Bombay H.C : Whether the Department could assess the sales to capital gains on the ground that the sale is genuine and still disallow the purchase cost in respect of the same transaction ?

High Court Of Bombay

Tribhovandas Bhimji Zaveri vs. Assistant Commissioner Of Income Tax & Anr.

Section 69C

Asst. Year 1988-89

S.H. Kapadia & J.N. Patel, JJ.

IT Appeal Nos. 404 & 881 of 2000

8th September, 2000

Counsel Appeared

S.E. Dastur i/b V.B. Patel & B.V. Jhaveri, for the Appellant : R.V. Desai with P.S. Jetley & J.P. Deodhar, for the Respondents

JUDGMENT

S.H. KAPADIA, J.:

Since the above two appeals arise from common orders of the Tribunal, the same are disposed of together by this common judgment.

2. Being aggrieved by the decision of the Tribunal, directing the addition of Rs. 1,53,02,226 for the asst. yr. 1988- 89, this appeal has been filed under s. 260A of the IT Act, 1961, by the assessee.

Facts

3. The assessee is a partnership-firm. It is engaged in the business of dealing in bullion, gold and jewellery. For the asst. yr. 1988-89, it filed it’s returns declaring an income of Rs. 33,18,400. The assessee claimed that in the year of account, relevant for the asst. yr. 1988-89, it had purchased gold ornaments of Rs. 1,53,02,226 weighing 58.803 kgs. from the partners of the firm and their family members. In other words, gold ornaments were purchased from 18 individuals, out of which 5 were the partners of the firm and the remaining 13 are their family members. In the audit report furnished under s. 44AB, the said purchases were shown as purchases of old ornaments. However, the purchase memos show the gold ornaments as new ornaments. The AO called for an explanation regarding the above purchase transaction. In it’s explanation, the case of the assessee was that the said 5 partners and their family members had filed returns for the asst. yr. 1978-79 under the Amnesty Scheme, 1985. That, this was done in March, 1987, when value of certain jewellery came to be declared as income from undisclosed sources under the head “Income from other sources”. The same jewellery was subsequently sold to the firm in the year of account relevant to the asst. yr. 1988-89. The amnesty return was filed on the basis of a valuation report obtained from a Valuer Meenawalla on 27th March, 1987. The value of the jewellery was accordingly disclosed under the Amnesty Scheme by all 18 individuals on 27th March, 1987. Thereafter, all 18 individuals sold the said jewellery to the assessee. The AO summoned all 18 individuals under s. 131 of the IT Act. 14 out of 18 individuals attended the office of the AO. They stated to have sold the jewellery to the assessee-firm. That, the jewellery was acquired by them out of their income from undisclosed sources. That, the income was earned during the asst. yr. 1978-79. That, the income earned was invested in purchase of the jewellery. That, this was disclosed under the Amnesty Scheme by filing a return in March 1987 for the asst. yr. 1978-79 and lastly, that all persons who sold the jewellery had offered capital gains on such sale of jewellery in their returns for asst. yr. 1988-89. All of them stated that the source of jewellery was out of undisclosed income. Except one individual, the remaining individuals could not specify the nature of the source of income. They could not give the names of the jewellers from whom the jewellery was purchased. That, all of them categorically stated that after declaration of the jewellery in March, 1987, under the Amnesty Scheme, they were given to Karigars for re-making jewellery and that the remade jewellery was sold to the firm as new ornaments. They also admitted that in September, 1982, action was taken by the Department under s. 132. However, at that time, the jewellery under question was not found by the Department. On the above evidence, the AO came to the conclusion that the purchase of gold ornaments of Rs. 1,53,02,226 was not a genuine purchase. He accordingly added the impugned amount to the income of the assessee, the impugned amount being Rs. 1,53,02,226. Being aggrieved, the assessee carried the matter in appeal to the CIT(A). The first appellate authority came to the conclusion that since the concerned jewellery stood declared in the returns filed under the Amnesty Scheme, no case was made out either to doubt the said purchases by the assessee-firm or to make the impugned addition of Rs. 1,53,02,226. Being aggrieved by the decision of the first appellate authority, the Department carried the matter in appeal to the Tribunal. By the impugned decision, the Tribunal came to the conclusion, inter alia, that the gold acquired out of undisclosed income surfaced in the asst. yr. 1988-89 and, therefore, the Department was justified in bringing the value of such gold, acquired outside the books, to tax in the assessment year in question. That, there was an attempt of capital build-up in the hands of ladies, minors and other relatives of the partners of the assessee-firm. That the entire scheme was planned and coordinated by the assessee-firm. That, the assessee-firm cannot be disassociated from the scheme of declaration of gold under the Amnesty Scheme in the names of the family members of the partners of the assessee-firm, particularly in view of the fact that different individuals could not have got the idea of acquiring gold in the asst. yr. 1978-79 and declaring such gold under the Amnesty Scheme by filing their returns on the same day viz., 30th March, 1987, and thereafter getting the gold converted into ornaments through Karigars around the same time and subsequently, selling the ornaments to the assessee-firm in the same accounting year. Accordingly, the Tribunal came to the conclusion that the assessee-firm has resorted to unfair tax-saving device. Accordingly, the Tribunal upheld the findings of the AO by adding Rs. 1,53,02,226 to the income of the assessee-firm. Being aggrieved by the decision of the Tribunal the assessee has come in appeal to this Court under s. 260A of the IT Act.

Arguments 4. Mr. Dastur, learned senior counsel for the appellants, contended that genuineness of the purchase cannot be doubted as the sales were disclosed in the hands of the sellers who paid taxes on account of capital gains on the sales. That, the IT Department had, in the same year, assessed these 18 individuals/declarants on account of capital gains in their assessment for asst. yr. 198889. That, merely because purchases were made from the partners and their family members, they cannot be doubted. That, the AO erred in coming to the conclusion that respective partners accounts were merely credited and that there was no real payment. It was pointed out that the amounts credited to the account of the respective partners and the members of their family were credited to the existing accounts and from these accounts, partners made substantial withdrawals in the same year and, therefore, the Tribunal erred in coming to the conclusion that these were paper transactions. It was further contended that the sellers were persons of substantial means. That, they were assessed to tax for many years. That, they have made substantial contribution in the business of the firm in the past. That, they have independent sources of income. Hence, the Tribunal erred in not considering the relevant facts. It was further contended that the ratio of the decision of the Supreme Court in the case of Jamnaprasad Kanhaiyalal vs. CIT (1981) 23 CTR (SC) 146 : (1981) 130 ITR 244 (SC) had no application to the facts of the present case, particularly in view of two distinctive facts viz., in the present case, there was disclosure under the Amnesty Scheme and the sellers had paid tax on account of capital gains when gold was sold to the firm. Such facts were not there in the case of Jamnaprasad Kanhaiyalal (supra). It was further contended that there were patent mistakes, on the face of the record, committed by the Tribunal for which the appellant filed miscellaneous application under s. 254(2) for rectification. In this regard, it was contended that the appeal filed by the Department was not in conformity with the IT Rules. That, the appeal was defective as the same was not accompanied by grounds of appeal, statement of facts as also exhibits filed by the assessee before the first appellate authority. It was contended that the Tribunal decided certain issues which never arose. In this matter, the CIT(A) decided the appeal in favour of the assessee. He held that the judgment of the Supreme Court in Jamnaprasad Kanhaiyalal’s case was not applicable to the facts of this case. Having so held, the CIT(A) did not thereafter go into the merits of the case. Against the decision of the CIT the Department went in appeal to the Tribunal. The Tribunal came to the conclusion that the decision of the Supreme Court was applicable. It was contended that on the said finding, the Tribunal should have remanded the matter back to CIT(A) to decide the matter on facts and in view of the applicability of the judgment of the Supreme Court in the case of Jamnaprasad Kanhaiyalal. That was not done. After coming to the conclusion that the judgment of the Supreme Court was applicable, the Tribunal examined the facts and found erroneously, that the firm had introduced unexplained investment in gold in the names of the partners and their family members by getting the returns of income filed for the asst. yr. 1978-79 under the Amnesty Scheme. Therefore, the Tribunal erred in giving its decision on the factual aspects of the case which did not arise out of the order of the first appellate authority as there was no factual finding given by the first appellate authority. That, the Tribunal, while giving its decision on the above facts, failed to take into consideration the evidence produced by the assessee before the AO as also before the CIT(A). That, substantial amounts which were withdrawn by the sellers before the end of the year has not been considered by the Tribunal. That, this fact was on record in the statement of facts filed before the first appellate authority and which was not enclosed in the appeal paper-book filed by the Department before the Tribunal. That, the Tribunal has failed to appreciate that before selling the jewellery to the assessee-firm, the partners and their relatives had disclosed the same under the Amnesty Scheme. They had paid income-tax on the declared jewellery. They had paid wealth-tax on the said jewellery for the asst. yr. 1978-79 upto 1986-87 when they filed the returns under the Amnesty Scheme and also in the return of net wealth for asst. yr. 1987-88. That, they had remade the jewellery and had disclosed the same under the Gold Control Act before the jewellery came to be sold. That, the parties who sold the jewellery were regularly assessed to income-tax. That, the sellers were assessed to wealth tax for asst. yr. 1987-88 and as such, their capacity to acquire the jewellery stood proved. Hence, not only the capacity of the sellers was proved, but also the actual transactions were proved as genuine. This was particularly in view of the fact that they were assessed to capital gains on the same transactions in their individual assessments for the asst. yr. 1988-89. That, the Tribunal failed to appreciate that there was no purpose for disclosing the jewellery under the Amnesty Scheme in the hands of the partners and their family members instead of in the hands of the firm as the taxes payable in both cases would have been the same. That, the CIT(A) did not go into the question of capacity of the partners and their relatives for acquiring the jewellery in question as the first appellate authority came to the conclusion that the said judgment of the Supreme Court in Jamnaprasad Kanhaiyalal’s case (supra) had no application to the facts of the present case. That, after the Department had assessed the partners and their relatives on account of capital gain for the asst. yr. 1988-89 and also under WT Act for asst. yr. 1987-88, the Department could not have assessed the value of the same jewellery in the hands of the firm once again in the same year 1988-89 and that the Department should not have, therefore, come to the conclusion that the sales to the firm were not genuine. Hence, the Tribunal erred in dismissing the miscellaneous application filed by the appellants under s. 254(2) of the Act.

Findings

5. At the outset, it may be mentioned that there is a difference between source of income and genuineness of the sale of ornaments by the individuals in favour of the assessee-firm. The most crucial question which was required to be taken into account by the Tribunal was whether the Department could have come to the conclusion that the impugned sales were not genuine when, in fact, these very sales have been assessed in the hands of the individuals to capital gains. In this connection, the following facts are required to be mentioned. On 31st March, 1987, 5 partners of the firm, along with their family members, made a declaration under the Amnesty Scheme and filed income-tax and wealth-tax returns for asst. yrs. 1978-79 to 1987-88. The individuals also filed their return for the asst. yr. 1988-89 which was not the amnesty year. For example, Gopaldas Zaveri filed a return of income on 29th June, 1988, declaring the income of Rs. 7,05,170. The income was processed and assessed under s. 143(3) of the IT Act. On the basis of sale of gold ornaments in the previous year relevant to the asst. yr. 1988-89, the sale effected by Gopaldas of the gold ornaments was assessed. Capital gains were accordingly charged for the said asst. yr. 1988-89. Accordingly, other individuals were also required to pay capital gains tax. In all, Rs. 29,00,000 were paid by way of capital gains. In other words, for the asst. yr. 1988-89, which was not the amnesty year, the Department assessed the individuals as sellers on the grounds that they have sold the gold ornaments belonging to them individually. Accordingly, tax has been recovered on the sale price of the gold ornaments. The tax paid by the individuals in all, was around Rs. 29,00,000. The cost taken into account was about Rs. 33,00,000. The sale price taken into account for the purposes of s. 48 of IT Act was around Rs. 1,53,02,226. In other words, the assessment orders have been passed in the case of individuals levying capital gains tax on the sale of gold ornaments by the individuals to the firm. The short point which is very crucial to be decided and which has not been considered by the Tribunal is : Can the Department assess capital gains tax on the individual sellers and still disallow the purchase cost in the hands of the firm on the ground that the purchase is not genuine ? On 29th June, 1988, return of income for the asst. yr. 1988-89 was filed along with the tax audit report. On 19th March, 1991, a show-cause notice was issued by the AO as to why value of the purchase of Rs. 1,53,02,226 should not be added to the income of the assessee. By the assessment order dt. 27th March, 1991, the AO disallowed Rs. 1,53,02,226 being the purchase consideration credited to the running accounts of the partners and their family members in respect of the same gold jewellery purchased from them holding that it was not a purchase consideration. That, it represented the income of the appellant from undisclosed sources for the asst. yr. 1988-89. The AO came to the conclusion that purchase consideration payable to the partners and their relatives represents income of the assessee from undisclosed source amounting to Rs. 1,53,02,226 for asst. yr. 1988-89. According to the Department, gold ornaments were not found in 1982 when action was taken under s. 132 of the IT Act and, therefore, the sale could not have taken place in favour of the firm in 1987 as the gold ornaments did not belong to the individuals. Hence, according to AO the ornaments always belonged to the firm. That, the individuals had no source to acquire the gold ornaments. That, the holder of the gold ornaments was only the firm and, therefore, the purchase of gold ornaments by the firm from the partners and their family members was not a genuine transaction. To the same effect, is the finding of the Tribunal. The Tribunal has found that there was an attempt of capital build-up in the hands of ladies, minors and other relatives of the partners of the assessee-firm. In coming to the above conclusion the Tribunal has relied upon various circumstances which are enumerated in the impugned judgment viz. that the purchase of gold ornaments of Rs. 1,53,02,226 represented only credit purchases and not cash purchases. That, the gold acquired out of undisclosed income has surfaced in the year of account relevant to the asst. yr. 1988-89. That the ladies and minors had no independent source of income to acquire the jewellery in the first instance. That, all the sellers gave stereo type answers to explain how they acquired the ornaments in the asst. yr. 1978-79. That the name of the jeweller from whom they acquired the ornaments has not been given. These circumstances have been enlisted broadly at p. 177 of the paper book. But, the most crucial circumstance which has not been taken into account by the Tribunal is the consequence of the order of assessment under which sales have been assessed to capital gains in the hands of the individuals. Therefore, the short point which arises for determination in this case and which has not been considered by the Tribunal is : Whether the Department could assess the sales to capital gains on the ground that the sale is genuine and still disallow the purchase cost in respect of the same transaction ? In other words, the consequences of the assessment orders passed in the case of 18 individuals, assessing the sales to capital gains has not at all been considered by the Tribunal. The AO and the Tribunal has proceeded on the footing that Rs. 1,53,02,226 represented income of the firm from undisclosed sources for the asst. yr. 1988-89. This is a very important circumstance. The assessment orders further indicate that while assessing the sale proceeds of the gold ornaments in cases of individuals, the cost of acquisition/purchase plus making charges during financial year 1977-78 has also been taken into account. On the other hand, in the present proceedings, the AO has proceeded on the basis that the ornaments, all along, only belonged to the firm. In other words, the Tribunal has not considered whether the assessment orders passed with regard to individuals could stand side by side with the order of the AO passed in the present appeal. If the ornaments, all along, belonged to the firm, then one fails to understand as to how the cost of acquisition/purchase has been taken into account for the financial year 1977-78 in the assessment orders passed in the cases of the 18 individuals. The assessees have been separately assessed. Lastly, in the present matter, the Tribunal has not considered the evidence which formed part of the statement of facts filed by the assessee before the first appellate authority. Against the order of CIT(A), the Department went in appeal to the Tribunal. They did not file the statement of facts which was filed by the assessee before the first appellate authority. That statement of facts also consisted of voluminous evidence which has been annexed to the paper-book in the present appeal running from pp. 91 to 128 of the paper-book in ITA No. 404 of 2000.

Under the above circumstances, we are of the view that the impugned order is required to be set aside. That the matter is required to be remitted to the Tribunal for disposal in accordance with law. The appeal filed by the Tribunal before the Department is accordingly restored to the file of the Tribunal. The Department can apply for rectification of their memo of appeal so that the requisite paper book/material can be brought on record. The Department is also given liberty to move the Tribunal by way of amendment application, if so advised, and they are given permission to add additional grounds to the memo of appeal, if so advised. This liberty is required to be given because we find merit in the contention of the Department that the grounds of appeal before the Tribunal do not cover all aspects of the case. The Tribunal may also give an opportunity to the parties, if it so desires, to produce additional evidence in accordance with the Rules. The Tribunal should also consider, in the light of what is stated hereinabove, the question regarding the applicability of the judgment of the Supreme Court in the case of Jamnaprasad Kanhaiyalal vs. CIT (supra) afresh, particularly with regard to the consequences of the assessment order being passed on the returns of the individuals, subjecting the sales to capital gains tax in the hands of the individuals.

Accordingly, the appeal is allowed. The impugned order is set aside. The Tribunal is directed to hear and dispose of the appeal in accordance with law within four (4) months from the date of the receipt of the certified copy of the order passed by us in the above two appeals. Subject to above, both the appeals are disposed of with no order as to costs.

[Citation : 247 ITR 727]

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