Bombay High Court
Mohanlal M. Patel vs Dy. Cit on 11 December, 2003
Equivalent citations: (2004)90TTJ(MUMBAI)57
ORDER
R.V. Easwar, J.M.:
These are cross-appeals arising out of the assessment made under section 158BC of the Income Tax Act in respect of the block period 1-4-1988 to 6-10-1998, which is the date on which a search of the premises of the assessee, Mohanlal Patel, took place under section 132 of the Act. On 29-12-1998, in continuation of the search, locker No. 415 in Development Credit Bank, jointly operated by the assessee and his son Pankaj M. Patel was opened, from which 23 "hundies" of Rs. 1,00,000 each were seized. Since the assessee was not available on that date, a statement was recorded under section 132(4) from Pankaj Patel. He stated that the "hundies" were given by one Nilesh Shah for safe custody. The address of Nilesh Shah was given. It was explained that Nilesh Shah was a friend doing brokerage of cheque discounting business and that the "hundies" reflected the business transactions that are being carried on by him. He further stated that he and his father were having business relationship with Nilesh Shah upto March, 1998 (i.e. cheque discounting), that Nilesh Shah used to bring cheques for discounting purposes from various parties and that he (Pankaj Patel) and his father (the assessee herein) used to discount them and make cash payment. To a question as to whether, in view of the provisions of section 132(4), Pankaj Patel had any proof to show that the "hundies" do not belong to him or the assessee, he answered in the negative. However, he finally confirmed (in answer to question No. 8) that the "hundies" belonged to him and his father and that they were kept by him in the locker and further explanation would be given after discussing the matter with his father who was then in hospital. A copy of the statement is placed at pp. 48-52 of the paper book filed by the assessee.
2. In the course of the assessment proceedings, the assessing officer recorded a statement from Nilesh Shah on 25-12-2000, a copy of which is available at pp. 53-55 of the paper book. He stated as under :
(a) That on the advice of the assessee's son he opened a current account with Dena bank in which the assessee and his son used to deposit cash and that he (Nilesh Shah) used to issue cheques signed by him for their purposes which were kept with the assessee/his son. A statement of the bank account was filed.
(b) That the "hundies" were signed by him sometime in the beginning of 1997 when the bank account was opened, that he had not done any cheque discounting business with anybody either before or after October, 1998, that he had not brought any cheques to the assessee for discounting, and that the promissory notes were signed by him against blank cheques issued by him to the assessee and that whatever cash was deposited in the bank account belonged to the assessee and was deposited either by him (Nilesh Shah) or the employees of the assessee.
(c) That he had never borrowed any money from the assessee on "hundies", that the "hundies" were taken by the assessee/his son as a precaution against the default or dishonour of the cheques, that the cash deposited in the bank account belonged to the assessee and his family members and that he was only getting a commission of 0.05 per cent for rendering services.
(d) He reiterated that though the "hundies" were signed by him he had not received any monies from the assessee and that they were given as "safety against the amount used to be deposited by them."
3. The statement of Nilesh Shah was given to the assessee on 25-10-2000, who was asked to submit a reply. The assessee did not avail of the opportunity. He showed no response. Therefore, the assessing officer, after referring to section 132(4A), added the amount of Rs. 23 lakhs under section 69A as unexplained investment in the "hundies", as they were found in the assessee's possession.
4. The assessing officer also made two other additions. He found that the assessee had discounted cheques amounting to Rs. 12,61,79,416 on which he had returned an income of Rs. 50,190, which worked out to 0.039 per cent. The assessing officer considered this to be too low. He observed that the normal profit in this line of business is 0.5 per cent to 0.7 per cent of the value of the cheques discounted and hence an estimate of 0.60 per cent would be reasonable. Accordingly, he estimated the income at Rs. 7,55,395. He allowed deduction only for bank charges of Rs. 2,540 and disallowed the claim for deduction of bank interest of Rs. 92,460 and salaries of Rs. 1,34,968. He thus made an addition of Rs. 7,02,664.
5. The assessing officer further noted that the assessee had also used the bank account of Nilesh Shah in Dena Bank for "his unaccounted discounting business". In this connection, he referred to the statement of Nilesh Shah to that effect and noted that the assessee, despite opportunity, did not refute the statement. He therefore, concluded that the account (which was in the name of Vivek Enterprises) was fully under the control of the assessee. The total deposit and withdrawal (cash) in the account was Rs. 9.41 crores. Since the account was operated through Nilesh Shah, the assessing officer estimated the income at a reduced rate of 0.25 per cent, which came to Rs. 2,35,250. This was added to the assessment.
6. The assessee challenged all the three additions in appeal before the Commissioner (Appeals). The Commissioner (Appeals) initially was of opinion that the assessing officer had taken an inconsistent stand inasmuch as he (the assessing officer) had accepted the statement of Nilesh Shah that he was acting only as a conduit in operating the account in Dena bank in the name of Vivek Enterprises and estimated the income at Rs. 2,35,250 but rejected the statement insofar as Nilesh Shah had stated that he had signed the promissory notes ("hundies") only as a precaution and had not received any monies from the assessee. He, therefore, called for a remand report from the assessing officer on this aspect. The assessing officer submitted the report by letter dated 11-2-2002, and reiterated that since the "hundies" were found in the possession of the assessee, he was assessable in respect of them. He also adverted to the fact that there were complaints filed against Nilesh Shah by the assessee and his group concerns under section 138 of the Negotiable Instruments Act (for dishonour of cheques) which coupled with the statement of Nilesh Shah that the cash deposits in the bank account were made by the assessee, established that even if the assessee is not assessable in respect of the advances made against the "hundies" he was assessable in respect of the cash deposits in the bank account.
7. The Commissioner (Appeals) took the view that the assessee has not properly explained the possession of the signed hundies, which were incomplete in other respects, such as date, name of the promisee, rate of interest, period, etc. According to him, the "hundies" were deliberately left incomplete so that the assessee could fill up whatever he wanted, including the date, so that he can enforce the payment whenever it suited him. He also held that there is nothing on record to believe the statement of Nilesh Shah that the "hundies" do not represent actual loans advanced, particularly when the assessee does not accept the truthfulness of the other part of the statement regarding the operation of the bank account in Dena Bank. He finally held that the assessee had advanced monies amounting to Rs. 23 lakhs on the security of the "hundies", which he could not explain and hence must be added as undisclosed income. Accordingly, he approved of the addition.
8. As regards the addition of Rs. 7,02,664 for commission on the cheque discounting business, following certain orders of the Tribunal in which the rate of commission was discussed, he held that the rate of commission income declared by the assessee was reasonable and no addition was called for. As regards the expenses by way of salaries are concerned, he sustained the disallowance for want of evidence. As regards the bank interest, he directed the assessing officer to verify if it is debited to the bank account and if so, to allow the same.
9. So far as the addition of Rs. 2,35,250 is concerned, it was deleted by the Commissioner (Appeals), subject to directions issued to the assessing officer to find out the beneficiaries of the accommodation entries made through the Dena Bank account and take steps to bring to tax the appropriate income in their hands, if they are assessable in his charge, and also to pass on the information to the assessing officers concerned so that all the beneficiaries are brought to assessment. He noted that the bank account has not been used to discount cheques but for the purpose of giving accommodation entries to connected persons.
10. Both the assessee and the department are in appeal. In the appeal filed by the assessee, two grounds have been taken : (1) Addition of Rs. 23 lakhs under sections 69A, and (2) disallowance of the bank interest of Rs. 92,460 and salaries of Rs. 1,34,968. In the appeal filed by the department, objection is taken to : (1) the estimate of the gross commission income from bill discounting activity at Rs. 2,80,159 @ 0.22 per cent as against 0.60 per cent as estimated by the assessing officer, and (2) the deletion of the addition of Rs. 2,35,250.
Assessee's appeal .-
11. In respect of the first ground, the following contentions were taken before us by the learned counsel for the assessee :
(a) The "hundies" are dumb documents. They are in fact promissory notes. They do not satisfy the definition of holder in due course according to section 9 of the Negotiable Instruments Act. No consideration is mentioned and even the name of the promisee has not been mentioned. Because of these defects, they are not valid, enforceable documents in law as held by the Madras High Court in Sesharal Bajna v. V. C. Subramanian AIR 1983 Mad 368 (Mad).
(b) Since they are not valid documents, they are not a valuable article or thing within the meaning of section 69A.
(c) Further, even assuming for the sake of argument that the "hundies" were valid, since the documents were executed in the beginning of 1997, the period of limitation for their enforceability expired in the beginning of 2000. Thereafter, they are not enforceable after that date.
(d) The statement of Nilesh Shah should be read as a whole, which was not done by the income tax authorities. Having assessed the income arising from the bill discounting business routed through the Dena Bank account in the assessee's hands, consistent therewith the income tax authorities ought to have accepted the claim that the assessee did not advance any monies on the "hundies" to Nilesh Shah.
On the other hand, the learned Commissioner (Departmental Representative), Mr. Udayakumaran, contended as follows :
(a) That so far as enforceability of the "hundies" is concerned, section 20 of the Negotiable Instruments Act gives statutory recognition to the mercantile practice of executing blank papers to be afterwards filled as bills of exchange and hence even an incomplete promissory note is valid, provided before enforcing the claim based upon it the holder thereof fills up the necessary details. This is what the Madras High Court in the cited decision has held.
(b) The fact that limitation period might have expired is irrelevant because the income tax authorities are concerned only with the investment made by the assessee.
(c) That the "hundies" were seized from the assessee and hence it amounts to prima facie ownership under section 110 of the Evidence Act as well as section 132(4A) of the Income Tax Act. The explanation of the assessee that they were given by Nilesh Shah for safe custody is unacceptable. The "hundies" are signed by Nilesh Shah, which means that he is the debtor, and no debtor would be allowed to retain the "hundies" so that he can handover them to another person for safe custody.
12. The learned Commissioner (Departmental Representative) raised an alternative contention to the effect that even if the amount of Rs. 23 lakhs is not assessable under section 69A as amount advanced under the "hundies", it would be assessable as unexplained cash deposits in the Dena Bank account. It is pointed out that the assessee has not rebutted the statement of Nilesh Shah that deposits in the bank account came from the assessee despite opportunity and, therefore, the deposits, being unexplained, should be assessed. Attention is drawn to para 11 of the assessment order where there is a clear finding to the effect that the bank account was being used by the assessee for "his unaccounted discounting business". In support of this alternative contention, he relied on rule 11 of the Tribunal Rules, under which the respondent can support the order of the first appellate authority on a different ground.
13. On a careful consideration of the facts and rival contentions, we are of the view that no strong grounds have been made out by the income tax authorities to make the addition of Rs. 23 lakhs on the basis that it represented advances made by the assessee against the "hundies". The statement of Nilesh Shah is clear in this regard. He has asserted that no monies were received by him from the assessee against the "hundies" executed by him and has cogently explained the circumstances under which they came to be executed and handed over to the assessee. Though the "safe custody" theory is unacceptable, from the statement of Nilesh Shah it appears clear that he has handed over the "hundies" to the assessee, duly executed by him but leaving the other relevant requisites blank, as a guarantee against any misuse of the funds remaining in the bank account, in addition to the blank signed cheques. We are inclined to believe the statement as depicting the true state of affairs. It, therefore, follows that no monies were advanced by the assessee on the "hundies". Accordingly, the addition is deleted.
14. But, that is not the end of the matter. The alternative plea of the learned Commissioner (Departmental Representative) merits acceptance. In the same statement, Nilesh Shah has also stated that the cash deposits into the bank account came from the assessee. This part of the statement has not been denied by the assessee despite opportunity. Based on this part of the statement, the assessing officer has recorded a finding in para 11 of the assessment order that the bank account was used by the assessee for his unaccounted discounting business. Acceptance of the uncontroverted statement of Nilesh Shah as a whole would mean that we have to hold : (i) that the assessee cannot be held to have advanced monies amounting to Rs. 23 lakhs on the security of "hundies" to Nilesh Shah, and (ii) that the cash deposits in the Dena Bank account came from the assessee, which he has to explain. These two conclusions would be consistent with the statement of Nilesh Shah. Therefore, the assessee has to explain the cash deposits into the bank account.
15. Having held that, we have to issue directions to the assessing officer to give effect to our decision. Under rule 11 of the Tribunal Rules, the respondent can only support the decision appealed against on another ground. The appellant, having appealed, cannot be worse off than he was after the passing of the adverse order by the first appellate authority. We have also to keep in mind the principle that the Tribunal has no powers of enhancement under the Income Tax Act, and what it cannot do directly cannot be permitted to be done indirectly, and any order passed by us cannot, therefore, result indirectly in enhancement of the income of the assessee, which means that the addition, if any, to be made by the assessing officer for any unexplained cash deposits into the bank account cannot exceed the amount of Rs. 23 lakhs in any case. Therefore, while accepting the alternative plea of the learned Commissioner (Departmental Representative), we restore the matter to the assessing officer, who will examine this aspect of the matter and make additions for unexplained cash deposits into the bank account, if any, keeping in mind our directions given above. The method to be adopted while making the addition, if any, such as the peak method or any other appropriate method, is also left open for examination by the assessing officer. He shall take a fresh decision on both the points as to whether any addition is called for and, if so, what is the method to be adopted to ascertain the quantum of addition in accordance with law and after giving adequate opportunity to the assessee.
16. The first ground is thus partly allowed, for statistical purposes.
17. As regards ground No. 2, we find that the Commissioner (Appeals) has issued directions to the assessing officer to verify the bank account and allow the interest if debited in the account. No further directions are considered necessary. With regard to the salaries, there is no evidence on record to support the claim and hence it is dismissed. The ground is rejected.
18. The appeal is thus partly allowed.
Department's appeal :
19. The first ground relates to the estimate of income from the cheque discounting business carried on by the assessee. The assessing officer has estimated the income at the rate of 0.60 per cent of the receipts, whereas the Commissioner (Appeals), taking note of the fact that no material was seized from the assessee showing commission income at the rate of 0.60 per cent and on the basis of certain orders of the Tribunal, has reduced the rate of commission to 0.22 per cent. On a consideration of the orders of the income tax authorities and the orders of the Tribunal compiled in the paper book, we see no reason to interfere.
20. The second ground relates to the estimate of commission allegedly earned by the assessee for giving accommodation entries through the bank account with Dena Bank operated in the name of Vivek Enterprises. The assessing officer has estimated the income at 0.25 per cent on a total volume of Rs. 9.41 crores of cheque discounting. The Commissioner (Appeals) has deleted the addition of Rs. 2,35,250 saying that the bank account revealed only accommodation entries. If the business belongs to the assessee, it is not understood as to how he would carry on the same without any income therefrom. We, therefore, restore the addition, the quantum of which we find reasonable. The ground is allowed.
21. The appeal is thus partly allowed.