High Court Of Calcutta
Peerless General Finance & Investment Co. Ltd. vs. DCIT & ORS.
Sections 147(a), 148
Asst. Year 1973-74, 1980-80, 1981-82
Barin Ghosh, J.
C.O. Nos. 4959 to 4961 of 1989
8th August, 2002
Counsel Appeared
D. Pal, R.K. Murarka, A.N. Chunder & D.N. Chunder, for the Petitioner : P.K. Ghosh, R.N. Mitra & Soumitra Pal, for the Respondents
JUDGMENT
Barin Ghosh, J. :
These writ petitions were heard analogously inasmuch as the facts relating thereto and law applicable in relation to the same are almost identical. The subject-matter of challenge in CO No. 4959(W) of 1989 is the notice dt. 28th March, 1989, issued under s. 148 of the IT Act, 1961 (hereinafter referred to as “the said Act”), for the purpose of reopening the assessment for the asst. yr. 1981-82. In CO No. 4960(W) of 1989 the subject-matter of challenge is a similar notice, dt. 28th March, 1989, for reopening the assessment for the asst. yr. 1980-81. In CO No. 4961(W) of 1989 the subject-matter of challenge is a similar notice also, dt. 28th March, 1989, for reopening the assessment for the asst. yr. 1973-74. The grounds upon which power under s. 148 of the said Act has been exercised are identical and the same are as follows : “the peerless general finance and investment CO. Ltd. Reasons for issuing notices under s. 148 of the IT Act for the asst. yr. 1973-74 On the basis of information available in, (a) the auditors’ observations in the annual reports of Peerless for 1986 (asst. yr. 1987-88) and 1987-88 (15 months ending on 31st March, 1988, relevant to the asst. yr. 1988-89) ; (b) the Supreme Court’s observations in the case of Reserve Bank of India vs. Peerless General Finance and Investment Co. Ltd. and (c) the report of the Reserve Bank of India on inspection of the books of Peerless conducted in 1979, the following facts of accounting of income and liabilities of the assessee-company came to light : (1) The Social Welfare Scheme Fund is in excess of the total liability of the company towards the certificate holders. (2) The company has been retaining in the fund amounts forfeited on surrender of certificates and liabilities already provided thereon on accrual basis. Amounts in respect of unclaimed matured certificates continue to remain in the fund even after maturity. Amounts in respect of lapsed certificates also continue to remain in the fund. (3) The generous distribution of commission among the agents out of the first year’s subscription and the class of investors tapped by such agents has resulted in large scale dropouts by the investors after the first year. (4) There was large-scale lapsation of certificates varying between 34.26 per cent, and 59.71 per cent, during the first three years, the forfeiture range.
2. While checking the income accounting for the previous year relevant to the asst. yr. 1985-86 it was found that the assessee has been furnishing incorrect computation of income on the basis of wrong assumptions and inflated generalisations as under : (i) The provision for refund of subscription at a fixed percentage of the first year’s subscription was in respect of pure contingent liability. The quantification of such liability was on the basis of flawed actuarial certificate. (ii) The provision for interest and bonus accrued at fixed percentage of the balance in the Social Welfare Scheme Fund on accrual basis was incorrect even on actuarial basis, which the assessee was supposed to be following.
3. On a check of the above-mentioned facts of the accounting of income and expenditure, it emerged that income exceeding Rs. 50,000 has escaped assessment in the following respects as a result of inadequate and incorrect statements, misleading actuarial certificate, wrong basis of calculation and suppression of relevant facts ; (a) Income from forfeiture of lapsed certificate. (b) Profit under s. 41(1) of the IT Act as a result of cessation of liability already claimed as ‘interest and bonus accrued’. (c) Excess deduction claimed under the head, ‘Interest and bonus accrued’, at a fixed percentage of the Social Welfare Scheme Fund on the ground that the fund was in excess of the requirement. (d) Excess deduction claimed under the head, ‘Interest and bonus accrued’, at a fixed percentage of the balance in the said fund on the ground that such percentage was in excess of the amount allowable onaccrual basis. (e) Deduction claimed under the head, ‘Provision for refund of subscription’ on the strength of wrong actuarial advice.
4. In the circumstances stated above, I have reason to believe that by reason of the omission and failure on the part of the assessee, the Peerless General Finance and Investment Co. Ltd., to disclose fully and truly all material facts necessary for its assessment for the asst. yr. 1981-82, income exceeding Rs.50,000, has escaped assessment for that year.” It has to be kept in mind that this power was exercised on 28th March, 1989, even for the asst. yr. 1973-74. During the course of hearing, learned counsel appearing on behalf of the Revenue produced the original of the reasons for furnishing such notices which contained appropriate endorsement of the CIT as well as of the Board as were necessary in terms of the then provisions contained in s. 151 of the said Act. It is true that the judgment of the Supreme Court referred to in support of the reasons do not state that there had been suppression of income during the relevant years under consideration. It is also true that the report of the Reserve Bank of India has not been produced by the Revenue. It is again true that a portion of the said report, which has been quoted by the Supreme Court in yet another judgment, does not say that there had been suppression of income by the petitioner during any of the years in question. The report of the auditors of the petitioner, however, admittedly says that the amount lying in the Social Welfare Scheme Fund of the petitioner is more than the liability of the petitioner towards its depositors. However, that talks about the year considered by the auditors and not about the years in question. If that can be taken into account, as the prima facie evidence to come to a conclusion that income chargeable to tax has escaped assessment, that itself would be sufficient. If the ITO depends on three different sources ofinformation to come to the prima facie conclusion that income chargeable to tax has escaped assessment, but in point of fact, it is established that one such source can be taken to a dependable source, that would suffice the requirement of the law. In the instant case, the petitioner used to collect deposits from the depositors during the relevant assessment years. While obtaining such deposits, it had contracted to return the amount of deposits along with interest on the maturity of such deposits.
The amount received by it from the depositors and kept apart for meeting the liability to refund the monies to the depositors had been shown in its balance-sheet in the liabilities side as Social Welfare Scheme Fund. The monies, which belong to the depositors, would alone be reflected under the heading “Social Welfare Scheme Fund”. If the auditor’s report shows that the fund shown in the liabilities side of the balance-sheet under the heading “Social Welfare Scheme Fund” is more than the liability of the petitioner, in fact, towards its depositors, that clearly demonstrates that apart from the monies belonging to such depositors, some other monies are also lying in the said fund and shown as liability. This is not possible. Any fund received by the petitioner by way of deposit would be reflected in the balance-sheet of the petitioner in the liabilities side as funds lying in the “Social Welfare Scheme Fund” and the cash received would be reflected in the assets side as “cash” available to the petitioner. If the liability is, in fact, less than what has been shown in the liabilities side, that would mean an income which should have been reflected in the P&L a/c, has not been so reflected and has been shown as liability in the balance-sheet. Though such reflection is surely for the year considered by the auditor, having regard to the report of the auditor annexed to the affidavit-in-reply, to the effect “The liability to certificate holders as shown under the ‘Social Welfare Scheme Fund’ needs to be reviewed and in the absence of detailed information and records regarding unrevived and lapsed certificates, surrendered certificates, matured and unclaimed certificates, etc., additional interest provided, etc., the same have not been adjusted and accordingly prima facie the fund appears more than adequate pending detailed ascertainment and computation”, it is anybody’s guess as to since when such reflections had been made. It is true that in order to exercise power under s. 148 of the said Act two things must be satisfied, namely, reason to believe and that the escapement is due to failure to disclose fully and truly all the material facts. As aforesaid, the auditor’s report is more than sufficient to form a prima facie reason to believe. At the stage of s. 148, it should not be construed to be a conclusive belief but should be construed to be a prima facie belief. As aforesaid, the auditor’s report itself, to the effect as aforesaid, can make a person prima facie believe that there has been escapement of assessment of income chargeable to tax. The question is whether the second condition is satisfied ? There is no dispute that when the return was submitted, the P&L a/c as well as the balance-sheet had been furnished. There is also no dispute that at the time when the original assessments had been made, books of account of the petitioner, as had been called for, had been produced. Learned counsel for the petitioner thus contended that there was no failure to disclose fully and truly all the material facts, and, accordingly, power under s. 148 of the said Act could not be used.
The petitioner, as aforesaid, during the relevant assessment years used to collect deposits on contracts. The contracts entailed the depositors to get back the deposits along with certain interest by way of bonus. The contracts used to provide that the depositors would be required to deposit an equal amount mentioned in the respective contracts for a certain period. They also used to provide that unless the depositors deposit the money as mentioned in the contracts for a certain period, the deposits will stand lapsed and the monies lying to the credit of the depositors shall stand forfeited and shall become the property of the petitioner. During the relevant years the petitioner used to treat a substantial portion of the first year’s deposit by an individual depositor as its income and used to show the same in the P&L a/c. The balance used to be shown in the Social Welfare Scheme Fund in the liabilities side of the balance-sheet. The money representing the liability on account of the Social Welfare Scheme Fund used to be invested by the petitioner and the earnings thereon used to be apportioned in between the petitioner, towards its income, and remaining towards liability on account of the Social Welfare Scheme Fund. Therefore, during the relevant assessment years, income on such deposits used to be shared between the petitioner and the depositors. The share of the petitioner used to be reflected in the P&L a/c as income of the petitioner and the share of the depositors used to be added to the Social Welfare Scheme Fund in the liabilities side of the balance-sheet of the petitioner. The deposits of the depositors, who could not meet their contractual obligation to deposit the amount mentioned in the contracts for the periods in question, used to be forfeited by the petitioner. Such forfeited amount used to be treated as income of the petitioner. The liability of the petitioner in its balance- sheet towards the
Social Welfare Scheme Fund used to be reduced to the extent of such forfeited amount. All these particulars have been admittedly furnished by the petitioner in the petitioner’s returns for the relevant years. Despite that, the actual liability of the petitioner towards its depositors is less than the liability shown in the balance-sheet under the heading “Social Welfare Scheme Fund”. How can this be ? The petitioner has itself answered the same in the instant writ petitions and, in particular, in para 10 thereof, which is as follows : “10. Under the said method of accounting followed and adopted by the petitioner-company the amount on a lapsed certificate actually forfeited by the petitioner-company was deducted out of the said fund and credited to the P&L a/c in the year of forfeiture. In respect of any lapsed certificate the petitioner-company is entitled to forfeit the amount of subscription paid only if it has not acquired the surrender value and only after the expiry of the period of five years from the date of lapsation of the certificate inasmuch as the lapsed certificate could be revived by the subscriber at any time within the said period of five years. Therefore, if a certificate has acquired surrender value and until the expiry of the period of five years, from the date of lapsation of the certificate the petitioner-company cannot exercise any rights whatsoever to forfeit the amount of subscription paid by the subscriber under the said certificate. Your petitioner states that all certificates which lapsed in a particular year are therefore not liable to be forfeited in that year by the petitioner-company. Further having regard to the nature of the business carried on by the petitioner and the fact that the subscribers are mostly from the poorer sections of the society and in order to maintain the good name of the petitioner company it was as a matter of policy considered by the petitioner commercially inexpedient and inadvisable for the petitioner-company to exercise right of forfeiture strictly. The petitioner-company therefore was required by the nature of its business to take a sympathetic and lenient view of the rights of the subscribers. In the premises the petitioner-company in its commercial wisdom considered it proper not to forfeit all the lapsed certificates liable to be forfeited in strict terms. The amount of subscription actually forfeited in any particular year was debited to the said fund and credited to the P&L a/c of the said year. It is relevant to point out here that theamount so forfeited although credited to the P&L a/c is in law and in reality not a revenue receipt of the petitionercompany but a capital receipt. Your petitioner therefore states that the amount of a lapsed certificate does not become income until it is actually forfeited. The surrender value of a certificate is always less than the total subscription paid up to the date of surrender. Therefore, in case of surrender of any certificate there is a surplus arising to the petitioner-company being the difference between the total subscription paid by the subscriber and the surrender value payable to him. Such surplus was treated as revenue income in the year of actual surrender and taken to the P&L a/c of that year under the heading ‘Surplus on Surrender’.” It has, therefore, been admitted in the petition that an income accrued in a particular year was not shown either in the balance-sheet or in the returns for that particular year as the forfeiture was delayed by the petitioner. It is not the case of the petitioner in the petition that either at the time of furnishing the returns or in the balance-sheet submitted along with the returns or while supplying information and producing books of account at the time of assessments, the petitioner had disclosed to the AO that any income arising out of forfeiture accrued in the assessment year was for commercial wisdom taken over to the next year. In that view of the matter, the second limb of the requisite for exercise of power under s. 148 of the said Act is fulfilled and prima facie it appears that there was failure on the part of the petitioner to disclose fully and truly all the material facts necessary for assessment during the relevant assessment years while submitting the return and furnishing information. For the reasons aforesaid, I refuse to entertain these writ petitions and accordingly, dismiss the same. There will be no order as to costs. All interim orders are vacated. Prayer made by learned counsel for the petitioners for stay of operation of this order is refused.
[Citation : 258 ITR 160]
