Income Tax Appellate Tribunal - Bangalore
Additional Income-Tax Officer vs T. Mudduveerappa Sons on 23 December, 1992
Equivalent citations: [1993]45ITD12(BANG)
ORDER
S. Kannan, Accountant Member
1. Giving rise as they do to certain common issues, these five departmental appeals and the cross-objection filed by the assessee were heard together and are disposed of by a common order.
2. We may clear the decks as it were, by dealing first with the cross-objection filed by the assessee. At the time of hearing, Shri Lakshminarasimhan, the learned counsel for the assessee, stated that he was not pressing the cross-objection. Hence, it is dismissed as such.
3. Departmental appeals : The assessee is a firm. At the relevant point of time its constitution was as follows:
Assessment years 1982-83, 1983-84 & 1984-85 S/Shri
1. T.M. Shivanna
2. T.M. Palanatraiah
3. G.P. Sadashivaiah
4. K.H. Veeranna Setty
5. C.N. Parvatha Raj Assessment years 1985-86 and 1986-87 S/Shri
1. T.S. Umesh
2. T.S. Jagadesh
3. T.M. Palanetraiah
4. G.P. Sadashivaiah
5. K.N. Veeranna Setty
6. C.N. Parvatha Raj It may here be mentioned that the aforesaid change in the constitution of the firm was occasioned by the death some time in July, 1983 of T.M. Shivanna.
4. The details of the income returned and income assessed may be abstracted as follows :
___________________________________________________________ Asst year Income returned Income determined ___________________________ Original re-assessment assessment ___________________________________________________________ Rs. Rs. Rs.
1982-83 1,35,130 1,35,130 5,05,770 1983-84 1,18,600 1,19,100 3,70,950 1984-85 1,74,005 6,52,600 -- 1985-86 1,62,774 6,43,300 -- 1986-87 2,36,960 7,20,450 --
5. On 31-3-1986, the Department conducted search and seizure operations not only in the business premises of the assessee-firm, but also in the residences of the partners for the time being of the firm. In the course of the search, besides certain papers and documents, the following items were found and seized :
Cash Rs. 60,000 Jewellery Rs. 2,00,000 Other investments Rs. 3,00,000
Of relevance to the purpose on hand is a bunch of papers marked 'A-4' and containing 61 sheets. Papers bearing page Nos. 4, 5, 6, 7, 14, 15, 21 and 22 containing certain words and figures are central to the controversy before us. These papers contain details relating to the period starting from 1-7-1980. Some of these papers also contain what appears to be the allocation of certain mounts amongst the partners.
6. On an examination of the said papers, the Assessing Officer concluded that the assessee firm had earned secret profits as detailed below :
Previous year Assessment amount
ending on year
Rs.
30-6-1981 1982-83 3,70,643
30-6-1982 1983-84 2,51,840
30-6-1983 1984-85 4,48,553
30-6-1984 1985-86 4,78,525
30-6-1935 1986-87 4,61,748
The Assessing Officer put the assessee-firm on notice of his intention to bring to charge in its hands the aforesaid concealed income in the relevant assessment years.
7. The assessee-firm responded by making the following points:
(i) The firm made no secret profits.
(ii) The documents do not relate to the firm or its transactions.
(iii) There is not even a mention of the firm's name in any of the papers relied on. Mere mention of partner's initials or entries against their names cannot mean that the documents belong to the firm or firm's business.
(iv) There is no indication as to wnat one or business the entries related to or what business generated such profits.
(v) The trade or business of the firm is controlled and there is no scope for the firm to carry on clandestine business year after year.
(vi) The Accountant has already denied before the investigating authorities that he ever wrote the papers or that he has knowledge of the papers.
(vii) The papers were not found in the firm's premises.
(viii) The Accountant wrote a letter categorically denying having written such slips. The partner in whose premises the said documents were seized wrote to say that he had no knowledge of such papers.
8. None of the aforesaid arguments found favour with the Assessing Officer who held that the assessee-firm had made secret profits as detailed above. In this regard, the Assessing Officer was impelled by the following considerations:
(i) the seized papers referred to above contained details of the secrei profits made by the assessee-firm.
(ii) The profits thus earned were also allocated amongst the partners of the firm whose names are referred to therein in the form of initials such as K.H.V; C.N.P; T.M.S; G.P.S and T.M.P.
(iii) The seized papers also contain details of certain interest income earned by the assessee-firm, which are referred to as "S.P. interest" and "A.C. interest".
(iv) Both the secreted profits and the interest income have been allocated amongst the partners in their profits sharing ratio.
(v) The contention of the partners that they had no knowledge of the papers cannot be accepted, when regard is had to the fact that the papers were seized from the residence of T.N. Palanetraiah, one of the partners of the firm. Their denial is clearly self-serving.
(vi) Similarly, the denial by the Accountant of the firm is nothing but connivance.
Since, at the time of the search, the original assessment for the assessment years 1982-83 and 1983-84 had already been completed, the Assessing Officer initiated re-assessment proceedings and brought to charge concealed income as detailed above. As for the assessment years 1984-85, 1985-86 and 1986-87, the assessments were pending; and the Assessing Officer completed the assessments by bringing to charge in the hands of the firm secret profits as detailed above.
9. Predictably, the assessee-firm took the matter in appeal before the first appellate authority. Basically, a two-fold contention was urged before the first appellate authority on behalf of the assessee. The first contention was that the papers in question had been "planted" and that, therefore, no credence can be placed on them. The second contention related to the merits of the case. Here all the arguments that were earlier advanced, unsuccessfully, before the Assessing Officer were reinterated. Of course the contentions that had earlier been advanced, unsuccessfully, before the Assessing Officer, were suitably amplified before the CIT (Appeals); but the basic fact remains that, on the merits of the case, what was urged before the CIT (Appeals) was essentially the same as that was urged before the Assessing Officer.
10. Certain legal contentions were also urged, which may be summarised as follows :
(i) The Assessing Officer has not brought on record any independent corroborative material to show that the assessee-firm had earned secret profits as alleged.
(ii) There is no automatic presumption in law that merely because there is a division of profits in the same ratio in which the profits of the firm are divided among the partners, the secret profits belong to the firm. The business or venture giving rise to the alleged secret profits might have been done by the five individuals in the status of an association of persons or body of individuals, or even through the instrumentality of a separate and distinct firm.
In this regard, reliance was placed on the Delhi case of Yadu Hari Dalmia v. CIT [1980] 126 ITR 48 (Delhi) and the Punjab and Haryana case of ITO v. Mohan Lal Vig. [1983] 139 ITR 681.
11. It was also contended on behalf of the assessee before the CIT (Appeals) that the presumption contained in Section 132(4A), which is a rebuttable presumption, is available for the limited purpose of passing an order under Section 132(5). The said presumption is not available for the purpose of making an assessment under Section 143(3) of the Act.
Further, under Section 34 of the Evidence Act, mere entries in a document without substantial proof cannot be considered to be complete evidence. In this case, only certain papers containing what according to the Assessing Officer are the details of the secret profits earned by the assessee-firm and the allocation thereof amongst the partners, were found. No supporting books of account were found. Therefore, there is all the more reason why Section 34 of the Evidence Act will avail the assessee.
12. Reliance was also placed on behalf of the assessee on (i) certain observations of the Supreme Court in the case of Jaydayal Poddar v. Bibi Hazara AIR 1974 SC 171; (ii) The Orissa case of Devamani Atha v. CIT [1978] 112 ITR 837 and the Delhi case of Yadu Hari Dalmia (supra).
13. The contention that the papers in question had been "planted" in partner Palanetraiah's residence did not impress the CIT (Appeals). According to him, "once the document is shown in the Panchnama, the theory of later introduction cannot be countenanced. The proper recourse (sic) would have been through different forums as the complaint makes it a criminal offence and the remedy is through Criminal Courts.
14. As for the merits of the case, all the contentions urged in that regard on behalf of the assessee found favour with the CIT (Appeals). Taking particular note of the fact that the Assessing Officer had not brought on record any independent evidence pointing to suppression of income by the assessee-firm and taking note of the further fact that the assessee was seriously challenging the authenticity of the seized papers, the CIT (Appeals) endeavoured to ascertain the authenticity of the papers by addressing himself to the following transactions recorded therein:
(i) Purchase of site for Rs. 32,677 in the name of T.M. Shivanna.
(ii) Entries in the name of Marivalle, Ganesh and Santosh.
(iii) Sale of car by K.H.V. for a sum of Rs. 9,000
(iv) Transactions relating to Smt. Prabhavathi and Shri Babu and
(v) Purchase of a Maruti car in September, 1983 for Rs. 90,000.
The CIT (Appeals) asked the partners whether the transactions were put through. The partners denied all the transactions, whereupon the CIT (Appeals) concluded:
... From these I cannot but conclude that the document does not depict or reflect a true picture of the business affairs of the firm and in the light of the various submissions made by the appellant's representative the authenticity of document A-4 is not established. Reliance therefore on this seized material for making huge additions without backing it up with reliable date/evidence/material is misplaced.
15. Secondly, the CIT (Appeals) accepted the assessee's contention that the presumption embodied in Section 132(4A), apposite as it was in the context of an order under Section 132(5), could not avail the Department in the context of an assessment made under Section 143(3). According to him, independent evidence is necessary for that purpose. In this regard, he referred to and relied upon the Rajasthan case of Addl. CIT v. Thahrayamal Balchand [1980] 124 ITR 111.
16. Thirdly, not only no independent inquiry was made by the Assessing Officer, but also no nexus was proved or established by the Assessing Officer between entries in the seized papers and the assessee-firm. In this regard the CIT (Appeals) considered that assessee's counsel had rightly relied on the Punjab & Haryana case of Mohan Lal Vig's case (supra).
17. Fourthly, the Assessing Officer had not made any attempt to identify the hand-writing contained in the seized papers and to make further enquiries relating to the genuineness of the entries made in those papers.
18. In view of the foregoing, therefore, concluded the CIT (Appeals), the Assessing Officer was not justified in making impugned addition for the assessment year 1984-85 and, accordingly, deleted the addition.
19. The first appellate authority took the same line as respects the assessment for the assessment years 1982-83, 1983-84, 1985-86 and 1986-87. It may here be highlighted that in the assessment for the assessment year 1985-86 the CIT (Appeals) was impelled by the further consideration that, even on the basis of the seized papers the addition of Rs. 4,78,525 made by the Assessing Officer could not be sustained, because the said figure represented the balance brought forward from the earlier year.
20. It is in these circumstances that the Department is now before us. Shri P.S. Puniha, the learned Departmental Representative, vehemently contended that the CIT (Appeals) was not justified in allowing the assessee's appeal.
21. The first limb of Shri Puniha's arguments was that having rejected -and rightly - the contention of the assessee that the papers in question were "planted" and, therefore, no credence could be placed on them, the CIT (Appeals) was not justified in coming to the conclusion that the seized papers lacked authenticity. According to him, the aforesaid two conclusions are contradictory. If the papers seized during the raid were not planted then they were available to the Department for the purposes of computing the assessee's secret profits and to bring them to charge.
22. The second limb of Shri Puniha's arguments was that none of the 15 points urged before the CIT (Appeals) on behalf of the assessee has any force. Generally speaking, they are either irrelevant, or inconclusive, or speculative, or downright invalid.
Amplifying his arguments in this regard, Shri Puniha contended that, the papers in question having been seized from the residence of Palanetraiah, one of the partners of the firm and the papers having contained details relating to secret profits and the allocation thereof amongst the five partners, the onus to prove that the secret profits did not belong to the firm lay on the assessee. This is especially in view of the fact that the matters relating to the contents of the seized papers are in the personal knowledge of the partners. Therefore, the assessee could not be heard to say that the Department must prove that the secret profits evidenced by the seized papers belonged to the firm.
Further, it is not necessary for the Department to find the primary records and other books of account on the basis of which the final statements contained in the seized papers came to be prepared.
Again, the fact that the sales-tax authorities did not make any addition on account of any suppression of turnover is neither here nor there. The sales Tax Authorities did not make any addition, obviously because they had not seized the papers in question. Stated differently, they could have made an addition, only if they had come upon any evidence of suppression, which they did not. The Income-tax Department, on the contrary, had discovered and seized papers evidencing the factum of secret profits having been earned and the allocation thereof. It should, therefore, follow that the Department was justified in bringing to charge the secret profits in the hands of the firm.
23. The third limb of Shri Puniha's arguments was centered on legal issues.
24. Repelling the assessee's argument that the secret profit could not be assessed in the hands of the firm, Shri Puniha contended that it is well settled that a firm and its partners are not different entities and that the firm is but a convenient, compendious name for the partners. The said legal position taken in conjunction with the fact that the seized papers disclosed not only secret profits but also the allocation thereof amongst the five partners, would go to show that the Department was not wrong in bringing to charge the secret profits in the hands of the firm.
25. Turning next to the question whether the presumption contained in Section 132(4A) of the Act was limited to an order under Section 132(5) of the Act, or whether it could be invoked for the purposes of making an assessment under Section 143(3) of the Act, Shri Puniha contended that, under the Scheme of the Act, the said presumption would avail the Assessing Officer in the context of making an assessment under Section 143(3) also. Further, the assessee has not in any way rebutted the said presumption. It should therefore follow that the secret profits disclosed by the seized papers were rightly brought to charge in the hands of the assessee-firm.
In this regard, Shri Puniha drew our attention to the provisions of Section 278D of the Act and highlighted the fact that the section has made it clear that the provisions of Section 132(4A) would be available even in the context of prosecution. Such being the scheme of the Act, contended Shri Puniha, it will necessarily have to be held that the presumption incorporated in Section 132(4A) is available for the assessment proceedings also.
26. Turning his attention to the Allahabad case of Pushkar Narain Sarraf v. CIT [1990] 183 ITR 388 relied upon by the assessee, Shri Puniha contended that the said decision is not applicable to this case because it turned on different set of facts. In this regard he highlighted the fact that the question referred to therein was different; it related to the provisions of Section 68 of the Act and not to the provisions of Section 143(3) of the Act.
27. The next limb of Shri Puniha's arguments related to certain general issues.
28. Adverting to the assessee's contention before the CIT (Appeals) that during the course of the search, the contents of the seized papers were not put to the partners of the assessee-firm and their response elicited on the various facets of the issue, Shri Puniha vehemently contended that this contention is baseless. He drew our attention to the fact that on 8-4-1986 and 9-4-1986, that is to say, within a week after the search, questions were asked of all the partners on the contents of the seized papers in question. True, said Shri Puniha, no questions were asked on the date of the search. There is, however, nothing strange in this. It is not always possible to ask questions about the contents of seized documents, particularly when, as in the case before us, the seized documents contained abbreviated notations or codes. It is first necessary for the officers to understand the significance of these abbreviated notations/codes. It is only thereafter that they could ask meaningful questions on the contents of the seized papers. In the case before us, the seized papers referred to some persons by the initials of their names. The Departmental officers had first to identify the persons concerned; only thereafter they could question the partners concerned. This is what exactly happened in this case. It should therefore follow that that nothing turned on the fact that the partners were not questioned on the contents of the seized papers even on the date of the search.
29. One of the contentions that was urged before the CIT (Appeals) on behalf of the assessee was that, if the assessee had really earned secret profits aggregating Rs. 20 lakhs spread over a period of five years, then at least some part of the profits would have been invested in assets such as land, building, jewellery etc. But no such investment was found during the search. Shri Puniha pointed out that this contention was contrary to the facts of the case. During the course of the search cash, jewellery and other investments were discovered and seized.
30. Shri Puniha summed up his arguments thus :
(i) Incriminating papers were found and seized.
(ii) These papers contained the initials of Palanetraiah, one of the partners.
(iii) The seized papers disclosed that the assessee-firm had made secret profits which it had failed to disclose.
(iv) The secret profits were also distributed amongst the partners in accordance with their profit sharing ratio.
(v) The assessee has not rebutted the presumption incorporated in Section 132(4A) of the Act.
(vi) No credence could be given to the baseless allegation that the seized papers had been planted in the house of Palanetraiah.
(vii) Consequently, the Department is entitled to succeed.
31. Shri G. Lakshminarasimhan, the learned counsel for the assessee, strongly supported the impugned order of the CIT (Appeals).
32. He first drew our attention to the fact that the CIT (Appeals) had addressed himself to two issues, namely, (i) the bona fides of the seized papers; and (ii) the nexus of their contents with the firm. On the former issue, the CIT (Appeals) did not accept the assessee's contention that the papers in question were planted in the residence of Palanetraiah by some interested parties.
According to Shri Lakshminarasimhan, the fact that the papers had been planted could be clear from the following. First Rule 112(7) of the Income Tax Rules stipulates that each and every one of the seized documents should contain the signatures of not only the person whose residence/business premises are searched, but also of the witnesses. In the case before us, it is a matter of record, the seized papers and particularly those relied upon by the Department for making the impugned additions did not contain the signatures of the witnesses. It was Shri Lakshminarasimhan's case that a week after the search the ADI concerned obtained Palanetraiah's initials on the seized papers in the guise of questioning that partner. In this regard Shri Lakshminarasimhan referred to the circumstances according to him significant, that at the relevant point of time the attention of the CIT concerned was drawn to the fact that the Department was trying to make use of planted papers. There was, however, no response from the CIT in this regard.
Secondly, the seized papers on which reliance is placed by the Department do not contain such significant details as the business which gave rise to the alleged secret profits, the turnover, the gross profit, the net profit and the like. Nor has the Department brought on record any independent evidence in this regard.
Thirdly, no such papers were seized from the residences of the other partners.
33. If regard was had to the totality of the circumstances, contended Shri Lakshminarasimhan, it would be seen that the papers in question were planted and hence there was no question of the Department making use of them.
34. Turning next to the merits of the case, Shri Lakshminarasimhan first contended that no nexus has been established between the contents of the seized papers and the assessee-firm. For a fact, the Department had not introduced any evidence in this regard. The assessee is a dealer in foodgrains. It also acts as a commission agent. The records of the assessee would show that the assessee's turnover which was about Rs. 39 lakhs in the previous year relevant to the assessment year 1981-82 swelled to Rs. 1.76 crores in the previous year relevant to the assessment year 1992-93, with the corresponding net profit registering a rise from Rs. 99,000 to Rs. 2,44,000. Going on the basis of the said figures, contended Shri Lakshminarasimhan, it would be seen that to earn an aggregate secret profits of Rs. 20 lakhs, the assessee-firm should have had an aggregate turnover of about Rs. 15 crores. It is indeed strange that given this picture, the Department was not able either to seize or to bring on record any evidence pointing to such huge turnover. This would show the impossibility of the situation.
Further, if the firm had made secret profits of Rs. 20 lakhs spread over a period of five years, at least a part of them would have found its way in investments such as land, building, jewellery etc. No such evidence was unearthed during the search. For a fact, no evidence was available to suggest that the assessee was having unaccounted stocks at the time of the search. True, some cash, jewellery and investments were noticed and seized; but ultimately no addition was made on account of the said seizure.
In this regard, Shri Lakshminarasimhan contended that, operating as it was in a regulated market, it was impossible for the assessee-firm to have effected undisclosed sales aggregating Rs. 15 crores, without any one of the agencies (such as those connected with the regulated market or those connected with sales-tax and the like) stumbling upon some evidence of clandestine transactions of the assessee-firm. Yet, no such evidence was unearthed by any of the agencies concerned. This would show that the assessee was not indulging in any clandestine transaction.
35. The next point made by Shri Lakshminarasimhan was that, significantly, on the date of the search, no questions were asked of the partners either on the contents of the seized papers or on their nexus with the firm. No direct question was at all asked on the nature of business, the magnitude of the turnover and the like. Nor was any direct question asked on the issue whether the contents of the seized papers related to the firm. For a fact, even when, a week after the search, sworn depositions were taken, no direct questions were at all asked about the contents of the papers and their relation to the assessee-firm.
36. Shri Lakshminarasimhan then drew our attention to the fact that the CIT (Appeals) had, on his own, picked up five items out of the many entries contained in the seized papers and elicited the response of the partners thereof with a view to satisfying himself about the authenticity of the papers. The partners denied the transactions. They denied any knowledge of the contents of the papers. It was, therefore, the CIT (Appeals) had rightly held that no evidentiary value can be attached to the seized papers.
37. The next point made by Shri Lakshminarasimhan was that no addition at all was made towards the cash, jewellery and investment seized. This was due to the simple reason that all the seized items had been properly accounted for by the assessee or, as the case may be, the partners concerned. This circumstance would also indicate that the Department's contention that the assessee firm had made huge secret profits is untenable.
38. Shri Lakshminarasimhan then contended that the Department itself was not sure as to whether the huge secret profits came out of the assessee's business or from other undisclosed sources. Thus, while in the assessment for the assessment years 1984-85 and 1985-86, the alleged secret profits were brought to tax in the hands of the firm as business income, in the other three years they were brought to charge under the head 'other sources'. This would indicate that the Department has no independence evidence to go by.
39. Thereafter Shri Lakshminarasimhan advanced certain legal contentions. First, the seized papers in question were not found in the business premises of the assessee-firm and that, consequently, there was no question of applying the presumption incorporated in Section 132(4A) vis-a-vis the firm. Secondly, at the time of the seizure the papers in question were bereft of the signature of all the partners. If, as the Department contends, the seized papers contained distribution of profits amongst the partners, then one would have normally expected the partners to affix their signatures on the papers in token of having accepted the details contained therein as correct. This, however, was not the case. It should, therefore, follow that the seized papers have no evidentiary value at all.
40. In this regard, he referred to and relied upon (0 the Supreme Court case of S.P. Gramophone Co. v. CIT [1986] 158 ITR 313 in which, in the context of the assessee's claim for registration, the Supreme Court had held that an unsigned paper containing allocation of profits amongst the partners has no evidentiary value; and (it) the case of Prashant S. Shah 188 ITR (Statutes) 83. In the latter case the Gujarat High Court had rejected a reference application filed by the Department seeking a reference on the question whether an unsigned valuation report seized by the Department could form the basis for making additions to the capital gains returned by the assessee and the Supreme Court dismissed the Department's Special Leave Petition.
41. Shri Lakshminarasimhan drew our attention to the Madhya Pradesh case of Milan Supari Stores v. ITO [1990] 184 ITR 106 and Milan Supari Storesv. Assistant ITC [1992] 194 ITR 72. In that case, in the course of a search certain stocks were seized. Relying on the factum of the said seizure, the Assessing Officer initiated re-assessment proceedings for the earlieryears. The Madhya Pradesh High Courtheld that the re-assessment proceedings were invalid. In that connection, the Court observed that merely because at the time of the raid in a particular year some unaccounted stock or money was found in possession of one of the partners of the firm, it would not automatically lead to the conclusion that the stock was accumulated as a result of suppression of full and true material facts by the firm in that previous year. According to Shri Lakshminarasimhan, this case would avail the assessee.
42. He then referred to and relied on the Supreme Court case of Mahasay Ganesh Prasad Ray v. Narendra Nath Sen AIR 1953 SC 431 in support of the proposition that the loose papers seized could not be regarded as accounts within the meaning of Section 90 of the Evidence Act.
43. Relying then on the Karnataka case of Canara Sales Corporation Ltd. v. CIT [1989] 176 FTR 340 Shri Lakshminarasimhan contended that the partners' having denied knowledge of the contents of the seized papers, it could not be said that there was failure to disclose the alleged secret profits.
44. Finally Shri Lakshminarasimhan relied on the decision of the Madras Bench of the ITAT in the case of FTO v. Thangam Aluminium. Industries and contended that no addition could be made in the hands of the assessee-firm on the basis of the material seized from the residence of the partner.
45. Shri Lakshminarasimhan then highlighted the fact that when the partners have denied the authenticity of the seized papers, the initial onus that lay upon them gets automatically shifted on to the Department and that it is for the Department to lead further evidence to show first, that secret profits were at all earned and, secondly, that the said secret profits belonged to the firm. The Department has brought on record no evidence in that regard.
46. Shri Lakshminarasimhan then drew our attention to the fact that two different Commissioners of Income-tax (Appeals) have, on examination of the matter, come to the same conclusion. This would also go to show that the Department has no case.
47. Finally, Shri Lakshminarasimhan summarised the assessee's case as follows:
(i) The impugned assessments of the firm are founded on the seized papers.
(ii) The papers in question were not seized from the business premises of the assessee-firm.
(iii) In any event, the seized papers not having been authenticated by the partners, have no evidentiary value, particularly insofar as the assessee-firm is concerned.
(iv) The Department has not brought on record any evidence to connect the seized papers with the firm. For a fact, neither at the time of the search nor a week thereafter did the Department officers put direct questions either on the contents of the seized papers or on their connection with the firm.
(v) When the papers were seized from the residence of a partner no addition can be made in the hands of the firm.
(vi) It is impossible to hold that the firm had made secret profits aggregating Rs. 20 lakhs particularly in view of the fact that profits to that extent would have entailed an aggregate turnover of Rs. 15 crores. Surprisingly, however, neither the Department nor the other authorities such as the authorities incharge of the regulated markets, sales-tax authorities and the like have come upon any evidence of concealment.
(vii) The Department has not found any unaccounted investment either by the firm or by the partners. For a fact, even the cash, jewellery and investment seized at the time of the search were found to have been fully accounted for and consequently no addition was made on that score.
(viii) The Department itself is in two minds about the source of the alleged secret profits.
(ix) It should, therefore, follow that the Department not having proved its case, the impugned orders of the first appellate authority do not invite interference.
48. In his reply, Shri Puniha, the learned departmental representative, made the following points:
(i) "Planted papers" theory is unacceptable.
(ii) There is no evidence to show that the partner Palanetraiah was forced to sign the papers seized a week later.
(iii) The Department need not identify the source of a particular income. It is enough if it shows that the income was earned. This was done in this case.
(iv) It is a matter of record that the contents of pages 7 and 22 of the seized papers were admitted by Palanetraiah. Since the said pages contained details of the figures brought forward from the earlier pages, namely 4, 5 and 6, it should be held that Palanetraiah was aware of the contents of those earlier pages. It should, therefore, follow that Palanetraiah, or for that matter, any other partner could not be heard to say that they had no knowledge of the contents of the papers.
(v) The cases referred to and relied upon by the assessee's counsel cannot avail the assessee because they deal with different facts and different questions.
(vi) With the result, the first appellate authority was not justified in deleting the additions made by the Assessing Officer.
49. Intervening in the course of the departmental representative's reply, the assessee's counsel drew our attention to the fact that the first appellate authority has highlighted the fact that the seized papers were in different hand-writings, in some instances as many as three. The Department has not identified the persons who made the notings on the seized papers. Therefore, the seized papers cannot avail the Department.
50. We have looked into the facts of the case. We have considered the rival submissions.
51. Some seized papers, forming part of 61 seized papers collectively identified as Annexure-IV, are at the centre of controversy before us. The relevant seized papers have been page numbered 4, 5,6, 7, 14, 15,21and 22. These papers relate to the periods 1-7-1980 to 30-6-1981 (page-5), 1-7-1981 to 30-6-1982 (page-4), 1-7-1982 to 30-6-1983 (page-6). Pages 7, 14, 15, 21 and 21 relate respectively to the position obtaining on 10-10-1983, 1-2-1986, 1-10-1985, 11-1-1985 and 15-7-1985. All these sheets contain: (a) statement in figures of what appears to be the financial results of certain transactions. (None of the seized papers contain any indication as to the nature, extent etc. of the transactions concerned); (b) the details of interest due to, or, as the case may be, due from the five persons who are partners of the assessee firm, on two counts, namely (0 "SP interest" and (ii) "AC Interest"; (c) the details of the allocation of not only interest on the said two accounts but also of the figures of the financial results of certain transactions referred to in (a) above; (d) the accounts of the five aforesaid persons containing the details of the amounts credited/amounts debited to the said accounts; and (e) skelton balance sheet.
52. The Department's case is that the aforesaid figures of the financial results of "unnamed" transactions represents the secreted profits of the assessee-firm. It is also the Department's case that in the course of the said transactions, which were not accounted for by the assessee-firm, the five partners of the firm had received, or, as the case may be, paid interest on the two counts referred to earlier. The seized papers also show that the secret profits were divided amongst the five partners of the firm in the same ratio as the one in which they have agreed to share the disclosed profits of the assessee-firm. The said fact taken in conjunction with the further fact that the said papers came to be seized from the residence of Paianetraiah, one of the partners of the firm, contends the Department, would clearly show that the assessee-firm had made secret profits, which it had failed to disclose in the returns of income filed by it for the respective years of assessment.
The assessee-firm, on the contrary, totally denies that it had made any secreted profits at all. Partners also denied having any knowledge of the entries contained on the seized papers. For a fact, the basic contention is that the papers in question were flaunted in the house of Paianetraiah. Touching on the merits of the case, it is further contended on behalf of the assessee-firm that the seized papers do not contain anything even remotely indicating the nature and extent of the so-called secret business; that they do not contain anything to connect the entries with the assessee-firm; that the Department has, not brought on record any evidence to establish a nexus between the said entries and the assessee firm; and that consequently there was no question of making any addition to the income returned by the assessee-firm on the basis of the said seized papers. It should, therefore, follow that the CIT(A) was justified in deleting the baseless addition(s) made by the Assessing Officer.
53. Now, as has been pointed out by the Punjab and Haryana High Court in Mohan Lal Vigs' case (supra), in the cases of the type under consideration, two distinct and separate proofs are necessary; namely, proof of recovery and proof of the truth of the contents of the seized books of account/papers. In that case the Officers of the Excise and Taxation Department of the State Government had raided the shop of the assessee and recovered a Dasti Bahi. The transactions contained in the Dasti Bahi were not recorded in the regular books. The assessee failed to comply with the directions of the ITO to the effect that the genuine set of accounts be produced. Thereupon the ITO called upon the assessee to show cause why the entire amount disclosed by the Dasti Bahi should not be treated as income from undisclosed sources. An assessment was made accordingly, rejecting the assessee's claim for spread over.
Prosecution proceedings were also launched under Section 277 of the Act and under Section 193 of the IPC on the basis of the recovered Dasti Bahi. The Chief Judicial Magistrate acquitted all the three partners of the firm of the charge under Section 193 of the IPC and acquitted two of the three partners of the charge under Section 193 of the IPC. The third partner was also acquitted on appeal by the Court of Additional Sessions Judge.
Dismissing the criminal appeal filed by the Department, the High Court observed:
... We are of the considered opinion that the evidence produced in this case is hardly sufficient to prove the charges under Section 277 of the IT Act and Section 193, IPC, against the respondents or any of them. The main documentary evidence which has been relied upon by the prosecution to prove its charges against the respondents is Dasti Bahi, ex. P.Y., allegedly recovered by the IT authorities (sic) from the business premises of the firm of the respondents when a raid was carried out at the said premises by those authorities, butwe doubt if the alleged recovery of Dasti Bahi, ex. P.Y. and also the contents of that Bahi, have been got duly proved by leading any legal evidence. Shri S.K. Jain, Deputy Excise and Taxation Commissioner, P.W. 6, has stated that he inspected the business premises of M/s. Roda Ram Lal Chand at Baba Bakala in Amritsar District, on September 2,1, 1963 and from those premises, the Dasti Bahi, ex. P.Y., was taken into possession by him. Admittedly, at that time, those premises stood locked. It is to be noted that no seizure memo was prepared by Shri Jain, P.W., in respect of the seizure of that Dasti Bahi, from there. Thus, there is the solitary statement of Shri Jain with regard to the recovery of the Dasti Bahi ex. P.Y., from those premises. In the absence of any independent corroboration of the statement of Mr. Jain, it will be difficult to hold that in fact the Dasti Bahi, ex. P.Y., was recovered from those premises. Any way, if it be presumed for the sake of argument that the recovery of the Dasti Bahi, ex. P.Y., from the business premises of the firm of the respondents stands proved from the statement of Shri Jain, P.W., it cannot be said that proof of the recovery of that Dasti Bahi, also amounts to the proof of the truth of the contents of the Dasti Bahi. In order to show that that Bahi contained true accounts relating to the business conducted by the firm of the respondents, some evidence should have been led by the prosecution for showing that those accounts were entered in that Bahi, by the respondents or by somebody at their instance, but it may be pointed out that no evidence whatsoever has been produced to prove the contents of that Bahi. No person who might have made those entries in ex. P.Y., was examined on behalf of the prosecution. No person who was acquainted with the handwriting of the person by whom entries in that Dasti Bahi, were made and signed has been examined. Accordingly, the entries of accounts made in ex. P.Y., have not been got legally proved and, therefore, those entries cannot be considered as legal evidence against the respondents.
The said ruling is thus to the effect that both the proof of recovery and proof of the truth of the contents of the seized books of account/papers are necessary and that proof of recovery would not tantamount to proof of the truth of the contents.
54. In the case before us, both the aforesaid aspects come up for consideration. Let us for the moment set aside proof of recovery and proceed to examine the question whether there is any proof of the truth of the contents of the seized papers in question. From the material facts of the case detailed above, it will atonce be clear that the proof of the truth of the contents of the seized papers is totally lacking in this case. The Department has failed to prove the proof of the contents of the seized papers on the lines adumbrated by the Punjab and Haryana High Court in the portion of the report of the case excerpted above. It should, therefore, follow, just as in the Punjab and Haryana case prosecution failed, so in the case before us the Department will have to fail in the quantum appeal.
55. Let us examine the matter more closely to see whether there is anything at all to support the Department's case that the contents of the seized papers represent secreted profits of the assessee-firm which it failed to disclose. As we see it, the Department's case can be reduced to two propositions, namely (i) that the statement in figures of what appears to be the financial results of some unnamed transactions, which is contained in the seized papers, represents the secreted profits, that is to say, the income that is chargeable to tax; and (ii) that the said secreted profits having been divided amongst the five persons in the same ratio as the one in which they shared the disclosed profits of the assessee-firm, they must, ipso facto, be regarded as that of the firm.
56. Now, it is well settled that for the purpose of making a quantum assessment under the Income-tax Act, preponderance of probabilities will do. The first limb of the Department's case is that the seized documents contain details of secreted profits. As pointed out earlier, it is common ground that the Department has not brought on record any evidence to prove conclusively that the seized documents contained details of secreted profits which are chargeable to tax. It remains to be seen whether preponderance of probabilities supports the department's case.
57. True, the seized papers contain statement in figures of what appears to be the financial results of certain unnamed transactions. There is nothing either in law or in logic to warrant the conclusion that the figures denote secreted profits which are chargeable to tax. For all we know, the figures may represent what may broadly be called gross receipts. To illustrate, let us assume that the five persons concerned had put through a joint adventure in the nature of trade, say, in real estate. To start with, they would have naturally contributed their share of the money - cash if you like - to purchase a particular piece of land and to develop it into plots. If they had sold plots over a period of time, then, as soon as each plot or each group of plots is sold, they could well have distributed the sale proceeds net of the expenses incurred in connection with the sale. This time they would be receiving cash. If they had chosen to note down on a sheet of paper the manner in which the sale proceeds are divided, the recovery of the sheet of paper containing the notings thereon cannot obviously lead to the conclusion that what was distributed was profits arising out of the joint adventure in the nature of trade. As pointed out earlier, what had been noted on the sheet of paper was the manner in which the sale proceeds, that is to say cash, was distributed. Profit, however, is a different matter altogether. And that will have to be computed taking into account not only the initial outlay on the purchase of the land in question, but also all other items of expenditure which are wholly and exclusively laid out for the purpose of earning the profit. This being the case, it would be untenable to contend that the seized sheet of paper contains details of profits distributed amongst the joint adventurers.
58. The foregoing illustration will indicate that, going merely on the basis of the seized papers and nothing more, it could not be predicated that what was distributed was profits and not sale proceeds, that is to say cash. Secondly, the above illustration will also highlight the fact that more than one interpretation could be placed on the details contained in the seized papers. The Department contends that what was distributed was profits. The above illustration, on the contrary, indicates that what was distributed can well be sale proceed, that is cash. In other words, the details of distribution contained in the seized papers do not by themselves present a preponderance of probabilities so as to support the Department's case that what was distributed was taxable income.
59. The second limb of the Department's case is that because the alleged secreted profits were divided among the five persons in the same ratio as the one in which they shared the disclosed profits of the assessee-firm, it must logically follow that the secreted profits belonged to the firm. Here again, as we see it, the Department's case is untenable.
60. Let us assume that the seized papers indicate existence of secreted profits. Even then the question is: Can they be treated as the profits of the assessee-firm merely because they had been distributed amongst the five persons in the same ratio as the one in which they had shared the disclosed profits of the assessee-firm? The answer, in our opinion, is 'No', because, here again, the preponderance of probabilities goes against the Department. If profits have been divided, such a division could also have taken place in different contexts. The five persons, for example, could have formed a separate AOP, in which event also profits could have been distributed. Again, they might have undertaken a joint venture, which would also have resulted in the profits being distributed among them. The point that we are making here is that the mere factum of distribution of profits cannot be used as a peg on which to hang the Department's case that the secreted profits belonged to the assessee-firm.
Going further, let us assume, again with the Department, that the five persons did constitute a firm in relation to secreted profits, Even then, as we see it, the Department's case does not improve. It is well settled that whatever may be the position under the Partnership Act, under the Income-tax Act a firm is a juristic entity for purposes of assessment. In that context, courts have been called upon to answer the question whether, where there is a plurality of firms with identical partners, the firms, constitute distinct and separate taxable entities, or a single taxable entity. In the Bombay High Court's case of Vissonji Sons & Co. v. CIT [1946] 14 ITR 272, Beaumont C.J. observed:
In law a firm has no existence independently of its partners and if there are two firms consisting of exactly the same partners, the real position in law is that there is only one firm. It may carry on separate businesses and may carry on those businesses in different names but in fact there is only one firm in law. I think there is a certain amount of confusion, if I may say so, in the case arising from the failure to appreciate that at the material dates, there was in law only one firm.
Chagla J. (as he then was), was a party to the said ruling. In the subsequent case of Jesingbhai Ujamshu v. CIT [1950] 18 ITR 23 however, the Bombay High Court held that "in law, common partners could constitute two separate firms in respect of different businesses for the purpose of income-tax, on the ground that a firm is recognised by the IT Act as an assessee as much as an individual or a joint Hindu family." It is interesting to note that in the said case the Bombay High Court was speaking through Changla C.J. who, referring to the aforesaid observations of Beaumont C.J. in Vissonji Sons & Co.'s case (supra), pointed out that the said observations were obiter. In that regard, Chagla C.J. observed at page-27 of the report:
With great respect to the learned Chief Justice, the actual question that he had to consider in that reference was whether a certain item which the assessee claimed as a bad debt was a bad debt or not and the learned Chief Justice disposed of that reference by coming to the conclusion that this question was really a question of fact and the only question of law that arose was whether there was sufficient evidence to justify the finding of fact by the Tribunal.
Therefore, this particular observation on which the Tribunal has relied was not called for the determination of the reference and, therefore, it must be looked upon as pure obiter.
61. Interestingly, as far back as in 1929, in the Calcutta case of Martin & Co., In re AIR 1929 Cal. 753. Rankin C.J. speaking for a Special Bench of the Calcutta High Court, observed:
The proposition that the same persons in the same shares cannot for income-tax purposes be partners of two entirely separate firms is a highly abstract proposition. It may or may not be correct but I am not prepared as at present advised to proceed upon so very general a principle without a careful enquiry into the concrete case and into the matters above mentioned. It may turn out that the case depends on the question of fact whether the two firms were entirely separate - a question of fact including the question of intention. It is necessary that we should know whether in substance and in truth the partners as part of the business of Martin and Company brought up certain assets (in which case the fact that these assets went by a different name would have no importance whatever) or whether, on the other hand, it was an entirely separate venture not intended to be any part of the business of Martin and Company or to have any connection with Martin and Company.
The Calcutta ruling was followed by the Punjab and Haryana High Court in R.N. Oswal Hosiery & Mahabir Woollen Mills v. CIT [1968] 70 ITR 843 and by a Full Bench of the Andhra Pradesh High Court in CIT v. G. Parthasaraihy Naidu & Sons [1980] 121 ITR 97. In the latter case, after noticing the earlier rulings on this issue, the Andhra Pradesh High Court enunciated the following principles:
(1) The concept of partnership law is that a firm is not an entity or a person in law but only a compendious mode of designating persons who have agreed to carry on the business in partnership.
(2) A firm as such is not entitled to enter into partnership with another firm or individual as the definition of "person" in Section 3(42) of the General Clauses Act. 1987, cannot be imported into Section 4 of the Indian Partnership Act.
(3) The law, English as well as Indian, has for some specific purposes, relaxed its rigid notions and extended a limited personality to a firm.
(4) Under the income-tax law a firm is an independent and distinct juristic person for the purpose of assessment as well as for recovery of tax as it is a "person" within the meaning of Section 2(31) of the Act, having its own entity and personality. It is also a separate entity under the sales tax law.
(5) It is well settled that it is open to any person to arrange his or its affairs by adopting a legal device to reduce his or its tax liability to the minimum permissible under the law and such a device cannot be equated to an attempt to evade tax as long as his or its action is consistent but not contrary to law [see CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC)] (6) In law, there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners.
(7) Whether a firm is genuine or bogus or benami is a pure question of fact. But whether two or more partnerships or firms constituted under different deeds of partnership are, in reality, only one partnership or not is a mixed question of fact and law.
(8) The prime guideline to determine this latter question is the cumulative effect or the totality of all the material factors relating to the object and intendment of the partnerships and businesses, their nature, character and identity, coupled with the factum or otherwise of inter-lacing and inter-locking of funds between the two firms.
(9) The very question as to whether there was really one partnership or two different assessable entities being two separate distinct partnership unconnected with each other, has to be determined by the IT authorities for the purpose of computing the assessment under the IT Act but not under the general law governed by the provisions of the Partnership Act.
(10) The finding of the Tribunal about the object and intendment of the partnerships and the businesses and the factum or otherwise of the interlacing and inter-locking of the funds between the two partnerships is a question of fact and such finding would be binding on the High Court in a reference unless there is no material in support of it.
62. The above principles will atonce bring into bold relief how untenable the Department's contention is, particularly in the absence of any external evidence. In other words, even if we sail with the Department and hold that the seized papers do, in fact, contain details of taxable profits distributed amongst the five persons, we will not be able to connect the secreted profits with the assessee-firm, relying only on the fact that the secreted profits had been divided amongst the five persons in the same ratio as the one in which they shared the disclosed profits of the assessee-firm. The Department's difficulty, as we see it, is that it has brought on record no evidence to establish a nexus, however, tenuous, between the so-called secreted profits and the assessee firm.
63. In view of the foregoing, therefore, we decline to interfere in the matter.
64. In the view that we have taken of the matter, we do not consider it necessary to examine the vexted question whether the seized papers had been planted in the residence of the partner as alleged.
65. Before taking leave of the matter, we may advert to an argument or two advanced by Shri Puniha for the Department.
Shri Puniha, it may be recalled, contended that the presumption incorporated in Section 132(4A) of the Act is available for the purpose of making an assessment under Section 143(3) of the Act. In this regard, he drew our attention to the fact that the presumption similar to the one incorporated in the said section has also been incorporated into Section 278D of the Act. As we see it, the said argument cannot avail the Department. For more than one reason. First, we have the Allahabad case of Pushkar Narain Sarrqf (supra) in which the High Court has clearly held that the presumption regarding correctness of books in Section 132(4A) is not available in the context of making a regular assessment. The reason is not far to seek. Appearing as it does in the fasciculus of sections dealing with the powers of the taxing authorities regarding production of evidence etc. and forming as it does a part of Section 132 dealing with search and seizure, the presumption contained in Section 132(4A) could only be regarded as being relevant in the context of an order to be passed under Section 132(5) of the Act.
Secondly, it is true that Section 278D incorporates a similar presumption. But the significant point to be noted is that a recourse to that presumption will be available only in cases where criminal complaints filed by the Department are admitted by the Court. In other words, if the criminal complaints are themselves rejected in limine on the ground that no prima facie case had been made by the Department, the question of the department's having access to the presumption does not arise. The point that we are making here is that the basic requirement underlying Section 277 is that the Department should, in the first instance, make a prima facie case for prosecution; the petition must be admitted by the court; and only thereafter can the Department rely on the presumption. This being the situation, the Department cannot be heard to say that simply because the presumption is incorporated in Section 278D, the benefit of presumption is available to the Department while making an assessment under Section 143(3) of the Act.
In the circumstances, therefore, we reject the aforesaid contention of the Department.
66. In the result, the Department's appeals are dismissed.