High Court Of Kerala
CIT vs. N. Jayaprakash, Package India Tin Fabricators
Sections 68, 69, 148, 153(2)
Asst. Year 1992-93
K.S. Radhakrishnan, Actg. C.J. & K.T. Sankaran, J.
IT Appeal No. 140 of 2002
20th January, 2006
Counsel Appeared
P.K.R. Menon & George K. George, for the Revenue : T.M. Sreedharan, T.S. Arunkumar & Tony Chacko, for the Assessee
JUDGMENT
K.S. Radhakrishnan, ACTG. C.J. :
Income-tax Appeal No. 149 of 2001 is an appeal preferred by the assessee against the order of Tribunal, Cochin Bench, in ITA No. 210/Coch/1998 dt. 27th July, 2001 and IT Appeal No. 140 of 2001 is an appeal preferred by the Revenue against the same order. We may first deal with the appeal preferred by the assessee under s. 260A of the IT Act, 1961. Assessee has raised six questions of law, of which the first four questions are consolidated, redrafted and stated as follows :
“1. Is not the notice dt. 1st Oct., 1993 issued under s. 148 legal and valid in the light of the amended provision contained in s. 148 as per Finance Act 2 of 1996 ?
Whether, on the facts and in the circumstances of the case, the Tribunal is justified in rejecting the contention of the assessee that the assessment order dt. 26th March, 1997 was barred by limitation in terms of s. 153(2) of the Act ?
Whether, on the facts and in the circumstances of the case, the additions sustained by the Tribunal in regard to inflation of cash balance and receipt on account of demand drafts, is legal and valid and sustainable in law ?”
Assessee is a proprietary concern by name “Package India Tin Fabricators” engaged in the fabrication and sale of tins. Assessee also derives share income from two firms M/s Das Prakash Agencies and M/s GPN Cashew Exporting Co. Assessee in response to notice under s. 148 dt. 1st Oct., 1993 and notice under s. 142(1) dt. 13th March, 1995 filed the return of income for the asst. yr. 1992-93 on 27th March, 1995 declaring a total income of Rs. 1,36,970 and agricultural income of Rs. 1,50,000. During the course of assessment proceedings, it was pointed out by the assessee’s representative that the notice under s. 148 had not given more than 30 days’ time for filing the return, and therefore, the assessment would be treated as null and void. Assessing authority accepted the stand of the assessee and dropped the assessment proceedings. Assessing authority had reason to believe that income chargeable to tax had escaped assessment and consequently assessment proceedings were again initiated by issuing notice under s. 148 dt. 28th March, 1996. Return of income was filed declaring a total income of Rs. 1,52,110 as against Rs. 1,36,970 returned earlier. The agricultural income returned earlier was omitted to be declared in the fresh return of income on 19th April, 1996.
The propriety of issuing a second notice under s. 148 was questioned by the assessee vide letter dt. 16th April, 1996 and reply was given on 15th July, 1996. AO later completed the assessment by order dt. 26th March, 1997 determining the aggregate income of the assessee as Rs. 30,36,990 as against the total income shown in the original return of Rs. 1,36,970. The major variation is the addition of Rs. 16,60,854 on account of unaccounted sales of tins. AO had narrated the events which led to this addition. He has also highlighted the inconsistent explanations. Aggrieved by the order of the assessing authority, assessee took up the matter in appeal before the CIT(A). Appellate authority found no infirmity in the assessing authority issuing second notice after having found that the first notice dt. 1st Oct., 1993 was invalid. Appellate authority also endorsed the view that initiation of proceedings by issuing fresh notice under s. 148 dt. 28th March, 1996 was valid. Order passed by the assessing authority was upheld except with regard to the plea of the assessee regarding agricultural income. Appellate authority held that there is no basis for keeping the figure of agricultural income especially when no such amount is returned in the second return filed. Aggrieved by the said order assessee filed appeal before the Tribunal. Contention of the assessee was that there was no scope for issuing fresh notice under s. 148 since the plea of escaped income was rejected by the Tribunal. On merits the assessee’s appeal was partly allowed. Tribunal found force in the contention of the assessee that it cannot be presumed that the sale of the entire tins had taken place in one stretch. Tribunal felt that only peak sales can be taken as the basis for making the addition. Consequently, Tribunal directed the AO to give the assessee necessary relief in the light of the directions given by the Tribunal. Revenue as well as the assessee filed appeals aggrieved by that part of the order which is adverse to them.
Counsel appearing for the assessee, Sri T.M. Sreedharan, submitted that the Tribunal was not justified in rejecting his legal plea stating that it was too technical. Counsel submitted, Tribunal should have found that the effect of the subsequent amendment with retrospective effect by Finance Act 2 of 1996 was to confer validity to the notice dt. 1st Oct., 1993 under s. 148, even though such notice allowed only less than 30 days for filing the return of income. Counsel submitted that by giving retrospective effect to the amended law w.e.f. 1st April, 1989 the notice dt. 1st Oct., 1993 issued under s. 148 was legal and valid. Counsel therefore submitted that final assessment for the year 1992-93 should have been completed before 31st March, 1996 by virtue of s. 153(2) of the IT Act and that the assessment order passed on 26th March, 1997 was invalid. Counsel further submitted that in the light of return of income pending before the AO when he issued fresh notice under s. 148 on 28th March, 1996, there was no legal validity for the fresh notice dt. 28th March, 1996 and any assessment order made pursuant thereto would be invalid. In support of his contention, reference was made to the decision of the apex Court in State of UP vs. Raja Syed Mohammad Saadat Ali Khan (1961) 41 ITR 737 (SC), CIT vs. Ranchhoddas Karsondas (1959) 36 ITR 569 (SC), CIT vs. S. Raman Chettiar (1965) 55 ITR 630 (SC).
Sri P.K. Raveendranatha Menon, senior counsel appearing for the Revenue, on the other hand contended that assessing authority has rightly held that the notice under s. 148 dt. 1st Oct., 1993 was invalid since it had not complied with the statutory prescription of 30 days’ time for filing return. Counsel submitted, assessee himself had pointed out the mistake and it was under such circumstance the assessment proceedings initiated in pursuance to notice dt. 1st Oct., 1993 were dropped. There is sufficient ground for initiating the assessment proceedings since the income had escaped assessment. Consequently, assessment proceedings were initiated by issuing notice under s. 148 dt. 28th March, 1996. Counsel for Revenue submitted, assessing authority had rightly applied the statutory provisions when it was pointed out by the assessee that the notice issued under s. 148 dt. 1st Oct., 1993 had not satisfied the condition of giving minimum 30 days’ time for filing return and hence rightly cancelled the notice. Counsel pointed out that Finance Act 2 of 1996 though had omitted the words “not being less than thirty days” retrospectively w.e.f. 1st April, 1989 that by itself would not revive notice dt. 1st Oct., 1993 issued by the assessing authority since it was already cancelled applying the then existing law. In support of his contention, counsel referred to the decision of the apex Court in CIT vs. G.M. Mittal Stainless Steel (P) Ltd. (2003) 179 CTR (SC) 553 : (2003) 263 ITR 255 (SC). Reference was also made to the decision of the Calcutta High Court in CIT vs. Assam Oil Co. Ltd. (1982) 133 ITR 204 (Cal) and also to CIT vs. Sun Engineering Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC). Reference was also made to the decision of the apex Court in Bakshi Ram vs. Brij Lal AIR 1995 SC 395, the decisions of the apex Court in CIT vs. K. Adinarayana Murty (1967) 65 ITR 607 (SC), CIT vs. Mahaliram Ramjidas (1940) 8 ITR 442 (PC), Gursahai Saigal vs. CIT (1963) 48 ITR 1 (SC), etc.
5. Before we examine the rival contentions on the legal questions raised, we may refer to s. 148 as unamended : “148. Issue of notice where income has escaped assessment.—(1) Before making the assessment, reassessment or recomputation under s. 147, the AO shall serve on the assessee a notice requiring him to furnish within such period, not being less than thirty days, as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under s. 139. (2) The AO shall, before issuing any notice under this section, record his reasons for doing so.”
It is trite law that issue of a notice under this section is a condition precedent to the validity of any assessment under s. 147, and therefore if no such notice is issued or if the notice issued is invalid or vague or is not served in accordance with law, the assessment would be bad. Assessing authority had not followed the time-limit prescribed while notice under s. 148 was issued on 1st Oct., 1993. Assessee filed his return of income on 27th March, 1995. Assessee had also pointed out to the ITO that in the notice dt. 1st Oct., 1993 issued under s. 148, the assessee was not given the statutory minimum period of time for filing the return of income. The law that was in force at the relevant point of time casts a statutory duty on the assessing authority to give minimum 30 days’ time. AO cancelled the notice when it was pointed out to him and therefore notice under s. 148 was issued on 28th March, 1996. Finance Act 2 of 1996, enacted by the Parliament and received the assent of the President on 28th Sept., 1996. The Act omitted the words “not being less than 30 days” from s. 148 w.e.f. 1st April, 1989. When notice dt. 1st Oct., 1993 as well as the fresh notice dt. 28th March, 1996 were issued the Finance Act 2 was not in force. Assessing authority had therefore rightly applied the then existing law.
6. Sec. 148 provides for initiation of assessment proceedings which starts with the issue of notice. Initiation of proceedings by the assessing authority on 1st Oct., 1993 was not valid and consequently it was dropped. Fresh notice was therefore issued under s. 148 in conformity with the time prescribed under s. 148. When the Finance Act was passed, a legally valid proceeding was in existence. Notice prescribed under s. 148 of the Act for the purpose of initiating reassessment proceedings is a condition precedent to the validity of an assessment made. Assessing authority was only curing the defect of not following the time-limit when it was pointed out by the assessee and therefore notice was issued strictly on the basis of the then existing statutory provision. The mere fact the time-limit prescribed under s. 148(1) was taken away would not make an invalid notice valid so as to render the assessment order dt. 26th March, 1997 invalid in terms of s. 153 (2) of the Act. Assessee cannot be allowed to raise such a plea after having persuaded the assessing authority to withdraw notice dt. 1st Oct., 1993 pointing out that it was not in conformity with the statutory provision. Assessee cannot be allowed to take advantage of the plea of limitation in terms of s. 153(2) of the Act contending that the notice dt. 1st Oct., 1993 was valid due to the omission of time-limit vide Finance Act 2 of 1996 w.e.f. 1st April, 1989.
We may in this connection refer to the decision of the Calcutta High Court in (1982) 133 ITR 204 (Cal) (supra) which was approved by the apex Court in (2003) 179 CTR (SC) 553 : (2003) 263 ITR 255 (SC) (supra). Calcutta High Court took the view that a subsequent reversal of the decision of the High Court by the Supreme Court would not render the reassessment proceedings void ab initio. Reference may also be made to the decision of the Gujarat High Court in CIT vs. Maneklal Harilal Spg. & Mfg. Co. Ltd. (1977) 106 ITR 24 (Guj), (which) took the view that what is relevant is whether the proceedings were validly initiated. Court took the view that it is because of the initial validity of the action of the ITO as on the date on which or the moment at which the proceedings were initiated, that it must be held that once they were validly initiated, the ITO had correctly and validly initiated the proceedings. Apex Court in G.M. Mittal Stainless Steel (P) Ltd.’s case (supra) held that it could not be said that reassessment proceedings were without jurisdiction on the basis of the law as it stood when the proceedings were initiated. On the strength of notice dt. 28th March, 1996 the return of income was filed and such return cannot be ignored. Reference may be made to the decisions of the apex Court in CIT vs. Ranchhoddas Karsondas (supra) and CIT vs. S. Raman Chettiar (supra).
Counsel for the assessee placed considerable reliance on the decision of this Court in CIT vs. P.N. Krishnakumar (2002) 174 CTR (Ker) 263 : (2002) 254 ITR 31 (Ker). Placing reliance on the said decision counsel submitted that Tribunal was bound to consider the retrospective amendment while it decided the appeal especially, when the appeal is a continuation of the original proceedings and that the Tribunal is bound to take note of the amendment brought about in the law pending the appeal. Counsel also referred to the decisions reported in Raja Bahadur Kamakshya Narain Singh of Ramgarh vs. CIT (1947) 15 ITR 311 (FC), State of UP vs. Raja Syed Mohammad Saadat Ali Khan (supra), CST vs. Bijli Cotton Mills AIR 1964 SC 1594, CIT vs. Straw Products Ltd. (1966) 60 ITR 156 (SC), Kapurchand Shrimal vs. CIT (1981) 24 CTR (SC) 345 : (1981) 131 ITR 451 (SC) and CIT vs. Sun Engineering Works (P) Ltd. (supra).
9. We are of the view the abovementioned decisions would not apply to the facts of this case. The mere fact that the time-limit has been taken away w.e.f. 1st April, 1989 would not vitiate the proceedings validly initiated applying the then existing law. The object and purpose of the amendment is only to take away the time-limit for giving time to the assessee to file a return which the legislature thought unnecessary. If the legislature wanted to undo all that was done by the assessing authority applying the then existing law it should have been specifically provided in the statute. In the absence of specific provision in the Finance Act 2 of 1996 invalidating those proceedings initiated by the ITO, we are not prepared to say that the action taken by the ITO applying the then existing law was invalid. Once we uphold the notice issued under s. 148 on 28th March, 1996 the plea of limitation raised by the assessee under s. 153(2) has to be rejected. We therefore decide the legal questions in favour of the Revenue and against the assessee holding that the Finance Act 2 of 1996 as amended would not validate an invalid notice which was issued under s. 148(1).
10. We may now examine the question Nos. 5 and 6 as to whether the Tribunal is justified in sustaining the additions with regard to inflation of cash balance and receipt on account of demand drafts. CIT(A) confirmed the addition of Rs. 1,88,000 being the cash transferred from the Trichur branch but not deducted from the cash balance in that branch. Assessing authority on verification of cash books of the assessee noticed that the assessee was transferring the sale proceeds from Trichur branch to head office by cash. It was also noticed that the cheques received from parties or their agents were credited in the accounts with UCO Bank, Trichur, and cash withdrawn from the bank was transferred to head office. Records reveal that normally entries for transfer of cash are made both at Trichur and the head office. But on 13th April, 1991 the receipt of cash is accounted in head office without corresponding effective entries in the cash book of Trichur branch. Records reveal that the outgoings to head office amounting to Rs. 1,88,000 were not reduced from cash balance. When the discrepancy was brought to the notice of the assessee, it was pointed out that the sister-concern M/s GPN Cashew Exporting Co. had enough balance on these days and since the assessee was also the managing partner of that sister-concern, whenever shortage was felt, it was adjusted from the sister-concern which was not accepted by the AO on the ground that the assessee was having extensive dealings with the sister-concern and such dealings were running into lakhs and all such cash transactions were regularly entered in the books, but there was no entry in respect of the transaction of Rs. 1,88,000. Assessing authority therefore held this as unexplained cash brought amounting to Rs. 1,88,000 and he treated it as assessee’s income and brought to tax under s. 68 of the Act. The addition was confirmed by the CIT(A), so also the Tribunal.
We notice that the assessing authority, CIT as well as the Tribunal have concurrently found that there has been artificial inflation of cash balance. Perusal of records indicated that even small cash transfers are promptly entered in the assessee’s and sister-concern’s books of account. Assessing authority noticed that artificial inflation of cash balance in head office accounted as receipts from Trichur branch when in fact there was no such cash availability. Though assessee tried to explain the cash availability of sister-concern at Kollam the same could not be established. Unexplained cash brought amounting to Rs. 1,88,000 was treated as assessee’s unexplained income and brought to tax under s. 68. We find no reason to disturb the concurrent findings rendered with regard to the unexplained income of the assessee. Revenue in IT Appeal No. 140 of 2001 raised three questions of law which are stated hereunder : “1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in directing that the sale proceeds of the first day may be available for the purchase and sale of tins of the second day and is not such finding and direction to the officer based on surmises, conjectures and hence perverse ? Whether, on the facts and in the circumstances of the case, is not the conclusion reached in para 10 and the direction contained therein are based on surmises and conjectures and hence vitiated ? Whether, on the facts and in the circumstances of the case and also for the ‘reasons’ given in para 10 of the order, the Tribunal is right in law and fact in interfering with the addition of Rs. 16,60,854 made on account of unaccounted sale of suppressed production of tins ?”
13. Counsel for the Revenue contended that the Tribunal was not right in interfering with the addition of Rs. 16,60,854 made on account of unaccounted sale of suppressed production of tins. Senior counsel appearing for the Revenue took us through para 10 of the Tribunal’s order and submitted that no cogent reasons have been stated by the Tribunal to accept the findings of the AO as well as that of the appellate authority. The findings of the Tribunal, according to the counsel, are on conjectures and surmises. In this connection, it is worthwhile to extract para 10 of the Tribunal’s order which reads as follows : “Considering the facts and on going through the orders of the Revenue authorities, we are in agreement with the findings of the Revenue authorities. However, we find considerable force in the argument of the assessee’s counsel that it cannot be presumed that the sale of the entire tins had taken place at one stretch. It could have taken place within the period of three months, July, August and September. If that be so, and if the tins are treated as sold, then the assessee’s plea that the sale proceeds of the first day may be available for the purchase and sale of tins of the second day cannot be rejected outrightly. In that case, only the peak sales can be taken as the basis for making the addition. We direct the AO to give the assessee necessary relief in the light of the above discussion.”
The first sentence of the para says that the Tribunal is in agreement with the Revenue authorities. In the next sentence, the Tribunal says “however Tribunal finds considerable force in the arguments of the assessee’s counsel”. Both the sentences would not go together. In the third sentence Tribunal used the expressions “it could have” and “if that be so” and then used the expression “if the tins are treated as sold”. We have no hesitation to say that Tribunal has not applied its mind to the various reasons stated by the assessing authority for interfering with the addition of Rs. 16,60,854 made on account of unaccounted sale of suppressed production of tins. Counsel appearing for the assessee however tried to sustain the said order and submitted that the Tribunal is right in finding that there was no evidence to show that the sale of the entire tins had taken place on a single day at one stretch. Counsel referred to Annex. D copy of the quantitative particulars of tins sold for the period from 25th July, 1991 to 27th Sept., 1991. So the peak sale was on 19th Aug., 1991.
We have perused the order passed by the assessing authority as well as that of the Tribunal. We are of the view that cogent and acceptable reasons have been stated by the AO in making addition towards unaccounted sale of tins. Facts would indicate that during the course of scrutiny of the assessee’s books of account the AO had noticed certain discrepancies in the cash book and impounded the books produced. Further in spite of repeated requests assessee had failed to produce his stock register. AO had to prepare month-wise statement of purchase of tin sheets and tins production and sales of tins. AO had noticed that the closing stock of tins as on 31st March, 1992 should have been 32659 tins as against 3200 tins disclosed. AO had also noticed that the assessee had availed of key loan facility from the Central Bank of India, Kollam, and the stock position of tins of each day was obtained from the said bank by the AO. The declared stock shown to the bank was adjusted in the original statement prepared by the AO and a second statement was prepared, as per which the closing stock of tins as on 31st March, 1992 should have been 45786 as against 3200 tins disclosed. AO had also noticed that the sales-tax authorities have detected unaccounted sales of tins and that on the basis of the admitted rate of fabrication charges and consumption of tin sheets, the assessee should have disclosed a much higher output. Under such circumstance assessing authority had concluded that the assessee had suppressed production of tins and that the suppressed stock of 42586 tins was sold outside accounts. Assessing authority adopting the average sale price of Rs. 39 per tin, had made an addition of Rs. 16,60,854 towards unaccounted sale of tins. Detailed and cogent reasons have been stated by the assessing authority in its order to make that addition. This is a case where the assessee had not produced his stock register. Assessee had also not produced any records to explain the difference of 29459 tins as loan taken from a sister- concern. Finding of the Tribunal, in our view, is most unsatisfactory and no cogent reasons have been stated by the Tribunal to disturb the findings by the assessing authority which were confirmed by the appellate authority. Under such circumstances we are inclined to dismiss IT Appeal No. 149 of 2001 and allow IT Appeal No. 140 of 2001. Order of the AO as modified by the CIT(A) would stand and the order of the Tribunal is interfered with to the above extent. Questions posed are all answered in favour of the Revenue and against the assessee.
[Citation : 285 ITR 369]
