Skip to content


A.V. Malliah Chettiar and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 129 and 197 of 1979 (Reference Nos. 79 and 125 of 1979)
Judge
Reported in[1985]153ITR659(Mad)
ActsIncome Tax Act, 1961 - Sections 139, 143(3), 147 and 148
AppellantA.V. Malliah Chettiar and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateK.S. Sivaraman, Adv.
Respondent AdvocateJ. Jayaraman, Adv.
Excerpt:
.....that those enquiries have revealed that the persons to whom the assessee claims to have sold dyes and chemicals were only fictitious persons and that the assessee's failure to produce its purchasers for verification before the ito could also lead to the inference transactions of sale of dyes and chemicals cannot true, and that the assessee should have dealt with the import licences as such at the then market rate. 147(b) of the act for both the years have been questioned by the assessee on the ground that the conditions requisite for reopening the assessments under that provision are not satisfied and, therefore, the ito had no jurisdiction to reopen the assessment. according to the learned counsel for the revenue, the materials which came to light after the original..........that those enquiries have revealed that the persons to whom the assessee claims to have sold dyes and chemicals were only fictitious persons and that the assessee's failure to produce its purchasers for verification before the ito could also lead to the inference transactions of sale of dyes and chemicals cannot true, and that the assessee should have dealt with the import licences as such at the then market rate. the tribunal after upholding the power of the ito to reopen the assessment under s. 147(b) proceeded to deal with the merits of the reassessments and ultimately held that the assessment of the income by the ito is quite justified. aggrieved by the decision of the tribunal in respect of both the assessment years, she assessee has sought and obtained a reference on the.....
Judgment:

Ramanujam, J.

1. At the instance of the assessee, the following two questions have been referred by the Income-tax Appellate Tribunal for the opinion of this court :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was information to justify the reopening of the assessment under section 147(b)

2. Whether the Tribunal's finding is merely on the basis of presumption without appreciating the documentary evidence and tenor of the transactions calling for direction to rehear the appeal ?'

2. The assessee is a firm exporting lungies to foreign countries. As a result of the exports made by it, it received incentive import licences for dyes and chemicals. The assessee claimed in the assessment year 1966-67 to have imported dyes and chemicals on the basis of such import licences and sold the dyes and chemicals imported to the following parties :

Rs.1. Shri V.N. Subbier ... 21,7362. Central Chemical Agency, Bombay ... 21,7173. Central Chemical Agency, Calcutta ... 74,349.

3. Based on the statement made by the assessee that they had imported dyes and chemicals and thereafter sold them to the three parties referred to above for a gross profit of 14%, the assessment was completed by the ITO for the year 1966-67 on March 29, 1967, under s. 143(3) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'). For the subsequent year 1967-68, the assessment was finalised on February 3, 1968, under s. 143(3) on the same basis. For this year the ITO added the income of another firm, Sivagami Textiles, to the income of the assessee on the ground that the said Sivagami Textiles is a benami concern of the assessee-firm, though for the assessment year 1966-67, the ITO had accepted the statement of the assessee that the Sivagami Textiles was an independent concern and, therefore, its income cannot be clubbed with that of the assessee.

4. Based on the finding rendered by the ITO in the assessment year 1967-68 that Sivagami Textiles is not an independent concern but a benami concern of the assessee, the original assessment order for the year 1966-67 dated March 29, 1967, was sought to be reopened under s. 147(b) of the Act. During the reassessment, it came to light that the sales of dyes and chemicals said to have been made by the assessee in favour of the three individuals referred to above are bogus transactions, as those persons have been found to be fictitious on enquiry. At that stage, the ITO called upon the assessee to produce the concerned parties for examination. The assessee, however, could not produce the said parties. Therefore, the assessing authority came to the conclusion that the assessee must have sold the import licences for dyes and chemicals at a premium and taking into account the price quoted in the 'Economic Times' and the local paper 'Viyapar', he determined the net profit in the sale of import licences at Rs. 77,550. He, therefore, added the said sum to the amount assessed already in the original assessment.

5. Thereafter, the ITO reopened the assessment for the year 1967-68 by invoking the provisions of s. 147(b) of the Act, on the ground that the sales of dyes and chemicals said to have been made by the assessee to various persons should be taken to be bogus transactions and the assessee was again called upon to produce its purchasers for verification. Since the assessee had failed to produce those persons, the ITO came to the conclusion that those persons were fictitious and, therefore, the alleged sales of dyes and chemicals to them can only be taken to be bogus transaction and, therefore, the conclusion is irresistible that the assessee should have sold the import licences as such to various parties at the prices quoted during the relevant period in the 'Economic Times'. On the basis, an addition of Rs. 46,293 came to be made to the income determined in the original assessment.

6. Aggrieved by the orders of the assessing authority reopening the assessments under s. 147(b) of the Act, the assessee filed appeals before the AAC in respect of both the years, but without success. Thereafter, the assessee went before the Tribunal questioning the jurisdiction of the ITO to initiate proceedings under s. 147(b) of the Act and the correctness of the revised assessment on merits. The Tribunal held that the ITO acted on sufficient materials for invoking his power under s. 147(b), that the ITO after making the original assessment had caused enquiries to be made to find out whether the alleged sales of dyes and chemicals made to the various parties are true transactions, that those enquiries have revealed that the persons to whom the assessee claims to have sold dyes and chemicals were only fictitious persons and that the assessee's failure to produce its purchasers for verification before the ITO could also lead to the inference transactions of sale of dyes and chemicals cannot true, and that the assessee should have dealt with the import licences as such at the then market rate. The Tribunal after upholding the power of the ITO to reopen the assessment under s. 147(b) proceeded to deal with the merits of the reassessments and ultimately held that the assessment of the income by the ITO is quite justified. Aggrieved by the decision of the Tribunal in respect of both the assessment years, she assessee has sought and obtained a reference on the questions set out above.

7. As already stated in respect of both the assessment years 1966-67 and 1967-68, the ITO had reopened the original assessment made under s. 143(3) of the Act. The reopening of the assessment for the year 1966-67 was on the basis that the assessee has come forward with a false plea that it had sold dyes and chemicals to three parties, namely, V. N. Subbier, M/s. Central Chemical Agency, Bombay, and M/s. Central Chemical Agency, Calcutta, and the enquiry reveals that these are fictitious ones and that the conduct of the assessee in coming forward with a false plea leads to the inference that the assessee has not imported dyes and chemicals in pursuance of the import licence granted to it, but it has actually sold the import licences as such and realised a larger profit than what the assessee has revealed in its books of accounts and disclosed in its return on the basis of which the original assessment was made. The reopening has also been made on the basis that Sivagami Textiles has been wrongly claimed by the assessee as an independent concern which was later found to be a benami concern of the assessee. For the assessment year 1967-68, the basis for reopening of the assessment is that the persons to whom the dyes and chemicals said to have been sold are fictitious persons leading to the inference that the assessee should have sold the import licences as such to various persons at the then prevailing market rate. The reopening of the assessment under s. 147(b) of the Act for both the years have been questioned by the assessee on the ground that the conditions requisite for reopening the assessments under that provision are not satisfied and, therefore, the ITO had no jurisdiction to reopen the assessment. As already stated, the Tribunal has found that there was sufficient material to justify the reopening of the assessment under s. 147(b) of the Act. The assessee has raised the above two questions as arising out of the order of the Tribunal.

8. The first question involves the jurisdiction of the ITO to reopen the assessment under s. 147(b) of the Act. The second question canvasses the correctness of the finding of the Tribunal that the there are sufficient materials for justifying the reopening of the assessment under s. 147(b) and the direction of the Tribunal to rehear the appeal so far as the constitution of Sivagami Textiles is concerned.

9. So far as the first question is concerned, the contention of the assessee before us is that the ITO had no material before him from which a reasonable inference could be drawn that income had escaped assessment and the mere fact that the assessee was not able to produce the various purchasers to whom it had sold dyes and chemicals cannot be a ground for invoking the power of the assessing authority under s. 147(b).

10. The learned counsel for the assessee has referred to various decisions to indicate as to in what cases the ITO could invoke section 147(b) of the Act. According to the learned counsel for the Revenue, the materials which came to light after the original assessment was made clearly lead to inference that income has escaped in the original assessment and, therefore, on the basis of those materials, the ITO is justified in invoking his jurisdiction to reopen the assessment under s. 147(b) of the Act.

11. Having regard to the rival contentions set out as above, we have to see as to what are the facts that came to light and what are the materials that came into the possession of the assessing authority after the original assessment. It is seen from the assessment order that the assessee at the stage of the original assessment claimed that it has effected sales of imported dyes and chemicals and photographic films to the extent of Rs. 79,935 for the assessment year 1967-68. Based on the assessee's claim, the assessing authority originally accepted that the sales have been effected by the assessee to genuine parties. Subsequent to the completion of the original assessment, it has been found on further enquiries at Bombay and Calcutta that the persons to whom the dyes and chemicals are said to have been sold are non-existing fictitious entities. From those materials which came into his possession after the original assessment, the ITO was of the view that the assessee's sales being not genuine, the assessee should be taken to have failed to produce all the material facts required for the completion of the assessment and it is only on that basis a notice was issued for reopening the assessment under s. 147(b).

12. For the assessment year 1966-67 in the original assessment made on March 29, 1967, on the basis of the assessee's statement that Sivagami Textiles is an independent concern, its income was not clubbed with that of the assessee. The assessing officer also had proceeded at the stage of the original assessment that the persons to whom the assessee claims to have sold dyes and chemicals were genuine entities and proceeded to complete the original assessment on that basis. In view of the fact that in the subsequent assessment year 1967-68, the assessing authority has himself found that Sivagami Textiles is a benami concern of the assessee, and, therefore, its income should be clubbed with that of the assessee's income, he felt that the income has escaped assessment and, therefore, reopening was called for under s. 147(b) of the Act. The ITO has also found on further enquiry at Bombay and Calcutta that the persons to whom the assessee claims to have sold the dyes and chemicals were not in fact genuine parties but fictitious ones and, therefore, the sales of dyes and chemicals pleaded by the assessee are in fact bogus transactions which led to the inference that there can be no sale of dyes and chemicals but there should be a sale of import licences as such. Thus, the reopening of the assessment for the year 1967-68 was for two reasons : (1) In the original assessment, M/s. Sivagami Textiles has been wrongly treated as an independent concern and its income was excluded from the income of the assessee, and (2) that the parties to whom the assessee claims to have sold imported dyes and chemicals put forward by the assessee are only bogus transactions leading to the inference that the assessee should have sold the import licences as such and realised larger profits than what the assessee has mentioned in its return. The material which came to light subsequent to the original assessments for the two years have been actually referred to in the revised assessments orders by the ITO. The AAC has in fact found that the assessee has admitted in its letter dated January 9, 1968, addressed to the ITO that as the assessee-firm not having repatriated the funds declared by it on G.R.I. Export Forms within the time-limit laid down therein they have been put in the caution list and subjected to certain restrictions which are not conducive to carrying on the exports as usual, constituted another firm by name Sivagami textiles and all the goods of the assessee-firm were sold to Sivagami Textiles and the latter made the actual exports. Based on the said admission, the appellate authority affirmed the finding of the ITO that M/s. Sivagami Textiles was a branch of the assessee-firm. On the question as to whether the parties to whom the assessee had sold the dyes and chemicals are fictitious persons as contended by the Revenue or genuine persons as contended by the assessee, the AAC took the view that evidently, the sales were not genuine and, therefore, the book profit of 14% which was accepted in the original assessment was an understated one, and that the ITO's view that these parties were bogus parties was not based on suspicion or any guesswork. He also found that an honest belief had arisen as a result of a genuine information that the assessee's income had escaped assessment, that such an information was not in the possession of the ITO at the time of the original assessment and that subsequently the information available was such from which he had reason to believe that the assessee's income had escaped assessment. In this view, the AAC had held that there is no illegality in the action taken by the ITO under s. 148 read with s. 147(b) of the Act.

13. When the matter reached the Tribunal, it also referred to the materials which came to the knowledge of the ITO subsequent to the original assessment as being sufficient to lead to an inference that income had escaped assessment. The Tribunal, while dealing with the contention of the assessee that simply because at such a distant point of time the purchasers could not be produced, the purchasers could not be taken to be fictitious persons and that no inference could be drawn that the assessee had sold the import licences at a premium merely because it was not able to produce the purchasers and, therefore, huge gross profit addition made cannot be justified, held that the onus is heavily on the assessee to prove the genuineness of the sales pleaded by it and since the assessee has not satisfactorily established by any acceptable evidence that the dyes and chemicals were in fact imported and sold to third parties at a profit of 14% as alleged by it, it is reasonable to presume that the assessee might have sold the import licenses at a premium having regard to the general prevailing practice of selling the import licences for dyes and chemicals for a larger premium amount, that since the identity of the purchasers had not been established by the assessee, the ITO was justified in not treating the alleged sale transactions as genuine, rejecting the book profits and estimating the profits made on the sale of import licences for dyes and chemicals on the basis of the market price for such import licences recorded in the 'Economic Times' and 'Viyapar'. Thus, it is clear that subsequent to the original assessment for the assessment year 1967-68, the following facts had come to the knowledge of the ITO :

(1) That the Sivagami Textiles is not an independent concern, but it is a benami concern of the assessee-firm; and

(2) That the persons to whom the assessee is said to have sold dyes and chemicals are fictitious persons leading to the inference that the assessee could not have imported dyes and chemicals in pursuance of the import licences but should have sold the import licences as such at the then market rate.

14. Admittedly, the ITO at the time of the original assessment accepted the statement of the assessee that the Sivagami Textiles is an independent concern and that the persons to whom the dyes and chemicals were sold were genuine persons without making any independent enquiry of his own. The enquiries were caused to be made only after the assessment and the said enquiries revealed that the Sivagami Textiles is not an independent concern but a benami concern of the assessee-firm and that them persons to whom the assessee claims to have sold dyes and chemicals are fictitious entities leading to the inference that the assessee could not have imported dyes and chemicals in pursuance of the imported licences but should have sold the import licences as such.

15. The question now is whether these materials which came into the possession of the ITO subsequent to the original assessment could be a basis for initiating proceedings under s. 147(b) of the Act.

16. It may be useful at this stage to refer to section 147(b) of the Act which is as follows :

'147. Income escaping assessment. - If -

(a) the Income-tax Officer has reason to believe that, by reasons of the omission or failure on the part of an assessee to make a return under section 139 for any assessment years to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year.

he may, subject to the provisions 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).'

17. The scope and ambit of this provision has been the subject-matter of a large number of decisions of this court as well as other High Courts as also the Supreme Court. But in all these cases, a uniform view has been taken that the question as to the nature of the subsequent information and whether such information could sustain a belief that any income chargeable to tax has escaped assessment, should be decided with reference to the facts of each case and no uniform rule applicable to all the cases could be laid down. Section 147(b) which has been invoked by the ITO in this case proceeds on the basis that even if there has been no omission or failure on the part of the assessee to make a return under s. 139 or to disclose fully and truly all material facts necessary for his assessment for that year, if the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year, he can reopen the assessment and reassess such income.

18. In this case, it cannot be said that there is no information in the possession of the ITO. As already stated, on the materials gathered as a result of the enquiries and investigations made subsequent to the original assessment, it came to light that Sivagami Textiles is not an independent concern and that the persons to who the assessee has sold the dyes and chemicals are fictitious persons leading to the inference that the assessee could not have sold the dyes and chemicals. Then the question is whether the information in the possession of the ITO could reasonably lead to a belief that income has escaped assessment. Admittedly, the materials gathered subsequent to the original assessment showed that the income of the Sivagami Textiles which is found to be a benami concern of the assessee has omitted to be included in the assessment and, therefore, there is reason to believe that income had certainly escaped assessment. At the stage of the original assessment, the assessee's plea was that it has sold dyes and chemicals to certain entities at a gross profit of 14 per cent. but subsequent information revealed that the alleged sales by the assessee are bogus transactions and the persons to whom the dyes and chemicals were said to be sold are only fictitious persons. The false plea of the assessee could be taken to be intended to reduce its profits and having regard to the fact that there is a good market for import licences, the assessee could have sold the import licences for getting higher profit and this inference by the ITO cannot be said to be an unreasonable one. Thus, on the facts found by the Tribunal, both the conditions referred to in s. 147(b) of the Act are satisfied, the conditions being that there is information in the possession of the assessing authority gathered subsequent to the original assessment and that information leads to the reasonable belief that income chargeable to tax has escaped assessment. We are clearly of the view that in this case, the initiation of proceedings under s. 147(b) of the Act by the ITO had rightly been upheld by the Tribunal.

19. The learned counsel for the assessee, however, puts forward a contention among others that the onus of showing that the materials furnished by the assessee are not true in on the Department and it is not sufficient merely to throw doubt or suspicion on the assessee's plea, and that in this case that onus has not at all been discharged by the Revenue. In support of this contention, the learned counsel for the assessee referred to the decision in East Coast Commercial Company Ltd. v. ITO : [1981]128ITR326(Cal) . We find that the case was decided under different circumstances. In the above case, after the original assessment, the ITO revived informations from a tax informer that certain income of the assessee has escaped assessment. Without causing any further enquiry or investigation, the ITO straightaway initiated proceedings under S. 147(a) of the Act. When that was challenged in the writ proceedings on the ground that the conditions set out in s. 147(a) are not satisfied and, therefore, initiation of proceedings under that section is bad, the court found that there was no prima facie consideration based on the information received from the tax informer, to find out whether the transactions of the assessee with some other person was bogus. There were no grounds for the formation of the belief that income of the assessee exceeding Rs. 15,000 had escaped assessment and there was also no fact or material from which it could be inferred that there was any failure on the part of the assessee to disclose the material facts necessary for the assessment. In those circumstances, that court held that the conditions in s. 147(a) were not satisfied. It is only in that context, the court observed that once all the primary facts necessary for the assessment were placed by the assessee before the assessing authority at the stage of the original assessment, he has discharged the obligation that lay upon him by disclosing and producing his books of account and other evidence and documents from which all the material facts could be discovered, that it was for the assessing authority to make further enquiry if he was not satisfied with the books, papers and documents produced by the assessee and to find out whether the transactions shown by the assessee were genuine or false and that no duty is case upon the assessee to inform the assessing authority as to who were the owners or proprietors of the various concerns to whom jute was purchased by the assessee or with whom it had other transactions. Therefore, the decision in that case may not be applicable to the facts of this case.

20. On the other hand, the decision in A. D. Jayaveerapandia Nadar v. CIT : [1964]54ITR401(Mad) relied on by the Revenue squarely applies to the facts and circumstances of this case. In that case, a Division Bench of this court was dealing with certain credit entries in the names of third parties found in the assessee's accounts. The assessee claimed on the basis of these entries that the credits in the names of the third parties in fact represented transactions of loan taken from those parties. The question arose as to who is to prove whether the credits in the names of third persons are found in the account books of the assessee, the initial burden lies upon him to prove that the entries are real and to establish that they were loan transactions, that it is the real nature of the transaction with regard to which the assessee has to produce prima facie evidence and that unless that evidence satisfies the ITO, the assessee cannot be said to have discharged the onus that lies upon him. The court was of the view that before bringing to tax an unexplained entry which for want of other evidence has to be regarded as an income receipt, there is no onus on the Department to trace out from what source such income could be derived and that if the accounts, then the ITO was justified in proceedings on the basis that the entries being in the name of a fictitious parson must be regarded as representing undisclosed income of the assessee.

21. In this case, the assessee was not able to establish its case that Sivagami Textiles is an independent concern and that the persons to whom the assessee is said to have sold the dyes and chemicals are real and not fictitious. Apart from this, there are materials gathered by the ITO indicating that Sivagami Textiles is not an independent concern and that the persons to whom the dyes and chemicals are said to be sold are fictitious persons. In view of this, unless the initial onus which is on the assessee to establish the truth of the basic facts put forward by it is discharged, the onus does not shift to the Revenue to show the actual source from which income has escaped assessment. In view of the special facts of this case, it is unnecessary to refer to the various decisions cited by the learned counsel for the assessee, as the decisions in those cases rested on the special facts of the respective cases. In this view, we have to agree with the Tribunal and answer the first question in the affirmative and against the assessee.

22. Coming to the second question, it is seen that the question as framed does not indicate the true scope. The said question refers to a finding of the Tribunal, but it does not say which of the findings of the Tribunal the assessee challenging under that question. However, having regard to the fact that the question refers to the direction given by the Tribunal to rehear the appeal, we take it that it refers to the findings as regards the question as to whether Sivagami Textiles is an independent concern or it is a benami concern of the assessee. On that question, the Tribunal felt that the AAC has not given any specific finding as to whether the amounts invested by Navaneethammal in that concern as a partner came from the joint family or from her own funds and for purposes of ascertaining that fact, the matter has been remitted to the AAC, as, according to the Tribunal, that question is material to find out whether Navaneethammal is a partner benami for the joint family or whether she is a partner in her individual capacity. On the materials on record, the Tribunal is right in directing a remand on the question as to whether Navaneethammal has invested her own funds or she is a partner by virtue of a HUF investing the funds.

23. We do not see any error in the order of the Tribunal. Therefore, both questions are answered against the assessee. The assessee will pay the costs of the Revenue. Counsel's fee Rs. 500, one set.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //