1. The assessee, who has filed this appeal against the order of the, AAC, Amritsar, for the assessment year 1973-74, gave up his plea against the reopening of the assessment under Section 147 of the Income-tax Act, 1961 ('the Act') at the time of hearing.
2. Another issue, raised in this appeal, was against the addition made to the trading profit. There had been an assessment made by the ITO under Section 143(3) of the Act. The assessee, who is dealing in leather and hides, in the year in issue had taken a contract to supply goods to MES authorities. According to the certificates, produced by the assessee at the time of hearing, payment amounted to Rs. 1,95,586.
The assessee was charged with profit at 10 per cent which came to Rs. 19,556. Besides, the assessee had been supplied stores amounting to Rs. 39,883. According to the law then prevailing, the ITO has taken profit at 5 per cent on the stores, which came to Rs. 1,994. The two sums aggregate to Rs. 21,550 from which a sum of Rs. 5,000 was deducted as remuneration payable to S. Kuldip Singh in whose name the contract was taken. This left a sum of Rs. 16,550 as profit derived from the business of contract taken by him during the year. This assessment was made on 27-5-1974. The ITO received information that the total payment, received from MES during the year, came to Rs. 2,95,052 and not Rs. 2,35,439, representing Rs. 1,95,556 and Rs. 39,883. This led the ITO to reopen the assessment and apply a rate of 12 1/2 per cent to the total receipts to work out the net profit, derived from the work of contract.
He worked out a profit of Rs. 31,881 as against the sum of Rs. 16,550 assessed earlier in the assessment made on 27-5-1974. He also caused another addition of Rs. 18,000 for unexplained investment made in the contract work from undisclosed sources. According to the ITO, the total payments received in the month of May 1972, amounted to Rs. 29,563.
This being the first month of receipt of contract payments, he estimated initially the investment of Rs. 18,000 made by him. He caused the sum to be added as the income for the year. The AAC maintained the two additions and did not grant any relief to the assessee. Having failed before the AAC, the assessee came in appeal before us.
3. It was submitted by the learned counsel for the assessee that the ITO had proceeded on the basis of information, which he had not properly verified. He referred to the two certificates dated 26-7-1973 granted by the Garrison Engineer which showed payment made to the assessee including that for stores at Rs. 1,27,241. Another certificate granted by the Garrison Engineer dated 18-1-1979 for the said period showed in aggregate a gross payment of Rs. 1,49,170. The ITO referred to seven certificates in his entry dated 19-8-1979 in the order sheet.
The total payments were shown at a gross sum of Rs. 3,10,900. No doubt, it was found that payments amounting to Rs. 1,33,300 were twice taken in the gross sum of Rs. 3,10,900. This left a net sum of Rs. 1,77,600 as gross payment, received by the assessee during the period. This was noted in the entry dated 1-12-1978 in the order sheet by the ITO. In the letter dated 26-5-1978 the Garrison Engineer had detailed the payments for the period 11-5-1972 to 31-3-1973. It was totalled at Rs. 1,16,240. It was, therefore, submitted by the learned counsel for the assessee that the ITO was not to proceed on the basis of such conflicting information received by him to make the addition. In our view, this could not be rebutted by the departmental representative, who spoke for the revenue. MES authorities had provided informations which are in conflict with each other on the issue of total payment made during the period in issue to the assessee. Looked at this in this background, we cannot favour an addition made by the ITO. We also cannot favour the application of a higher gross or net profit rate than what was adopted at the time of original assessment. The ITO has not brought any material to show that the assessment of the profit at 10 per cent was in any way inadequate. Therefore, we cannot favour the addition either on the basis of conflicting information received from the MES authorities regarding the gross receipts nor by the adoption of a higher percentage of profit for working out the profit.
4. Similarly, we find force in the submission of the assessee regarding the addition of Rs. 18,000 towards the intitial investment. The facts, whatever has been relied upon by the ITO in his second assessment, were there before the ITO. It is not the case of the ITO that any information had been withheld or not supplied by the assessee at the time of the original assessment. He had the information at the time of original assessment that the receipts of May amounted to Rs. 29,563.
Therefore, this information could not lead the ITO to a finding at the time of second assessment regarding the initial investment. The law does not permit a second look on the same facts for drawing a different inference. The law permits a second look, no doubt, but that should be when the ITO has brought out some fresh material to justify a second look at his earlier finding. We cannot, therefore, uphold the addition of Rs. 18,000 towards the initial capital investment in the business of contract, which we, accordingly, delete.
1.. I am unable to agree with my learned colleague to delete totally the additions on account of contract income and unexplained investment in contract business. Before dealing with the issue, I will like to point out a factual error in para 2 of the order in respect of the first assessment made on 27-5-1974. The assessee had disclosed the contract income on estimate by applying the net profit rates of 10 per cent and 5 per cent on the payments and value of stores received respectively but the ITO had applied a net profit of 12 1/2 per cent on the total of payments received and value of stores together. The net income computed by him was Rs. 29,430. The AAC allowed a relief of Rs. 5,000 on account of payment to Shri Kuldip Singh for supervision of contract work and the net income as per original assessment came to Rs. 24,430. This will mean that the observations in the concluding part of para 3 of the order of my colleague about applying a higher net profit rate in the reassessment are factually incorrect. Further at the time of hearing the application of rate of net profit of 12 1/2 per cent was not seriously contested and the argument raised was that no profit should be worked out on the stores supplied in view of the Supreme Court decision in the case of Brij Bhusan Lal Parduman Kumar v.CIT 115 ITR 524. I will deal with both these points little later after considering the question of discrepancy in contract receipts, which gave rise to the action to reopen the assessment on the part of the ITO.It may be stated also that the assessee had given up the challenge to the reopening of assessment under Section 147 at the time of hearing of this appeal.
2. The gross contract payments in the original assessment were taken at Rs. 2,35,439. Later on, in order to get the benefit of tax deducted at source from the contract payments, which had not been allowed in the assessment completed, the assessee filed seven tax deduction certificates of the MES authorities. The receipts as per these certificates amounted to Rs. 3,10,900. This discrepancy in receipts invited the reopening of the assessment by the ITO by issuing notice dated 14-6-1977. In the course of reassessment proceedings, which went on for considerable time, several opportunities for reconciliation of receipts figures were given and the learned departmental representative has been very diligent in filing the copy of order sheet entries before him. It is seen from those entries that the assessee filed return of income in response to notice under Section 148 of the Act on 18-2-1978.
There were earlier hearings also. On 18-2-1978, the case was adjourned to 24-2-1978. The order sheet entries from 24-2-1978 to 22-1-1979 speak eloquently about the ITO's efforts and the opportunities given to the assessee to reconcile figures and these entries are reproduced below: 24-2-1978 - Present Shri R.S. Makhni, ITP on behalf of the assessee.
Return filed also placed on record. Asks for time for reconciling the payments received. Case adjourned to 15-3-1978. Sd/- ITO. Sd/- ITP. 15-3-1978- Present Shri R.S. Makhni, ITP on behalf of the assessee.
File application for adjournment on the plea that payments under dispute are to be got verified from the concerned officer. Case adjourned to 17-4-1978. Sd/- ITO. Sd/- ITP. 17-4-1978 - Present Shri R.S. Makhni, ITP. Request for further time for furnishing the information. Case adjourned to 28-4-1978.
7-8-1978 - Issue notice under Section 142(1) of the Act for 19-8-1978.
19-8-1978 - Present Shri Kuldip Singh S/o Shri Charan Singh, partner along with Shri R.S. Makhni, advocate. Requested to furnish as under: (iii) Copy of contract account as appearing in the books of the firm.
Details of the seven certificates issued by the Garrison Engineer, Amritsar and Garrison Engineer, Tibri Base, have been furnished to the 'A' and the counsel. According the these certificates, the total payments received by the 'A' came to Rs. 3,10,900. You are requested to reconcile the discrepancy. Adjourned to 4-9-1978. Sd/- ITO. Sd/- 'A'.
28-9-1978 - Present Shri Kuldip Singh, states that his father is not well. Case is adjourned to 16-10-1978.
16-10-1978-Present Shri R.S. Makhni, ITP. States that Shri Charan Singh and his son are not well though no medical certificate is furnished. The information as desired on 19-8-1978 is also not given. He is further requested to intimate the source of investment in contract. Case is finally adjourned to 27-10-1978. Sd/- ITO. 27-10-1978 - Present Shri Charan Singh. On his request case is again adjourned to 10-11-1978. Sd/- ITO. Sd/- ITP. 27-10-1978 - Present Shri Charan Singh. He has been supplied with the seven certificates of payment issued by the MES authorities. He wants 1-12-1978 - Present Shri Charan Singh with Shri R.S. Makhni, ITP. Nothing has been done by the 'A' to get payments verified. Following duplicate copies of payments are given to 'A': Requested to give date-wise certificates of payments from MES authorities together with evidenee of source of investment in firm.
Adjourned to 20-12-1978.
20-12-1978 - Present Shri Charan Singh. On his request case adjourned 22-1-1979-Present Shri Kuldip Singh s/o Shri Charan Singh. Date-wise certificates of MES authorities are given. Sd/- ITO.The assessment was completed by the ITO more than six months later on 30-7-1979. The ITO had supplied to the assessee, as per order sheet entry dated 19-8-1978, the details of seven certificates issued by Garrison Engineer, Amritsar and Garrison Engineer, Tibri Base, which showed that the total payments received by the assessee came to Rs. 3,10,900. Till 16-10-1978, the assessee had not furnished the information as desired on 19-8-1978. On that date, the ITO further asked the assessee to intimate the source of investment in contract.
There were again a number of hearings. On 27-10-1978, the assessee was supplied with seven certificates of payments issued by the MES authorities for the purpose of verification and the case was adjourned to 1-12-1978. On 1-12-1978, the ITO noted that nothing had been done by the assessee to get the payments verified. On that date, duplicate copies of payments amounting to Rs. 1,33,300 were supplied to the assessee. There is nothing in the order sheet entries which would support the observation of my colleague that payments amounting to Rs, 1,33,300 were twice taken in the gross sum of Rs. 3,10,900. In the order sheet entry dated 1-12-1978, the ITO had again asked the assessee to give date-wise certificates of payments from MES authorities together with evidence of source of investment in firm. The ITO had also written to the MES authorities direct and had obtained information about payments from Garrison Engineer, Tibri Base, by letter dated 14-1-1978 and a copy of that letter was filed before us by the departmental representative. It is also seen from another copy of letter of Garrison Engineer, Amritsar Division, dated 18-1-1979 which is also filed by the departmental representative that as a result of enquiries made by the assessee that letter was given to him and it is that letter which the assessee eventually filed on 22-1-1979. It was pointed out by the learned departmental representative that the figures totalled up from the two letters, one obtained by the ITO from the Garrison Engineer, Tibri Base and the other obtained by the assessee himself from Garrison Engineer Amritsar, showed that there were payments of Rs. 1,16,240 received from Garrison Engineer, Tibri Base and Rs. 1,77,401 from Garrison Engineer, Amritsar, during the financial year 1972-73. The total of these two certificates comes to Rs. 2,93,641. The ITO in the reassessment order has taken the gross total payment figure at Rs. 2,95,052, which is a little more than the figure of receipts of Rs. 2,93,641. There appears to be thus, a small error in the figures worked out by the ITO and I will prefer to go by the figure of Rs. 2,93,641 established from the two certificates filed before the Tribunal. I fail to understand why these figures have not been accepted as correct. The assessee's counsel, however, filed before us photostat copies of two certificates issued in 1973 by Garrison Engineer, Amritsar, which showed payments of Rs. 1,27,241 and Rs. 1,09,488. It is obvious that these certificates cannot be relied upon particularly in the face of the last certificate dated 18-1-1979 addressed to the assessee himself, which showed the gross payments of Rs. 1,77,401. It is interesting to point out that a photostat copy of this letter was also filed by the assessee along with that by the departmental representative. The assessee has not, in the first instance, kept any proper accounts or books of accounts nor has produced any other evidence like the bank account to establish the amount of gross payments received and the matter has rested on obtaining certificates from the MES authorities. The assessee was given repeated opportunities over substantial period of time to reconcile the payments and eventually the assessee furnished a certificate dated 18-1-1979 from Garrison Engineer, Amritsar, which showed higher figure of payments than the two certificates issued in 1973. In these circumstances, the ITO cannot be blamed for finally deciding the case by considering the figures supplied by the assessee by letter dated 18-1-1979 and the figures obtained by him directly under letter dated 14-1-1978 from Garrison Engineer, Tibri, Base. Consequently, I am of the view that the gross payments which included value of stores issued and income-tax recovered at source were Rs. 2,93,641 instead of Rs. 2,95,052. If there is any conflict in the figures in the certificates issued by the MES authorities the assessee cannot benefit from that situation as it has itself to blame for the MES by neither keeping proper accounts nor gathering the information from bank statements where the payments would have been collected. The ITO very patiently gave the assessee all the time and opportunity to reconcile the figures but this had proved in vain. To furnish the figures of contract receipts was the responsibility of the assessee and so far as the payments from Garrison Engineer, Amritsar, are concerned, it has discharged that duty by filing the certificate dated 18-1-1979. It is interesting to note that on the certificate dated 18-1-1979, there is a note recorded that payments of C.A. No. G.E./ASR./P.46/72-73 were not available with that office. Those payments if included would have increased the amount of receipts further. The best that can be done for the assessee in my view is to reduce the gross payments to Rs. 2,93,641 and I hold so.
3. The next issue is about the inclusion of cost of stores supplied in the gross receipts and thereafter working out the profit on these also.
In view of the Supreme Court ruling in the case of Brij Bhusan Lal Parduman Kumar (supra), no profit can be worked out on the stores supplied in the case of MES contracts. Following that authority, I hold that the value of stores be excluded from the gross receipts and the net profit rate be applied to the balance receipts. This is another relief which I allow to the assessee.
4. The next question is the applicability of net profit rate of 12 1/2 per cent. This is the rate which was applied at the original assessment stage and upheld by the AAC in appeal. The same rate has been applied by the ITO in the reassessment and the application of this net profit rate within my knowledge was not seriously contested. I consider a net profit rate of 12 1/2 per cent to be quite reasonable and all the more so, when the cost of materials supplied is being excluded. So much about the working of the contract income.
5. There is an addition of Rs. 18,000 on account of unexplained investment in the contract business. The ITO worked it out with reference to the payments received in the first month of commencement of contract, namely, May 1972. This issue was not raised by the ITO at the original assessment stage. No evidence has been led by the assessee to show that investment issue cropped up before the completion of original assessment on 27-5-1974. In the reassessment now before us, the ITO has raised this issue by order sheet entry dated 16-10-1978. It is important to remember that the issue of investment was not the basis for reopening the assessment. The assessment was reopened on account of discrepancy in the figures of gross receipts from the contract. It is well settled that once an assessment is properly reopened, the ITO is not confined to the issue for which it is reopened but can travel further if he finds any other new grounds. The ITO at the reassessment stage thought of the aspect of the investment in contract business and both he and the AAC have indicated in the orders that the assessee was called upon to produce the books of accounts of Sialkot Tannery Works in order to verify, if any, capital flowed from the firm to be utilised in the contract work but tine assessee did not comply with the ITO's direction. The ITO then considered the statements of accounts of partners of the firm furnished during the course of original assessment proceedings and found that the firm had not included the investment in those statements of accounts and the contract work investment was, thus, kept outside the books of account. No proper accounts have been admitted to have been kept for the contract business. In this connection it is relevant to look into the assessment order dated 27-5-1974, which shows that the assessee worked out the profit by applying the net profit rates of payments and the value of stores received and the ITO has also observed that the assessee had not kept any proper accounts for the contract work. In view of these clear facts, the ITO had raised a very valid and interesting point about the source of investment in the contract work and he gave the assessee opportunities to explain its case. No information was given to the ITO and he adopted the payment received in the first month of contract work to be affording an inkling about the investment made in the contract work. Those payments are recorded both in the orders of the ITO and the AAC and though the payments received amounted to Rs. 29,563, he estimated the initial investment after considering certain factors at Rs. 18,000 only. For want of explanation, he considered the investment to have been met by the assessee outside the books and considered it as the assessee's income from undisclosed sources. Before the AAC, an explanation was attempted and it was claimed that the assessee withdrew Rs. 24,175 from Punjab and Sind Bank on 13-1-1971. The AAC observed that the certificate from bank was produced before him and not before the ITO and the assessee had raised a clean loan from the bank but she was not satisfied that the assessee had obtained the loan about sixteen months in advance of starting of the contract work in the course of an earlier accounting period relevant to the assessment year 1971-72 and the assessee was keeping it idle for such a long period. On the facts and in the circumstances of the case, I find that the AAC has correctly rejected the assessee's explanation which was produced haltingly before the AAC and kept back before the ITO despite his giving a number of opportunities to the assessee. The addition of Rs. 18,000, in my opinion, on account of unexplained investment is justified and reasonable and I confirm the same. The learned Judicial Member, in my view, has applied the test for reopening of an assessment. That question did not arise here. The assessment was already reopened and the ITO in the course of reassessment had hit upon the question of source of investment the position about reopening of a assessment is distinguishable from that arising at the time of completing of a reassessment in respect of a new item of income escaping assessment. I may also mention that the original assessment was made on the basis of figures given by the assessee and it is nowhere shown that month-wise figures of payments were furnished. These month-wise figures of payments came up for consideration only at the reassessment stage.
Again, it is not an automatic inference that from the figure of payments of a particular month, it must be presumed that the ITO has also gone into the question of the source of the amounts invested in the execution of contract work with reference to which contract payments have been received.
1. The assessee is a contractor for the supply of charpai, blankets, etc., to the Garrison Engineer, Amritsar, and other places. An original assessment was made in this case where after including the cost of materials supplied, the receipts were shown at Rs. 2,35,439. The assessee having no books of account had returned an income by estimating a profit of 10 per cent on original receipts and 5 per cent on cost of materials. The ITO made an assessment accepting the figure of total receipts and adopting a profit rate of 12 1/2 per cent.
Subsequently, the assessment was reopened by him in order to bring to tax certain additions to the receipts not considered in the original assessment and found out from scrutiny of certain certificates received from the governmental authorities. In the reopened assessment the income was worked out on total receipts of Rs. 2,95,052 with a gross profit rate of 12 1/2 per cent. At the time of the reassessment, the ITO went into the question of initial investment and made an addition of Rs. 18,000. The AAC having dismissed the assessee's appeal, the matter came up on appeal to the Tribunal. The Tribunal dealt with two disputes, one relating to the addition to the business income and the other relating to the initial invesment of Rs. 18,000. The learned Judicial Member accepted the assessee's claim for relief whereas the learned Accountant Member partially gave relief on the trading account addition but sustained the addition of Rs. 18,000 on account of initial investment.
The two Members having, thus, differed, the matter is referred to me as the Third Member on the following three points: At the time of the hearing, the learned counsel for the assessee gave up the grounds regarding (1) and (2). There is no difference, therefore, to be resolved on these points and the matter has to be decided against the assessee on this.
2. On the question of initial investment, the learned counsel for the assessee pointed out that full details of the receipts were given. The assessee had also pointed out before the appellate authorities, if not before the ITO himself, how he had withdrawn a sum of Rs. 24,175 from the bank and this was available to him for the purpose of investment.
In fact, even though the receipts from the Government came during the year, the investment in the goods was done very much earlier. The moneys borrowed from the bank, therefore, were clearly utilised for this purpose. Merely because the assessee had no accounts, he should not be penalised on what was clearly a genuinely explained investment.
The points raised before the original Bench were also stressed. The learned counsel has also referred to certain passages in Kanga and Palkhivala's Law of Income-tax with regard to the powers of the ITO on reopening.
3. After hearing the learned counsel for the department, I agree with the learned Accountant Member that the addition of Rs. 18,000 should be upheld. In the present case, the assessment was reopened as there was a positive escapement of income on account of certain receipts being omitted as verified from the certificates. The reopening itself, therefore, of the assessment was valid and proper. It is settled law that in a reopened assessment any escapement of income could be gone into and compensated. Even the assessee's learned counsel was not able to establish that at the time of the original assessment, the ITO had looked into the question of investment or that the assessee had himself furnished any details as to the initial investment. The source of initial investment, therefore, had come up for consideration for the first time, the technical point, therefore, made out by the assessee and supported by the learned Judicial Member cannot be accepted especially after the reopening itself has been found to be proper. On merits also, the addition is justified and the quantum of addition is proper. That the assessee received sale proceeds from the Government on account of supply of goods even in the very first month of the year is clear. This would have necessitated the initial investment. The only claim made by the assessee is that the investment was made very much earlier than the beginning of the year and was also financed by the bank loan taken on 30-1-1971. Even if the period for which the loan was availed of is not as long as sixteen months as computed by the ITO, certainly the assessee would not have taken bank loan at considerable interest if it was not immediately necessary for investment. The money, therefore, cannot be said to have been available to the assessee for a long period as about sixteen months. The assertion that the payments were made to the purchasers long before the beginning of the year has not been factually proved. The source of initial investment, therefore, can be held to have been not explained properly. Even though the investment necessary for the initial months' receipts were much higher, the ITO has made an addition of only Rs. 18,000. This cannot, therefore, be said to be excessive or unjustified. I agree with the learned Accountant Member that this addition should be sustained. The matter will now go back to the original Bench, which heard it for disposal according to law.