Income Tax Appellate Tribunal - Cochin
Accountant Member Zainalabdeen ... vs Income-Tax Officer on 29 November, 1985
Equivalent citations: [1986]16ITD1A(COCH)
ORDER
T. V. Rajagopala Rao, Judicial Member
1. These two appeals, first by the assessee and the second by the department, arise out of the order of the Commissioner (Appeals), Trivandrum dated 10-12-1984 and they relate to the assessment year 1978-79. As common questions are involved in these appeals they can be disposed of conveniently by a common order.
2. The first contention in the assessee's appeal is that the assessment order passed on 20-1-1984 is illegal inasmuch as when the matter was restored to the ITO to comply with the procedure under Section 144B of the Income-tax Act, 1961 ('the Act'), the ITO should have assumed jurisdiction and forwarded a draft assessment order to the IAC, instead of the IAC assuming jurisdiction presuming that the old draft assessment order sent by the ITO is still alive. The facts leading to this contention are as follows. The assessee is an individual. The assessment year involved is 1978-79 for which the previous year ended on 31-3-1978. The assessee filed his income-tax return for this assessment year on 17-1-1979 disclosing an income of Rs. 1,02,790 and an agricultural income of Rs. 1,000. The ITO proposed to tax the assessee on an income of Rs. 11,63,660. As the variance between the returned income and the income on which the assessee is proposed to be assessed is more than Rs. 1 lakh, the ITO forwarded the draft order dated 13-3-1981. It was issued to the assessee on 17-3-1981. The objections to the draft order were filed on 31-3-1981. Both the draft order and the objections were sent to the IAC. After receiving the draft as well as the objections the IAC posted the proceedings for enquiry on 19-9-1981. The notice of that enquiry reached the assessee on 23-9-1981. Directions under Section 144B were issued on 25-9-1981, without hearing the assessee, approving various additions and disallowances proposed by the ITO. The IAC directed the ITO to complete the assessment accordingly. In pursuance of those directions of the IAC, the ITO completed his assessment order dated 26-9-1981.
3. Aggrieved against the assessment order dated 26-9-1981, the assessee preferred an appeal to the Commissioner (Appeals), Ernakulam. It was urged before the Commissioner (Appeals):(i) that the assessment was barred by limitation, (ii) no opportunity was granted before the directions were given by the IAC under Section 144B, and (iii) the assessment, therefore, should not merely be set aside but it should be annulled. The argument that it was barred by time was dismissed as untenable by the Commissioner (Appeals). The second argument regarding opportunity was found to be without force. However, the learned Commissioner (Appeals) found his inability to agree with the assessee to order annulment of the assessment. He held that so long as there is no inherent lack of jurisdiction for the ITO to take up the assessment, the assessment can only be set aside but cannot be annulled. The learned Commissioner (Appeals) relied upon the decision of the Hon'ble Supreme Court in Guduthur Bros. v. ITO [1960] 40 ITR 298 and the decision of the Allahabad High Court in Sant Baba Mohan Singh v. CIT [1973] 90 ITR 197 for coming to the conclusion recorded in his order dated 23-2-1982. He had distinguished the decisions in P.V. Doshi v. CIT [1978] 113 ITR 22 (Guj.), Addl. ITO v. Ponkunnam Traders [1976] 102 ITR 366 (Ker.) and Ponkunnam Traders v. Addl. ITO [1972] 83 ITR 508 (Ker.) cited on behalf of the assessee. Ultimately he had set aside the assessment order and directed the ITO to pass fresh order in accordance with law. The last sentence containing the crucial decision of the learned Commissioner (Appeals) is as follows:
As pointed out earlier, the assessment has been validly initiated and the proceedings cannot be held to be null and void. Moreover, proceedings under Section 144B are part of the procedure for assessment and since the irregularity committed by the learned Inspecting Assistant Commissioner is a procedural irregularity the assessment order is set aside and the Income-tax Officer is directed to pass fresh orders in accordance with law.
4. As against the said orders of the Commissioner (Appeals) dated 23-2-1982, the assessee carried the matter in further appeal to this Tribunal, which was subsequently numbered and disposed of as IT Appeal No. 199 (Coch.) of 1982 by its order dated 17-11-1983. It was reiterated before this Tribunal that in view of the decisions of the Kerala High Court in Ponkunnam Traders v. Addl. ITO [1972] 83 ITR 508 and Addl. ITO v. Ponkunnam Traders [1976] 102 ITR 366 the assessment should have been annulled. The Tribunal dismissed this plea of the assessee as untenable in view of the following decisions :
Banarsidas Bhanot & Sons v. CIT [1981] 129 ITR 488 (MP), H.H. Maharaja Raja Power Dewas v. CIT [1982] 138 ITR 518(MP) and Third ITO v. Shivaji Park Gymkhana [1983] 4 ITD 462 (Bom.).(SB) and confirmed the order of the Commissioner (Appeals) dated 23-2-1982. After holding that the ratio of the Special Bench decision of the Tribunal in Shivaji Park Gymkhana's case (supra) fully applies to the facts of the present case, the Tribunal held as follows at the close of para 6 of its order :
... respectfully following the same we hold that the assessment order in the present case is not a nullity, that the failure of the Inspecting Assistant Commissioner to give a proper opportunity to the assessee of being heard is only a procedural irregularity and that the matter has to be restored to the Income-tax Officer for complying with the procedure under Section 144B. The order of the Commissioner (Appeals) has only to be confirmed.
Thus, by its order dated 17-11-1983, the Tribunal dismissed the appeal tiled by the assessee. After the disposal of the appeal by the Tribunal, again the IAC took up the matter for hearing, heard the assessee's chartered accountant and issued directions dated 11-1-1984 to the ITO. In pursuance of those directions the ITO passed assessment order under Section 143(3) of the Act, read with Section 144B dated 20-1-1984. Before passing the said assessment, the ITO gave a fresh opportunity to the assessee as there was change of incumbent in the office. Now this assessment dated 20-1-1984 formed the basis of the present appeals before this Tribunal.
5. Even at the outset it should be stated that this present ground, viz., the directions of the Tribunal dated 17-11-1983 were not correctly implemented was not urged before the ITO. However, the ground that when the original assessment was set aside by the Commissioner (Appeals), the ITO ought to have sent a fresh draft order and only then the IAC should assume jurisdiction under Section 144B was taken for the first time in the appeal before the Commissioner (Appeals). It is contended that since the said procedure had not been followed the fresh assessment made by the ITO on the directions issued by the IAC were both illegal, within jurisdiction and should be struck down as ab initio void. The learned Commissioner (Appeals) in his impugned orders dated 10-12-1984 held that neither the 1AC nor the ITO committed any irregularity either in giving directions or in passing fresh assessment order. He held that the learned Commissioner (Appeals) while setting aside the assessment did not cancel the earlier draft order sent by the ITO. He held that after all the grievance of the assessee before the Commissioner (Appeals) was that he had not been given an opportunity of being heard by the IAC before he gave directions. Once that grievance is satisfied or remedied by the IAC, the assessee cannot keep on challenging the procedure on imaginary grievances.
6. In this appeal, the preliminary objection is that assumption of jurisdiction of the IAC on the ground or premise that the old draft order sent by the ITO is still alive, is illegal as well as incorrect. When the assessment is set aside, according to the learned counsel for the assessee, Shri C.K. Nair, the whole proceedings are open. In the set of facts before the Tribunal the draft order is washed off and it is no longer in existence as soon as the assessment order is set aside. It, is also the case of the assessee that the proceedings should freshly start with passing of a fresh draft order. Further, according to the assessee's counsel, when the proceedings came back for fresh start there was change of incumbent in the office of the ITO. So the successor ITO may choose to send the same draft of a different draft. According to the learned advocate, the old draft is dead and gone. He vehemently argued that Explanation 1(iv) to Section 153 of the Act states that in a case where objections were filed over the draft assessment order the directions of the IAC under clause (iv) of Explanation 1 to Section 153 should be received within 180 days from the date of forwarding the draft order, or in a case where no objections were filed for the draft, the assessment should be completed within 30 days of such forwarding. So, the argument of the learned counsel continued that the date of forwarding of the draft is a crucial date to determine the period of limitation. Applying the law to the facts of the case, the learned counsel argued that the draft order was passed under Section 144B(1) and was issued to the assessee on 17-3-1981. Objections to the draft were filed on 31-3-1981. In the submission of the learned counsel, to comply with the limitation prescribed under Explanation 1(iv) to Section 153 valid directions could be given only within 180 days after 17-3-1981 and not beyond that. In this case he pointed out that the directions were given by the IAC on 11-1-1984 which date falls much beyond 180 days after 17-3-1981. The learned counsel argued that the directions issued beyond the period of limitation prescribed under Explanation 1(iv) to Section 153 are not valid and assessment order passed on those directions is equally vitiated and, consequently, the whole proceedings are vitiated with illegality.
7. Another argument advanced on behalf of the assessee was that the ITO who framed the draft order dated 13-3-1981 was different from the ITO who ultimately passed the assessment order dated 20-1-1984. Though the later order dated 20-1-1984 was passed by the ITO who was wielding jurisdiction at the appropriate time yet he did not actually apply his mind even to one addition proposed in the draft order dated 13-3-1981 though the assessment order dated 20-1-1984 was authenticated by the ITO yet virtually it was an assessment order passed by the IAC. It is argued that the mind of the ITO did not follow the hand (sic) with regard to passing of assessment order dated 20-1-1984. The learned counsel for the assessee argued that it is a mechanical order passed by the ITO and so it was invalid. He further argued that the IAC would not get jurisdiction by picking up old draft assessment order dated 13-3-1981. That order, in his submission, is dead and gone since the assessment order is set aside.
8. The learned departmental representative countered the arguments of the assessee's counsel as follows : He invited our attention to the last sentence in the order of the Commissioner (Appeals) dated 23-2-1982 which was extracted above. He argued that the whole grievance highlighted in the appeal before the Commissioner (Appeals) was that the IAC fixed proceedings under Section 144B for hearing on 19-9-1981. The notice issued to the assessee for that hearing was received by him on 23-9-1981, whereas the directions were passed on 25-9-1981. The assessee contended that before giving the directions under Section 144B, the IAC did not hear the assessee nor set right that irregularity and so the assessment was to be set aside. He vehemently contended that the draft assessment order dated 13-3-1981 was not set aside. It is only the assessment order dated 26-9-1981 which was set aside, in order to facilitate correcting the irregularity which occurred in following the procedure under Section 144B. In the submission of the learned departmental representative, Sub Sections (1) to (4) of Section 144B denote the stages of procedure to be followed one after the other. The assessment which would be completed on receipt of directions from the IAC under Section 144B(4) is quite different and distinct from the draft order which would be passed by the ITO under Section 144B(4). The ultimate assessment order which would be passed by the ITO under Section 144B(4) may not conform to the draft order with regard to all, some or any addition proposed in the draft order because while giving directions the IAC may favourably consider the objections raised by the assessee to the draft. The irregularity has crept in while following the procedure under Section 144B(4) inasmuch as opportunity to the assessee was not granted about his objections. In order to correct that irregularity, the assessment was set aside with a direction to the ITO to frame fresh assessment according to law. This order of the Commissioner (Appeals) confirmed by the Tribunal cannot be read as setting aside the draft assessment order. If draft assessment order itself is set aside, as is sought to be argued on the other side, the assessment would have been cancelled rather than set aside. But both the Commissioner (Appeals) as well as the Tribunal did not agree with the assessee's contention to set aside the assessment. So the argument that the draft order was dead and gone once the assessment was set aside is fallacious. So also, the argument that clause (iv) of Explanation 1 to Section 153 prescribed the period of limitation for giving directions by the IAC after the receipt of the draft orders as well as the objections from the ITO and such limitation prescribed applies even to the fresh assessment contemplated under Sub-sections (2A) and (3) of Section 153 is also fallacious. The third argument of the learned counsel for the assessee that the subsequent ITO who passed the assessment order dated 20-1-1984 did not apply his mind even with regard to one addition but mechanically passed the assessment order and so it is illegal and is not sound in view of the categorical provisions of Section 129 of the Act.
3. In support of the contention of the learned counsel of the assessee that since the assessment was set aside with a direction to redo the same, the powers of the ITO are not restricted to the directions given by the appellate authority but he can exercise all the powers which are available to him under Section 143, he relied upon the following decision : C1Tv. Seth ManicklalFomra [l975] 99 ITR 470 (Mad.) at p. 474, the Hon'ble Madras High Court held that once the order of assessment is set aside and the matter comes up for fresh assessment before the ITO, we are of the opinion that the powers will have to be decided with reference to any observations made by the AAC in his order or with reference to scope of appeal before the AAC. The Madras High Court followed the decision of the Allahabad High Court in J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. CIT [1963] 47 ITR 906 which according to the Madras High Court held the following ratio as noted :
... It was held that though the Income-tax Officer, while making a fresh assessment in compliance with the Appellate Assistant Commissioner's directions was bound by the directions given subject to carrying out those directions, he has the same powers as he had originally when making the assessment order under Section 23 ....
10. The view of the Andhra Pradesh High Court in Pulipati Subbarao & Co. v AAC [1959] 35 ITR 673 where it was held that the ITO's jurisdiction is restricted by the order of the AAC remanding the matter for fresh disposal was expressly dissented from by the Madras High Court.
11. The learned counsel for the assessee also relied upon the decision of the Madhya Pradesh High Court in Kundanlal Maru v. CIT[I982] 135 ITR 84 as well as the decision of the Kerala High Court in K.P. Moideenkutty v. CIT [1981] 131 ITR 356. So also he placed reliance upon the Gujarat High Court decision in Mrs. Meeraben P. Desai v. Union of India [1981] 130 ITR 922.
12. In reply the learned departmental representative submitted that the ratio of the above decisions do not apply to the facts of this case and they are quite distinguishable.
13. The learned counsel for the assessee also relied upon the following authorities to substantiate his plea that a mechanical order passed by the ITO and following the instructions of the superior officers is violative of the principles of natural justice and so such orders should be struck down- Dinshaw Darabshaw Shroff v. CIT [1943] II ITR 172 (Bom.). Excerpts from pp. 792, 793, 846 and 847 under the head 'Quasi-Judicial Enquiry' of Kanga & Palkhivala's Law & Practice of Income-tax, Vol. 1, Seventh edn.
Then he also relied upon Chaturvedi and Pithisaria's Income-tax Law, Third edn., and took us through pp. 2567, 2678 and 2803. The learned counsel also relied upon the law laid down at page 319 of Wade's Administrative Law, Fifth edn. He further relied upon the commentary at page 3365 in Seventh edn. of Sampath lyengar on Income Tax. He further relied upon the principles of natural justice adumbrated in Basu's. Constitution, Eighth edn. at pp. 520-521 besides relying upon the following decisions-Ponkun-nam Traders v. Addl. ITO [1972] 83 ITR 508 (Ker.), Addl. ITO v. Ponkunnam Traders [1976] 102 ITR 366 (Ker.), Jai Prakash Singh v. CIT [1978] 111 ITR 507 (Gauhati), C1T v. Sham Lal [1981] 127 ITR 816 (Punj. & Har.) and S. Mubarik Shah Naqshbandi v. CIT [1977] 110 ITR 217 (J and K).
14. Having, thus, evaluated the respective arguments on either side we do not find any substance in the arguments advanced by the learned counsel appearing for the assessee. Firstly, the argument that when the assessment is set aside with a direction to redo the assessment, in our considered opinion, the powers of the ITO while completing the fresh assessment are restricted to the directions issued and the submission that he can exercise all the powers which are available under Section 143, that the appellate authorities are not empowered to fetter the powers of the ITO after setting aside the assessment order, is not correct exposition of law. It is no doubt true that some of the expositions made by the Madras High Court in Seth Manicklal Fomra's case (supra) appeared to be supporting the argument advanced on behalf of the assessee. In that case the AAC passed orders setting aside the assessment and directed the ITO to redo the assessment in the light of the observations contained in the order. While making the fresh assessment the ITO included a sum of Rs. 87,595 as income from other sources. In the original assessment the assessee was assessed only for business income. Under the fresh assessment a fresh source of income is added to it. The question is whether the ITO is empowered to add a new source of income in the fresh assessment. It is argued that the AAC's order remanding the case shall not be treated as one setting aside the entire order and remanding the entire proceedings for reconsideration by the ITO. Their Lordships did not accept this plea and they held :
... We are unable to read the order of the Appellate Assistant Commissioner as in any way limiting the scope of the ITO when he makes the fresh assessment order. Once the order of assessment is set aside it is open to the Income-tax Officer to consider the entire matter afresh and neither the order of the Appellate Assistant Commissioner in terms restricts the Income-tax Officer to consider the issue relating to the estimation of the income alone nor there is any warrant for reading such a restriction of the power either under Section 251(1)(a) or under Section 143(3) under which the Income-tax Officer makes a fresh assessment.... (p. 473) Lower down, no doubt there was an observation of the Madras High Court as follows :
... But if the order of assessment is set aside and the Income-tax Officer is directed to make a fresh assessment, we do not find anything in the provision of the Act which would restrict the powers of the Income-tax Officer in passing an order under Section 143(3). Once the order of assessment is set aside and the matter comes up for fresh assessment before the Income-tax Officer we arc of opinion that the powers will have to be decided with reference to the provisions under Section 143(3) and not with reference to any observations made by the Appellate Assistant Commissioner in his order or with reference to the scope of the appeal before the Appellate Assistant Commissioner.... (p. 474) The Madras High Court purported to follow the Allahabad High Court decision in J,K. Cotton Spg. And Wvg. Mills Co. Ltd.'s case (supra) and a later decision of the same High Court in Abhai Ram Gopi Nath v. CIT [1971] 79 ITR 339. The ratio laid down by both these decisions even in the words of the Madras High Court is stated to be as follows :
... It was held that though the Income-tax Officer, while making the fresh assessment in compliance with the directions, was bound by the directions given, subject to carrying out those directions, he has the same powers as he had originally when making the assessment order under Section 23.... (p. 475) Therefore, the decisions which the Madras High Court followed are authorities for the proposition that the ITO while passing fresh assessment orders is bound to follow the appellate authorities' directions. What are his powers as to matters not covered strictly by the directions of the appellate authorities are quite different and we are not now concerned with such sort of powers in this case. We are not considering the powers of the ITO. Neither in the Madras High Court decision nor in the Allahabad High Court decision it was held that when assessment was set aside and the matter was remanded, the ITO is bound to pass a fresh assessment order with regard to every addition and disallowance and he cannot endorse the assessment already passed by his predecessor. The Madhya Pradesh High Court in Kundanlal Maru's case (supra) while admitting that the abovesaid Madras decision in Seth Manicklal Fomra's case (supra) decided two points-the first being that when an assessment order is set aside without restricting the powers of the ITO while making fresh assessment order the whole matter was at large and secondly, once the assessment orders were set aside no fetters on the powers of the ITO can be put. The said High Court preferred to have its own reservations about the second point decided by the Madras High Court when it observed 'in the instant case, it is not necessary for us to go into the later question to answer the question at hand'. In fact, in that case the scope of the powers of the ITO while passing fresh assessment orders was determined with reference to the scope of the remand order and the Madhya Pradesh High Court very much relied upon the Andhra Pradesh High Court decision in Pulipati Subbarao & Co.'s case (supra) which the Madras High Court dissented from. Therefore, the Madhya Pradesh High Court was not an authority for the proposition that once the assessment order is set aside no betters on the powers of the ITO can be put. In the facts of the case before the Madhya Pradesh High Court, when the assessment order was set aside no restriction over the powers of the ITO were imposed while making the fresh assessment order, whereas in the case before us the remand was specifically made only to set right the irregularity committed while following the procedure under Section 144B and this was made very clear in the Tribunal's decision dated 17-11-1983, the operative paragraph of which is already extracted in this order above. If we read the operative paragraph it is very clear that the remand was made only to set right the procedural irregularity and comply with the procedure under Section 144B. Thus, the facts of the Madhya Pradesh High Court decision are quite different from the facts before us and, therefore, the ratio of the said decision does not help deciding the issue before us.
15. The decision of the Kerala High Court in K.P. Moideenkutty's case (supra) which is binding on us specifically is as follows :
The scope of the proceedings after remand will necessarily have to be determined with reference to the terms of the order whereby the AAC had remitted the case to the ITO.... (p. 360) In fact, by laying down the abovesaid proposition the Kerala High Court followed the decision of the Andhra Pradesh High Court in Pulipati Subbarao & Co.'s case (supra) which was dissented from by the Madras High Court in Seth Manicklal Fomra's case (supra). Thus, it can be seen that the ratio laid down by the Kerala High Court itself comes into conflict with the second proposition laid down by the Madras High Court in Seth Manicklal Fomra's case (supra).
16. Another decision cited by the learned counsel of the assessee was in Mrs. Meeraben P. Desai's case (supra). In that case what happened was that the draft order which was forwarded along with covering letter was neither dated nor signed even though the forwarding letter was dated and duly signed. The High Court held for purposes of limitation that the letter forwarding the draft only need necessarily be signed and dated and simply because-the draft order accompanying it had not been either dated or signed does not make it illegal. We do not know how the ratio of this decision help the assessee in any way. We are bound by the Kerala High Court decision cited above and respectfully following it, we hold that the scope of the ITO's powers while making fresh assessment is very much dependent upon the scope of the remand order or directions made by the Commissioner (Appeals) or the Tribunal in their orders. Having regard to the scope of their orders we are unable to hold that the draft assessment order dated 17-3-1981 was either obliterated or dead and gone or cannot be acted upon by the IAC while giving directions dated 11-1-1984. We are also unable to appreciate that any limitation was prescribed for passing directions by the IAC.
17. The learned counsel for the assessee contended that clause (iv) of Explanation 1 to Section 153 prescribes a limitation of 180 days from the date of forwarding draft assessment order to the date of giving directions by the IAC under Section 144B(4). After a careful reading of clause (iv) of Explanation 1 to Section 153, we are of the opinion that it prescribes a period for exclusion only. According to us, Explanation 1 comes into operation or comes to be considered only when certain period is sought to be excluded for the purpose of limitation. If in a given case the exclusion is not sought for and no enlargement of the period of limitation is required to be made out by the ITO it does not come to be considered at all. Even otherwise what all the provision says is that whatever period or, however much time might have been taken between the forwarding of the draft order and giving directions by the IAC, only 180 days would be allowed as a period entitled for exclusion for determination of the question of limitation. That is not the same thing as saying that direction given beyond 180 days from the date of service of the draft order is a nullity. That interpretation is not what is contemplated by clause (iv) of Explanation 1 to Section 153.
18. The argument that the subsequent ITO who passed the assessment order dated 20-1-1984 did not apply his mind even with regard to one addition and mechanically passed the assessment order, his mind does not accompany the hand while passing the said assessment order and that he virtually followed the lAC's direction and though the ITO who had the requisite jurisdiction passed the order dated 20-1-1984 in this case, it was the IAC who should be deemed to have passed the orders, for all practical purposes and, therefore, the principles of natural justice are violated are all arguments to be rejected. Firstly, Section 129 is as follows :
Whenever in respect of any proceeding under this Act an income-tax authority ceases to exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the income-tax authority so succeeding may continue the proceeding from the stage at which the proceeding was left by his predecessor :
Provided that the assessee concerned may demand that before the proceeding is so continued the previous proceeding or any part thereof be reopened or that before any order of assessment is passed against him, he be reheard.
The abovesaid provision clearly shows that the succeeding ITO may continue the proceedings from the stage at which the proceedings were left by his predecessor. The predecessor ITO left the proceedings at a stage where he had forwarded the draft order as well as the objections filed by the assessee to the IAC and he was awaiting the directions of the IAC. The succeeding ITO received the directions and he completed the proceedings and passed the assessment order. The proviso under Section 129 clearly states that before any order of assessment is passed against the assessee, the assessee concerned may demand to be reheard. Though no such request for rehearing was made by the assessee in this case, still the ITO granted an opportunity to the assessee to be heard again and the fact that such opportunity was granted to the assessee was also recorded in the last line of paragraph 1 of the assessment order dated 20-1-1984. Thus, there was no substance in the argument of the learned counsel that inasmuch as there is change in the incumbent of the office of the ITO, the ITO should have passed a fresh draft order, is not correct. In this case there is clear evidence that the assesses was granted an opportunity to make the submissions before the ITO before passing a fresh assessment order dated 20-1-1984. The various decisions and authorities cited in support of this part of the assessee's contention are clearly distinguishable and do not apply to the facts of the present case and, hence, we need not consider them independently (or singularly).
19. The argument of the learned counsel that the assessment order dated 20-1-1984 is virtually an assessment passed by the IAC has no legs to stand in view of the fact that under Section 144B(5) the statute itself make it obligatory on the part of the ITO to follow such and every direction issued by the IAC. So when the statute itself recognises that authority of the IAC no complaint can be made on the ground that the ITO did not apply his mind but only followed the orders of the superior officers and, hence, his own assessment orders are violative of principles of natural justice. For all the above reasons we are unable to hold that the assessment order dated 20-1-1984 is either null and void or vitiated by any illegality. Thus, the preliminary objection of the assessee fails.
20. Let us come to the merits of the case. The first addition made is towards property income. Admittedly the assessee purchased 'Chinnakkada property' in the accounting year relevant to assessment year 1977-78. This property is situated in Quilon. The assessee described this property in his wealth-tax return as 'Chinnakkada Show Room'. The inspector visited this property on 6-2-1981 and submitted his report dated 16-2-1981 to the ITO. According to him, the property is situated on the left side of Chinnakkada Beach Road few yards away from lodge-cum-hotel building newly constructed by the assessee. Prior to its purchase, this property was occupied by 'Kottakkal Aryavaidya Sala'.
21. There is a main two-storeyed tiled building in the front and three out-houses, work-shed and two latrines at back. The main building bears No. MC XIV/433. One of the out-houses according to the inspector bears No. MC XIV/429. There are 16 rooms, all found locked at the time of inspector's inspection in this premises. Licence to run it as a lodge from November 1980 was obtained from the municipality as per Receipt No. 24219 dated November 1980 for Rs. 40. Hearsay gathered by the inspector that till it was permitted to be used as a lodge, spare parts, empty tins useful in cashew business of the assessee were stored in some rooms. The inspector recommended that one-sixth of the premises may be taken to be under use for business of the assessee and five-sixth of the annual value determined may be assessed to property tax for assessment year 1978-79 with which we are concerned in this appeal.
22. The ITO had estimated the annual value at Rs. 6,000 and deducted Rs. 500 on estimate towards property tax and one-sixth of the remaining towards repairs and ultimately computed income from this property at Rs. 4,583. In the letter of the assessee dated 16-1-1981 addressed to the ITO, it is stated that the annual value of this property was determined by the municipal authority at Rs. 500 and since it is exempt under the proviso to Section 23(1) of the Act no income has been shown for its notional value. The order of the ITO assessing property tax on Rs. 4,583 was confirmed by the learned Commissioner (Appeals) in his impugned orders.
23. It is contended before this Tribunal by Shri C.K. Nair, the learned counsel for the assessee, that 14 per cent of the annual value determined by the municipality of Quilon was taken to be the property tax. According to him, the property tax levied by the municipality was Rs. 371 and in support thereof he filed Annexure IX of the paper book. He submitted that though the property tax was Rs. 371 for 1982-83 but as revision of tax is taken for every five years it may be roughly taken as property tax obtained on 31-3-1978. He contended that the whole building was used only in the business of the assessee. At any rate even if it is held otherwise, there is no room to determine the annual value at Rs. 6,000.
According to him it should not be more than Rs. 2,650, i.e., Rs. 371*100/14
24. The learned departmental representative contended on the other hand that according to the inspector's report which is furnished at page 3 of his compilation filed before this Tribunal, the annual value over the building bearing Municipal Nos. MC XIV/433, MC XIV/429 also should be added to the annual value determined over the building MC X1V/432, in order to come to the total annual value of the building and if the annual value is thus computed on all the three buildings marked, the annual value taken by the ITO at Rs. 6,000 is quite fair and just and is not liable to be disturbed.
25. After hearing both sides we hold that firstly, we have to determine what portion of this property was used for business. We hold that the portions suggested by the inspector is justifiable. Based on his report we hold that one-sixth property should be taken to be under use of the assessee for his business and annual value of five-sixth of this property should be treated as income from property liable for income-tax. Secondly, we hold the property comprises of not only MC XIV/432, but also MC XIV/433 and MC XIV/429. The method of finding of annual value determined by the municipality with reference to tax levied was admitted, as it represents 14 per cent of the annual value determined. We, therefore, direct the ITO to find out municipal tax paid over MC XIV/433 and MC XIV/429 for the accounting year and find out the annual value of all the portions of the building marked with above numbers, and enhance the total value by adding one-ninth as it is the recommended method by the learned authors, Chaturvedi and Pithisaria in their Income-tax Law, Vol. 1, Third edn. which is as follows :
If the Income-tax Officer decides to base the annual value of the property on its municipal valuation, he may, but is not bound to, do so. In big cities, where the municipality gives a 10 per cent repairs' deduction, the municipal valuation is, for income-tax annual value, adjusted by addition of a one-ninth of the amount fixed by the municipality. For example where the Bombay Corporation has fixed the rateable value of a building at Rs. 72,000, the Income-tax Officer will add a one-ninth, i.e., Rs. 8,000 and take the basis as Rs. 80,000. From such Rs. 80,000 deduction for municipal taxes is further to be made and the balance will be its annual value for income-tax purposes. (p. 738) If the total annual value, thus arrived at, falls below Rs. 6,000 then the ITO is directed to deduct the municipal tax as well as one-sixth for repair and levy tax on the resultant figure. But if the total annual value is found to be more than Rs. 6,000 the assessee is not entitled to any relief. Hence, this ground is deemed to have been allowed for statistical purposes.
26. The next ground is the disallowance of Rs. 12,769 from out of car expenses. It represents one-third of the total expenses. The assessee maintains a Benz car. The possibility of making personal use of the car cannot be ruled out. The only ground raised was that the business increased considerably. It was urged by the learned counsel for the assessee that the profit derived in the accounting year relevant to this assessment year is more than Rs. 6 lakhs and, hence, making restriction to one-fourth of the expenses for the personal use of the car is more appropriate.
27. After hearing both sides, we feel we should accept this submission. We restrict the disallowance of one-fourth of Rs. 38,306. The assessee gets a relief of Rs. 3,192.50.
28. The next ground is with regard to the disallowance of Rs. 50,000 under Section 40A(3) of the Act. The assessee made local purchases of shelled cashew kernels being 38,727.230 kgs. valuing Rs. 9,57,158.95. They include 1,134 kgs. of kernels valuing Rs. 50,000 purchased from a cashew worker called Shri Rajan. The amount was originally stated to have been paid through crossed cheque. It was subsequently turned out that the payment was made through bearer cheque No. 684331 dated 10-6-1977 drawn on Federal Bank Ltd., Quilon. In the beginning only bald address of Shri Rajan was furnished. He was not traced at that address. Summons were issued under Section 131 of the Act. Those summons were returned on the ground that there was no such person. Shri Rajan was never produced for examination before the ITO or before any of the authorities. The honoured cheque No. 684331 dated 10-6-1977 for Rs. 50,000 was seized by the ITO from the Federal Bank Ltd., Quilon and impounded. The assessee produced only bill No. 15 of 1977 dated 7-6-1977 purported to have been signed by Shri Rajan under which 100 tins of cashew kernels at Rs. 500 per tin was sold to the assessee at a total value of Rs. 50,000 before the ITO. It was subsequently intimated to the ITO that Shri Rajan died in 1979 in a scooter accident.
29. The ITO held that the payment is not made either by crossed cheque or a crossed demand draft. He also held that the payment is not covered by the provisions of Rule 6DD of the Income-tax Rules, 1962. He applied Section 40A(3) and added Rs. 50,000 to the returned income. The learned Commissioner (Appeals) confirmed his finding.
30. It is argued before this Tribunal that the lower authorities were greatly prejudiced by the suspicion that the assessee uttered a lie saying that the payment was made by a crossed cheque. The learned counsel argued that there was no such attempt as misrepresentation. The mistake occurred only because the entries in the bank pass book do not distinguish crossed cheques from other cheques. He agrued that the finding that the payment was not covered by Rule 6DD was wrong. The fact that the total of the bogus purchases arrived at was taken at Rs. 7,48,377 would show that the impugned Rs. 50,000 purchase was not bogus and it is a true purchase. The ITO admitted in his assessment order that the cheque was encashed by Shri Rajan himself shows that the payment was genuine. The payment and identity were, thus, established. No bank would pay Rs. 50,000 without proper identification. He also argued that cashew kernel can be said to be a product of cottage industry or an agricultural produce. He invited our attention to the press note issued on 2-5-1969 in which it was recognised that kapas converted from cotton and rice converted from paddy were agricultural produce under Rule 6DD [see page 269 of Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn.]. He argued that cashew kernel brought out of cashew seeds are in no way different. Hence, according to him, the payment is covered by Rule 6DD.
31. The learned departmental representative, on the other hand, strongly tried to uphold the legality, validity, reasonableness and correctness of the orders of lower authorities by adopting their reasoning as part of his arguments for upholding the disallowance under Section 40A(3). His reasons are : (1) the provisions of Section 40A(3) are categorical, unambiguous and clear and so a case covered by those provisions should be disallowed ; (2) the payment of Rs. 50,000 was made at One time to Shri Rajan through a bearer cheque but not either by a crossed cheque or crossed demand draft ; (3) the payment is not covered by Rule 6DD which forms an exception. Identity of the person and the truth of the payment were not established ; (4) cashew kernel is neither an agricultural produce nor a forest produce nor a product of horticulture. So also it was not a payment made to a grower, cultivator or producer of such an article ; and (5) it is not the case of the assessee that cashew kernels have been manufactured or processed without the aid of power in a cottage industry nor the payment was made in a town or village not served by any bank.
32. Thus, after hearing both sides, we express our inability to support the disallowance. While arriving at the total figure of unproved purchases at Rs. 7,48,377 the ITO did not include this amount of Rs. 50,000 which was disallowed under Section 40A(3), This would strengthen the presumption that the identity of the person as well as the truth or the payment must have been believed to be true. Secondly, the assessee purchased raw cashewnuts, shelled them and obtained kernels therefrom. So also he made local purchases of kernels, amounting to Rs. 9,57,149. We do not agree with the finding of the ITO or the Commissioner (A ppeals) that cashewnuts are neither agricultural produce nor horticultural produce. Cashew plantation is one of the well recognised aforestation programmes undertaken by the Forest Department of every State including Kerala. Be that what it may, cashew tops or rearing cashewnut trees in the backyards of many of the rural houses in Kerala is a common sight. Cashewnut is a direct product of a cashew plant. So we should hold that cashewnuts are horticultural produce and, therefore, payment made towards purchase of such cashewnuts is directly covered under the provisions of Rule 6DD and comes under one of the exemptions under Section 40A(3). In order to bring cashewnut purchases into exempted category, we need not adopt a circuitous or a devious way of finding the reasoning or intendrnent of the revenue in enacting the CBDT's circular referred to before us, and whose reference is already cited above. There is a presumption that once a cheque is honoured by a bank and payment is made under it, it was paid to the correct person on a proper identification. This is the purport of the Patna High Court decision in Addl. CIT v. Bahri Bros. (P.) Ltd. [1985] 22 Taxman 3 (Pat.). In the Patna High Court case while explaining the source of certain cash credits, the assessee submitted that the cash credits appearing in its books were genuine loans from certain parties. All transactions of receipt as well as payment of loans and of brokerage and interest were made through account payee cheques and, therefore, the cash credits should be held to be genuine. In the facts of that case a certificate of the bank to the effect that the cheques given by the creditors were honoured in favour of the assessee was also filed. The assessee in that case could not produce confirmatory letters from the creditors as the letters addressed have come back with the postal remarks 'addressee left'. Under those circumstances the Patna High Court held that the assessee had not only disclosed the identity of the creditors but also the sources of income. Here in this case also the bearer cheque dated 10-6-1977 given in favour of Shri K. Rajan was seized from the custody of the Federal Bank Ltd., Quilon. Copy of the cheque issued discloses that it was a bearer cheque and was issued for an amount of Rs. 50,000. The proceedings dated 6-3-1981 found at page 18 of the paper book filed by the department would disclose that, the cheque was honoured and, therefore, there is sufficient evidence that the amount was paid to the person to whom the cheque was issued by the Federal Bank Ltd. As in the Patna High Court case, in the case before us we have to hold that Shri K. Rajan is not a fictitious person and that the primary onus which lay upon the assessee that he. had paid Rs. 50,000 to Shri K. Rajan stood established. We, therefore, firstly hold that Section 40A(3) does not apply to the payment made. Assuming without admitting that it does apply there is prima facie evidence to establish the genuineness of the payment and, hence, the disallowance under Section 40A(3) cannot stand. The assessee got a relief of Rs. 50,000.
33. Let us take up the major ground raised in the appeal of the assessee, viz., the disallowance of Rs. 4.5 lakhs towards bogus purchase of cashew kernels locally from unauthorised persons. The appellant is a cashew exporter. For the assessment year 1978-79, he made purchases of shelled cashew kernels weighing 38,727 kgs. and their value was Rs. 9,57,158.95. The total purchases of kernels in pounds was 85,342 Ibs. Out of the total purchases thus made, purchases from Kerala State Cashew Development Corpn. and few other authorised exporters was 17,185,230 kgs. and local purchases from unauthorised dealers was 21,542 kgs. or 47,092.40 Ibs. The average purchase price of cashew kernels is Rs. 15.77 per pound and the total value of all the purchases made locally from unauthorised persons was Rs. 7,48,377. This is apart from a single purchase for Rs. 50,000 made from Shri K. Rajan which was disallowed by the ITO under Section 40A(3). These local purchases were made under bought notes prepared by the assessee himself. These bought notes are contained in four bill books bearing S. Nos. 801 to 1140. According to the ITO the bought notes are self-serving documents on which no reliance can be placed, especially in the absence of affirmation on oath or examination of clerks who purported to have filled up the entries in the bill books containing bought notes. The ITO in his assessment order states that each bought note was prepared for less than Rs. 2,500 in order to get over the hurdle of Section 40A(3). Further full addresses of persons from whom cashew kernels were purchased were not furnished in any one of the bought notes. The names of persons from whom the kernels were purchased were so general and commonplace such as Hydrose, Perinad, K. George, G. Krishnan, Kundara, Kochucherukkan, etc. The ITO in his assessment order states that unless their full addresses were given it is difficult to summon and examine them in order to verify the truth of the bought notes. The ITO addressed letter dated 11-9-1980 requesting to furnish the full names and addresses of the sellers. Though the assessee took time for producing the persons ultimately they were never produced. So also, the assessee did not produce the clerks who prepared the bought notes. The ITO found in his assessment order that in the past assessment years the assessee was consistently showing the yield of kernels from 36 to 40 Ibs. per bag of cashewnuts as against the normal out-turn of 45 to 46 Ibs. per bag. The assessee by his letter dated 29-9-1980 explained the reason for the low outturn stating that the marketing federation entered into the cashew field for the first time in the accounting year in question. Since the officials of the corporation were new to this line the selection of raw nuts could not be done properly, resulting in the procurement of low quality and the expdrters who took delivery of raw nuts from the federation ultimately suffered huge losses on account of the inferior quality of nuts supplied to them. It was also explained as the reason as to why other exporters were able to show better out-turn though they purchased raw nuts from the marketing federation. According to the assessee, the reason might have been that from out of the purchases made from the federation the proportion of African raw nuts might have been more or higher than that of the assessee in the case of other purchasers. Ultimately, it is explained that uniform out-turn in all cases cannot be obtained. It is also explained that inasmuch as purchases were made from different parties separate bought notes were prepared and there was nothing unusual about it. The ITO found that in the whole of the relevant previous year cashew kernels were not available freely in the market and they were available only from the authorised dealers. He also found that in the previous year in question even possession exceeding 50 kgs. of raw cashewnuts with any single person was made penal and so the ITO concluded that it is quite unlikely that the assessee purchased cashew kernels worth less than Rs. 2,500 from so many private parties. Ultimately he concluded that all the so-called purchases from the private parties for which the bought notes were prepared, viz., 21,542 kgs. of the value of Rs. 7,48,377 was bogus and, therefore, he made an addition of the same under the head 'Income from other sources'. While making the addition, the ITO did think that the bogus sales include suppressed turnover of yester years inasmuch as he gave the following findings :
Under the circumstances, the reasonable conclusion is that the purchases in question are bogus and the assessee had brought in his own unaccounted stock (suppressed by consistently showing poor out-turn in the past years) in the guise of purchases from outsiders.
He held that unproved purchases of the value of Rs. 7,48,377 represent the unaccounted stock but, however, he assessed the same as the assessee's income from undisclosed sources.
34. In appeal before the Commissioner (Appeals) following four main points of arguments were pressed into service on behalf of the assessee :
1. The practice of accepting local purchases evidenced by bought notes has been the established and it is an accepted practice and no exception to this practice need be made only while considering the case of the assessee.
2. In order to meet the export commitment certain quantity of purchases should be made and the very fact that certain quantity of export could be made would prove that the assessee should have purchased the whole quantity of kernels purported to have been purchased by it.
3. No manufacturer or dealer would ensure a uniform out-turn and the very fact that the out-turn was poor would not justify the conclusion that such a large portion would be regarded as bogus purchases.
4. Suppression of out-turn in earlier years would not justify addition in later years.
35. From a reading of the impugned order of the Commissioner (Appeals), it would appear that he had accepted the tenabiiity of the arguments (1) and (4) noted above. The argument Nos. (2) and (3) noted above were not accepted. The learned Commissioner (Appeals) held that the total bags of cas'hewnuts purchased were 16,823 of 80 kgs. each or 168 lbs. each. If suppression of 3 lbs. per bag is to be taken then the total quantity of suppression possible would be 50,469 lbs. But having accepted two out of the four arguments advanced and giving due credit to the substance of the arguments accepted, the learned Commissioner (Appeals) felt that, inasmuch as he has already upheld the additions of Rs. 50,000 under Section 40A(3), he felt that the circumstances of the case would justify that retaining a further addition of Rs. 4.5 lakhs would be adequate and, therefore, he deleted the excess and, thus, partly allowed the appeal on this point.
36. Both the department as well as the assessee were aggrieved with this impugned decision of the learned Commissioner (Appeals). This department in its appeal contended that having found the probable suppression of out-turn at 50,469 lbs. the ITO should have simply found its value at Rs. 15.77 per Ib. and worked out the disallowance at Rs. 7,95,911 and having found that the ITO's addition is less than this figure he should have simply confirmed the ITO's disallowance. In his view there is no justification to reduce the addition from Rs. 7,48,377 to Rs. 4.5 lakhs. It is also its case that the ITO's addition under the head 'Income from other sources' is only a mistake and the Commissioner (Appeals) is not only justified but according to Allahabad High Court decision in Addl. CIT v. Etawah District Exhibition & Cattle Fair Association [1981] 131 lTR 461 is duty-bound to correct the mistake and sustain the addition of the suppressed out-turn instead of under the head 'Income from other sources'.
37. On the other hand it is the case of the assessee that the learned Commissioner (Appeals) is not correct in confirming the disallowance to the extent of Rs. 4.5 lakhs for the reason that such local purchases really represent the under-statement of the production in the accounting year. His only ground for sustaining the addition was that the out-turn should have been 39 lbs. per bag as in earlier years and not 36.26 lbs. as disclosed in this year. According to the assessee, it is unrealistic to presume that the out-turn should be uniform in each year.
38. One bag of cashewnuts weighs 80 kgs. or 168 lbs. The total bags purchased during the year both from authorised and unauthorised dealers comes to 16,823 bags, when converted into pounds they come to 28,26,264 lbs. Out of it, the assessee claims that it had locally purchased 85,342 lbs. of cashewnuts from unauthorised dealers. Therefore, out of the total 27,40,922 lbs. of cashewnuts were purchases from authorised dealers. The total purchases from unauthorised dealers, viz., 85,342 lbs. when converted into bags, they come to 508. The Commissioner (Appeals) gave a finding that there was scope for suppressed turn-out of kernels to an extent of 3 lbs. per bag and so the total of probable suppressed out-turn would come to 16,823 x 3=50,469 lbs. or when converted into bags they come roughly to 300 bags. So it is the conclusion of the Commissioner (Appeals) that from out of 508 bags claimed to have been purchased by the assessee from unauthorised dealers a quantity of 300 bags of raw cashewnuts may represent bogus purchases. According to the Commissioner (Appeals) the said quantity was an outer limit of either suppressed turnover of yester years or the suppressed turnover of this year. He did not rule out the possibility that in this bogus purchases no suppressed out-turn of yester years was includeo. He also did not state how much quantity of suppressed out-turn of yester years was included in this total of 300 bags or 50,469 lbs. However, taking an overall view and having regard to the fact that this total of 50,469 lbs. include the suppressed out-turn of yester years also, he wanted to make an addition of Rs. 5 lakhs and inasmuch as he sustained an addition of Rs. 50,000 paid to one single party, viz., Shri K. Rajan and he disallowed the same under Section 40A(3), he made an addition of Rs. 4.5 lakhs towards bogus purchases.
39. It is the case of the department that having found the bogus purchases at 50,469 lbs. the learned Commissioner (Appeals) should have simply multiplied its price at Rs. 15.77 per pound and should have arrived at the figure of Rs. 7,95,896.13. However, as the ITO made only an addition of Rs. 7,48,377 the learned Commissioner (Appeals) ought to have sustained the addition made by the ITO instead of reducing it from Rs. 7,48,377 to Rs. 4.5 lakhs. We found a fallacy in this argument advanced on behalf of the department. Firstly, they did not consider the fact that the learned Commissioner (Appeals) had accepted two out of the four arguments advanced on behalf of the assessee before him. The first argument advanced and accepted was that the practice of local purchases based on bought notes has been accepted in a number of other cases and there was no reason why an exception should be made only in the case of the assessee. The second and more important argument is that if there was any suppression of out-turn in earlier years the ITO cannot add anything to the income of the later year. If due regard had to be given to these two arguments, what was the addition that should have been sustained ? It is significant that none of the two accepted arguments by the learned Commissioner (Appeals) was attacked either as erroneous or unacceptable by the revenue. The only ground taken in support of sustaining the whole addition made by the ITO by the revenue is as follows :
The learned Commissioner (Appeals) erred in restricting the addition made by the ITO of Rs. 7,48,377 representing inflation in purchase of shelled cashew kernels to Rs. 4.5 lakhs. He failed to appreciate that shelled cashew was not freely available with unlicensed dealers since by law only licensed dealers were permitted to handle shelled cashew kernels. He also failed to consider that the assessee failed to produce the clerk who allegedly wrote the bought notes for the alleged purchase of shelled nuts. In any case, the learned Commissioner (Appeals) ought to have found that even as per his own reckoning, the assessee has suppressed a yield of shelled cashewnuts out of processing his own raw nuts to the extent of 22,899 kgs. as against inflated purchase of 21,543 kgs. added back as spurious purchase by the ITO. Under the circumstances, the learned Commissioner (Appeals) failed to restore the addition in its entirety.
Assuming for a while that the scope of the ground raised by the revenue in its appeal also contemplates and attacks the two accepted grounds raised by the assessee before the Commissioner (Appeals), let us see how far they are tenable. In the paper compilation filed before us, the assessee quoted at least four instances where the local purchases made by some other assessees were accepted for the assessment year 1978-79. The four cases-are furnished below :
Sl. No. Name of the assessee P.A. No. Quantity of kernels Value
purchased (lbs.)
1. K.A. Karim & Sons 46-00-FN-3347/ 96,885 13,59,624
Kilikolloor, Quilon TVM(CC)
2. B. Ramanujan Thampi, PZ-7177/TVM 297,510 12,52,438
Eastern Cashew Co., (CC)
Pattom, Trivandrum
3. P. Alikunju, PQ-7358/ALP(B) 54,726 13,53,939
M.A. Nazir Cashew
Industries, Karunagappally
4. Global Export Enterprises 46-012-FT-2121/ 37,800 5,41,502
TVM(CC)
In fact the Commissioner (Appeals) in his impugned order at paragraph 18 clearly gave the following finding :
The practice of local purchases supported by bought notes cannot be given a go-by in the appellant's case alone. A trade practice is to be uniformly accepted or rejected. It is also true that for the suppression of an earlier year an addition cannot be made to the income of a later year.
In our view, none of these two findings is questioned as incorrect in the revenue's appeal. In Jaldu Anantha Raghurama Arya alias Rama Rao v. CIT [1959] 37 ITR 371 (AP) the facts were : the assessee was son of one Jaldu Venkata Subbarao who carried on business in timber at Masulipat-nam. Shri Venkata Subbarao died on 22-6-1942. After his death the executors and trustees took over the management of his estate. During the assessment proceedings for the assessment year 1943-44, the examination of books of account of Masulipatnam timber depot produced by the executors revealed excess sales and closing stock of the value of Rs. 75,073. This amount was added to the book version of profit on the ground that it represents income in addition to the book profits. The contention before the AAC as well as the Tribunal on behalf of the assessee was that late Venkata Subbarao must be presumed to have purchased some stock and kept unaccounted for in the books of account and on this assumption a request was made that the addition should be deleted. Ultimately the argument pressed before the High Court was that the amount of Rs. 75,073 represented the value of stocks which were suppressed in previous years and, hence, they could not be regarded as the income of the year of account. The point at issue before the High Court was whether the amount of Rs. 75,073 represents income, profits and gains received in the relevant accounting year. The assessee relied upon a portion of the commentary on the Indian Income-tax Act by A.C. Sampath lyengar quoted in the judgment. The Andhra Pradesh High Court held that the authority cited does not in any way support the contention of the assessee. The High Court held as follows :
...The question as to when exactly an assessee is said to have received the income or profits has to be largely determined with reference to the system of accounting employed by him. It is pointed out by the Tribunal that according to the method followed by the assessee this sum was received by him during the year of account. It seems that he was bringing into account the sales effected by him and was not maintaining an account of the stocks he had : nor was he in the habit of taking inventory of the stocks on hand. This clearly shows that he treated that income as received only as and when he sold the stocks. In these circumstances, we reach the conclusion that the additional sum of Rs. 75,073 was income received by him during the year 1942-43. (p. 374) The ratio of the decision, however, applies only in a case where the assessee was not maintaining any stock account or was not in a habit of taking inventory of the stock on hand. In this case it was not the complaint of the department that the assessee was not maintaining any stock account of the purchase of either cashew nuts or kernels every year. No addition was also made for improper maintenance of stock account in any of the previous years. In such circumstances the Andhra Pradesh High Court decision does not squarely apply to the facts on hand. In the particular facts and circumstances of this case, there is every justification for the learned Commissioner (Appeals) to feel that the full scope of bogus purchases, viz., 50,469 lbs. include the suppressed outturn of earlier years also. The ITO by his letter dated 14-8-1980 furnished at page 4 of the paper compilation filed by the department, at paragraph 3 called upon the explanation of the assessee on the following point:
Explanation for the low out-turn of kernels. The out-turn of kernels as per the statement filed is 36.26 lbs. whole per bag. This is too low in view of the fact that the normal out-turn should be 45 lbs. Any special reason for the poor out-turn may be explained in writing supported by facts.
Therefore, it is the case of the department that the normal yield of kernels was 45 lbs. per bag, whereas, the disclosed turnover was 36.26 lbs. per bag. When this is the position for 1978-79 the position obtaining with regard to assessment years 1976-77 and 1977-78 would also disclose that the out-turn shown by the assessee was not to the full extent. In the assessment year 1976-77, he disclosed an out-turn of 39.38 lbs. per bag whereas in 1977-78 he disclosed 39.56 lbs. per bag. Therefore, even in the immediately preceding two assessment years the disclosed out-turn was at least 5 lbs. less than normal out-turn.
40. It is further submitted by the learned counsel for the assessee that for the assessment year 1977-78, the assessee made a local purchase of 46,142 lbs. of kernels and in the assessment year 1979-80, he made similar purchase of 68,537 lbs. and both these purchases were accepted by the ITO without demur. Therefore, when that was the position there was no reason why 21,546 kgs. purchased during the accounting year relevant to the assessment year 1979-80 should be doubted on the ground that it is from local parties.
41. Having considered the arguments on both sides we have to hold firstly that none of the two arguments accepted by the Commissioner (Appeals) after giving effect of which he reduced the addition from Rs. 7,48,377 to Rs. 4.5 lakhs were ever questioned as illegal. Secondly, the assessee was in the habit of disclosing the stock of cashewnuts and kernels regularly every year in its accounts and no addition was ever made on the ground that some purchases were left out or the out-turn disclosed was not correct. Under the circumstances we agree with the learned Commissioner (Appeals) when he held that from out of the total stock held by the assessee the maximum which could be said to represent bogus purchases does not exceed 50,469 lbs. We also approve the finding of the Commissioner (Appeals) that this maximum includes the suppressed out-turn of yester years. We also hold that when the practice of local purchases supported by bought notes was accepted in the case of other assessees there is no reason why this practice should be deviated only in the case of the present assessee before us.
42. In the result, we hold that the addition of Rs. 4.5 lakhs made by the Commissioner (Appeals) is quite in order. In our opinion, no material whatsoever is placed before us to further reduce the addition from Rs. 4.5 lakhs to any lesser figure by the assessee. Therefore, both the assessee as well as the department should fail on this ground.
43. The next ground in the assessee's appeal is about the addition made towards under-valuation of closing stock of tins. The ITO made an addition of Rs. 24,000 under this head. The opening stock of tins was 6,890. in number. Out of them 1,500 tins were used during the year. The closing stock of tins was 8,391. According to the assessee, the whole of the closing stock of the tins were damaged ones and their value was not more than Rs. 1 per tin at which the stock was disclosed. The ITO held that the particulars furnished by the assessee about the purchase of tins during the accounting year relevant to this assessment year shows that the average purchase price per tin was Rs. 9. So conceding the argument that the remaining out of the opening stock of 5,390 were all damaged ones their value did not exceed Re. 1 per tin, still the ITO held that there was no justification to value the remaining 3,001 tins at the same rate as even on the own showing of the assessee they came out of the purchases during the accounting year and so the average of Rs. 9 per tin should be applied to them. Thus, the total value works out to Rs. 32,399. Deducting the value of the stock already disclosed, viz., Rs. 8,391 a round sum addition of Rs. 24,000 was felt justified and made. The addition was confirmed by the Commissioner (Appeals). The order of the ITO which was confirmed by the Commissioner (Appeals) presumed two things-first, remaining out of the opening stock 5,390 tins were damaged ones and secondly, all the purchases made during the year were purchases at an average price of Rs. 9 per tin. To the extent any of the two presumptions go wrong the impugned order requires interference at our hands. Full details of purchases of tins during the accounting year as well as the opening stock of the tins at the beginning of the accounting year were furnished at Annexure XVI of the paper book filed by the assessee. As can be seen on 8-7-1977, 550 tins of third quality were purchased for a total of Rs. 572. So we feel justified that apart from 5,390 these 510 tins purchased during the accounting year and which are presumed to be remaining as closing stock also can justifiably be valued at Re. 1 per tin. Except the above modification in other respects the order under appeal appears to be unassailable. The ITO is directed to work out the relief and grant it to the assessee.
44. Another ground in the assessee's appeal is the cash credit of Rs. 30,000 received from one Shri Arumugam Swamy. The ITO requested the assessee to furnish the confirmation letter and also to give the permanent account number if he is an income-tax assessee. But no confirmation letter was filed. The ITO also by a separate letter dated 5-2-1981 requested the assessee to produce Shri Arumugam Swamy before him on 16-2-1981 with the relevant books of account maintained by him. Arumugam Swamy was never produced. On 18-2-1981, however, the assessee wrote to say that the amount represents advance received for supply of cashew shell oil. It was also intimated that the amount of Rs. 30,000 was sent in cash to the assessee. Taking all the factors into consideration the ITO treated the amount as bogus cash credit and added it to the income of the assessee. No further material was also produced before the learned Commissioner (Appeals) to come to a different conclusion. The learned Commissioner (Appeals) in his impugned orders stated that a mere statement that the credit represented trade advance does not further the case of the borrower.
45. When the matter came before us Annexures XII and XIII were filed by the assessee to show that the amount of Rs. 30,000 was not a cash credit but was a trade advance and it was in fact adjusted towards the supply of cashew shell oil in the next year. These Annexures were not produced before the Commissioner (Appeals) or before the ITO nor were considered by them. The allegation that this is not a cash credit but represents a trade advance was made in the letter dated 18-2-1981 a copy of which is furnished at page 14 of the paper compilation filed on behalf of the department. Had it been a fact that even by 28-3-1979 the trade advance was adjusted towards supply of the shell oil nothing prevented the assessee to mention the fact in any one of its replies submitted to the ITO. The very fact that even on 18-2-1981 the assessee was rest content with mentioning that it was not a cash credit but only a trade advance received for supply of cashew shell oil and he did not further state that the cashew shell oil was supplied and the amount was adjusted would make us hold that Annexures XI to XIII cannot be safely relied upon. In any view of the matter as they were not considered by any of the lower authorities we are not prepared to consider them for the first time. Thus, in view of the fact that no confirmation letter was produced nor Shri Arumugani Swamy was examined before the ITO the addition of Rs. 30,000 towards unproved cash credit in our opinion is quite proper and legal.
46. The learned departmental representative no doubt relied upon the following decisions-Shankar Industries v. CIT [1978] 114 ITR 689 (Cal), Gumani Ram Siri Ram v. CIT [1975] 98 ITR 337 (Punj. & Har.), Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) and CIT v. Orissa Steel Corpn. (P.) Ltd. [1983] 144 ITR 662 (Cal.) for the proposition that the onus is On the assessee to prove the cash credit. In view of the fact that we are deciding this issue in favour of the department and as there is no dispute regarding the burden of proof with regard to cash credit, we are not elaborately going into and discussing the facts for the ratio of the above decisions.
47. It is the case of the assessee that it had purchased 5,588 bags of African raw nuts. It made a provision of Rs. 16 and odd per bag for African raw nuts towards Central Sales Tax (CST) and, thus, the total provision made came to Rs. 88,517. Shri Kochunni Nair, the learned advocate for the assessee, did not very much question the correctness of the position that purchase tax of imported raw nuts has been done away with by an amendment brought about in the Central Sales Tax Act, 1956 with effect from 7-9-1976 and, thus, the provision is inadmissible. However, what he contends is that, the closing stock of African raw nuts of 1,592 bags were valued including purchase tax of Rs. 16 and odd per bag and the purchase tax element included in the closing stock value should be deleted. This is a matter which the ITO would verify and allow the assessee to amend the closing stock value if the submission of the assessee is found correct. As regards the disallowance of the provision of Rs. 88,517 is concerned, the impugned order of the lower authorities is confirmed.
48. The assessee made another provision for payment of CST on local purchases of kernels made. The total provision made was Rs. 51,686. The ITO disallowed it on the ground that levy of CST on local purchases of kernels was done away with by an amendment to Central Sales Tax Act, 1956 with effect from 7-9-1976. The learned Commissioner (Appeals) in his impugned order confirmed the disallowance on two grounds. Firstly, he stated that this is an exempted item from 7-9-1976. Secondly, he stated that the tax is provided in respect of local purchases which have been held to be bogus by the ITO. He held that on the first point itself the disallowance is to be confirmed. However, he felt that even on second ground the disallowance can be upheld despite his not upholding the ITO's finding that the entire local purchases are bogus. He further felt that local purchases to an extent of Rs. 2 lakhs are acceptable and the provision of tax thereon if otherwise admissible is to be allowed on that figure. However, he felt that the correct way of allowing any tax on such purchases is when the amount is actually paid because then only the liability could be known as a matter of law as well as fact. Ultimately, he confirmed the disallowance made by the ITO.
49. In this second appeal the learned advocate for the assessee sought to contend that the disallowance of the entire provision for purchase tax even after accepting local purchases for about Rs. 2 lakhs is not correct. Though he does not deny the amendment dated 7-9-1976, to the Central Sales Tax Act, he contends that the amendment was made public only in 1980 and it is not applicable for the purchases of kernels. Further, in the wealth-tax appeal of the assessee for the same assessment year, the AAC by his orders dated 26-7-1984 held that purchase tax liability on cashew kernels is an allowable deduction in the computation of the assessee's net wealth. Therefore, for the sake of consistency the learned Commissioner (Appeals) should have allowed the provision for purchase tax while computing the total income. The wealth-tax appellate order is provided as Annexure XIV in the paper book filed by the assessee. Paragraph 4 of those orders deals with purchase tax provision. A reading of that paragraph would reveal that the provision was allowed as a deduction. Shri Kochunni Nair, the learned advocate for the assessee, contended that purchase tax liability by itself was not done away with by the amendment dated 7-9-1976. What was dispensed with was purchase tax liability on purchase of kernels made in the course of export. He submitted that before claiming exemption from CST there must be an anterior export contract of cashew kernels. In the absence of proof of such prior export contract the assessee is not entitled to exemption.
50. Section 5(3) of the Central Sales Tax Act, which was introduced by Section 3 of the Central Sales Tax (Amendment) Act, 1976 with retrospective effect from 1-4-1976 reads as follows :
Notwithstanding anything contained in Sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.
While giving the Statement of Objects and Reasons for introducing clause (3) the Gazette of India dated 26-8-1976, Part II, Section 2, Extraordinary at page 1334 the reasons were explained as follows :
This clause seeks to insert with retrospective effect from 1-4-1976 . a new Sub-section (3) in Section 5. The new Sub-section provides that the last sale or purchase of any goods preceding sale or purchase occasioning export of those goods out of the territory of India shall also be deemed to be in the course of such export if such last sale or purchase took place after, and was for the purpose of complying with the agreement or order for, or in relation to such export.
In view of the above clarification about the intendment of Sub-section (3) of Section 5 the argument advanced by the learned advocate for the assessee that the purchases of cashew kernels are exempt from CST only when there are prior export orders to comply with, does not appear to be wholly correct. The correct position appears to be that the exemption could be available even if the last purchase of kernels was made in relation to export. If purchases were made in relation to exports there need not be prior contract for export. If the purchases are made with an intent to export them the exemption would be available. In view of the above, we find that the ultimate disallowance of the provision of Rs. 51,686 towards CST for local purchases of cashew kernels is quite in order. This ground fails.
51. The assessee owns two lorries-KLQ 4268 and KLQ 3987. No income has been returned from these two lorries. The ITO estimated the income which must have been derived over two lorries at Rs. 5,000 as in last year after allowing depreciation of Rs. 5,000. The learned Commissioner (Appeals) confirmed it.
52. It is the present contention advanced on behalf of the assessee that the two lorries were used solely for business purposes and inasmuch as the business income was assessed the income from two lorries cannot be assessed independently. At page 5 of the paper book filed on behalf of the department, the department furnished copy of the letter dated 22-8-1980 addressed by the chartered accountant of the assessee to the ITO purporting to answer the queries raised in the ITO's letter dated 14-8-1980. The last paragraph of the letter disclosed both the query as well as explanation for it and they are as follows :
During the course of the examination of accounts you have raised some queries regarding the maintenance of an office by the assessee at Tuticorin. The details are as under :
1. The assessee is having a lorry booking office at Tuticorin.
2. The address of the same is 228, G.C. Road, Tuticorin-1.
3. Lorry KLU 5218 was purchased on 13-4-1978.
4. Lorry KLU 5947 was purchased on 7-12-1978.
53. The lorries which are under consideration are no doubt different from the two lorries whose particulars are furnished at points 3 and 4 noted above. But the information furnished at points 1 and 2 noted above was furnished only with reference to the enquiry during the course of assessment for the assessment year 1978-79 with which we are concerned in these appeals. Therefore, it is clear that during the relevant accounting year, the assessee maintained a lorry booking office at Tuticorin. If really the lorries of the assessee were not plied on hire but were used only in the cashew business of the assessee, where was the need to maintain a booking office at Tuticorin taking a premises on rent. This fact itself would falsify the version that the lorries were made use of exclusively in the own business of the assessee. Further, this version was a later development. In Annexure X in the paper book filed by the assessee at which copy of the grounds filed before the Commissioner (Appeals) were furnished by the assessee, no such ground is taken. Further no material is placed before us as to what happened for a similar addition made in the immediately preceding assessment year. The assessee did not contend that the estimation of income on the two lorries was in any way excessive. Having regard to the above we are inclined to confirm the addition.
54. This leaves us with the last ground in the assessee's appeal complaining about the shortage in weighted deduction allowed to the assessee than what is due to it under law. So also we have to deal with the contention of the department that the commission payment to agents at Bombay (Nutmeat Trading Co.) was wrongly allowed or considered for weighted deduction. The total claim was made with reference to the following items totalling to Rs. 2,17,654. The items as well as the expenditure under each of them are as follows :
Rs.
1. Salary of persons said to be exclusively handling export business 11,850
2. Stationery 1,460
3. Postage and telegram (cable charges) 1,839
4. Subscription to associations and journals 3,028
5. Foreign commission 1,99,477 Total 2,17,654 The assessee claimed one-third of the total, viz., Rs. 72,551 as weighted deduction. The ITO disallowed weighted deductions on items 1, 2 and 4 from out of the above list of expenses, on the simple ground that they are not eligible for weighted deduction since they have been incurred within India and do not come under any of the clauses of Section 35B(l)(b) of the Act. He allowed item No. 3. The foreign commission which is dealt with as item No. 5 in the list above is further analysed. The bifurcation of the payment of commission is as follows :
Rs.
1. Richard Franco Agency Inc., New York 85,872
2. Cable charges 1,839
3. Nutmeat Trading Co. 83,332
4. Gibbs Nathaniel, Canada 28,434
55. From out of the above the commission as well as cable charges incurred with reference to the transaction with Richard Franco Agency, totalling to Rs. 87,711 was allowed by the ITO for weighted deduction. As regards item No. 2, viz., the commission paid to Nutmeat Trading Co., the ITO held that this party rendered services only within India as go between for the sale of assessee's goods with the trade representatives of the USSR in India and so he disallowed weighted deduction over the commission payment. As regards item No. 3, the ITO held that Gibbs Nathaniel of Canada is purported to be a buyer and commission agent. The payment made to the said party can utmost be said to be trade discount and, hence, it is not eligible for weighted deduction. Thus, out of the total of Rs. 1,99,477 claimed as deduction towards commission payment the ITO allowed weighted deduction only on an expenditure of Rs. 87,711 and disallowed weighted deduction on Rs. 1,11,766. In the appeal before the learned Commissioner (Appeals) he allowed weighted deduction even on commission payment made to Nutmeat Trading Co. That means he allowed weighted deduction on a further amount of Rs. 83,332 than the amount considered by the ITO. However, the learned Commissioner (Appeals) did not consider either items 1, 2 and 4 in the list given above or the amount of commission of 28,434 purported to have been incurred as commission payment to Gibbs Nathaniel of Canada.
56. In this second appeal the assessee contends that even on the above-said items it is duly entitled to weighted deduction. It is the contention of the department that the commission paid to Nutmeat Trading Co. was wrongly considered for weighted deduction. In Annexure XVII provided in the paper book on behalf of the assessee the total expenditure incurred on each and every item, the proportion of the total expenditure taken for claiming of weighted deduction and the eligible amount according to the assessee for weighted deduction were all furnished. As regards the first item the total of the expenditure towards salary of persons exclusively handling export business was Rs. 15,800. The assessee claimed weighted doduction at 75 per cent of the same and, thus, it had put forward a claim for weighted deduction on a total amount of Rs. 11,850 under this head. Under the head 'Stationery' the total expenditure incurred was Rs. 2,921, 50 per cent was taken to be eligible for weighted deduction and so the assessee claimed weighted deduction on an amount of Rs. 1,460. The total expenditure incurred for subscription to associations and journals was Rs. 3,097, and the assessee claimed weighted deduction on Rs. 3,028. The claim depends upon the proportion which the export turnover bore to the total turnover. The export turnover was Rs. 1,34,93,091 in a total turnover of Rs. 1,37,52,446. The claim made by the assessee regarding salary of persons exclusively handling export business, stationery as well as subscriptions to various associations and journals were found to be made according to the Special Bench decision in J.H. & Co. v. Second 1TO [1982] 1 SOT 150 (Bom.) and, therefore, we have no hesitation to hold that those three items are to be allowed. In view of the Bombay High Court decision in CIT v. Eldee Wire Ropes Ltd. [1978] 114 ITR 485, the mere fact that some expenditure was incurred in India is not a ground for not considering the said expenditure for weighted deduction. Such an embargo is confined only to an expenditure coming directly under Section 35B(l)(b)(iii). The Bombay High Court in the cited decision held as follows :
... As far as other heads of expenditure are concerned, it is urged that under items other than Sub-clause (iii) there is no warrant for excluding expenditure incurred in India. It would appear that where the Legislature desired to exclude expenditure incurred in India for the purposes of giving benefit of weighted deduction to the assessee, it expressly did so by specifically mentioning such exclusion in the Sub-clause, for example, in Sub-clause (iii). It must follow that where this was not done the expenditure can be incurred by the assessee either outside India or in India but it must pertain to the purposes mentioned in the various Sub-sections which purposes are indicated as pertaining to various activities outside India.... (p. 486) Commission payment to Nutmeat Trading Co. is not covered under Section 35B(l)(b)(iii). However, as regards the disallowance of weighted deduction on the commission payment of Rs. 28,434 purported to have been made to Gibbs Nathaniel of Canada is concerned, the assessee is not able to place before us that the facts on which the decision of the ITO is based are wrong. Under the circumstances, we have to hold that the finding of the ITO that the amount paid to Gibbs Nathaniel of Canada, satisfies the description of trade discount and not a commission payment. From the facts and circumstances of the case, the commission agent as well as the purchaser cannot be one and the same and, therefore, the disallowance of weighted deduction on an amount of Rs. 28,434 is to be upheld. The appeal of the department on the question of weighted deduction has to fail.
In the result, the appeal of the assessee is partly allowed, whereas the appeal of the department is dismissed.