Rajasthan High Court - Jaipur
Raunaq Finance Ltd. vs Joint Commissioner Of Income Tax on 6 July, 2004
Equivalent citations: (2004)191CTR(RAJ)215, [2005]272ITR210(RAJ), 2004(4)WLC206
JUDGMENT
1. The appeal has been admitted in terras of the following questions :
"1. Whether the existence of 'reason to believe' which is sine quo non for validity of initiating reassessment proceedings under Section 147/148 of the Act, can be solely established by the testimony of a hostile witness examined at the back of the assessee which is contrary to the evidence on record ?
2. Whether the finding that the appellant had no materials to lease is so contradictory to the accepted position that the appellant was actually assessed on rental income for 5 years derived from the leasing of the very material, that it stands vitiated by itself ?
3. Whether the uncorroborated testimony of a person who persistently fails to substantiate his testimony and fails to get himself cross-examined or even adduce any independent evidence to rebut the statement of the party affected by such a statement, deserves to be rejected outright and cannot be used as evidence against the party affected by such an uncorroborated testimony ?
4. Whether the statement of Shri Manish Mehrotra, the alleged proprietor of M/s Longman Industrial Enterprises was admissible in evidence ?
5. Whether the Tribunal did not err in law in confirming the reassessment withdrawing the depreciation allowance of Rs. 51,75,000 allowed by the CIT(A) against the original assessment order passed by the AO under Section 143(3) of the IT Act, 1961 ?"
2. The relevant assessment year is 1992-93. The return for the assessment year has been filed on 31st Dec., 1992. The assessment under Section 143(3) was completed on 14th March, 1995. Subsequently, it is noticed that a search operation was conducted on 10th Feb., 1995 at the residential and business premises of Shri Manish Mehrotra proprietor of M/s Longman Industrial Traders, New Delhi. At the time of search, the statements of Shri Manish Mehrotra were recorded and in his statements he admitted that he never manufactured the shuttering material, nor he has sold any shuttering material to M/s Raunaq Finance Ltd. through M/s Unitech Ltd. He further stated in his statements at the time of search that he received the cheques worth Rs. 51,75,000 from M/s Raunaq Finance Ltd., but after depositing those cheques in bank account, the same was withdrawn on the same date or the next date and the cash was returned to M/s Raunaq Finance Ltd. after deducting the commission for giving the hawala entry. Thus, the shuttering transaction with M/s Raunaq Finance Ltd. was only on paper. M/s Raunaq Finance Ltd., assessee, has claimed depreciation at 100 per cent on this shuttering material in this assessment year and that has been allowed.
3. The ITO was of the view that income assessed in the case of this assessee has escaped in this year, therefore, he issued the show-cause notice to the assessee as to why the income escaped by allowing 100 per cent depreciation on shuttering material should not be disallowed. The notice was issued after considering the statements of Shri Manish Mehrotra and managing director of Finance Corporation and also a letter from M/s Unitech Ltd., and also the material brought on record. The depreciation of Rs. 51,75,000 which was allowed in the earlier assessment order dt. 14th March, 1995, has been withdrawn and addition to that effect has been made in the assessment under Section 143(3)/148 of the IT Act.
4. In appeal before the CIT(A), the CIT(A) has affirmed the view taken by the AO regarding reopening of the assessment as well as the addition of Rs. 51,75,000 which was allowed earlier in the regular assessment under Section 143(3) of the IT Act.
5. In appeal before the Tribunal, the Tribunal has also affirmed the view taken by the CIT(A).
6. Learned senior counsel for the assessee Mr. Sharma has submitted that there are sufficient evidences which are brought on record by the assessee to prove the genuineness of the transaction regarding purchase of shuttering material from M/s Longman Industrial Traders by the assessee and AO has merely relied upon the statements of Shri Manish Mehrotra, who is the proprietor of M/s Longman Industrial Traders. He further submits that no opportunity was given to the assessee to cross-examine Shri Manish Mehrotra, therefore, the reopening as well as the addition made on the basis of statements of Shri Manish Mehrotra is not justified.
7. On the other hand, learned counsel for the Department Mr. Mathur submits that when AO has information in his possession that income assessed in the case of this assessee for asst. yr. 1992-93 has escaped assessment, he has every right to reopen the assessment and tax the income which has escaped assessment. He further submits that Shri Manish Mehrotra proprietor of M/s Longman Industrial Traders admits that he has not supplied any shuttering material to the assessee or to M/s Unitech Ltd. and he also admits that it was only a hawala transaction and that is sufficient if no sufficient material has been brought on record in spite of opportunity being given to assessee to prove the genuineness of the transaction. The depreciation worth Rs. 51,75,000 which was wrongly allowed has rightly been withdrawn in the reassessment.
8. The facts are not in dispute that in the original assessment completed on 14th March, 1995, the AO has allowed the depreciation worth Rs. 51,75,000 on the shuttering material which has been claimed by the assessee. The case of the assessee is that assessee has purchased this shuttering material from M/s Longman Industrial Traders through M/s Unitech Ltd. and amount has been paid by cheque/draft and that has rightly been allowed in the original assessment dt. 14th March, 1995. That cannot be withdrawn only on the basis of statement of Shri Manish Mehrotra during search.
9. In assessment under Section 143(3) depreciation of Rs. 51,75,000 was allowed on the shuttering material which has been claimed to have been purchased from M/s Longman Industrial Traders and, subsequently, when the search was conducted at the residential and business premises of Shri Manish Mehrotra who is proprietor of M/s Longman Industrial Traders, his statements were recorded. After search an appraisal report was prepared by the investigation wing of the Department and that has been supplied to the AO in the case of this assessee, The AO after perusal of the report has reason to believe that income in case of this assessee for the asst. yr. 1992-93 has escaped in the original assessment, therefore, he recorded the reasons for issue of notice under Section 148 of the IT Act. The reasons recorded by AO for ready reference read as under:
"In this case, return of income was filed on 31st Dec., 1994 showing total at Rs. 1,74,030. The assessment was made under Section 143(3) on 20th March, 1995 and total income was determined at Rs. 78,55,380. As a result of appeal effect, the assessed income was reduced to Rs. 1,74,030 vide appeal effect order dt. 31st Oct., 1995.
During the course of investigation in the case of M/s HCL Finance & Investment Ltd., the Asstt. CIT Company Circle 1(4), New Delhi, noticed that the assessee-company purchased wooden shuttering of Rs. 60 lakhs from M/s Longman Industrial Traders, Prop. Manish Mehrotra, New Delhi. When the matter was further examined and. search was conducted on the residential premises of Shri Manish Mehrotra by Dy. DIT (Inv.) Unit-n, New Delhi, he confessed that he was issuing bills only without actual delivery of goods and the sale consideration was subsequently refunded in cash to the purchasers. He was to get the commission for providing just the name through this firm for transaction. He also admitted that he has provided bills to M/s Raunaq Finance Ltd. as under :
S. No. Name of party Bill Date Amount
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1. M/s Raunaq Finance Ltd. 132 5-3-1992 Rs. 51,75,000 In the assessment order for the asst. yr. 1992-93, it is discussed that the assessee had purchased wooden shutterings of Rs. 51,75,000 from Longman Industrial Traders. As per detailed report received from CIT, Delhi-1, vide letter No. 3074, dt. 11th Dec., 1995, this is bogus purchase in order to claim 100 per cent depreciation.
In the light of above discussion and in consequence to above information in possession with me, I have, therefore, reason to believe that the above income chargeable to tax has escaped assessment due to failure on the part of assessee to disclose fully and truly all material facts necessary for his assessment for the asst. yr. 1992-93. Accordingly, proceedings under Section 147 r/w Section 148 are hereby initiated. Therefore, notice under Section 148 is hereby issued."
10. It is true that mere statements of Shri Manish Mehrotra, proprietor of Longman Industrial Traders cannot be the basis for disbelieving the transaction, but if it is corroborated and some other materials are available on record to support the statements of Shri Manish Mehrotra, the statement of Shri Manish Mehrotra, proprietor of Longman Industrial Traders cannot be brushed aside for considering the genuineness of transaction. But, so far the question of reopening of the assessment is concerned, if the person concerned, from whom the material has been purchased, he himself states subsequently before the authorities that the transaction was not genuine and AO received this information, that can be a ground for reopening of assessment as that is only a stage of show-cause notice. If the AO has any such material or information to take the prima facie view that income has escaped, on the basis of such information,, the show-cause notice for reopening of assessment can be issued at this stage. At notice stage no final finding of the fact is necessary that the transaction was not genuine.
If, on the material information, prima facie view can be taken regarding escapement of income, the AO is well within his jurisdiction to issue the show-cause notice for reopening of the assessment.
11. In the case of Rattan Gupta v. Union of India and Ors. (1998) 234 ITR 220 (Del), Delhi High Court has considered the similar issue. The Delhi High Court has occasioned that- what is the condition precedent for reopening of the assessment. The Delhi High Court has taken the view that the letter and the appraisal report constituted the relevant material for formation of belief 'that the assessee's income had escaped assessment and notice under Section 147 r/w Section 148 for reopening of the assessment is valid.
12. In the case of Phool Chand Bajiang Lal and Anr. v. ITO and Anr. (1993) 203 ITR 456 (SC), the facts before their Lordships are that after completion of the assessment, subsequent information has been received from the AO that company's that its managing director had confessed that company had not advanced any loan to any person during period covering the date of cash loan. At p. 477 their Lordships observed as under :
"From a combined review of the judgments of this Court, it follows that an ITO acquires jurisdiction to reopen an assessment under Section 147(a) r/w Section 148 of the IT Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessee to make a true arid full disclosure of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts."
13. Considering the view taken by Delhi High Court and Hon'ble Supreme Court in the aforesaid cases and also the reasons recorded by the AO for reopening of the assessment, we see no infirmity in the issue of show-cause notice under Section 147 r/w Section 148 for reopening of the assessment.
14. Consequently, in our considered opinion, there is no infirmity in the order of the AO for reopening of the assessment.
15. Now it brings us to the issue whether depreciation of Rs. 51,75,000 which has been allowed on the shuttering material, can that be withdrawn on the basis of material brought on record.
16. Mr. Sharma, learned senior counsel for the assessee submits that there are sufficient documentary evidence in support of the genuineness of the transaction regarding purchase of shuttering material. The authorities below have wrongly brushed aside this evidence and wrongly made the addition of Rs. 51,75,000 by withdrawing the depreciation on shuttering material. During the course of argument, he brought to our notice that the payment for purchase of shuttering material has been made by account payee cheque. The acknowledgement of receipt of material by lessee that is M/s Unitech Ltd. has been given against the delivery challan. The certificate of lease that materials were put to use has been issued by M/s Unitech Ltd. The lease rent has been received from M/s Unitech Ltd. and that lease rent has been assessed in the case of this assessee. The managing director of Unitech Ltd. has admitted that transaction is genuine and he received the shuttering material from M/s Longman Industrial Traders, therefore, he submits that against these evidences mere statements of Shri Manish Mehrotra, proprietor of M/s Longman Industrial Traders could not be accepted, specially when no opportunity has been given to the assessee to cross-examine Shri Manish Mehrotra, proprietor of M/s Longman Industrial Traders.
17. It is true that payment of Rs. 51,75,000 has been made by the assessee to Shri Manish Mehrotra, proprietor of M/s Longman Industrial Traders and that has been encashed by Shri Manish Mehrotra. The case of the assessee is that he has purchased the shuttering material from M/s Longman Industrial Traders through M/s Unitech Ltd. and M/s Unitech Ltd. admits this fact that he has received shuttering material from M/s Longman Industrial Traders. So far payment is concerned, Shri Manish Mehrotra has not denied the payment but he stated that the cheque was deposited and the same amount has been withdrawn on the same date and cash has been returned to M/s Raunaq Finance Ltd. after deducting 1 per cent commission on that amount.
18. When AO has issued the summons to M/s Raunaq Finance Ltd. and to M/s Unitech Ltd., none of them have produced any additional material that on what date the material has been delivered by M/s Longman Industrial Traders and at what place. At the same time, Shri Manish Mehrotra, proprietor of M/s Longman Industrial Traders failed to appear, he simply sent the letter in reply, stating the fact what he has admitted in the statements at the time of search. One Shri Satyender P, Singh, managing director of M/s Raunaq Finance Ltd. appeared before AO on 22nd Jan., 1999. He admitted that he does not know Shri Manish Mehrotra. He explained that the transaction was through M/s Unitech Ltd. and the payment has been made by M/s Raunaq Finance Ltd. on receipt of the shuttering material and that material has been received by M/s Unitech Ltd. on behalf of the assessee and assessee has leased out that asset to M/s Unitech Ltd. M/s Unitech Ltd. has issued the certificate to assessee to the effect that he has received the material and that has been put to use in the month of March, 1991. Except that, in spite of repeated questions by the AO to M/s Satyender P. Singh, managing director of M/s Raunaq Finance Ltd., he failed to produce any register maintained for receipt and dispatch of shuttering material in question.
19. Managing director of M/s Unitech Ltd., Shri A.C. Joshi, also attended on 10th March, 1999 for examination by the AO. He also failed to produce any register maintained for the purpose of receipt and dispatch of shuttering material claimed to have been purchased by M/s Raunaq Finance Ltd. from M/s Longman Industrial Traders. The AO has given more than two months time to trace-out the register maintained for the purpose of receipt and dispatch of shuttering material, specially the register in which the material received from M/s Longman Industrial Traders has been recorded.
20. It is pertinent to note that in the statement of Shri Manish Mehrotra he has admitted that M/s Longman Industrial Traders was incorporated in 1991, but the business/manufacturing activities were carried out in the business premises and he has issued only the fake/hawala bills for the shuttering transaction which has not taken place. Even he stated in his statement that in Bhiwadi, there was no factory premises of M/s Longman Industrial Traders which manufacture the shuttering material.
21. On these given facts, it appears that AO has not taken pains to find out the genuineness of the transaction. He simply wrote letters or issued summons to examine the managing director or the proprietor of these firms and companies.
22. When Shri Manish Mehrotra in his statements admitted that it was only a hawala transaction and he has no factory in Bhiwadi manufacturing shuttering material, it should be found out that whether Manish Mehrotra has any factory to manufacture the shuttering material. No steps have been taken by ITO. Shri Manish Mehrotra is not prepared to come for cross-examination as he is not affected if tax is not paid by assesses. Other side has produced the evidence regarding payment of Rs. 51,75,000 against shuttering material to Shri Manish Mehrotra. To safeguard the interest of Revenue, the AO should at least try to find out whether there is any factory of Shri Manish Mehrotra in Bhiwadi. He can depute his Inspector to find out if there is any factory owned by Shri Manish Mehrotra. In fact, there is no factory owned by Shri Manish Mehrotra. How it is possible that Manish Mehrotra has supplied the shuttering material to M/s Unitech Ltd. for M/s Raunaq Finance Ltd.
23. When, on the one hand, Shri Manish Mehrotra, who is supplier of the shuttering material has stated in his statement at the time of search as well as reiterated the same thing in reply to notice by the Department, it is not proper to allow the depreciation on shuttering material claimed to have been supplied by Shri Manish Mehrotra. On the other hand, mere statement of Shri Manish Mehrotra is also not enough to disallow the depreciation, specially when the payment has been made to Shri Manish Mehrotra firm by account payee cheque. Therefore, in our view, the AO has not properly enquired the issue in detail at the time of assessment order under Section 143(3), nor he has taken pain after show-cause notice for reopening of the assessment. The depreciation cannot be allowed only on the basis of payment made by cheque, specially in cases where the receiver of the cheque states that after depositing the cheque, the cash has been withdrawn and has been paid back to assessee after deducting his commission. After reopening of the assessment, it also appears that Shri Manish Mehrotra has not cooperated. He did not appear for cross-examination. Even the officials for M/s Unitech Ltd. and M/s Raunaq Finance Ltd. have not co-operated by not producing the relevant record for scrutiny to find out the genuineness of the transaction.
24. In such cases, the AO should depute his Inspector and make a detailed enquiry by visiting the places and contacting the concerned persons and then submit a report regarding genuineness of the transaction. If assessee so desires, he can cross-examine the Inspector of the Department and thereafter a fresh view should be taken regarding genuineness of the transaction.
25. In these circumstances, we set-aside the finding of Tribunal confirming the finding of CIT(A) and remit the matter back to AO to make detailed enquiry regarding genuineness of the transaction between M/s Longman Industrial Traders and M/s Raunaq Finance Ltd. In case all the three concerned parties are not willing to co-operate, then depute a Inspector to make necessary enquiry by visiting the relevant places and contact the concerned persons, if necessary, record their statements and submit the report to AO.
After submitting the report, give liberty to the assessee also to cross-examine the Inspector if so desired by M/s Raunaq Finance Ltd. On the basis of material collected including report of the Inspector, give a fresh finding regarding genuineness of transaction. If transaction is not found genuine, the AO will be at liberty to withdraw the depreciation allowed in the original assessment i.e., assessment under Section 143(3) of the Act.
26. Shri Sharma, learned counsel for the assessee, also brought to our notice that lease money received against the shuttering material has been offered to tax and that has been assessed in the hands of the assessee.
27. In case the transaction of shuttering material is not found genuine and if any lease money on account of this shuttering material has been received, the liberty is given to the assessee to put up his case and submit the relevant material before the concerned AO to the effect that if any lease money on account of shuttering material in question has been assessed and if on scrutiny by the AO, it is found that some lease money, which has been assessed is in relation to this shuttering material which has been supplied by M/s Longman Industrial Traders and found bogus, to that extent relief should be given to the assessee.
28. In the result, we set-aside the order of Tribunal and remit the matter back to AO to pass a fresh order on the basis of material already available on record and other material which the AO procures on fresh detailed enquiry including the report of Inspector of the Department in this regard.
The appeal stands disposed of with the above directions.