Income Tax Appellate Tribunal - Nagpur
R.S. Rekhchand Mohota And Sons vs First Income-Tax Officer on 29 February, 1988
Equivalent citations: [1988]26ITD94(NAG)
ORDER
P.I. Mohansingh, Judicial Member
1. These appeals of the assessee relate to the assessment years 1975-76 and 1977-78 and arise out of the orders of the Commissioner of Income-tax (Appeals), dated 31-7-1984. The aforesaid appeals involve a common issue and are, therefore, heard together and disposed of toy a common consolidated order for the sake of convenience. A common ground is taken in the aforesaid appeals, namely, that on the facts and in the circumstances of the case, the CIT (Appeals) erred in holding that the proceedings were rightly initiated by the Income-tax Officer under Section 147(a) of the Income-tax Act, 1961.
2. The original assessment in this case was completed on 27-4-1976 on total income determined at Rs. 5,43,270. There were credits of Rs. 90,000 in the account of one Chaudhary Sukhbirsingh & Sons, Delhi, as follows :
Credit Debit
10-8-1974 Draft No. 9023567 13-11-1974 Balance
Rs. 50,000 carried
over Rs. 90,000
22-8-1974 Draft No. 198543
Rs. 20,000
22-8-1974 Draft No. A-074088 -----------
Rs. 20,000 Rs. 90,000
----------- ------------
Rs. 90,000
-----------
In the original assessment the assessee filed the balance sheet in which the credit entry of Rs. 90,000 appears to the account of Chaudhary Sukhbirsingh & Sons. The copy of interest account is also filed in the original assessment proceedings. In the course of original assessment proceedings in pursuance of enquiry made by the ITO, the assessee also filed confirmatory letter dated 10-2-1976 from the said party in support of the credit. The confirmation letter is signed by Chaudhary Sukhbirsingh as Proprietor of Chaudhary Sukhbirsingh & Sons. The confirmation letter also gives permanent account number of said Chaudhary Sukhbirsingh & Sons. On the basis of the material the ITO making the original assessment accepted the said credit as genuine and also allowed interest payment of Rs. 3,200 made to the said party during the year in question. As stated earlier, the original assessment was completed on 27-4-1976 under Section 143(3) of the IT Act, 1961 after due enquiry. Subsequent to the making of original assessment, it is alleged that the ITO received information from the Commissioner of Income-tax, Delhi-IV, whereby it was intimated that Chaudhary Sukhbirsingh had admitted before the ITO that he was doing name-lending business and that herfurnished a list of parties to whom he had lent his name. The list included the name of the assessee. The ITO recorded his reasons on 12-9-1979 for issue of notice under Section 148 in the following terms :
The assessee in his balance sheet has shown credit of Rs. 90,000 in the name of Chaudhary Sukhbirsingh, New Delhi. The credit is not genuine. The amount of Rs. 90,000 therefore, represents assessee's income which has escaped assessment. I have, therefore, reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for assessment year 1975-76 income chargeable to tax amounting to Rs. 90,000 has escaped assessment for the year. Action under Section 147(a) is therefore necessary to reassess the income.
Wardha, S.L. Deshpande, Dt/12-9-1979. ITO
The said reasons do not mention anything about the communication said to have been received from the Commissioner of Income-tax, New Delhi, nor about the statement said to have been made by said Chaudhary Sukhbirsingh. On the basis of the said reasons the ITO issued notice under Section 148 on 12-9-1979 to the assessee which was received by the assessee on 13-9-1979.
3. The assessee filed the return in pursuance of the said notice dated 12-9-1979 on 12-10-1979 declaring the income at Rs. 5,11,625 as originally assessed. Thereafter nothing appears to have happened for a long time till September 1983. The ITO for the first time issued a letter dated 21-9-1983 in respect of reopened assessment for assessment years 1975-76, 1976-77 and 1977-78. In the said letter issued in reassessment proceedings, the ITO for the first time referred to the statement said to have been given by Chaudhary Sukhbirsingh before the ITO, New Delhi on 3-2-1978 in which he is said to have denied having advanced any amount to any party. He is further said to have furnished the list of 102 parties which includes the name of the assessee-firrn also. A copy of the statement of Chaudhary Sukhbirsingh is enclosed with the said letter issued by the ITO to the assessee. The ITO further called upon the assessee to show cause as to why this amount of Rs. 90,000 be not added to the total income of the assessee and why the interest thereon should not be disallowed. The assessee gave a reply to the said letter on 30-12-1983. In the said reply the assessee submitted that he had furnished all material facts necessary for the purpose of assessment and the ITO after making full enquiry was satisfied about the genuineness of the said credit of Rs. 90,000 and hence he accepted the same. The assessee had furnished balance sheet, interest account, confirmation letter from Sukhbirsingh, details of draft numbers by which the amounts were received, permanent account number of the said party and all information necessary for completing the assessment. The assessee, therefore, contended that the provisions of Section 147(a) were not applicable to the facts of the case and hence the reopening under that section was bad in law. If the reopening is to be treated in consequence of information received from Delhi after the completion of the original assessment then the same could be only under Section 147(6) and the reassessment under Section 147(b) has to be completed within one year from the date of such reopening, that is within one year from 12-9-1979. But the reassessment proceedings having not been completed by 12-9-1980, the same were barred by time. The assessee also pointed out various discrepancies and improbabilities in the statement of Sukhbirsingh-the creditor-and submitted that the statement on the face of it was absurd and false and no value can be attached to the said statement. On the basis of the said statement it cannot be said that the assessee had not disclosed fully and truly all material facts necessary for completing the assessment. Though on the basis of the said statement one may entertain a doubt that some income might have escaped assessment, nevertheless it cannot be said that such escapement was because of non-disclosure of all material facts for completing the assessment. It was thus submitted that the reopening under Section 147(a) was bad in law.
4. The ITO did not accept the contention of the assessee and completed the reassessment proceedings by his order dated 22-8-1984. The ITO distinguished the Supreme Court cases cited by the assessee. The assessee relied on the Supreme Court decisions in ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 and ITO v. Madnani Engg. Works Ltd. [1979] 118 ITR 1. The ITO placed reliance on the decision of the Calcutta High Court in the case of H.A. Nanji and Co, v. ITO [1979] 120 ITR 593 in which case the Calcutta High Court had referred to the Supreme Court, decision cited above and has distinguished the same. The ITO in his assessment order referred to the case of one M/s. Rakoor Industries (P.) Ltd., Delhi, in whose books the credit of Chaudhary Sukhbirsingh, Delhi had appeared and that the additions on account of cash credit made in the case of the said assessee was confirmed by the Delhi Tribunal. In the said case the Department appears to have examined the books of account of the creditor-Chaudhary Sukhbirsingh & Sons-and it was observed that the total assets as appearing in his balance sheet were Rs. 2,24,484. This observation shows that said Chaudhary Sukhbirsingh was maintaining books of account, but in the statement alleged to have been made by said Sukhbirsingh before the ITO, Delhi, he has denied to have maintained any record at all and that he has given the list, which runs into five pages, relying on the memory and after contacting the parties. He says in the statement that he has not maintained any record for such name-lending. The assessee contended before the ITO that the said statement is thoroughly unreliable on the face of it and is contradictory in many ways and appears to be palpably false. On the basis of the said statement, it was contended that no reasonable man can entertain a belief that the income of the assessee has escaped assessment especially when the same has been made after obtaining confirmation letter from said Sukhbirsingh who has confirmed to have advanced money to the assessee by bank drafts and has also received back the amount mostly by draft and partly by cash. The income-tax has been deducted at source on the interest payment and has been deposited by the assessee. It was therefore contended that there was no material to entertain a belief that any income chargeable to tax escaped assessment by reason of non-disclosure of all material facts necessary for the purpose of assessment. It was contended that if at all the ITO could entertain a belief regarding escapement of income on the basis of the said piece of information then at the most the provisions of Section 147(b) would apply and not Section 147(a). The ITO rejected all those contentions and added Rs, 90,000 to the total income of the assessee under Section 68 as unexplained credit. He also disallowed Rs. 3,200 being interest payment to the said party.
5. As against this order of the ITO, the assessee went up in appeal before the CIT (Appeals). The assessee reiterated the contentions before the CIT (Appeals) which were raised before the ITO. In addition, the assessee relied on a number of Supreme Court decisions in Calcutta Discount Co. Ltd. v. ITO [1961] 41 ITR 191, Madnani Engg. Works Ltd.'s case (supra) and CIT v. Burlop Dealers Ltd. [1971] 79 ITR 609. The CIT (Appeals) quoting the extract of the Calcutta High Court judgment in H.A. Nanji and Co.'s case (supra) gave the following finding :
Respectfully following the decision of the Calcutta High Court in the matter, I hold that the initiation of proceedings under Section 147(a) was based on reasonable belief and on relevant and adequate material. I, therefore, hold that the initiation of proceedings under Section 147(a) was valid.
He further observed that the assessment suffers from many short-comings, and, therefore, he set aside the assessment and directed the ITO to ascertain full facts and reframe the assessment. As against this order of the CIT (Appeals) the assessee is in appeal before us.
6. Extensive arguments were advanced on behalf of the assessee and reliance was placed on a number of decisions of the Supreme Court and High Courts.
7. The revenue has also relied on a number of cases.
8. The main argument of the learned counsel for the assessee is that at the time of original assessment he had disclosed fully and truly all material facts necessary for the purpose of its assessment for that year and that no income chargeable to tax had escaped assessment. The counsel for the assessee contended that in the original assessment proceedings the assessee had filed the balance sheet in which the credit entry of Rs. 90,000 in the name of Sukhbirsingh & Sons appeared. He also filed the interest account which showed interest payment to the parties concerned and being called upon to prove the genuineness of the credit, the assessee filed the confirmation letter from said Sukhbirsingh & Sons, with full details regarding the credits, the draft numbers by which the amounts were received, etc. The details of repayment were also given so also the Permanent Income-tax Account Number of said Chaudhary Sukhbirsingh & Sons was given in the said confirmation letter. The counsel, therefore, submitted that the assessee having submitted all those information in pursuance of enquiry made by the ITO, there was no further duty oast on the assessee to instruct the ITO as to what inference he should draw from the said material. All the primary facts necessary for the purpose of assessment were furnished by the assessee and the ITO being satisfied with the said evidence and material accepted the credit as genuine. According to the counsel, if the ITO wanted to investigate the matter further he should have done so at that stage. If he had doubted the genuineness of the transactions, it was for the ITO to investigate and determine whether the documents furnished by the assessee were genuine or not. But the ITO being satisfied with the evidence and having decided not to investigate the matter further it could not be said that the assessee failed to make a true and full disclosure of material facts, by not confessing before the ITO that the credit entries in its books of account were not genuine. The assessee relied on the decision of the Supreme Court in the case of Burlop Dealers Ltd. (supra) and also the case of Madnani Engg. Works Ltd. (supra).
9. The learned Departmental Representative contended that there was a duty cast on the assessee that he should make not only full disclosure of primary facts but that they should be true. The subsequent statement of Sukhbirsingh received from CIT, Delhi, whereby said Sukhbirsingh has denied having advanced any money to any one proved that the disclosure of primary facts by the assessee may be full but was not true and hence the provisions of Section 147(a) were applicable to the facts of the case.
In reply, the learned counsel for the assessee contended that the subsequent statement of Sukhbirsingh was thoroughly unreliable on the face of it as the same contradicted his own confirmation letter given earlier in which he confirmed having advanced Rs. 90,000 to the assessee by various bank drafts, the fact of having received back the money by bank drafts in his favour, receipt of interest payment and income-tax deducted at source. In support of the plea that the statement given by Sukhbirsingh was palpably false, it was contended by the learned counsel that in the said statement he has denied to have maintained any record while the ITO has referred to some Tribunal's order in which the accounts of Sukhbirsingh & Sons and the balance sheet, etc. were scrutinised. It was further contended that he could not give names of 102 parties without record as alleged by him and that too by contacting these 102 parties. It was thus submitted by the counsel for the assessee that the subsequent piece of information in the form of the statement of Sukhbirsingh may raise certain doubts in the mind of the ITO regarding the genuineness of credit of Rs, 90,000 but it cannot give any prima facie indication much less a reasonable belief at that stage that the primary facts disclosed by the assessee in assessment proceedings were untrue. Thus, it cannot be said at the stage of issue of notice under Section 148, that the ITO believed that the income chargeable to tax had escaped assessment because of non-disclosure of true facts at the time of original assessment. In this view of the matter, it was contended that at the most the provisions of Section 147(6) may apply but in no case the provisions of Section 147(a) would apply to the facts of the case.
The revenue mainly relied on the following cases :
Calcutta High Court decision in H.A. Nanji and Co.'s case (supra) ; Punjab and Haryana High Court decision in Kirpa Ram Ramji Dass v. ITO [1982] 135 ITR 68 ; Calcutta High Court decisions in Biju Patnaik v. ITO [1976] 102 ITR 96 and Girindranath Paul v. ITO [1975] 99 ITR 426.
The assessee relied upon the following decisions :
Calcutta Discount Co. Ltd.'s case (supra), Burlap Dealers Ltd.'s case (supra), Madnani Engg. Works Ltd.'s case (supra), Lakhmani Mewal Das' case (supra) and Dinesh Kumar Gordhandas v. CIT [1983] 140 ITR 211 (MP).
10. We have carefully considered the facts and circumstances of the case and the arguments advanced by both the sides and we have carefully gone through the decisions relied upon by both the sides. It is a known principle that the assessment once made is final and it cannot be reopened or even rectified except in the circumstances as provided in the Act itself. There is a finality attached to the order and if it is to be reopened as per certain provisions of law, then such provisions are to be strictly construed. The only provision authorising reopening of completed assessment is Section 147 which is divided into two parts, viz., 147(a) and 147(6). There are certain features common to both the Sub-sections while there are others which differ widely in scope and application. Both the sub-sections come into play only if the ITO has reasonable belief that some income chargeable to tax has escaped assessment. The belief must be genuine. The assessment can be reopened under Sub-section (a) of Section 147 if the assessee has failed to furnish the return or at the time of original assessment he has failed to disclose fully and truly all material facts necessary for the purpose of assessment. What are material facts will depend upon the facts of each case. After having stated all material facts it is for the ITO to draw inference and complete the assessment. If the assessee had disclosed fully and truly all material facts at the time of original assessment then the case cannot be reopened under Section 147(a). There may be cases where the assessee might have disclosed all material facts but the ITO, in consequence of some information which may come in his possession after completing the assessment may have reason to believe that income chargeable to tax has escaped assessment. In such a case the provisions of Section 147(6) would apply. Even under Section 147(6) cases can be reopened only if there is some information subsequent to the making of the assessment. It cannot be reopened on mere change of opinion. These are the basic principles enunciated by different Courts in a number of cases. Keeping in view these basic principles and the facts of the case, the case in hand before us is to be decided.
11. The first case cited by the assessee was that of the Supreme Court in the case of Calcutta Discount Co. Ltd. (supra). In that case while interpreting the words 'Omission or failure to disclose fully and truly all material facts necessary for his assessment for that year', the Supreme Court has held that "the said words used in Section 34 of the Indian IT Act, 1922 postulated a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts were material and necessary for assessment differed from case to case. In every assessment proceeding, the assessing authority would, for the purpose of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority had to draw inference as regards certain other facts and ultimately from the primary facts and the further facts inferred from them, the authority had to draw the proper legal inferences, and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable. So far as primary facts are concerned, it was the assessee's duty to disclose all of them including particulars of entries in account books, particular portions of documents, and documents and other evidence which could have been discovered by the assessing authority, from the documents and other evidence disclosed. The duty however, did not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts were before the assessing authority, it was for him to decide what inferences of facts could be reasonably drawn and what legal inferences had ultimately to be drawn. It was not for anybody else-far less the assessee-to tell the assessing authority what inferences, whether of facts or law, should be drawn".
On the basis of the ratio laid down in the aforesaid case, it was contended by the learned counsel for the assessee that the assessee having disclosed all primary facts necessary for completing the assessment, there was no further duty cast on the assessee to instruct the ITO as to what inferences should be drawn by Mm from the said facts. The assessee heavily relied on the case of the, Supreme Court in the case of Burlop Dealers Ltd. (supra). In that case the assessee for the assessment year 1949-50 submitted profit and loss account, disclosing a profit of Rs. 1,75,875 in a joint venture from H. Manory Ltd. The assessee claimed deduction of Rs. 87,937 from the said amount being half the profit paid to one Ratiram Tansukhrai under a partnership agreement. The assessee stated that on June 5, 1948, it had entered into an agreement with H. Manory Ltd. to do business in plywood and in consideration of financing the business, the assessee was to receive 50 per cent of the profit. The assessee also claimed that it had entered into an agreement on October 7, 1948 with Ratiram Tansukhrai for financing transaction of H. Manory Ltd. and had agreed to pay 50 per cent of the profit earned by it from H. Manory Ltd. to the said Ratiram Tansukhrai. The ITO accepted the return filed by the assessee and relying on the documents and evidence submitted by the assessee in the said proceedings assessed the assessee on Rs. 87,937 only for the assessment year 1949-50. In subsequent assessment year, viz., for assessment year 1950-51, the assessee showed a profit of Rs. 1,62,155 received from H. Manory Ltd. and claimed deduction of Rs. 81,077 said to have been paid to Ratiram as his share. The ITO examined the transaction and the agreement entered into between the assessee and Ratiram on October 7, 1948 and held that the said agreement was a bogus document and was merely a device to reduce the profit received from H. Manory Ltd. This order for assessment year 1950-51 was confirmed by the Tribunal. In the meanwhile relying on the findings arrived at in assessment year 1950-51, the ITO issued a notice for re-opening the assessment for the assessment year 1949-50.
The ITO reassessed the said assessee for the assessment year 1949-50 and the AAC confirmed the action under Section 34(1)(a) of the IT Act, 1922. He observed that the assessee had misled the ITO into believing that there was a genuine arrangement with Ratiram Tansukhrai when in fact the assessee knew that the said arrangement was not genuine. In appeal before the Tribunal, the Tribunal held that the assessee had produced all relevant accounts and documents necessary for completing the assessment and that the assessee was under no obligation to inform the ITO about the true nature of transaction. In this view of the matter, the Tribunal reversed the order of the AAC. The Supreme Court in that case on page 612 observed as follows :
We are of the view that under Section 34(1)(a) if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the ITO about the inference which the ITO may raise from those facts. The terms of the Explanation to Section 34(1) also do not impose a more onerous obligation. Mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of Section 34(1), but where on the evidence and the materials produced the ITO could have reached a conclusion other than the one which he has reached, a proceeding under Section 34(1)(a) will not lie merely on the ground that the ITO has raised an inference which he may later regard as erroneous.
The assessee had disclosed his books of account and evidence from which material facts could be discovered, it was under no obligation to inform the ITO about the possible inferences which may be raised against him. It was for the ITO to raise such an inference and if he did not do so the income which has escaped assessment cannot be brought to tax under Section 34(1)(a).
The Supreme Court in earlier part of its judgment observed as follows :
The ITO had, in consequence of information in his possession that the agreement with Ratiram Tansukhrai was a sham transaction, reason to believe that income chargeable to tax had escaped assessment. Such a case would appropriately fall under Section 34(1)(b). But the period prescribed for serving a notice under Section 34(1)(6) had elapsed. Under Section 34(1)(a) the ITO had authority to serve a notice when he had reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for year, income chargeable to tax had escaped assessment.
The ratio laid down in the aforesaid case makes it clear that the only duty cast on the assessee is to make full and true disclosure of all the primary facts and he having done so there is no further duty cast on the assessee to instruct the ITO as to what further investigation is to be made and what inference he should draw therefrom. If, however, the ITO comes in possession of certain information in consequence of which he has reason to believe that income chargeable to tax has escaped assessment then the case would fall under Section 147(6) and not under Section 147(a). In the aforesaid case, in subsequent year, the ITO had come to a definite conclusion that the agreement between the assessee and said Ratiram Tansukhrai was a sham document and this finding was confirmed by the AAC and the Tribunal, and it was on this basis it was sought to be contended that the assessee had not disclosed all material facts truly at the time of original assessment for the assessment year 1949-50 and that the assessee had misled the department in believing that the arrangement between him and said Ratiram Tansukhrai was a genuine arrangement. Inspite of this, the Supreme Court held that the assessee at the stage of original assessment having disclosed all documents and evidence, i.e., primary facts, there was no further duty cast on the assessee to instruct the ITO as to what further investigation he should make and what further inference he should draw from the evidence produced and In such a situation the case could not be reopened under Section 34(1)(a) of the Indian IT Act, 1922. In the present case, the assessee had disclosed all material facts, viz., balance sheet, interest account, confirmation letters from the creditor, details of payment received by draft number, etc, permanent account number of the said creditor and such other primary facts as were necessary for completing the assessment. It was then, not for the assessee to instruct the ITO as to what further investigation, he should make in the matter and what inference, he should draw from the said facts. The ITO having accepted the said evidence, he could not reopen the case on the ground that the assessee had not disclosed fully and truly all material facts at the time of original assessment. The statement of Sukhbirsingh referred to above is not enough to conclude that the material facts disclosed by the assessee at the time of original assessment were untrue or not complete. The ITO may entertain a doubt on the basis of the said information tha,t some income might have escaped assessment but that is not equivalent to saying that the assessee had not disclosed fully and truly all material facts necessary for the purpose of assessment and, therefore, in such a situation the case cannot be reopened under Section 147(a) of the Act.
12. The assessee further referred to the decision of the Supreme Court in the case of Madnani Engg. Works Ltd. (supra). In that case, at the time of original assessment, the assessee had produced all the hundis, on the strength of which it had obtained loans from creditor as also entries in the books of account showing payment of interest. On the basis of the said evidence the credit entries were accepted and interest payment was also allowed. In the assessment proceedings for subsequent years, it was discovered by the ITO that various items shown as loans against the security of hundies in the petitioner's books of account were fictitious. On the basis of such finding in subsequent years, the ITO had reason to believe that the assessee had failed to disclose fully and truly all material facts necessary for his assessment and it was because of such failure the income chargeable to tax has escaped assessment. The Supreme Court referred to its earlier decision in the case of Burlop Dealers Ltd. (supra) and held as follows :
It will thus be seen that according to this judgment, there was no obligation on the assessee to disclose that the partnership agreement produced by it was bogus and that the entries made by it in its books of account were false. The assessee discharged the obligation which lay upon it by disclosing its books of account and evidence from which material facts could be discovered and it was for the ITO to decide whether the documents produced by the assessee were genuine or false. Here also the respondent produced all the hundis on the strength of which it had obtained loans from creditors as also entries in the books of account showing payment of interest and it was for the ITO to investigate and determine whether these documents were genuine or not. The respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the ITO that the hundis and the entries in the books of account produced by it were bogus. We do not see any distinction at all between Burlop Dealers' case [1971] 79 ITR 609 (SC) and the present one and the language of Section 147(a) being identical with that of Section 34(1)(a) the ratio of the decision in Burlop Dealers' case must govern the decision of the present case. We must, therefore, hold that there was no failure on the part of the respondent to disclose fully and truly all material facts necessary for its assessment and the condition for the applicability of Section 147(a) was not satisfied.
From the above decision, it is clear that the duty cast on the assessee is to disclose all material facts necessary for the purpose of his assessment. In the present case, as in the case of Madnani Engg. Works Ltd. (supra), the assessee had produced confirmation letters giving full details of the amounts received by bank drafts as also entries in the books of account showing payment of interest, tax deducted at source on such interest payment, permanent account number of the creditor and other relevant details necessary for the purpose of making the assessment. It was then for the ITO to investigate and determine whether the documents and evidence produced by the assessee was genuine or not. The assessee cannot be said to have failed to make a true and full disclosure of the material fact by not confessing before the ITO that the entries in the books of account produced by him were bogus. In fact, there is no material to come to the conclusion that the evidence produced by the assessee was not true. Even the CIT (Appeals) has not come to the conclusion that the credit entry in question was not genuine or that, the evidence produced by the assessee at the original assessment stage was untrue or incomplete. The CIT (Appeals) has observed that the assessment suffered from many shortcomings. The amounts of loans in question were received through bank and repaid through bank and hence he felt that this factual aspect also requires verification, both from bank as well as the records of Delhi party. He further observed that this factual position has not been examined by the ITO. As against this, we have the confirmation letters signed by the said creditor giving full details of the loans with draft numbers, etc., and the acceptance of the creditor that he had in fact advanced the loan in question to the assessee. In this view of the matter, it cannot be said that at the time of original assessment, the assessee had not disclosed all material facts truly necessary for the purpose of assessment. We have to see the situation at the point of time when the notice under Section 148 is issued. On the basis of the aforesaid facts can it be said that the ITO had reason to believe that income has escaped assessment because of failure on the part of the assessee to disclose fully and truly all material facts ? For the purpose of reopening the assessment, the ITO may have a tentative belief that some income chargeable to tax has escaped assessment, but thereafter, the question arises as to whether the provisions of Section 147(a) or 147(6) would apply. If the provisions of Section 147(a) are to be applied, then the ITO must have sufficient material with him to come to the conclusion that at the time of original assessment, the assessee did not disclose all material facts truly. As stated earlier, there was no material with the ITO to come to the conclusion that the assessee had not disclosed all material facts truly. The question whether a particular statement is true or not is to be decided on appreciation of evidence. The question of truthfulness or otherwise of a statement is to be decided by process of inference to be drawn from appreciation of evidence. At the time of original assessment, the assessee disclosed all the material facts necessary for the purpose of assessment and the ITO was satisfied about the genuineness of the credit. Therefore, the determination of the question that a particular credit is genuine, is on the basis of inference drawn by the ITO on certain facts before him. Now up to the stage till the issue of notice under Section 148 there was no material with the ITO to come to the reasonable conclusion that the facts disclosed by the assessee at the time of original assessment were untrue. In such a situation, it cannot be said that the assessee failed to disclose fully and truly all material facts necessary for the purpose of his assessment and it was because of such failure, the income chargeable to tax has escaped assessment. Applying the test laid down by the Supreme Court in the aforesaid case to the facts of the present case it is clear that the provisions of Section 147(a) are not applicable to the present case.
13. The assessee further relied upon the decision of the Madhya Pradesh High Court in the case of Dinesh Kumar Gordhandas (supra). In that case, the assessee-firm submitted its returns for the assessment years 1967-68 and 1969-70. During the original assessment proceedings the. assessee had pled copies of the balance sheet, details of the interest account and also a copy of the Pyau accounts and had shown a payment of interest on amounts advanced to one C. While completing the assessments, the ITO had allowed the assessee's claim for payment of interest to C. He also did not take any action in respect of fresh credits introduced in C's name during the assessment years. After the completion of assessments the ITO took up the assessment proceedings for 1972-73 and examined the genuineness of credits in the name of C and arrived at the conclusion that the loans in her name were not genuine. On the basis of the facts which were found during the proceedings for the assessment year 1972-73, the ITO initiated action under Section 147 of the IT Act, 1961, in respect of assessment years 1967-68 and 1969-70. The Tribunal held that the reassessment proceedings had been validly initiated.
On the aforesaid facts, the High Court held that the assessee had placed all the primary facts before the ITO during the original assessment proceedings. Accordingly it was for the ITO to make the necessary enquiries and draw proper inferences as to whether the transaction of loan on which the payment of interest was disclosed by the assessee was a genuine transaction of loan or not. The ITO having failed to do so, it could not be said that the assessee had not fully and truly disclosed the material facts necessary for the assessments in question. The reassessment proceedings were not valid.
14. The revenue placed its reliance on the decision of the Calcutta High Court in the case of H.A. Nanji and Co. (supra). In that case the assessee had claimed deductions from income for the accounting year relevant to the assessment year 1958-59, on account of interest paid on a. number of hundi loans which were accepted as genuine in the original assessment. Subsequently, the ITO received a circular from the Special Investigation Department which gave a list of bogus hundi creditors, which included the alleged creditors of the assessee. The ITO initiated reassessment proceedings. In his recorded reasons the ITO referred to the circular setting out the names of hundi creditors and the respective amounts involved which were not examined in the course of the assessment. Thereafter, he referred to the list of bogus creditors and then stated that he had reasons to believe that the hundi loans shown by the assessee were fictitious and income had escaped assessment. He issued a notice under Section 148 which was challenged by the assessee in writ proceedings.
The Calcutta High Court distinguished the Supreme Court cases viz., Calcutta Discount Co. Ltd.'s case (supra), Burlop Dealers Ltd.'s case (supra) and Madnani Engg. Works Ltd.'s case (supra) on facts. The Calcutta High Court distinguished the aforesaid cases in the following manner :
The cases are distinguishable on facts from the case before us. Here the ITO was proceeding not merely on the basis of the primary facts which he had at the time of original assessment. The assessee claimed deductions from income for the relevant year on account of interest paid on a number of hundi loans which were accepted as genuine in the original assessment. Subsequently, the ITO received a list of bogus hundi creditors from the Government authorities which included the alleged creditors of the assessee. The ground for the belief for initiation of proceedings under Section 147, Clause (a), was thus not the same set of primary facts as at the time of original assessment as in the cases cited above but altogether additional materials which were not before the ITO when the assessment now sought to be reopened was made.
It is to be noted that each case has to be decided on its own facts and the principle laid down by the Court has to be appreciated with reference to the facts of a particular case. In this case the credits were accepted in the original assessment without verification. In the affidavit filed by the ITO in the said writ petition, he made specific averment which is found at page 597 of the report, the extract of which is given below :
It does not, however, appear from the records that the petitioner had produced the discharged hundis, receipts for payment, alleged interest bills of brokers for procuring the purported loans, purported confirmation letters from the parties quoting their income-tax file No. as alleged. It also appears from the records that the said hundi loan account had been accepted by the assessing ITO as such without verification.
It is thus clear that in the aforesaid case all the primary facts necessary for the purpose of assessment were not disclosed by the assessee and the assessment was completed without verification. It is in this light the decision of the High Court has to be appreciated. The revenue heavily relied upon the observation of the Calcutta High Court on page 611 of the report, which is as follows :
The decisions cited above lay down that the assessee is under a statutory obligation to disclose fully and truly all primary facts relating to assessment and to produce all relevant documents but he is under no obligation to disclose, differential facts which could be arrived at by a process of reasoning from such primary facts. The question for consideration is whether in such a case the initiation of proceedings under Section 147 is based on new primary facts or it is based on inferential facts on the primary facts already disclosed, the latter being impermissible in law. In this case, the disclosure of the hundi loans as genuine by the assessee were of primary facts which were accepted as such by the ITO during the assessment. The ITO, after the assessment, came to be in possession of a list of bogus creditors and therefrom he came to the tentative belief that in respect of the relevant year the hundi creditors of the assessee disclosed by him whose names appear in the list were bogus creditors. The fact could be ascertained only by a bare comparison of the list of bogus creditors with the creditors disclosed by the assessee in the course of assessment and did not involve any act of drawing conclusion by a process of reasoning, nor was it based on materials disclosed by the assessee during assessment as in the cases cited above but on fresh materials which came into the possession of the ITO after assessment. It cannot accordingly be said that the discovery of the creditors of the assessee as bogus creditors according to the list was an inferential fact based on the same materials which the assessee had disclosed as primary facts in respect of the assessment in the usual course nor was the belief a result of mere pretence or change of opinion only on the same primary facts or one a prudent man acting bona fide could not have arrived at.
The aforesaid observation was in the context whether the discovery of the creditor of the assessee as a bogus creditor according to the list was inferential fact based on the same material or whether it was based on additional primary fact which came into possession of the ITO after making the assessment and which the assessee had failed to disclose at the time of original assessment. Their Lordships of the Calcutta High Court have observed that the ITO formed a belief about the escapement of income on the basis of the new primary fact which came into the possession of the ITO subsequently. The original assessment was completed without enquiry and in the absence of necessary primary facts. It was thus observed by their Lordships of the Calcutta High Court that the discovery of bogus creditor was not an inferential fact based on the same material nor was the belief a result of mere pretence or change of opinion on the same primary facts, but it was based on some positive evidence in possession of the ITO which the assessee had failed to disclose at the time of original assessment. In fact in the aforesaid case the assessee had not disclosed the primary facts and the case was completed without verification. In the case under consideration, as mentioned earlier, all the primary facts necessary for the purpose of assessment were disclosed by the assessee at the time of original assessment and there was no material with the ITO to come to the conclusion that the facts disclosed by the assessee earlier at the time of original assessment were untrue. We, therefore, find it difficult to see how the decision of the Calcutta High Court is applicable to the facts of this case.
15. The revenue then relied upon the decision of the Punjab and Haryana High Court in the case of S.P. Mohan Singh v. ITO [1983] 141 ITR 440. In this case the petitioner filed its return for the assessment year 1964-65 declaring an income of Rs. 75,727 along with the statement of accounts, etc. The ITO issued notice under Section 143(2) requiring the petitioner to file a copy of the cash credits and squared up accounts along with the confirmatory letters from the creditors showing specifically the districts in which those creditors were being assessed. The petitioner supplied the information which, according to it, was scrutinised by the ITO on April 21, 1966 and thereafter the petitioner agreed to the addition of an amount of Rs. 1,500 to its income. On August 31, 1966, the petitioner also filed some more confirmation letters relating to some of its creditors. The ITO doubted the genuineness of certain sums totalling Rs. 6,000 and initiated penalty proceedings under Section 271(1)(c) and imposed a penalty of Rs. 1,724. The ITO completed the assessment on an income of Rs. 82,581 on November 16,1966. In October 1971, the ITO, however, initiated proceedings for reopening the assessment of the petitioner on the basis that the parties in whose names cash credits appeared in its books were established to be bogus hundi and hawala dealers, that the cash credits represented the petitioner's income and on that account he had reason to believe that an amount of Rs. 66,220 had escaped assessment. The petitioner filed a writ petition to quash the notice issued for reassessment on the ground that the petitioner having disclosed all facts truly and fully at the time of its original assessment, which was, after investigation, accepted by the ITO, the ITO had no jurisdiction to proceed against it on the basis of a mere change of opinion or information alleged to have been received subsequent to the finalisation of the assessment after a period of four years from the original assessment. The revenue contended that the facts and material presented by the petitioner were accepted by the ITO without making any enquiries into the individual items or the genuineness of the cash credits, that apart from the letters of confirmation, there was no other evidence before the ITO regarding the cash credits and that the total income of the assessee was assessed at Rs. 82,581 mainly on the basis of the return. The revenue further contended that certain classified information was received by the department from the Central Excise and Customs Dept. which revealed that there was a substantial bogus hundi racket and hawala dealing prevalent amongst the businessmen, and that it was on the basis of the material that came to light that the ITO came to the conclusion that he had reasons to believe that the petitioner had not fully and truly disclosed the material facts at the time of the original assessment and as a result of that the petitioner's income had escaped assessment.
On the aforesaid facts their Lordships of the Punjab and Haryana High Court have held that in a case where the facts stated or disclosed by the assessee are either found to be bogus or non-existent, he cannot forestall the reassessment on the plea that he had fully and truly disclosed all the material facts. There is no question of truthfulness about a fact or a material fact which, to the knowledge of the assessee, was non-existent. Further, the facts or the material, placed by the petitioner before the ITO at the time of the initial assessment did not amount to any 'disclosure'in the light of the Explanation to Section 147 and, therefore, the reopening of the assessment was valid. The High Court upheld the validity of issue of notice under Section 147(a) because on the facts of the said case and the material which came in possession of the ITO subsequent to the original assessment the ITO found that the material disclosed by the assessee at the time of original assessment was bogus and untrue. If there is sufficient material to come to the conclusion that the facts disclosed by the assessee at the time of original assessment were untrue and bogus or the documents produced were fabricated or misleading and it was because of such false representation the income had escaped assessment then the provisions of Section 147(a) would apply. Therefore, in all such cases the basic fact that has to be considered is that at the point of time of issue of notice under Section 148 is there sufficient material to reasonably come to the conclusion that the facts disclosed by the assessee at the time of original assessment were untrue and it was because of this that the income chargeable to tax had escaped assessment. As stated earlier, in this case at the time of issue of notice there was no material with the ITO on the basis of which he can believe or come to the conclusion that the facts disclosed by the assessee at the time of original assessment were untrue. In fact in the reasons recorded on 12-9-1979, which are quoted above, the ITO has not referred to any material at all. Even if it is to be assumed that the ITO had with him the copy of statement of Sukhbir Singh, referred to above, even then on the basis of that statement, which has been pointed out to be palpably unreliable and contradictory in many ways, it cannot be said that the ITO could reasonably come to the conclusion that the disclosure of material facts made by the assessee at the time of original assessment was untrue.
16. The revenue relied upon the decision of the Calcutta High Court in the case of Girindranath Paul (supra). In that case there appeared cash credits to the extent of Us. 30,000 in the name of M/s. IT of Calcutta. At the time of the original assessment, it was explained by the assessee that the sum was advanced by the above party for goods to be supplied in the next year, that the goods were actually supplied in the next year and that this explanation was accepted by the ITO. The records of the department disclosed that subsequent information revealed that there was no such firm as M/s. IT at all. The ITO had, accordingly, prima facie ground for thinking that the alleged transaction was fictitious and that there had been untrue disclosure of material fact by the assessee at the time of assessment leading to an escapement of income of the said amount of Rs. 30,000. The disclosure required under Section 34(1)(a) must be a full and true disclosure of all material facts. When the assessee makes a disclosure about a transaction and supports it by explanation and evidence, and a party to the transaction is found on enquiry never to have had his place of business at the disclosed address, obviously the disclosure could not be a true disclosure. Accordingly, the assessee could not be heard to complain that the assumption of jurisdiction by the ITO in initiating proceedings under Section 34(1)(a) was not warranted in law.
It is obvious in this case that subsequent to the assessment the ITO found as of fact that the party from whom the assessee had received advance of Rs. 30,000 never existed and accordingly the ITO came to a definite conclusion that explanation offered earlier by the assessee was false and it was on this belief that the jurisdiction under Section 34(1)(a) was founded. The High Court on examination of records was satisfied that there was definite material on record on the basis of which the ITO could reasonably believe that the disclosure made by the assessee at the time of original assessment was not true. It was on this basis the reopening under Section 34(1)(a) was justified. In the present case, as mentioned earlier, there was no sufficient material to come to the reasonable conclusion that the evidence and primary facts disclosed by the assessee at earlier stage were untrue which would warrant the formation of belief about the escapement of income and further belief that such escapement was due to non-disclosure of true facts by the assessee. The vague statement of a creditor, which on the face of it, appears to be palpably false. and unreliable and which contradicts his own earlier confirmation and transaction through bank cannot by itself lead to a formation of belief that the disclosure of primary facts made by the assessee at the time of original assessment and supported by evidence was false. It is very material at this stage to reproduce the view expressed by the Supreme Court in Madnani Engg. Works Ltd.'s case (supra) which is as follows :
The respondent could not be said to have failed to make a true and full disclosure of material facts by not confessing before the ITO that the hundis and the entries in the books of account produced by it were bogus.
On appreciation of the facts and material on record, the reasons recorded by the ITO for reopening the assessment and after carefully going through the decisions cited by the learned counsel for the assessee and also the revenue, we are of the considered opinion that it could not be said at that stage that the ITO had any reason to believe that the facts and evidence disclosed by the assessee at the time of original assessment were untrue and it was because of making false statement the income chargeable to tax escaped assessment. The statement of Sukhbir Singh might give a feeling that some income might have escaped assessment but that statement by itself is not enough to lead to the formation of a belief that the disclosure made by the assessee at the time of original assessment was untrue. We, therefore, hold that the reopening made by the ITO under Section 147(a) is unjustified. At best, the ITO could have reopened the assessment under Section 147(6). However, it is not the case of the revenue that it had reopened the case under Section 147(6). Even if we assume that reopening under Section 147(6) was justified and the notice could be read as one under Section 147(6), the action cannot be justified because in this case the assessment orders have not been completed within one year from the date of reopening of the assessment. In this case the assessment was reopened on 12-9-1979 and the reassessment is completed on 28-2-1984. Thus the same is barred by time as per the provisions of Section 153(2)(6)(n). We, therefore, hold that the reopening of the assessments by the ITO under Section 147(a) is bad in law and the appeals filed by the assessee are allowed.
G.R. Raghavan, Accountant Member
1. For the reasons recorded hereunder, I am unable to agree with the conclusion of the Judicial Member, that, the reopening of the assessments for the years 1975-76 and 1977-78 Under Section 147(a) is bad in law.
2. These two appeals by the assessee are against the combined order of the CIT (Appeals) in his appeal Nos. OIT (Appeals)/!., 2/ 84-85, dated 31-7-1984 relating to the assessment years 1975-76 and 1977-78. The common ground of appeal for both these years is, that, the OIT (Appeals) was not justified in upholding the reopening of the assessments for these years under the provisions of Section 147(a). The facts are briefly as under :
The assessment for 1975-76 was completed on 27-4-1976 on a total income of Rs. 5,43,270. The same was reduced in appeal by the AAC to Rs. 5,11,625. The balance sheet filed with the original return showed a credit of Rs. 90,000 in the account of M/s Choudhary Sukhbir Singh & Sons. It would appear, that, a confirmatory letter was filed in respect of this credit. In the original assessment, the ITO had apparently accepted the credit and completed the assessment as mentioned earlier. Subsequently, in August 1979, the ITO received a copy of the letter from the Commissioner of Income-tax, Delhi-IV, New Delhi intimating, that, the above referred Choudhary Sukhbir Singh had admitted before the ITO, that he was doing hawala business (name-lending) for a number of years and he had also furnished a list of the names of the parties, with whom he had done this business. The details of such transactions and the list of names included the sum of Rs. 90,000 alleged to have been advanced to the assessee-firm. With reference to the same, the ITO reopened the assessment Under Section 147(a), after recording his reasons for his belief, that the assessee's income had escaped assessment for this year. Similarly, the assessment for 1977-78 was also reopened with a view to disallowing interest of Rs. 4,750 which was allowed as a deduction in the original assessment. The reopened assessments were completed by the ITO after adding the sum of Rs. 90,000 to the income already assessed for 1975-76 and also disallowing the interest thereon both for 1975-76 and 1977-78.
3. Aggrieved with the same, appeals were filed before the CIT (Appeals) contesting the reopening of the assessments Under Section 147(a) as also the assessments made in pursuance thereof. The submissions made regarding the applicability of Section 147(a) before the CIT (Appeals) are summarised hereunder :
There was a full and true disclosure of all material facts relating to the credit in question at the time of the original assessment. It was for the ITO to make thorough enquiries into those facts and decide whether the credit was acceptable or otherwise. The assessee was not bound also to advise the ITO as to what factual or legal inferences should properly be drawn from the material facts. According to the assessee, where primary facts had been disclosed in the original return, there was no justification for reopening the assessment Under Section 147(a). Reliance was placed on Calcutta Discount Co. Ltd.'s case (supra), Madnani Engg. Works Ltd.'s case (supra) and Burlop Dealers Ltd.'s. case (supra). It was also submitted, that, if at all the case could only attract the provisions of Section 147(6), by virtue of information received after the original assessment as to the genuineness of the credit, but however, the assessment made on 28-2-1984 was time barred inasmuch as, it should have been completed before 31-3-1981. On merits as well, it was submitted, that, whatever documentary evidence was available in this regard with the assessee, was furnished at the time of the original assessment and absolutely no fresh evidence had been brought on record by the ITO to disprove the genuineness of the loans. It was also submitted, that, the assessee had no opportunity of cross-examining the concerned parties and the ITO had also failed to take into account the affidavit of the broker who had arranged the loans.
4. The CIT (Appeals) upheld the reopening of the assessments Under Section 147(a) following the decision of the Calcutta High Court in H.A. Nanji and Co.'s case (supra). He found, that, the Calcutta High Court in the above decision, on more or less identical facts, had considered all the three Supreme Court's decisions relied upon by the assessee and referred to earlier, and distinguished the same with reference to the facts in that case. He reproduced certain crucial passages in the judgment at pages 611 and 612 and came to the conclusion, that, the facts in the present case being identical, the reopening of the assessments Under Section 147(a) was based on reasonable belief and on relevant and adequate material, following that decision. In view of the same, he did not countenance the plea, that the provisions of Section 147(a) were applicable but actually time barred, according to the assessee. As to merits, he held, that the ITO had merely gone on the basis of the statement recorded by the ITO, Delhi and since the appellant had no opportunity of cross-examining the party concerned, he came to the conclusion, that the factual aspects of the case required a thorough probe and verification and accordingly set aside the assessments and restored the same to the ITO's record for a factual verification of the credits and disposal of the assessments accordingly.
5. Aggrieved with the same, the assessee is in appeal before us. The submissions on behalf of the appellant may be summarised hereunder :
Our attention was invited to the primary requirements to be satisfied for reopening the assessment Under Section 147(a) which are as under:
(i) The ITO must have reason to believe that income has escaped assessment.
(ii) He must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment for the relevant year.
With reference to the second condition, it was submitted, that, the assessee had furnished all the required material particulars in support of the credit in the account of Sukhbir Singh. Confirmation of the transaction was also filed before the ITO. The permanent account No. of the creditor was also furnished to the ITO on the confirmation letter as also the receipts issued by the alleged creditor. It was, therefore, submitted, that, since all the material facts relating to the loan transaction were made available to the ITO, it could not be said that, there was omission or failure on the part of the assessee to disclose fully and truly all material facts. It was further submitted, that, the duty of the assessee ended with disclosure of primary facts and it did not extend to, indicating, what factual or legal inferences should properly be drawn from those facts. Reliance was placed on the Supreme Court's decision in Calcutta Discount Co. Ltd.'s case (supra) in this regard. It was further submitted, that, the material, on the basis of which the ITO reopened the assessment, was only an inferential fact based on the same material which the assessee had disclosed as primary facts, and, such an inferential fact could not confer jurisdiction on the ITO to have recourse to Section 147(a). The assessee's learned representative heavily relied on the Supreme Court's decisions in Burlop Dealers Ltd.'s case (supra), Madnani Engg. Works Ltd.'s case (supra) and Dinesh Kumar Gordhandas' case (supra). In fine, it was submitted, that, all primary facts as referred to in the Supreme Court's decision in Calcutta Discount Co. Ltd.'s case (supra), were made available to the ITO at the time of the original assessments ; there was no failure on the part of the assessee to disclose fully and truly any primary facts; the material relied upon by the ITO was only an inferential fact, which was based on the primary facts already disclosed at the original assessment stage and, therefore, the ingredients necessary for invoking the provisions of Section 147(a) were absent, and at best, the case, if at all, would only be covered by the provisions of Section 147(b), which however, were time barred. It was also submitted, that the reopening was based on a change of opinion, which is barred under Section 147(a).
6. On behalf of the revenue, the following submissions were made : The ITO had not enquired into the genuineness of the credit and he had merely accepted the statement of the assessee in this behalf without making any further probe into the matter. The duty cast upon the asseasee is not only, to disclose fully all material facts relating to the assessment but also make a true disclosure of all such facts in the sense that, if the assessee knowingly passed on certain bogus credits as genuine credits, he would not have made a true disclosure of all material facts. In the present case, though the assessee had filed a confirmatory letter relating to the credits, and, also furnished the permanent account number of the creditor, he could not be considered to have made a full and true disclosure of all material facts, inasmuch as the claim relating to the credits made by the assessee, stood disproved in the light of the subsequent statement of the creditor himself before the income-tax authorities, that, he had indulged in hawala transactions, which included the credits alleged to have been advanced to the assessee. In the light of the subsequent denial of the creditor, the earlier confirmatory letter had lost its veracity and evidentiary value. Reliance was heavily placed on Calcutta High Court's decision in H.A. Nanji and Co.'s case (supra) which has also considered the decisions of the Supreme Court in Calcutta Discount Co.'s case (supra), Burlop Dealers Ltd.'s case (supra) and Madnani Engg. Works Ltd.'s case (supra) the latter being distinguished by the Calcutta High Court. Our attention was also invited to the following IT Cases :
S.P. Mohan Singh's case (supra), Biju Patnaik's case (supra), Kirpa Ram Ramji Dass' case (supra), CIT v. Ess Ess Kay Engg. Co. (P.) Ltd. [1982] 137 ITR 446 (Punj. and Har.), Sujir Ganesh Nayak and Co. v. ITO [1974] 97 ITR 372 (Ker.) and Girindranath Paul's case (supra).
7. In reply, it was submitted, that, there was no such thing as additional primary fact as there can be only one set of primary facts. Truthfulness or falsity of facts depends on appreciation of evidence which had come at a later stage and, therefore, if at all, only the provisions of Section 147(b) were attracted and not 147(a).
8. After a careful consideration of the facts and circumstances, the rival submissions and the authorities cited, I am of the considered opinion, that, the assessee in this case had failed to disclose fully and truly all material facts necessary for its assessments for the years under consideration. The section lays down, that, the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment would entitle the ITO to have reason to believe, that his income has escaped assessment. In the present case, much has been made of the fact, that the assessee had filed a confirmatory letter which also furnished the permanent account number of the creditor and apart from this, there was no other primary fact, which the assessee was bound to disclose to the authorities. It was also submitted, that, it was not for the assesses to advise the ITO as to what inferential conclusions he was to draw from an examination of those facts. At first flush, this argument is quite attractive. However, if we consider the issue deeply without being dazzled by the attractiveness of the argument, the hollowness of the same becomes amply evident. The section not only requires the assessee to disclose all material facts but it lays emphasis on a full and true disclosure. In the present case, can it be said that the assessee had made a full and true disclosure of all the material facts for its assessment ? The following facts will show that he had failed to make a full and true disclosure. The so-called creditor who was alleged to have advanced moneys to the assessee makes a statement Under Section 131 of the IT Act before the income-tax authorities, to the effect, that he was indulging in hawala transactions and even furnished a list of all such transactions with the names of the parties who had been accommodated. The list furnished to the department included the assessee's name and also included the sum of Rs. 90,000 alleged to have been advanced to the assessee on four different dates. No doubt, this may not constitute sufficient evidence for the ITO to straightaway assess the same as the income of the assessee from undisclosed sources, but, the question is not, that, at the stage of reopening of an assessment Under Section 147(a). The question is, whether this would constitute a material fact or a primary fact as referred to by the Supreme Court in Calcutta Discount Co. Ltd.'s case (supra), which the assessee had failed to disclose at the original stage, so as to confer jurisdiction on the ITO to reopen the assessment on the belief, that, income had escaped assessment. I am of the opinion, that, it certainly does. The statement is not by a third party. It was by the alleged creditor himself confessing in so many words, that, he had indulged in hawala transactions and the credits appearing in his name in the books of the assessee were factitious. In this light, this would constitute a primary fact, which the assessee had failed to disclose as he must have been fully aware of it at the time of the original assessment. What is required is a full and true disclosure of all primary facts. A half-hearted and partial disclosure does not absolve the assessee or put it beyond the pale of Section 147(a).
9. This is definitely not an inferential fact as made out on behalf of the appellant. This aspect has been very clearly brought out by the Calcutta High Court in H.A. Nanji and Co.'s case (supra). In that case as well, the assessee had claimed deduction on account of interest in respect of certain hundi loans which were accepted as genuine in the original assessment. Subsequently, the ITO received a circular from the Special Investigation Department, which gave a list of bogus hundi creditors, which included the alleged creditors of the assessee. The ITO reopened the proceedings Under Section 147(a). In the recorded reasons the ITO also referred to the circular setting out the names of the hundi creditors and the respective amounts involved. On these facts, it was held, that, it could not be said, that the discovery of the creditors of the assessee as bogus creditors, was an inferential fact based on the same materials which the assessee had disclosed as primary facts nor was the belief, that, the income had escaped assessment, a result of pretence or change of opinion on the same primary facts. It was further held, that, when such names disclosed by the assessee were found in the list of bogus creditors, the ITO could prima facie, believe, that, the income had escaped assessment and, therefore, the reopening Under Section 147(a) was well within the limits of that section. In coming to this conclusion, their Lordships had referred to the decisions of the Supreme Court in Calcutta Discount Co. Ltd.'s case (supra), Burlop Dealers Ltd.'s case (supra) and Madnani Engg. Works Ltd.'s case (supra). All these cases were distinguished on facts by the Calcutta High Court from the case before it. The observations made by the Calcutta High Court, while distinguishing these decisions are quite significant in this context and, therefore, I reproduce the same hereunder:
The cases are distinguishable on facts from the case before us. Here the ITO was proceeding not merely on the basis of the primary facts which he had at the time" of original assessment. The assessee claimed deductions from income for the relevant year on account of interest paid on a number of hundi loans which were accepted as genuine in the original assessment. Subsequently, the ITO received a list of bogus hundi creditors from the Governmental authorities which included the alleged creditors of the assessee. The ground for the belief for initiation of proceedings under Section 147, Clause (a), was thus not the same set of primary facts as at the time of original assessment as in the case cited above, but altogether additional materials which were not before the ITO when the assessment now sought to be reopened was made.
The decisions cited above lay down that the assessee is under a statutory obligation to disclose fully and truly all primary facts relating to assessment and to produce all relevant documents but he is under no obligation to disclose inferential facts which could be arrived at by a process of reasoning from such primary facts. The question for consideration is whether in such a case the initiation of proceedings under Section 147 is based on new primary facts or it is based on inferential facts on the primary facts already dis-closed, the latter being impermissible in law. In this case, the disclosure of the hundi loans as genuine by the assessee were of primary facts which were accepted as such by the ITO during the assessment. The ITO, after the assessment, came to be in possession of a list of bogus creditors and therefrom he came to the tentative belief that in respect of the relevant year the hundi creditors of the assessee disclosed by him whose names appear in the list were bogus creditors. This fact could be ascertained only by a bare comparison of the list of bogus creditors with the creditors disclosed by the assessee in the course of assessment and did not involve any act of drawing conclusion by a process of reasoning, nor was it based on materials disclosed by the assessee during assessment as in the cases cited above but on fresh materials which came into the possession of the ITO after assessment. It cannot accordingly be said that the discovery of the creditors of the assessee as bogus creditors according to the list was an inferential fact based on the same material which the assessee had disclosed as primary facts in respect of the assessment in the usual course nor was the belief a result of mere pretence or change of opinion only on the same primary facts or one a prudent man acting bona fide could not have arrived at.
(Italics ours) The further passage in this decision at page 612 which has been extracted by the CIT (Appeals) in his order also supports my view in this behalf.
10. I am, therefore, fortified by this decision that the belief the income of the assessee had escaped assessment is not an inferential fact based on the same materials, which the assessee had disclosed as primary facts for the simple reason, the belief of the ITO is with reference to a subsequent occurrence which is quite significant and material in this context, namely, that the so-called creditor had himself confessed, that, he had dealt in bogus loan transactions and the assessee was one, who had been accommodated by him in this regard. This fact would blow the theory of inferential fact, made much of, on behalf of the appellant, sky high.
11. It is also necessary to draw a distinction between the falsity of the material facts disclosed by the assessee and the erroneous inference which the ITO may draw from such material facts which are otherwise full and true. In the latter cases, the Courts have, no doubt, come to the view that the reassessment is not permissible as the same would amount to a change of opinion. But, however, when the material facts disclosed themselves are untrue or are not full, definitely the jurisdiction of the ITO Under Section 147(a) is not precluded. The present is one such instance. The decisions of the Hon'ble Supreme Court in Madnani Engg. Works Ltd.'s case (supra) and Burlop Dealers Ltd.'s case (supra) are clearly distinguishable on facts as mentioned by the Calcutta High Court in H.A. Nanji and Co.'s case (supra). If a disclosure of facts which has been rendered to be false by subsequent events as in the present case, cannot be reached by recourse to Section 147(a), I am afraid, the provision would become a mere adornment in the Act. A catena of decisions are quite clear on this point. In S.P. Mohan Singh's case (supra) it has been held, that, "where the facts stated or disclosed by the assessee are either found to be bogus or non-existent he cannot forestall the reassessment on the plea that he had fully and truly disclosed all the material facts". Their Lordships have further observed in that decision that, "there is no question of truthfulness about a fact or a material fact which, to the knowledge of the assessee, was non-existent". In that case, the revenue received some classified information from Central Excise and Customs Department which revealed that, there was a bogus hundi racket and hawala dealings prevalent amongst the businessmen, and that it was on the basis of such material, that the ITO concluded, he had reason to believe, that the petitioner had not fully and truly disclosed the material facts at the time of the original assessment. In Biju Patnaik's case (supra), it was held, that the subsequent confessions made by the alleged hundi creditors to the effect, that they had indulged in hawala transactions constituted sufficient material, which could lead to the formation of belief in the mind of the ITO that the income of the assessee had escaped assessment due to failure on his part to disclose fully and truly all the material facts necessary for his assessment in the relevant assessment year.
In Kirpa Ram Ramji Dass' case (supra), the credits appearing in the account of an assessee were accepted initially and the assessment was completed. Subsequently, as a result of investigation and raids by the Income-tax Department, it was found that the alleged creditors had engaged in hawala business and, therefore, the ITO reopened the assessment Under Section 147(a). It was held by the Punjab & Haryana High Court, that, the subsequent information constituted the basis for the belief of the ITO, that the assessee had not fully and truly disclosed all material facts and, therefore, the provisions of Section 147(a) were applicable.
In Ess Ess Kay Engg. Co. (P.) Ltd.'s case (supra) it has been held, that, an assessment could be reopened Under Section 147(a) if the facts disclosed by the assessee at the original assessment stage were found to be untrue on the basis of the material discovered later by the assessing authority. In that case, certain commission payments were originally allowed as a deduction in the assessment of the assessee. Subsequently, on the basis of fresh material, the ITO found, that, all the material particulars were not disclosed in this regard and, therefore, reopened the assessment Under Section 147(a).
A similar view has been taken by the Kerala High Court in Sujir Ganesh Nayak and Co.'s case (supra). Here again, on the basis of subsequent receipt of information, the ITO had reason to believe, that the assesses had not fully and truly disclosed all material facts. This was again a case of hundi transactions.
12. There is, therefore, overwhelming authority in support of the proposition that, if the disclosure of facts made by the assessee subsequently turns out to be false or not full, the ITO can form a belief that, there has been an escapement of income on account of failure of the assessee to make a full and true disclosure.
13. The affidavit of the broker filed before the ITO is of no use in this connection. I am, therefore, entirely in agreement with the learned CIT (Appeals), that, the ITO was well within his jurisdiction in reopening the assessments Under Section 147(a).
14. As regards the merits, I entirely agree with the reasoning of the CIT (Appeals) set out in para 11 of his order. Since no opportunity has been allowed to the assessee to cross-examine the creditor and the affidavit filed by the broker has also not been examined, it is but fair, that, the assessment should be set aside and restored to the ITO for making a fresh assessment, after examining all the aspects referred to by the CIT (Appeals) in his order.
15. In view of this, the appeals are dismissed.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT As there is a difference of opinion between the Members, the following question is placed before the President for reference to the Third Member :
Whether, on the facts and in the circumstances of the case, the reopening of the assessments by the Income-tax Officer under Section 147(a) is proper and valid in law ?
THIRD MEMBER ORDER S. Narayanan, Vice President
1. The following question has been referred to me as Third Member by the President:
Whether, on the facts and in the circumstances of the case, the reopening of the assessments by the Income-tax Officer under Section 147(a) is proper and valid in law ?
2. According to the learned Judicial Member of the Bench, which originally heard these appeals, the reopening of the two assessments above under Section 147(a) was bad in law. The learned Accountant Member, however, held that the assessments had been reopened Under Section 147(a) validly. The relevant facts were briefly as follows.
3. The assessee is a registered firm. It carries on business in cotton cloth (wholesale and retail) and grain mainly. The head office is at Hinganghat. There are branches at Durg, Bikaner, Nagpur, Rajnandgaon and Bhatapara. The accounting year is the Diwali Year. The method of accounting is mercantile.
4. There are two assessments involved (1975-76 and 1977-78). The assessment for 1975-76 was completed on 27-4-1976 on a total income of Rs. 5,43,270. It was reduced in first appeal to Rs. 5,11,625. The balance sheet filed in the original assessment proceeding showed a credit balance of Rs. 90,000 in the account of one M/s. Chaudhary Sukhbir Singh & Sons. A 'confirmatory letter' dated 10-2-1976 from the party was also filed in support of the said credit. It may be noted that the account of the above party in the books of the assessee was recorded as under :
Credit Debit
10-8-1974 Draft No. 9023567 13-11-1974 Balance
Rs. 50,000 Carried
over Rs. 90,000
22-8-1974 Draft No. 198543
Rs. 20,000
22-8-1974 Draft No. A-074088
Rs. 20,000
----------
Rs. 90,000
---------- ----------
Rs. 90,000
----------
Another fact of interest is that the 'confirmation letter' was signed by Chaudhary Sukhbir Singh as proprietor of M/s. Chaudhary Sukhbir Singh & Sons also gave the Permanent Account No. of the party. On the basis of the above material, the Income-tax Officer making the original assessment accepted the credit of Rs. 90,000 as genuine and also allowed interest payment of Rs. 3,200 made to the said party during the year in question. This assessment was completed Under Section 143(3) of the Act on, as already noted, 27-4-1976.
5. On 12-9-1979 the ITO recorded his reasons for issue of a notice Under Section 148 for reopening the assessment for this year in the following terms :
The assessee in his balance sheet has shown credit of Rs. 90,000 in the name of Chaudhary Sukhbir Singh, New Delhi. The credit is not genuine. The amount of Rs. 90,000 therefore, represents assessee's income which has escaped assessment. I have, therefore, reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for assessment year 1975-76 income chargeable to tax amounting to Rs. 90,000 has escaped assessment for the year. Action under Section 147(a) is therefore necessary to reassess the income.
Vardha, S.L. Deshpande, Dt. 12-9-1979. ITO
A notice Under Section. 148 was thereupon issued on 12-9-1979 to the assessee and was served on the assessee on 13-9-1979.
6. The assessee filed a return in pursuance of the said notice of 12-9-1979 disclosing total income of Rs. 5,11,625 as originally assessed. Thereafter the ITO apparently did not proceed with the matter. On 21-9-1983 the ITO took up the proceedings not only for this assessment year but also for the assessment years 1976-77 and 1977-78. These two assessment years had also been reopened by then Under Section 147(a) of the Act. In his letter of 21-9-1983 issued to the assessee the ITO mentioned for the first time a statement said to have been made by Shri Sukhbir Singh before the ITO, New Delhi on 3-2-1978 in which he was said to have denied having advanced any amount to any party. He was also further said to have furnished a list of 102 parties including the name of the assessee also. A copy of this statement of Shri Sukhbir Singh was enclosed with the letter of 21-9-1983 issued by the ITO to the assessee. The assessee was asked to show cause why the sum of Rs. 90,000 should not be added to the total income of the assessee for 1975-76 and why interest of Rs. 3,200 thereon originally allowed should not be disallowed in the reassessment. The assessee replied that a full enquiry had been made on the basis of the material supplied at the time of the original assessment and after such enquiry the ITO was satisfied about the genuineness of the credit of Rs. 90,000 and had then concluded the original assessment accepting the credit as genuine. It was pointed out that the assessee had furnished the Balance Sheet, Interest Account, confirmation letter from Shri Sukhbir Singh, details such as the numbers of the drafts by which moneys were received from Shri Sukhbir Singh, Permanent Account Number of that party and also other necessary information for completing the assessment. The assessee's contention, therefore, was that Section 147 was not applicable.
7. The assessee further submitted that if the reopening was to be looked upon as in consequence of information received from Delhi, subsequent to the completion of the original assessment, then the only provision that could be relevant was Section 147(b). But in that case, assessment had to be completed within one year from the date of such reopening, i.e., within one year from 12-9-1979, but the reassessment not having been completed by 12-9-1980 action Under Section 147(b) was also barred by limitation.
8. Over and above the above submissions, on merits also the assessee pointed out various discrepancies and improbabilities in the statement of Shri Sukhbir Singh and contended that that statement on the face of it was absurd and that no value could be attached to such a statement; that on the basis of the said statement it could not be said that the assessee had not disclosed fully and truly all material facts necessary for the completion of the assessment. No doubt, on the basis of the said statement one could entertain a doubt that some income might have escaped assessment but nevertheless it could not be said that such an escapement was because of non-disclosure of material facts for completing the assessment.
9. The ITO rejected the above submissions and completed the reassessment by his order dt. 22-8-1984. The ITO relied on the decision in H.A. Nanji and Co.'s case (supra). In that decision the Calcutta High Court had distinguished the following decisions :
(i) Calcutta Discount Co. Ltd.'s case (supra)
(ii) Burlop Dealers Ltd.'s case (supra)
(iii) Madnani Engg. Works Ltd.'s case (supra) The ITO also referred in his order to the case of one M/s. Rakoor Industries Pvt. Ltd., Delhi, in whose books there was a credit in the name of Chaudhary Sukhbir Singh. An addition was made on this account in that case and that addition was also confirmed by the Delhi Bench of the Tribunal. Apparently in that case the department examined the books of account of Chaudhary Sukhbir Singh & Sons and it was seen that the total assets as per the balance sheet stood at Rs. 2,24,484. According to the assessee, it was evident from this that the said party was maintaining books of account but in the statement said to have been made by that party before the ITO, Delhi, he had denied having maintained any record and had also stated that he had given the aforesaid list of 102 parties running to 5 pages relying on his memory. The submission for the assessee was that such a statement could never be acted upon. The assessee further pointed out to the ITO in the course of the reopened proceedings that income-tax had been deducted at source on the interest payment due to the said party and had also been deposited in the Treasury by the assessee. The ITO, however, as already noted, rejected all these submissions and closed the reassessment Under Section 147(a) making an addition of Rs. 90,000 and disallowing Rs. 3,200 being interest paid to the above party.
10. The matter went up in appeal before the Commissioner (Appeals). The Commissioner (Appeals), however, following H.A. Nanji & Co.'s case (supra) confirmed the ITO's action. The matter then came up to the Tribunal.
11. The reasons recorded by the learned Judicial Member for his conclusion that Section 147(a) was not attracted in this case, were briefly as under :
(i) Once an assessment is made a finality attaches to the order of assessment. If it is to be reopened, then the relevant statutory provisions authorising such reopening have to be strictly complied with.
(ii) An assessment can be reopened under Section 147(a) where there is non-disclosure of material facts. Once the material facts are disclosed fully and truly, it is for the ITO to draw the appropriate inference and complete the assessment. Thus, if there is no non-disclosure on the part of the assessee, then Section 147(a) will not be applicable. This will be the position even in those cases where the assessee might have disclosed all material facts, but the ITO, in consequence of some information that comes into his possession subsequent to the assessment, has reason to believe that income chargeable to tax escaped assessment. The ITO can invoke only Section 147(6) in such a case. These are well settled principles.
(iii) In the instant case all primary facts necessary for completion of the assessment were disclosed by the assessee in the original assessment. It was not for the assessee thereafter to instruct the ITO what inferences were to be drawn by him from the said facts. See Burlop Dealers Ltd.'s case (supra), specially the observations of the Court at page 612.
(iv) Madnani Engg. Works Ltd.'s case (supra) was also a relevant decision in this regard. In that case at the time of the original assessment the assessee had produced all the hundis on the strength of which it had obtained loans from the creditors as also entries in the books of account showing payment of interest. On the basis of this material the credit entries were accepted and interest payment was also allowed. This was for the assessment year 1959-60. In the course of the assessment proceedings for the year 1963-64 the ITO was of the view that various items shown as loans against the security of the hundis in the assessee's books of account were fictitious. He, therefore, reopened the proceedings Under Section 147(a) for the assessment year 1959-60. The Supreme Court held that the action of the ITO in reopening the assessment was bad in law, because there was no non-disclosure on the part of the assessee. It observed (at p. 5) specifically as under :
The respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the ITO that the hundis and the entries in the books of account produced by it were bogus. We do not see any distinction at all between Burlop Dealers case [1971] 79 ITR 609 (SC) and the present one and the language of Section 147(a) being identical with that of Section 34(1)(a) the ratio of the decision in Burlop Dealers' case (supra) must govern the decision of the present case. We must, therefore, hold that there was no failure on the part of the respondent to disclose fully and truly all material facts necessary for its assessment and the condition for the applicability of Section 147(a) was not satisfied.
Hence, it was clear that in the instant case also as in Madnani Engg. Works Ltd.'s case (supra) there was no non-disclosure on the part of the assessee. It was for the ITO to investigate and determine whether the documents and evidence produced by the assessee were genuine or not. The assessee could not be said to have failed to make a true and full disclosure of material facts by not confessing before the ITO that the entries in the books of account produced by him were bogus. In fact there was no material to conclude that the evidence produced by the assessee was not true.
(v) As noted by the Commissioner (Appeals) himself the loan amounts in question were received through bank. They were repaid through bank and that this position had not been examined by the ITO. On the other hand, in support of the assessee's claim there was the confirmation letter as well as details of the Draft numbers, etc. (under which the loans had been received), were on record. In other words, the ITO had no reason to believe that income had escaped assessment because of any non-disclosure on the part of the assessee. See also in this regard Dinesh Kumar Gordhandas' case (supra).
(vi) H.A. Nanji and Co.'s case (supra) was of no assistance to the revenue. The facts of that case were distinguishable. In that case as per the affidavit filed by the ITO before the Court it was apparent the assessee had not produced the discharged hundis, receipts for payment of alleged interest, bills of brokers for procuring the alleged loans and confirmation letters from the parties with their income-tax file numbers. As made clear in the judgment itself in that case the ITO formed the belief of income escaping assessment on the basis of a new primary fact which came to the knowledge of the ITO subsequently. Secondly, the original assessment was also completed there without enquiry and in the absence of necessary primary facts. It was because of this the Court held there that the assessee had failed to disclose all primary facts in the original assessment. That factual situation did not obtain in the instant case. The instant case was one where all primary facts necessary for the purpose of assessment were disclosed by the assessee at the time of the original proceeding.
(vii) The decision in S.P. Mohan Singh's case (supra) was also distinguishable. The Court held there that where the facts stated or disclosed by the assessee in the original proceedings are either found to toe bogus or non-existent, reassessment cannot be opposed on the plea that the assessee had fully and truly disclosed all material facts. If there was sufficient material to conclude that facts disclosed by the assessee at the time of the original assessment were untrue and bogus or the documents produced were fabricated or misleading and because of such false representation income had escaped assessment then Section 147(a) would apply, i.e., the basic fact to be considered is whether at the time of issue of notice Under Section 148 there is material to conclude that the facts disclosed by the assessee at the time of original assessment were untrue and because of that income chargeable to tax had escaped assessment. On the contrary in the instant case at the time of the issue of notice Under Section 148 there was no material with the ITO for the belief or for the conclusion that the facts disclosed by the assessee at the time of the original assessment were untrue. In fact in the reasons recorded by the ITO on 12-9-1979 he had not referred to any material at all. Even assuming that the ITO had with him at that time a copy of the statement of Sukhbir Singh referred to above, even then on the basis of that statement which had been pointed out to be palpably unreliable and contradictory in many ways it could not be said that the ITO could reasonably come to the conclusion that the disclosure of material facts made by the assessee in the original assessment was untrue.
(viii) Girindranath Paul's case (supra) was relied upon by the Departmental Representative, but that case was distinguishable on facts. In that case subsequent to the assessment the ITO found as a fact that the parties from whom the assessee claimed to have received an advance of Rs. 30,000 never existed and accordingly the ITO reached the definite conclusion that the explanation offered earlier by the assessee was false. It was on this that he assumed jurisdiction Under Section 34(1)(a) of the Act of 1922. Such a situation did not obtain here as already noted. The vague statement of a creditor which on the face of it appeared to be false and unreliable and contradicted his own earlier confirmation of the transaction having been through a bank could not by itself lead to the formation of the belief that the disclosure of primary facts made by the assessee in the original assessment was false. Non-disclosure in the original assessment cannot be asserted against the assessee rightly because it did not confess before the ITO that the loan transaction and the entries in its books of account were bogus. See Madnani Engg. Works' Ltd.'s case (supra). The statement of Sukhbir Singh might give a feeling that some income might have escaped assessment, but that statement by itself could not clothe the ITO with jurisdiction to act Under Section 147(a). No doub, the could have reopened the assessment Under Section 147(6) but that was not the revenue's case. Even assuming Section 147(b) applied here the assessment not having been completed within the limitation period, the reassessment has to be struck down as bad in law on that account.
12. The learned Accountant Member, who disagreed, recorded the following :
(i) In August 1979 the ITO received a copy of a letter issued by the Commissioner (Appeals)-IV, New Delhi. This was to the effect that Sukhbir Singh had admitted before the ITO at Delhi that he was doing hawala business (name-lending) for a number of years and that he had also furnished a list showing the names of the parties with whom he had done this business. The details of such transactions and the list of names included the sum of Rs. 90,000 alleged to have been advanced to the assessee-firm. That was why the ITO took action under Section 147(a).
(ii) The assessment for 1977-78 was reopened with a view to dis-allow interest of Rs. 4,750 allowed as a deduction in the original assessment. In the reassessment under Section 147(a) the ITO disallowed such interest.
(iii) The Commissioner (Appeals) upheld the reopening of the assessment but held on merits that the ITO had merely gone on the basis of the statement recorded by the ITO, Delhi and that the matter had to be looked into again by the ITO for verification of the credit and also to give the assessee an opportunity of cross-examining the Delhi party.
(iv) The facts and circumstances of the case showed that the assessee had failed to disclose fully and truly all material facts necessary for its assessments for the years under consideration. The disclosure must be a full and true disclosure of all material facts. No such disclosure was evident here.
(v) The alleged creditor declared before the income-tax authorities, Delhi, that he was indulging in hawala transactions. He furnished a list of such transactions with the names of the parties who were so accommodated. This list included the assessee's name and mentioned the sum of Rs. 90,000 in question. No doubt, this would not constitute sufficient evidence for the ITO to straight-away assess the sum as the assessee's income from undisclosed sources but that is not the question at the stage of reopening under Section 147(a).
(vi) The question at the stage of reopening under Section 147(a) is whether the above position would constitute a material fact or a primary fact, which the assessee had failed to disclose at the original stage. The answer would have to be 'yes'. The statement was not by a third party. It was by the alleged creditor himself, confessing that he had indulged in hawala transactions and declaring that the credits in his name in the books of the assessee were fictitious. This primary fact the assessee failed to disclose. It must have been fully aware of this fact at the time of the original assessment. Hence, what the assessee disclosed at the original assessment was only a half-hearted and partial disclosure. It did not save it from the reach of Section 147(a).
(vii) Nor was the above circumstances a mere inferential fact. See H.A. Nanji & Co.'s case (supra). As in that case here also the belief for initiation of proceedings under Section 147(a) was not based on the same set of primary facts as at the time of original assessment but on altogether additional material not before the ITO when the original assessment was made, i.e., there was a subsequent occurrence which was quite significant and material. The so-called creditor confessed to dealing in bogus loan transactions with many parties including the assessee. It was on this that the belief of the ITO regarding escapement of income was found. Hence there was no question of the assessee trying to distinguish between a primary fact and an inferential fact for disclosure. The inferential fact theory put forward by the assessee stood ' 'blown sky high".
(viii) A distinction has to be drawn between the falsity of material facts disclosed by the assessee and the erroneous inference which the ITO may draw from such material facts which are otherwise full and true. In the latter case reopening is not possible as it would be only a change of opinion but in the former case action under Section 147(a) would be justified. The instant case falls in this category. The disclosure of facts made by the assessee was rendered false by a subsequent event and Section 147(a) was applicable to such a case. [See S.P. Mohan Singh's case (supra).]
(ix) Subsequent confessions made by alleged hundi creditors to the effect that they had indulged in hawala transactions would constitute material for the formation of the belief of income escaping assessment because of non-disclosure on the part of the assessee. See Kirpa Ram Ramji Dass' case (supra).
(x) Section 147(a) could be applied if the facts disclosed by the assessee at the original assessment stage were found to be untrue on the basis of material discovered later by the ITO. See Ess Ess Kay Engg. Co. Ltd.'s case (supra) as also Sujir Ganesh Nayak and Co.'s case (supra). In other words, if the disclosure of facts made by the assessee subsequently turns out to be false or not full, the ITO can form the belief of escapement of income due to non-dis-closure.
(xi) The affidavit of the broker filed before the ITO was "of no use in this connection". Action under Section 147(a) was fully justified. On merits, the Commissioner (Appeals) was correct to sending the matter back to the ITO because no opportunity was allowed to the assessee to cross-examine the creditor and the affidavit filed by the broker had also not been examined. The assessment was, therefore, rightly set aside by the Commissioner (Appeals) for being redone by the ITO.
13. I have heard Shri D.M. Harish, the learned counsel for the assessee as also Shri T.S. Ramakrishnan, Departmental Representative. Submissions before the authorities below were reiterated and I was taken through the orders on record.
14. In deciding whether the ITO acquired jurisdiction Under Section 147 validly, it is essential to keep in mind the statutory requirement of Section 148(2). That provides that the ITO shall before issuing any notice Under Section 147/148(1) record his reasons for doing so. This is a statutory requirement that has to be strictly complied with for compliance. See paragraph 11(supra). The reasons recorded by the ITO have been reproduced in para 5 (supra). The reason referred to here is the reason for reopening the assessment, i.e., the reason for the ITO's belief that income had escaped assessment. Judged by this test the action taken by the ITO Under Section 147(a) can be struck down straightaway as not valid, not being in conformity with the legal requirement. The ITO does not record why he believes that income had escaped assessment. What he actually records is a firm conclusion to the effect that the credit of Rs. 90,000 was not genuine. There is, however, no material for such a firm conclusion. On 12-9-1979 when the ITO recorded his reasons, what had happened was Chaudhary Sukhbir Singh made a confession of having accommodated various parties by way of fictitious loans including the assessee. In fact, as the learned Accountant Member has observed in para 14 of his order, on merits an addition of Rs. 90,000 could not have been made on the basis of the material collected by the ITO in the course of reassessment and on the basis of which the reassessment itself was made. If this was the position on 28-2-1984, when the reassessment was completed making an addition of Rs. 90,000, it should have been much worse in 1979 when the assessment was reopened. In other words, this is a case where no reasons have been recorded that would fulfil the strict requirements of. Section 148(2). But I find that there are other reasons as well for holding that the action taken Under Section 147(a) was not valid. In Burlop Dealers Ltd.'s case (supra) the assessee-company disclosed a profit of Rs. 1,75,875 from a joint venture in plywood chests. It claimed that half the profit of Rs. 87,937 was paid to one R under an agreement dated 7-10-1948 for financing the transaction of the venture. The ITO brought to tax only Rs. 87,937 as the profit earned from the venture. For the assessment year 1950-51 the assessee had similarly claimed that it had paid half the profit from the joint venture to R but on examination of the transaction the officer held that the agreement of 7-10-1948 was a got-up device to reduce profits and taxed the entire profit from the venture ; and that was ultimately upheld. Meanwhile on 13-5-1955 a notice Under Section 34(1)(a) of the old Act of 1922 [in pan materia with Section 147(a) of the new Act] was issued for reopening the assessment for the year 1949-50. The ITO also brought to tax for that year in the reassessment the sum of Rs. 87,937 allowed as a deduction in the original assessment.
15. The question before the Supreme Court was whether the assessee had been guilty of non-disclosure. The Court held that it was not. It noted that the assessee had disclosed in its books of account and evidence from which material facts could be discovered : it was under no obligation to inform the ITO about the possible inferences which may be raised against it. It was for the ITO to raise such an inference and if he did not do so income which escaped assessment could not be brought to tax Under Section 34(1)(a).
16. The facts of the instant case offer a parallel here. The assessee disclosed all facts relating to the credit. The ITO made no attempt to have the creditor examined at Delhi. On the contrary, be accepted the evidence of the books of account of the assessee and further evidence furnished by the assessee in support of the credit, viz., confirmatory letter dated 10-2-1976 from the creditor giving the permanent A/c. No. of the creditor. The ITO's failure in this regard led to the charge of non-disclosure on the part of the assessee, in the light of the above decision of the Supreme Court.
17. Madnani Engg. Works Ltd.'s case (supra) has already been noticed briefly in paragraph 11(iv) (supra). The facts of that case require detailed notice as the ratio of that case is directly applicable here. In Madnani Engg. Works Ltd.'s case (supra) the original assessment for the assessment year 1959-60 was completed in August 1960. The assessee-company had paid certain interest to its creditors in that year on monies borrowed on hundis. The interest so claimed, was allowed as deductible expenditure. Later, in January 1968, the ITO issued a notice for reopening the assessment on the ground that the loan transactions represented by the hundis were bogus and no interest was paid by the assessee to any of the creditors and interest had been wrongly allowed. The assessee then filed a writ petition in the High Court.
18. In December 1968, the ITO filed a counter-affidavit in the writ proceedings. In this, he declined to disclose the facts that led to the reopening on the ground that if such facts were disclosed it would cause great prejudice to the Revenue and frustrate the very object of the reopening of the assessment. In January 1970, he filed a second affidavit. In this, he stated that in the course of the assessment of the assessee for a subsequent assessment year (1963-64) it was discovered that various items shown as loans against the security of hundis in the assessee's books of account for the assessment year 1959-60 were in fact fictitious and that credits against the names of certain parties, viz., A, C, R, M and D were found not to be genuine and hence there was room to claim that the assessee was guilty of non-disclosure in the original assessment leading to escapement of income chargeable to tax. A Single Judge of the High Court dismissed the writ petition but on appeal a Division Bench allowed the petition and quashed the notice. The matter went up to the Supreme Court.
19. The Supreme Court held, affirming the decision of the Division Bench, that the extent of reason to believe on the part of the ITO was first of all a justiciable issue ; that secondly, it was seen that the assessee had produced in the original assessment all the hundis on the strength of which it had obtained loans from creditors, as also entries in the books of account showing payment of interest ; and it was for the ITO to investigate and determine whether these documents were genuine or not and the respondent could not be said to have failed to make a true and full disclosure of the material facts by not confessing before the ITO that the hundis and the entries in the books of account produced by it were bogus. The Court went on to observe that in the second affidavit the ITO had merely stated his belief but did not set out any material on the basis of which he had arrived at such belief. Hence there was nothing on the basis of which the Court could be satisfied on the affidavit that he has reason to believe that a part of the income of the respondent had escaped assessment by reason of its failure to make a full and true disclosure of the material facts.
20. Madnani Engg. Works Ltd.'s case (supra) offers a very close parallel to the assessee's case here. Firstly, from the reasons recorded by the ITO Under Section 148(2) it could be seen that only a bald conclusion was stated for reopening the assessment and no material was indicated which would have led to a reasonable belief of income escaping assessment due to the non-disclosure of the assessee. See para 14 (supra). The second point of similarity with Madnani Engg. Works Ltd.'s case (supra) is that here also the assessee had produced in the original assessment confirmatory letter from the creditor, the entries in its books of account showing payment of interest and also the information as to where the creditor was assessed. It was then for the ITO to investigate and determine whether the above material was genuine or not. The ITO did not proceed upon such an enquiry. In such circumstances, the assessee could not be said to have failed to make a true and full disclosure of material fact by not confessing before the ITO that the confirmatory letter and the entries in the books of account produced by it were bogus.
21. There was some argument on whether page 13 of the paper book filed by the assessee before the Tribunal was before the authorities below. This is the "confirmatory letter" given by the creditor. It is actually in the form of a letter from the assessee to the creditor. It is dated 10-2-1976. The letter states that a copy of the account of the creditor at Ledger Folio No. 24 fox the Samvat Year 2030-31 (assessment year 1975-76) was enclosed with that letter and that the creditor should check up and confirm, mentioning his Income-tax File No. and P.A. No., of the above statement of account. The letter then proceeds to give the actual account of the creditor as it stood in the books of the assessee for that year. (A copy of the said account already stands recorded in paragraph 4 (supra). On this letter itself Chaudhary Sukhbir Singh stated that he had checked the above statement of account and confirmed that the same was correct. He also gave his Permanent A/c. No. and then signed the above declaration. According to the Departmental Representative, this was not before the Income-tax Officer at the original assessment. But my attention was invited to page 53 of the paper book by the learned counsel for the assessee. At page 53 is a copy of the reassessment order dated 28-2-1984. That clearly mentions that in the original assessment proceedings the assessee filed the confirmatory letter signed by somebody as authorised agent. The Departmental Representative then contended that interest payment of Rs. 3,200 was not disclosed in the original assessment and hence there was failure to disclose fully and truly all material facts. According to the Departmental Representative, the confirmatory letter also not having mentioned anything relating to interest, action under Section 147(a) was justified on account of non-disclosure. However, it was not in dispute before me that interest payments shown as made to the creditor were recorded in the books of account. The books of account were also produced before the ITO. Coupled with the specific confirmation received from the creditor regarding the loan transaction it cannot be argued that the assessee failed to disclose fully material facts. In this regard it was stated by the learned counsel for the assessee that in fact details of individual interest payments exceeding Its. 400 were filed but that the individual payments to the creditor having been less than E.s. 400 each time such details were not separately given. This is also a point of importance and strengthens the conclusion that there has been no failure to disclose fully and truly all primary facts.
22. The Departmental Representative strongly relied upon the decision in Ess Ess Kay Engg. Co. (P.) Ltd.'s case (supra). According to the Departmental Representative, the ratio of this case applied squarely here and against the assessee. I have seen this decision. In this case the assessee claimed deduction of commission paid to its sole selling agent (by name M/s. Kay Engineering Sales Corporation) in its original assessment for the assessment year 1966-67. The assessee furnished details regarding the payment and the commission was allowed as a deduction. Subsequently on the basis of fresh material the ITO found that the assessee had not truly disclosed all the material particulars with regard to the services rendered by the sole selling agent and that the sole selling agent was nothing but a legal device to evade tax. The ITO reopened the assessment Under Section 147(a). The Court upheld his action. In doing so it noted that the ITO had occasion to examine the assessee's accounts for the next assessment following the assessment which was reopened Under Section 147(a). In that next assessment year (1967-68) the ITO on the basis of the following material came to hold that the sole selling agency firm had not rendered any services :
(a) T.A. Bills of Shri K.S. Khosla, managing partner of M/s. Kay Engineering Sales Corporation which were impounded under Section 131 were false to the extent that he was shown on tour on certain dates on which he was actually present in Kapurthala and attended the directors' and shareholders' meetings of the company.
(b) The receipt and despatch books of the company which were inspected during the course of proceedings for 1967-68 showed that no correspondence was exchanged between the so-called sole selling agents and the company.
(c) It was found that the existence of Shri S.K. Puri and Yodha Earn, who are said to be the two travelling agents employed by the firm and submitted daily progress reports, was doubtful as the assessee had failed to furnish even the basic information about them.
(d) The assessee's claim that M/s. Kay Engineering Sales Corporation had issued circulars, letters, etc., to its distributors was doubtful and was not supported by any evidence.
(e) Shri K.S. Khosla, who was working as director-in-charge (sales) in the account year relevant to the assessment year 1965-66, continued to work in this year as well and drew his salary and T.A. Bills. This was in addition to the payment made by the assessee to M/s. Kay Engineering Sales Corporation on account of overriding commission.
Acting on the above material (the Court noted) the ITO had rightly reopened the assessment for the assessmeut year 1966-67. In this regard it observed that the assessee had not disclosed fully and truly all the material particulars as regards the commission paid by it to the sole selling agent ; that even if the assessee had made a full disclosure of material facts, the same having been found to be untrue later on the basis of the discovery of new facts, it cannot be said that the assessee fully and truly disclosed all the material facts and hence reopening the assessment was the result of a mere change of opinion (at p. 453). The Court repeated this at p. 456 also when it observed as under :
As observed above, in the present case, the assessing authority had, from the facts discovered later on, formed an opinion that the primary facts disclosed were untrue.
23. It appears to me that the ratio of the above decision turned on the finding of fact available from the record to the effect that the facts discovered later showed that the disclosure made by the assessee in the original assessment was not true and full. That is not the situation here. In this case all that happened at the time of reopening of the assessment in 1979 was that the creditor confessed to having accommodated various parties including the assessee by way of fictitious loans. The assessee had not had a chance to controvert the statement. Even by the time of the completion of the reassessment the material gathered by the ITO was such that the addition could not be confirmed and the matter had to be sent back, according to the learned Accountant Member, t for an enquiry again. In other words, there were no firm facts available to the ITO in 1979 on the basis of which he could have affirmed a reasonable belief that income had escaped assessment due to the non-disclosure of the assessee. As already noted, the reasons recorded by him for reopening proceed upon a bald conclusion stated by him to the effect that the loan in question was not genuine, and nothing more. The decision in Ess Ess Kay Engg. Co. (P.) Ltd.'s case (supra) does not help the Bevenue here.
24. Another decision relied upon strongly for the Revenue was in ITO v. Mahadeo Lal Tulsian [1977] 110 ITR 786 (Cal.). In that case for the assessment year 1961-62 the assessee-firm had included a number of hundi loans and it claimed credit for interest alleged to have been paid on such loans. The ITO accepted the loans as genuine and allowed deduction for the interest claimed to have been paid. Subsequently a notice Under Section 148 was issued for reopening the assessment by the successor-ITO. One of the partners of the assessee-firm filed a writ petition challenging the notice claiming that there had been full and fair disclosure of all basic facts. A Single Judge accepted the case of the assessee. The matter then came up before a Division Bench.
25. The Division Bench held that though the assessee did disclose the hundi loans in the assessment proceedings that by itself did not lead to the conclusion that escapement of assessment, if any, was merely the result of a different view taken by the successor-ITO. The successor-ITO arrived at the conclusion that the assessee concealed a part of its income by falsely representing the same as loans in the original assessment. That could not be said to be a mere change of opinion or view. On the other hand, the successor-ITO was proceeding on the actual facts as subsequently found out leading to the conclusion of escapement of income due to non-disclosure. The Court noted in this regard that from the reason assigned by the ITO in his report to the Commissioner and in his affidavit before the Court that certain transactions which were represented as loans at the time of the original assessment were believed to be not genuine when similar transactions with the same person in the succeeding two years were found to be not genuine. This led to the further belief that due to such misrepresentation, a part of the income had escaped assessment.
26. In fact in the affidavit of the ITO before the Court it was specifically stated as under :
At the time of the original assessment the assessee-firm filed some copies of accounts including profit and loss account, balance-sheet and loan account but the said loan account did not include the list of hundi loans. Subsequently, during the course of assessment for the year 1964-65 completed on 28th August, 1968, and also for the assessment year 1965-66 it was found by the Income-tax Officer that the assessee introduced cash credits in the form of hundi loans which were not genuine as there was no confirmation either of the parties advancing the loans nor any other evidence about the loan transaction was furnished and produced before the assessing Income-tax Officer. Therefore, I deny that the facts relevant to the said assessment year were fully and truly disclosed and brought to the knowledge of the Income-tax Officer making the assessment as alleged in 1961-62 and it came to light in the course of assessment for the years 1964-65 and 1965-66 that the hundi loans were not genuine.
27. The above extract shows that there is a factual difference between the instant case and the case before the Calcutta High Court. Unlike in the Calcutta case in the case before me there is no material or finding except the bare confession of the creditor, which, however, had remained to be tested by way of cross-examination by the assessee. Hence there were no firm facts found or material gathered on the basis of which a reasonable belief could have been formed of income escaping assessment due to non-disclosure. This decision, therefore, does not help the Revenue.
28. I would refer to two decisions, before concluding this matter. The first is Sujir Ganesh Nayak and Co. v. ITO [1976] 104 ITR 524 (Ker.) and the second is Panchanan Hati v. CIT [1978] 115 ITR 336 (Cal.). In the Kerala decision the ITO had sought to reopen the assessments for the years 1961-62, 1962-63 and 1963-64 Under Section 147 on the ground that subsequent information received by the ITO showed that certain loans disclosed by the assessee in the original assessment proceedings were bogus. A Single Judge dismissed the writ petitions filed by the assessee challenging the notices. The learned Accountant Member in fact has relied on this decision of the Single Judge in Sujir Ganesh Nayak and Co.'s case (supra). [Presumably the later decision of the Division Bench overruling the Single Judge's decision in Sujir Ganesh Nayak & Co.'s case (supra) was not brought to his notice]. The Division Bench noted that if it is a case of loans, after disclosing their details to the assessing authority the assessee was not expected to inform the ITO further that they are bogus loans. The character of the transaction whether it was in the nature of trade or in the nature of loans or cash credits was a matter for inference and inference could be legal inference or inference of fact. Hence, the ITO before proceeding Under Section 147(a) must at least take up a definite stand whether the matter he relies upon as not having been disclosed by the assessee is real or not and whether it is a primary fact or not and if it is a fact whether it is a primary fact or an inferential fact. The Court went on to note that in the case before it the controversy was about the truth or falsity of certain loans. They were either facts or not facts. If the loans were real transactions and so, are facts, then there is no non-disclosure, whether they be primary facts or inferential facts. On the other hand, if they are bogus and consequentially, not facts, then also Section 147(a) has no application, because mention of them in the return is only a positive or affirmative statement of false transactions which are not in the origin of facts and by no stretch of imagination can it said to be a negative act of non-disclosure of facts. In either case Section 147(a) has no application. The ratio of this decision applies equally strongly here.
29. The last decision I would notice in this regard is in Panchanan Hati (supra). In that case, subsequent to the original assessment a piece of information came to the knowledge of the ITO to the effect that persons shown in the assessee's books of account as creditors had confessed subsequently before the ITO that they had acted as name-lenders for third parties. The ITO proceeded on the basis that this fact was kept concealed by the assessee at the original assessment. He, therefore, reopened the assessment Under Section 147(a). The Court held that it was impossible for the assessee to have disclosed to the ITO in the original assessment the confession made by the creditors which was made subsequently to the authorities and not to the assessee and was not in existence during the original assessment. The ITO could not have had any reasonable ground to believe that there was non-disclosure on the part of the assessee in such a case and the assessee had disclosed all primary facts within his knowledge at the time of the original assessment and which facts were duly considered by the ITO. The Calcutta High Court, following the decision of the Supreme Court in Lakhmani Mewal Das' case (supra) held that the reopening Under Section 147(a) was not valid in law. The facts of this case are very close to the facts of the instant case and hence the ratio of this decision also is applicable here in favour of the assessee.
30. In the result, I would agree with the learned Judicial Member and hold that the reopening of the assessment Under Section 147(a) for the assessment year 1975-76 was not proper and valid in law.
31. So far as the assessment year 1977-78 is concerned, as noted by the learned Accountant Member, that assessment was reopened with a view to disallowing Es. 4,750 which was allowed as a deduction in the original assessment, i.e., it was consequential to the reopening of the assessment year 1975-76. In view of my above conclusion regarding 1975-76 I hold that the reopening of the assessment for the assessment year 1977-78 Under Section 147(a) also was not proper and valid in law.
32. The matter will now go back to the Bench which originally heard the appeals for disposal in accordance with law.
N.D. Raghavan, Judicial Member
1. The assessee came on second appeal before this Bench of the Tribunal in respect of assessment years 1975-76 and 1977-78, having been aggrieved by the order dated July 31, 1984 of the CIT (Appeals) on the common ground that "on the facts and in the circumstances of the case the CIT (Appeals) erred in holding that the proceedings were rightly initiated by the I.TO Under Section 147(a) of the IT Act, 1961".
2. In support of the respective contentions of both the learned representatives for the assessee and revenue many authorities were cited by them which were considered by the Tribunal. While arriving at the decision after careful analysis of the respective submissions on both sides, this Bench of the Tribunal consisting of Shri P.I. Mohan Singh, Judicial Member and Shri G.R. Raghavan, Accountant Member, differed from each other in their conclusions.
3. In his detailed order dated May 29, 1985, the learned Judicial Member for the various reasons discussed therein ultimately held that the reopening of the assessment by the ITO Under Section 147(a) of the Act was bad in law and thus allowed the appeals of the assessee.
4. On the other hand, in his detailed order dated June 27, 1985 the learned Accountant Member for the different reasons discussed therein could not agree with the conclusions as aforesaid of the Judicial Member but held that the assessment should be set aside and restored the case to the ITO for making a fresh assessment after examining all the aspects referred to by the CIT (Appeals) in his order and thus dismissed the appeals of the assessee.
5. In view of the difference of opinion between the two learned Members as aforesaid, the following question was referred by them in their order dated July 2, 1985 to the Hon'ble President of the Tribunal for assigning to a Third Member, i.e., Whether, on the facts and in the circumstances of the case, the reopening of the assessment by the ITO Under Section 147(a) is proper and valid in law ?
6. Thereafter in accordance with the directions of the President, this matter was assigned to a Third Member. The Bombay Bench consisting of the Vice President (WZ) Dr. S. Narayanan (Accountant Member) heard the case and for the various reasons recorded by him in his order dated July 22, 1987 after carefull analysis of all the points in issue ultimately agreed with the order of the learned Judicial Member and thus held that the reopening of the assessment Under Section 147(a) for both the assessment years was not proper and valid in law. Therefore, he has sent the matter back to this Bench where the appeals were originally heard for disposal in accordance with law.
7. After hearing the learned representatives on both sides and carefully going through the order of the learned Third Member, we pass this order in confirmity with the majority decision holding that the reopening of assessment Under Section 147(a) for both the assessment years was not proper and valid in law for the reasons as detailed in the majority decision.
8. In the result, we allow the appeals of the assessee accordingly.