Karnataka H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that failure of the assessee at least to indicate the presence of the closing stock relating to the chips could give rise to a reasonable belief as envisaged under s. 147(a) of the IT Act, and in that view in concluding that the AO had the jurisdiction to initiate proceedings under s. 147(a) of the Act, in a valid manner ?

High Court Of Karnataka

V.M. Salgaocar & Bros. (P) Ltd. vs. CIT

Section 147(a)

Asst. Year 1977-78

V.K. Singhal & T.N. Vallinayagam, JJ.

IT Ref. Case No. 49 of 1996

3rd December, 1999 

Counsel Appeared

V.M. Salgaocar for S. Parthasarathi, for the Assessee : M.V. Seshachala, for the Revenue

JUDGMENT

V.K. SINGHAL, J. :

The Tribunal, Bangalore Bench, has referred the following question of law under s. 256(1) of the IT Act, 1961, in respect of the asst. yr. 1977-78 : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that failure of the assessee at least to indicate the presence of the closing stock relating to the chips could give rise to a reasonable belief as envisaged under s. 147(a) of the IT Act, and in that view in concluding that the AO had the jurisdiction to initiate proceedings under s. 147(a) of the Act, in a valid manner ?”

2. The facts of the case are that the assessee filed a return of income on 30th June, 1977, declaring the total income at Rs. 1,52,12,656. This was revised on 18th Jan., 1978, and a total loss of Rs. 2,85,77,361 was declared in the revised return. The AO completed the assessment on 6th Sept., 1980, by determining the total income of Rs. 1,80,63,239.

The assessee-company is engaged in the business of mining iron ore and exporting the same to different countries and mainly to Japan. The closing stock of the assessee as shown in the original return of income was revised slightly in the revised return. The following items at the values shown below were shown in the closing stock in the said revised return :

Quantity in Rate per ton

Value

tonnes

Lumpy ore 58,310 12.50 7,28,750

Blue dust 11,23,1

92

10.00 1,12,31,920

1,19,60,670

A search and seizure operation was conducted by the Department in the premises of the assessee- company during the period from 20th Dec., 1980, and 22nd Dec., 1980. During the said operations, an unsigned paper, purported to be showing the valuation of closing stock as on 30th Sept., 1976, was found in the file of the accountant dealing with the matter relating to determination of the closing stock, along with other papers. It may be mentioned in this connection that the previous year of the assessee for this year also ended on 30th Sept., 1976, and, thence the closing stock as referred to above means the stock as on that date.

In the above mentioned paper, found during the search and seized by the Department, the position of the stock as on 30th Sept., 1976, was shown as below:

Vagus plot

VMS

Quantit y in

tonnes

Rate per ton

Value in Rs.

Lumpy 58,300 16 9,32,800

VMS Chips VMS

4,33,37

4 6 26,00,244

Blue dust

11,03,6

06

16,32,2

13 1,43,46,878

68 1,88,04,622

On the basis of the increased valuation of stock as shown in the above mentioned seized paper, the Department initiated proceedings under s. 147 to assess the escaped income. It is an undisputed fact that the proceeding was in fact started by the Department under s. 147(a) and not under s. 147(b). Assessment was completed on 19th Sept., 1984, by making addition of Rs. 70,98,570 to the value of the closing stock of iron ore which was confirmed by the CIT(A).

It was the plea of the assessee that it had truly and fully disclosed all the particulars relating to its closing stock, at the stage of the original assessment. It was argued that so far as the chips were concerned, the value of the said chips was nil and that the lumpy ores at mechanical plot were not to be included within the closing stock of the assessee inasmuch as the ores must have been sold away before the last date of the relevant previous year, but missed to be taken into consideration by the person preparing the stock statement on account of non-reaching of the relevant information relating to sales. The Tribunal ultimately came to the view that the Department had found a paper not only from the business premises of the assessee but also from the file in which the papers relating to preparation of stock statement were maintained. The Tribunal thus held that at least a primary significance of this particular paper found during the search could not be brushed aside, although whether whatever is written therein could be accepted in toto or not was a different question. The Tribunal observed that this particular paper showed not only higher rates of valuation in respect of the two items disclosed by the assessee in its closing statement, but also included two further times, viz., chips and lumpy ore at mechanical plot which had not been shown in the stock statement of the assessee at all. The Tribunal remarked that even if it be contended that the lumpy ore at mechanical plot did not form part of the closing stock inasmuch as such ore had already been sold away, the finding of a paper purporting to be the list of closing stock as on the relevant date showing this particular item would naturally give rise to the reasonable belief in the mind of the AO that on account of omission on the part of the assessee to disclose the existence of this item, income chargeable to tax had escaped assessment. The Tribunal also found that so far as chips were concerned, the main argument of the assessee was that the value of this particular item was nil and, hence, the item had not been shown in the inventory of closing stock. The Tribunal however remarked that since the assessee was in the habit of showing this particular item in its closing stock for earlier years at the rate of Rs. 6 per ton, if the rate had gone down to nil in this particular year, it was certainly the duty of the assessee to have disclosed the existence of the stock, but at nil value. Ultimately, the Tribunal came to the conclusion that the failure on the part of the assessee to disclose the value of the closing stock of the chips even at nil value at the original assessment stage coupled with the later discovery of a paper showing such fact, would clearly lead any person of ordinary prudence to the reasonable belief that the assessee had failed to disclose truly and fully all facts necessary for the assessment which had led to underassessment of income. Finally, the Tribunal came to the conclusion that on account of failure of the assessee to at least to indicate the presence of stock relating to chips during the original assessment stage, the AO could be said to have a reasonable belief as stock of in s. 147(a) and had, therefore, the jurisdiction to initiate proceedings under that section.

3. The proceedings which were initiated by the Revenue were under s. 147(a) as it was then existing. According to the provisions at the relevant time it was necessary that there must be a reason to believe by the AO that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts which are necessary for assessment, the income chargeable to tax had escaped assessment. At the time of initiation of proceedings it has to be seen by the AO that the assessee has not fully and truly disclosed all material facts. The Tribunal has recorded a finding that the AO has recorded a finding that it was on account of failure of the assessee to indicate the presence of the stocks relating to chips at the original assessment statement. The AO could reasonably believe as required under s. 147(a). The documents which were found though stated to be unsigned at the time of search and seizure were sufficient for initiation of proceedings under s. 147(a). It is not necessary that in the proceedings under s. 147 (a), if any item is proposed to be added then finally it should be added by the AO or should be upheld by the appellate authority. Even after initiation of the proceedings the assessee may satisfy a particular document or transaction that there is no escapement of income and the AO may drop the proceedings. Similarly, even if the addition is made the appellate authority may come to a different conclusion on the basis of the facts and law, but that would not affect the jurisdiction of the AO to initiate the proceedings under s. 147(a).

In these circumstances, we are of the view that the Tribunal was right in holding that failure of the assessee at least to indicate the presence of the closing stock relating to the chips could give rise to a reasonable belief as envisaged under s. 147(a) of the IT Act, and in that view in concluding that the AO had the jurisdiction to initiate proceedings under s. 147(a) of the Act in a valid manner.

The reference is answered in favour of the Revenue and against the assessee.

[Citation : 250 ITR 682]

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