Income Tax Appellate Tribunal - Cochin
Smt. B. Indira Rani vs Assistant Commissioner Of Income-Tax on 25 April, 1991
Equivalent citations: [1991]38ITD611(COCH)
ORDER
G. Santhanam, Accountant Member
1. This is an appeal by the assessee against the order of the learned Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961.
2. The assessee was having three bar attached hotels and two foreign liquor wholesale shops. As against the returned loss of Rs. 3,95,978 for the assessment year 1985-86, the total income was determined at Rs. 10,93,910 involving several additions. In the tax audit report accompanying the return of income it was mentioned in Form No. 3CD that the assessee has borrowed Rs. 12 lakhs on hundi other than through account payee cheques. No addition was made by the ITO under Section 69D of the I.T. Act. It is seen from the records that the ITO had called for the confirmatory letters in respect of credit balances of financiers by his letter dated 18-3-1987 and the assessee had complied with the same. Thereupon the assessment was completed.
3. The learned Commissioner of Income-tax acting under Section 263 of the I.T. Act, 1961, issued notice to the assessee bringing her attention to the fact that the ITO had overlooked the provisions of Section 69D of the I.T. Act and as such his order dated 31-3-1987 was erroneous in so far as it was prejudicial to the interests of the revenue and required suitable revision. The assessee filed her objections by her letter dated 13-10-1988 and explained that she was under the bona fide belief that any borrowal of money from money-lenders constituted a hundi transaction and as such she gave the information to the auditors that the borrowings were on hundi and thus the auditor has made his remark referred to by the Commissioner of Income-tax in the impugned notice. Further it was contended that the borrowings were cash transactions without any documents like hundi or pronote and wanted an opportunity of being heard. An opportunity was given to the assessee and it was pleaded before the Commissioner of Income-tax that the description of the transaction amounting to Rs. 12 lakhs by the auditor in his report given under Section 44AB of the I.T. Act was incorrect and that the ITO was satisfied with the genuineness of the transactions and hence there was no error in his order resulting in any prejudice to the interests of the revenue. The Commissioner of Income-tax in his order under Section 263 held that if the borrowings were by means of hundies the ITO should have straightaway made an addition of a like sum to the income of the assessee. However, in view of the revised stand of the assessee that the description in the audit report was not correct and that the transactions were ordinary loan transactions through cash without being supported by hundi papers or promissory notes, it has become necessary for him to set aside the order of the ITO to enable him to look into the genuineness of the transaction. In this view of the matter, he set aside the order of the ITO on this count and restored the same to the ITO for fresh disposal. Being aggrieved, the assessee is now in appeal before us.
4. Shri C.K. Nair, the learned counsel for the assessee, submitted that the proposal in the notice was to treat the transactions as hundi transactions and to make addition under Section 69D of the I.T. Act. The proposal was not for looking into the genuineness of the transaction. The ITO has made omnibus additions to the income of the assessee on several counts as will be evident from the fact that the loss of Rs. 3,59,978 was converted into an income of Rs. 10,93,910. Thus the assessment was made under Section 143(3) of the I.T. Act. The audit report describing the loans amounting to Rs. 12 lakhs as hundi loans received in cash was also before the ITO. In fact, he was satisfied that they were not hundi loans and that was the reason why he wanted to test the genuineness of the transactions by calling upon the assessee to produce confirmatory letters etc. The assessee complied with the same. The amount came from about 35 persons. The assessment was made after a search and seizure made under Section 132 of the I.T. Act and after a study of all the documents on record. The ITO was satisfied about the genuineness of the loan transactions. That is why he did not make any addition covering this sum of Rs. 12 lakhs. The confirmatory letters and account copies were all before the ITO. When the ITO was making huge additions as a result of search operations and on the basis of the seized records and after a thorough scrutiny it passes ones comprehension as to how he could have overlooked the auditor's remarks about the hundi loans. Rather he was convinced that the loans amounting to Rs. 12 lakhs were not hundi loans and that is why he called upon the assessee to produce the confirmatory letters etc. Unfortunately for the assessee the learned ITO has not specifically stated that these are not hundi loans. However, his conduct will show that he looked upon them as non-hundi loans. Therefore, there was no error resulting in prejudice to the revenue. When these points were brought to the notice of the learned Commissioner of Income-tax in the course of the hearing under Section 263 proceedings, the learned Commissioner took the mistaken view that the assessee had changed her stand and, therefore, it was but necessary to enquire into the genuineness of the transactions. Shri Nair further submitted that it was not the assessee who had changed her stand but it was the learned CIT who had shifted his ground as will be evident from the fact that whereas the original notice was for treating the transaction as hundi loan, the final order under Section 263 was for finding out the genuineness of the transaction. If the learned CIT had thus other ideas about the nature of the transaction or its validity, he ought to have issued fresh notice under Section 263. This apart, he submitted, that there was nothing in the order of the ITO which would show that the ITO had not enquired into the genuineness of the transaction. Therefore the order of the CIT is without any basis whatsoever. He relied on the following decisions:-
(i) CIT v. Caxton Press (P.) Ltd. [1981] 129 ITR 462 (Delhi)
(ii) Bagsu Devi Bafna v. CIT [1966] 62 ITR 506 (Cal.)
(iii) V. Venkata Rao v. ITO [1989] 45 Taxman 88 (Hyd.) (Tax - Mag.), a decision of the Hyderabad Bench 'B' of the Tribunal
(iv) CIT v. Kanda Rice Mills [1989] 44 Taxman 316 (Punj. & Har.).
5. Shri A.D. Menon, the learned departmental representative, supported the order of the Commissioner of Income-tax. He submitted that it is very clear from the order of the ITO that he had not considered the report of the auditor wherein it was stated that a sum of Rs. 12 lakhs was borrowed otherwise than through account payee cheques by way of hundies. Therefore, the CIT was justified in invoking the provisions of Section 263 of the IT Act. While the case was being processed before the CIT it came to light that the assessee was raising her claim on the ground that there was mis-description in the auditor's reportand that the loans were taken in cash and that they were not hundi loans etc., it became necessary for him to direct the ITO to look into this aspect of the matter also and, therefore, there was nothing wrong in the CIT having issued directions to the ITO to go into the genuineness of the transactions. He also relied on the following decisions:-
(i) Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi)
(ii) Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC)
(iii) Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC).
6. Shri Nair in his reply stated that before jurisdiction is assumed under Section 263 it should be shown that there was a mistake in the order of the ITO as a result of which there was prejudice to the revenue. The CIT's revised charge is that the ITOs had not looked into the genuineness of the loans amounting to Rs. 12 lakhs. This is certainly an inference and there is no justification for drawing such an inference if regard is had to the surrounding circumstances of the case and the manner in which hefty additions have been made. He relied on the following decisions:-
(i) Tribunal decision in M.B.S. Purushotham v. ITO [1988] 26 ITD 520 (Hyd.)
(ii) The report of the Supreme Court as found in 187 ITR (Statutes) 37 in CIT v. P.S.T.S. Thiraviarathna Nadar
(iii) Kerala Law Journal Tax Case 1991 para 21 and
(iv) B.C.S. Kartar Chit Fund & Finance Co. (P.) Ltd. v. CIT [1989] 179 ITR 317/46 Taxman 88 (Punj. & Har.) He further submitted that the CIT was only instituting a roving inquiry in the hope that something would turn up and such a course is not permissible to him in a proceeding under Section 263 unless it has been established that the initial order of the ITO suffered from an error resulting in prejudice.
7. We thus heard rival submissions and perused the records. Form No. 3CD prescribed under Rule 6G(2)(a) of the I.T. Rules contains a statement of particulars in the case of person carrying on business and the said statement has to be furnished by the tax auditor under Section 44AB of the I.T. Act. The question as against Column 8 of the statement cited supra the answers thereto are as follows:
Whether any amount is borrowed on a Amount borrowed on hundi hundi form, or any amount due thereon Rs. 12,00,000 (including interest on the amount borrowed) Amount outstanding is repaid to, any person otherwise than Rs. 12,00,000. through an account payee cheque? If so, give details.
It is the Commissioner's contention that the ITO has overlooked the information provided by the auditor as above and if he had applied his mind to this aspect of the matter he would have straightaway made an addition under Section 69D of the I.T. Act in a sum of Rs. 12 lakhs. This he failed to do and, therefore, the order of the ITO was erroneous in so far as it was prejudicial to the interests of the revenue.
It is on this basis that the CIT initiated the proceedings under Section 263 of the I.T. Act. The assessee's grievance is that the learned CIT has not appreciated the facts in the proper perspective and has not looked into the surrounding circumstances of the case and his inference that the ITO had not applied his mind to this piece of information found in the statement of particulars in Form No. 3CD is not warranted in the circumstances of the case. The learned departmental representative emphasizes the fact that the ITO has not held that the sum of Rs. 12 lakhs did not represent hundi loans and, therefore, the inference of the CIT that the ITO had not applied his mind to the facts of this case was justified. So, the entire issue turns on whether the ITO had really overlooked the information as was found in the statement of particulars cited supra or whether it could be reasonably held that he had applied his mind to the nature of the borrowings in a sum of Rs. 12 lakhs though he had not obviously referred to its nature in his order. Form No. 3CD has got many particulars to be answered. Item 4(viii) deals with entertainment expenditure and carries against it the figure of Rs. 11,579. In the assessment order such entertainment expenditure was disallowed as follows:
Regarding Hotel Rajdhani Rs. 3,397
Regarding Hotel President Rs. 6,682
Regarding Hotel Panchavadi Rs. 1,501
Rs. 11,580
Another Item under Sr. No. 7(i) deals with tax, duty or other sum debited to the profit and loss account but not paid during the previous year against which purchase tax of Rs. 4,878/68 is mentioned. The same has been disallowed by the ITO as follows :
Regarding Hotel Panchavadi Rs. 2,319
Regarding Hotel President Rs. 2,560
Rs. 4,879
Therefore, it can be said that the ITO was very much aware of the statement of particulars furnished by the tax auditor in Form No. 3CD including the information that is provided by him about the borrowals having been made on hundi to the extent of Rs. 12 lakhs. We went through the assessment file and the auditor has furnished the details among others for the sum of Rs. 12,00,000 in a separate statement in response to Serial item 10 of Form No. 3CD which require the auditor to state the following information:
10. Particulars of each loan or deposit of Rs. 10,000 or more taken or accepted by the assessee in the following form :
(i) Name and address of the lender/depositor
(ii) Whether amount borrowed on hundi?
(iii) Whether loan/deposit account was squared up during the year?
(iv) Maximum amount outstanding at any time during the year
(v) Whether loan/deposit was taken or accepted in cash?
(vi) Has any loan or deposit of Rs. 10,000 or more been repaid in cash?
It would appear that there are 37 entries in that statement and as against 34 entries it is remarked by the auditor that they are hundi loans. The ITO has gone into each and every item found in that statement and has noted as 'confirmed' against some items and has ticked off the other items and has also remarked in some cases 'Bharathan and Co.' or 'Ramesan Industries'. These facts lend support to the contention of the assessee that it is not as though the ITO was unaware of the remarks of the auditor about the nature of the loans and that the ITO had not only looked into the nature of the loan but had also looked into their genuineness and because he was satisfied about their genuineness and about their true nature he did not make any specific addition either under Section 69D or otherwise. This is not a case where the assessment was completed accepting the return of the assessee. This is a case where hefty additions have been made under Section 143(3) of the I.T. Act. This is a case also where the ITO had called for confirmation of the credits appearing in the books of account and the assessee had complied with such a request. It is also seen that the assessee has furnished the confirmatory letters from all the creditors with their names and addresses and their Permanent Account Numbers or G.I.R. Numbers with the statement of accounts starting with opening balance, further credits and debits etc. The nature of the receipt or payment in these accounts are also mentioned. Therefore, we are inclined to accept the contention of the learned counsel for the assessee that the ITO had adjudged the true nature of these transactions as simple loan transactions and had gone into their genuineness and accepted the same though he had not specifically adverted to them in his order. When huge additions are being made on several counts (in this case a loss of 3,95,978 was converted into an income of Rs. 10,93,910), if at all the ITO had entertained any doubts about the genuineness of the loans, he would have certainly made additions on that score also especially after he had called upon the assessee to produce confirmatory letters. This has not been done. Therefore, in the preponderance of probabilities we hold that the ITO was satisfied that the loans are not hundi loans but are ordinary loan transactions and that they were genuine.
8. The learned departmental representative submitted that in the absence of a clear finding that the sum of Rs. 12 lakhs did not represent hundi transactions, the CIT was justified in invoking his jurisdiction under Section 263. Assuming, without admitting, that the CIT was justified in invoking the jurisdiction under Section 263, we hold that on merits the revenue has no case for it. The show-cause notice refers to the amount of Rs. 12 lakhs borrowed on hundi otherwise than through account payee cheques and the applicability of Section 69D of the I.T. Act which was allegedly overlooked by the ITO as a result of which the order of the ITO was erroneous and prejudicial to the interests of revenue requiring revision. In response to this notice the assessee had replied in detail explaining the true nature of the transaction supported by statements from all the creditors, a sample of which is given below:
TO WHOM IT MAY CONCERN:
I had given a sum of Rs. 35,000 (Rupees Thirty Five Thousand only) as loan to Smt. Indira Rani, Sreenilayam, Veerabhadra Gardens, Pottakuzhi, Pattom, Trivandrum, in cash during the financial year 1984-85. Neither hundi nor pronote or any other document has been executed in this connection. I gave the money in cash as loan. I declare that what is stated above is true and correct.
Sd/- Nirmalakumari, W/O Nirmal Kumar No. 3 M.S.Naidu Place: Madras Madras. Date: 12-10-1987
Several such letters were filed before the learned CIT. The learned CIT has not referred to any of these letters produced before him by the assessee in support of his contention that the transactions did not represent hundi loans. Nor has he recorded a finding that these letters required further verification or examination. Therefore, the prima facie ground on which action under Section 263 was initiated has fallen to the ground in the light of the evidence produced by the assessee. The learned Commissioner viewed the explanation of the assessee as a change of stand on her part. We are unable to persuade ourselves to such a plea. The auditor has opined the transactions as hundi transactions made in cash. He has furnished the details in the prescribed form. Details were not gulped by the ITO without scrutiny. He had called for confirmatory letters which were furnished by the assessee from each one of the creditors. The confirmatory letters have in them the copy of the accounts showing the transaction in great detail. A mere look at these confirmatory letters which are on the record of the ITO would show that they are not hundi transactions because nowhere has it been described as a hundi loan. Further the ITO would appear to have applied his mind to each of the details found in the statement furnished by the auditor which bear the tick marks of the ITO as well as certain remarks. Thus, it cannot be held that the ITO was not satisfied with the genuineness of the transactions. Nor can it be said that the assessee had revised her stand for the first time before the CIT in the 263 proceedings. Therefore, there could be no occasion for the learned CIT to take the view that the transactions are either hundi transactions hit by the provisions of Section 69D or in the event of such transactions not being hundi transactions their genuineness should be enquired into. This conclusion we reach on the analysis of the materials that were already before the ITO, the kind of scrutiny made by the ITO and also the materials that were placed before the learned Commissioner of Income-tax in the course of proceedings under Section 263 of the I.T. Act. The learned CIT has remarked that the preliminary enquiries conducted by him have shown that it is necessary to make a detailed enquiry about the loans before they are accepted as genuine. We have gone through the CIT's file which contains the issue of notice and the record of hearings etc. and contains in it a noting to the following effect made on 9-12-1988 before passing of the order under Section 263 of the I.T. Act on 9-3-1989 :
No response so far. This will be posted sometime later. In the meantime some enquiry to be caused about the genuineness of the creditor at Madras. A.D.I, will please do the necessary....
This noting is only symptomatic of the suspicion of the learned CIT that all is not well with the assessment Suspicions however great cannot take the place of proof nor can it be a cause of action under Section 263. No material in regard to the type of enquiry conducted and the kind of information collected pursuant to this noting is available on record. For these reasons we vacate the order of the CIT.
9. On both sides several case laws, as noted in the preceding paragraphs., were cited before us. As the decision is based on the facts of the case and the preponderance of probabilities thereon we do not propose to go into those cases.
10. In the result, the appeal is allowed.