated that the ITO has referred to proceedings under Section 147(6) and had stated that such proceedings would lie if the ITO had not considered the material originally available on record and which subsequently came to his notice after going through the records itself, while giving his finding, the CIT (Appeals) has stated that from the records it appears that the assessment has been reopened under Section 147(a) and that such reopening is correct. It was argued before the CIT (Appeals) by the advocate who appeared before him that it was not clear whether the proceedings were reopened under Section 147(a) or under Section 147(b) and the reasons that were recorded for reopening the assessment were not communicated to the assessee. In the course of hearing before us, we asked the departmental representative to file a copy of the reasons recorded, but such copy has not been produced before us. The only material on which we have to rely on to decide the issue is the observation of the ITO inpara2ofhis assessment order. This para reads as follows:
Sale receipts for shops sold were being accounted by the partnership on cash basis as per regular method of accounts followed by it. The partnership had entered into agreements with various parties for sale of its shops. At the time of dissolution of partnership and closure of its business on 1-4-1982 the amount due as per these agreements for sale of shops was nominal value of Rs. 10,79,845. It is agreed by the parties lo distribute this asset.
The ITO thereafter proceeded to observe in para 3 that in the profit and loss account the value of the closing stock was shown at Rs. 56,500 only. The balance-sheet for that year did not include amount receivable in respect of the sale of shops and other commercial premises such as open plot, terrace etc. either from the prospective purchasers or from the selling agent. The only amount shown as receivable was sundry debtors of Rs. 36.76. In view of these discrepancies and not for showing the full value of the unrealised amounts and/or closing stock of the shops left with the assessee, action under Section 147 was taken by issue of notice under Section 148 dated 4-2-1987. Therefore, the primary consideration that weighed with the ITO was that the assessee had not shown the full value of the unrealised amount which he regarded as closing stock of the shops left with the assessee at the time of dissolution. Broadly speaking, the case of the revenue appears to be that following material facts which the assessee should have disclosed were not disclosed by it:
(1) Intimation of dissolution required to be given under Section 176(3) was nctgiven;
(2) Copy of the dissolution deed was not filed; and (3) The amounts which were recoverable in terms of the various agreements for sale entered into by the assessee in respect of the shops were not disclosed. We have to decide whether all these were material facts so far as the assessment year 1982-83 is concerned. We have further to decide whether as a result of the alleged nondisclosure of such material facts, there was, in effect, any escapement of income which could be related to the assessment year 1982-83.
12. On a careful perusal of the orders of the revenue authorities, we find that neither the ITO nor the CIT (Appeals) has doubted the fact that the firm was in fact dissolved on 1-4-1982 and not at an earlier date. The ITO has acted on the facts which have come to light on the production of the dissolution deed, but has not doubted the genuineness of this deed nor has he indicated anywhere that the dissolution in fact had taken place earlier than 1-4-1982. The ITO's grievance is that the factum of dissolution was never disclosed and that, notice as required under Section 176(3) was not given, nor a copy of the dissolution deed was filed. All these would be true for the assessment year 1983-84, since the dissolution had in effect taken place on 1-4-1982 and had not taken place at any date falling in the accounting year relevant to the assessment year 1982-83. That is not the suggestion either of the ITO or the CIT (Appeals). In fact, the CIT (Appeals) has accepted that the firm was dissolved from 1-4-1982 as is clear from some of the observations made by him in para 7 (page 14 of his order). In this connection, we may only cite the following observations of the CIT (Appeals) at page 14 of his order in para 7:
Though the firm is dissolved with effect from 1-4-1982, there have been no transaction after 31-3-1982 and therefore the value of closing stock was required to be shown in the balance sheet for assessment year 1982-83 relevant to the date 31-3-1982.
Therefore, any effort on the part of the learned departmental representative to now argue that the dissolution had taken place at an anterior date would be fruitless. We cannot ignore or fail to take notice of the fact that both the ITO and the CIT (Appeals) had accepted or negatively had not challenged the position that the firm was dissolved from 1-4-1982 and not earlier. If this much is accepted, all that is now alleged about the non-disclosure of the dissolution deed, non-intimation of the factum of dissolution or non-disclosure of the amounts recoverable cannot be treated as material facts so far as the assessment year 1982-83 is concerned. The accounts drawn by the assessee for the assessment year 1982-83 were on the same basis that was adopted by the appellant from 1977-78 onwards. The value of the closing stock represented the cost of shops or office premises under construction which wore not booked. This method was accepted by all the preceding officers after due examination of the books of account. In fact, copy of the assessment order for the assessment year 1981-82 has been filed (pages 17 & 18 of the paper book No. 2) in which the same ITO in para 2 has observed as follows:
The assessee firm is deriving income from same business as in the past. Regular books of account are maintained. Copies of trading account, P&L a/c. and balance sheet arc filed. Sales arc supported by receipts. Expenses are also supported with vouchers.
While completing the original assessment for the year 1982-83, the same ITO had made similar observations in para 2 which read as follows:
The assessor firm derives income from the same business as in the past. Regular books of account are maintained. Copies of trading account, P&La/c and balance sheet are filed. Sales are supported by receipts. Expenses are also supported with vouchers.
Therefore, so faras the assessment year 1982-83 is concerned, there was no material fact regarding the amounts receivable or the valuation of closing stock which was not disclosed by the appellant. Even when the return for the assessment year 1983-84 was filed, a specific note was made that the firm had been dissolved on 1-4-1982. It is pertinent to note that the date of dissolution was indicated in this note made on the return of income for the assessment year 1983-84 which was filed on 12-8-1985. Even then, this return was accepted without demur by the ITO who made the assessment on 14-10-1985 on nil income under Section 143(1) of the Act. No effort was made to call for the dissolution deed, even when a specific statement to the effect that the firm was dissolved on 1-4-1982 was made on the first page of the return of income (copy filed on pages 10 & 11 of the paper book No. 2). Therefore, in our opinion, there was no non-disclosure of material facts so far as the assessment year 1982-83 is concerned. The dissolution had taken place on 1-4-1982. This fact was not challenged or doubted either by the ITO or by the CIT (Appeals). This fact was disclosed in the return of income filed for the assessment year 1983-84. This fact was not relevant for the assessment year 1982-83 and therefore, it was not necessary for the firm to have given intimation of dissolution under Section 176(3) of the Act so far as assessment year 1982-83 is concerned. The closing stock that was valued for this year was on the same basis as was adopted for valuing opening stock or for valuing the stock in the earlier years. Therefore, there was no under-statement or under-valuation of stock as is alleged by the ITO while filing the return for the assessment year 1982-83. On these facts, we are of the view that there was no failure on the part of the assessee to disclose material facts relating to the assessment year 1982-83. What was alleged as material facts which were not disclosed such as non-intimation of the factum of dissolution or non-filing of dissolution deed were, in our opinion, not material for the assessment year 1982-83, but could at best have some relevance for the assessment year 1983-84. Even in the assessment year 1983-84, the factum of dissolution on 1-4-1982 was clearly stated in the return of income. We are, therefore, of the view that there was no failure on the part of the assessee to disclose material facts which would justify action under Section 147(a), assuming that the assessment was reopened under that section.
Assuming that there was any nondisclosure of material facts in the form of non-declaration of recoverables amounting to Rs. 10,79,845 which were listed in the dissolution deed, there was, in our opinion, no escapement of income relating to the assessment year 1982-83 on account of such non-disclosure even assuming that there was any such non-disclosure. We have come to this finding after taking note of the fact that if the unrealised amounts or recoverable amounts were to be treated as closing stock of the year ended 31 st March, 1982, then the opening stock worked out on the same basis, i.e., by taking note of the amounts which stood unrealised which were not recovered as on 1-4-1981 should also have been taken into account and such amounts, according to Shri Inamdar, as per the statement filed before us were in the neighborhood of Rs. 15 lakhs. This aspect of the matter was brought to the notice of the CIT (Appeals) who has conveniently chosen not to deal with it. Therefore, assuming that the extent of recoverables represented the market value of the stock as was the case of the ITO, similar recoverables at the beginning of the year should have been taken into account for working out the extent of escapement of income, if any, that had taken place during the assessment year 1982-83. If this aspect of the matter is taken into account, in our opinion, there was in fact no escapement of incomeso far as the assessment year 1982-83 isconcemed. Thirdly, we find that the recoverables of Rs. 10,79,845 of which details have been given at pages 47 to 49 of the paper book No. 2 were in respect of booked flats or shops. In respect of these shops, agreements of sales were entered into as early as in 1975. These shops were booked as early as in 1975,1976, 1977 and 1978. The assessee used to account for the receipts in respect of such shops when it actually received the amounts out of these agreements. Since the appellant was following cash system of accounting, it was showing the receipts from business on actual receipt basis. There were certain agreements where the amount agreed upon was recovered by 31-3-1982. These agreements were entered into earlier and the amounts whenever received were accounted for in the books. There were, however, certain agreements where small recoveries in variant degrees were still outstanding as on 1 -4-1982. Such recoveries together amounted to Rs. 10,79,845, which were ultimately shown when the firm was dissolved on 1-4-1982. We are, therefore, not prepared to accept the argument of the departmental representative that the dissolution had taken place in the assessment year 1982-83. In fact, in the course of the argument the departmental representative Shri Khaladkar almost conceded that all the allegations of non-disclosure of documents, like dissolution deed, details of recoverables, intimation under Section 176(3) would have relevance only if we assumed that dissolution had taken place in the assessment year 1982-83. By not giving the information that the firm has been dissolved, the assessee, according to Shri Khaladkar, had not disclosed material fact which had led to escapement of income. Although there can be no quarrel with this basic proposition of law, the said proposition is qualified by the assumption or argument so assiduously advanced by Shri Khaladkar that the dissolution had taken place at a date anterior to 1-4-1982 or any time in the assessment year 1982-83. This assumption, we are afraid, is not tenable on perusal of the facts on record. Therefore, the cases cited by Shri Khaladkar in support of his argument, such as Shankerlal Dhondiram's case (supra), A.I. Rahimtulla's case (supra) and Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd.'s case (supra) would have no relevance. In fact, the facts in the case of Shankarlal Dhondiram (supra) are clearly distinguishable and the issue was also slightly different. In the case of A.I.Rahimtulla (supra), the Bombay High Court observed that the Income-tax Act postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment will differ from case to case. Since there is a duly on the assessee to disclose fully and truly all material facts necessary for the purpose of assessment, it is not relevant that, had the ITO been diligent, he could have got all necessary information for the purpose of assessment. All these would have relevance in the present case, if the dissolution had taken place in the assessment year 1982-83. The factum of dissolution or intimation under Section 176(3) or the filing of dissolution deed, had, in our opinion, no relevance so far as the assessment year 1982-83 is concerned. Even if we refer to the provisions of Section 176(3), we find that the language of the section clearly postulates that the intimation has to be given in the assessment year in which the business or profession is discontinued. Section 176(1) says that where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the previous year for that assessment year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year. It is in the light of these provisions of Section 176(1) that Sub-section (3) provides that any person discontinuing any business or profession shall give to the Assessing Officer notice of such discontinuance within fifteen days thereof. Such notice should have been given by the assessee within 15 days of the date of dissolution, i.e., by 15th April, 1982 but it would have relevance for the assessment year 1983-84 and not for the assessment year 1982-83, We are, therefore, firmly of the view that having regard to the method of accounting followed by the assessee consistently over a period of years which was accepted by the Income-tax authorities after due examination of the books of account of the assessee, there was no failure on the part of the assessee to disclose material facts for the assessment year 1982-83 and therefore, re-assessment under Section 147, assuming that it was under Section 147(a), was not justifiably initiated. The order of the CIT (Appeals) in this regard is therefore reversed.
13. Since we have allowed the first ground of the appellant regarding the validity of the proceedings under Section 147, it would be strictly not necessary to deal with me merits of the issue. However, since considerable arguments were advanced on the merits of the case, we would briefly deal with them. We have already pointed out that even assuming that there was non-disclosure of material facts like dissolution deed, such non-disclosure did not in effect amount to escapement of income. Here, it is necessary to point out, as we have already done in earlier paragraph that Rs. 10,79,845 was the total amount recoverable over a period of years from 1975 to 1982. This fact has been accepted by the CIT (Appeals) himself in para 8 of his order, as is clear from the following observations made by him:
If the facts are analysed properly, it will be seen that this is the profits which the assessee has actually accumulated year after year.
[Page 17 of CIT (Appeals)'s order] Having accepted that the profits had accumulated year after year, he has come to the conclusion that there is an escapement of income of Rs. 10,79,845 which observation is contradictory to the above finding. It was never the case of the assessee that such rccoverablcs spread over a period of 6 years (in respect of agreements entered into with customers who intended to purchase shops ever since upto 1980) could ever be considered as closing stock. They were simply recoverables in terms of the various agreements. The figures of recoverables varied from year to year. According to ihc assessee, .such rccovcrablcs amounted to Rs. 15,67,830 as on 1-4-1981 and Rs. 10,79,845 as on 31-3-1982. Therefore, the opening figure of unrealised amounts had to betaken into account to find out whether non-disclosure of such rccovcrables or unrealised amounts at the end of the year did, in effect, result in any non-disclosure of income which had accrued to the firm. If this is taken into account, in our opinion, there was no escapement of income because the figure of recoverables at the beginning of the year apparently was very much more than the figure of recoverables at the end of the year. This aspect of the matter, as we have stated earlier, has not been considered by the CIT (Appeals) at all. Next, we have already pointed out that the sum of Rs. 10,79,845 was recovered by the erstwhile partners in the assessment years 1983-84 to 1989-90. Therefore, if at all such recoverables were to be treated as representing the market value of the closing stock of the firm, a proper discounting of the value of such stock, if it was to be treated as such, had to be done. This has not been done. We are informed that the partners had disclosed the amounts in their individual assessments whenever they have recovered them and had claimed exemption. Although initially such returns were accepted under Section 143(1), the department has taken proceedings in the partners' cases under Section 148 to bring to tax such recoveries which are justly taxable under Section 176(3A) in the hands of the partners. When faced with the query in this behalf, the counsel for the assessee did not seriously dispute this fact. Having regard to this position of facts, we are of the view that even on merits, there is no case for bringing to tax an amount of Rs. 10,79,845 as income of one year, i.e., assessment year 1982-83.
14. The next issue thatsurvives for consideration is the leviability of interest under Section 139(8) and 217 particularly when the assessment is reopened under Section 147. This ground was taken as an additional ground and can survive only if the ieopening under Section 147 is confirmed. It may be mentioned that Shri Inamdar relied on the decision of the Supreme Court in the case of CIT v. Mahalahhmi Textile Mills Ltd. [1967] 66 ITR 710 to argue that all questions, whether of law or of facts which relate to assessment of the assessee, may be raised before the Tribunal. If for reasons recorded by the departmental authorities in respect of a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant the relief. The Supreme Court observed that under Section 33(4) of the Indian Income-tax Act, 1922, the Appellate Tribunal is competent to pass such orders on appeal "as it thinks fit". There is nothing in the Income-tax Act which restricts the Tribunal to the determination of questions raised before the departmental authorities. In view of the fact that we have reversed the order of the CIT (Appeals) confirming the re-assessment under Section 147, the grounds relating to levy of interest under Section 139(8) and 217 do not survive. They have to be dismissed as redundant.
15. In the result, the appeal of the appellant is allowed.
16. We will now turn to the appeal by the revenue. The two grounds raised by the revenue are that the CIT (Appeals) erred in deleting the addition of Rs. 3,00,000 on account of value of shops No. 17 to 28 and 54 to 57 and the second ground is that the CIT (Appeals) erred in vacating the disallowance of Rs. 20,000 on account of brokerage. The CIT (Appeals) has dealt with the first issue in para 14 of his order. The CIT (Appeals) observed that on 18-10-1980 right to construct the open space was sold and the agreed price was Rs. 8.7 lakhs out of which the assessee has already received Rs. 3.04 lakhs and credited the same to the receipts account. The balance of Rs. 5.66 lakhs was yet to be received and this amount had been shown as receivable for the open terrace in the total amount of Rs. 10,79,845 which is as per the schedules attached to the dissolution deed.lt was, therefore, clear that the ITO was not justified in making a separate addition of Rs. 3 lakhs. The shops were not constructed and only the rights to construct the shops were agreed to be sold. A part of the amount for the agreed sale price had already been received and accounted for and the balance receivable was included in Rs. 10,79,845 indicated in the dissolution deed as well as the schedules attached thereto. It was not correct, therefore, for the ITO to assume that the sale of these shops was not disclosed by the appellant. Shri Sathe in this connection has drawn our attention to the plan showing the development of the Meghdoot Shopping Centre in which the shops No. 17 to 28 and 54 to 57 which were not constructed are shown in red, especially as open space. Such open space or right to develop such open space was sold on 18-10-1980 for Rs. 8,70,000. The figure of recoverable of such open space was Rs. 8,40,000 as on 1-4-1981 since the assessee had received and accounted for an amount of Rs. 30,000 received upto 31-3-1981. The appellant had recovered Rs. 3,04,000 as on 31 -3-1982 and had accounted for the same on receipt basis. An amount of Rs. 5,66,000 was shown as outstanding and was included in the total figure of Rs. 10,79,845. We are, therefore, in full agreement with the CIT (Appeals)'s finding in para 14 of his order which, in our opinion, does not call for any interference. The first ground of the departmental appeal is, therefore, rejected.
17. The second ground concerns the disallowance of Rs. 20,000 as brokerage. The ITO noticed that the firm had claimed a sum of Rs. 20,000 as brokerage in addition to Rs. 24,399 paid as service charges to Associated Planners at the rate of 5 per cent of the sale proceeds. Since such brokerage was claimed for the first time and no details had been filed, the ITO disallowed the same. It was argued before the CIT (Appeals) that this amount of brokerage was paid for legitimate purpose of the business and have been allowed as bonafide business expenditure in the original assessment. The amount was disallowed without giving the assessee an opportunity of being heard. Actually such brokerage represented commission paid to one Shri Joshi for negotiating the deal for selling the rights of construction on the land of the unbuilt shops. The service charges were paid to Associated Planners at the rate of 5 per cent, but the brokerage had been paid to different parties. The CIT (Appeals) accepted these arguments and directed that the disallowance be deleted. He has dealt with this issue in paras 15 and 16 of his order.
18. After hearing both the parties and after going through the order of the CIT (Appeals), we find that the CIT (Appeals) in this regard is correct and his order does not call for any interference. The same is confirmed.
19. In the result, departmental appeal is dismissed, since both the grounds raised by it are rejected.