Income Tax Appellate Tribunal - Hyderabad
Colonisers vs Assistant Commissioner Of Income-Tax on 21 March, 1991
Equivalent citations: [1992]41ITD57(HYD)
ORDER
N.D. Raghavan, Judicial Member
1. The assessee is a firm carrying on business as developers of land. During the course of assessment for the assessment year 1985-86, the Income-tax Officer found that there were 8 cash credits to the extent of Rs. 3.50 lakhs on different dates of the accounting year. The assessee filed confirmation letters from all the seven persons concerned. In the confirmation letter, the address of a creditor Sri A. Ravi Gopal was shown as 10-1 -462, West Marredpalli, Secunderabad. The enquiries conducted by the Income-tax Officer through his Inspector revealed that this house belonged to another gentleman Sri A.Rammohan and this person denied any knowledge of the alleged creditor Sri A.Ravi Gopal. The Income-tax Officer also found that Sri Ravi Gopal had opened a bank account with Bank of Tamilnadu on 8-4-1985 with a sum of Rs. 50 and on 18-5-1985 the cheque issued by the assessee in repayment of the debt at credit was encashed. This account was eventually closed on 19-11-1985. The Income-tax Officer further found that the amount credited to his account was withdrawn by self cheque and on the reverse side of the self cheque, Sri M. A.Qayyum, Accountant of the assessee- firm, signed in token of having received cash of Rs. 2 lakhs from the bank. When Sri Qayyum was examined on 1-3-1988, he stated that the amount withdrawn by him by signing the self cheque was handed over to Sri G. Aravinda Reddy, partner of the firm. In a statement recorded from Sri Aravinda Reddy, he stated that the sum of Rs. 2 lakhs received from Sri Qayyum was immediately passed on to one Sri Udayabhanu, who is said to be an accountant of Babu Khan Estate, and at that time the creditor was also present in the room. Sri Udyabhanu is stated to have paid the money to the creditors. Though he said that he could remember the face of this creditor, he was not sure whether he could produce the person. The Income-tax Officer also found that the creditor was introduced to the bank by Sri M.A.R. Krishnam Raju, Chartered Accountant. When the Income-tax Officer asked the assessee to produce Sri Ravi Gopal, the assessee expressed inability to do so. During the course of assessment, certain statements were recorded from the partner Sri Aravinda Reddy and also one or two witnesses like Sri Qayyum, Accountant of the assessee-firm, and Sri M.A.R. Krishnam Raju, Chartered Accountant who introduced one of the creditors, Sri Ravi Gopal, to the Bank of Tamilnadu.
2. On the above facts, the Income-tax Officer was of the opinion that the mere filing of confirmation letters did not discharge the onus that lay on the assessee. When the credit is in the name of a third party, the burden still lay on the assessee to establish the identity of the third party. The assessee did not prove the transaction by establishing the identity of the creditor, the capacity of such creditor and the genuineness of the transaction. Since the assessee did not know the whereabouts of this creditor, he could not produce him before the Income-tax Officer. The Inspector's enquiries also showed that the above person did not stay at Marredpally at any time. During the course of recording statement on 21-3-1988, the Managing Partner was informed that on verification at the address given of Sri Ravi Gopal and another creditor Sri A. Suman Kumar, it came to light that the above persons never stayed at Marredpally address given by them. These and other creditors were also not produced before the Income-tax Officer and so he was of the opinion that the assessee did not discharge the responsibility of proving the credits in the names of the above persons. The Income-tax Officer also found that in the repayments of loans said to have been made by the assessee to M/s Coastal Engineers, Sri G. Subba Rao and M/s Everest Enterprises, the same were transferred to Moghal Estates with whom the assessee had entered into an agreement to develop the land. Similarly, in respect of the credit in the name of Sri N. Srinivas, the Income-tax Officer found that the assessee-firm returned the amount on 12-2-1985, and on the same day when the amount was transferred, it was withdrawn by self cheque.
3. On the basis of the above facts, the Income-tax Officer was of the opinion that the assessee failed to establish the identity of the creditors and the genuineness of the transactions. He accordingly treated the entire amount of Rs. 3.50 lakhs as assessee's income from undisclosed sources under Section 68 of the Income-tax Act, 1961.
4. On appeal, the Commissioner of Income-tax (Appeals) held that the responsibility of establishing the genuineness of the transactions recorded in the books of account of the assessee squarely lay on the assessee itself. As the assessee had not been able to establish the identity of the persons, an attempt at judging their credit worthiness or the genuineness of the actual transactions would be a superfluous exercise.
In the circumstances, the CIT (Appeals) confirmed the addition of Rs. 3.50 lakhs made by the Income-tax Officer.
5. Aggrieved with the above decision of the CIT (Appeals), the assessee came in appeal before the Tribunal. During the course of appeal before the Tribunal, the assessee, amongst other grounds, took two grounds, viz., grounds 3 and 5, regarding the addition of Rs. 3.50 lakhs under Section 68, which ran as follows : -
3.The Assessment Order was passed without giving any opportunity to the Appellant for rebuttal and answer for the proposed additions which were made on the basis of the material gathered by ITO privately behind the back of the Appellant. The Assessment Order is thus clearly in violation of the mandatory provisions of Section 142(3) of the Income-tax Act, 1961 the rules of natural justice and rules of evidence. The Assessment Order was therefore clearly illegal and void and liable to be quashed, by the Appellate Authority.
5. The learned First Appellate Authority ought to have deleted the additions made by the Assessing Officer under Section 68 since the (Assessing Officer) failed to issue summons and examine the lenders under Section 131 of the Act. This tantamounts to violation of essential rules of Natural Justice and the additions ought to have been deleted by the First Appellate Authority.
6. It was submitted before the Tribunal that a prayer was made before the Income-tax Officer to compel the production of the creditors as the assessee has no power to compel their presence. It accordingly requested the Income-tax Officer to issue summons to the creditors concerned so that they could be examined. It was submitted that it was the duty of the Income-tax Officer to enforce the attendance of a witness if his evidence is material. The Income-tax Officer did not carry out this exercise. While making the addition, the Income-tax Officer relied upon, without affording a reasonable opportunity to the assessee of meeting or explaining the materials contained in the Inspector's report and so the resultant assessment would be violative of principles of natural justice. While it may be open to the Income-tax Officer to collect materials behind the back of the assessee, if he desires to use the material so collected against the assessee, the assessee must be informed of the material and must be given adequate opportunity of explaining it. In the light of the above arguments, it was submitted by the assessee's representative that since the enquiry report and the sworn statements were not given to the assessee, the Inspector's report relied on in the order was not provided to the assessee and the request for the issuance of summons under Section 131 was not complied with, the order of the Income-tax Officer was violative of principles of natural justice. The learned departmental representative, on the other hand, defended the Income-tax Officer's order. He claimed that adequate opportunity was provided to the assessee.
7. After considering the rival submissions, the learned Judicial Member held that it is not disputed that in making the assessment, the Income-tax Officer relied on the Inspector's report. It is also not disputed that copies of the Inspector's enquiry report and sworn statements were not provided to the assessee. It was found from the records that the assessee made a request for the issuance of notice under Section 131 and the request of the assessee was not complied with. Having regard to the facts and circumstances of the case, he was of the opinion that there was failure of natural justice on the part of the Assessing Officer. He, therefore, thought it fit to "set aside the order and restore it to the file of the Assessing Officer with direction to redo the assessment after providing adequate opportunity to the assessee of being heard". In the circumstances, he was of the opinion that the appeal should be treated as allowed for statistical purposes.
8. The learned Accountant Member, however, did not agree with the views of the learned Judicial Member. He, however, agreed with the finding of the learned Judicial Member that the enquiry report and the sworn statements were not provided to the assessee and in spite of a specific request made by the assessee for the issuance of summons under Section 131 of the Income-tax Act to ensure the attendance of the creditors, the Assessing Officer did not choose to comply with such a request and thus there was dismal failure of natural justice in framing the assessment. While the learned Judicial Member has set aside the order of assessment and restored the matter to the file of the Assessing Officer, the learned Accountant Member felt unable to persuade himself to this point of view. According to him, the assessment order contained some other disallowances besides the additions on account of cash credits. The assessee carried the matter in appeal against those additions and obtained partial relief before the CIT (Appeals). In the second appeal, the dispute was only regarding the additions made under Section 68. So, to set aside the entire order is to travel beyond the subject matter of appeal. According to him, the correct course is to set aside the additions under Section 68 but not the entire order of assessment.
9. As pointed out earlier, the learned Accountant Member also agreed that there was violation of principles of natural justice in this case. In view of the decision of the Kerala High Court in Ponkunnam Traders v. Addl. ITO [1972] 83 ITR 508, and the Supreme Court in Union of India v. Tulsiram Patel AIR 1985 SC 1416, the learned Accountant Member held that the only course open to the Tribunal is to set aside the additions and leave it to the revenue to take such action as it may deem fit if otherwise permissible under law. In the circumstances, he held that the non-compliance with the principles of natural justice should be considered as striking at the root of the matter itself and hence the additions under Section 68 in this case should be held as void ab initio as they have no legal legs to stand upon. At any rate, the additions made without affording adequate opportunity to the assessee are liable to be quashed.
10. The learned Accountant Member then went into the merits of the additions and on the basis of merits also he held that there was no case for addition of the amount of Rs. 3.50 lakhs.
11. In view of the above difference of opinion, a reference was made to the Third Member in accordance with the provisions of Section 255(4) of the Income-tax Act. The learned members of the Tribunal who differed inter se have stated the following points of difference for adjudication by Third Member:-
(1) In a case where the assossee is on appeal against the additions by way of cash credits only and the other additions are not under challenge, whether the Tribunal would be justified in setting aside the entire order of assessment instead of the additions?
(2) Whether the additions made by the Assessing Officer in violation of the principles of natural justice should be set aside as void ab initio and thus deleted or should the case be restored to the ITO with directions for redoing?
(3) Where an assessee has assailed additions on the failure of natural justice and also on the merits of each addition, whether it would be just and proper to deal with only the question of natural justice and to restore the issue to the Assessing Officer without considering the merits of each addition?
12. Sri Swamy, learned counsel for the appellant, contends that the learned Judicial Member is not correct in setting aside the entire order of assessment instead of those additions which are vitiated by failure to observe principles of natural justice. According to him, the setting aside of the entire assessment would mean setting aside even the relief obtained by the assessee from the hands of the first appellate authority to which no objection was taken by the revenue. This will result in the entire process of assessment being thrown open thereby jeopardizing the interest of the assessee in an unforeseen manner. In this connection, he relied on the decision of the Mysore High Court in Pathikonda Balasubba Setty v. CIT [ 1967] 65 ITR 252, and the Madras High Court in V. Ramaswamy lyengar v. CIT [1960] 40 ITR 377, He also refers to the commentary of the learned authors Chaturvedi and Pithisaria contained in Vol. 5 at page 4389.
13. The learned departmental representative, on the other hand, supports the order of the learned Judicial Member, According to him, the Tribunal has full powers to pass such orders as it thinks fit. In the circumstances, as long as the Tribunal has jurisdiction to set aside the entire assessment order, the order of the Tribunal cannot be questioned.
14. In respect of the second point of difference, Sri Swamy supports the view taken by the learned Accountant Member. When once there is non-observance of principles of natural justice, according to him, the order requires to be quashed. The principles of natural justice have been elevated to the status of Fundamental Rights and every person has the right to be heard before being condemned. As pointed out by the learned Accountant Member, the Constitution Bench of the Supreme Court in the case of Tulsiram Patel (supra) held that the principles of natural justice have come to be recognised as being a part of the guarantee contained in Article 14 of the Constitution because of the new and dynamic interpretation given by the Supreme Court to the concept of equality which is the subject matter of that Article. The court also held that the rule of natural justice in appeals and writ petitions, namely the audi alteram partem rule, means that a person against whom an order to his prejudice may be passed should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral and documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses, who are to give evidence against him, examined in his presence and have the right to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. In the present case, there is clear violation of principles of natural justice inasmuch as the assessee was not given a copy of the Inspector's report, copies of the statements recorded were not furnished to it and its request for examination of the creditors under Section 131 was denied. Sri Swamy also points out that both the Members have agreed that there was a failure of observance of principles of natural justice. Once this is accepted, the only course open to the Tribunal is to strike down the additions or quash the order only to the extent it deals with the addition of Rs. 3.50 lakhs. This is exactly what the learned Accountant Member has done. Once the additions are quashed, there is nothing to be gone into and the learned Judicial Member is not correct in observing that further opportunity should be given to the revenue to examine the credits afresh after observing the principles of natural justice. He relies in this connection on the decision of the Supreme Court in B.R. Singh v. Union of India AIR 1990 SC 1, and the commentary of the learned authors Chaturvedi and Pithisaria in Vol. 3 at pages 2803 and 2804.
15. The learned departmental representative, on the other hand, contends that there was no failure of natural justice. The gist of the Inspector's report, viz., that the creditor Sri Ravi Gopal never resided at the address given by the assessee, wasput to the partner in the statement recorded from him on 21-3-1988. There can be no question of furnishing of copies of the sworn depositions recorded from the partner, as the deponent himself is a partner in the firm. In any case, it was pointed out that the partner was also cross-examined by the counsel of the firm, Sri Abdul Razack. In any case, it is contended that the failure to observe the principles of natural justice in this case was not to such an extent as to result in quashing the order of assessment and deleting the additions completely, but it is a fit case where the issue should be gone into once again after giving the assessee a suitable opportunity of meeting the case sought to be made against it. He relies in this connection on the decision of the Supreme Court in GuduthurBros. v. ITO [ 1960] 40 ITR 298 the Andhra Pradesh High Court in Addl, CIT v. Boina Suranna [1980] 124 ITR 328, and the Supreme. Court in Kapurchand Shrimal v. CIT [1981] 131 ITR 451. On the basis of the above decisions, Sri Shyamsunder, learned departmental representative, contends that the learned Judicial Member was correct in sending back the matter to the Income-tax Officer for further investigation.
16. Regarding the decision given by the learned Accountant Member on merits, it is stated by Shri Swamy, the learned representative for the assessee, that the issue is only consequential to non-observance of principles of natural justice. Sri Shyam Sunder, learned departmental representative, on the other hand, points out that there was no order on merits by the learned Judicial Member and so it cannot be said that there was a difference of opinion on the merits of the additions.
17. We have considered rivailsubmissions. The first point of difference stated by the learned Members is whether the Tribunal would be justified in setting aside the entire order of assessment instead of merely setting aside the additions. The Madras High Court in the case of V. Ramaswamy lyengar (supra), held that power to remand is not expressly given in Section 33(4) [of the old Act] but such a power is implicit in the words "pass such orders thereon". The power of the Tribunal to remand is only incidental to its power to hear and dispose of the appeal. If in an appeal the Tribunal could interfere in favour of the appellant, a remand could be made as incidental to that power for the purpose of giving relief to the assessee, but the power of remand could not be exercised so as to exceed the jurisdiction of the Tribunal under Section 33(1) [of the old Act]. It cannot exercise the power of remand for the purpose of enhancing the tax. It would appear from this decision that while the power of remand is implicit in the powers of the Tribunal to pass "such orders on the appeal" and is also incidental to its powers to hear and dispose of the appeal, it cannot be exercised for the purpose of enhancing the tax which it is prohibited to do by Statute.
18. The Mysore High Court in the case of Palhikonda Balasubba Setty (supra), held that the powers of the Tribunal are limited to the subject matter of appeal and the Tribunal has no power to make an enhancement beyond the figure fixed by the Department. It was held that the Tribunal could only deal with the additions in dispute but not with other parts of the order which are not disputed before it.
19. In the light of the above two decisions, it is clear that the Tribunal, while it has powers to remand the case to the lower authorities, has no power to enhance, or the power of remand or setting aside should not be exercised in such a manner that it may result in an enhancement of the assessment. In the presentcase, certain additions made by the Income-tax Officer have already been deleted by the CIT (Appeals) and there is also no appeal by the revenue against such relief-given by the CIT (Appeals). By setting aside the entire assessment, the result would be that even the deletions ordered by the CIT (Appeals) are set at naught. Viewed in the light of the facts of this case and also the decisions mentioned above, we are of the opinion that in the facts and circumstances of the case, the appropriate course would be to set aside only that portion of the order of assessment which deals with the impugned additions and not the entire order of assessment as done by the learned Judicial Member. On this issue, we agree with the learned Accountant Member that only that part of the assessment order which deals with the addition of Rs. 3.50 lakhs has to be set aside and not the entire assessment.
20. Now, the question next to be answered by us is as to whether additions made by the Assessing Officer in violation of the principles of natural justice should be set aside as void ab initio thus deleting it or should the case be restored to the Income-tax Officer with direction for redoing. From a perusal of the orders of both the learned Members, it appears that both the Members agree that there is failure to observe the principles of natural justice. While so, the learned Judicial Member goes on to give a direction to the Income-tax Officer to re-examine the matter, whereas the learned Accountant Member stops short of such direction to the Income-tax Officer and also does not say that giving such direction is wrong. Even after declaring that the additions made without affording adequate opportunity to the assessee is liable to be quashed, he goes on to decide the issue on merits and gives his verdict for deletion only after considering the merits and not before. In this view of the matter, we find that the second question referred to us for our answer has two segments. The first segment is as to whether the additions made in violation of the principles of natural justice should be set aside as void ab initio. The second segment is as to whether the addition should be deleted or should the case be restored to the Income-tax Officer with a direction for redoing.
21. Now, let us take the first segment of the second question. As it has been discussed in the earlier paragraphs, there is plethora of cases holding that violation of principles of natural justice makes the decision void as in every other case ultra vires. The rules of natural justice operate as implied mandatory requirement, non-observance of which amounts to arbitrariness and discrimination. The principles of natural justice have been elevated to the status of Fundamental Rights guaranteed in the Constitution of India as is evident from the decision of the Full Bench of the Honourable Supreme Court in the case of Union of India v. Tulsiram Patel AIR 1985 SC 1416 at 1460, holding that the principles of natural justice have thus come to be recognised as being a part of the guarantee contained in Article 14 of the Constitution of India because of the new and dynamic interpretation given by the Supreme Court to the concept of equality which is the subject matter of that Article and that violation of principles of natural justice by a State action is a violation of Article 14. In fact, the principles of natural justice, in the realm of life and liberty, would ipso facto even be read into Article 21 of the Constitution because any procedure which affected life or liberty had to be a just, fair and reasonable procedure which necessarily meant the principles of natural justice. That is why these principles have been called as part of the universal law, as part of the rule of law and have also been termed as fair play in action. Audi alteram partem is one of the fundamental principles of natural justice. A quasi-judicial or administrative decision rendered or an order made in violation of the rule of audi alteram partern is null and void and the order made in such a case can be struck down as invalid on that score alone-Maneka Gandhi v. Union of India AIR 1978 SC 597, P. Gangadharan Filial v. ACED [1980] 126 ITR 356 at pp. 365 to 367 (Ker.). In other words, the order which infringes the fundamental principles, passed in violation of audi alteram partem rule, is a nullity. When a competent court or authority holds such as order as invalid or sets it aside, the impugned order becomes null and void-Navabkhan Abbaskhan v. State of Gujarat AIR 1974 SC 1471 at 1479. In the light of these decisions, we do opine that the addition made by the Assessing Officer in violation of the principles of natural justice has to be set aside as void only in so far as the additions by way of cash credits alone are concerned, which are separable from the other additions in the order that are not challenged, and consequently becoming non est in the eye of law.
22. The second segment of the second question, as to whether the addition should be deleted or should the case be restored to the Income-tax Officer with a direction for redoing, consequently remains to be answered by us at this stage. Before answering, it will be useful to take the aid of the following decisions :-
(a) In Supdt. (Tech.-I), Central Excise v. Pratap Rai [1978] 114 ITR 231, the Honourable Supreme Court held that whenever an order is struck down as invalid being in violation of principles of natural justice, there is no final decision of the case and fresh proceedings are left open. All that is done is that the order assailed by virtue of its inherent defect is vacated but the proceedings are not terminated.
(b) In GuduthurBros.' case (supra), the Honourable Supreme Court was dealing with a case where penalty was levied without affording the assessee an opportunity of being heard. There the penalty proceedings were validly initiated. The penalty imposed without giving opportunity of hearing was set aside. The question arose as to whether the proceedings could be continued from the stage of notice and was it so permissible. It was held that "as the Appellate Assistant Commissioner pointed out only to an illegality which vitiated the proceedings after they were lawfully initiated, the notice issued under Section 28(1 )(a) did not cease to be operative and it was open to the Income-tax Officer to take up the matter at the point at which the illegality supervened and to correct his proceedings. The notice under Section 28(1 )(a) having remained still to be disposed of, the proceedings started after the order passed by the Appellate Assistant Commissioner could be described as during the course of the assessment proceedings, because the action would relate back to the time when the first notice was issued. The Income-lax Officer had jurisdiction to continue the proceedings from the stage at which the illegality had occurred.
23. Having answered the first segment of the second question that only that part of the assessment order which deals with the addition of Rs. 3.50 lakhs has to be struck down as void and not the entire assessment on the ground of violation of principles of natural justice, we answer the second segment of the second question that in that event and under that circumstance there is no necessity to give separate direction to delete the addition concerned or for the case to be restored to the Income-tax Officer for redoing, inasmuch as the Department is always free to take such action as is open to it in accordance with law.
24. Taking up the third question referred to us, the question of going into the merits of the addition does not at all arise at this stage when there is no dispute that there was violation of the principles of natural justice and for the reason that the portion of the order of the Income-tax Officer directing the. addition of Rs. 3.50 lakhs remains quashed as null and void. As also pointed out by the Honourable Andhra Pradesh High Court in the case of Boina Suranna (supra), considering the issue on merits without giving the assessee an opportunity of being heard would only be putting the cart before the horse. In the circumstances, we are of the opinion that when the order has been declared as null and void as regards the addition concerned on the ground of non-observance of principles of natural justice, the merits of such addition need not be gone into. We thus agree with the learned Judicial Member for the third question, of course without expressing any opinion on the merits of the addition in dispute dealt with by the learned Accountant Member,
25. The matter will now go back to the regular bench for decision according to majority opinion.
M.K. Chaturvedi, Judicial Member
1. This appeal by the assessee is directed against the order of the Commissioner of Income-lax (Appeals) I, Hyderabad and pertains to the assessment year 1985-86.
2. At the outset learned counsel for the assessee submitted that in the instant case, principles of natural justice have been violated and the dictum of, audi alterant partem, has not followed. Our attention was invited at ground Nos. 3 & 5 of the appeal. These are as under:-
(3) The assessment order was passed without giving any opportunity to the appellant for rebuttal and answer for the proposed additions which were made on the basis of the material gathered by ITO privately behind the back of the appellant. The assessment order is thus clearly in violation of the mandatory provisions of Section 142(3) of the IT Act, 1961 the rules of natural justice and rules of evidence. The assessment order was therefore clearly illegal and void and liable to be quashed by the appellate authority.
(5) The learned first appellate authority ought to have deleted the addition made by the Assessing Officer under Section 68 since he (Assessing Officer) failed to issue summons and examine the lenders under Section 131 of the Act. This tantamounts to valuation of essential rules of Natural Justice and the additions ought to have been deleted, by the first appellate authority.
3. We first propose to discuss in brief the facts of the case. The business of the appellant is to acquire land and to construct housing colony for individual purchasers of house after developing the land. Accounting year of the assessee ends on 31 -3-1985. During the relevant assessment year the housing colony was under construction. No house was sold. From time to time the appellant has received advances from the intending purchasers and has used the advances received for developing the land, acquiring further land and for constructing certain buildings. In the profit and loss account furnished along with the return of income, the appellant had claimed deduction for the indirect expenses against petty miscellaneous receipts. The advances received and the expenditure on development and construction of buildings have been directly taken to the balance sheet.
4. The assessee filed its return of income on 25-9-1985 admitting net loss of Rs. 98,080. A search was conducted on 26-9-1986 and 29-9-1986 in the business premises of Mogul Builders and Moghal Planners, M/s Babukhan Constructions, M/s. Hyderabad Builders during which the books of account relevant to various assessment years were seized. During this search, books of account relevant to assessee's firm also were found and seized.
5. As seen from the books of account, viz., cash book and ledger relevant for this assessment year, the following amounts were noted as cash credits :
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S.No. Name of the party from Amount of Date on
whom the assexsee-firm loan taken by which the loan
borrowed the asses see.-firm was obtained
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1. Sri A. Ravi Gopal 1,50,000 By cash 4-4-1984
2. M/s Everest Enterprises 30,000 " 2-5-1984
3. Sri G.S. Murthy 20,000 " 8-5-1984
4. Sri G. Subbarao 10,000 " 9-5-1984
5. Sri G.R. Gupta 20,000 " 14-5-1984
6. M/s Coastal Engineers 20,000 " 16-5-1984
7. Sri N. Srinivas 50,000 " 29-5-1984
8. --do-- 50,000 " 7-6-1984
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6. During the course of assessment proceedings, the assessee filed confirmatory letters from M/s Everest Enterprises (2) Sri N. Srinivas (3) Shri G. Subbarao (4) Sri G.S. Murthy and Sri G.R. Gupta. M/s Coastal Engineers also have sent its confirmatory letter on 13-1-1988 to the effect that they have given a temporary loan of Rs. 20,000 on 16-5-1984 to the assessee. In regard to Shri A. Ravigopal, the assessee filed confirmatory letter before the ITO during the assessment proceedings for the assessment year 1984-85 to the effect that he has paid as loan a sum of Rs. 50,000 on 20-1-1984 and Rs. 1,50,000 on 4-4-1984 by way of cash to the assessee. Details of bank accounts of all the loan creditors was obtained from the banks, since all the amounts of loans were returned by the assessee before the accounting year relevant for this assessment year.
7. In order to ascertain the veracity of the credits, ITO made certain enquiries. Inspector was deputed and his report was relied upon. Sworn statements were taken into consideration.
8. Learned counsel invited our attention to a letter dated 16-3-1988 given to the Income-tax Officer apropos the enquiry. A xerox copy of the said letter was appended in the paper book filed by the assessee at page 38. The evidence of filing this letter is recorded on the face of it which bears receipt No. 120126 dated 16-3-88. The relevant portion of the letter is reproduced here as under:-
You also know, Sir, that we do not have any power, authority or force to produce persons or compel their personal appearance or attendance before you to support our case. We are therefore handicapped and request you, Sir, to kindly assist as and invoke the powers of discovery and inspection vested in you under Section 131 of the ITA and issue summons to all those 11 persons (loan creditors) and compel their attendance so that justice is done in our Assessment proceedings. We are prepared to bear and pay cost and expenses to be incurred in this regard for enforcing the personal attendance of those 11 persons, if intimation is given to us in this regard with a challan towards requisite amount to be deposited for the purpose.
9. It was submitted by the learned counsel that it is the duty of the ITO to enforce attendance of witness if his evidence is material. Thus, the ITO does not exercise his powers to call the witness and examine him, he cannot treat the deposits in the name of the witness as assessee's suppressed income. To support his contention, learned counsel relied on the ratio laid down in NathuRam Premchand v. CIT [1963] 49 ITR 561 (All.), Dr. Surmukh Singh Uppal v. CIT [1983] 144 ITR 191/144 ITR 200 (Punj. & Har.) and CIT v. IshwarDass Sharma [1986] 158 ITR 168 (Delhi).
10. It was also submitted that where in making an assessment the ITO relied upon without affording a reasonable opportunity of meeting or explaining materials contained in Inspector's report, the resultant assessment would be violative of principles of natural justice. To support this proposition learned counsel relied on the ratio laid down in the case of Mc Lead & Co. Ltd. v. State of Orissa 1971 Tax LR165 (Orissa).
11. It was further submitted that the power to make private enquiry is implicit in the provisions of Section 143(3). Therefore it is open to ITO to collect materials to facilitate assessment even by private enquiry but if he desires to use against the material so collected, the assessee must be informed of the material and must be given adequate opportunity of explaining it. To support this proposition learned counsel relied on the ratio laid down in the case of C. Vasantlal & Co. v. CIT [1962] 45 ITR 206 (SC) and Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 (SC).
12. In the light of these arguments it was submitted by the learned counsel that since enquiry report and sworn statements were not given to the assessee, the Inspector's report relied in the order was not provided to the assessee and request for the issuance of summons under Section 131 was not complied with the order of assessment is violative of the principles of natural justice.
13. Shri M.K. Rao, learned D.R. submitted that in the facts and circumstances of the case it cannot be said that adequate opportunity was not provided to the assessee. Since the case was getting time barred the Assessing Officer had some difficulty in complying with some of the requests made by the assessee for the issuance of summons etc. It is not correct to say that assessing officer has not followed the principles of natural justice. Learned D.R. relied on the orders of the revenue authorities and submitted that the additions made were just and proper and perfectly in consonance with the canons of law.
14. We have heard the rival submissions in the light of material placed before us. We have examined all the relevant papers and documents. We have also gone through the decisions relied on by the parties in course of hearing. It is not disputed that in making the assessment, the ITO relied on the Inspector's report. It is also not disputed that the copy of the Inspector's report, enquiry report and sworn statements were not provided to the assessee. We find from records that assessee made a request for the issuance of notice under Section 131 and the request of the assessee was not complied with. Having regard to the facts and circumstances of the case, we are of the opinion that there is a failure of natural justice on the part of the Assessing Officer. We therefore set aside the order and restore it to the file of the Assessing Officer with direction to redo the assessment after providing adequate opportunity to the assessee of being heard.
15. In the result, the appeal is treated as allowed for statistical purposes.
G. Santhanam, Accountant Member
1. I have gone through the order proposed by my learned brother in ITA No. 504/Hyd/1989 for the assessment year 1985-86 in the case of Colonisers v. Commissioner of Income-tax (Investigation) Circle 1(1), Hyderabad. In relation to certain credits appearing in the books of the appellant, I am in agreement with the finding recorded by my learned brother that the enquiry report and sworn statements were not provided to the assessee and that in spite of a specific request made by the assessee for issuance of summons under Section 131 of the IT Act, to ensure the attendance of the creditors, the Assessing Officer did not choose to comply with such a request and thus there is dismal failure of natural justice in framing the assessment. For this reason, the learned Judicial Member has set aside the order of assessment and restored the case to the file of the Assessing Officer. I am unable to persuade myself to the point of view of my learned brother. The assessment order contained certain additions and disallowances in addition to cash credit additions. The assessee has carried the matter in appeal against such additions and disallowances and obtained relief in part. In second appeal, the dispute is only about additions under Section 68. Therefore, to set aside the entire order is to travel beyond the subject matter of appeal. The learned Judicial Member should have confined himself only to setting aside the additions under Section 68 but not the entire order of assessment. This apart, having found that there was gross violation of natural justice in the sphere of cash credit additions, the only course open to us is to set aside the additions and leave it to the revenue to take such action as it may deem fit if otherwise permissible under law as has been held by the Supreme Court in M. Chockalingam and M. Meyyappan v. CIT [1963] 48 ITR 34. Further any learned brother's order is silent on the merits of the case, though the appellant has assailed the additions not only on grounds of violations of natural justice, but also on the merits of such additions. Hence, with very great respects to my learned brother I am constrained to pass a dissenting order.
2. Natural Justice - In Ponkunnam Traders' case (supra) it was held by the Kerala High Court that the failure to conform to the principle of natural justice of audi alter am partem would make a judicial or quasi-judicial order void. Justice K.K. Mathew of the Kerala High Court as he then was before his elevation to the Supreme Court dealt at length on the principles of natural justice and the consequences flowing from the violation of such principles by referring to a number of decisions at pages 512 to 518 in the case cited supra. The learned Judge approvingly quoted the decision of the Privy Council in Annamunthodo v. Oilfields Workers' Trade Union [ 1961] 13 All ER 621 page 521 where Lord Denning said:
Counsel for the respondent union did suggest that a man could not complain of a failure of natural justice unless he could show that he had been prejudiced by it. Their Lordships cannot accept this suggestion. If a domestic Tribunal fails to act in accordance with natural justice the person affected by their decision can always seek redress in the courts. It is a prejudice to any man to be denied justice. He will not, of course, be entitled to damages if he suffered none. But he can always ask for the decision against him to be set aside.
3. It was vehemently contended by the learned departmental representative that in view of the approaching time limit for the completion of the assessment, the assessing authority did not summon the creditors in spite of specific request by the appellant and, therefore, the ITO was justified in drawing an adverse inference against the appellant for failure to produce the creditors. This point is directly answered by the Kerala High Court in the case cited supra at page 521 in the 3rd para as follows:
There is a serious danger in making the ultra vires principle, or any part of it, discretionary. Administrative inconvenience should not normally be allowed to distort the law.
This decision of the single Judge of the High Court of Kerala was confirmed by the decision of a Division Bench of the same High Court in Addl. ITO v. Ponkunnam Traders [1976] 102 ITR 366.
4. In Tulsiram Patel' s case (supra) AIR 1985 SC 1416 the Five Member Constitution Bench of the Supreme Court had to deal with the principles of natural justice and at para 95 at page 1460 Justice D.P. Madon for himself and on behalf of Y.V. Chandrachud, CJ., Tulzapurkar, Pathak, JJ (Majority view) held that "the principles of natural justice have thus come to be recognised as being a part of the guarantee contained in Article 14 because of the new and dynamic interpretation given by this Court to the concept of equality which is the subject matter of that Article. Shortly put, the syllogism runs thus: violation of anile of natural justice results in arbitrariness which is the same as discrimination; where discrimination is the result of a State action, it is a violation of Article 14,: therefore, a violation of a principle of natural justice by a State action is a violation of Article 14. Article 14, however, is not the sole repository of the principles of natural justice. What it does is to guarantee that any law or State action violating them will be struck down. The principles of natural justice, however, apply not only to legislation and State action but also where any Tribunal, authority or body of men, not coming within the definition of 'State' in Article 12, is charged with the duty of deciding a matter. In such a case, the principles of natural justice require that it must decide such matter fairly and impartially".
5. The learned Judges proceeded to stale further that "the rule of natural justice in the appeals and writ petitions, namely, the audi alteram partem rule, in its fullest amplitude means that a person against whom an order to his prejudice may be passed should be informed of the allegations and charges against him, be given an opportunity of submitting his explanation thereto, have the right to know the evidence, both oral or documentary, by which the matter is proposed to be decided against him, and to inspect the documents which are relied upon for the purpose of being used against him, to have the witnesses who are to give evidence against him examined in his presence and have the right to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not however, conform to the judicial process in a court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing within the meaning of audi alteram partem rule in a quasi-judicial or administrative inquiry. If we look at Clause (2) of Article 311 in the light of what is stated above, it will be apparent that that clause is merely an express statement of the audi alteram partem rule which is implicitly made part of the guarantee contained in Article 14 as a result of the interpretation placed upon that Article by recent decisions of this Court".
6. Thus, the principles of natural justice are lifted to the high pedestal of fundamental rights guaranteed under Article 14 of the Constitution, any violation of which would strike at the very root of the matter unless the application of such principles are accepted or excluded by any other provisions contained in the Constitution. Such being the importance of natural justice, it is my considered view that non-compliance with the principles of natural justice in a fiscal enactment (where it is not excluded) should be considered as striking at the root of the matter itself and hence the additions under Section 68 in this case should be held as void ab initio as they have no legal legs 10 stand upon, At any rate, the additions made without affording adequate opportunity to the assessee is liable to be quashed - see Nagulakonda Venkata Subba Rao v. CIT [1957] 31 ITR 781(AP).
7. Whether one agrees or not with the above view, before remanding the issue, it has to be seen whether the facts and the circumstances of the case merit such a course of action in the interest of justice, fair play and equity. Hence I propose to deal with each of the additions in the context in which it was made.
8. The following credits were added as non-genuine under Section 68 for the assessment year 1985-86:
S.No. Name of creditors Amount Date of Date of
Rs. borrowal return
1. A. RaviGopal 1,50,000 4-4-1984 30-3-1985
2. Everest Enterprises 30,000 3-5-1984 15-1-1985
3. G.S. Murthy 20,000 8-5-1984 15-1-1985
4. G. Subba Rao 10,000 9-5-1984 15-1-1985
5. G.R. Gupta 20,000 14-5-1984 15-1-1985
6. Coastal Engineering 20,000 16-5-1984 15-1-1985
7. Srinivas N. 50,000 29-5-1984
50,000 7-6-1984 6-2-1985
------------
3,50,000
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9. The Income-tax Officer obtained account copies of Shri A. Ravi Gopal and Shri A. Suman Kumar, S.B. A/c Nos. 2025 and 2026 In the Bank of Tamil Nadu Ltd. He found that these two accounts were opened on 8-4-1985 with Rs. 50 as deposit and on 18-5-1985 Rs. 2,00,000 was credited to this account by transfer and the same was withdrawn by self-cheque on the same day and as on 19-11-1985 when the accounts were closed the balance was Rs. 51 only. He also found that the address given in the Account Opening Forms, Account Nos. 2025 and 2026 in the Bank of Tamil Nadu Ltd. and the address given in the confirmation letters were one and same. Then he went on to give details of the credits obtained by the firm as follows:
Sri A. Ravigopal and Sri A. Suman Kumar allegedly gave the loan to M/s The Colonisers as follows:
(1) Sri A. Suman Kumar Rs. 2,00,000 on 20-1-1984 By cash
(2) Sri A Ravi Gopal Rs. 50,000 on 20-1-1984 By cash
Rs. 1,50,000 on 4-4-1984 By cash
Passing for a moment I am compelled to remark that the credit in the name of Shri A. Suman Kumar does not belong to the previous year relevant to the assessment year 1985-86. Therefore, even if there had been any adverse finding about Sri Suman Kumar's credit, it could not and it should not be used against the other credits found in the name of Sri A. Ravi Gopal in the impugned assessment year. Secondly, Shri Ravi Gopal's credit of Rs. 50,000 allegedly given on 20-1-1984 also belonged to the previous year relevant to the assessment year 1984-85. In other words, that credit was outside the previous year. The only credit that survives for consideration is that of Shri A. Ravi Gopal which is stated to have been given on 4-4-1984 by cash in a sum of Rs. 1,50,000. As for the physical existence of Sri A. Ravi Gopal the ITO himself has stated that a bank account was operated by him with the Bank of Tamil Nadu Ltd. and he had obtained a copy of the S .B. A/c Nos. 2025 and 2026 respectively belonging to Sri Suman Kumar and Sri A. Ravi Gopal. He had also scrutinised the Account Opening Forms. The very fact that a bank account was opened would show that the person was very much in physical existence as otherwise it cannot be assumed that persons not in existence could persuade a banker to open an account in his name and operate the same. What is still more relevant is the fact that one Shri M. A.R. Krishnam Raju, Chartered Accountant, had introduced these two persons to the Bank of Tamil Nadu Ltd. for opening the accounts. In his deposition Shri Krishnam Raju had stated that they were his clients and he had filed their income-tax returns though he did not know much about their past history etc. So these enquiries conducted by the ITO would certainly show that Shri A. Ravi Gopal, the creditor for this assessment year is a person very much in existence though it might be that his whereabouts could not be known at the time of Inspector's visit. It is also pertinent to recall that the Inspector visited the address on 25-3-1988 whereas the amount was given to the assessee on 4-4-1984 and was returned on 30-3-1985. Such a lapse of time in the course of enquiry is a circumstance to be reckoned with even if the creditor is not to be found in the address given. Shri Ravi Gopal in his confirmatory letter has given his permanent account number as R. 795/B-Ward, Survey Circle. If the ITO had doubted the veracity of the existence of the creditor or his creditworthiness he could have as well called for the income-tax records from the concerned Circle and tested the veracity of the credit. He did not do that. However, he deputed an Inspector after considerable lapse of time. The Inspector's report, if at all it can be called a report, runs as follows:
As directed by ITO, I have served summons on Shri A. Ram Mohan, H.No. 10-1-462, West Marredapally, Sec'bad today.
As regards the whereabouts of Shri A. Ravi Kumar and Shri A. Suman Kumar, I made some enquiries, in the above premises (including tenant' sportion and also neighbouring houses) but nobody could tell anything about these persons.
10. Shri A. Ram Mohan is not a creditor and whatever statement was recorded from him was not put to the assessee. Shri A. Ravi Kumar is not the concerned creditor in the impugned assessment year. The name of the creditor in the impugned assessment year is Shri A. Ravi Gopal but not Shri A. Ravi Kumar. Shri A. Suman Kumar is not a creditor in the sense that his name does not appear as a creditor in the impugned assessment year. Therefore, one fails to understand how a report about Ravi Kumar and Suman Kumar (whatever be the content of the report) could be attributed to Shri A. Ravi Gopal who is the creditor in the books of the firm in the impugned assessment year and how an adverse inference could be drawn against the appellant. Even assuming that the Inspector wrongly took the name of Ravi Gopal as Ravi Kumar, there is nothing in his report which would suggest the names of the persons whom he contacted and the type of questions put to them and the answers elicited from them or the statements allegedly made by them. All that the Inspector states is that as regards their whereabouts he made some enquiries in the above premises (including tenant's portion and also neighbouring houses) but nobody could tell anything about these persons. This report cannot be stretched to draw an inference that these two persons did not physically exist. In my view, when the assessee furnishes the name and address of the creditor coupled with a confirmation letter of credit with income-tax reference etc. the onus that lies on the assessee stands discharged. Unless the ITO brings on record some evidence to dislodge the onus that got shifted to his shoulders, and put such evidence or material to the assessee, he is not entitled to draw an adverse inference.
11. Some more facts are to be stated with regard to Shri A. Ravi Gopal's loan. The Income-tax Officer examined Shri G. Amarender Reddy on 29-2-1988. He has stated that he got the amount through the good offices of Uday Bhanu and Shri M.A.R. Krishna Raju, C.A., and the Amount was repaid by cheques. Shri Khayum, the Accountant of the firm was examined, who stated that he encashed the cheques given to Shri Ravi Gopal (and also Suman Kumar, although he is not the creditor for the assessment year under appeal) gave the monies to his boss, A.G. Amarender Reddy, in the presence of two creditors. The money was then disbursed to them and both he and Shri Reddy came away from the room after disbursing the cash. Shri Uday Bhanu has stated that through his friend Shri M.A.R. Krishnam Raju, he had arranged this loan. Shri M.A.R. Krishnam Raju in his letter dated 12-3-1988 had confirmed having arranged these loans from Shri A. Ravi Gopal and Suman Kumar, that they were his clients, that he prepared their income-tajf returns and got them assessed and that after the assessments they had taken away the files and that he was responsible for introducing these persons to the Bank of Tamil Nadu for opening the Savings Accounts. Thus, the physical existence of Shri Ravi Gopal and Suman Kumar cannot be doubted merely because of a vague report by the Income-tax Inspector. A responsible member of Institute of Chartered Accountants of India had deposed that he was instrumental in getting the loan from Shri Ravi Gopal and Suman Kumar. Even if one were to brush aside the evidence of Shri Reddy, Khayum and Uday Bhanu, it would do well to remember that the cheques were issued to these persons on 31 -3-1985 but it was found to be encashed only in May 1985.This is is a circumstance to show that the assessee did not have control over the cheque after it was issued in favour of these persons. The assessee's accountant might have assisted these persons in encashing the cheques but that does not mean that the proceeds remained with the assessee or his accountant. What the creditors did with the moneys thus received is not the concern of the assessee nor the assessee can be called upon to explain why those persons withdrew the money without keeping it in their accounts. At best, there might be a room of suspicion but suspicion cannot lake place of proof. Besides, Ravi Gopal had in his confirmative letter clearly stated his P.A.No. and the Ward in which he is assessed. The learned Income-tax Officer did not choose to ascertain from his counterpart as to the fact whether the said loan amount was admitted in the tax records of Shri Ravi Gopal or whether he had income sufficient to make such an advance. The Income-tax Officer having failed to examine the issue from this angle, I hold that he has not dislodged the prima facie evidence adduced by the assessee in the form of confirmation letter from Shri Ravi Gopal. For all these reasons the addition is fit to be deleted. In the course of the narration the name of Suman Kumar is also incidentally mentioned and it must be emphasised that Suman Kumar has not advanced any moneys to the assessee during the previous year relevant to the assessment year 1985-86 but such mention was made because the Income-tax Officer has enquired about these two persons in the course of examination of the partner and the Accountant and others.
12. The next credit is from Everest Enterprises, supported by a confirmation letter in which P.A.No. and the Circle in which the assessment is made are given. Further, the source of Rs. 30,000 is stated to be from out of the balance available with the firm. Also it is stated that the loan was returned by Cheque No. 353978 dated 15-1-1985. No worthwhile enquiry was made about this creditor but still his credit was disbelieved. There is not even any material to suggest that the cheque by which the repayment was made was encashed by the assessee or by his nominees. The Income-tax Officer has not discharged the onus that got shifted to him when prima facie evidence was adduced by the assessee. Hence the addition is fit to be deleted.
13. Shri G.S. Murthy is a creditor for Rs. 20,000 and the advance was made on 8-5-1984 and returned on 5-1-1985. He has vouchsafed the transaction in the confirmation letter dated 30-3-1985. He has stated that the return was filed with Income-tax Officer, Ongole, and the P.A.No. was not allotted to him. It was also mentioned that he made the advance out of his past savings of LIC commission" and other savings. Further, it was stated that he got back the amount by cheque No. 353981 drawn on Bank of Tamil Nadu. By this primary evidence the assessee has discharged the onus. The Income-tax Officer did not verify the income-tax return filed with the ITO, Ongole, nor found any material to show that the cheque by which the repayment was made was encashed by the assessee or by his nominee. In the absence of any such investigation, mere suspicion cannot take the place of proof and, therefore, the addition on this count is fit to be deleted.
14. Shri G.S.Subba Rao is stated to have advanced a sum of Rs. 10,000 on 9-5-1984 which was said to be repaid on 15-1-1985. He has given a confirmation letter dated 14-12-1987 in his own hand in his letter pad. The confirmation letter contains his address and speaks to the factum of making the advance and also its repayment. Further, the letter says that he made the advance of Rs. 10,000 out of his professional income and that he is assessed to income-tax in J-Ward, Circle-II, Hyderabad, and P. A.No. is allotted to him. Thus the assessee has discharged the primary onus, by filing the confirmation letter.
15. There is no material before the Income-tax Officer to doubt the veracity of the statement of Shri Subba Rao. When the Income-tax Officer demanded the presence of the creditors, the assessee wrote to Subba Rao to be available before the Income-tax Officer on 17-3-1988 and Shri Subba Rao in his letter dated 14-3-1988 had informed the assessee that in view of his prior commitment with Vysya Bank for the finalisation of its balance sheet and Board meeting etc. he would be at Bangalore till the accounts are audited and, therefore, requested the assessee to take time from the Income-tax Officer for recording his statement. Thus Shri Subba Rao has physical existence of his loan and has responded to the call of the assessee to be present before the Income-tax Officer for examination. However, the Income-tax Officer did not grant time but proceeded to make an adverse inference against the assessee disbelieving the credit given in the name of Shri Subba Rao. May be the Income-tax Officer had his own compulsions because the time limit for completing the assessment was fast approaching. That does not mean that the assessee should suffer on that count. The ITO had enough time to look into the credits since the filing of the return of income but if he took up the issue of credits only in the fag end of the time limit, he has to blame himself and not the assessee. At any rate, there was no material to disbelieve the statement of a responsible member of the Institute of Chartered Accountants of India who may be credited with at least with some knowledge of the tax laws, the responsibilities and the liabilities arising therefrom and when he made a statement that he had paid the amount from his professional income, unless something turns up to disbelieve his version, the same cannot be rejected on flimsy grounds. Hence the addition of Rs. 20,000 is fit to be deleted.
16. Shri G.R. Gupta, had advanced a sum of Rs. 20,000 on 16-5-1984 and that was repaid on 15-1 -1985. In his confirmation letter his address is found. He has stated that P. A.No. was not allotted to him and he made the advance of Rs. 20,000 out of his salary savings when he was working as a Cash Officer with Andhra Bank. Here, again the Income-tax Officer did not do any enquiry, which might indicate a contrary view. Therefore, there was no justification to disbelieve the version of the creditror.
17. Coastal Engineering has in its confirmatory letter admitted having given a loan of Rs. 20,000 on 16-5-1981, which was repaid on 15-1-1985 by Cheque No. 353979 drawn on Bank of Tamil Nadu. The address of Coastal Engineering is found in the confirmation letter. It is not assessed to income-tax. No enquiry was done by the Income-tax Officer to say whether the address was wrong or whether it did not exist. There is no material to show that the Cheque No. 353979 by which the repayment was made was funnelled back to the assessee. Therefore, it cannot be held that the assessee has not discharged the initial onus about this credit. In the absence of any material to the contrary, there is no justification for treating the sum of Rs. 20,000 as the income of the assessee.
18. Mr. Sreenivas has advanced a sum of Rs. 50,000 on 29-5-1984 and also another sum of Rs. 50,000 on 7-6-1984 and the amounts were repaid on 6-2-1985. He has declared that he has given these sums to the assessee out of the sale proceeds of his plot at Road No. 2, Banjara Hills, Hyderabad - 34. He has also given his address/The Income-tax Officer did not bring anything on record to show that the statement of the creditor was false or otherwise fit to be rejected. The creditor has not only given his address but also indicated the source from which he got this amount. In the circumstances, to treat the loan as income is manifestly unjust.
19. It is to be emphasised that the ITO enquired about Ravi Gopal, one of the several creditors, and generalised on all the creditors - a very sweeping generalisation. In the preceding paragraphs it has been indicated why the assessee's version cannot be rejected as regards the credits appearing in his books. Perhaps the only justification if at all it can be called a justification for the Income-tax Officer to reject the credits as not genuine is the failure of the assessee to produce the creditors when called upon to do so by the Income-tax Officer. At this stage it is but necessary to state the circumstances in which the assessee was unable to produce the creditors. We are concerned with the assessment year 1985-86. For the first time the Income-tax Officer called upon the assessee to produce the creditors by his letter dated 7-3-1988 which was served on the assessee on 9-3-1988.
Immediately on 12-3-1988, the assessee addressed letters to the creditors requesting them to appear before the Income-tax Officer on 17-3-1988. The letters are in the paper book at page 53. The existence of these letters have been verified with the assessment records because copies were marked to the Income-tax Officer. The letters were posted under Certificate of Postings, a copy of which has been furnished before us at page 40. There is no dispute that the assessee has addressed these letters to the creditors asking them to be available for recording of statements before the Income-tax Officer on 17-3-1988 at 11.00 A.M. On 16-3-1988, the assessee addressed a letter to the Income-tax Officer inviting him to invoke the powers of discovery and inspection vested in him under Section 131 of the Income-tax Act and issue summons to all the eleven creditors and compel their presence so that justice is done in the assessment. The assessee has also offered to bear and pay cost and expenses to be incurred in this regard for enforcing the personal attendance of those 11 persons. Thus, the assessee was not sitting idle over the letter of the Income-tax Officer. It has taken every offer to ensure the presence of the creditors at the appointed place and at the appointed time and has also sought the assistance of the Income-tax Officer in enforcing their attendance. The learned Income-tax Officer did not pay any attention to the request of the assessee but drew an adverse inference which he is not entitled to do and this is my considered opinion. For all these reasons, I do feel that the additions as cash credits should be set aside, lock, stock and barrel. On the facts and in the circumstances of the case, there is no justification to restore the issue to the file of the Income-tax Officer for further enquiry, as in that case the remedy would be worse than the malady because of efflux of time also.
The Assessing Officer made certain additions and disallowances in framing the assessment. One of the additions was made under Section 68. The assessee carried the matter in appeal against the additions and disallowances. The first appellate authority has partly allowed the appeal but sustained the additions towards cash credit. The assessee is in second appeal against the additions under Section 68. The assessee has made out a case for failure of natural justice so far as cash credit additions are concerned. The Judicial Member, who proposed the order has recorded a finding that there was violation of the principles of natural justice in collecting the materials behind the back of the assessee and in not putting the same to the assessee. The Accountant Member concurs with this finding of the learned Judicial Member. However, the learned Judicial Member set aside the order of assessment and restored the case to the file of the Assessing Officer to redo the same after affording an opportunity to the assessee. The Accountant Member is unable to persuade himself to the point of view of the learned Judicial Member for the following reasons:-
(a) Only the additions that are in dispute before the Tribunal are liable to be set aside and not the entire order of assessment.
(b) Failure of natural justice vitiates the proceedings and the additions made in violation of the principles of natural justice should be declared as void ab initio.
(c) In order to decide whether to remit the matter or not, one should have regard to the facts and circumstances of each addition individually especially when the additions are assailed on merits also.
(d) With Inspector's Enquiry Report about one creditor and without putting the same to the assessee the ITO has generalised against all other creditors which he is not entitled to do.
2. The learned Judicial Member did not choose to deal with the merits of the additions - whether the initial onus on the assessee stood discharged etc.
3. From the above facts, the following points of difference are noticed and are placed before the Hon'ble President with a request to take suitable further action:-
(1) In a case where the assessee is on appeal against the additions by way of cash credits only and the other additions are not under challenge, whether the Tribunal would be justified in setting aside the entire order of assessment instead of the additions?
(2) Whether the additions made by the Assessing Officer in violation of the principles of natural justice should be set aside as void ab initio and thus deleted or should the case be restored to the ITO with directions for redoing?
(3) Where an assessee has assailed additions on the failure of natural justice and also on the merits of each addition, whether it would be just and proper to deal with only the question of natural justice and to restore the issue to the Assessing Officer without considering the merits of each addition?