Commissioner Of Income Tax, ... vs M/S Prima India Products
2008 Latest Caselaw 1003 Del

            THE HIGH COURT OF DELHI AT NEW DELHI

%                                  Judgment delivered on: 11.07.2008

+            ITR 78/1989

COMMISSIONER OF INCOME TAX, DELHI-X ... Applicant

                                  - versus -

M/S PRIMA INDIA PRODUCTS                                     ... Respondent

Advocates who appeared in this case:

For the Applicant     : Mr Sanjeev Sabharwal with Ms P.L. Bansal
For the Respondent    : None

CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether Reporters of local papers may be allowed to see the judgment ?

2. To be referred to the Reporter or not ?

3. Whether the judgment should be reported in Digest ?

BADAR DURREZ AHMED, J (ORAL)

1. This reference under Section 256 (1) of the Income-tax Act,

1961 (hereinafter referred to as „the said Act‟), at the instance of the

revenue, relates to the assessment year 1982-83. The following

questions of law have been referred to this court by the Income Tax

Appellate Tribunal:-

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in cancelling the Commissioner‟s order u/s 263 without reversing the Commissioner‟s finding that the Income-tax Officer had failed to enquire into the source of deposits / investments made during the relevant accounting period and hence the assessment order

was erroneous and prejudicial to the interests of revenue ?

2. Whether, on the facts and in the circumstances of the case, it was permissible to the Tribunal to hold for the first time that the assessee possessed Rs. 2,40,000/- on 31.3.1981 and that the deposits / investments made by the assessee and its partners during the accounting period relevant to assessment year 1982-83 came out of the aforesaid sum of Rs.2,40,000/- ?

3. Whether, the Tribunal was right in holding that the assessee having moved a petition before the Settlement Commission and averring therein that the investments as detailed in Annexure-I to the said petition came out of Rs.2,40,000/- claimed to be with the assessee as on 31.3.1981, there was no need for the examination of investments and their sources in the proceedings for assessment year 1982-83 ?"

2. The facts are that the assessment in this case was completed

under Section 143(3) of the said Act on 29.03.1985 on a total income

of Rs 82,220/-. A search was conducted at the business premises-cum-

residence of the assessee firm and the partners on 16.02.1982. During

the search, various documents, including investments in the form of

FDRs and cash, etc. were found. It was also found that the assessee

firm had loans and advances to the extent of Rs 2,29,000/-, additions

and alterations in the house property to the extent of Rs 1 lakh, cash to

the extent of Rs 72,854 and bank balance of Rs 69,602/- which had not

been declared to the department. It was noted that the investment in the

FDRs, etc. were in the names of various partners of the firm, namely,

Smt Santosh Rani, Prince Mohan Aggarwal and Shri Dinesh Kumar

Aggarwal. During the course of the assessment proceedings of the

firm, the Income-tax Officer had made certain inquiries regarding the

source of investments but, according to the Commissioner, failed to

take any action and did not assess the said amount which was seized

during the search operations in the hands of the firm. According to the

Commissioner, the assessment order was erroneous and as such was

prejudicial to the interest of the revenue. Consequently, a notice under

Section 263 of the said Act was issued. A written reply was submitted

by the assessee through its advocates on 13.12.1986. In the said letter

dated 13.12.1986, it was contended by the assessee that the action

under Section 263 of the said Act was without jurisdiction as the basic

conditions specified therein were not satisfied. The assessee‟s plea was

that an application had been moved before the Settlement Commission

wherein a certain amount of cash, FDRs, etc. belonging to the assessee

firm relating to the assessment years 1980-81 and 1981-82 had been

disclosed. It was contended on the part of the assessee that the same

did not form part of the records of the proceedings for the assessment

year 1982-83 which is the subject assessment year.

3. However, after considering the objections raised by the

assessee, the Commissioner did not agree with the assessee‟s

contentions and passed the order dated 19.02.1987, whereby the

Commissioner set aside the assessment made by the Income-tax Officer

and directed that he should make the assessment afresh after proper

examination and investigation regarding the source of investments

made in various names by the firm during the relevant accounting

period and after allowing proper opportunity of hearing to the assessee

to prove the contention that the investment was out of undeclared

income of earlier years. The commissioner had considered the letter

dated 16.02.1985 which had been written by the assessee to the

Income-tax Officer during the assessment proceedings pertaining to the

investments made by the partners. In that letter, it had been submitted

that the following investments had been made in the names of the

partners:-

1. Santosh Rani Rs 5,000/- FDR dated 20.11.1981 Rs 80,000/- Bank deposit on 06.01.1982 Rs 20,000/- loan on 09.02.1982

2. Prince Mohan Aggarwal;

Rs 25,000/- loan on February, 1982

3. Dinesh Kumar Aggarwal.

Rs 10,000/- FDR on 20.11.1981.

4. It was stated in the said letter dated 06.02.1985 that the total

investments to the tune of Rs 1,40,000/- in the year under consideration

were made out of the accumulated come out of the undisclosed sources

of the firm as on 31.03.1981. It was also stated in the said letter that

this fact had been disclosed before the Settlement Commission and the

same amount had been considered for tax in the previous years. It was

also stated that except these investments, there were no fresh

investments in the partners‟ accounts / names in the year under

consideration.

5. The Commissioner noted in his order that a perusal of the

assessment record shows that the Income-tax Officer accepted this

contention of the assessee, prima facie, without verifying or

investigating or making any inquiry into the contention raised. The

Commissioner was also of the view that there was nothing on record to

prove the nexus between the undeclared income by the assessee prior to

1981 and the investments made in the names of the partners during the

relevant accounting period. The Commissioner was also of the view

that the Income-tax Officer was required to examine the contention of

the assessee and to investigate the genuineness and veracity of the

explanation offered regarding the source of investments during the

relevant accounting year in the names of the partners alleged to be out

of undeclared income in respect of the earlier years. It is in this

background that the Commissioner had passed the said order dated

19.02.1987 under Section 263 of the said Act.

6. The said order has been set aside by the Tribunal in the

assessee‟s appeal being I.T.A. No.1242/Del/87 dated 08.04.1988. The

Tribunal examined the application made by the assessee before the

Settlement Commission and noted the terms of settlement offered by

the assessee. The same are as under:-

"i) That it be accepted that the undisclosed income of the assessee firm for the years upto and including the year ended 31.3.1981 amounted of Rs.2,40,000/- and that the said amount of Rs.2,40,000/- was available as on 31.3.81 and thereafter in the manner detailed in Annexure I hereto.

ii) That the aforesaid amount of Rs. 2,40,000/- be assessed in the hands of the assessee firm by spreading the same equally over the assessment years 1976-77 to 1981-82 (both inclusive), i.e. an additional amount of Rs.40,000/- be assessed in the hands of the assessee firm, in each of the above mentioned assessment years, over and above the income disclosed by the books of accounts. Further, that the provisions of Section 245E of the Act be invoked so far as the assessment years 1976-77 to 1979-80 (both inclusive) are concerned, so as to give effect to the aforesaid proposal.

iii) That it be accepted that the cash amounts available as on 31.03.1981, as detailed in Annexure I hereto, were available for making investment advances in the period subsequent to 31.3.1981.

iv) That it be accepted that the assessee firm did not own as on 31.3.1981, any assets other than the assets disclosed in its balance sheet as on 31.3.1981 and the above mentioned undisclosed assets amounting to Rs. 2,40,000/-.

v) That the assessee firm be granted the benefit of registration / continuation of registration for each of the assessment years under consideration.

vi) That interest and penalties chargeable / imposable under the various provisions of Income-tax Act, 1961, be waived for each of the assessment years under consideration, and further that the assessee

firm and the partners therein be granted immunity from prosecution under the provisions of the Income- Tax Act, 1961 and / or any other law for the time being in force in relation to the various matters covered by the instant application for settlement.

vii) That the assessee firm and the partners therein be granted instalments spread over a period of 3 years for making payment of the taxes ultimately determined as payable upon disposal of the instant application for settlement."

7. The Annexure I referred to in the terms of the settlement,

which carries the heading "Details of availability of undisclosed funds

as on 31.3.1981", so much as is relevant for the present case, reads as

under:-

"III. Amount available in Cash with the firm as on 31.3.81 which was invested in banks, loans etc. in the previous year relevant to the A.Y. 1982-83 as under:-

            a)   Smt. Santosh Rani
                 1) F.D.R. dt. 20.11.81      5,000
                 2) Bank Deposit on 6.1.82   80,000
                 3) Loan to Navin Jain Metal 20,000      1,05,000
                     Udyog on 9.2.82

            b)   Sri Prince Mohan.
                 1) Loan to Navin Jain Metal 25,000      25,000
                      Udyog on 11.2.82

            c)   Shri Dinesh Kumar
                     F.D.R. Dt. 20.11.81        10,000   10,000     1,50,000/-
                                                                    2,31,000/-

                            Rounded off to Rs. 2,40,000/-"

8. After considering the said offer for settlement before the

Settlement Commission and the other surrounding circumstances, the

Tribunal came to the following conclusion:-

"5. In view of the question, about of facts, admitted by the assessee as to undisclosed income of the assessee firm for the year upto and including the year ending on 31.3.1981 about the said amount of Rs.2,40,000/- and also further the assessee that the said sum of Rs.2,40,000/- was available as on 31.3.1981 and thereafter in the manner detailed in Annexure I, the same has yet to be taken as proved. The contents of annexure-I, to the order of the learned Commissioner of Income-tax, as such need no further examination / investigation. Since the assessee has already same to the Revenue Department, in this case the settlement Commission, with the disclosure. The investment of Rs.2,40,000/- made in differents case of the partner of the assessee firm as such is held to have been proved. The impugned order stands cancelled on merits and on facts, with the natural consequent flowing out of these findings to follow.

6. The appeal succeeds and stands allowed."

9. In this context, when we examined the questions that have

been referred to us, it was apparent that the concern of the

Commissioner at the time of issuing the notice under Section 263 and

ultimately the order under Section 263 was with regard to the nexus

between the undeclared income of the assessee prior to 1981 and the

investments made in the names of the partners during the accounting

period relevant to the assessment year under consideration. It is

obvious that if there was such a nexus, then there would be no occasion

to pass the order under Section 263 of the said Act. It is because of the

fact that the Commissioner felt that there was no such nexus that a

further inquiry was necessary on the part of the Income-tax Officer.

However, the Tribunal has taken note of the fact of the disclosures

before the Settlement Commission as also Annexure-I to the said

application for settlement. The said annexure clearly reflects the FDRs,

bank deposits and loans mentioned in the letter dated 06.02.1985 issued

by the assessee to the Income-tax Officer. It is in this context that the

Tribunal came to the conclusion that in view of the contents of

Annexure-I, no further examination was required by the Income-tax

Officer. The obvious conclusion is that the Tribunal was satisfied that

there was a nexus between the undeclared income which had been

disclosed before the Settlement Commission and the investments made

in the names of the partners during the accounting period relevant to

the assessment year under consideration. It is apparent that by virtue of

this, the Commissioner‟s finding that the Income-tax Officer had failed

to inquire into the source of the deposits/investments stood reversed by

necessary implication. Consequently, question No.1 would have to be

answered in favour of the assessee and against the revenue.

10. With regard to question No.2, we are of the opinion that the

same also has to be answered in favour of the assessee and against the

revenue. This is because of the very nature of the provisions of Section

263 of the said Act. While the Commissioner, issuing an order under

Section 263 requiring further investigation, has to merely raise doubts

and suspicion based on material facts, the Tribunal, if it reverses such

an order, has to take a stand and has to return a finding as to whether

the said doubts were substantiated or not. It is in this context that the

Tribunal in the present case came to the conclusion that the investments

made by the assessee and its partners during the accounting period

relevant to the current assessment year (1982-83) came out of and had a

direct nexus with the sum of Rs. 2,40,000/- as had been disclosed by

the assessee before the Settlement Commission.

11. Question No.3 also stands answered in favour of the assessee

and against the revenue in view of the discussion above. The reference,

therefore, stands answered accordingly.

BADAR DURREZ AHMED, J

RAJIV SHAKDHER, J July 11, 2008 dutt